Chemring Group PLC
Annual report and accounts 2020
“ Our focus in recent years has been
on putting in place the foundations
on which to build a stronger, higher
quality business. The resilience of the
Group in response to the coronavirus
pandemic is a consequence of the
dedication and commitment of all
our people and clearly demonstrates
the significant progress that we
have made.
Chemring is well placed, with a
robust strategy, market-leading
positions across different
geographies and sectors, and
with products and services that
are critical to our government
and blue-chip customers.
Chemring’s long-term
prospects remain strong.”
Michael Ord
Group Chief Executive
Investment case
COVID-19 response
Chairman’s statement
Strategic report
2020 performance
1
2 What we do
4
6
8
11 Group Chief Executive’s review
14 Business model
16 Section 172 statement
17 Stakeholder engagement
20 Target markets
22 Strategy
24 Key performance indicators
28 Focus on
32 Financial review
36 Risk management
38 Principal risks and uncertainties
45 Viability statement
46
48 Health and safety
51 Environment
55 Our people
59 Ethics and business conduct
62 Non-financial information statement
Introduction to sustainability
Governance
64 Board of directors
66 Chairman’s introduction to governance
68 Corporate governance report
76 Audit Committee report
80 Nomination Committee report
82 Directors’ remuneration report
101 Directors’ report
Financial statements
105 Consolidated income statement
106 Consolidated statement of
comprehensive income
107 Consolidated statement of changes in equity
108 Consolidated balance sheet
109 Consolidated cash flow statement
110 Notes to the Group financial statements
135 Parent company balance sheet
136 Parent company statement of
comprehensive income
136 Parent company statement of changes in equity
137 Notes to the parent company financial statements
141 Five-year record
142 Accounting policies
149 Independent auditor’s report to the
members of Chemring Group PLC
Other information
156 Corporate information and website
To discover more about Chemring please go
to www.chemring.co.uk
2020 performance
Financial highlights
Operational highlights
Key points
• 2020 performance was ahead of the
Board’s expectations with strong
performance in both segments.
• All businesses remained open and
operational despite the challenges
caused by COVID-19.
• Investment in the Group’s manufacturing
infrastructure is driving improvements
in safety, efficiency and enhancing
operational resilience.
• Strong growth in orders and revenue for
Roke including strategically important
first electronic warfare order for
Resolve to the US DoD.
• Good progress made on securing new
business in the UK, the US and Australia
for the supply of global countermeasures,
including the receipt by Chemring
Australia of a definitised contract of
$107m in support of the F-35.
• Continued progress on the US Programs
of Record. Further orders received in
the year for the next phase of HMDS
delivery, with the IDIQ increased by
$200m, and customer approval and
contract awarded for Low Rate Initial
Production for the EMBD programme.
• Sale of Chemring Ordnance, Inc.
completed, concluding our strategic
exit from commoditised energetics.
• Significant reduction in net debt from
strong operational cash generation
partially offset by scheduled capital
expenditure and the adoption of IFRS 16.
• 2020 dividend up 8% to 3.9p per share.
• Board’s expectations for 2021 are
unchanged. Approximately 78%
of expected 2021 revenue is covered
by the order book (2019: 76%).
Revenue
£402m
(+20%)
Order book
£476m
(+6%)
Increase in revenue as the countermeasures
facilities in Salisbury and Australia were
operational, as well as strong performance
in the Sensors & Information segment.
Building in the Countermeasures & Energetics
sector in line with strategy. Targeted 2021
revenue from continuing operations
approximately 78% covered by orders in hand.
Underlying operating profit*
Statutory operating profit
£55m
(+24%)
£46m
(+48%)
Reflects revenue growth in both sectors
and improving margin in Countermeasures
& Energetics, as operational gearing and
performance both positively impacted margin.
The difference to underlying operating profit
reflects the amortisation of acquired intangible
assets which is the only item treated as
non-underlying in 2020.
Underlying operating profit (£m)*
Group
£54.7m
20
19
18
54.7
44.0
31.0
Sensors & Information
Countermeasures & Energetics
£27.4m
£39.9m
20
19
18
15.3
Read more on
Page 28
27.4
26.3
20
19
18
39.9
27.5
23.9
Read more on
Page 30
Progress
Building a resilient business to
ensure solid foundations are in
place to deliver medium-term
growth opportunities.
Safety
As part of our commitment
to continuous improvement,
delivering on our three core
values: Safety, as paramount,
Excellence and Innovation.
2021 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 £34.7m (2019: £21.9m).
Chemring Group PLC Annual report and accounts 2020
1
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
What we do
Innovation and technology
is at our core
At Chemring we create market-leading, technology
solutions and develop world-class thinking to
solve the most challenging problems.
through to design, manufacture and in-service
support for our sensors and detection systems,
countermeasures and energetic products.
Using our extensive science and engineering
expertise, we turn ideas into reality, designing
and developing critical solutions that protect
and safeguard in an uncertain world.
Our customer base spans national defence organisations
and security agencies, as well as commercial markets
such as space and transport. We support our customers
in more than 50 countries across the globe.
We achieve this by innovating at every stage of
the value chain, from research and development,
Chemring is organised into two sectors – Sensors
& Information and Countermeasures & Energetics.
Where we operate
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 support
export sales. The percentages represent the
proportion of sales for that destination in the
year ended 31 October 2020.
UK
30%
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,
industrial sectors.
Asia Pacific
6%
Steady year-on-year growth in
key regional markets as defence
spending increases in response
to increased threats. Our
Australian business enables us
to maintain, support and evolve
next-generation capabilities
for the Australian and
regional customers.
US
54%
The US maintains the largest
defence budget in the world
and remains our primary home
market. Our exposure to key
long-term US programmes,
particularly in the Sensors &
Information sector but also in
Countermeasures & Energetics,
gives us good visibility for
future earnings.
Europe
10%
In Europe, our Norwegian business
continues to have a strong order
book for its niche products and has
long-term supply agreements with
key customers, providing good
future visibility.
2
Chemring Group PLC Annual report and accounts 2020
Sensors & Information
Innovation is core to solving our clients’ difficult problems.
Our Roke business draws on a 60-year heritage of innovation in sensors,
communications, cyber and artificial intelligence to innovate and apply
these technologies in new ways.
Operating across defence, national security and industrial domains, we
enable our clients to deliver competitive advantage, defend their people,
assets and information, and defeat their adversaries.
With over 500 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.
We operate across the whole lifecycle providing advice, research and development,
engineering, design and in-service support for our products and services.
Countermeasures & Energetics
Chemring is the world leader in the design, development and manufacture
of advanced expendable countermeasures for protecting air and sea
platforms against the growing threat of guided missiles.
We combine a deep understanding of platform signatures, missile seekers
and chemical formulations to develop new countermeasures against
evolving threats.
Our niche, world-class energetics portfolio provides high-reliability,
single-use devices that perform critical functions for the space, aerospace,
defence and industrial markets.
Every day, our products, services and experts assist customers, including NASA,
to launch rockets into orbit, provide cutting-edge raw materials to meet
unique client requirements, and provide vital aircraft safety systems, including
actuators to release oxygen masks and ejector seats for aircrew egress.
Revenue
£137.2m
(2019: £131.9m)
Revenue
£265.3m
(2019: £203.3m)
Underlying operating profit
Underlying operating profit
£27.4m
(2019: £26.3m)
20
19
18
£39.9m
(2019: £27.5m)
15.3
27.4
26.3
20
19
18
39.9
27.5
23.9
Chemring Group PLC Annual report and accounts 2020
3
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Investment case
Investing in sustainable
performance and growth
In the last two years 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 during the
year, Chemring completed the process of exiting the
commoditised energetics market. In doing so, we have
retired significant operational and reputational risk.
These actions have been enhanced by a focus
on embedding a culture of safety and continuous
improvement across the Group.
Chemring now has a clearly defined strategy,
which will deliver significant value for our
shareholders. In particular, the Board believes that
the Group has attractive market-leading positions
on a number of global defence programmes, which
provide opportunities for future growth in revenues,
profit and cash flows. These include:
1
2
3
4
Well positioned in
niche segments
Against the background of stable
and growing defence budgets,
particularly 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 include the Group’s global
market-leading positions 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 Roke’s
national security and
defence markets
Roke’s consulting, technology
and R&D service activities are
experiencing strong growth,
driven principally by information
security for the national security
and defence markets. There are a
growing number of opportunities
for our electronic warfare products
in the international market, as well
as the opportunity to leverage
Roke’s intellectual property in
the industrial 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 last two years Chemring
has been restructured, the
portfolio reshaped and significant
investment has been made in the
modernisation and automation
of our facilities. These actions
provide strong foundations for
future growth and margin growth.
We are a business that relentlessly innovates to protect its customers
4
Chemring Group PLC Annual report and accounts 2020
5
6
Market-leading niche positions in both sectors
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.
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 2020
5
We are a business that relentlessly innovates to protect its customers
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS COVID-19 response
Resilient in the face
of uncertainty
COVID-19 (“CV-19”) represents an unprecedented
challenge across the globe. Our ability to respond to
the challenge was fostered through an approach of
pro-active monitoring and implementing proportional
measures as the crisis evolved. As such we have been
able to protect and safeguard our people and maintain
operations in support of our customers.
Safeguarding health, safety and wellbeing
Our first priority throughout this crisis has been the health, safety
and wellbeing of our people, their families, our customers and the
communities in which we operate. From the outset we adopted an
agile approach which balanced risk mitigation with business continuity
and which was based on the latest government recommendations in
each of our home markets.
We have continued to monitor the situation closely, responding to the
crisis as it has evolved, providing our people with timely guidance and
support to maintain their wellbeing and ensuring that we take appropriate
action as required.
The response of our people has been outstanding. They have risen to
the challenge, adapting their behaviour and working practices in order
to minimise the spread of the virus, whilst continuing to focus on the
needs of our customers.
Maintaining operations and business continuity
As a company we recognise our essential contribution to the ongoing
defence and national security missions of our customers. Our business
continuity plans were therefore enacted at all our sites and, where
necessary, we adapted our working practices and environments to
minimise the risk of spreading the virus. This included the implementation
of social distancing and home working, and, where this was not possible,
the use of enhanced PPE to further minimise any potential risk.
In the US, the UK and Norway, Chemring’s operations were designated as
critical to the defence and national security industrial base, and in Australia
the risk of business interruption was considered to be low. All our businesses
have therefore remained open throughout the pandemic. We continue to
make every effort to maintain delivery of essential services and
manufacturing production in support of our customers.
One significant risk to our operations was associated with the ability of
our customers to test and accept goods. Our manufacturing businesses
have worked closely with their customer representatives to deliver timely
testing and acceptance of products. In the first half of the year we worked
through some CV-19 related disruptions where customer representatives
were not able to complete product acceptance procedures on a timely
basis. This persisted in the second half of the year, resulting in some
short-term revenue deferrals, although this did not impact the Group
at year end.
CV-19 timeline at Chemring
30 January 2020
WHO declares Public Health
Emergency of International Concern
4 March 2020
AGM trading update – no current impact
to businesses or supply chains but
monitoring closely
11 March 2020
WHO declares CV-19
global pandemic
3–29 February 2020
Daily monitoring of global cases
begins, all travel moved to high
risk and attendance at mass
events restricted
w/c 9 March 2020
Crisis Management Team established and
business continuity plans enacted.
Group-wide changes to working
arrangements, social distancing and
self-quarantine developed; ban on
international travel, mass events and
external visitors
w/c 16 March 2020
Group guidance on social distancing,
cleaning, personal hygiene, travel,
visitors and alternative working
arrangements implemented; weekly
senior leadership video call convened
and CEO weekly video blogs to all
employees commenced
6
Chemring Group PLC Annual report and accounts 2020
Our values in action
Adapting to CV-19
Adapting our business to COVID-secure requirements ensured our operations
continued throughout the pandemic. Our colleagues remain resilient; whether
through socially distanced team briefings outdoors, the installation of hygiene
stations in our offices or clear signage for safety reminders, all our Chemring
sites have risen to the challenge.
Managing our stakeholders
Throughout the pandemic we have recognised that its impact will
be felt by all our stakeholders. We have therefore endeavoured to
support and inform them through early and regular engagement.
Employees
Our first priority has been to safeguard the health and wellbeing of
our employees. At every stage we have sought to provide them with
timely guidance and support in order to maintain their wellbeing and
minimise the risk of exposure.
Customers
We have actively worked with our customer base to ensure the
delivery of timely testing and acceptance of products. At times,
this has required innovative solutions including virtual product
inspections. In turn, we are grateful to our customers for their
flexibility and support and the designation of our operations as
critical to the defence and national security industrial base.
Shareholders
We have proactively engaged with our shareholders, providing them
with regular market updates and participating in numerous investor
calls and virtual investor roadshows. We also published on our
website a pre-recorded video of our interim financial results in
lieu of our normal presentation to analysts and investors.
Suppliers
Chemring enjoys strong relationships with our suppliers and we have
worked closely with them throughout the crisis. We have had no
significant supply chain issues to date and are grateful to our many
suppliers for the support that they have given us.
Read more on our stakeholders
Page 17
Protecting our financial position
Given the uncertainty surrounding the length of the CV-19 pandemic, the
Group has taken various actions to protect profitability and to conserve cash.
Operational expenditure has been reduced and all discretionary spending is
tightly controlled as we seek to ensure the Group is well placed to navigate
the current challenges. The already-established enhanced focus on working
capital management, in particular the reduction of intra-period net debt
volatility, is proving beneficial and the Group is focusing on ensuring that
working capital disciplines are maintained in these challenging times.
In response to the CV-19 pandemic and the risk of business disruption,
the Group took the precautionary measure of obtaining an additional
short-term debt facility of £100m to further strengthen the Group’s
liquidity position. £50m of this facility was drawn in April 2020 and
was repaid in full in October 2020, having not been required.
Conclusion of financial stress tests
We carried out a number of financial stress tests, further details of which
are included in the viability statement. The conclusion was that the Group
could withstand a greater than 50% decline in operations for six months
without the need to renegotiate bank facilities or covenants.
24 March 2020
Our response to CV-19
press release published
on website
14 April 2020
CV-19 update
announcement issued to
the markets
June 2020
Chemring Nobel moves from
Phase 1 to Phase 2 transition with
easing of some controls
3 June 2020
Interim results announced
and virtual investor
roadshow commenced
1 April–30 May 2020
Focus on wellbeing and securing supply
chains; stable routine of the new normal
established and CV-19 Playbook
developed including all controls (subject
to government guidance) to protect
people and business continuity
May 2020
Three-phase change control process
established: Safeguard-Transition-
Emerge; all businesses in Phase 1 with
stringent controls
3 June to present
Control framework
embedded to provide
continual monitoring and
adjustments to risk controls
Chemring Group PLC Annual report and accounts 2020
7
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chairman’s statement
Building on strong foundations
In a year that presented extraordinary challenges to us all, I am pleased to report
on the progress that the Group has made during 2020. Two years ago we put
in place a roadmap to deliver long-term growth and a more sustainable business
model. The significant progress that we have made in building a stronger, more
resilient business has been demonstrated in the way in which the Group has
reacted as the CV-19 pandemic has developed across the globe.
Building on strong foundations
At the heart of our CV-19 response has been the need to protect our
people whilst maintaining our operations in support of the critical needs
of our customers. In the face of adversity, the response of our people, at
every level, has been outstanding. They have risen to the challenge,
adapting their behaviour and working practices in order to minimise the
spread of the virus.
In maintaining our operations and with careful financial management, I am
pleased to report that all our sites have remained open and we have been
able to protect jobs and livelihoods.
Despite the changing and challenging environment in which we have been
operating, the Group delivered a strong performance that was ahead of
our expectations. On behalf of the Board I would like to acknowledge the
commitment and professionalism that our colleagues have demonstrated,
and thank them and their families for their support.
Purpose and strategy
Chemring’s purpose is innovating to protect people, platforms, missions
and information from constantly changing threats.
We achieve this through innovation, using our extensive science and
advanced engineering expertise to design, develop and manufacture
critical solutions that protect and safeguard in an uncertain world.
The Group’s strategy is to deliver profitable growth by operating in markets
where we have differentiators such as intellectual property, niche technology,
high barriers to entry and deep long-term customer relationships.
On 7 May 2020 Chemring announced that we had completed the sale of
Chemring Ordnance Inc. for $17m, and with it our strategic exit from the
commoditised energetics market. This has reduced the Group’s exposure
to significant reputational and operational risk, and enables greater focus
on our growing and differentiated positions in Sensors & Information and
Countermeasures & Energetics where we are already a market leader.
“ 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 people and
infrastructure in order to
deliver sustainable growth
into the future.”
Carl-Peter Forster
Chairman
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.
8
Chemring Group PLC Annual report and accounts 2020
Our values in action
CFA donation (Australia)
The Country Fire Authority (“CFA”) supports our Australian facility in its
emergency readiness and management approach, staff training, and risk
assessment and permitting of on-site activities. The local CFA has been the
first responder to assist at on and off-site events with the potential to impact
ongoing operations.
During 2020 Chemring took the opportunity to give back. Chemring Australia
donated $25,000 towards the CFA’s Ultra-Light Tanker Fund. This fund will
allow the Lara CFA to purchase a manoeuverable vehicle that can respond in
areas that are not readily accessible to larger tankers. This is an important
capability that the CFA will deploy in the protection of our local community.
We are delighted to support the continued efficient and effective operations
of the CFA, noting the exceptional work the organisation does throughout the
Lara region and across the state of Victoria.
Purpose and strategy continued
We will maintain and grow our positions in Countermeasures & Energetics,
investing in modernisation and automation to improve operational
effectiveness and reliability and 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 support our medium-term ambition of generating mid-to-high
teen margins at a sector level. As a Board we remain open to acquisition
opportunities but only if they meet a strict set of criteria, enhance
shareholder value and fit in with our wider growth plans. To date,
we have reviewed and declined to proceed with a number of
possible transactions.
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 people and our infrastructure
in order to deliver sustainable growth into the future.
Read more on our strategy
Page 22
Health, safety and the environment
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.
Safety is therefore at the core of our operating philosophy and the basis
of our safety culture that is felt throughout the business. As a Board we
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 that our people can operate safely in a factory environment
and with processes that are designed and maintained to reduce
employees’ exposure to hazardous situations.
Our goal of zero harm goes beyond the management of safety and
recognises our impact on the environment. All Chemring businesses have
local environmental systems aligned with international standards and have
undertaken local initiatives and programmes to reduce energy and waste.
As our sustainability agenda evolves, we have taken a more centralised
approach to assessing and managing our environmental performance. This
year we established the Environmental Committee with responsibility for
advising on the strategic environmental direction of Chemring. Further
details on this can be found in the Sustainability section of this report.
Read more on our health, safety and the environment
Page 48
People and our community
Our people are our greatest asset. It is through them that we will
progress our strategy and deliver long-term growth. Having spent time
with colleagues at every level across the business, the Board is continually
impressed with the experience, talent and passion that they demonstrate.
Ensuring that our people are motivated and feel valued remains a key area
of focus for the Board. In 2020 the Group maintained its efforts on
continuous development, engagement and the wellbeing of our people.
Investing in our people and our infrastructure is key to improving the
quality of the business.
The Development Framework that was launched in the autumn of 2019,
which focuses on the development of management, leadership and
technical skills at all levels across the business, has delivered a number of
key initiatives in the year.
During 2020 every colleague whose role includes being a first line manager
or supervisor has commenced participation in our new development
programme. There are over 340 participants who between them directly
manage around 85% of the total population of the organisation.
The first Early Careers Conference for UK and Norwegian graduate and
apprentice colleagues provided the opportunity for face-to-face networking,
interaction with senior leaders and development workshops. Sadly, the
corresponding event that was scheduled in the US did not take place as a
result of CV-19. Our Early Careers Programme will continue to evolve and
has already led to a record number of apprentices joining Chemring in 2020.
Chemring Group PLC Annual report and accounts 2020
9
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Chairman’s statement continued
People and our community continued
During the year, Laurie Bowen, as the non-executive director with
responsibility for employee engagement on behalf of the Board and as
Chairman of the Remuneration Committee, met with groups of colleagues
from different business areas and at different levels in the organisation
to hear directly from them their views on working at Chemring, as
well as sharing the work of the Board. These groups included previous
participants in the Emerging Leaders Programme, line managers and
supervisors, and a business unit leadership team. These groups were
chosen to complement the work done previously by Andrew Davies,
another non-executive director, in 2019 when he met with groups of
operators from around the businesses.
On behalf of the Board I thank all employees for their high level of
commitment and enthusiasm which has been particularly impressive
given the challenges faced as a result of CV-19.
Read more on our people and our community
Page 55
Governance and ethics
During the last two years we have taken significant steps to ensure
that we have in place the necessary policies and procedures across the
business to operate with integrity and transparency and to the highest
ethical standards. This has been coupled with a focus on creating an
inclusive culture across the Group where everyone does the right
thing and takes responsibility for their actions.
The bedrock of our governance is the Operational Framework and the
Code of Conduct, both of which bind our values, behaviour, policies and
procedures, and provide the necessary governance to enable us to
operate in a safe, consistent and accountable way.
We have maintained our focus in this area during 2020 and have
implemented further processes through which to manage our exposure
to potential risks. There were two notable developments during the year.
The first was the formation of a new Ethics & Compliance Committee.
This committee, which meets regularly throughout the year and is chaired
by me, has responsibility for the oversight and monitoring of Chemring’s
ethical business conduct and compliance. The second was the appointment
of a Security and Corporate Facility Security Officer in the US with
responsibility for ensuring that at all times we operate in full compliance
with our Special Security Agreement with the US Government.
Good governance and ethical behaviour underpin our evolving sustainability
agenda and ensures that we operate safely, responsibly and in compliance
with current legislation in all our jurisdictions.
Dividends
The Board is recommending a final dividend in respect of the year ended
31 October 2020 of 2.6p (2019: 2.4p) per ordinary share. With the
interim dividend of 1.3p per share (2019: 1.2p), this results in a total
dividend of 3.9p (2019: 3.6p) per share.
If approved, the final dividend will be paid on 23 April 2021 to shareholders
on the register on 6 April 2021. In accordance with accounting standards,
this final dividend has not been recorded as a liability as at 31 October 2020.
Board of directors
On 16 December 2019, we announced that Nigel Young had indicated
his intention to retire as a non-executive director when his current
appointment came to an end and Nigel therefore stood down from the
Board on 30 April 2020. Nigel served as a non-executive director from
1 May 2013 and was the Senior Independent Director from March 2016.
During his tenure the Group progressed through a period of significant
transformation and the Group is extremely grateful for his guidance and
commitment. Nigel’s role as Senior Independent Director was assumed
by Andrew Davies on 1 May 2020.
Laurie Bowen, non-executive director, assumed the role of Chairman
of the Remuneration Committee on 4 March 2020.
With the appointment of Fiona MacAulay as a non-executive director
on 3 June 2020 we were able to add to our Board, amongst other attributes,
significant experience in operating safely in hazardous environments.
Current trading and outlook
Trading since the start of the current financial year has been in line
with expectations.
The Board’s expectations for the Group’s 2021 performance
remain unchanged.
A great deal of work has been done in recent years to produce a more
balanced delivery of revenue and profit across the year. The Group
expects the balance of its trading performance in 2021 to be similar
to 2020 with a slight bias towards the second half of the financial year.
The Group order book as at 31 October 2020 was £476.0m, of which
£326m is currently expected to be recognised as revenue in 2021 , giving
excellent visibility for the full year.
In the longer term, Chemring is well placed, with a robust strategy,
market-leading positions across different geographies and sectors, and
products and services that are critical to our government and blue-chip
customers. This, together with the Group’s strong balance sheet, gives the
Board confidence that, despite any near-term CV-19 related uncertainty,
Chemring’s long-term prospects remain strong.
Carl-Peter Forster
Chairman
15 December 2020
10
Chemring Group PLC Annual report and accounts 2020
Group Chief Executive’s review
Delivering against our strategy
Our focus in recent years has been on putting in place the foundations on
which to build a stronger, higher quality business. The resilience of the Group
in response to the coronavirus pandemic is a consequence of the dedication
and commitment of all our people and clearly demonstrates the significant
progress that we have made.
Introduction
Despite the challenging and changing environment that we have been
operating in, all our sites have remained open and we have made every
effort to sustain our operations in support of our customers and their
essential missions. The response of our people, and their families, has
been outstanding and it is this significant team effort that has produced
results ahead of our expectations, reflecting strong performance in
both segments.
Safety
Safety is our core value, with the health, safety and wellbeing of our
colleagues, their families, our customers and the communities in which
we operate being our priority. This has been particularly relevant this year.
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.
2020 has been an unprecedented year due to the CV-19 pandemic.
Whilst this created a need for special focus we have still maintained
progress in line with our HSE strategy, with an emphasis on embedding
the standards and processes we implemented last year across the areas
of control of major accident hazards, injury reduction and HSE risk
management. Despite the challenges of CV-19, 2020 has proven that
we have developed and continue to build a stronger safety culture.
In 2020 our lost time injury rate was 0.24 compared to 0.40 in 2019.
This represents five injuries and reflects a 40% decrease in lost time
injuries and we are pleased to report there were no fatalities or
life-changing injuries. Our total recordable injury frequency (“TRIF”)
rate was 0.85. The 2020 TRIF rate matches our 2019 performance.
Michael Ord
Group Chief Executive
Underlying operating profit
£54.7m
20
19
18
54.7
44.0
31.0
Revenue
£402.5m
20
19
18
Dividend
3.9p
20
19
18
402.5
Environmental, social and governance
At Chemring we acknowledge our responsibility to contribute to a sustainable
future. We have a strong and recognised obligation to ensure the responsible
operation of our business and are fully committed to safe, sound and
ethical business conduct at all times.
335.2
297.4
3.9
3.6
3.3
Good progress has been made during 2020 as we manage our
sustainability agenda, and in particular our environmental, social and
governance (“ESG”) related risks. During the year we concluded the
exit from the Group’s commoditised energetics businesses and in doing
so we retired significant reputational risk and have improved the quality
of the Group and its future earnings. Chemring is now a business with
an evolving purpose of Innovating to Protect, and, with that we are
focused on protecting our customers, people, assets and information.
Chemring Group PLC Annual report and accounts 2020
11
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Group Chief Executive’s review continued
Environmental, social and governance continued
Whilst our approach to sustainability continues to evolve we are
committed to implementing transparent policies and procedures, and to
fostering an inclusive culture across the Group where everyone does the
right thing and takes responsibility for their actions. In doing so we will
build a sustainable company of which all our stakeholders can be proud,
now and in the future.
2020 performance
Despite the changing and challenging environment in which we have
operated throughout much of 2020, I am pleased to report that the
Group has recorded a strong set of results for this financial year, ahead of
the Board’s expectations. Revenue for the year was up 20% to £402.5m
(2019: £335.2m), underlying operating profit was up 24% to £54.7m
(2019: £44.0m) and statutory profit before tax was up 62% to £43.3m
(2019: £26.7m). Underlying earnings per share was up 35% to 15.1p
(2019 11.2p).
This award provides a platform from which to explore further
opportunities to penetrate the EW market in the US.
Roke is increasingly exploring partnering agreements with other leading
organisations to access further market opportunities. An example of
this is Charlie Charlie One (“CC1”), a Dismounted Situational Awareness
system that Roke has developed in partnership with Samsung SDS Europe.
This ongoing relationship focuses on product development, sales and
marketing, management and joint customer engagement. Some initial sales
of CC1 have now been made and successful demonstrations and trials
conducted in 2020 with several European militaries may culminate in
future orders in 2021.
Roke remains a key driver of future growth and as such we will continue
to invest in support of this business as we seek to optimise the opportunity
for Chemring. We will continue to prioritise business development activities
with our UK Government customers and in parallel we will seek to develop
further opportunities in both the industrial sector and internationally.
We set ourselves three broad objectives for 2020 and it is pleasing to
report good progress against all three.
The first was to defend and grow our global countermeasures business.
The third objective was to protect and grow our US sensors business.
Our US sensors business has continued to make good progress in all of
the US DoD’s Programs of Record.
It was a year of solid recovery in performance within the countermeasures
businesses, with a significant improvement in revenue that was driven
primarily by the Australian and Salisbury facilities being operational after
the F-35 fit-out and phased restart in 2019. All sites focused on improving
efficiency and competitiveness through modernisation, automation and
lean manufacturing.
The actions we have taken to consolidate our countermeasures businesses
into a single global structure continue to progress well. Strong working
relationships and collaboration are now common, as is the sharing of
operational best practice, supply chains, market intelligence and new
product development.
The Tennessee capacity expansion programme, designed to address
the expected F-35 demand from the US Government and international
nations and safeguard the Group’s position in the global countermeasures
market, continues to progress on schedule. During the year £22m was
spent on the facility, bringing the total spend to date to £37m. The
expected total cost of the programme is approximately £50m, with
the first incremental revenues from this facility expected in 2022.
Order intake for the countermeasures businesses was strong with
notable highlights being Chemring Australia’s undefinitised contract on
the F-35 programme for the US DoD, announced in May 2019 at a value
of $60m, being definitised at a value of $107m in April 2020, and the
US countermeasures businesses being awarded contracts totalling $136m
during the year to supply expendable countermeasures to the US Air Force,
US Navy and other services. This significant order intake reinforces the
mission criticality of our products and underpins our decision to invest
in our manufacturing facilities.
The second objective was to grow Roke.
Our Roke business delivered another solid year with double-digit growth
in revenue. It also maintained strong margins despite increased investment
in people, infrastructure and product development.
In the UK, the markets for electronic warfare, cyber-security and data
science capabilities, in which Roke is a leading participant, have remained
buoyant in the period. 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.
Whilst Roke’s primary focus is in the UK and Europe, we are also pursuing
opportunities in the US and Asia Pacific markets. Securing an important
first electronic warfare (“EW”) order for Roke’s Resolve product to the
US DoD was a key strategic objective for 2020 and was achieved through
significant collaboration between Roke and our US sensors business.
The US DoD’s Explosive Hazard Detection HMDS program, on which
we are the sole-source provider, continued to progress as expected with
customer deliveries made on schedule throughout the year. Delivery
orders of $62m were received during the year and early into the second
half of the year a contract modification was received which increased the
existing IDIQ by a further $200m. This gives good visibility on the
program out to 2024.
The two sole-source biological agent threat detection programs continued
to make good progress during the year, with the customer awarding a contract
modification that moved the naval variant, EMBD, from development to
Low Rate Initial Production (“LRIP”). On the other biological detector
program, JBTDS, which is designed for the US Army, we continued to
deliver against our Engineering and Manufacturing Development (“EMD”)
contract. A customer LRIP procurement decision is expected in 2022.
On the chemical agent detector program, AVCAD, we continued to progress
through the EMD phase as expected. Chemring is currently one of two
contractors selected for this competitive program and the next customer
procurement decision point is expected to be at the conclusion of the
EMD phase in 2021. We continue to focus our efforts on building a
winning solution.
Aside from these three broad objectives the Group also made good progress
in its strategic focus on higher margins and more predictable revenue streams.
A significant milestone in the year was the disposal of Chemring Ordnance
in May 2020. This completed the strategic exit from the four
commoditised energetics businesses that was announced in November 2018
and, with it, the Group has retired its exposure to a significant amount of
operational and reputational risk. This move has also enabled us to place
greater focus on our remaining niche specialist energetic devices and
materials businesses. These businesses, which have deep intellectual
property and high barriers to entry, enjoyed a stronger year driven by
favourable market conditions and improving operational execution.
The Group’s order book at 31 October 2020 was £476.0m (2019: £449m),
of which approximately £326m is scheduled for delivery during 2021,
representing cover of approximately 78% of expected 2021 revenue.
The increase since 31 October 2019 is primarily attributable to contracts
awarded in the countermeasures businesses.
The underlying operating profit from continuing operations of £54.7m
(2019: £44.0m) resulted in an underlying operating margin of 13.6%
(2019: 13.1%). The increase in margin primarily reflects the positive
impact of the Australian and Salisbury facilities being operational after
the F-35 fit-out and phased restart in 2019, combined with a strong
year in Sensors & Information due to a strong performance on the
HMDS IDIQ contract and in Roke’s information security business.
12
Chemring Group PLC Annual report and accounts 2020
Net debt at the year end was £48.2m (2019: £75.7m). The current debt
level reflects the recognition of a £6.5m finance lease liability as a result of
applying IFRS 16 Leases (effective 1 November 2019), and the previously
announced high level of capital expenditure in 2020 which has been funded
by continued strong operational cash generation. Underlying operating
cash inflow of £82.4m (2019: £63.9m) represented 110% (2019: 104%)
of EBITDA.
On 19 November 2019, the final tranche of 5.68% private placement loan
notes of $83.6m was repaid. This was funded from the Group’s £145m
multi-currency revolving credit bank facility. In response to the emerging
CV-19 pandemic and the risk of business disruption, in April 2020 the
Group obtained an additional short-term £100m facility, of which
£50m was drawn, to further strengthen the Group’s liquidity position.
Having not been used, this facility was repaid in full in October 2020.
Culture
The realignment of the operating businesses under two sectors and
the changes in leadership that were enacted in 2019 and 2020 has created
a strong foundation from which are able to build a culture and environment
founded on inclusion, respect and diversity. We are committed to
implementing transparent policies and procedures, and to fostering an
inclusive culture across the Group where everyone does the right thing
and takes responsibility for their actions. We want all of our colleagues to
be able to bring their whole self to work and then return home safely at
the end of every day. In doing so we will build a sustainable company of
which all our stakeholders can be proud, now and in the future.
Particular areas of focus in 2020 have been around people development,
communication and wellbeing. Each of these are key to developing the
capability of all our colleagues and ensuring that they are engaged with
Chemring enabling us to continue to build a stronger business.
Chemring is its people and this means understanding how we can make
the Chemring community feel even more inclusive so that anyone who
lives our values and supports our purpose feels they can bring their whole
self to work without fear of judgement or discrimination. Through
the culture review undertaken in 2019, and the ongoing engagement
throughout 2020, we are determined to ensure that all colleagues have
a voice and are able to share their thoughts regularly and know that the
leadership team is listening.
Innovation requires diversity of thought, education, background, experience and
personality type. We will continue to focus throughout 2021 on developing an
inclusive and dynamic work environment for all our colleagues in support of our
business goals and to ensure that we continue to invest in our people.
Conclusion
Despite the challenging environment in which we have been operating
throughout most of 2020, a great deal has been achieved this financial
year. We set ourselves demanding goals and our teams across the Group
have risen to those challenges.
The work that has been done in recent years to build a stronger, higher
quality and more sustainable business, based on our shared values of Safety,
Excellence and Innovation, is delivering positive returns for all stakeholders.
This would not have been possible without our greatest asset – our people.
I would like to thank all of my colleagues across Chemring for their
commitment, innovation and hard work in exceptional circumstances.
The resilience that the business has shown as we have adapted to the
coronavirus pandemic, the solid demand and increased visibility that we
continue to see for our products and services, and the innovation and
dedication of our people enable me to look to the future with confidence.
Innovating to Protect
Michael Ord
Group Chief Executive
15 December 2020
Our values in action
Tennessee capacity expansion programme
The Tennessee capacity expansion programme is a £50m investment project to build the world’s most advanced automated countermeasures
manufacturing facility. Based at our Tennessee site, this new facility is a key enabler to ensuring we maintain and grow our global countermeasures
leading role.
Chemring Group PLC Annual report and accounts 2020
13
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 2,300 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 markets. 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. Our niche
energetics businesses win orders 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 minimising the cycle time from order to delivery.
14
Chemring Group PLC Annual report and accounts 2020
Outcomes
Stakeholder value
Investment
Our investment in property, plant and equipment in the year totalled £36.9m. In addition,
we invested £62.0m in product development, of which £52.5m was customer funded.
The capacity expansion project at the Tennessee countermeasures site continues to
progress on schedule and, excluding significant investments such as this, we aim for
investment to at least match depreciation and amortisation each year.
Investment
£98.9m
(2019: £96.9m)
Cash flow
We aim to convert 100% of underlying EBITDA to underlying operating cash flow over
the medium term, accepting that timing differences will arise at individual period ends.
In 2020, the conversion ratio was 110%, reflecting strong operating cash generation and
the continued focus on managing working capital.
Underlying cash conversion
110%
(2019: 104%)
Dividends
For the year ended 31 October 2020, our dividend will be 3.9p per share, an increase
of 8% on the prior year, subject to the approval of the final dividend at the Annual
General Meeting.
Dividend
3.9p
(+8%)
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 2020
15
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Section 172 statement
Responding to our stakeholders’ needs
Section 172 (1) of the Companies Act 2006 requires the directors to
act in the way they consider, in good faith, would most likely promote
the success of the company for the benefit of its members as a whole.
In doing so, section 172 requires the directors to have regard, amongst
other matters, to the:
• likely consequences of any decision in the long term;
• interests of the company’s employees;
• need to foster the company’s business relationships with suppliers,
customers and others;
• impact of the company’s operations on the community and environment;
• desirability of the company maintaining a reputation for high standards
of business conduct; and
• need to act fairly as between members of the company.
In discharging our section 172 duties the directors have regard to the
factors set out above and any other factors which we consider relevant to
the decision being made. We acknowledge that every decision we make
will not always result in a positive outcome for all of our stakeholders.
However, by considering the Company’s purpose, vision and values,
together with our strategic objectives and having a process in place for
decision making, we aim to ensure that our decisions are considered
and proportionate.
Further details on how the Board operates and reflects stakeholder views
in its decision making are set out in the corporate governance report on
pages 66 to 75. Further information on how the Board has had regard to
section 172 matters during the year can also be found in the following
sections of the annual report:
Section 172 factor
Key examples
Page
Consequences of any decision in
the long term
• Investment case
• Business model
• Target markets
• Strategy
Interests of employees
• COVID-19 response
• Stakeholder engagement
• Health and safety
• Our people
Fostering business relationships
with suppliers, customers and
others
• COVID-19 response
• Business model
• Stakeholder engagement
Impact of operations on the
community and the environment
• Target markets
• Strategy
• Ethics and business conduct
• Health and safety
• Environment
• Our people
Maintaining high standards of
business conduct
• Ethics and business conduct
• Corporate governance report
Acting fairly between members
• Investment case
• Stakeholder engagement
• Corporate governance report
16
Chemring Group PLC Annual report and accounts 2020
4
14
20
22
6
17
48
55
6
14
17
20
22
59
48
51
55
59
66
4
17
66
Stakeholder engagement
The Board recognises that positive interaction and collaboration with all of
our stakeholders is essential to the delivery of sustainable long-term value.
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.
We engage with a wide range of stakeholders at the Board level, at a
Group level and within our business units. In understanding what matters to
our stakeholders we are able to take this into account when setting our
strategy and also in planning our day-to-day business operations.
The table below sets out how we engage with our key stakeholders.
Customers
Employees
Why we engage
Ensuring that we provide innovative solutions that meet our customers’
needs, efficiently and on time, is crucial to the delivery of our strategy and
the long-term success of the business. Understanding our customers’
needs can only be achieved through regular interaction and collaboration.
Why we engage
Our people are at the heart of our business. They are critical to the
delivery of our strategy and the future growth of the business. We
recognise the importance of attracting, developing and retaining the best
talent, and the need to provide a safe and inclusive environment where
individuals can thrive.
How we engage
• Regular meetings, teaming arrangements and engagement at all levels
How we engage
• Regular all-hands meetings and team briefings
of our customers’ organisations
• Partnering with customers on a broad range of technology and
product development programmes
• Participating in industry forums and working groups, and hosting
customer visits to our sites
• Attending and exhibiting at selected trade shows, which enables
high-level interaction and the opportunity to brief customers on key
product developments and other initiatives
• The Group Chief Executive and President of our US operations
support our businesses through regular interactions with senior
customer representatives, and provide feedback to the Board
• External market updates and customer views are obtained to support
the Board’s strategy review
• In the US, our Government Security Committee works closely with
the customer to ensure that we operate in full compliance with our
Special Security Agreement with the US Government and updates the
Board on a regular basis
• Works councils, trade unions, representative bodies and forums which
support and connect people with shared characteristics or interests
• Publication of a monthly video blog by the Group Chief Executive,
regularly featuring other members of the senior leadership team
• Publication of regular company notices and the in-house magazine,
Chemring-I, which features news and events from across the Group
• Our real-time employee engagement tool, “Employee Voice”, enables
employees to provide immediate and anonymous feedback on
developments within the business, output from which is regularly
provided to the Board
• Direct engagement with the Board’s nominated non-executive director,
Laurie Bowen, through meetings with colleagues from across the
business and at different levels of the organisation
• Board engagement with a wide range of employees during collective
and individual site visits throughout the year
How we monitor
• Order intake
• R&D expenditure
• Capital investment
• Process safety events
How we monitor
• Employee Voice participation and positivity scores
• Safety performance indicators
• Diversity statistics
• CEO pay ratio
Outcomes
• Customer-focused inputs into the Group strategy
Outcomes
• Development of people strategy and related investment
• Innovation and investment driven by customer requirements
• Safe, healthy and motivated workforce
• Collaborative, strategic customer relationships
• Focus on diversity and inclusion
• Improved customer satisfaction
• Improved employee retention
• Attractive proposition for potential new employees
Chemring Group PLC Annual report and accounts 2020
17
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Stakeholder engagement continued
On 30 November 2020, Chemring celebrated
its 115th anniversary. A lot has changed since
1905. We have grown into a global business
and are proud to have some of the world’s
finest engineers, scientists and thought leaders
as a part of our team. Throughout our history
we have always recognised the importance of
regularly engaging with all our stakeholders.
Suppliers
Shareholders
Why we engage
We rely on our suppliers to provide us with quality raw materials,
products and services. Constructive engagement ensures that our
suppliers are able to meet our high expectations on safety, quality, value,
delivery performance and ethical business conduct. We recognise that
prompt payment terms and strong supplier relationships are important
in building a long-term, sustainable and supportive supply chain.
Why we engage
The continued support of our shareholders is something that we value
greatly. We therefore recognise the importance of providing all of our
shareholders with regular updates on the Group’s operational and
financial performance, strategy and future prospects, and ensuring
that shareholder views are taken into consideration in relation to
major developments in the business.
How we engage
• Day-to-day interaction with suppliers is conducted largely by supply
How we engage
• Engagement with shareholders is predominantly led by the Group
chain management teams within our businesses
• Long-term agreements are entered into with our key suppliers,
which provide visibility on future requirements and enable us to agree
performance targets to assist with our drive for continuous improvement
• All suppliers are issued with our Supplier Code of Conduct, which sets
Chief Executive, the Group Finance Director and the Group Director
of Corporate Affairs, although the Chairman and Senior Independent
Director also meet with shareholders to discuss specific matters
• Publication of our interim and full year results statements, along with
regular trading updates throughout the year
out the standards of ethical business conduct we expect of them
• Face-to-face meetings or video calls following the publication of any
significant news update or at the request of the shareholder
• Formal presentations and structured roadshows for our institutional
investors, either in person or by video as occurred during the CV-19
lockdown period, following the publication of the Group’s interim and
full year results
• Collation of feedback by our brokers and other financial advisers from
our institutional investors, in which their views can be expressed on a
non-attributable basis
• Our website (www.chemring.co.uk) provides financial, business and
governance information on the Group and an alerts service enables
subscribing shareholders to receive notification of corporate updates
• Our Annual General Meeting provides the opportunity for our private
shareholders to hear from and engage directly with the Board
How we monitor
• Payments made within payment terms
How we monitor
• Earnings per share
• Statistics on issue of the Supplier Code of Conduct and inclusion
• Dividends paid
of suppliers on the Chemring Compliance Portal
Outcomes
• Collaborative, long-term relationships
• Total shareholder return
• Environmental, social and governance metrics
Outcomes
• Development of capital allocation and dividend policy
• Delivery of safe and reliable products and services to customers
• Development of ESG strategy
• Appropriate working capital management
• Supportive, long-term shareholder base
18
Chemring Group PLC Annual report and accounts 2020
Communities
Governing bodies and regulators
Why we engage
We recognise the important role that each of our businesses play in their
local communities and we actively encourage our businesses to support
local initiatives and charitable causes. Equally, our businesses take pride in
the contribution that they make to their local communities, both as a
local employer and in the work they do to support good causes.
Why we engage
Our businesses operate in highly regulated environments and we need to
ensure that we maintain our licences to operate and continue to run our
businesses in full compliance with all laws and regulations. We also need
to keep ahead of planned regulatory developments which may impact
our operations in future.
We also recognise the impact of our business on wider society and our
responsibility to contribute to a sustainable future for all.
How we engage
• Our community investment policy confirms our commitment to
How we engage
• Maintenance of a regular dialogue with contacts within governments
and at our regulators
• Participation in industry working groups and trade representative bodies
• Consultation with local governing bodies on planned business
developments and investments
• Interaction with the US Board’s Government Security Committee
support selected charitable causes with a focus on the military and
armed services, STEM-related initiatives and those linked to the local
communities in which our 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 addition to making cash donations, we also encourage and support
employees who undertake voluntary work in the local community
• Our people across the Group 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
• Since 2018 we have provided sponsorship through the Horizons
Bursary Scheme run by the Institution of Engineering and Technology,
which provides financial support during degree study for students who
have faced or continue to face adversity whilst they study; these
students are all studying STEM degree courses which are relevant to
the disciplines required within Chemring
How we monitor
• Charitable donations
How we monitor
• Compliance statistics
• Environmental performance indicators
• Safety-related capital investment
Outcomes
• Development of ESG strategy
• Informed communities
Outcomes
• Implementation of Operational Framework
• Trusted supplier to government customers
• Contribution to local businesses and employment
• Sustainable business operations
• Contribution to wider society
Chemring Group PLC Annual report and accounts 2020
19
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Target markets
Building leading positions
Chemring is an international technology company.
Our home markets are the US, the UK, Europe
and Australia.
The CV-19 global pandemic is impacting defence
budgets globally, with some countries cutting near-term
investment whilst others are increasing investment
in the short term to provide stimulus to key defence
industrial partners.
Whilst not immune to this trend, our home markets
are proving relatively resilient. The US, the UK and
most of our European customers are providing
additional injections of funding for the defence industry
and continuing to place orders for procurement
programmes. Australia is expected to go even further,
having announced in 2020 a large-scale budget increase
through to 2030 that is expected to fund multiple
large-scale acquisition programmes.
Global sales
% of Chemring’s global sales (2016–2020)
rest of the world 4%
USA 49%
Europe 10%
Asia Pacific 10%
Middle East and
T UK 27%
27+27+
US
We are capitalising on our successful investment in explosive hazard
detection and next-generation chemical and biological detection
technologies where we continue to make progress on a number
of Programs of Record.
The largest part of our investment is in the US Countermeasures
sector. The capacity expansion programme at our North American
manufacturing operations, which continues to progress on schedule,
will allow us to capitalise on the growing F-35 fleets. F-35 will become
the primary fighter jet 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 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. This is
especially true for our core platform positions in the US market,
notably the F-16, F-15 and F-18, which are all intended to remain
in service at minimum into the 2030s.
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.
20
Chemring Group PLC Annual report and accounts 2020
The US is the world’s largest defence market and
our US businesses are well positioned to benefit
from this strong defence budget
The FY21 National Defense Authorization Act was passed in July 2020
with a base budget for FY21 of $636bn. The President’s FY21 Budget
Request also projected the US DoD five-year programme to settle at
a base budget level of $758bn in FY25*, 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 and
warfighting options. Since the beginning of the CV-19 global pandemic, the
US passed the Coronavirus Aid, Relief and Economic Security (“CARES”)
Act, in March 2020, which provided $10.5bn of stimulus spending for the
US DoD. In July 2020, the US Senate also introduced the Coronavirus
Response Additional Supplemental Appropriations Act, which is expected
to provide additional short-term stimulus funding to the US Department
of Defense, of which a large amount will be allocated to a “Defense
Industrial Base Resiliency Fund” to support the US defence industry.
With 78% of FY21 expected revenue covered by the order book, the
Group is safeguarded against any near-term disruption caused by the
US presidential transition.
The full impact of the CV-19 global pandemic on long-term defence
spending has yet to be fully understood in the US, and we expect further
clarity from the US Government and DoD throughout 2021.
Our US businesses remain well positioned despite any near-term uncertainty:
• 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. Electronic warfare in particular is
expected to be a key area of spend in the current spending plan, with
several programmes likely to begin in 2024 that play to Chemring Group’s
capabilities in signals intelligence (“SIGINT”) and electronic intelligence
(“ELINT”) and land-based electronic warfare.
* Source: Congress.gov
49
49
+
+
10
10
+
+
10
10
+
+
4
4
+
+
T
Following the announcement by the UK Government
in November 2020 that an extra £16bn will be spent
on Defence over the next four years, the UK will
remain a leading European defence market
UK Defence spending is expected to grow from around £41.5bn per
annum in 2020 through to over £50bn per annum by 2025. As the sole
source supplier of countermeasures to the UK’s F-35 and Typhoon fleets,
and through its Roke business, Chemring is well positioned to benefit
from this increase, selling directly to the MOD and security agencies, as
well as to prime contractors.
New funding for defence comes on top of the Conservative party’s existing
pledge to spend an additional 0.5% above inflation on defence every year,
and marks a welcome change to the slower growth experienced since 2015.
Over the past decade, budgets have been 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. These commitments now provide a clearer funding path for the
next generation of UK military capability.
We still await the publication of the Integrated Defence Spending Review,
now expected in Q1 2021, which will lay out the key priorities for defence
over the next five years and beyond. Whilst significant portions of the
new funding may be required to plug the pre-existing affordability gap, we
may yet see legacy capabilities and platforms retired in favour of
investment in the next generation. However, major committed
programmes are now likely to be protected, with investment focused on
cyber, space, combat air and naval platforms, as well as a significant boost
to defence R&D.
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, a role that may gain increased significance as the UK seeks
to invest in innovation and modernisation.
Europe combines modern, well-equipped forces
with budget-constrained NATO members on its
Eastern borders
European defence spending is returning to growth. In an attempt to
minimise the impact of the CV-19 global pandemic, equipment
procurement has been pulled forward into 2020 and 2021 to support
industry in most Western European and Nordic members, with Germany
in particular having agreed up to €10bn in stimulus to support its defence
industry through 2023/2024. 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 Maritime Airborne Warfare
System (“MAWS”), the Franco-German Multinational Ground Combat
System (“MGCS”), the Franco-German-Spanish Future Combat Air
System and the UK-Italian and Swedish Tempest fighter aircraft all
expected to drive R&D spending through the 2020s.
European defence spending currently falls short of NATO’s 2% GDP
target, with only eight countries in Europe meeting this target in 2019.
Major contributors to spend, such as Germany, have committed to reaching
1.5% of GDP by 2024, though recent GDP reductions caused by CV-19
have resulted in many countries achieving the goal in 2020. However,
most, like Germany, are likely to commit to maintaining this level of
defence spending through to 2024, making it likely that few will 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 and, in 2020, the Australian
Government announced its intention to grow the defence budget to
AU$73.7bn by 2029-30, with total estimated funding of AU$575bn over
the decade.
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.
Chemring Group PLC Annual report and accounts 2020
21
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
1
2
© Crown copyright 2020
3
22
Chemring Group PLC Annual report and accounts 2020
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.
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 US military needs, including classified programmes.
We will leverage this access to launch our non-US capabilities into
the largest market in the world.
Our principal risks are documented on
Pages 38 to 44
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. In 2020, Roke secured a strategically important first electronic
warfare order for Resolve to the US DoD.
KPI
Order book
£476m 6%
(2019: £449m)
Strategy in action
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.
Outside of the US, we continue with our significant investment in
safety and automation to create a group of high-performing
manufacturing facilities.
KPI
Order intake
£437m 6%
(2019: £411m)
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.
KPI
Revenue
£402m 20%
(2019: £335m)
Chemring Group PLC Annual report and accounts 2020
23
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
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.
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.
Strategic priority
Safety
KPI
1
2
3
Number of energetic
events causing harm
or injury
1
(2019: 2)
Number of near miss
and potential hazard
reports
2,320
(2019: 1,880)
Lost time injuries
number and frequency
rate
Number: 5
(2019: 8)
2020
2020
2019
2019
[•]
1
2020
2020
2019
2019
2
2
[•]
2,320
2,033
1,880
2020
2020
2019
2019
[•]
5
8
8
Rate: 0.24
(2019: 0.40)
2020
2020
2019
2019
[•]
0.24
0.40
0.35
Description
Number of energetic events causing
harm or injury.
Number of near miss and potential
hazards reported, including unsafe
conditions and behaviours.
Number of lost time injuries per
200,000 man hours worked.
Number of recordable injuries per
Order intake is measured at
Order book is measured at expected
Revenue is measured at sales value
200,000 man hours worked.
expected sales value and represents
sales value and indicates future potential.
less any applicable sales taxes.
the last 12 months’ activity.
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 an
The level of order book, in particular
The trend of revenue gives an
indication of market conditions and our
for delivery in the next year, gives a
indication of both the state of the
restricted workday and lost time
competitiveness within our markets.
degree of confidence in expected
future financial performance.
end market and our business’ ability
to execute orders on time to satisfy
customer needs.
2020 performance
There was one event this year
compared to two last year. The one
event resulted in minor injuries with
no potential for serious harm.
This level of reporting demonstrates
that the workforce is engaged and
feels comfortable reporting near misses
and potentially hazardous situations.
The 2019 comparative has been
restated to include continuing
operations only, following the
divestment of Chemring Ordnance, Inc.
and Chemring Defence UK Limited.
The rate decreased this year. The
total numbers are low and the wider
total recordable injury frequency
rate provides a better indicator
of performance.
The 2019 comparative has been
restated to include continuing
operations only, following the
divestment of Chemring Ordnance, Inc.
and Chemring Defence UK Limited.
The 2019 comparative has been
Strong order intake in Countermeasures & Energetics resulted in an order book
Group revenue growth was in
for the continuing business at year end of £476m (2019: £449m). £326m is currently
line with our expectations, as the
due as revenue in 2021, approximately 78% coverage of 2021 targeted revenue.
countermeasures facilities in Salisbury
and Australia were operational for
the whole year. There was continued
strong performance in the Sensors &
Information segment.
24
Chemring Group PLC Annual report and accounts 2020
Orders
5
Order intake
Group
£437m
(2019: £411m)
6
Order book
Group
£476m
(2019: £449m)
Revenue
7
Revenue
Group
£402m
(2019: £335m)
Sensors & Information
Sensors & Information
Sensors & Information
Countermeasures
Countermeasures
Countermeasures
& Energetics
& Energetics
& Energetics
4
Total recordable
injuries number and
frequency rate
Number
18
(2019: 17)
Rate
0.85
(2019: 0.85)
injuries. It is a more sensitive
indicator of occupational safety than
lost time injury frequency rates, as
more minor events are captured.
restated to include continuing
operations only, following the
divestment of Chemring Ordnance, Inc.
and Chemring Defence UK Limited.
Strategic priority
Safety
KPI
1
2
3
Number of energetic
events causing harm
Number of near miss
and potential hazard
Lost time injuries
number and frequency
or injury
1
(2019: 2)
reports
2,320
(2019: 1,880)
rate
Number: 5
(2019: 8)
4
Total recordable
injuries number and
frequency rate
Orders
5
Order intake
Group
£437m
(2019: £411m)
6
Order book
Group
£476m
(2019: £449m)
Revenue
7
Revenue
Group
£402m
(2019: £335m)
Rate: 0.24
(2019: 0.40)
Number
18
(2019: 17)
2020
2019
Rate
0.85
(2019: 0.85)
2020
2019
Sensors & Information
Sensors & Information
Sensors & Information
18
17
2020
2019
£149m
£134m
2020
2019
£87m
£80m
2020
2019
£137m
£132m
Countermeasures
& Energetics
Countermeasures
& Energetics
Countermeasures
& Energetics
0.85
0.85
2020
2019
£288m
£277m
2020
2019
£389m
£369m
2020
2019
£265m
£203m
Description
Number of energetic events causing
Number of near miss and potential
Number of lost time injuries per
harm or injury.
hazards reported, including unsafe
200,000 man hours worked.
conditions and behaviours.
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
This indicates employee awareness of
Industry standard indicator that
strategic safety risks of the business.
hazards and the greater the reporting
provides a measure of injuries that
This indicator measures those events
the more engaged our people are.
result in a person being away from
that have caused injury or harm.
work for more than one day.
2020 performance
There was one event this year
This level of reporting demonstrates
The rate decreased this year. The
compared to two last year. The one
that the workforce is engaged and
total numbers are low and the wider
event resulted in minor injuries with
feels comfortable reporting near misses
total recordable injury frequency
no potential for serious harm.
and potentially hazardous situations.
rate provides a better indicator
The 2019 comparative has been
restated to include continuing
operations only, following the
of performance.
The 2019 comparative has been
restated to include continuing
divestment of Chemring Ordnance, Inc.
operations only, following the
and Chemring Defence UK Limited.
divestment of Chemring Ordnance, Inc.
and Chemring Defence UK Limited.
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.
The 2019 comparative has been
restated to include continuing
operations only, following the
divestment of Chemring Ordnance, Inc.
and Chemring Defence UK Limited.
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 £476m (2019: £449m). £326m is currently
due as revenue in 2021, approximately 78% coverage of 2021 targeted revenue.
Group revenue growth was in
line with our expectations, as the
countermeasures facilities in Salisbury
and Australia were operational for
the whole year. There was continued
strong performance in the Sensors &
Information segment.
Chemring Group PLC Annual report and accounts 2020
25
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Key performance indicators continued
Strategic priority Underlying operating profit and margin
KPI
8
Underlying operating profit and margin
Underlying operating profit
Group
£54.7m
(2019: £44.0m)
Underlying operating margin
Group
13.6%
(2019: 13.1%)
Sensors & Information
Sensors & Information
2020
2019
£27.4m
£26.3m
2020
2019
20.0%
19.9%
Countermeasures
& Energetics
Countermeasures
& Energetics
2020
2019
£39.9m
£27.5m
2020
2019
15.0%
13.5%
Continuing underlying
earnings per share
9
Continuing underlying
earnings per share
15.1p
(2019: 11.2p)
2020
2019
15.1p
11.2p
Change from previous
year
up 35%
(2019: up 62%)
2020
35%
2019
62%
Working capital and inventory
Net debt and cash flow
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 average number of shares
in issue.
Working capital is defined as inventories,
Inventory is measured at cost.
Measured as net debt divided by
Cash flow from continuing operating
trade and other receivables, less trade
and other payables.
EBITDA for the previous 12 months.
activities before tax outflows, non-
underlying items and pension payments.
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.
Efficiently turning profit into cash
demands a degree of control over
working capital.
The primary focus for improvement in
This is a measure of leverage within
This is a key measure to ensure profit
working capital is inventory.
the business and is a banking covenant.
turns into cash in short order.
2020 performance The continuing underlying operating profit increased by 24% 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 35% in
2020, driven by increased underlying
operating profit and lower interest costs.
Working capital as a percentage of
Broadly in line with increased levels
This has decreased in 2020, as
revenue improved from 27% to 21%.
of business activity during the year.
EBITDA has increased and net debt
has decreased.
Operating cash flow increased in 2020
as an increase in operating profit was
supplemented by the enhanced focus
on working capital.
26
Chemring Group PLC Annual report and accounts 2020
Strategic priority Underlying operating profit and margin
Working capital and inventory
Net debt and cash flow
Continuing underlying
earnings per share
KPI
10
Working capital
Group
£85.1m
(2019: £90.5m)
11
Inventory
Group
£91.3m
(2019: £78.1m)
Sensors & Information
Sensors & Information
2020
2019
£38.8m
£35.2m
2020
2019
£24.8m
£19.4m
Countermeasures
& Energetics
Countermeasures
& Energetics
2020
2019
£46.3m
£55.3m
2020
2019
£66.5m
£58.7m
12
Net debt: continuing
underlying EBITDA
0.65x
(2019: 1.24x)
13
Continuing underlying
operating cash flow
£82.4m
(2019: £63.9m)
2020
2019
0.65x
1.24x
2020
2019
£82.4m
£63.9m
Conversion of EBITDA
into operating cash
110%
(2019: 104%)
2020
2019
110%
104%
Description
Underlying operating profit excludes non-underlying items that could, by their size or
Calculated as adjusted earnings after tax
nature, distort the Group’s underlying quality of earnings. Underlying operating margin is
divided by the average number of shares
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.
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.
Why is it a KPI?
Underlying operating profit provides a consistent year-on-year measure of the trading
The measurement of underlying EPS
performance of the Group’s operations. A focus on operating margin allows the impact
reflects all aspects of the Group’s
of changes in revenue and cost base to be monitored, enabling comparisons to be made
income statement including the
of management performance and trading effectiveness.
management of interest and tax.
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.
This is a key measure to ensure profit
turns into cash in short order.
2020 performance The continuing underlying operating profit increased by 24% 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 35% in
2020, driven by increased underlying
operating profit and lower interest costs.
Working capital as a percentage of
revenue improved from 27% to 21%.
Broadly in line with increased levels
of business activity during the year.
This has decreased in 2020, as
EBITDA has increased and net debt
has decreased.
Operating cash flow increased in 2020
as an increase in operating profit was
supplemented by the enhanced focus
on working capital.
Chemring Group PLC Annual report and accounts 2020
27
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Focus on
Sensors &
Information
Chemring’s Sensors & Information products include
world-leading systems for detecting improvised
explosive devices (“IEDs”), chemical and biological
agents, and core technologies for detecting,
intercepting and jamming electronic communications.
The Group is also a leading supplier of consulting
and technology services, trusted by government
and industrial partners worldwide to solve the
most technically challenging security-critical issues.
Operating across defence, national security and
commercial domains, the Sensors & Information
sector is constantly innovating to enable customers
to deliver competitive advantage and to defend their
people, assets and information.
Key facts
Revenue
£137.2m
(2019: £131.9m)
Underlying operating profit
£27.4m
(2019: £26.3m)
Order book
£87m
(2019: £80m)
Underlying operating margin
20.0%
(2019: 19.9%)
Statutory operating profit
£21.0m
(2019: £19.7m)
28
Chemring Group PLC Annual report and accounts 2020
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 tactical electronic warfare and
cyber-security, and in building a technology-based strategy for growth
beyond current DoD Programs of Record in the areas of explosive
hazard detection and chemical and biological threat detection.
The Group’s specialist consulting and technology services business, Roke,
operates in the growing cyber-security market, and investing in recruiting,
developing and retaining our people, together with expanding our
geographical and customer coverage, is key to profitable growth in this area.
We continue to actively explore opportunities to expand Roke’s capabilities
and offerings, particularly into industrial and international markets. As part
of this we have established Roke USA, Inc. in the US which provides the
platform from which to transition the electronic warfare (“EW”) and other
technologies created in the UK and commercialise them in the US.
There is growing collaboration between our US and UK businesses and
both our UK and US businesses (Roke and Chemring Sensors & Electronic
Systems (“CSES”)) have a single aligned strategy which captures the
individual businesses’ focus areas and also their shared campaigns.
Markets
In the Sensors & Information sector, our current strong positions in
explosive hazard detection and chemical and biological detection are
expected to be enhanced by market share growth in EW and cyber-
security. Chemring is a key provider of capability to our clients in defence
and national security, and with a growing concern about many national
and international threats, our customers are continuing to increase
demand for our products and services.
As CV-19 changes how our customers protect and secure borders,
monitor threats and work to reopen global air travel, we see growing
interest in civil applications for some of our products and services,
including our chemical and biological agent detection portfolio that may
convert to revenue opportunities over the medium term.
The US remains the largest market for the Sensors & Information
sector, and will continue to follow traditional acquisition paths in pursuit
of agility as it looks to outpace threats, particularly in the intelligence and
surveillance domains. The FY21 President’s Budget Request projects the
US DoD five-year programme to reach $747bn in FY24. This provides
growth to sustain personnel increases in all four services, major equipment
programmes 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.
Changes in focus are driven by new defence strategies that prioritise
near-peer competition and look to enhance the technological effectiveness
of systems through the convergence of EW, signals intelligence (“SIGINT”)
and cyber across domains, as well as the development of new capabilities
across the electromagnetic spectrum. This more agile approach to
procurement and the need to keep pace with rapidly evolving and
complex threats aligns well with our Sensors & Information strategy.
Performance
Revenue for Sensors & Information increased by 4% to £137.2m (2019:
£131.9m) and underlying operating profit increased by 4% to £27.4m
(2019: £26.3m), as underlying operating margin improved to 20.0% (2019:
19.9%). The Sensors & Information business in the US has seen continued
progress on the US Programs of Record and Roke’s information security
business has continued to grow.
On a constant currency basis revenue would have risen 4% to £137.6m
and underlying operating profit would have been up 6% to £27.8m.
The statutory operating profit for the year was £21.0m (2019: £19.7m).
Our values in action
EW expansion into the US
Establishing a foothold in the electronic warfare market in the US
was a key strategic objective for the Sensors & Information sector
in 2020. Close collaboration between Roke and our US sensors
business, CSES, resulted in Roke securing a first order for its
Resolve electronic warfare system into the potentially significant
US EW market. We will support the customer through product
trials and evaluation with a view to securing further orders to
meet the customer’s future operational requirements.
G
O
V
E
R
N
A
N
C
E
Key developments in the year on the major US Programs of Record are
summarised below.
The US DoD’s Explosive Hazard Detection HMDS program, which
encompasses concurrent development, trialling and manufacturing,
continues to progress as expected. Under the previously awarded IDIQ
sole-source contract vehicle, further delivery orders of $62m were
received in the year, providing visibility on this Program of Record well
into 2021. The production phase is progressing as planned and customer
deliveries were made on schedule throughout the year. Early into the
second half of the year a contract modification was received which
increased the existing IDIQ by a further $200m. This gives good visibility
on the program out to 2024.
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. The new fleet will comprise both refurbished
and new HMDS, and this activity will run alongside technology upgrade programs.
On the Joint Biological Tactical Detection System (“JBTDS”) program,
following the Biological Point System Assessment in 2019/20, we are
making some customer requested technical changes and enhancements,
and now expect a customer procurement decision in 2022.
The second biological program is the Enhanced Maritime Biological
Detection System (“EMBD”), where the customer is the US Navy. In May,
we were pleased that the customer approved and awarded the contract
modification for low rate initial production (“LRIP”) for the EMBD program.
The program is expected to be worth up to $100m over five to ten years
once in full rate production, which is expected to commence in 2022.
Across the two biological programs, in 2020, revenue was $10m lower than
2019 due to the phase of the program being heavily weighted to customer
testing, the funded development work having been completed in 2019.
The Aerosol and Vapor Chemical Agent Detector program (“AVCAD”) is
progressing through the engineering and manufacturing development (“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. Throughout 2020
we have continued to deliver the 75 test and evaluation units that were
ordered in October 2019. The next customer procurement decision point
is expected to be at the conclusion of the EMD phase in 2021.
In the UK, the markets for electronic warfare, cyber-security and data
science capabilities, in which Roke is a leading participant, have remained
buoyant in the year. 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.
Roke delivered double-digit growth in revenue and has maintained
strong margins despite increased investment in people, infrastructure
and product development. In addition, Roke secured an important first
EW order for Resolve to the US DoD. This was a key strategic objective
for 2020 and provides a platform from which to explore further
opportunities to penetrate the EW market in the US.
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 tactical
electronic warfare and information security, and securing positions on
the US DoD Programs of Record.
In the US, HMDS program deliveries are on schedule with good
medium-term visibility and the focus continues to be on ensuring that
the Virginia and North Carolina facilities are mobilised and resourced
to maximise Chemring’s opportunity to convert current and potential
chemical and biological Programs of Record. We will also invest in next
generation product development and in modifying existing technologies
to enable them to be deployed on a wider number of platforms including
autonomous systems and UAVs.
In the UK, the national security and defence markets continue to grow
with a focus on emerging technologies in connectivity, cyber, automation
and data analytics. Roke will deliver research, design, engineering and
advisory services using its high-quality people and capabilities.
Roke will focus its efforts on continuing to grow across all its business
areas in the UK, increasing in scale both organically and through potential
bolt-on acquisitions, however any acquisition must meet a strict set of
criteria, enhance shareholder value and fit in with our wider growth plans.
To date, we have reviewed and declined to proceed with a number of
possible transactions.
Roke is increasingly exploring partnering agreements with other leading
organisations to access further market opportunities. An example of this
would be Charlie Charlie One (“CC1”), a Dismounted Situational
Awareness tool that Roke has developed in partnership with Samsung
SDS Europe. This ongoing relationship focuses on product development,
sales and marketing, management and joint customer engagement. Some
initial sales of CC1 have now been made and successful demonstrations
and trials conducted in 2020 with several European militaries may
culminate in future orders in 2021.
We continue to focus on how we monetise our know-how and
intellectual property in the commercial market with initial successes in the
transport and medical markets, although the impact of CV-19 is likely to
put commercial customers’ budgets under pressure in some areas, which
may result in some short-term challenges in this small but growing niche.
The strategic focus and collaboration between Roke and our US sensors
business has secured our first EW order to the US DoD. We will continue
to support the customer through product trials and evaluation with a
view to securing further orders to meet its operational deployment
requirements in this potentially significant market.
The order book for Sensors & Information at 31 October 2020 was
£87.3m (2019: £80.0m), of which £76m is expected to be delivered in
2021, providing 53% cover of expected 2021 revenue.
2021 trading performance for Sensors & Information is expected to show
a continuation of the levels of business seen in 2020, with medium term
growth opportunities driven by the chemical and biological detection
Programs of Record moving in to full rate production.
Chemring Group PLC Annual report and accounts 2020
29
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Focus on continued
Countermeasures
& Energetics
Chemring is the world leader in the design,
development and manufacture of advanced
expendable countermeasures and countermeasures
suites for protecting air and sea platforms against
the growing threat of guided missiles.
Our niche, world-class energetics portfolio provides
high-reliability, single-use devices that perform critical
functions for the space, aerospace, defence and
industrial markets including satellite deployment,
aircrew egress and aircraft safety systems.
Key facts
Revenue
£265.3m
(2019: £203.3m)
Underlying operating profit
£39.9m
(2019: £27.5m)
Order book
£389m
(2019: £369m)
Underlying operating margin
15.0%
(2019: 13.5%)
Statutory operating profit
£37.4m
(2019: £22.0m)
3030
Chemring Group PLC Annual report and accounts 2020
Strategy
The Countermeasures & Energetics sector strategy continues to be one
of strengthening and protecting our world-leading positions 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 on future technological developments.
Having exited the commoditised energetics businesses, the Group is now
able to place 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 & Energetics sector remains robust. Chemring
continues to maintain a market-leading position in the addressable air
countermeasures market. Growth in the sector over the next five years
is primarily being driven by increased US requirements, coupled with new
technologies being developed in the UK that will be shared across the
Group’s countermeasures businesses. Sole-source positions on several
products and platforms in conjunction with high barriers to entry are
evident in the strong current order book.
In the energetic devices and materials businesses our focus remains on the
high-value niche areas of the market where market conditions continue to
strengthen. Demand for our range of energetic devices, propellant and
explosive products continues to grow year on year. Increasingly,
customers are signing long-term contracts in order to secure supply and
this improved visibility is enabling greater focus on our investment into
manufacturing capacity, efficiency and product R&D.
Performance
Order intake in the year increased to £287.8m (2019: £276.5m), driven by
high levels of activity in the important US market. Chemring Countermeasures
USA was awarded contracts totalling $136m during the year to supply
expendable countermeasures to the US Air Force, the US Navy and
other services, including winning a competitive tender for MJU 32/38
flares worth $50m over five years. As the second qualified source of
global F-35 countermeasures, our Australian subsidiary’s undefinitised
contract of $60m, announced in May 2019, was definitised at a value of
$107m on the F-35 programme. With deliveries under these contracts
being made in 2020 to 2022, these contracts give improved visibility and
strengthen our leading position in the global countermeasures market.
In the UK, Chemring Countermeasures UK and Chemring Energetics UK
both signed long-term framework agreements with the UK MOD covering
the next five years, with a further two-year option. Initial delivery orders
valued at £32m were received with deliveries to be made during 2021
and 2022.
In the final month of the financial year, Chemring Countermeasures UK
was awarded contracts worth £25.8m from the UK MOD to develop and
supply naval countermeasures in support of the Royal Navy, and a further
£5.5m contract from the UK MOD to manufacture air countermeasures
in support of the UK armed forces. Deliveries under these contracts will
be made in 2021 through to 2023.
Revenue for Countermeasures & Energetics increased significantly by
30% to £265.3m (2019: £203.3m), driven primarily by the Australian and
Salisbury countermeasures facilities being operational after the F-35 fit-out
and phased restart that took place during 2019. Our niche energetic
devices businesses enjoyed another strong period driven by favourable
market conditions.
Our values in action
F-35 programme success
As part of a significant AU$18m investment to upgrade production
at our Australian site, the facility was closed for most of 2019 to
be fitted and qualified for F-35-related production. In early 2020,
Chemring Australia secured a US$107.5m production contract to
supply countermeasure flares for Australian, US and international
F-35 Lightning II Joint Strike Fighter operators. The significant
contract award confirms Chemring’s position as the designated
sole source for operational countermeasures specifically designed
to protect the F-35 from incoming missile threats. Since that point,
our Australian business has made excellent progress in the delivery
of countermeasures for the F-35 programme, further strengthening
our reputation with the US DoD.
Underlying operating profit increased by 45% to £39.9m (2019: £27.5m),
as underlying operating margin improved to 15.0% (2019: 13.5%) driven
by improved operational execution.
The statutory operating profit for the year was £37.4m (2019: £22.0m).
Our global countermeasures business has continued to perform well
throughout the year with delivery targets across all product lines being
met. The Australian business made excellent progress in the delivery of
countermeasures for the US F-35 programme, further strengthening our
reputation with the US DoD. Following its phased restart during 2019, the
UK countermeasures business has successfully achieved its manufacturing
volume objectives. As this business progresses on its modernisation
programme, driving improved operational efficiency will be a key area of
focus for 2021. The two US businesses continue to work through some
CV-19 related challenges associated with the timely completion of customer
acceptance tests and staffing levels, but to date these have not had a
material impact on our ability to deliver and had no impact at year end.
The Tennessee capacity expansion programme, designed to address the
expected F-35 demand from the US Government, continues to progress
on schedule. During the year £22m was spent on the facility, bringing the
total spend to date to £37m. The expected total cost of the programme
remains approximately £50m, with the first incremental revenues from
this facility expected in 2022.
Our niche energetic devices and materials businesses have continued to
perform well, with order intake and deliveries remaining robust. Our
specialist devices business in Chicago has strengthened its position in the
space market and saw its products play critical roles on both the SpaceX
NASA Crew Dragon mission to the International Space Station and NASA’s
latest mission to Mars, where we have a number of mission-critical devices
on NASA’s Atlas V Launch Vehicle and Perseverance Rover.
Our values in action
Mission to Mars
On 30 July 2020, NASA launched its latest rover, Perseverance, on
a rocket to Mars. Not only was this a ground-breaking mission, but
it would not have been possible without a considerable number of
components engineered by Chemring Energetic Devices on both
the Perseverance rover and the launch rocket, Atlas.
Opportunities and outlook
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 explosives has enabled Chemring Nobel in
Norway to work proactively with its customer base on long-term
contracting models, providing much improved visibility.
In 2021 we will continue the process of modernisation and automation
across our sites, and in improving our competitiveness through investment
in lean manufacturing capabilities. We will invest in new product development
to ensure that our product portfolio remains highly relevant to our
customers, and will continue the process of operational alignment to
share technology and manufacturing excellence.
Countermeasures & Energetics’ order book at 31 October 2020 was £388.7m
(2019: £368.7m). The increase is a result of strong order intake in the US
and Australia on the F-35 programme. Of the 31 October 2020 order
book, approximately £250m is currently expected to be delivered in 2021,
representing 92% coverage of expected 2021 revenue.
Chemring Group PLC Annual report and accounts 2020
31
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Financial review
Delivering margin improvement
and strong cash generation
Our focus in 2020 has been on maintaining
operational execution and resilience in the face
of significant external challenges. The 2020 results
demonstrate the benefits of our focus on strengthening
our business model and financial resources in the
past two years.
In Countermeasures & Energetics, our Australian site demonstrated its ability
to manufacture F-35 countermeasures at rate and secured a two-year order
with the US DoD for $107m. Our Salisbury site achieved its revenue goals
in the year and became progressively more efficient. Demand for our niche
energetic devices continued to be strong with our Chicago site’s products
supporting the manned US space missions. The significant multi-year investment
in our Tennessee site progressed as planned, with commissioning due in the
summer of 2021 and first incremental revenues expected in 2022.
In Sensors & Information the execution of the HMDS Program of Record
continued as planned with a further $200m IDIQ contract received. The
Chem-Bio Programs of Record continued to progress with EMBD moving
into LRIP slightly ahead of expectation and JBTDS and AVCAD continuing
through the EMD and customer testing phases. Our Roke business enjoyed
another year of double-digit revenue growth, which included the
strategically important first electronic warfare product sale into the US.
We have continued to focus on improving the quality and the resilience
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 in capacity, infrastructure and systems will continue at an
elevated level for the next two 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 2020 was up 6% to £436.6m
(2019: £410.6m), driven by the release of further delivery orders on the
HMDS IDIQ contract as well as orders awarded to the Australian and US
countermeasures businesses.
Revenue from continuing operations for the year was up 20% to £402.5m
(2019: £335.2m), as the countermeasures facilities in Salisbury and Australia
were operational for the full year, as well as strong performance in the
Sensors & Information segment.
The underlying operating profit from continuing operations of £54.7m
(2019: £44.0m) resulted in an underlying operating margin of 13.6%
(2019: 13.1%). The increase in margin reflects the improving operational
execution in the Countermeasures & Energetics segment.
Andrew Lewis
Group Finance Director
“ Strong working capital
management drove 110% cash
conversion and a significant
decrease in net debt and
interest costs.”
Net debt
£48.2m
(2019: £75.7m)
Finance expense
£3.0m
(2019: £4.6m)
32
Chemring Group PLC Annual report and accounts 2020
Insurance recoveries of £5.2m (2019: £15.0m) are included within the result
for the year in relation to the incident in 2018 at the UK countermeasures
site. This largely offset the additional costs of the phased restart, which
included some production inefficiencies as the site increased volumes.
Foreign exchange translation has provided a minor headwind on revenue
and profit. While exchange rates have been volatile in the year, there has
been a weakening of the US dollar against sterling compared to 2019 with
the average rate moving from $1.26 to $1.28. On a continuing constant
currency basis, restating the current year at the 2019 average exchange rate,
revenue would have been £406.4m and underlying operating profit would
have been £55.7m, being a headwind of £1.0m on 2020’s underlying
operating profit.
Total finance expense fell significantly to £3.0m (2019: £4.6m).
This was driven by the repayment of the private placement loan notes
in November 2019 and the continued focus on reducing intra-period
working capital volatility, thus maintaining net debt stability.
This resulted in an underlying profit before tax from continuing operations
of £51.7m (2019: £39.4m). The effective tax rate on the underlying profit
before tax from continuing operations was 17.6% (2019: 20.1%). The underlying
earnings from continuing operations per share was 15.1p (2019: 11.2p).
Statutory operating profit from continuing operations was £46.3m
(2019: £31.3m) and after statutory finance expenses of £3.0m (2019: £4.6m),
statutory profit before tax from continuing operations was £43.3m
(2019: £26.7m), giving statutory earnings per share from continuing
operations of 12.3p (2019: 8.2p). The statutory profit from discontinued
operations was £nil (2019: £1.2m loss) giving a statutory profit of £34.7m
(2019: £21.9m) 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, gains on the movement in the fair value of derivative financial
instruments and the tax credit associated with this.
Revenue from discontinued operations fell to £9.5m (2019: £43.4m) and
underlying operating loss was £0.1m (2019: £3.5m) primarily as a result
of the disposals made in the last two years.
Finance expenses
Total finance expenses of £3.0m were down 35% from £4.6m.
Tax
The continuing underlying tax charge totalled £9.1m (2019: £7.9m) on a
continuing underlying profit before tax of £51.7m (2019: £39.4m). The
effective tax rate on underlying profit before tax for the year was a charge
of 17.6% (2019: 20.1%). The decrease in the continuing effective rate of
tax on the results of the Group is due to prior year tax adjustments and
the geographic mix of profits. We expect the future effective tax rate to
return to the low twenties.
The continuing statutory tax charge totalled £8.6m (2019: £3.6m)
on a continuing statutory profit before tax of £43.3m (2019: £26.7m).
The discontinued underlying tax was £nil (2019: £6.2m credit) on an
underlying loss before tax of £0.1m (2019: £3.5m).
Earnings per share
Underlying earnings per share from continuing operations was 15.1p
(2019: 11.2p) and diluted underlying earnings from continuing operations
per share was 14.8p (2019: 11.0p).
Total underlying basic earnings per share was 15.1p (2019: 12.2p) and the
statutory basic earnings per share was 12.3p (2019: 7.8p).
Group financial position
Net debt and cash flow
The Group’s net debt at 31 October 2020 was £48.2m (2019: £75.7m),
representing a net debt to underlying EBITDA (continuing) ratio of 0.65x
(2019: 1.24x). IFRS 16 Leases has been adopted in 2020, adding £6.5m to
opening net debt. Comparators have not been restated.
The financial health of the Group has continued to improve in a number
of aspects during the year. Disciplined working capital practices have
been maintained to reduce intra-period volatility. No defined benefit pension
contributions were required in the year and none are expected in 2021. The
Group is working to achieve further improvements over the medium term.
Continuing underlying operating activities generated cash of £82.4m
(2019: £63.9m). Continuing underlying cash conversion was 110%
(2019: 104%) of continuing underlying EBITDA.
In November 2019 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, which reduced interest costs in 2020.
Working capital
Working capital relating to the continuing businesses was £85.1m
(2019: £90.5m), a decrease of £5.4m in a year where revenue has grown
by 20%. As a percentage of revenue, working capital has decreased by
6% to 21% at 31 October 2020. The improvement reflects our continued
focus on commercial contracting, inventory levels and cash management.
In absolute terms all areas of inventory, trade receivables and trade payables
have increased as the business has grown. Our focus has been on ensuring
this has been executed in a managed and balanced manner and year end
trade receivable days of 30 and trade payable days of 26 demonstrate this
has been successfully achieved.
Weekly net debt
m
£
225
200
175
150
125
100
75
50
25
0
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
FY20
FY19
FY18
FY17
FY16
Chemring Group PLC Annual report and accounts 2020
33
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Financial review continued
Group financial position continued
Debt facilities
The Group’s principal debt facilities comprised a £136.7m revolving credit
facility and a $10.0m overdraft. These were established in October 2018
with a syndicate of five banks and run until October 2022 with two
“one year” options to extend. The Group had £86.4m (2019: £130.2m)
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
£7.6m (2019: £9.6m), 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.
The reduction in the surplus has been driven by market movements in the
second half of the period following the CV-19 impact on equity and bond
markets. The resilience of the Scheme’s investment strategy has limited
this impact.
The 6 April 2018 triennial valuation showed a technical provisions deficit
of £5.8m, which represented a funding level of 94% of liabilities. Deficit
recovery payments totalling £6.25m were made prior to 31 December 2018.
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:
• 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 £36.9m (2019: £40.7m) 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, with over half being spent at 31 October 2020, and is focused on
delivering capacity to meet expected F-35 demand from the US Government.
Research and development
R&D expenditure was £62.0m (2019: £56.2m). 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
2020
£m
52.5
4.5
5.0
2019
£m
47.2
5.0
4.0
Amortisation of development and patent costs was £1.4m (2019: £1.4m).
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, underlying operating cash flow and underlying cash
conversion. 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 113 and 114.
34
Chemring Group PLC Annual report and accounts 2020
A reconciliation of underlying measures to statutory measures is provided below:
2020
Non-
underlying
Underlying
Statutory
Underlying
2019
Non-
underlying
Statutory
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:
(Loss)/profit after tax (£m)
Sectors – continuing operations:
Sensors & Information EBITDA (£m)
Sensors & Information operating profit (£m)
Countermeasures & Energetics EBITDA (£m)
Countermeasures & Energetics operating profit (£m)
We present a measure of constant currency revenue and operating
profit. This is calculated by translating our results for the year ended
31 October 2020 at the average exchange rates for the comparative
year ended 31 October 2019.
Revenue
Effect of using prior period
FX translation rates
Revenue at constant currency
Underlying operating profit
Effect of using prior period
FX translation rates
Underlying operating profit
at constant currency
2019
£m
335.2
Growth
%
20%
2020
£m
402.5
3.9
406.4
335.2
54.7
44.0
21%
24%
1.0
55.7
44.0
27%
74.6
54.7
51.7
(9.1)
42.6
15.1
14.8
0.5
(8.4)
(8.4)
0.5
(7.9)
(2.8)
(2.8)
75.1
46.3
43.3
(8.6)
34.7
12.3
12.0
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
(0.1)
0.1
—
2.7
(3.9)
(1.2)
30.7
27.4
56.5
39.9
—
(6.4)
—
(2.5)
30.7
21.0
56.5
37.4
29.3
26.3
41.7
27.5
—
(6.6)
—
(5.5)
29.3
19.7
41.7
22.0
• 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.
Our use of APMs is consistent with the prior year and we provide
comparatives alongside all current year figures.
The directors believe that these APMs improve the comparability
of information between reporting periods as well as reflect the key
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.
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.
Further details are provided in note 3.
The adjustments to continuing operations comprise:
• amortisation of acquired intangibles of £8.9m (2019: £12.1m); and
• profit on the movement in the fair value of derivative financial
instruments of £0.5m (2019: £0.6m loss).
The discontinued operations loss after tax primarily relates to the
businesses which were “held for sale” at 31 October 2018, which
have subsequently been divested from the Group or closed during
the last two years:
• operating loss of £0.1m (2019: £3.5m);
• exceptional items of £0.1m profit (2019: £3.8m loss); and
• tax credit on the above of £nil (2019: £6.1m credit).
Management considers non-underlying items to be:
• amortisation of acquired intangibles;
• discontinued operations;
Andrew Lewis
Group Finance Director
15 December 2020
Chemring Group PLC Annual report and accounts 2020
35
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Risk management
Managing risk
We continue to manage key risks to ensure
the delivery of the Group strategy.
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
36
Chemring Group PLC Annual report and accounts 2020
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)
• Dan Reinke (Acting Group HSE Director)
Risk management policy and framework
The Group’s risk management policy sets out the Group’s approach to
risk management, including its risk appetite; the framework for assessing,
managing and monitoring risk within the business; and the key roles and
responsibilities for the oversight and implementation of the Group’s risk
management systems and controls.
The Group’s risk management framework draws fundamentally from the
“Three Lines of Defence Methodology”, with the “First Line” being day-to-day
management of risk and maintenance of effective control procedures at
individual businesses. The “Second Line” comprises various risk management
and control functions established at the corporate management level,
which are designed to enhance and monitor the First Line. The “Third
Line” comprises the Group’s internal audit function, utilising an external
firm of auditors, 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 and
emerging risks, as referenced below. These risks are collated on the
Group risk register, together with details of the applicable mitigation
plans and risk owners.
The Group has implemented an 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
is a fundamental part of the Operational Framework and 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:
• a CV-19 Playbook was introduced, incorporating all of our
Group-wide controls for the management of CV-19-related risks
within our business operations;
• our HSE Management Framework has been updated, and we have
implemented new standards in relation to the management of process
safety events and asset integrity;
• enhanced anti-bribery and corruption procedures have been implemented
across the Group, in order to further mitigate the potential risk associated
with the engagement of third party sales partners, service providers
and suppliers;
• we have implemented additional IT and cyber-security standards;
• we have refreshed our assessment of the potential impact of Brexit on
the Group and developed mitigation plans; and
• our internal audit programme has been further refined to align with the
key risks on the Group risk register.
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.
Principal risks
The current Group risk register comprises risks in seven key risk areas,
covering health, safety 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 38 to 44.
CV-19
The management of risks associated with CV-19 was a key focus during
the year. Further details on the mitigation actions taken to manage these
risks are set out on pages 6 and 7. CV-19 continues to present a risk to
the Group’s operations and we continue to take all appropriate actions
to protect and safeguard our employees, and ensure continuity of
our businesses.
Brexit
Whilst the UK has now exited from the EU and remains in a transition
period, the potential impact on future trading arrangements between the
UK and the EU is unknown. This may impact the relationships between
our UK businesses and their customers and suppliers in the EU, and the
freedom of movement of people across borders. Our UK businesses have
updated their business continuity plans to mitigate the anticipated impacts
as far as possible, based on the latest available information, but the full
impact remains subject to some uncertainty. Brexit-related risks only
impact our UK businesses and, given the mitigation actions taken, we
do not consider that Brexit is a Group-level strategic risk but the risk
is reflected in the individual risk registers of the businesses concerned.
Emerging risks
The current UK Corporate Governance Code requires the Board to
undertake a robust assessment of the emerging risks that may impact the
Group in the future. This requirement has been reflected in the Group’s
risk management processes and emerging risks are now considered by the
Risk Management Committee when compiling the Group risk register.
Emerging risks are identified through discussions with both external and
internal subject matter experts and other stakeholders, including
customers and regulators, and through horizon scanning of future
developments in areas relevant to the Group’s business operations.
Certain emerging risks relating to future technological, regulatory and
macro-economic changes are reflected on the Group risk register and
mitigation plans implemented accordingly. However, other emerging risks
have also been identified, where it is not yet possible to determine the
potential impact on the Group. Climate change is an example of such
a risk, which could impact on the Group’s businesses as the result of the
increasing frequency of extreme weather events and additional regulations
focused on minimising the environmental impact of our operations and
products. We are currently developing our internal processes to ensure
that we are in a position to report in line with the recommendations of
the Taskforce on Climate-Related Financial Disclosures from 2023 onwards.
Risk review
The Board carries out an annual review of the effectiveness of the Group’s
systems of internal control and risk management systems. 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
under review 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.
Chemring Group PLC Annual report and accounts 2020
37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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, strategy, 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. The table below identifies the inherent risk (after mitigation actions) associated with each risk area and
whether the trend in the risk from the Group’s perspective is increasing, decreasing or unchanged.
The overall risk profile for the Group continued to improve during the year and the Group risk register reflects the following changes to principal risks:
• risks associated with occupational health and safety continued to reduce, reflecting good progress on the implementation of the Group’s three-year
HSE strategy and an increased focus on asset integrity within our operations;
• market-related risk has increased, reflecting the potential for future defence budget constraints amongst our key customers as a consequence of
CV-19 and the potential impact of the change in the US administration, albeit this risk is likely to have more of an impact from 2022 onwards;
• financial risks have reduced as the Group continues to deliver strong cash generation and reduce indebtedness; and
• the inherent risk associated with cyber threats and system failures has increased, acknowledging that the continuing changes in the nature of cyber
attacks and the increased sophistication of the methods employed are an increasing risk for all businesses.
In addition to the risks disclosed below, the Risk Management Committee also monitors and manages a wide range of other risks to which the Group
may be exposed. All of the principal risks are linked to the Group’s strategy, further details of which are set out on page 22.
Inherent risk:
High
Medium
Low
Trend:
Increasing
Stable
Decreasing
Health, safety and environment risks
Occupational and process safety
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, 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 fully implemented within
the businesses.
• Robust major accidents hazard analysis process
adopted across the Group.
• Asset integrity review completed using external
consultants at higher hazard sites and new asset
integrity standard adopted.
• HSE “Second Line of Defence” assurance
process established, supplemented by an audit
by external consultants of higher hazard sites.
• Fundamental Safety Rules issued to all employees
Group wide.
• Incident investigation and crisis management
standards adopted.
• Increased capital investment in older facilities to
improve safety and reliability.
Through the implementation of our major
accident hazard review process, together with
increased reporting and investigation of process
upset conditions, we have identified and taken
further actions to reduce the likelihood of a major
energetic event. In addition, we conducted asset
integrity reviews during the year and we are
strengthening our asset integrity programmes.
We are also investing in new automated
production systems and improving process
controls for our legacy operations.
Our lost time incident rate reduced from 0.40 to
0.24 during the year and our total recordable
injury frequency rate matched 2019 at 0.85. There
was also a reduction in the number of injuries
resulting from energetic ignitions during the year,
with one recordable injury requiring medical
treatment, compared to two such incidents in the
prior year.
We hope to see further improvements in process
safety in 2021, as we implement the second year
of our three-year HSE Strategy and continue with
our capital investment programme.
See also: Health and safety
Page 48
38
Chemring Group PLC Annual report and accounts 2020
Health, safety and environment risks continued
Environmental laws and regulations
Risk and potential impacts
Mitigation actions/factors
• Monitoring programmes established at certain
sites and appropriate financial provisions held.
• Environmental liability insurance procured for
certain risks.
• Environment Committee established.
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
Inherent risk level, change during the
year and outlook
The sale or closure of several sites during the last
two years 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.
We have implemented a more centralised
approach to the management of our
environmental performance, recognising that
minimising our environmental impact and
addressing climate change related risks is
become increasingly important.
See also: Environment
Page 51
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, change during the
year and outlook
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.
• 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.
• Focus on organisational development to ensure
the business is appropriately structured to meet
current and future needs and provide 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 & Energetics
and Sensors & Information segments.
• Short-term trading and cash constraints may
impact on the Group’s ability to invest in
longer-term technologies and capabilities.
• Increased collaboration between businesses
across the Group on establishing shared routes
to market.
We recognise that the CV-19 pandemic is impacting
defence budgets globally and whilst not immune
to this, our businesses are expected to remain
relatively resilient in the near term. The longer-term
outlook for defence spending is less clear and we
expect further clarity over the next year.
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 is enabling us to better promote
our global capabilities.
See also: Target markets
Page 20
• 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 2020
39
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Principal risks and uncertainties continued
Strategic risks continued
Political
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, 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.
• 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.
Contract-related
Risk and potential impacts
Mitigation actions/factors
• The Commercial Policy within the Operational
Framework requires central approval for
certain contractual risk exposures.
• Commercial and contract risk management
training programme implemented.
• Stage payments negotiated with customers
wherever possible, in order to improve
working capital management.
The Group’s government contracts may be terminated at
any time and may contain other unfavourable provisions.
The Group may need to commit resources in advance
of contracts becoming fully effective, to ensure prompt
fulfilment of orders or to enable conditions precedent
to be met.
• The Group may suffer financial loss if its contracts
are terminated by customers, or a termination
arising out of the Group’s default may have an
adverse effect on its ability to re-compete for
future contracts and orders.
• 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
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.
The impact of the change in the US administration
on defence expenditure is not expected to have a
near-term impact on the Group and we expect
further clarity on the longer-term implications
over the next year.
See also: Target markets
Page 20
Inherent risk level, change during the
year and outlook
The implementation of the Operational
Framework has significantly increased our visibility
on commercial and contracting practices across
the Group, and is enabling us to manage
contractual risk exposures more effectively.
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, change during the
year and outlook
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.
• 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 such as Countermeasures & Energetics
and Sensors & Information.
Innovation is 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 continues to see strong growth in its R&D
service activities and is positioning itself to exploit
growing opportunities in the industrial sector.
40
Chemring Group PLC Annual report and accounts 2020
Mitigation actions/factors
Inherent risk level, change during the
year and outlook
• Committed banking facilities in place to
October 2022.
• Regular monitoring of actual and forecast
financial 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.
The final tranche of private placement loan notes
was repaid in November 2019.
The year-end bank covenant of net debt: EBITDA
was 0.65x, well within the covenant limit of 3.0x.
At the year end, the legacy UK defined benefit
pension scheme was £7.6m in surplus (on an
IAS 19 basis). No contributions are currently
required in 2021. The next triennial actuarial
valuation of the scheme will be carried out as at
April 2021.
See also: Financial review
Page 32
Financial risks
Risk and potential impacts
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 the
payment of debts.
As a result of a number of past events, the Group is
exposed to a number of contingent liabilities which
may or may not result in future cash outflows.
(Further details are contained in note 34 of the
Group financial statements).
The Group may also face an increased funding
requirement for its legacy UK defined benefit
pension scheme.
• 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.
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 21 of the Group financial statements.
Chemring Group PLC Annual report and accounts 2020
41
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Principal risks and uncertainties continued
Operational risks
Risk and potential impacts
Mitigation actions/factors
The Group’s manufacturing activities may be
exposed to business continuity risks, arising from
plant failures, supplier interruptions, quality issues
or large scale employee absences.
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.
• Major accident hazard analysis process and upset
condition management standard implemented
across the Group.
• Key performance indicators adopted, to provide
better visibility on operational performance and
to facilitate early identification of potential
production and quality issues.
• Business continuity plans established across
the Group.
• A delay in completing new manufacturing
• Increased capital investment in legacy facilities to
facilities, such as those being built in
Tennessee, could constrain capacity
and limit future business growth.
improve safety and reliability.
• Asset integrity programme initiated.
• Detailed plans developed for all significant capital
investment projects and additional dedicated
resource employed to oversee key projects.
• CV-19 Playbook implemented.
• Business interruption risks insured
where appropriate.
Inherent risk level, change during the
year and outlook
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. We have also implemented a
Group-wide asset integrity programme to
improve the resilience of our operations.
Construction and fit-out of the new automated
manufacturing facilities in Tennessee continues to
progress in line with plan.
Capital investment projects initiated at our
facilities in Scotland and Norway. The insurance
claim in respect of the August 2018 incident at the
UK countermeasures site yielded £5.2m during
the year.
CV-19 required us to respond to fast changing
regulations to ensure production and customer
acceptance could continue which was handled
without major disruption.
See also: Group Chief Executive’s
review and Health and safety
Pages 11 and 48
People risks
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, 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.
• Ongoing strengthening of leadership teams
across the Group.
• Development framework implemented
across the Group, focusing on developing
management and leadership skills and behaviours
particularly amongst our line manager and
supervisor population.
• Ongoing review of capability requirements
against the business strategy.
• Culture review completed, facilitating the
development of a framework to support the
evolution of the new Chemring culture.
• Employment Voice real-time engagement tool
deployed across the Group.
• Incentive arrangements enhanced to encourage
collaboration and create a Group focus at
senior level.
We have made good progress on the
implementation of our development framework
during the year, with over 340 line managers and
supervisors having participated in a structured
development programme.
We have also focused on communications using a
wide range of formal and informal challenges, both
at the corporate level and within individual businesses.
The deployment across the Group of Employee
Voice has enabled us to monitor employee
sentiment on a continuous basis and gives
employees the ability to provide feedback
on changes as they occur.
See also: Our people
Page 55
42
Chemring Group PLC Annual report and accounts 2020
Legal and compliance risks
Compliance and corruption
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, change during the
year and outlook
The Group operates in over 50 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.
• Ethics & Compliance Committee established to
oversee compliance across the Group.
• Operational Framework in place, mandating
compliance with a range of policies and
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.
• Code of Conduct stipulates the standards of
acceptable business conduct required from all
employees and third parties acting on the
Group’s behalf.
• Updated Bribery Act Compliance Manual
implemented, incorporating enhanced
anti-bribery policies and procedures.
Product liability and other customer claims
Risk and potential impacts
Mitigation actions/factors
• Rigorous production processes adopted,
monitoring critical parameters on a batch
or unit basis.
• State-of-the-art 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.
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.
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 continuing to refine the assurance process,
which will become a key aspect of the internal
audit programme going forward.
In the year ahead, we will be implementing our
Group-wide on-line compliance system – the
Chemring Compliance Portal. This will host our
Operational Framework policies and associated
training material, and will automate our
anti-bribery processes. The new system will
provide much greater visibility on compliance
across the Group.
See also: Ethics and business conduct
Page 59
Inherent risk level, change during the
year and outlook
We continue to focus on the establishment of
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 ongoing investment in updated
manufacturing facilities and increased focus on
contractual risk management, will help to further
mitigate risks in this area in future.
Our exit from the commoditised energetics
business had also reduced our risk exposure in
this area.
Chemring Group PLC Annual report and accounts 2020
43
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Principal risks and uncertainties continued
Reputational risks
Cyber-related risks
Risk and potential impacts
Mitigation actions/factors
Inherent risk level, 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
“CMMC” 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 was a specific
area of focus for our internal audit programme
in 2020 and we are developing a plan to address
the recommendations arising out of that review.
44
Chemring Group PLC Annual report and accounts 2020
Viability statement
Assessing our resilience
In accordance with the UK Corporate Governance Code, the Board
is required to undertake an assessment of the long-term viability of
the Group.
Assessment of viability and going concern
The Group’s business activities, key performance indicators, and principal
risks and uncertainties are set out within the strategic report on pages 1
to 62.
The directors believe that the Group is well placed to manage its business
risks successfully, despite the current uncertain economic outlook. The
Group’s forecasts and projections, taking account of reasonably possible
changes in trading performance, show that the Group should be able to
operate within the level of its current committed facilities.
As part of 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
2022, 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 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;
• 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.
In addition to the above, the directors continue to monitor developments
in, and the potential impact of, CV-19 in the short and medium-term, and
are, in particular, focused on the key risks of delays by customers in testing
and acceptance of products, disruption to production capacity and efficiency
as a result of government guidance on social distancing measures, and the
impact of the current situation on the Group’s supply chain. The directors
have modelled a severe but plausible downside scenario for CV-19,
whereby the Group experiences a 25% reduction in production capacity
for a six month period. Throughout this severe but plausible downside
scenario, the Group continues to have significant liquidity headroom
on its existing facilities and against the revolving credit facility covenants.
The CV-19 outbreak is not currently having any material impact in relation
to these risks or any other potential impacts; however, the directors are
monitoring the situation closely.
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
The directors have also assessed the Group’s viability over a three-year
period to October 2023 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 2023.
The directors have chosen a three-year period to assess viability to reflect
the characteristics of the Group’s end markets and their contracting
arrangements. 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. The impact of CV-19 on viability is clearly a consideration for all
companies at this time. Our operations have been designated as critical to
the defence and national security industrial base in all territories in which
we operate in. All our businesses remain open with business continuity
plans mobilised at every location.
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 macro-economic environment, including how CV-19
may impact the economy and future government policy and spending,
underperformance in executing the Group’s strategy, failure to deliver
operational improvements and material movements in foreign exchange
rates. 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,
including the CV-19 scenario referred to above, 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 and the forecasts show compliance with
covenants under the revolving credit facility.
Chemring Group PLC Annual report and accounts 2020
45
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Introduction to sustainability
Committed to a
sustainable future
Chemring acknowledges its responsibilities to contribute to a
sustainable future. We have a strong and recognised obligation
to ensure the responsible operation of our business and are fully
committed to safe, sound and ethical business conduct at all
times at all of our locations.
Purpose
Innovating to protect people, platforms, missions
and information from constantly changing threats.
Michael Ord, the Group Chief Executive, is the director responsible for
corporate responsibility across the Group and is supported by other
members of the Group’s Executive Committee in ensuring that the
Group meets its duty to present and future generations.
Vision
To be a leading provider of critical and innovative
technologies that detect and protect people,
platforms, missions and information against
constantly changing threats.
The Board is aware of the increasing interests of its shareholders in the
way in which the company is managing its sustainability agenda and in
particular its environmental, social and governance (“ESG”) related risks.
Whilst our approach to sustainability continues to evolve we are committed
to implementing transparent policies and procedures, and to fostering an
inclusive culture across the Group where everyone does the right thing
and takes responsibility for their actions. In doing so we will build a
sustainable company of which all our stakeholders can be proud, now
and in the future.
Our approach to sustainability
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 and 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 which are linked to their incentive plans.
“Green team” in Tennessee
46
Chemring Group PLC Annual report and accounts 2020
Our values in action
The “Green team” in Tennessee
The “Green team” at our US countermeasures site in Tennessee is
driving a “zero waste to landfill” programme. Non-hazardous
waste such as scrap wood, plastic, cardboard and metal from both
the site and the local elementary school is now collected and
recycled. In 2020, 70% of our non-hazardous waste in Tennessee
was diverted from landfills.
ESG highlights
Health and safety
Environment
TRIF rate
0.85
(2019: 0.85)
Process safety sub-committee
formed and asset integrity
standard developed
Electricity usage
(Mwh)
Water
consumption (m3)
87,500
(2019: 85,500)
1.27m
(2019: 1.28)
Environmental
committee
formed and
review underway
People
100%
of line managers
participated in our
development
programme as part
of the Development
Framework
Ethics and business conduct
Our Early Careers Programme
has led to a record number of
apprentices joining Chemring
in 2020
Improved Board
diversity
37.5%
of our Board
are female
Ethics & Compliance
Committee formed
Chemring Group PLC Annual report and accounts 2020
47
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Health and safety
Establishing a strong
health and safety culture
Our goal is zero harm, not as a statistical target but as a moral
imperative, which will be achieved by establishing a strong
proactive safety culture.
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 HSE Director
reports directly to the Group Chief Executive, and is responsible for the
effective administration and implementation of the Group’s health, safety
and environment strategy. The Group HSE 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 incentive plan.
Managers and supervisors in the Group’s businesses are required to
enforce procedures, and to provide leadership and commitment to
promote and embrace a positive health and safety culture. The Board
emphasises the importance of individual responsibility for health and
safety at all levels of the organisation, and expects employees to report
potential hazards, to be involved in implementing solutions and to adhere
to rules and procedures.
A key element in the 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.
Achievements
2020 has been an unprecedented year due to the CV-19 pandemic.
Whilst this created a need for special focus, we have still maintained
progress in line with our health, safety and environmental ("HSE") strategy,
with a focus on embedding the processes we implemented last year
around the themes of:
• control of major accident hazards;
• injury reduction; and
• HSE risk management.
As a result of the restrictions associated with CV-19, the HSE milestones
were reviewed to reduce travel and keep to an absolute minimum the
need for person-to-person contact. Actions taken in delivering the HSE
plan included:
• implementation of a travel risk management process;
• development of a revised Crisis Management Plan;
• formation of HSE sub-committees with focus in the areas
of environment and process safety;
• completion of a Group-wide review of asset integrity; and
• a review of the HSE strategy.
Control of major accident hazards
Our Countermeasures & Energetics businesses are required to manage
major accident hazards which are governed by stringent legislation within
their respective operating countries. Over the last two years, we have
implemented a number of processes to enhance our focus in this area
by ensuring we design, maintain and operate with integrity. We continue
to invest in modern processes and technology to remove the employees
from exposure to energetic hazards. During the design of these processes
we have placed more scrutiny on the application of process hazard analysis.
48
Chemring Group PLC Annual report and accounts 2020
Our values in action
Safety Week
During September 2020, Chemring held its first ever Group-wide
Safety Week to encourage people to think, act and protect in
relation to safe behaviours and practices. With lots of different
events and activities, Safety Week proved to be a strong
engagement exercise, so much so that the week is to become an
annual event that will grow year on year. All sites took part joining
in activities such as safety bingo, hazard hunts, the creation of a
Cause No Harm pledge wall and fire extinguisher training.
Last year we mandated that all Countermeasures & Energetics businesses
would need to conduct regular reviews to identify the potential for major
process safety events. The reviews are based on a “stress test” that
addresses the following questions:
• Have potential major accident hazards been identified?
• Are there effective controls in place to prevent and contain a major event?
• Are these controls being actively monitored?
This year saw the second iteration of that review process, with an increase
in the number of hazard scenarios being identified as the rigour of process
hazard analysis matured. We are pleased to report that all major accident
risks are effectively controlled, with the exception of one involving a storage
facility which is the subject of a “stop work order” and has been made
safe whilst improvement measures are put in place.
We are continually seeking ways to reduce the risk of any process safety
event occurring. As such we conducted a review of asset integrity at all
Countermeasures & Energetics businesses during the year using external
consultants. The objective of the review was to drive a reduction in the
number of process safety events related to equipment failures and improve
the reliability of our processes. Based on the Centre for Chemical Process
Safety of the American Institute of Chemical Engineers' standards, the
assessment covered eight elements of an asset integrity management
framework, with a primary focus on maintenance. As a result of the
review we have developed an asset integrity strategy for the Group,
implemented a Group standard on asset integrity and convened a
Chemring team of experts to oversee the Group approach to the
management of asset integrity. More specifically we are in the process
of identifying and selecting a computerised maintenance management
system to ensure that a common system is used across the businesses.
During the year, we also established a process safety sub-committee with
the purpose of sharing best practices and advice on the development of
new standards and guidance. The committee will provide a continued
focus on process safety and the evolution of our approach to reducing
process safety risks.
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.
Last year we implemented a corporate reporting system to support our
focus on learning from near miss incidents, supported by monthly learning
review panels. These have continued throughout the year and have matured
in terms of their quality, providing a much greater insight into the
measures we can take to prevent injury.
With regards to leadership on safety, this has never more been critical
than during the CV-19 pandemic. Business unit leaders conducted virtual
all-hands communications and distributed video blogs to reinforce safety
as the core priority and the need to adhere to our CV-19 safeguards.
Our focus on injury prevention, in response to CV-19, broadened to place
more emphasis on safety measures for people working from home and
their emotional wellbeing. Information and guidance on health and wellbeing
was continually shared with our colleagues and was supported by frequent
contact through remote meetings. In addition the businesses provided
guidance and equipment to colleagues to enable them to work safely
from home.
HSE risk management
Safe delivery of our business is achieved through the management of risk
and is built around understanding our hazards, and establishing clear
expectations and consistency. Our HSE Management System Framework
Standard puts our HSE policy into practice by setting standards on eight
core elements across the Group to drive a 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.
During the year assurance visits were conducted with only two high-priority
findings identified, which have subsequently been addressed. In addition to
our internal assurance process, an external review of safety was conducted
to assess our progress since the last external review in 2018. The review
concluded that we had achieved strong progress (two years in a year)
and observed that a step change had occurred, and that if we maintained
focus, we would meet our goal of becoming a “proactive safety”
organisation in 2021.
In 2019 we commenced a journey to fundamentally change our safety
culture and implemented a targeted HSE strategy. 2020 was focused on
embedding those standards and processes, with few new initiatives. This
year’s performance, despite the challenges of CV-19, has demonstrated
that we have continued to build a stronger safety culture.
Chemring Group PLC Annual report and accounts 2020
49
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Health and safety continued
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 (“LTI”) rates
and total recordable injury frequency (“TRIF”) rates based on 200,000
working hours.
Process safety
Process safety is measured through both reactive and proactive indicators,
namely the number of energetic events that cause harm or injury and
process safety near miss events. In 2020 one energetic event causing injury
was reported, compared to two in 2019. There were no life-altering
injuries as a result of such events. The incident during the year involved
the handling of phosphorus during which an operator’s gloves caught fire
and resulted in burns to the operator.
In 2020 our LTI rate was 0.24 compared to 0.40 in 2019, reflecting a
40% decrease in lost time injuries. This equates to five injuries compared
to eight in 2019.
In addition to our reactive metrics we also measure process safety near
miss events, with a total of 903 recorded in 2020 compared to 847 in the
previous year.
We are pleased to report that there were no fatalities or life-changing
injuries during the year. Our TRIF rate was 0.85. The 2020 TRIF rate
matches the 2019 performance of 0.85. None of the injuries represented
a serious injury, but reflect an increase in the number of impacts, slips,
trips, falls and manual handling injuries. This will be an area of focus in the
2021 HSE plans.
We focus not only on actual injuries but also near miss events. We
therefore place an emphasis on near miss reporting as a leading indicator
of a maturing safety culture. This year we had 1,417 occupational safety
near miss reports, compared to 1,033 in 2019, reflecting an increase in
reporting. Of those near miss incidents we had a total of 20 high-potential
incidents that focused areas for improvement across the Group.
During 2019 we trialled a new leading indicator for process safety events
(“PSE”), which are now categorised as level 1, 2 and 3, with 3 being the
event with the most serious potential. We set ourselves a target of
4.6 per 100 production employees, based on the number of upset
conditions, energetic events and near miss record in 2019, from which
an estimate of future performance was made to which we applied a
10% target reduction for level 2 and 3 process safety events. This year
we achieved 1.44 against the target of 4.6 indicating a decrease in the
number of PSE events.
HSE strategy forward outlook
In 2019 we set a three-year strategy focused on the control of major
accident hazards, injury prevention and HSE risk management. We have
now conducted a review of our HSE strategy and, whilst these areas will
continue to be areas of focus, the new strategy will broaden to place even
greater focus on health and the environment. The new strategy is therefore
a natural evolution and reflects the maturity of the business. As such, the
next three-year strategy will have at its core:
• asset integrity and process safety – relating to the control of major
accident hazards and PSE events;
• occupational health and safety – focusing on injury and illness
prevention, including psychological health and wellbeing;
• environment and sustainability – to co-ordinate our work on protecting
the environment; and
• security and resilience – to co-ordinate and bring focus to ensure we
have secure and resilient business operations, which protect our people
and assets.
Our progress against this strategy will be reported in the next annual
report and accounts.
50
Chemring Group PLC Annual report and accounts 2020
Environment
Reducing our environmental impact
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.
Reduction in greenhouse gas emission intensity
11.5%
Introduction
Our environmental performance information is presented in accordance
with the Streamlined Energy and Carbon Reporting (“SECR”) Guidance
(March 2019), as specified under the Companies Act 2006 (Strategic
Report and Directors’ Report) Regulations 2013. Data is presented
for our financial year, from 1 November through to 31 October, and
includes information on our most significant environmental aspects:
energy consumption and associated greenhouse gas (“GHG”) emissions;
freshwater use; and waste generation. The scope of the reporting includes
all continuing global businesses under our operational control and does not
include several small leased office spaces used for drop-in needs, where
we do not have energy data and they are not in our operational control.
Our GHG emissions calculations are undertaken in accordance with the
GHG Protocol Corporate Accounting and Reporting Standard. We are
reporting 2019 and 2020 data and include scope 1 GHG emissions, as
well as location- and market-based approaches for scope 2 emissions of
purchased electricity. Our key scope 1 emissions sources are natural gas
and fuel oil used for building and process heating, with small contributions
from fuels used in on-site vehicles and refrigerant releases. Primary scope 1
emissions are CO2, with small contributions from CH4, N2 and HFCs.
For the purpose of this report, we are restating our 2019 data, excluding
companies no longer under our operational control, to allow 2019 to be
used as a baseline for GHG emissions and to compare progress made in
2020. We have reviewed and adjusted, where needed, 2019 figures following
our data review. For waste generation, we are using 2020 as a baseline.
Our approach
We are actively seeking ways to reduce our impact on the environment
and build resilience to climate change by focusing on energy, waste and
water, and understanding the impact of global climate change on our
operations. These four focus areas have been identified based on an
overall evaluation of environmental impacts and risks, with a focus on
impacts that we can influence. These focus areas will be periodically
reviewed by our newly established Environmental Committee,
consistent with broader sustainability goals and reporting guidelines.
Many of our Chemring businesses have environmental management
systems and have undertaken local initiatives and programmes to reduce
environmental impacts. This year we have implemented a more centralised,
robust approach to drive environmental performance and collect more
accurate data.
Our strategy
Our strategy is to reduce our global GHG emissions through improving
energy efficiency to reduce consumption and by purchasing electricity
from renewable sources. In 2018, Chemring made a conscious decision to
purchase its UK electricity using REGO-backed renewable energy contracts.
This purchasing covers our UK businesses, namely Chemring Energetics
UK, Roke, Chemring Countermeasures UK and our HQ based in Romsey,
and reduced our total CO2e impacts by over 9% as noted in the
market-based CO2e values below.
To improve our energy efficiency, we have made improvements to our
operations, including installing new energy-efficient buildings to replace old
buildings, upgrading HVAC systems and improving lighting. Improvements
in lighting technology provide safety, maintenance and energy savings.
Several of our businesses have implemented relamping projects to replace
fluorescent lighting with LED lighting. LED lighting provides significant
advantages over more traditional fluorescent lighting in terms of reduced
energy consumption, less maintenance and provides a safer way to light
our operational areas. Fluorescent and HID bulbs need regular
replacement and are more costly to operate than LEDs.
In our Chicago operations, 75 460-watt fixtures have been replaced with
232-watt fixtures, giving a total energy saving of 17,100 watts. Similarly,
our North Carolina facility has replaced all Hi-Bay lighting with LED lamps
providing 30,000 watts of savings. In addition, replacing fluorescent fixtures
at that facility with LEDs provided 50,000 watts of savings. Our Scotland
facility, one of larger energy users, is performing a similar exercise.
Climate change resilience
We recognise that climate change has the potential to have an impact on
our operations, having experienced flooding from a severe weather event
at our Tennessee facility in 2018 and wildfires in areas surrounding our
Australia operations in 2019. We intend to review the physical and
transition risks of global climate change on our operations and supply
chain. Mitigation measures taken to date include improving drainage at
our Tennessee facility and maintaining lower vegetation heights at the
Australian and Norwegian sites.
Chemring Group PLC Annual report and accounts 2020
51
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Environment continued
Energy use and associated GHG emissions for 2020 and 2019
In 2020, we recorded a 14% reduction in energy usage normalised to sales. Our Countermeasure & Energetics businesses in Norway and Scotland are
responsible for 37% and 28%, respectively, of the energy usage of the Group. This is followed by our business in Tennessee, which consumed 15% of
annual energy consumption. Norway and Scotland have energy reduction plans in place, and the Tennessee business is reviewing energy reduction
opportunities. Our UK operations account for 81% of our scope 1 emissions, 24% of our scope 2 emissions and 39% of our energy use.
In terms of GHG emissions, in 2020 we observed an 6% increase in scope 1 and 2 emissions from 21,142 tCO2e in 2019 to 22,480 tCO2e in 2020 using
location-based emission factors. When normalised for gross revenues, this reflects a decrease of 11.5%, from 63.1 to 55.8.
20203
USA,
Norway,
Australia
UK
Group
total
UK
20194
USA,
Norway,
Australia
Group
total
5,826
1,452
178
332
217
4
—
5,272
1,362
40
124
—
1
—
554
90
138
208
217
3
—
Scope 1 emissions – continuing operations
Combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the Group
Co2e (tonnes)
Gas
Heating oil
Liquid petroleum gas
5,587
1,704
38
443
89
192
6,030
1,793
230
Fuels consumed by Group-owned and leased vehicles, excluding business travel and employee commuting
Co2e (tonnes)
Diesel
Petroleum
103
—
184
211
287
211
The operation or control of any manufacturing process by the Group
Co2e (tonnes)
On-site waste incineration
Refrigerants discharged(2)
Total scope 1 emissions CO2e (tonnes)
Scope 2 emissions – continuing operations
Total emissions CO2e (tonnes)
Electricity – location-based(1)
Electricity – market-based
Total scope 1 and 2 Emissions – continuing
operations(1)
Location based CO2e (tonnes)
Market based CO2e (tonnes)
Total energy consumption (Mwh)
1
88
7,521
4
649
1,772
5
737
9,293
6,799
1,210
8,009
3,145
—
10,042
11,082
13,187
11,082
3,116
—
10,017
10,878
13,133
10,878
10,666
7,521
51,022
11,814
12,854
78,591
22,480
20,375
129,613
9,915
6,799
46,851
11,227
12,088
79,069
21,142
18,887
125,920
Notes:
1. Our 2019 annual report noted total scope 1 and 2 GHG emissions of 28,591 tonnes of CO2 equivalents. Following a re-evaluation of energy use data and calculations, and with
2.
the removal of discontinued operations to allow 2019 to be used as a baseline, the new 2019 total is 21,142 CO2e tonnes.
Impacts from the release of refrigerants are included in the 2020 scope 1 data (representing 8% of the scope 1 total) however, this information was not available and thus not
included in restated 2019 figures.
3. Our 2020 and restated 2019 data does not include environmental impacts associated with Chemring Ordnance, Chemring Energetic Devices Torrance and Santa Clarita, and
Chemring Defence UK, which were sold or closed during the reporting period.
4. As part of our data validation, several discrepancies were noted in last year’s report; these have been addressed in the table above. The previous 2019 values overstated the CO2e
emissions by 6.7%.
Total scope 1 and scope 2 emissions CO2e (tonnes) – continuing operations and location-based
Group revenue (£m) continuing operations
Total CO2e (tonnes) per £m of revenue
2020
22,480
402.5
55.8
2019
21,142
335.2
63.1
52
Chemring Group PLC Annual report and accounts 2020
Water consumption
In 2020 we used a total of 1,265,812 metres3 of freshwater, similar in magnitude to our 2019 use. This includes both purchased and extracted
groundwater, which was not included in past reports.
Freshwater (metres3)
Freshwater use
20203
USA,
Norway,
Australia
UK
Group
total
UK
20193
USA,
Norway,
Australia
Group
total
578,989
686,823
1,265,812
578,008
699,929
1,277,937
Our Australian facility continues to collect and use rainwater that falls on the site for facility needs. A core activity as we move forward will be to
develop a sustainable water policy and seek further water conservation opportunities across all our areas of operation.
Waste generation
In 2020 our total hazardous and non-hazardous waste was 402 and 1,588 tonnes respectively. Of this, 22% of hazardous and 50% of non-hazardous
waste was recycled. We will use 2020 data as a baseline for future waste reporting.
Waste (tonnes)
Recycled, non-hazardous
Recycled, hazardous
Not recycled, non-hazardous
Not recycled, hazardous
Total waste (tonnes)
20203
USA,
Norway,
Australia
601
1
625
262
Group
total
792
89
768
313
1,489
1,962
UK
191
88
143
51
473
At our Countermeasures & Energetics businesses we generate unique waste which is often best managed by destroying it at on-site treatment facilities.
In 2020, we made a significant investment in upgrading the treatment facility at our Tennessee operation, improving site grading and building new
treatment units. Upgrades were also made at our Salisbury facility.
With respect to waste management there are two priority areas: the reduction of waste generation and the reduction of waste sent to landfill. To help
track progress in these areas we have begun recording the amount of waste sent to landfill, and are evaluating and updating our waste reduction plans
at our largest waste-generating businesses.
At our business in Tennessee, our employee “Green Team” is driving a programme towards zero waste to landfill. One milestone achieved in 2020
was a 70% reduction in non-hazardous waste sent to landfills. Non-hazardous waste is routinely generated at the plant, including scrap wood, plastic,
cardboard and metal. Another milestone achieved in 2020 was the reduction in the number of waste dumpsters on site. The facility has a dedicated
area for recycling that is also used to support a local elementary school’s recycling programme.
Chemring Group PLC Annual report and accounts 2020
53
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Environment continued
Land quality
Our 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
(2019: £3.2m) provision in respect of environmental liabilities, which the Board considers to be adequate (see note 23).
Environmental incidents
There were no significant environmental incidents in the year.
Environmental fines or penalties
The Group had no fines or penalties in the last three years.
Our values in action
Australia – water tanks
Chemring Australia is based in Lara, Victoria. Due to its rural location,
the facility is not connected to mains water. To reduce its environmental
impact, the team collects and utilises rainwater on-site in preference to
trucking water onto the site. Greg Kilpatrick, HSE Manager Chemring
Australia, shares more about the scheme and its environmental and
safety benefits:
“Rainwater that lands on our buildings flows to collection tanks.
The overflow from these tanks is pumped to our fire services building,
where it is treated (filtered and UV stabilised), then redirected back to our
site buildings. There, it is used for our manufacturing processes, cleaning,
sewage treatment, emergency showers/eyewash stations, and our
HVAC humidifiers.”
54
Chemring Group PLC Annual report and accounts 2020
Our people
Investing in our 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. Developing a high performing and inclusive
culture is a key enabler in our ability to deliver this strategic growth.
Engaged, motivated, empowered and appropriately skilled employees are
integral to our success. We support all our people through creating a safe,
inclusive environment, where every individual is able to work well and
contribute to the development of the business.
The CV-19 crisis has meant that it has been more important than ever to
keep our people, their families and the wider community safe and the business
running in support of our customers and other external stakeholders.
Our approach to developing a high performing and inclusive culture is
focused on five key areas:
Understanding our population
Our Chemring business is highly diverse. Our colleagues work in diverse
environments across the globe, with skill sets ranging from skilled scientists,
engineers, technicians and operators to deep functional experts in areas
such as health and safety, people and technology. Our success depends on
our people and understanding our global population is core to that.
Making sure that we have an appropriately diverse pool of talent within
the organisation is a fundamental metric. Ensuring that our employee gender
diversity is reflected in our Board make up has been a key focus over the
past two years and we are delighted that this has now been achieved.
Investment in systems to continue our understanding of our employee
population is part of the approach for 2021.
Understanding our
population
Engaging with our
people
Developing at
Chemring
Diversity and
inclusion at
Chemring
Chemring in the
community
All employees gender split
32%
68%
Male
Female
68+
Female78+
Male
22%
78%
Women in management roles
Chemring Group PLC Annual report and accounts 2020
55
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS+
32
+
+
U
+
22
+
+
U
Our people continued
Engaging with our people
Communication both within and across the Group is key to engagement.
Each business unit uses 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 an active Q&A encouraging anyone
from across the business to ask a question, and through the Chemring
magazine, Chemring-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. This is now live in every part of the business with colleagues
being asked questions weekly through the online portal to help gauge
sentiment in the business in real time.
During the year, Laurie Bowen, as Chairman of the Remuneration
Committee and non-executive director designated by the Board, met with
groups of colleagues from different business areas and at different levels in
the organisation to hear direct from them their views on working at
Chemring as well as sharing the work of the Board. These groups included
previous participants in the Emerging Leaders Programme, line managers
and supervisors and a business unit leadership team. These groups were
chosen to complement the work done previously by non-executive
director Andrew Davies in 2019 when he met with groups of operators
from around the US businesses.
Development and creating networks are key themes at all levels in
the organisation.
The Early Careers network continues to develop with an event in
November 2019 bringing together all UK and Norwegian graduate and
apprentice colleagues who were in the first two years of their employment.
The conference provided the opportunity for face-to-face connections,
interaction with senior leaders and development workshops. The
corresponding US event did not proceed due to the CV-19 outbreak.
Consideration is now being given to options to enhance networking
amongst this key group virtually.
The Annual Leadership Forum due to be hosted in the UK in June this
year was also cancelled due to the global pandemic. Constant, regular
updates and virtual meetings of the global leadership teams have ensured
that this key group remains well connected and up to date on the
challenges around the business and have provided the opportunity for
discussion and debate. The forum is planned to resume in 2021.
CV-19 put extraordinary pressure on a wide group of colleagues and
ensuring we were able to monitor how they were coping and provide
support as it was required was very important. This tool has been
invaluable as we have navigated through this crisis. In particular for those
colleagues who were required to work remotely for a period of time,
it provided a key insight into how they were feeling and gave immediate
insights into areas where the business needed to make change or create
additional focus, to support productivity and wellbeing.
Throughout 2020 we recorded an average response rate of close to
50% with a target to move this to closer to 70% in 2021. The average
positivity score was over 70% across all areas. Business units review
their own population data at least once a week as well as reviewing
verbatim comments.
Development at Chemring
Development is the cornerstone of the drive to continuously improve the
quality of our business. Our colleagues are involved in performing a huge
number of often complex processes and procedures and work continues
to ensure high levels of operator competence throughout the organisation.
Individuals across the organisation are encouraged to undertake continuing
professional development as required to ensure that expertise and knowledge
remains up to date. Additionally through different routes, further technical
development, including workplace PhD programmes and MBA study, are
actively undertaken by a number of colleagues. Additional focus will be
placed on these areas in 2021.
Outside of technical competence, the Development Framework created
in 2019 focuses on the development of management and leadership skills.
Development Framework
Leadership
Accelerate Talent
Early Careers
Senior Level Leader
Leading Our Organisation
Mid Level Leader
Leading Our Leaders
Emerging Leaders
Programme
Early Careers
Participants / Network
First Level Leader
Leading Our People
Managing Yourself
Leading Ourselves
Future Leaders
Programme
Early Careers
Programme
56
Chemring Group PLC Annual report and accounts 2020
During 2020 all colleagues whose role includes being a first line manager
or supervisor have commenced participation in the development programme
as part of the Development Framework. There are over 340 participants
who between them directly manage around 85% of the total population
of the organisation. This programme is based around a global approach to
ensuring all line managers understand the people policies and processes
affecting their teams locally and are trained in their responsibility for these.
Additionally they receive training in six core topics to support their
development as effective managers and leaders. These topics are
supported globally, and tailored and deployed locally: Global Voice,
Local Accent.
Looking forward to 2021, work has been ongoing in 2020 in preparation
for the launch of the second cohort of participants in the Emerging
Leaders Programme. This programme, run every second year, brings
together high-potential future leaders from around the Group onto
a multi-faceted nine-month programme to support their development
as leaders of the future. The programme includes learning modules,
one-to-one coaching, live business projects run by senior level
sponsors and group work on specific work challenges.
This year Chemring welcomed a record number of graduates and
apprentices to the UK businesses. Alongside this our commitment to
sponsoring bursaries for undergraduates through the Institute of
Engineering and Technology underlines our commitment to supporting
future generations of scientists and engineers.
Wellbeing continues to be a key theme in 2020. As part of line manager
development and through the Early Careers network events, areas such as
maintaining mental health have been addressed as well as helping individuals
to develop healthy habits. Mental health first aid training has continued at
Roke and will be extended to additional business units in 2021.
Diversity and inclusion at Chemring
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. Different expertise and experience contribute
positively to Chemring’s development and contributes to a broader and
better basis for decision making.
Chemring strives for diversity on a broad basis including gender, age,
background, education, disability and nationality (within the constraints
of our regulatory requirements). As a business, 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.
We have a number of formal and informal groups around the business
which 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 Chemring operates.
Future focus is on ensuring all our recruitment procedures incorporate
our commitment to diversity. We ensure that any external bodies we
work with for the provision of support have diverse candidate pools and
attraction approaches that are open to all suitably qualified individuals.
Our values in action
Apprenticeships
Across our businesses, we look to support young people and those at
the start of their careers through the next stages of their development.
Esme King, who is based at our UK countermeasures facility, completed
her advance apprenticeship and is now in her first year as a shift
maintenance engineer.
“After spending three and a half years as an apprentice on site,
I am now a shift maintenance engineer. Doing my apprenticeship
and learning on the job has given me invaluable skills and competence.
It really is the best way to get the qualifications, skills, and experience
you need to succeed in engineering.”
Chemring Group PLC Annual report and accounts 2020
57
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our people continued
Chemring 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 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. In particular throughout the CV-19 crisis our colleagues
and businesses have provided significant support with the production of
PPE including Perspex face shields for use in healthcare settings, and the
making of face coverings on site for use by colleagues at no cost.
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.
Our values in action
Supporting the armed
forces community
Demonstrating our support for the armed forces
community, Chemring has pledged itself to the Armed
Forces Covenant, ensuring that those who serve or
who have served in the armed forces, and their
families, are treated fairly. We are proud to support
the armed forces, our employees who serve as
members of the reserve forces and those who work
with the cadet forces.
Our Chemring Countermeasures UK business in
Salisbury received the silver award from the Defence
Employer Recognition Scheme.
58
Chemring Group PLC Annual report and accounts 2020
Ethics and business conduct
Conducting business
in a responsible manner
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 promoting 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 35 policies and procedures which
have been adopted by all of our businesses. The Operational Framework
implements a robust governance and compliance framework to enable us
to operate in a safe, consistent and accountable way.
The leaders of each of our businesses are required to ensure that:
• every employee, at every level of the organisation, has access to and
understands the requirements of the Operational Framework;
• appropriate training and monitoring processes are in place to ensure
proper implementation of the Operational Framework; and
• local procedures and processes are adopted to implement the
requirements of the Operational Framework.
During the year we introduced an online compliance system, through
which all of our Operational Framework policies, procedures and associated
training will be disseminated to employees across the Group in future.
Our governance framework also requires all businesses to complete
an Operational Assurance Statement on a half-yearly basis, providing a
detailed assessment of their compliance with the Operational Framework.
Our businesses have now produced three Operational Assurance
Statements and the output from the process is enabling us to drive
continuous improvement in our governance and compliance framework,
including the identification of additional training requirements for our
employees. It also allows us to monitor and address the evolution of a
number of the key risks we face. During 2021, we intend to refresh the
current process to enable the output to be more effectively used in our
future internal audit activities.
Ethics & Compliance Committee
During the year, the Board established an Ethics & Compliance
Committee, chaired by Carl-Peter Forster, with the other members being
the Group Chief Executive, the President of our US operations and the
Group Legal Director & Company Secretary. The Committee now
has oversight of the Group’s ethical business conduct and compliance
framework, including our anti-bribery processes. It will monitor the
implementation of the framework across the Group and recommend
areas for improvement in the future.
At its first two meetings, the Committee undertook a review of:
• the Group’s key compliance policies and associated training material;
• the effectiveness of arrangements for dissemination of our Code of
Conduct and training;
• the adequacy of our whistleblowing arrangements; and
• the compliance certificates submitted by our businesses in respect of
their compliance with our anti-bribery processes (further details below).
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
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
Chemring Group PLC Annual report and accounts 2020
59
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Ethics and business conduct continued
Code of Conduct
Our 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 our standards of behaviour and business conduct,
as set out within the Code, and applicable laws and regulations in all of
the countries in which we operate. All employees, current and new, are
provided with a copy of the Code of Conduct, and asked to confirm that
they will adhere to its standards. During the year we issued a training
video on the Code, which has been made available to all employees and
can be used during the induction process for new employees. Our aim is
to ensure that all employees complete mandatory training on the Code
of Conduct on an annual basis in future.
Whistleblowing
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 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.
During the year we updated our internal procedures for the handling of
whistleblowing reports to ensure that all reports made, whether through
the external service or through other internal channels, are dealt with in a
proper and consistent manner.
In 2021, we intend to run a campaign to further increase awareness of our
whistleblowing arrangements amongst employees.
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, conflicts of interest, gifts and hospitality, and
facilitation payments. A number of other policies within the Operational
Framework also address bribery and corruption risks in areas such as
finance, political donations and lobbying, charitable donations and offset.
Our detailed anti-corruption procedures are incorporated within our
Bribery Act Compliance Manual (“BACM”), which is updated on a regular
basis, and includes 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;
• approval of 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;
• risk-based anti-corruption processes for the engagement of service
providers and suppliers;
• regular mandatory training on BACM and its application to their
respective roles for management, supervisors and all employees
working within commercial, sales and marketing, finance and human
resource functions;
• approval of the giving and receiving of reasonable, proportionate and
appropriate gifts and hospitality in the normal course of business; and
• proper identification, disclosure and management of potential or actual
conflicts of interest.
During the year we issued a BACM “Pocket Guide” to all employees
across the Group, providing an overview of our anti-corruption policies
and the requirements of the detailed manual.
All businesses are required to complete a BACM Compliance Certificate
on a biannual basis, confirming that all policies and procedures within
BACM have been complied with and providing supporting information to
demonstrate compliance.
We recognise that the appointment of third party sales partners in our routes
to market can present particular bribery and corruption risks, and we therefore
implement enhanced anti-corruption procedures for 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, 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;
• 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.
60
Chemring Group PLC Annual report and accounts 2020
Our new online compliance system introduced during the year has
allowed us to automate our anti-corruption processes, which were
previously paper based, and will provide greater consistency in the
application of the processes across the Group. The system will enable
us to disseminate mandatory anti-corruption training to potential sales
partners and will allow us to monitor third parties on a continuous basis.
It also incorporates a module for employees to seek online approval for
gifts and hospitality, and provides monitoring and reporting functions
which will increase visibility on compliance for our businesses and our
legal departments in the UK and the US. We have transitioned all third
party sales partners to the new system and will be transitioning higher-risk
service providers and suppliers during 2021.
Relevant employees completed updated online training on BACM during
the year and a review of our BACM procedures was completed by PwC
as part 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.
“ Our new online compliance
system introduced during the
year has allowed us to automate
our anti-corruption processes,
which were previously paper
based, and will provide greater
consistency in the application of
the processes across the Group.”
Sarah Ellard,
Group Legal Director
Chemring Group PLC Annual report and accounts 2020
61
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Non-financial information statement
Companies Act 2006 requirements
This section of the strategic report constitutes the Group’s non-financial information statement and addresses the requirements of sections 414CA
and 414CB of the Companies Act 2006. The non-financial information is included within the various other sections of the strategic report and is
cross-referenced below.
Our Code of Conduct provides direction to our employees on the standards of behaviour and business conduct which we expect from them. It sits
alongside our Operational Framework, which incorporates a wide range of policies and procedures to enable our businesses to comply with their
legal obligations and to operate in a safe, consistent and accountable way.
Our Code of Conduct and our key public policies are available at www.chemring.co.uk.
51
17
55
48
59
82
55
59
55
59
Reporting requirement
Environmental matters
Employees
Relevant policies which govern our approach Where to read more
Page
• Group health, safety and environmental policy
• Environment
• People policy
• Stakeholder engagement
• Group health, safety and environmental policy
• Our people
• Remuneration policy
• Whistleblowing policy
• Code of Conduct
Social and community matters
• Community investment policy
• Health and safety
• Ethics and business conduct
• Directors’ remuneration
report
• Our people
Respect for human rights
• Modern Slavery Act Statement
• Our people
• Code of Conduct
• Ethics and business conduct
• Supply chain policy
• Ethics and business conduct
Anti-bribery and corruption
• Anti-corruption policy
• Ethics and business conduct
59
• Supplier Code of Conduct
• Code of Conduct
• Bribery Act Compliance Manual
• Offset policy
• Code of Conduct
Business model
Stakeholders
Risk management
Non-financial key performance
indicators
• What we do
• Investment case
• Business model
• Target markets
• Strategy
• Stakeholder engagement
• Risk management
• Principal risks
and uncertainties
• Key performance indicators
• Health and safety
• Environment
• Our people
2
4
14
20
22
17
36
38
24
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51
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62
Chemring Group PLC Annual report and accounts 2020
Governance
64 Board of directors
66 Chairman’s introduction to governance
68 Corporate governance report
76 Audit Committee report
80 Nomination Committee report
82 Directors’ remuneration report
101 Directors’ report
Board of directors
Experienced leadership
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 15 December 2020):
4 years, 7 months
Board length of service
(as at 15 December 2020):
2 years, 6 months
Board length of service
(as at 15 December 2020):
3 years, 11 months
Board length of service
(as at 15 December 2020):
9 years, 3 months
Experience:
• Board experience at Chairman and
Experience:
• Extensive senior management
Experience:
• Extensive international experience
Chief Executive level
experience in the defence sector
in the defence sector
Experience:
• Legal, compliance and
governance expertise
• Extensive international experience
within the industrial goods and
engineering sectors
• International experience
in both service and
manufacturing industries
• Board experience at Finance
• Chartered Secretary
Director level
• Chartered Accountant
Andrew Lewis joined the Group on
9 January 2017 and was appointed to
the Board as Group Finance Director
on 19 January 2017.
Sarah Ellard was appointed as Group
Legal Director on 7 October 2011,
having been Group Company
Secretary since 1998.
Prior to joining the Group, Sarah trained
and worked at Ernst & Young LLP.
She is a Fellow of The Chartered
Governance Institute.
Andrew spent eight years as Group
Finance Director of Avon Rubber p.l.c.,
where he also performed the Interim
CEO role during 2015, following the
retirement of the previous CEO.
Prior to joining Avon, Andrew was
Group Financial Controller of Rotork
plc and before that he was a Director
at PricewaterhouseCoopers in Bristol
and New Zealand.
• 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 both IMI plc
and Babcock International Group PLC,
and was previously a non-executive
director of Rexam PLC, Rolls-Royce plc
and Cosworth Ltd. He is also Chairman
of the Hella KGaA Shareholder
Committee and the Kinexon GmbH
Advisory Board, a member of the
Boards of The Mobility House AG
and Leddar Tech Inc. and holds
advisory roles with Geely Group,
Rock Tech 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.
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.
64
Chemring Group PLC Annual report and accounts 2020
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
Senior Independent
Non-Executive Director
Stephen King A N R
Non-Executive Director
Fiona MacAulay A N R
Non-Executive Director
Board length of service
(as at 15 December 2020):
1 year, 5 months
Board length of service
(as at 15 December 2020):
4 years, 7 months
Board length of service
(as at 15 December 2020):
2 years, 1 month
Board length of service
(as at 15 December 2020):
0 years, 6 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:
• Board experience at Chief
Executive level and in
non executive positions
technology sector
international defence industry
• Chartered Accountant
• International and operational
experience in high-hazard industries
Fiona MacAulay was appointed as a
non-executive director on 3 June 2020.
She is also Chair of Independent
Gas plc and a non-executive director
of Ferrexpo plc, Coro Energy plc
and EPI Group Ltd.
Fiona previously held a number of
senior operational roles within the oil
and gas sector, including a two-year
appointment as Chief Executive of
Echo Energy plc in 2017.
Andrew Davies was appointed as an
independent non-executive director
on 17 May 2016 and was appointed
as Senior Independent Director
on 1 May 2020. He also served as
Chairman of the Remuneration
Committee until 4 March 2020.
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 and was appointed
as Chairman of the Remuneration
Committee on 4 March 2020. She is
also a non-executive director and
Chairman of the Nomination
Committee at 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.
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 a non-executive
director and Chairman of the Audit
Committee and Risk Committee at
Signature Aviation plc.
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 retired as Group Finance
Director of Caledonia Investments plc
in 2018. He was previously
a non-executive director and
Chairman of the Audit Committee
at The Weir Group plc and a
non-executive director and
Senior Independent Director
at TT Electronics 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 2020
65
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chairman’s introduction to governance
Embedding a robust
governance framework
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 2020. The report explains how the
Board operates and how corporate governance is addressed in Chemring.
UK Corporate Governance Code
In the year under review, Chemring was subject to the UK Corporate
Governance Code published in July 2018 by the Financial Reporting
Council (the “Code”) and this report sets out how we have complied with
the Code.
Further details on the Remuneration Committee’s approach to the Code
are set out on pages 82 to 100.
Response to CV-19
The CV-19 pandemic and the Group’s response was obviously a key area
of focus for the Board during the year. The Board convened on a number
of occasions during the early weeks of the pandemic to review the actions
taken by management to protect and safeguard our people, and ensure
continuity of operations for our customers and other stakeholders. The
Board continues to receive regular updates from management and the
Group’s Crisis Management Team on ongoing developments with regards
to the pandemic and potential impacts on the business. Further details of
the Group’s response are set out on pages 6 and 7.
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 form the foundation for our organisation
and our strategy, and are reflected in our Code of Conduct.
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 embraces within
Chemring of always doing the right thing and taking personal responsibility
for our actions. We firmly believe that promoting a Chemring culture
which embraces responsible behaviour will contribute to the long-term
success of the business and all of our stakeholders.
Governance and Operational Framework
During the year, we established an Ethics & Compliance Committee,
which I now chair, with the other members being the Group Chief
Executive, the President of our US operations and the Group Legal
Director & Company Secretary. The Committee has oversight of our
ethical business conduct and compliance arrangements across the Group,
and its establishment reinforces the importance of responsible behaviour
at all levels of the organisation. Further details of the Committee’s
activities during the year can be found on page 59.
Carl-Peter Forster
Chairman
“ The Group acknowledges its
responsibilities to contribute
to a sustainable future.”
66
Chemring Group PLC Annual report and accounts 2020
Our Operational Framework, which was implemented on 1 January 2019,
provides an enhanced governance framework to enable us to operate in
a safe, consistent and accountable way. Together with our Code of Conduct,
the Operational Framework promotes a set of policies, practices and
behaviours which are fully aligned with Chemring’s purpose, values, vision
and strategy.
Stakeholder engagement
In recognition of the requirement under the Code for the Board to establish
a mechanism for engaging directly with our employees, Andrew Davies
was designated as the non-executive director who would engage on
behalf of the Board up until March 2020, when the role was assumed by
Laurie Bowen. Laurie held a number of remote meetings with employees at
all levels of the organisation in the UK and in the US during the year, at
which she shared with employees a perspective on the Board’s priorities
and provided an opportunity for them to ask questions of her. 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 continue to provide valuable input to the Board’s deliberations.
We fully recognise our obligation to engage with and consider the impact
of the Board’s decisions on all of our stakeholders. Further details on our
approach can be found on pages 16 to 19 and later in this report.
Board changes
Nigel Young retired as a non-executive director on 30 April 2020.
Nigel served on the Board for nearly seven years and was formerly the
Chairman of the Audit Committee and the Senior Independent Director.
We thank him for his significant contribution to the Board during his
seven-year tenure. Andrew Davies was appointed as the Senior
Independent Director on 1 May 2020.
We welcomed Fiona MacAulay to the Board as a new non-executive
director on 3 June 2020. Fiona has significant industrial experience and a
deep understanding of operational excellence, technical engineering and
safety-critical environments. Her contribution to the Board is already
proving very valuable.
Details of the process followed for Fiona’s appointment are set out in the
Nomination Committee report on pages 80 and 81.
Board effectiveness
The requirement for remote working during the early stages of the
pandemic meant that a number of Board meetings during the year were
required to be held virtually. I believe that the Board has adapted well to
a new way of working and whilst meeting in-person will always be our
preference, virtual meetings will provide an opportunity for additional
interaction between Board members going forward.
CV-19 related travel restrictions and lockdown arrangements from March
onwards also meant that the Board as a collective was unable to visit as
many sites as planned at the beginning of the year and we hope to resume
this activity during 2021. However, we continued to interact with the
management of the businesses and other employees remotely, as these
engagement activities are very beneficial to aiding the Board’s understanding
of both the challenges and opportunities within our businesses.
We continue to build on the strong relationship established with our
US Board in recent years, and whilst we were unable to meet collectively
in-person with the US Board as scheduled during the year, the President
and Chairman of the US Board attended several of our Board meetings
by video-conference. Given the importance of our US businesses, it is vital
that we maintain positive interactions with the US Board and we will build
further on this engagement in the year ahead.
Board evaluation
In progressing the appointment of a new non-executive director during
the year, we reflected on 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, externally-facilitated
performance evaluation in the latter part of the year, which is described
on page 75. The suggestions made during the evaluation process will be
taken into consideration as we continue to improve the effectiveness of
the Board in the coming year.
Carl-Peter Forster
Chairman
15 December 2020
Compliance with the UK Corporate Governance Code
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 2018 by the Financial Reporting
Council (the “Code”). The Company was in compliance with the
provisions of the Code throughout the year ended 31 October 2020.
Further details on how the Company applied the principles of the Code
during the year can be found as follows:
See page
Board leadership and company purpose
Long-term value and sustainability
Culture
Shareholder engagement
Employee engagement
Other stakeholder engagement
Conflicts of interest
Division of responsibilities
Role of the Chairman
Division of responsibilities
Non-executive directors
Composition, succession and evaluation
Appointments and succession planning
Skills, experience and knowledge
Length of service
Evaluation
Diversity
Audit, risk and internal control
Audit Committee
Integrity of financial statements
Fair, balanced and understandable
Internal controls and risk management
External auditor
Principal and emerging risks
Remuneration
Policies and practices
Alignment with purpose, values and long-term
strategy
Independent judgement and discretion
46
70
18
17
17
72
73
72
73
80
72
64
75
81
76
77
78
36
78
38
95
95
97
Chemring Group PLC Annual report and accounts 2020
67
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate governance report
Board leadership and company purpose
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 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.
Remuneration Committee
Sets and reviews the directors’ remuneration
policy, and oversees remuneration
arrangements for the senior leadership.
See page 76
See page 80
See page 82
(Audit Committee report)
(Nomination Committee report)
(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 and the Chief Financial Officer of the Group’s US operations, the Group HSE 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.
Ethics & Compliance Committee
Oversees the Group’s ethical business conduct and compliance
framework; monitors the implementation of the framework across the
Group and recommends areas for improvement in the future.
See page 36
(Risk management)
See page 59
(Ethics and business conduct)
68
Chemring Group PLC Annual report and accounts 2020
Board activities in 2020
Leadership
Strategy
• Monitored the potential impact of CV-19 on the Group and the
• Approved the updated five-year plan and strategy for the Group
implementation of crisis management and business continuity plans
• Reviewed the company’s purpose, vision and values
• Engaged in a review with external advisers on:
> the macro-economic environment and prospects for global
• Monitored culture through feedback on employee sentiment
defence budgets;
measured through “Employee Voice”
• Approved the appointment of a new non-executive director
• Approved updated terms of reference for Board committees
> the global countermeasures market;
> the electronic warfare market; and
> potential opportunities within the chemical and biological
• Completed the annual Board performance evaluation
detection markets.
• Approved the disposal of Chemring Ordnance, Inc.
• Reviewed progress on the US Programs of Record
Financial
Health, safety, environment and sustainability
• Monitored performance of the businesses against the 2020 budget
• Reviewed health and safety implications of CV-19
• Reviewed liquidity and financing requirements against the backdrop
• Monitored health and safety key performance indicators on a monthly basis
of CV-19
• Approved the 2021 budget
• Approved the half year results, and the annual report and accounts
• Reviewed the Group’s capital allocation policy, approved the interim
dividend and made a recommendation for the final dividend
• Received briefings on significant incidents and high potential near misses
• Considered the findings of an external review of maintenance practices
completed at the high-hazard sites and the asset integrity standard
adopted as a result
• Approved the updated Group HSE Strategy and HSE Management
System Framework, and reviewed progress against key objectives
• Approved additional safety-related investment at the Tennessee facility
People and culture
Governance, risk and regulatory
• Received regular reports from the Remuneration Committee
• Established an Ethics & Compliance Committee
• Approved the appointment of Laurie Bowen as the non-executive
• Reviewed the Group’s risk register, and completed the annual assessment
director designated to engage with employees on the Board’s behalf
in place of Andrew Davies and considered the issues raised with
Mrs Bowen by employees
• Reviewed the updated people strategy
• Considered progress on employee development initiatives and future plans
• Received feedback on employee sentiment across the Group
of the Group’s internal control and risk management systems
• Received regular updates from the Audit Committee
• Considered an updated Brexit impact assessment
• Received updates on key legal issues and regulatory matters impacting
the Group
• Received regular updates on significant whistleblowing reports
• Approved the Group’s Modern Slavery Act statement for 2020
Shareholders
• Reviewed feedback from the results presentations and institutional
investor meetings
• Received updates from brokers and other advisers and the Group
Director of Corporate Affairs on current shareholder views on
the Group
Chemring Group PLC Annual report and accounts 2020
69
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate governance report continued
Board leadership and company purpose continued
How the Board monitors culture
Safety
• The Board monitors safety performance against key performance indicators on a monthly basis, including near miss reporting rates
• The Board receives regular updates from the Group HSE Director on progress against the HSE strategy, significant incidents and near misses, and
key findings of our HSE assurance processes
• The Board is briefed by independent external consultants on their periodic review of the Group’s progress on establishing a proactive safety culture
Employees
• Laurie Bowen, the non-executive director charged with employee engagement on behalf of the Board, provides regular feedback on her discussions
with employees at all levels of the organisation
• The Board receives regular updates on employment sentiment across the Group measured through our real-time engagement tool, Employee Voice
Governance and business conduct
• The Ethics & Compliance Committee monitors ethical business conduct and implementation of the Group’s compliance framework, and makes
recommendations to the Board on areas for future improvement
• The Group Legal Director & Company Secretary reports to the Board on a monthly basis on governance and compliance matters
• The Group has a formal whistleblowing policy and procedures, and the Board is provided with an overview of whistleblowing reports received,
related investigation findings and any remedial actions taken
Internal control and risk management
• The Audit Committee reviews internal audit reports produced by our internal auditors, PwC, and the Board considers any significant issues arising
therefrom and any improvements required to our internal control systems
• The Board reviews the Group’s risk register on a regular basis and has high-level oversight of mitigation plans implemented for key risks
How the Board considers stakeholders in its decision making
Details of how the Board engages with stakeholders and how the Board monitors stakeholder interests are set out on pages 16 to 19. Set out below are
some examples of how the Board considered stakeholders in their decision making during the year.
Response to CV-19
• The Board ensured that the health and wellbeing of employees was prioritised in the Group’s response to CV-19, that the businesses were
complying with government guidance and that appropriate support was provided to employees
• The Board considered communications from customers regarding the criticality of the Group’s ongoing operations and ensured that the businesses
implemented appropriate business continuity plans to maintain deliveries to customers
• The Board engaged with shareholders on the Group’s CV-19 response and provided regular updates on the impact on the business
• Shareholder views were considered by the Remuneration Committee when approving the remuneration and incentive-related outcomes for the
senior leadership team
• The Board acknowledged the exceptional efforts made by all employees during the year in approving a staff recognition payment of £500 (or local
currency equivalent) for every employee in the Group in December 2020
Strategy development
• As part of the annual strategy update, the Board commissioned external consultants to undertake a review of the Group’s principal markets and the
priorities of its key customers, which underpin the Group’s growth strategy and development of the technology roadmap
• The Board also receives regular feedback from the businesses on the emerging technology requirements of their principal customers and future
budget allocations, which are reflected in decisions regarding investment in operational capabilities and research and development
• In developing the Group’s strategy, the Board continues to recognise the need for investment in people, processes and products to ensure that the
businesses can operate safely for the benefit of all stakeholders
• The Board also considers feedback from shareholders when reviewing strategy, particularly with regards to capital allocation and future growth plans
Capital investment programme at Countermeasures USA
• In approving additional capital investment at the countermeasures business in Tennessee during the year, the Board considered how we could
continue to improve safety for the employees on the site and strive to meet our key customers’ future demand requirements
70
Chemring Group PLC Annual report and accounts 2020
Board site visits
During the year, the Board as a collective visited Roke and received a
presentation from the management team on their business performance,
future strategy, and key opportunities and challenges. The Board had planned to
visit Alloy Surfaces in the US in October and to meet in-person with our
US Board but were prevented from doing so by CV-19-related travel restrictions.
Individual directors visited various sites during the first half of the year.
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 and views the facilities where safe to do
so. We hope to resume our programme of site visits in the coming year.
Leadership of the US businesses and the US Board
Our 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.
The Chairman of the US Board and the President of our US operations
attended several of our Board meetings during the year, including the
meeting at which we conducted our annual review of the Group strategy.
Our broader interaction with the US Board has increased in recent years,
and the increased collaboration is proving very beneficial from both an
operational and governance perspective. Our US Board also collates and
provides valuable feedback from a range of both internal and external
stakeholders in the US, and this is a key input into the annual strategy review.
Employee engagement
Andrew Davies was designated as the non-executive director who would
engage with employees on behalf of the Board up until March 2020, when
the role was assumed by Laurie Bowen. Laurie held a number of remote
meetings with employees at all levels of the organisation in the UK and in
the US during the year, at which she shared with employees a perspective
on the Board’s priorities and provided an opportunity for them to ask
questions of her. Whilst every meeting was different due to the nature of
the businesses and the diversity of the employees who joined the
meetings, the following topics were typically addressed at each meeting:
• the role of the Board and its responsibilities, and, where appropriate,
how the UK and US Boards work together;
• application of the Group’s values, particularly in relation to safety;
• leadership and vision;
• communications and employee engagement;
• relationships with customers and other stakeholders;
• collaboration within the Group; and
• training and employee development.
Feedback from the meetings was provided to the Board and will be
reflected in future decision making.
We believe that Laurie’s engagement with employees is currently proving
effective, as evidenced by the openness and quality of the discussions with
employees, and when combined with the feedback on employee sentiment
the Board receives through Employee Voice, we have meaningful input
into the Board’s decision making processes. We will, however, continue to
review the effectiveness of our approach to engagement with employees
and all of our stakeholders.
Further details on employee engagement more broadly can be found
on page 56.
Shareholder engagement and the
Annual General Meeting
The Annual General Meeting provides an opportunity for all shareholders
to engage directly with the Board. All directors are required to attend the
meeting and make themselves available to take questions from
shareholders or address any concerns raised by shareholders.
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 usually conducted by way of a poll, which allows all
votes to be counted, not just those of shareholders who attend the meeting.
Our next Annual General Meeting in March 2021 is likely to be subject
to CV-19 related restrictions. The Notice of Annual General Meeting,
which will be sent to shareholders in January 2021, will provide confirmation
of the arrangements.
Chemring Group PLC Annual report and accounts 2020
71
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate governance report continued
Division of responsibilities
Composition of the Board, independence
and operation
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 64 and 65.
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.
Experience of the Board
The members of the Board maintain the appropriate balance of
experience and knowledge of the business to enable them to discharge
their duties and responsibilities effectively.
8
Defence
Manufacturing
Number of directors with applicable
specific experience
518+
International
Governance
Technology
Marketing
Strategy
5
6
6
5
8
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.
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.
The roles of Chairman and Chief Executive are separate and clearly
defined in accordance with the requirements of the Code, with the
division of responsibilities set out in writing and agreed by the Board.
The Chairman meets regularly with the executive directors and other
members of the Executive Committee outside of scheduled Board
meetings. Interactions between the executive and non-executive directors
also occur on a regular basis outside of Board meetings, and all of the
non-executive directors provide support, as appropriate, with specific
business requirements.
The Chairman serves as the conduit to ensure that the views of all of
the executive and non-executive directors are reflected in the Board’s
discussions, and that decisions are taken by the Board as a whole.
Time commitment of directors
The Board recognises the importance of ensuring that individual directors
have sufficient time available to discharge their duties effectively. Existing
commitments of prospective directors are carefully considered prior to
appointment and incumbent directors are required to notify the Chairman
or, in the case of the Chairman the Senior Independent Director, if there
are any significant changes to their external commitments.
Approval of directors’ external appointments
In accordance with the Code, all proposed new external appointments of
directors require the approval of the Board. During the year, the Board
approved the appointment of the Chairman as a non-executive director
and Senior Independent Director of Babcock International Group PLC.
In approving this appointment, the Board satisfied itself that, following the
cessation of certain of his other appointments, the Chairman continued to
have the capacity to fulfil his obligations to the Group.
72
Chemring Group PLC Annual report and accounts 2020
14
+
14
+
18
+
12
+
12
+
+
12
+
+
U
Board roles and responsibilities
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 strategy
• 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 2020
73
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate governance report continued
Division of responsibilities continued
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 71, at least once a year.
Board and committee meetings held during the year
4
3
2
1
0
November
December
January
March
April
May
July
October
Board
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
Sarah Ellard
Stephen King
Andrew Lewis
Fiona MacAulay
Michael Ord
Nigel Young
Board
(8 scheduled
meetings and
6 ad hoc
meetings)
Audit Committee
(5 scheduled
meetings)
Nomination
Committee
(3 scheduled
meetings)
Remuneration
Committee
(2 scheduled
meetings)
14(14)
14(14)
14(14)
14(14)
14(14)
14(14)
3(3)
13(14)
10(10)
—
5(5)
5(5)
—
5(5)
—
1(1)
—
3(3)
3(3)
3(3)
3(3)
—
3(3)
—
—
—
3(3)
2(2)
2(2)
2(2)
—
2(2)
—
—
—
1(1)
The maximum number of meetings which each director could have attended is shown in brackets.
In addition to the scheduled meetings, six ad hoc Board meetings were convened to deal with matters arising between scheduled meetings. During the
year, the Chairman interacted regularly with the non-executive directors without the executives being present.
Composition, succession and evaluation
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 80 and 81.
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.
74
Chemring Group PLC Annual report and accounts 2020
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 three female members and from a Board perspective
has met the voluntary targets set out in the Hampton-Alexander Review
that by 2020 at least 33% of Board should be female. We remain committed
to further improving diversity on the Executive Committee and the wider
senior leadership team.
Actions for the year ahead
• Further development of the Board and Nomination Committee’s focus
on diversity, succession planning and talent management.
• Continuing focus on future strategic growth.
• Resumption of the Board’s site visit programme.
• Further strengthening of the Board’s interactions with key stakeholders.
Further details on the Board’s approach to diversity are set out in the
Nomination Committee report on pages 80 and 81.
• Increased interactions between the non-executive directors outside of
scheduled Board meetings.
Induction, training and development
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.
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.
Performance evaluation
The Code recommends that the performance evaluation of the Board
be externally facilitated at least every three years. The Board selected
Claire Howell of REDCO Ltd to facilitate the evaluation during the year.
REDCO Ltd also provide the Company with advice regarding broader
executive development.
Questionnaires were sent to each of the directors for completion and
Ms Howell followed up with one-to-one conversations with each director.
The review focused on:
• the Board’s role and governance;
• operation of the Board and its committees;
• performance and risk monitoring;
• the role of the Chair and contributions of individual directors; and
• identification of areas in which the Board could improve its effectiveness.
The responses were consolidated into a report which was discussed with
the Chairman prior to sharing with the remainder of the Board. Specific
comments from directors were not attributed to individuals in order to
provide full transparency on the responses.
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 was now considered appropriate. The Board
identified certain actions to further improve its effectiveness, based on
the principal conclusions of the evaluation process, and these will be
addressed in the year ahead.
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.
Audit, risk and internal control
Financial and business reporting
The statement of directors’ responsibilities in respect of the financial
statements and accounting records maintained by the Company is set out
on page 103.
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 2020,
taken as a whole, is fair, balanced and understandable. Furthermore, the
Board believes that the disclosures set out on pages 1 to 62 provide the
information necessary to assess the Company’s performance, business
model and strategy.
Risk management and internal control
The Board is responsible for determining the nature and extent of the
risks that it is willing to take to achieve its strategic objectives. The Board
is also responsible for ensuring that the Group’s risk management and
internal control systems are effective across the businesses, and that
appropriate risk mitigation plans are in place.
The Board undertakes an annual review of the effectiveness of the
Group’s systems of internal control, including financial, operational and
compliance controls, and risk management systems. Further details of the
review undertaken during the financial year ended 31 October 2020 are
set out on page 37.
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.
Audit
Details of the Group’s external and internal audit activities can be found
in the Audit Committee report on pages 76 to 79.
Long-term viability statement
The Code requires the Board to undertake an annual assessment of the
long-term viability of the Group, further details of which can be found on
page 45.
Chemring Group PLC Annual report and accounts 2020
75
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Audit Committee report
Stephen King
Chairman of the Audit Committee
Audit Committee members
Stephen King (Chairman)
Laurie Bowen
Andrew Davies
Fiona MacAulay (appointed June 2020)
Introduction
I am pleased to present my report as Chairman of the Audit Committee.
The Audit Committee continues to play a very important role in the
governance of the Group’s financial affairs, both through monitoring the
integrity of the Group’s financial reporting and reviewing material financial
reporting judgements. The report provides an overview of the operation
of the Committee and its activities during the year. During the early part
of the financial year, the Committee was focused on matters relating to
the 2019 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 2020 half year and full year results, and the
external and internal audit activity during 2020.
76
Chemring Group PLC Annual report and accounts 2020
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
• Monitoring the integrity of the Group’s financial statements and
any formal announcements relating to the Group’s financial
performance, and reviewing the appropriateness of significant
financial reporting judgements
• Providing guidance to the Board in its consideration of whether the
annual report and accounts are fair, balanced and understandable
• 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
Operation of the Committee
The Committee’s full 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 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 five meetings held during the year are shown on page 74.
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
A summary of the significant issues considered in relation to the 2020
financial statements is set out below.
IFRS 16 Leases became 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 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 have been prepared under the
new standard.
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 became effective for accounting
periods beginning on or after 1 January 2019. The Committee reviewed
the tax provisions held by the Group at 31 October 2019, and concluded
that on adoption, IFRIC 23 had no material impact on the Group’s current
tax provisions.
The Committee also reviewed the report issued by the Financial
Reporting Council in July 2020 on its thematic review of the financial
reporting effects of CV-19 and considered how the recommendations
had been addressed in the 2020 financial statements.
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
> implementation of IFRS 16, IFRS 9 and
IFRIC 23.
• The Group’s going concern status and
viability statements
Risk and control
environment
• Effectiveness of the Group’s systems of
internal control
• Implementation of new ERP systems
across the Group
• Consistency and effectiveness of
forecasting methodologies
External audit
• Interim review and full year audit plans
• Planning for the external audits of the
US businesses
• 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
• Effectiveness of the internal auditors and
their key findings
The Committee relies on regular reports from the executive directors,
the wider management team, and the external and internal auditors in
order to discharge its responsibilities. The Committee is satisfied that it
received timely, sufficient and reliable information to enable it to fulfil its
obligations during the year.
Chemring Group PLC Annual report and accounts 2020
77
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Audit Committee report continued
Key matters considered by the Committee
in relation to the financial statements
Revenue recognition policies and procedures
The Committee reviews the Group’s revenue recognition policies and
procedures on an ongoing basis, to ensure that they remain appropriate
and that the Group’s internal controls are operating effectively in this
area. The Committee considered the key assumptions underlying the
accounting treatment of any material contract with a customer where
judgement on revenue recognition was required.
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 2020 and 31 October 2020, against the latest forecasts for
the businesses concerned and the future strategic plan for the Group.
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. Further details on the assessment
process, which also considered the potential impact of CV-19 on the
Group, and the Group’s long-term viability statement are set out in the
strategic report on page 45.
Since the year end, the Committee has reviewed the form and content
of the 2020 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?
Held for sale/discontinued operations
• Have any significant matters been omitted?
The Committee agreed the presentation of the results of businesses
held for sale/discontinued operations.
Is the report balanced?
Capitalised development costs
The Committee continued to monitor the level of development costs
capitalised during the year and the periods over which such costs are to
be amortised. Detailed reviews of the Group’s most significant research
and development projects, and their associated capitalised development
costs, were undertaken by the Committee in April 2020 and October 2020.
It was concluded that no impairment charges were required in 2020.
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, £5.2m of which was included in the results
for the year.
Contingent liabilities
The Committee considered the appropriate accounting treatment of
the Group’s potential tax liability which may arise as a result of the
European Commission’s judgement in April 2019 that the UK’s
Controlled Foreign Company exemptions may breach state aid rules.
The Committee concluded that it would be appropriate to treat this
as a contingent liability.
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
78
Chemring Group PLC Annual report and accounts 2020
• Has appropriate prominence been given to both positive and negative
aspects of performance during the year?
• 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?
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 effectiveness of co-ordination of the individual business unit audits
on a global basis;
• 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.
External audit continued
Audit effectiveness continued
There are no contractual or similar obligations to restrict the choice of
external auditor.
KPMG LLP 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.
Following the 2019 year-end audit, it was identified that co-ordination
between KPMG’s UK and US audit teams and the planning for the audits
of the US businesses could be improved. The US audits are carried out
by KPMG US under a separate engagement letter in order to satisfy
the requirements of our Special Security Agreement with the US
Government. The 2020 audit plan provided for planning work for the
2020 year end audits of the US businesses to commence in the first half
year of the financial year and this resulted in a more efficient audit of the
consolidated Group results at the year end. The Committee reviewed
KPMG’s overall effectiveness in fulfilling the external audit during the year
and concluded that KPMG had conducted a comprehensive, appropriate
and effective audit.
The Committee has recommended to the Board that KPMG be
reappointed as the Group’s auditor at the 2021 Annual General Meeting.
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.
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 £0.1m 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 tax 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 auditor, 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 auditor.
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 2020 included specific focus on:
• the key financial and operating controls within the business;
• IT and cyber-security governance and controls;
• ERP system implementation;
• forecasting methodologies and effectiveness across the Group; and
• the Group’s anti-bribery and corruption processes compared to best
practice standards.
Restrictions on travel and visitor access to our sites as a result of CV-19
resulted in fewer physical on-site internal audits being carried out than
had originally planned but PwC followed the plan as closely as possible
under the circumstances and were able to complete all of their planned
thematic reviews.
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. Progress on addressing internal audit
findings is also reviewed by the Group Chief Executive and the Group
Finance Director in their quarterly reviews with each of the businesses.
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 2021. 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 2021 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. PwC will also continue with their thematic reviews of selected
Group-wide internal control systems and processes. The audit plan is
developed with input from the Committee and the executive directors,
and with due regard to the key risks on the Group’s risk register.
Stephen King
Chairman of the Audit Committee
15 December 2020
Chemring Group PLC Annual report and accounts 2020
79
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Nomination Committee report
Carl-Peter Forster
Chairman of the Nomination Committee
Nomination Committee members
Carl-Peter Forster (Chairman)
Laurie Bowen
Andrew Davies
Stephen King
Fiona MacAulay (appointed June 2020)
Introduction
I am pleased to present the Nomination Committee’s report for the year
ended 31 October 2020.
The main focus of the Committee during the year was on the
appointment of another independent non-executive director to replace
Nigel Young following his retirement in April 2020. As the result of this
process, Fiona MacAulay joined the Board on 3 June 2020. Further details
of the appointment process are set out below.
During the year the Committee also took the requisite actions to ensure
we were operating in compliance with the UK Corporate Governance
Code published in July 2018.
80
Chemring Group PLC Annual report and accounts 2020
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.
The Board performance evaluation completed during the year considers
the potential requirement for additional appointments to the Board. Whilst
we are satisfied with the current composition, we will continue to review
the position, keeping in mind the benefits of increased diversity on the Board.
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 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
three meetings held during the year are shown on page 74.
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.
The Board performance evaluation completed during the year considered
the requirement for additional appointments to the Board. Whilst we are
satisfied with the current composition, we will continue to review the
position, keeping in mind the benefits of increased diversity on the Board.
As referred to above, Fiona MacAulay was appointed to the Board
as an independent non-executive director during the year on the
recommendation of the Committee.
Appointments to the Board
The Committee is responsible for reviewing and recommending new
appointments to the Board, and oversaw the process which resulted
in the appointment of Fiona MacAulay during the year.
Fiona joined the Board as a non-executive director on 3 June 2020 as the
result of a search process which was initiated in preparation for Nigel Young’s
planned retirement in April 2020. Russell Reynolds was appointed by the
Committee to assist with the search. 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 selected by the
Committee to facilitate the search, given their contemporary knowledge
of the Group, having recruited two non-executive directors in 2018 and
2019, and understanding of the Board’s requirements.
Diversity
Board
3
5
Male
Female63+
Female80+
Senior managers
Male
64
16
Executive Committee
2
6
Male
Female75+
Female70+
All employees
Male
1,562
679
Appointments to the Board continued
Russell Reynolds provided an initial long-list of potential candidates, following
which members of the Committee met with a number of 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 Fiona MacAulay.
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.
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.
We have established succession plans for the Board and key members of
the Executive Committee, covering both emergency replacements and
longer-term appointments.
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 met this target from a Board perspective with the appointment of
Fiona MacAulay during the year and we continue to aspire to further
improving female representation 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, our senior managers and all employees across
the Group. Senior managers are generally directors and functional heads
within head office and the business units.
Further details on diversity and inclusion at Chemring are set out on
page 57.
Carl-Peter Forster
Chairman of the Nomination Committee
15 December 2020
Chemring Group PLC Annual report and accounts 2020
81
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
+
20
+
+
U
+
30
+
+
U
+
25
+
+
U
+
37
+
+
U
Directors’ remuneration report
Remuneration overview
Laurie Bowen
Chairman of the Remuneration Committee
Remuneration Committee members
Laurie Bowen (Chairman)
Andrew Davies
Carl-Peter Forster
Stephen King
Fiona MacAulay (appointed June 2020)
Introduction
The directors’ remuneration report for the year ended
31 October 2020 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 2020;
• additional statutory information on remuneration arrangements;
• a summary of the directors’ remuneration policy which was approved
in 2019; and
• an overview of how the policy will be implemented in 2021.
Our 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 95 to 97. 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.
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.
82
Chemring Group PLC Annual report and accounts 2020
Details of the attendance of members of the Committee at meetings held
during the year are shown on page 74. 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 assumed the Chairmanship of the Committee on 4 March 2020.
The Remuneration Committee’s
activities during the year
This is my first report since becoming Chair of the Remuneration
Committee in March 2020, when I took over from Andrew Davies. I would
like to thank Andrew for his hard work and effectiveness in the role. I am
relatively new to the Board having joined in August 2019 and I am delighted
to bring to the role my experience from serving for several years on a
remuneration committee. I have taken the opportunity to take a fresh look
at Chemring’s executive remuneration to which shareholders gave strong
support for the directors’ remuneration policy which was last approved in
2019. I am looking forward to engaging with our shareholders in 2021 as we
review the directors’ remuneration policy which shareholders will be asked
to approve at the Annual General Meeting in 2022.
This year, the Committee’s decisions have been made particularly carefully
in light of the extraordinary impact of CV-19 on the economy, on markets
as a whole and indeed on all our stakeholders. Our operations in the UK,
the US and Norway were designated as critical, and our businesses have
remained open throughout. We did not receive any government furlough
funding (or overseas equivalent) for employees and, in October 2020, we
repaid early the £50m short-term debt facility secured at the start of the
pandemic. An interim dividend was paid in September and the Board is
recommending the payment of a final dividend of 2.6p per ordinary share.
The performance of the business has been excellent as the annual report
describes – see page 1. The order pipeline is strong and we announced in
September that Chemring Countermeasures USA had secured two
important new contracts with the US Navy and the US Air Force.
This performance owes a great deal to the commitment and contribution
of all our employees, each of whom will receive a payment of at least £500
(or local currency equivalent) for their contribution during what has been
a very challenging year. It is also important to recognise the performance
of Michael Ord, who completed his second year as Group Chief Executive
in July 2020. Under his leadership, the share price has increased by 25%
over the financial year. Chemring’s relative total shareholder return over the
three years to the end of October 2020 was 48.9% and the Company was
promoted to the FTSE 250 Index in March 2020.
During the year, the Committee made three important policy decisions.
The Committee evaluated Chemring’s practice in relation to the alignment
of the pension arrangements of the executive directors to those of
UK-based employees. The pension arrangements in the UK vary widely
and, when we last analysed company contributions, they ranged from 4%
to 20% of salary. The Committee has decided that the value of the pension
contributions for all executive directors will be aligned with that for
employees with effect from November 2022.
The Committee also agreed to introduce a new mechanism to ensure that
executive directors continue to hold shares after they step down from the
Board to the value of the shareholding guideline (i.e. 200% of salary or the
existing shareholding if lower at the time) for two years after they leave the
Board. Any awards of shares under the Performance Share Plan (the “PSP”)
made from November 2021 will count toward the shareholding. Previous
awards will continue to be subject to the three-year vesting and two-year
holding period following cessation of employment. The new commitment
will formally be incorporated into the next directors’ remuneration policy
which will be submitted to shareholders for approval at the 2022 Annual
General Meeting.
Finally, the Committee also on a prospective basis changed the comparator
group for the relative TSR performance condition adopted in the PSP. The
comparator group previously comprised a small group of peer companies
operating in the defence and technology sectors but increasing consolidation
in these sectors reduced the size of the robust comparator group. Against
this background, the Committee agreed that relative TSR would be
measured against the FTSE All-Share (excluding investment trusts) for the
PSP awards made in December 2019 and thereafter.
Summary of major activities
and decisions of the Committee in 2020
Salary
• 2020 salary reviews for the executive directors
and members of the senior leadership team
Annual bonus
• Consideration of the 2019 annual bonus
plan outturn
• Approval of the 2020 annual bonus plan
financial targets and personal objectives for
the executive directors
• Approval of changes to the structure of the
2020 annual bonus plan for the business unit
management teams
• Approval of the 2020 annual bonus plan payments
Performance Share
Plan (“PSP”)
• Consideration of vesting outcomes for PSP
awards made in 2018
• Approval of 2020 PSP awards and performance
conditions, including changes to the TSR
comparator group
• Consideration of adjustments to performance
targets following completion of the disposal of
the commoditised energetics businesses
Governance
• Review of governance and reporting requirements
in relation to directors’ remuneration
Other
• Agreement of timeframe for alignment of
executive directors’ pension contributions
• Adoption of post-employment shareholding policy
• Review of annual directors’ remuneration report
Performance outcomes
Performance against the 2020 annual bonus and PSP targets is explained
in more detail on pages 86 to 88 but in summary:
• Annual bonus: The EPS and operating cash flow targets within the annual
bonus plan, which were set on a challenging basis at the start of the
year, were fully achieved and hence 100% of bonus entitlement in
respect of financial performance is payable to the executive directors.
Performance against the 2020 personal objectives was strong and the
objectives were deemed to have been 90% satisfied, resulting in a total
bonus payment of 98% of the maximum for each of the executive directors.
The Committee discussed whether any downward adjustment should
be made to annual bonus payments and took the view that, as a matter
of principle, the exceptional performance of the leadership team should
be fully acknowledged and rewarded, and that stakeholders’ needs were
best served by paying out bonuses as earned.
• PSP awards (subject to performance in the year ended 31 October 2020):
Both the EPS performance condition and the TSR performance condition
were fully satisfied, and awards granted in January 2018 will therefore
vest at 100% of total award value on 19 January 2021.
Implementation of the policy for 2021
Base salaries were reviewed in November 2020 and increases will be
made effective from 1 January 2021.
The Committee took the opportunity to review the salary of the Group
Chief Executive in light of his exceptional performance over the last two
years and his development in the role since his appointment in July 2018.
His salary on appointment reflected the fact that this was his first role as a
chief executive. Across the two financial years to 31 October 2020, he has
had a transformative effect on the Group. The market capitalisation of the
business has increased almost 45% and the Company has been promoted
into the FTSE 250 Index. During this time, financial and operational
performance has also been strong. The market for talent across the Group
is tight and some significant adjustments to pay have been necessary for
members of the leadership team. The Committee considered Michael Ord’s
individual development, his performance in the role, the internal differentials
and the external market data for similarly-sized companies by market
capitalisation. The Committee increased Mr Ord’s base salary by 6.6%
on top of the general budgeted increase for UK employees of 3%, to
£483,000 from 1 January 2021. The Committee is mindful of the need
to demonstrate pay restraint with regards to executive directors but also
believes it is crucial and indeed fair to recognise the development and
leadership qualities of the Group Chief Executive, which have been
comprehensively demonstrated over the last two years. He has a vital
role to play in taking Chemring to the next stage of its development.
The Committee reviewed the base salary of the Group Finance Director.
The Remuneration Committee wanted to acknowledge Andrew Lewis’s
development and strong performance in the role since his appointment in
2017. He has played a key role in support of the Group Chief Executive.
The Committee decided that an additional base salary increase of 2% on
top of the general budgeted increase for UK employees of 3% to
£369,280 should be awarded.
The base salary for the Group Legal Director & Company Secretary will
increase by 3% of salary in line with the budgeted increase for UK employees.
Her base salary was also adjusted with effect from 1 November 2020
to reflect that her contractual hours have reverted to a full-time
equivalent position.
Although the average budgeted increase for UK employees is 3% of salary,
there have been market adjustments and promotion increases throughout
the business at all levels. The Group Chief Executive and the Group
Finance Director are not therefore being singled out for special treatment
but are being treated in the same way as other employees at all levels
where performance, development and market alignment are being
recognised and addressed.
No changes will be made to the structure of the annual bonus plan or to
PSP awards for the executive directors for 2021. No other changes are
proposed to the implementation of the directors’ remuneration policy for
2021. The directors’ remuneration policy will be reviewed during the course
of 2021 before its scheduled renewal at the 2022 Annual General Meeting.
Conclusion
I hope you will find this report helpful and informative and that you will
support 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.
Laurie Bowen
Chairman of the Remuneration Committee
15 December 2020
Chemring Group PLC Annual report and accounts 2020
83
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration report continued
2020 remuneration at a glance
2020 remuneration year in summary
Salary
Salary increases for Michael Ord, Andrew Lewis and Sarah Ellard of 2.5%, which was below the average budgeted salary increase
for UK employees.
Annual bonus
Bonuses payable for 2020 performance as follows:
• Michael Ord – 122.5% of salary (£539,918)
• Andrew Lewis – 98% of salary (£344,662)
• Sarah Ellard – 98% of salary (£221,681)
Performance Share
Plan
Awards granted
Awards made in December 2019, valued at 150% 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 January 2018, which were subject to performance conditions measured over the three years ended
31 October 2020, will vest at 100% of award value on 19 January 2021.
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 2020.
Michael Ord
Andrew Lewis
Michael Ord
Sarah Ellard
Andrew Lewis
Michael Ord
Sarah Ellard
£0.0m
£0.25m
£0.5m
£0.75m
£1.0m
£1.25m
Total pay (£’000)
£1,045
Total pay (£’000)
£1,474
£1,045
£955
£1,474
Total pay (£’000)
£1.5m
£1,045
£955
Salary
Pension and benefits
Annual bonus
PSP
£0.0m
Andrew Lewis
Annual bonus plan outcome
Sarah Ellard
This chart illustrates the bonuses payable for performance in 2020. 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.
Pension and benefits
Total bonus (£’000)
Annual bonus
£0.75m
£0.25m
£1.25m
£1,474
£1.0m
£0.5m
£1.5m
Salary
£955
PSP
Michael Ord
Andrew Lewis
Michael Ord
Sarah Ellard
Andrew Lewis
Michael Ord
Sarah Ellard
£0.0m
Andrew Lewis
£0.0m
Sarah Ellard
60%
£0.1m
60%
£0.0m
£0.25m
£0.5m
£0.75m
£1.0m
Salary
Pension and benefits
Annual bonus
75%
£1.25m
122.5% 125%
PSP
£1.5m
£540
60%
60%
75%
98% 100%
98% 100%
98% 100%
122.5% 125%
Total bonus (£’000)
£345
£540
£222
£345
Total bonus (£’000)
£0.2m
75%
98% 100%
£0.3m
£0.4m
£0.5m
122.5% 125%
£0.6m
Target (% of salary)
60%
£0.1m
£0.2m
Actual (% of salary)
98% 100%
£0.3m
Maximum (% of salary)
£0.4m
£0.5m
£0.6m
60%
Target (% of salary)
98% 100%
Actual (% of salary)
Maximum (% of salary)
£540
£222
£345
£222
£0.1m
£0.0m
£0.2m
Performance share plan outcome
This chart illustrates the total value of the performance share plan awards granted to the executive directors on 19 January 2018 that will vest on
Andrew Lewis
19 January 2021, based on 100% vesting of awards. The grant value is based on the share price on the grant date and the vesting value is calculated
on the same basis as in the directors’ emoluments table on page 85.
Andrew Lewis
Maximum (% of salary)
Target (% of salary)
Actual (% of salary)
Vesting value
£0.3m
£0.4m
£0.6m
£0.5m
Grant
Grant
Grant
Sarah Ellard
Andrew Lewis
Sarah Ellard
£0.0m
£0.1m
£0.2m
£0.3m
£0.4m
£0.5m
Vesting value
£0.6m
Grant
Vesting value
Grant
Vesting value
£0.7m
Vesting value
£0.8m
Sarah Ellard
£0.0m
Value of shares vesting
£0.1m
£0.2m
Accrued dividends
Grant
£0.3m
£0.4m
£0.5m
£0.6m
£0.7m
£0.8m
Value of shares vesting
Accrued dividends
Vesting value
£0.0m
£0.1m
£0.2m
£0.3m
£0.4m
£0.5m
£0.6m
£0.7m
£0.8m
Value of shares vesting
Accrued dividends
84
Chemring Group PLC Annual report and accounts 2020
Annual report on remuneration
This part of the report explains how the directors’ remuneration policy was implemented in 2020. 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
Pension
benefits 2
£’000
Total
fixed pay
£’000
Bonus
(cash and
deferred
shares) 3
£’000
PSP 4
£’000
Total
variable pay
£’000
Executives
Michael Ord
Andrew Lewis
Sarah Ellard5
Non-executives
Carl-Peter Forster
Laurie Bowen6
Andrew Davies7
Stephen King8
Fiona MacAulay9
Nigel Young10
Total remuneration
Year
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
440
430
350
341
225
220
200
200
62
14
58
65
65
53
23
—
28
63
1,451
1,386
21
21
20
20
20
20
—
—
—
—
—
—
—
—
—
—
—
—
61
61
44
43
70
68
45
44
—
—
—
—
—
—
—
—
—
—
—
—
505
494
440
429
290
284
200
200
62
14
58
65
65
53
23
—
28
63
540
527
345
336
222
216
—
—
—
—
—
—
—
—
—
—
—
—
—
—
689
371
443
239
—
—
—
—
—
—
—
—
—
—
—
—
540
527
1,034
707
665
455
—
—
—
—
—
—
—
—
—
—
—
—
Total
£’000
1,045
1,021
1,474
1,136
955
739
200
200
62
14
58
65
65
53
23
—
28
63
159
155
1,671
1,602
1,107
1,079
1,132
610
2,239
1,689
3,910
3,291
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. 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.
3. 40% of any bonus is delivered as an award of deferred shares.
4. PSP awards granted in January 2018, which were based on performance over the three years ended 31 October 2020, will vest in January 2021 and the estimated values, based
on the average share price over the three-month period ended 31 October 2020, equating to 249p per share, plus the value of accrued dividends have been included in the 2020
emoluments. PSP awards granted in March 2017 vested on 24 March 2020 and have been included in the 2019 emoluments at the actual value on the date of vesting.
£154,690 of the value of Mr Lewis’s award which is due to vest in January 2021 is attributable to share price growth since the date of grant and £99,494 for Mrs Ellard. None of
the value of the awards which vested in March 2020 for Mr Lewis and Mrs Ellard is attributable to share price growth as the share price fell between the date of grant and the
vesting date.
5. Sarah Ellard’s salary and pension benefits for the years ended 31 October 2020 and 31 October 2019 were based on her contracted working hours of 90% of the full-time equivalent.
6. Laurie Bowen was appointed as a non-executive director on 1 August 2019 and was appointed as Chairman of the Remuneration Committee on 4 March 2020, for which she
received an additional fee of £10,000 per annum with effect from that date, included in the above figures on a pro-rated basis.
7. Andrew Davies 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 4 March 2020.
8. 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 2019 figures above on a pro-rated basis.
9. Fiona MacAulay was appointed as a non-executive director on 3 June 2020.
10. Nigel Young, who retired as a non-executive director on 30 April 2020, received an additional fee of £10,000 per annum, included in the 2019 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 2020
85
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Directors’ remuneration report continued
Annual report on remuneration continued
Base salary and benefits paid during the year (audited)
Salaries for the executive directors were reviewed in December 2019 and a 2.5% increase, with effect from 1 January 2020, was approved by the
Committee. The increase was below the average budgeted increase for the UK workforce. The salaries of the executive directors during the year were
therefore as follows:
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Annual salary from
1 January 2019 to
31 December 2019
£430,000
£343,119
£220,689
Annual salary from
1 January 2020 to
31 October 2020
£440,750
£351,696
£226,206
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 were frozen at current levels
until the end of 2022.
Details of variable pay opportunity in the year
Annual bonus (audited)
80% of the annual bonus opportunity for 2020 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 2020 bonus plan,
compared with actual performance, were as follows:
Underlying diluted earnings per share
(continuing operations1)
Underlying operating cash flow
(continuing operations1)
Note:
1. Excluding the commoditised energetics businesses.
Weighting
(80% of overall bonus)
50%
50%
Performance
Threshold
Target
Stretch
Threshold
Target
Stretch
Target
12.7p
13.4p
14.7p
£70.4m
£74.1m
£81.5m
Actual
14.8p
£82.4m
The personal objectives set in respect of the 2020 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
• Continued implementation of the Group HSE Management System
Key achievements
• Major accident hazard risk scenarios assessment completed Group-wide
and assurance process established
Framework Standard
• Minimising the Group’s total recordable injury frequency rate
• Reducing the number of process safety events
• Asset integrity review completed and new standard developed
• Total recordable injury frequency rate maintained at 0.85 and lost time
injury rate reduced from 0.40 to 0.24
• Process safety event rate of 1.44 against a target of 4.6, reflecting a
significant reduction in the number of process safety events
Excellence
• Implementation of a continuous improvement plan to improve
• All businesses have implemented continuous improvement plans and a
number of business unit specific projects were completed during the year
competitiveness
Innovation
• Establishment of a framework for encouraging, capturing and rewarding
innovation to improve competitiveness
• All businesses have established innovation plans to deliver improved
competitiveness, with areas of innovation spanning products, operations
and business systems
Governance and assurance
• Continued implementation of the Operational Framework across
• The Operational Framework and associated operational assurance process
have been fully embedded in all businesses
the Group
• Support development of the internal audit programme
• The Operational Framework was reissued in March 2020 and will be
updated again in January 2021 to establish an annual cadence to capture
legislative and regulatory changes, and also changes which will improve
business competitiveness
• Output from the operational assurance returns is now being used to shape
the internal audit programme
86
Chemring Group PLC Annual report and accounts 2020
Strategic objective
People
• Implementation of processes for talent management, succession planning
and leadership
Key achievements
• The Group people development framework has been adopted by all of the
businesses, providing a more structured approach to leadership training
and development
• Ensuring all employees have a voice in the business to strengthen our
values-based culture
Sensors & Information
• Delivery of UK and European growth strategy for Roke
• Maximisation of value for the US Programs of Record on detection
technologies and secure next phase of AVCAD
• Development and mobilisation of a growth strategy in the US market
Countermeasures & Energetics
• Continued delivery of an integrated global countermeasures organisation
• Commission new production facilities in Tennessee
• All employees globally now have the opportunity to participate in the
Employee Voice programme, and all businesses have initiated employee
forums and other information sharing approaches to ensure all employees
have the opportunity to hear from senior leaders regularly
• Year-on-year revenue growth achieved at Roke, with notable successes in
electronic warfare and information advantage equipment sales into Europe
and new programmes in the UK
• $200m of further IDIQ contract cover secured for HMDS and continuing
progress on chemical and biological detection programs, including AVCAD
• Growth strategy in development focusing on chemical and biological
detection and national security, and first electronic warfare sales made in
the US
• Further progress made in the alignment and integration of the three
countermeasures businesses, with collaboration in the areas of supply
chain, sharing of resource and best practice operating methods, product
development and technology transfer
• Characterisation facility completed and construction work completed on
the new extrusion facility in Tennessee; installation of manufacturing
equipment underway
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
• Develop funding strategy
• Implement enhanced investor relations programme
• Oversight of the ERP system implementation programme
• Continued development of the central finance team
• Appoint new tax advisors in the US
• Manage the EU State Aid contingent liability
Key achievements
• Private placement notes repaid in November 2019, interest costs reduced
significantly year-on-year and net debt reduced to £48.2m
• New ERP system implementation project completed in Australia and
planning phase completed in several US businesses
• Central finance team strengthened in the UK and the US
• BDO appointed as new tax advisors in the US
• Dialogue with HMRC on the EU State Aid matter progressed
Sarah Ellard
• Development of additional training programmes to support the
Key achievements
• Additional training programmes developed on the Code of Conduct,
Operational Framework
anti-bribery, data protection and export control
• Implement further enhancements to the Group’s anti-bribery policies
and procedures
• Ethics & Compliance Committee established
• Implement an integrated online compliance system
• Ongoing refinements to anti-bribery processes implemented
• Develop proposals for liability management exercises for the legacy UK
• Whistleblowing and investigation protocols refreshed
defined benefit pension scheme
• Finalise insurance claim settlements
• Chemring Compliance Portal established, including a new gifts and hospitality
approval system
• Pensioner buy-in options reviewed for the legacy defined benefit pension
scheme and project ongoing
• Further progress made on insurance claims during the year, with additional
payments of £5.2m secured
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 2020
87
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 2020 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
£539,918
£344,662
£221,681
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 was satisfied that no discretion was necessary.
Performance Share Plan (audited)
Vesting of 2018 PSP awards
The PSP awards granted on 19 January 2018 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 2020 was 36.5% 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 the commoditised energetics businesses to ensure that
performance was measure on a like-for-like basis.
The Company’s total shareholder return over the performance period ranked 1.46 against a median of 4 for the comparator group. 100% of the part of
the awards subject to the total shareholder return measure will therefore vest.
The awards granted on 19 January 2018 will therefore vest in full on 19 January 2021.
Details of the awards granted to the executive directors on 19 January 2018 are provided below (audited):
Executive
Andrew Lewis
Sarah Ellard
Executive
Andrew Lewis
Sarah Ellard
Vesting date
19 January 2021
19 January 2021
Number of
shares
at grant
265,791
170,952
Number of
shares
to vest
265,791
170,952
Number of
shares
to lapse
—
—
Value of shares
to vest 1
Value of accrued
dividends
Total value of awards
to vest
£661,820
£425,670
£27,111
£17,437
£688,931
£443,107
Note:
1. Value based on the average closing share price of 249p over the three-month period ended 31 October 2020.
88
Chemring Group PLC Annual report and accounts 2020
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
Date
of grant
17 December 2019
17 December 2019
17 December 2019
Value
of award
150% of salary
150% of salary
150% of salary
Closing
share price
on date
of grant
225.5p
225.5p
225.5p
Number of
conditional
shares
awarded
307,142
245,085
157,635
Face
value
£692,605
£552,667
£355,467
% that
vests at
threshold
25%
25%
25%
Vesting
determined by
50% EPS growth
and 50% relative
TSR performance,
as detailed below
The performance conditions applying to the awards made in December 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 2019 and as to the other half of each award on the Company’s total
shareholder return performance over the same three-year period.
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 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 FTSE All-Share (excluding investment trusts)
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%
Any shares that vest in respect of the December 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).
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
44
70
45
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
Total benefit accrued at
31 October 2020
Pension
£’000 p.a.
—
—
24
Cash
£’000
—
—
72
Transfer value
of accrued
benefit at
31 October
2020
£’000
—
—
461
Increase in
transfer value
during year
(less members’
contributions)
£’000
—
—
—
Value of
benefit
for single
figure
£’000
44
70
45
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.
Chemring Group PLC Annual report and accounts 2020
89
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration report continued
Annual report on remuneration continued
Payments to past directors (audited)
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.
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 vested in full on 19 January 2020. Mr Flowers received £7,096
in respect of the dividends paid on these shares during the deferral period. The deferred award over 65,981 shares granted to Mr Flowers in part
satisfaction of his annual bonus for the year ended 31 October 2017 is also expected to vest in full on 18 January 2021. Mr Flowers will receive
£6,730 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 vested at 69.95%, equating to 254,358 shares, on 24 March 2020.
Mr Flowers received £22,383 in respect of the dividends paid on these shares during the deferral period.
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.
Remuneration in the wider workforce
In addition to determining the remuneration arrangements for the executive directors, the Committee considers and approves the base salaries for
eight senior executives, excluding those based in the US. The Committee also receives information on general pay levels and policies across the Group.
The Committee, therefore, has due regard to salary levels across the Group in applying its remuneration policy.
The Group comprises a number of businesses, some of which have been developed through organic growth, others of which have been acquired over
time. As a result there are diverse remuneration arrangements in place across the Group. An example of this is pension provision, where contributions
range from 4% to 20% of salary depending on location and length of service. Where possible the business aims to consolidate and normalise its
remuneration approach, particularly in relation to fixed pay arrangements, taking into account regional and sector-related variations.
In the US, the US Board has established a Compensation Committee to set the remuneration arrangements for the senior leadership 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 annual bonus plan for the senior leadership is typically operated for around 70 employees across the Group and works in a similar fashion to that
for the executive directors, albeit with greater focus on business unit performance where appropriate. Therefore, overall bonus outcomes maintain a
level of consistency with Group level performance but allow for differentiated outcomes based on business unit and individual performance.
The PSP typically includes over 30 participants each year, who are considered to have direct influence on the Group-level performance. The performance
conditions (and other main terms) are the same as for the executive directors. All UK employees are encouraged to participate in the UK Sharesave Plan.
90
Chemring Group PLC Annual report and accounts 2020
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.
From November 2021, the executive directors will be required to hold shares to the value of the shareholding guideline (i.e. 200% of salary or their
existing shareholding if lower at the time) for two years post‐cessation of employment. The shareholding will be assessed at the point of stepping down
from the Board.
The interests of the directors in the ordinary shares of the Company at 31 October 2020 are shown below. All are beneficial holdings.
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Stephen King
Fiona MacAulay
Legally
owned
(number
of shares)
50,000
113,797
107,700
30,000
15,000
—
35,500
—
Value of
legally
owned
shares as %
of salary 1
30%
84%
124%
—
—
—
—
—
Guideline
met
No
No
No
—
—
—
—
—
Unvested and subject to performance
conditions under the PSP
Jan/June
2018
award
394,495
265,791
170,952
—
—
—
—
—
Mar
2019
award
421,568
336,391
216,361
—
—
—
—
—
Dec
2019
award
307,142
245,085
157,635
—
—
—
—
—
Total at
31 October
2020
1,123,205
847,267
544,948
—
—
—
—
—
Deferred
bonus share
awards
100,333
105,191
66,990
—
—
—
—
—
Sharesave
options
16,853
8,910
8,910
—
—
—
—
—
Note:
1. Based on the number of shares legally owned, prevailing base salary and share price of 260.5p at 31 October 2020.
The directors’ share interests at 31 October 2020 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 2020.
Outstanding PSP awards (audited)
Number of shares under award
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2019
394,495
421,568
—
816,063
283,430
265,791
336,391
—
Awarded
during
the year
—
—
307,142
307,142
—
—
—
245,085
Lapsed
during
the year
—
—
—
—
(85,171)
—
—
—
885,612
245,085
(85,171)
(198,259)
182,297
170,952
216,361
—
—
—
—
157,635
(54,781)
—
—
—
(127,516)
—
—
—
Vested
during
the year 1
—
—
—
At
31 October
2020
394,495
421,568
307,142
Date of
vesting
26 June 2021
22 March 2022
17 December 2022
Closing
share price on
date of grant (p)
218.0
139.6
225.5
—
1,123,205
(198,259)
—
—
—
—
265,791 1
336,391
245,085
847,267
—
170,952 1
216,361
157,635
24 March 2020
19 January 2021
22 March 2022
17 December 2022
24 March 2020
19 January 2021
22 March 2022
17 December 2022
195.7
190.8
139.6
225.5
195.7
190.8
139.6
225.5
569,610
157,635
(54,781)
(127,516)
544,948
Note:
1. As explained above, these awards will vest in full on 19 January 2021.
Chemring Group PLC Annual report and accounts 2020
91
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration report continued
Additional statutory information on remuneration arrangements continued
Outstanding PSP awards (audited) continued
Performance conditions for outstanding awards
Awards made on
26 June 2018
Awards made on
22 March 2019
Measure
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)
Total compound earnings per share growth
per annum over the three financial years ended
31 October 20212 (50% of award)
Rank of the Company’s total shareholder return
of the members of the comparator group over
the three-year period from 22 March 2019 to
21 March 2022 (50% of award)
Director
Executive directors’
award values
Threshold
vesting
Full
vesting
Michael Ord1
200% of salary
Michael Ord
Andrew Lewis
Sarah Ellard
140% 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 an 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.
2. 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
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.
Outstanding deferred bonus share awards (audited)
Number of shares under award
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2019
—
Awarded
during
the year
100,333
Lapsed
during
the year
—
— 100,333
41,143
—
—
64,048
41,143
32,944
25,795
64,048
—
—
—
41,195
58,739
41,195
—
—
—
—
—
—
—
—
Vested
during
the year
—
—
—
—
—
(32,944)
—
—
At
31 October
2020
100,333
100,333
41,143
64,048
105,191
—
25,795
41,195
(32,944)
66,990
Date of
vesting
16 December 2022
Closing
share price on
date of grant (p)
210.0
18 January 2021
16 December 2022
19 January 2020
18 January 2021
16 December 2022
188.0
210.0
172.0
188.0
210.0
Outstanding Sharesave options (audited)
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2019
16,853
16,853
12,162
—
12,162
7,297
—
7,297
Awarded
during
the year
—
—
—
8,910
8,910
—
8,910
8,910
Number of shares under award
Lapsed
during
the year
—
Vested
during
the year
—
At
31 October
2020
16,853
Exercise
price
178p
—
—
—
—
—
—
—
—
16,853
(12,162)
—
(12,162)
(7,297)
—
—
8,910
8,910
—
8,910
148p
202p
148p
202p
(7,297)
8,190
Exercise
date
1 October 2023–
31 March 2024
I October 2020–
31 March 2021
I October 2023–
31 March 2024
I October 2020–
31 March 2021
1 October 2023–
31 March 2024
92
Chemring Group PLC Annual report and accounts 2020
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 250 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 SmallCap 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 2020, of £100 invested in Chemring Group PLC on 31 October 2010 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
250
200
150
100
50
0
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
31 Oct 2020
Chemring
FTSE 250
FTSE SmallCap
Source: Thomson Reuters
Chief Executive’s remuneration table
The total remuneration figures for the Group Chief Executive during each of the last ten financial years are shown in the table below. Mark Papworth
replaced David Price as Group Chief Executive on 5 November 2012, Michael Flowers replaced Mark Papworth on 24 June 2014 and Michael Ord
replaced Michael Flowers on 1 July 2018.
The total remuneration figures for 2012 and 2014 include the payments for loss of office made to David Price and Mark Papworth respectively. The
figures for 2018 include a full year’s salary and benefits for Michael Flowers.
The total remuneration figure for each year includes the annual bonus based on that year’s performance and, where applicable, vested PSP awards
based on the three-year performance period ending in the relevant year. The annual bonus payout and PSP award vesting level as a percentage of the
maximum opportunity are also shown for each of these years.
David Price
2011
1,239
2012
1,325
0%
0%
100%
54.4%
Mark
Papworth/
Michael
Flowers
Mark
Papworth
2013
785
40%
0%
2014
841
50%
0%
Michael Flowers
2015
507
0%
0%
2016
855
2017
831
68.3%
59.5%
0%
0%
Michael
Flowers/
Michael Ord
2018
969
0%
35%
Michael Ord
2019
1,021
2020
1,045
98%
98%
0%
0%
Total remuneration £’000
Annual bonus
(% of maximum)
PSP awards vesting
(% of maximum)
Percentage change in the executive directors’ remuneration
The table below shows the percentage change in the total remuneration (excluding the value of any PSP awards and pension benefits receivable in the year)
for each of the executive directors between the 2019 and 2020 financial years, compared to that of the average for all eligible employees of the Group.
Group Chief Executive
Group Finance Director
Group Legal Director & Company Secretary
Average of other employees
Salary
2.3%
2.6%
2.3%
4.0%
Benefits
0%
0%
0%
0%
Annual bonus
2.5%
2.7%
2.8%
3.0%
Chief Executive’s pay ratio
The table overleaf shows how the Group Chief Executive’s single remuneration figure for the 2020 financial year compares to equivalent single figure
remuneration for full-time equivalent UK employees ranked at the 25th, 50th and 75th percentile.
The Committee considered the calculation approaches as set out in the Regulations and elected to use Method A, as it is considered to be the most
appropriate and robust way to calculate the ratio. The calculation was based on:
• actual base salary, benefits, bonus and long-term incentive awards for the year ended 31 October 2020, with salaries for part-time employees
annualised on a full-time equivalent basis to allow equal comparisons; and
• employer pension contributions.
Chemring Group PLC Annual report and accounts 2020
93
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Directors’ remuneration report continued
Additional statutory information on remuneration arrangements continued
Chief Executive’s pay ratio continued
No components of pay and benefits were omitted for the purpose of the calculations; however, joiners and leavers during the year were excluded from
the calculations.
Year
2020
Year
2020
Methodology
Method A
Total remuneration
25th percentile (lower
quartile) pay ratio
39.9
50th percentile
(median) pay ratio
25.0
75th percentile (upper
quartile) pay ratio
15.8
25th percentile
£23,378
Salary
50th percentile
£39,000
75th percentile
£61,200
25th percentile
£26,184
50th percentile
£41,848
75th percentile
£66,096
Total remuneration
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
2020
£m
144.1
10.4
28.0
2019
£m
138.1
9.5
8.5
% change
4%
9%
229%
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 £32,000 (2019: £38,400). 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
The directors’ remuneration policy is subject to a binding vote by shareholders every three years. 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 2020 Annual General Meeting
The directors’ remuneration report is subject to an advisory vote by shareholders every year. At the Annual General Meeting held on 4 March 2020, 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)
228,152,712
1,435,143
229,587,855
7,993,104
237,580,959
99.37%
0.63%
100.0%
3.36%
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.
94
Chemring Group PLC Annual report and accounts 2020
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 neither 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.
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
• 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 implemented by the Board provide an opportunity for employees to
express their views on a wide range of topics, including directors’ remuneration arrangements
Simplicity
Remuneration structures should avoid
complexity and their rationale and
operation should be easy to understand
• 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
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
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
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
• 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
• 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
• 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
Alignment to culture
Incentive schemes should drive behaviours
consistent with company purpose, values
and strategy
• 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
Further details of the policy are set out on pages 96 to 98, and an explanation of how the policy will be applied in 2021 is set out on pages 98 to 100.
Chemring Group PLC Annual report and accounts 2020
95
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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
• Other executive directors – 100% 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
• Normally 150% of base salary (although grants of up to 200%
of base salary may be made in exceptional circumstances such
as on recruitment)
• 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
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
Pension1
• 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
contribution paid in lieu of occupational pension scheme membership
• New appointments: 10% of base salary cash supplement contribution
• Longer-serving employees have accrued benefits under
paid in lieu of occupational pension scheme membership
the Group’s defined benefit scheme, which was closed to
future accrual for the executive directors on 6 April 2010
• 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
Other benefits
• Main benefits currently provided to UK executives are a
car allowance, life assurance and private medical insurance
• 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
• Executive directors are eligible for other benefits which
based on the cost to the Company and is not pre-determined
may also be introduced
• Any reasonable business-related expenses (including tax thereon) can
be reimbursed if determined to be a taxable benefit
96
Chemring Group PLC Annual report and accounts 2020
Chairman and non-executive directors
Element
Operation
Fees
• The Chairman is paid a single fee for all his responsibilities. The non-executive 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
Note:
1. The current remuneration policy provides for a maximum pension contribution of 10% of base salary for new executive director appointments. This provision was enacted on
the appointment of Michael Ord in June 2018. The pension level for Andrew Lewis and Sarah Ellard remains unchanged currently reflecting that these were legacy arrangements
agreed at the time of their appointment. However, pension contributions for all directors will be aligned with the workforce with effect from 1 November 2022. For information,
employer pension contributions across the UK workforce currently range from 4% to 20% of salary.
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.
Chemring Group PLC Annual report and accounts 2020
97
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration report continued
Directors’ remuneration policy continued
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
Fiona MacAulay
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
3 June 2020
3 June 2020
2 June 2023
Application of the remuneration policy in 2021
This part of the report sets out how the approved directors’ remuneration policy will be implemented in 2021.
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
• Provides an appropriate
level of basic fixed income,
avoiding excessive risk
arising from over-reliance
on variable income
• The executive directors’ salaries were reviewed in November 2020, and the following salary
increases were agreed, effective 1 January 2021:
> Michael Ord – £483,000
> Andrew Lewis – £369,280
> Sarah Ellard – £258,880
• The general percentage increase of 3% applied to the executive directors' salaries is in line with
the average budgeted salary increase for UK employees.
• As noted in the Chairman’s statement, the Group Chief Executive’s salary was increased by an
additional 6.6% to recognise his strong leadership and performance in the role since his
appointment in July 2018 and his criticality to the business in the next stage of its development.
The Committee, whilst cognisant of pay restraint sentiment in the wider economy, believes that
now is the right time to make this adjustment to ensure the Group Chief Executive is
appropriately remunerated in comparison to peer companies of a similar size and complexity.
• Andrew Lewis’s salary was increased by an additional 2% to recognise his strong performance
in the role and to ensure his overall remuneration package is sufficiently competitive with
comparable peers.
• Sarah Ellard’s base salary reflects her reverting to a full-time equivalent position following a review
of her working patterns and the general salary increase set out above.
Benefits
• Provides a competitive
package of benefits that
assists with recruitment
and retention
• No changes are proposed to the structure of pension and benefits provision for 2021.
• As noted in the Chairman’s statement, the pension provision for the executive directors will be
aligned with the workforce with effect from November 2022.
98
Chemring Group PLC Annual report and accounts 2020
Element
Bonus
Purpose and link to strategy
Implementation
• Incentivises annual delivery
of financial, strategic and
personal goals
• Maximum bonus only
payable for achieving
demanding targets
• Delivery of a proportion of
bonus in deferred shares
plus the ability to receive
dividend equivalents
provides alignment with
shareholders’ interests and
assists with retention
• The annual bonus plan for 2021 will operate on a similar basis to 2020. 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%
• Personal objectives have been set to reflect performance in the following key areas:
> Safety, including continuing implementation of the Group HSE Management System Framework
Standard and associated assurance processes, and delivery of further reductions in the Group’s
total recordable injury frequency (“TRIF”) rate and frequency of process safety events
> Strengthening of environmental policies and development of related key performance indicators
to underpin the Group’s ESG strategy
> Strengthening of the Group’s continuous improvement plans in the areas of manufacturing,
planning and supply chain management
> Deployment of the Group’s information technology roadmap
> Ongoing implementation of the Operational Framework and delivery of enhancements to the
associated assurance processes
> Implementation of the Chemring Compliance Portal
> Development of common standards for the protection of people, information and technology
> People management, including talent management, succession planning and leadership
development, and further promotion of “Employee Voice”
> Commission new production facilities in Tennessee
> Delivery of growth strategy for Roke and development of Roke USA
> Development of a chemical/biological detection growth strategy
• 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 2021 bonus plan is consistent with the remuneration policy detailed on pages 95 to 96,
in terms of maximum bonus opportunity, deferred share arrangements and clawback.
Chemring Group PLC Annual report and accounts 2020
99
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration report continued
Directors’ remuneration policy continued
Application of the remuneration policy in 2021 continued
Executive directors
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 2021 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 2021 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 2021 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 total shareholder return 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%
• 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. The fees for the non-executive directors are
determined by the executive directors and the Chairman, and the Remuneration Committee determines the fees for the Chairman. From 1 January 2021
(and onwards), it was agreed to introduce a separate fee for the positions of Senior Independent Director and for the employee engagement lead, to
recognise the additional responsibilities and time commitment associated with the roles. No other changes will be made to the fees payable to the
Chairman and the non-executive directors in 2021.
Fee as at
1 January 2021
£200,000
£55,000
£10,000
£10,000
£10,000
£5,000
Percentage
increase
0%
0%
0%
0%
—
—
Details of the fees that will apply for 2021 are set out below:
Chairman’s fee
Other non-executive directors’ base fee
Audit Committee Chair fee
Remuneration Committee Chair fee
Senior Independent Director fee
Non-executive directors’ fee for employee engagement
Approval of the directors’ remuneration report
The directors’ remuneration report was approved by the Board on 15 December 2020.
Signed on behalf of the Board
Laurie Bowen
Chairman of the Remuneration Committee
15 December 2020
100
Chemring Group PLC Annual report and accounts 2020
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 2020.
Employees and employee consultation
Details of the Group’s employment policies and employee consultation
practices are set out on pages 55 to 57.
The following sections of the annual report are incorporated into the
directors’ report by reference:
Political donations
No political donations were made during the year (2019: £nil).
• strategic report on pages 1 to 62;
• corporate governance report on pages 66 to 75;
• Audit Committee report on pages 76 to 79;
• directors’ remuneration report on pages 82 to 100; and
• notes to the Group financial statements as detailed in this section.
Business review
The strategic report on pages 1 to 62 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 21 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
£34.7m (2019: £21.9m).
The directors are recommending the payment of a final dividend of 2.6p
per ordinary share which, together with the interim dividend of 1.3p per
share paid in September 2020, gives a total for the year of 3.9p (2019: 3.6p).
The final dividend is subject to approval by shareholders at the Annual
General Meeting on 4 March 2021 and has not therefore been included
as a liability in these financial statements.
Directors and their interests
The current directors are shown on pages 64 and 65.
Nigel Young retired as a non-executive director on 30 April 2020.
Fiona Macaulay was appointed as a non-executive director on 3 June 2020.
In accordance with the Company’s Articles of Association, all directors are
required to submit themselves for election or re-election at every Annual
General Meeting. All directors will therefore be seeking election or
re-election at the Annual General Meeting on 4 March 2021. Ordinary
resolutions are required to be passed for the re-election of directors,
which means that more than half of the votes cast must be in favour of
the resolution.
Details of the service contracts entered into between the Company and
the executive directors are set out in the directors’ remuneration report
on page 97. The non-executive directors do not have service contracts
with the Company.
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.
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 2020.
Information required in relation to directors’ shareholdings is set out in
the directors’ remuneration report on page 91.
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 34.
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. 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 25 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.
A member or members representing at least 5% of the ordinary share
capital of the Company may require the directors to convene a general
meeting. A member or members representing at least 5% of the ordinary
share capital of the Company or at least 100 members with the right to
vote at an Annual General Meeting and each holding, on average, at least
£100 of paid-up share capital may request a resolution to be put before
an 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.
Chemring Group PLC Annual report and accounts 2020
101
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ report continued
Share capital and shareholder rights continued
General continued
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.
Substantial shareholdings
At 14 December 2020, 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 is not aware of any agreements between shareholders that
may result in restrictions on the transfer of securities and/or voting rights.
Name
Jupiter Fund Management PLC
Invesco Limited
Royal London Asset Management Limited
Old Mutual Asset Managers
Ameriprise Financial, Inc. and it’s Group
Norges Bank
J O Hambro Capital Management Limited
AXA Investment Managers S.A.
Schroders Plc
BlackRock, Inc.
FIL Limited
Aviva PLC & it’s subsidiaries
Majedie Asset Management Limited
J P Morgan Chase & Co
Neptune Investment Management Limited
Prudential Plc
Investec Asset Management Limited
Standard Life Investments Limited
BT Pension Scheme Trustees Limited as Trustee
of the BT Pension Scheme
% interest
8.4
8.1
5.2
5.1
5.0
5.0
5.0
5.0
BELOW 5.0
BELOW 5.0
BELOW 5.0
4.9
4.9
4.9
4.8
4.8
4.8
4.6
3.8
Employee share schemes and plans
Approach to share ownership
The Group actively encourages its employees to share in the future
success of the Group, and therefore operates share-based arrangements
to provide incentives and rewards to employees.
The Group operated four share-based incentive plans during the year,
as set out below. Further details of awards and vesting are provided in
note 28 to the Group financial statements.
The Chemring Group 2008 and 2018 UK Sharesave Plans (collectively
the “UK Sharesave Plan”)
The UK Sharesave Plan is open to all eligible UK employees. Employees
may choose between three and five-year savings periods, at the end of
which the employee can choose to exercise the option or seek the return
of their savings. A grant of options was made on 30 July 2020.
The Chemring Group Performance Share Plan (the “PSP”)
The 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
17 December 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.
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 (2019: nil)
during the year. At 31 October 2020, the Company held a total of
675,592 1p ordinary shares in treasury (representing 0.24% of the
ordinary shares in issue on 31 October 2020).
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.
102
Chemring Group PLC Annual report and accounts 2020
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 viability
statement on page 45.
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 25);
• contracts of significance (see directors’ report);
• 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.
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 2021, 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.
Chemring Group PLC Annual report and accounts 2020
103
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ report continued
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 15 December 2020 and is signed on its behalf by:
Michael Ord
Group Chief Executive
15 December 2020
Sarah Ellard
Group Legal Director
15 December 2020
104
Chemring Group PLC Annual report and accounts 2020
Consolidated income statement
For the year ended 31 October 2020
Continuing operations
Revenue
Operating profit
Finance expense
Profit before tax
Taxation
Profit after tax
Discontinued operations
(Loss)/profit after tax from discontinued operations
Profit after tax
Earnings per ordinary share
Continuing operations
Basic
Diluted
Continuing and discontinued operations
Basic
Diluted
1. Further information about non-underlying items is set out in note 3.
Underlying
performance
£m
Note
2020
Non-
underlying
items 1
£m
1,2
2,4
7
8
5
402.5
54.7
(3.0)
51.7
(9.1)
42.6
(0.1)
42.5
—
(8.4)
—
(8.4)
0.5
(7.9)
0.1
(7.8)
Total
£m
Underlying
performance
£m
402.5
335.2
46.3
(3.0)
43.3
(8.6)
34.7
—
34.7
44.0
(4.6)
39.4
(7.9)
31.5
2.7
34.2
2019
Non-
underlying
items 1
£m
—
(12.7)
—
(12.7)
4.3
(8.4)
(3.9)
(12.3)
2020
2019
Underlying
Note performance
Total
Underlying
performance
10
10
10
10
15.1p
14.8p
15.1p
14.7p
12.3p
12.0p
12.3p
12.0p
11.2p
11.0p
12.2p
12.0p
Total
£m
335.2
31.3
(4.6)
26.7
(3.6)
23.1
(1.2)
21.9
Total
8.2p
8.1p
7.8p
7.7p
Chemring Group PLC Annual report and accounts 2020
105
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Consolidated statement of comprehensive income
For the year ended 31 October 2020
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial (losses)/gains on 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
Exchange difference reclassified to income statement on disposal of foreign operation
Tax on exchange differences on translation of foreign operations
Total comprehensive income attributable to equity holders of the parent
Note
30
24
24
2020
£m
34.7
(1.9)
0.7
(1.2)
(0.2)
(1.4)
0.5
(1.1)
32.4
2019
£m
21.9
1.6
(0.7)
0.9
(5.2)
—
0.2
(5.0)
17.8
106
Chemring Group PLC Annual report and accounts 2020
Consolidated statement of changes in equity
For the year ended 31 October 2020
Total
£m
305.8
34.7
(3.5)
1.2
32.4
0.5
3.6
(10.4)
(2.3)
—
Total
£m
294.2
21.9
(3.6)
(0.5)
17.8
0.8
2.5
(9.5)
—
—
—
—
—
—
—
—
—
4.9
—
—
—
—
—
—
—
—
At 1 November 2019
Profit after tax
Other comprehensive loss
Tax relating to components of other
comprehensive loss
Total comprehensive (loss)/income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Purchase of shares by employee share
ownership plan trust
Transactions in own shares
Share
capital
£m
2.8
Share
premium
account
£m
306.2
Special
capital
reserve
£m
12.9
Revaluation
reserve
£m
1.0
Translation
reserve
£m
(17.8)
Retained
earnings
£m
8.5
Own
shares
£m
(7.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
0.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1.6)
0.5
(1.1)
—
—
—
—
—
34.7
(1.9)
0.7
33.5
—
3.6
(10.4)
(2.3)
(4.9)
28.0
At 31 October 2020
2.8
306.7
12.9
1.0
(18.9)
(2.9)
329.6
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
—
—
—
—
—
—
—
—
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)
—
—
—
—
0.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.0
—
1.4
—
1.4
—
—
—
8.0
(17.8)
21.9
(5.0)
(0.5)
16.4
—
2.5
(9.5)
(8.0)
8.5
At 31 October 2019
2.8
306.2
12.9
(7.8)
305.8
1. Transfer to reclassify exchange differences on translation of foreign subsidiaries included in retained earnings to the translation reserve.
Chemring Group PLC Annual report and accounts 2020
107
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Consolidated balance sheet
As at 31 October 2020
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
Lease liabilities
Trade and other payables
Provisions
Current tax
Derivative financial instruments
Liabilities directly associated with assets classified as held for sale
Non-current liabilities
Borrowings
Lease liabilities
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
2020
£m
£m
2019
£m
£m
11
12
12
13
30
24
15
16
17
22
29
18
19
20
23
22
29
18,33
19
23
24
18,25
22
25
26
26
26
27
108.5
29.8
16.6
194.0
7.6
15.7
91.3
62.8
14.7
0.4
—
(1.5)
(97.2)
(3.3)
(9.1)
(0.7)
(57.5)
(3.8)
(15.7)
(22.9)
(0.1)
—
108.5
26.1
25.3
170.0
9.6
18.5
372.2
358.0
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)
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
169.2
—
541.4
(111.8)
—
(100.0)
(211.8)
329.6
2.8
306.7
12.9
1.0
(18.9)
28.0
332.5
(2.9)
329.6
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
15 December 2020.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
108
Chemring Group PLC Annual report and accounts 2020
Consolidated cash flow statement
For the year ended 31 October 2020
Cash flows from operating activities
Cash generated from continuing underlying operations
Cash impact of continuing non-underlying items
Cash (utilised in)/generated from discontinued underlying operations
Cash impact of discontinued non-underlying items
Cash flows from operating activities
Retirement benefit deficit recovery contributions
Tax received/(paid)
Net cash inflow from operating activities
Cash flows from investing activities
Purchases of intangible assets
Purchases of property, plant and equipment
Customer funding for capital programmes
Proceeds on disposal of subsidiary
Net cash outflow from investing activities
Cash flows from financing activities
Dividends paid
Purchase of own shares
Proceeds from issue of shares
Finance expense paid
Capitalised facility fees paid
Drawdown of borrowings
Repayments of borrowings
Payment of lease liabilities
Net cash outflow from financing activities
Increase/(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
2020
£m
82.4
(3.6)
(2.6)
(1.3)
74.9
—
1.0
75.9
(5.2)
(35.6)
0.9
14.5
(25.4)
(10.4)
(2.4)
0.5
(3.0)
—
108.0
(123.1)
(1.7)
(32.1)
18.4
(3.3)
(0.4)
14.7
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)
Chemring Group PLC Annual report and accounts 2020
109
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements
1. Revenue
All of the Group’s revenue is derived from the sale of goods and the provision of services. The following table provides an analysis of the Group’s revenue
by destination:
UK
US
Europe
Asia Pacific
Rest of the world
UK
US
Europe
Asia Pacific
Rest of the world
Sensors Countermeasures
& Energetics
£m
48.9
156.3
39.3
14.0
6.8
& Information
£m
69.5
61.0
1.7
1.1
3.9
137.2
265.3
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
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 Countermeasures
& Energetics
£m
263.4
1.9
& Information
£m
52.0
85.2
137.2
265.3
Sensors
& Information
£m
49.0
82.9
Countermeasures
& Energetics
£m
202.2
1.1
131.9
203.3
2020
£m
118.4
217.3
41.0
15.1
10.7
402.5
2019
£m
91.0
183.0
30.6
24.7
5.9
335.2
2020
£m
315.4
87.1
402.5
2019
£m
251.2
84.0
335.2
All revenues recognised arose from contracts with customers.
As at 31 October 2020 £476.0m (2019: £448.7m) of revenue was outstanding in respect of obligations that were unfulfilled or only partially fulfilled as at
the year end. £326.0m (2019: £287.0m) of this revenue is expected to be recognised in the next financial year and £150.0m (2019: £161.7m) 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.
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 and sea platforms, cartridge/propellant actuated
devices, pyrotechnic devices for satellite launch and deployment, missile components, propellants, separation sub-systems,
actuators and energetic materials.
110
Chemring Group PLC Annual report and accounts 2020
2. Business segments continued
A segmental analysis of revenue and operating profit is set out below:
Year ended 31 October 2020
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 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
Sensors Countermeasures
& Energetics
£m
265.3
& Information
£m
137.2
Unallocated
£m
—
Total
£m
402.5
30.7
(2.8)
(0.5)
27.4
(6.4)
—
(6.4)
21.0
56.5
(15.7)
(0.9)
39.9
(2.5)
—
(2.5)
37.4
(12.6)
—
—
(12.6)
—
0.5
0.5
(12.1)
(3.0)
(15.1)
(8.6)
(23.7)
—
(23.7)
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)
74.6
(18.5)
(1.4)
54.7
(8.9)
0.5
(8.4)
46.3
(3.0)
43.3
(8.6)
34.7
—
34.7
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
Assets and liabilities by segment are not reported to the Group Chief Executive on a monthly basis; therefore they 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
2020
£m
148.5
193.9
8.8
21.0
372.2
2019
£m
158.0
169.3
9.1
21.6
358.0
Information on major customers
Included in segmental revenues for continuing operations are revenues of £154.2m (2019: £137.9m), which arose from sales to the Group’s largest
customer, the US Department of Defense. The largest customer had sales reported in both of the Group’s business segments. This was the only
individual customer where direct sales accounted for more than 10% of Group revenue from continuing and discontinued operations for the year.
Chemring Group PLC Annual report and accounts 2020
111
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
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
Gain/(loss) on the movement in the fair value of derivative financial instruments (note 22)
Impact of non-underlying items on EBITDA
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 after tax
2020
£m
0.5
0.5
(8.9)
(8.4)
0.5
(7.9)
0.1
(7.8)
42.5
34.7
2019
£m
(0.6)
(0.6)
(12.1)
(12.7)
4.3
(8.4)
(3.9)
(12.3)
34.2
21.9
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 £8.9m (2019: £12.1m). Amortisation of acquired
intangibles arising from business combinations is associated with acquisition accounting 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 £0.5m gain (2019: £0.6m 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.
Tax
The tax impact of continuing non-underlying items comprises a £0.5m tax credit (2019: £4.3m credit) on the above non-underlying items.
Discontinued operations
Further details on the results of discontinued operations are 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
Amortisation arising from business combinations (note 4)
Amortisation of development costs (note 4)
Amortisation of patents and licences (note 4)
Depreciation of property, plant and equipment– continuing operations
EBITDA
Non-underlying items
Underlying EBITDA
2020
£m
46.3
8.9
1.4
—
18.5
75.1
(0.5)
74.6
2019
£m
31.3
12.1
1.3
0.1
15.8
60.6
0.6
61.2
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 2020 at the average exchange rates for the comparative year ended 31 October 2019.
112
Chemring Group PLC Annual report and accounts 2020
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 leases (pre-IFRS 16)
Government grants
Foreign exchange losses
Staff costs (note 6)
Cost of inventories recognised as an expense
– customer-funded
– internally-funded
– arising from business combinations
– development costs
– patents and licences
– owned assets
– leased assets
– plant and machinery
– other
2020
£m
52.5
4.5
8.9
1.4
—
16.9
1.6
0.3
—
—
—
1.5
139.4
134.7
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
Operating lease expense is no longer applicable under IFRS 16 Leases, which was adopted by the Group from 1 November 2019. Amounts recognised
in the income statement in respect of leases for 2020 are disclosed in note 19.
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
2020
£m
0.2
0.6
0.8
0.1
0.9
2019
£m
0.2
0.4
0.6
0.1
0.7
Included in the fees for the audit of the Company’s annual accounts is £0.1m (2019: £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 76 to 79, 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. The Board concluded that the future focus
within the energetics segment should be on the energetic devices businesses. It therefore made the decision to exit the commoditised energetics businesses.
Revenue
Underlying operating loss from discontinued operations
Tax on the underlying operating loss from discontinued operations
Underlying (loss)/profit after tax
(Loss)/profit after tax is analysed as:
Before exceptional items
Exceptional items
Tax on exceptional items
Loss for the year from discontinued operations
2020
£m
9.5
(0.1)
—
(0.1)
(0.1)
0.1
—
0.1
—
2019
£m
43.4
(3.5)
6.2
2.7
2.7
(3.8)
(0.1)
(3.9)
(1.2)
Chemring Group PLC Annual report and accounts 2020
113
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
5. Results from discontinued operations continued
In the year ended 31 October 2020, the loss related to the continued trading activity of Chemring Ordnance, Inc. On 7 May 2020 the Group sold its US
subsidiary Chemring Ordnance, Inc. to Nammo Defense Systems Inc., concluding the Group’s exit from its commoditised energetics businesses. The
consideration of $17m was paid in cash on completion, subject to normal working capital and other closing adjustments.
In 2020 the exceptional items include a gain on disposal of £3.5m relating to the sale of Chemring Ordnance, Inc., an increase to the disposal provision in
respect of the disposal of the European Munitions businesses in 2014 of £1.3m and a £2.1m increase to the disposal provisions relating to the exit of the
commoditised energetics businesses announced in 2018.
In the year ended 31 October 2019, the sale of Chemring Military Products, Inc. and Chemring Defence UK Limited were completed and Chemring Prime
Contracts Limited was closed. The exceptional items included 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.
Details of the sale of the subsidiaries
The Group completed the sale of the entire issued stock capital of Chemring Ordnance, Inc. to Nammo Defense Systems, Inc. on 7 May 2020. Under the
terms of the agreement, the Group received $17m upon completion of the transaction.
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 was received on the first
anniversary of the transaction. A further deferred consideration amount of £0.4m is payable on the second anniversary of the transaction. 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.
2020
£m
Chemring
Ordnance, Inc.
13.8
—
13.8
(0.8)
(9.3)
(1.6)
2.1
1.4
—
3.5
2020
£m
Total
13.8
—
13.8
(0.8)
(9.3)
(1.6)
2.1
1.4
—
3.5
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)
7 May 2020
£m
2020
£m
5 April 2019
£m
24 June 2019
£m
Chemring
Ordnance, Inc.
10.5
10.5
(0.4)
(0.4)
10.1
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
10.5
10.5
(0.4)
(0.4)
10.1
2019
£m
Total
1.7
1.1
2.8
—
(4.0)
(1.6)
(2.8)
—
—
(2.8)
2019
£m
Total
17.9
17.9
(13.9)
(13.9)
4.0
Consideration received or receivable:
– cash
– fair value of deferred consideration
Total disposal consideration
Net working capital adjustment
Net assets and liabilities disposed of
Disposal costs
Profit/(loss) on disposal before tax
Reclassification of foreign currency translation reserve
Income tax on profit/(loss) on disposal
Profit/(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.
114
Chemring Group PLC Annual report and accounts 2020
6. Staff costs
The average monthly number of employees, including executive directors, was:
Direct
Indirect
Continuing operations
Discontinued operations
The costs incurred in respect of employees at continuing operations, including share-based payments, were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment charge
Staff costs
7. Finance expense
Bank overdraft and loan interest
Loan notes interest
Amortisation of debt finance costs
Interest cost/(credit) on retirement benefit obligations (note 30)
Right-of-use asset interest
Amount capitalised
Finance expense
2020
Number
1,381
899
2,280
104
2,384
2020
£m
116.9
12.4
6.1
4.0
139.4
2020
£m
3.3
—
0.2
0.1
0.2
3.8
(0.8)
3.0
2019
Number
1,324
988
2,312
262
2,574
2019
£m
106.8
12.5
5.2
2.5
127.0
2019
£m
1.2
3.7
0.2
(0.2)
—
4.9
(0.3)
4.6
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 £0.8m (2019: £0.3m) 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 2020 of £1.8m (2019: £1.8m) which is all due within one year (2019: £1.8m).
Chemring Group PLC Annual report and accounts 2020
115
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
8. Taxation
Current tax charge – current year
Current tax (credit)/charge – prior year
Deferred tax charge – current year (note 24)
Deferred tax charge/(credit) – prior year (note 24)
Tax charge for continuing operations
2020
£m
5.8
(1.1)
3.0
0.9
8.6
2019
£m
3.1
6.8
0.3
(6.6)
3.6
Income tax in the UK is calculated at 19.0% (2019: 19.0%) of the taxable profit for the year. Tax for other jurisdictions is calculated at the rates prevailing
in those jurisdictions.
The tax charge for continuing operations can be reconciled to the income statement as follows:
Profit before tax from continuing operations
Tax at the UK corporation tax rate of 19.0% (2019: 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
2020
£m
43.3
8.2
(0.9)
(0.4)
—
(0.2)
—
1.9
8.6
2019
£m
26.7
5.1
(1.5)
—
(2.3)
0.2
1.6
0.5
3.6
In addition to the tax charge in the income statement, a tax credit of £1.2m (2019: £0.5m charge) has been recognised in equity in the year.
The effective rate of tax on the profit before tax of the Group is 19.9% (2019: 13.5%), and the effective rate of tax on the underlying profit before tax of
the Group is 17.6% (2019: 20.1%). The effective rate of tax on the underlying profit before tax is lower than the 2019 effective tax rate due to prior year
tax adjustments and the geographical mix of profits.
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.
9. Dividends
Dividends paid on ordinary shares of 1p each
Final dividend of 2.4p per share for the year ended 31 October 2019 (2.2p per share for the year ended 31 October 2018)
Interim dividend of 1.3p per share for the year ended 31 October 2020 (1.2p per share for the year ended 31 October 2019)
Total dividends
2020
£m
6.8
3.6
10.4
2019
£m
6.2
3.3
9.5
Subject to approval at the Annual General Meeting, the final dividend of 2.6p per ordinary share will be paid on 23 April 2021 to all shareholders
registered at the close of business on 6 April 2021. The total dividend for the year will therefore be 3.9p (2019: 3.6p) 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 2020.
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 2020 and 31 October 2020.
116
Chemring Group PLC Annual report and accounts 2020
10. Earnings per ordinary share
Earnings per share is based on the average number of shares in issue, excluding own shares held, of 281,447,284 (2019: 280,061,053).
Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 288,416,915 (2019: 286,092,818).
The number of shares used in the calculations is 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:
2020
Basic EPS
(pence)
15.1
Diluted EPS
(pence)
14.8
12.3
—
12.3
12.0
—
12.0
£m
42.6
(7.9)
34.7
—
34.7
£m
31.5
(8.4)
23.1
(1.2)
21.9
Underlying profit after tax
Non-underlying items (note 3)
Profit from continuing operations
Loss from discontinued operations
Total profit after tax
11. Goodwill
Cost
At 1 November 2018
Disposals
Foreign exchange adjustments
At 31 October 2019
Disposals
Foreign exchange adjustments
At 31 October 2020
Accumulated impairment losses
At 1 November 2018
Disposals
Foreign exchange adjustments
At 31 October 2019
Disposals
Foreign exchange adjustments
At 31 October 2020
Carrying amount
At 31 October 2020
At 31 October 2019
2020
Ordinary
shares
Number
millions
281.4
7.0
288.4
2019
Ordinary
shares
Number
millions
280.1
6.0
286.1
2019
Basic EPS
(pence)
11.2
Diluted EPS
(pence)
11.0
8.2
(0.4)
7.8
8.1
(0.4)
7.7
£m
200.8
(3.0)
(1.6)
196.2
(8.9)
0.5
187.8
(91.6)
3.0
0.9
(87.7)
8.9
(0.5)
(79.3)
108.5
108.5
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 28 to 31.
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 6.2% (2019: 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% (2019: 1% to 3%).
Chemring Group PLC Annual report and accounts 2020
117
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
11. Goodwill continued
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 based on our Board-approved five year plan which considered past experience and our
understanding of customer budgets and priorities. The relative value ascribed to each varies between CGUs as the budgets are built up from the
underlying operating companies within each CGU.
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
2020
%
9.0
7.0
7.4
9.4
2019
%
10.0
8.0
8.8
10.8
2020
£m
28.4
14.6
36.4
16.1
13.0
2019
£m
28.4
14.6
36.3
16.1
13.1
108.5
108.5
The pre-tax discount rates used for other CGUs ranged from 6.9% to 9.0% (2019: 8.0% to 10.0%).
Following a detailed review, no impairment losses were recognised in the years ended 31 October 2020 and 31 October 2019 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 CGUs would require an
impairment against goodwill.
There are no reasonably possible changes in assumptions that would require an impairment against goodwill.
12. Development costs and other intangible assets
Development
costs
£m
Acquired
technology
£m
Acquired
customer
relationships
£m
Patents and
licences
£m
Cost
At 1 November 2018
Additions
Disposals
Foreign exchange adjustments
At 31 October 2019
Additions
Disposals
Foreign exchange adjustments
At 31 October 2020
Amortisation
At 1 November 2018
Charge
Disposals
Foreign exchange adjustments
At 31 October 2019
Charge
Disposals
Foreign exchange adjustments
At 31 October 2020
Carrying amount
At 31 October 2020
At 31 October 2019
118
Chemring Group PLC Annual report and accounts 2020
62.7
4.0
(14.3)
(0.4)
52.0
5.0
(1.2)
0.1
55.9
(38.7)
(1.3)
14.0
0.1
(25.9)
(1.4)
1.2
—
(26.1)
29.8
26.1
95.9
—
—
(1.1)
94.8
—
(1.1)
0.1
93.8
(75.3)
(8.3)
—
1.1
(82.5)
(5.3)
1.1
(0.1)
79.8
—
—
(0.8)
79.0
—
(31.8)
1.4
48.6
(63.0)
(3.8)
—
0.7
(66.1)
(3.6)
31.8
(1.4)
0.4
—
—
—
0.4
0.2
—
—
0.6
(0.2)
(0.1)
—
—
(0.3)
—
—
—
(86.8)
(39.3)
(0.3)
Total
£m
176.1
—
—
(1.9)
174.2
0.2
(32.9)
1.5
143.0
(138.5)
(12.2)
—
1.8
(148.9)
(8.9)
32.9
(1.5)
(126.4)
7.0
12.3
9.3
12.9
0.3
0.1
16.6
25.3
12. Development costs and other intangible assets continued
Included within the development costs of £29.8m, individually material balances relate to Joint Biological Tactical Detection System £8.6m (2019: £8.6m),
Next Generation Chemical Detector £12.5m (2019: £11.1m) and Perceive £4.0m (2019: £2.5m). 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 ten years.
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.
Acquired technology of £7.0m includes individually material balances relating to Chemring Sensors & Electronic Systems £4.2m (2019: £8.3m), Chemring
Energetic Devices £1.7m (2019: £2.1m) and Roke £1.0m (2019: £1.5m). The remaining amortisation periods for these assets are three years, seven years
and two years respectively.
Acquired customer relationships of £9.3m include individually material balances relating to Chemring Energetic Devices £7.2m (2019: £8.8m), Chemring
Sensors & Electronic Systems £1.9m (2019: £2.7m) and Roke £nil (2019: £1.0m). The remaining amortisation periods for these assets are six years and
three years respectively.
13. Property, plant and equipment
Cost or valuation
At 1 November 2018
Additions
Disposals
Foreign exchange adjustments
At 31 October 2019
Recognition of right-of-use asset on initial application of IFRS 16
Reclassification
Additions
Disposals
Foreign exchange adjustments
At 31 October 2020
Depreciation
At 1 November 2018
Charge
Disposals
Foreign exchange adjustments
At 31 October 2019
Charge
Disposals
Foreign exchange adjustments
At 31 October 2020
Carrying amount
At 31 October 2020
At 31 October 2019
Land and
buildings
£m
Plant and
equipment
£m
Right-of-use
land and
buildings
£m
Right-of-use
plant and
equipment
£m
124.9
13.6
(8.4)
(1.8)
128.3
—
(2.4)
14.9
(14.8)
0.6
137.8
27.1
(34.7)
(2.7)
127.5
—
2.4
21.7
(9.2)
—
126.6
142.4
(35.6)
(3.3)
8.3
0.5
(30.1)
(3.4)
14.8
(0.6)
(19.3)
107.3
98.2
(79.0)
(12.5)
34.2
1.6
(55.7)
(13.5)
9.0
(0.3)
(60.5)
81.9
71.8
—
—
—
—
—
5.9
—
0.1
(0.4)
0.1
5.7
—
—
—
—
—
(1.5)
0.1
—
(1.4)
4.3
—
—
—
—
—
—
0.4
—
0.2
—
—
0.6
—
—
—
—
—
(0.1)
—
—
(0.1)
0.5
—
Total
£m
262.7
40.7
(43.1)
(4.5)
255.8
6.3
—
36.9
(24.4)
0.7
275.3
(114.6)
(15.8)
42.5
2.1
(85.8)
(18.5)
23.9
(0.9)
(81.3)
194.0
170.0
During the year, £0.8m (2019: £0.3m) of interest was capitalised, as set out in note 7. £1.1m (2019: £1.1m) of capitalised interest was charged
as depreciation and £0.1m (2019: £nil) was disposed of. This results in a net book value for capitalised interest of £9.6m (2019: £10.0m).
Included within land and buildings and plant and equipment are assets under construction of £21.7m and £15.5m respectively (2019: £8.6m and £6.2m).
These assets are not depreciated.
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 2020
2020
£m
5.8
120.8
126.6
2019
£m
5.8
122.5
128.3
Chemring Group PLC Annual report and accounts 2020
119
STRATEGIC REPORTGOVERNANCEFINANCIAL 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.
2020
£m
124.7
(18.4)
106.3
2019
£m
126.3
(29.2)
97.1
At 31 October 2020, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £16.9m
(2019: £20.7m).
14. Subsidiary undertakings
All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2020, 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 Overseas Investments Limited*
CHG Overseas Limited*
Chemring UAE Limited
Greys Exports Limited
Kembrey Engineering 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.
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
Norway
Scotland
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
Non-trading
Sensors & Information
Non-trading
Holding company
Non-trading
Dormant
Dormant
Non-trading
Non-trading
Dormant
Dormant
Sensors & Information
Countermeasures & Energetics
Countermeasures & Energetics
Countermeasures & Energetics
Property holding company
Countermeasures & Energetics
Holding company
Holding company
Holding company
Countermeasures & Energetics
Sensors & Information
Sensors & Information
Non-trading
Share directly held by Chemring Group PLC.
*
CHG Overseas Limited, Chemring North America Unlimited, Parkway No 10 Limited, Chemring Investments Limited, Chemring Energetics Limited,
Chemring Europe Limited, Chemring Finance Europe Limited, Chemring Limited, Kembrey Limited, Kembrey Engineering Limited, Chemring UAE Limited
and CHG Overseas Investments Limited are exempt from the requirement to file audited accounts for the year ended 31 October 2020 by virtue of
section 479A of the Companies Act 2006. See page 156 for the registered offices of the subsidiary undertakings.
120
Chemring Group PLC Annual report and accounts 2020
15. Inventories
Raw materials
Work in progress
Finished goods
2020
£m
50.3
25.2
15.8
91.3
2019
£m
38.8
25.1
14.2
78.1
There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised £5.5m
(2019: £2.7m) 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
Accrued income
All amounts shown above are due within one year.
2020
£m
46.4
(0.5)
45.9
0.2
3.2
4.0
9.5
62.8
2019
£m
30.6
(0.3)
30.3
4.4
7.0
3.7
8.3
53.7
The average credit period taken by customers on sales of goods, calculated using a countback basis, is 30 days (2019: 20 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. As at 31 October 2020,
£1.5m of gross trade receivables were aged greater than 30 days past due (2019: £0.6m).
The directors consider that the carrying amount of trade and other receivables approximates to their fair values.
Of the £8.3m of accrued income at 31 October 2019, £8.3m had been billed and paid in the year. Of the £9.5m of accrued income at 31 October 2020,
over half was billed in the month after the reporting date. The remainder relates to the completion of performance obligations which will be billed at the
next contractual milestone which is expected within the next year.
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 cash at banks of
£14.7m (2019: £1.3m) less the bank overdraft included in short-term borrowings of £nil (2019: £4.6m).
– US dollar denominated
– US dollar denominated
18. Borrowings
Within current liabilities
Loan notes
Bank overdrafts
Borrowings due within one year
Within non-current liabilities
Bank borrowings
Preference shares
Borrowings due after more than one year
Total borrowings
Analysis of borrowings by currency:
Sterling
US dollar
2020
£m
—
—
—
57.5
0.1
57.6
57.6
2020
£m
0.1
57.5
57.6
2019
£m
64.6
4.6
69.2
7.7
0.1
7.8
77.0
2019
£m
7.8
69.2
77.0
Chemring Group PLC Annual report and accounts 2020
121
STRATEGIC REPORTGOVERNANCEFINANCIAL 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
– US dollar denominated
– US dollar denominated
An analysis of borrowings by maturity is as follows:
Borrowings falling due:
– within one year
Borrowings falling due:
– within one to two years
– within two to five years
– after five years
Total borrowings
Bank
loans and
overdrafts
£m
2020
Loan
notes
£m
Preference
shares
£m
—
57.5
—
—
57.5
57.5
—
—
—
—
—
—
—
—
—
0.1
0.1
0.1
Bank
loans and
overdrafts
£m
4.6
—
7.7
—
7.7
2019
Loan
notes
£m
64.6
—
—
—
—
12.3
64.6
Total
£m
—
57.5
—
0.1
57.6
57.6
2020
%
1.5
1.5
3.3
—
Preference
shares
£m
—
—
—
0.1
0.1
0.1
2019
%
2.1
2.1
—
5.7
Total
£m
69.2
—
7.7
0.1
7.8
77.0
The Group has a multi-currency revolving credit facility of £145m. 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
2020
£m
86.4
2019
£m
130.2
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. Leases
The carrying amount, additions and depreciation charge for right-of-use assets by class of underlying asset is included in note 13.
The expense relating to short-term and low-value leases in the year was £0.9m. In total, payments of £1.7m were made under leasing contracts, of which
£1.5m was made to repay the principal portion of the lease.
A maturity analysis of the future undiscounted lease payments in respect of the Group’s lease liabilities is presented in the table below:
Lease liabilities falling due:
– within one year
Lease liabilities falling due:
– within one to two years
– within two to five years
– after five years
Lease liabilities included in balance sheet as at 31 October 2020
122
Chemring Group PLC Annual report and accounts 2020
2020
£m
1.5
1.7
2.1
—
3.8
5.3
20. 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
2020
£m
19.9
25.4
1.8
3.7
22.8
17.1
6.5
97.2
2019
£m
6.7
24.1
1.6
2.8
15.3
12.3
5.5
68.3
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 £15.3m included in advance receipts from customers recognised at 31 October 2019 has been recognised as revenue in 2020 (2019: £5.7m).
Of the £22.8m of advanced receipts from customers at 31 October 2020, £22.8m is relevant to goods and services that will be delivered and provided
within a year. No revenue was recognised in 2020 from performance obligations satisfied in previous years.
The average credit period taken on purchases of goods is 26 days (2019: 16 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.
21. 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 which the Group has long-term business relationships. The Group’s principal customers are government defence
departments, such as the US Department of Defense and 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.
The majority of continuing revenue in 2020 related to the US DoD, the UK MOD and the US and UK defence prime contractors, which 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) and a revolving credit facility (“RCF”) (note 18). The Group seeks to manage its capital through an appropriate mix of these items.
On 19 November 2019, the final tranche of 5.68% private placement loan notes of $83.6m was repaid. This was funded from the Group’s £145m
multi-currency RCF. The RCF is with a syndicate of five banks and 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 2020, the RCF was drawn by £58.0m.
(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.
Chemring Group PLC Annual report and accounts 2020
123
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
21. Financial risk management continued
(c) Financial risk management continued
ii. Foreign currency risk management continued
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 2020, there were no options or structured derivatives utilised.
iii. Interest rate risk management
The Group finances its operations through a combination of retained profits and bank borrowings. The UK borrowings are denominated in sterling
and US dollars, and at the shorter end are subject to floating rates of interest.
IFRS 9 Financial Instruments
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.
Assets carried at amortised cost
Trade receivables
Accrued income
Other receivables
Cash and cash equivalents
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
Accruals
Lease liabilities
Borrowings
2020
2019
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
45.9
9.5
3.2
14.7
0.4
—
(0.7)
—
(19.9)
(25.4)
(1.8)
(17.1)
(5.3)
(57.6)
45.9
9.5
3.2
14.7
0.4
—
(0.7)
—
(19.9)
(25.4)
(1.8)
(17.1)
(5.3)
(57.6)
30.3
8.3
7.0
1.3
0.2
7.0
(1.2)
(1.8)
(6.7)
(24.1)
(1.6)
(12.3)
—
(77.0)
30.3
8.3
7.0
1.3
0.2
7.0
(1.2)
(1.8)
(6.7)
(24.1)
(1.6)
(12.3)
—
(77.0)
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).
22. 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
2020
£m
0.4
(0.7)
—
(0.3)
2019
£m
0.2
(0.9)
(0.3)
(1.0)
124
Chemring Group PLC Annual report and accounts 2020
22. Financial instruments continued
There was a £0.5m gain (2019: £0.6m loss) on the movement in the fair value of derivative financial instruments recognised in the income statement.
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
2020
Loans and
overdrafts
£m
0.3
—
—
0.3
—
57.5
0.1
57.6
Derivative
instruments
£m
2019
Loans and
overdrafts
£m
0.7
0.3
—
1.0
69.2
—
7.8
77.0
Total
£m
0.3
57.5
0.1
57.9
Total
£m
69.9
0.3
7.8
78.0
A maturity analysis of the contracted cash outflows on lease liabilities is provided in note 19.
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
2020
Carrying
amount
£m
Fair value
£m
2019
Carrying
amount
£m
Fair value
£m
0.4
—
(0.7)
—
(0.3)
0.4
—
(0.7)
—
(0.3)
0.2
7.0
(1.2)
(1.8)
4.2
0.2
7.0
(1.2)
(1.8)
4.2
The assets and liabilities under Level 3 on the fair value hierarchy related 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 2020 the closing exchange rate for the US dollar was 1.29 (2019: 1.29) and the average exchange rate was 1.28 (2019: 1.26).
For the year ended 31 October 2020 a 10 cent strengthening in the US dollar exchange rate would have increased reported net debt by approximately
£4.5m (2019: £5.7m).
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 reasonably 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 reasonably 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
2020
£m
(12.8)
(2.1)
0.1
(2.0)
2019
£m
(12.9)
(1.8)
0.2
(1.6)
2020
£m
15.0
2.6
(0.1)
2.5
2019
£m
15.1
2.5
(0.4)
2.1
Chemring Group PLC Annual report and accounts 2020
125
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
22. Financial instruments continued
Sensitivity analysis continued
As at 31 October 2020, 92% of the Group’s gross debt was at a fixed rate of 3.01% and the remainder was 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 2020.
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.
23. Provisions
At 1 November 2019
Transfer between categories
Provided
Foreign exchange adjustments
Paid
Released
At 31 October 2020
These provisions are classified on the balance sheet as follows:
Included in current liabilities
Included in non-current liabilities
Legal
provision
£m
6.8
—
0.8
—
(0.8)
(1.0)
5.8
Environmental
provision
£m
3.2
—
0.2
—
(0.1)
(0.1)
Restructuring
provision
£m
1.3
—
—
—
(0.8)
—
Disposal
provision
£m
2.9
3.0
3.6
—
(0.5)
—
Other
provision
£m
3.0
(3.0)
1.1
—
(0.6)
—
Total
£m
17.2
—
5.7
—
(2.8)
(1.1)
3.2
0.5
9.0
0.5
19.0
2020
£m
3.3
15.7
19.0
2019
£m
4.8
12.4
17.2
The legal provision represents the estimated legal liabilities faced by the Group at the balance sheet date. There are uncertainties regarding the range
of possible outcomes and timing of cash outflows, dependent on the outcome of court proceedings. The amount of £1.0m released during the year
was the result of a favourable resolution of a historic legal claim. 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 £7.4m. There are uncertainties regarding the timing of cash outflows, dependent on the outcome of regulatory proceedings.
The restructuring provision relates principally to the Tennessee capacity expansion programme which is expected to be completed in 2021. The range
of possible outcomes is estimated between £0.5m and £0.6m.
The disposal provision relates to estimated liabilities faced by the Group in respect of the disposal of its European Munitions businesses in 2014 and its
commoditised energetics businesses in Derby and Florida in 2019 and 2020 respectively, under the terms of their respective sale agreements. The range
of possible outcomes is between £nil and £29.4m, and the risk of economic outflow relating to these reduces with the passage of time. These are
expected to be utilised over the next six years.
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.
126
Chemring Group PLC Annual report and accounts 2020
24. Deferred tax
The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:
At 1 November 2018
Credit/(charge) to income
(Charge)/credit to other comprehensive income
Transfers
At 1 November 2019
(Charge)/credit to income
Credit to other comprehensive income
Transfers
At 31 October 2020
Analysed as:
Deferred tax assets
Deferred tax liabilities
At 31 October 2020
Deferred tax assets
Deferred tax liabilities
At 31 October 2019
Accelerated
tax
depreciation
£m
(8.8)
1.7
—
(0.1)
(7.2)
(1.2)
0.1
(0.3)
(8.6)
0.4
(9.0)
(8.6)
1.5
(8.7)
(7.2)
Pensions
£m
(1.2)
(0.1)
(0.7)
0.1
(1.9)
(0.2)
0.7
(0.1)
(1.5)
—
(1.5)
(1.5)
—
(1.9)
(1.9)
Tax
losses
£m
2.6
5.1
—
(0.2)
Acquired
intangibles
£m
(5.0)
(2.0)
0.2
(1.0)
7.5
1.7
—
—
9.2
9.2
—
9.2
7.5
—
7.5
(7.8)
(0.5)
0.3
0.1
(7.9)
0.5
(8.4)
(7.9)
0.6
(8.4)
(7.8)
Other
£m
2.1
1.6
—
1.2
4.9
(3.7)
0.1
0.3
1.6
5.6
(4.0)
1.6
8.9
(4.0)
4.9
Total
£m
(10.3)
6.3
(0.5)
—
(4.5)
(3.9)
1.2
—
(7.2)
15.7
(22.9)
(7.2)
18.5
(23.0)
(4.5)
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.
The UK corporation tax rate of 19% (effective 1 April 2020) was substantively enacted on 17 March 2020, reversing the previously enacted reduction in
the rate from 19% to 17%. This will increase the company’s future current tax charge accordingly.
At the balance sheet date, the Group had unrecognised deferred tax on losses of £2.1m (2019: £1.9m) and unrecognised deferred tax on interest deductions
as a result of US interest limitation regulations of £22.7m (2019: £23.5m) 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.
25. Share capital
Issued and fully paid
282,849,930 (2019: 282,489,995) ordinary shares of 1p each
2020
£m
2.8
2019
£m
2.8
During the year, 359,935 ordinary shares (2019: 726,631) 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 2020
127
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
26. 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 is £2.7m (2019: £0.6m) of the Company’s own shares held by the Group’s Employee Share Ownership Plan Trust
(“ESOP”) which is treated as a branch of the parent company. The ESOP purchased 1,015,104 shares during the year (2019: nil) and 116,777 shares
(2019: 90,073) were distributed following the vesting of awards under the deferred bonus and PSP schemes.
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 2.6p per ordinary share for the year ended 31 October 2020.
27. Own shares
At 1 November 2019
Transactions
At 31 October 2020
2020
£m
7.8
(4.9)
2.9
2019
£m
7.8
—
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. Nil ordinary shares (2019: nil) were acquired during the year and 1,113,118 ordinary
shares (2019: nil) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at 31 October 2020
was 675,592 (2019: 1,788,710), with an average cost of 439.0p (2019: 439.0p) per share.
This represents 0.2% (2019: 0.6%) of the total issued and fully paid ordinary share capital.
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 £4.0m (2019: £2.5m) 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 2020 all now relate to the 2016 PSP as the vesting date of any remaining PSP awards was reached during the prior year.
Outstanding at the beginning of the year
Awarded
Vested
Lapsed
Outstanding at the end of the year
Subject to vesting at the end of the year
The following awards were outstanding at 31 October 2020:
Date of award
19 January 2018
26 June 2018
22 March 2019
17 December 2019
PSP
Number of conditional shares
2016 PSP
Number of conditional shares
2020
2019
2020
— 1,699,869
5,924,866
— 2,404,522
—
—
(1,113,118)
—
— (1,699,869)
(1,031,094)
2019
3,853,797
2,952,924
—
(881,855)
—
—
—
—
6,185,176
5,924,866
—
—
Number of
ordinary
shares
under award
1,017,973
394,495
2,496,118
2,276,590
Vesting price
per share
Pence
nil
nil
nil
nil
Date when
awards due
to vest
19 January 2021
26 June 2021
22 March 2022
17 December 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.
128
Chemring Group PLC Annual report and accounts 2020
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 2016 PSP awards made in the year ended 31 October 2020 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
Date awarded
17 December
2019
210p
nil
0.5%
29.1%
172.5p
22 March
2019
140p
nil
0.6%
30.0%
98.2p
26 June
2018
218p
nil
0.6%
36.1%
153.3p
19 January
2018
188p
nil
0.6%
34.7%
132.2p
The weighted average fair value of awards made during the year was 172.5p (2019: 98.2p).
In the year ended 31 October 2020 1,113,118 awards vested (2019: nil). 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 30 July 2020.
Outstanding at the beginning of the year
Granted
Exercised
Lapsed
Outstanding at the end of the year
Subject to exercise at the end of the year
The following options were outstanding at 31 October 2020:
Date of award
27 July 2016
27 July 2017
27 July 2017
30 July 2018
30 July 2018
29 July 2019
29 July 2019
30 July 2020
30 July 2020
Number of deferred shares
2020
—
—
—
—
—
2019
50,000
—
(50,000)
—
—
2020
2019
Number
of share
options
1,428,744
831,613
(359,935)
(126,680)
1,773,742
40,373
Weighted
average
exercise
price
Pence
152.8
202.0
141.1
161.4
177.7
148.0
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 ordinary
shares under
award
66,283
40,373
51,079
211,609
60,328
488,144
38,569
711,475
105,882
Exercise price
per share
Pence
105.0
148.0
148.0
178.0
178.0
154.0
154.0
202.0
202.0
Dates between which
options may be exercised
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
1 October 2023–31 March 2024
1 October 2025–31 March 2026
The weighted average fair value of options granted in the year was 39.5p (2019: 30.0p).
The weighted average fair value of options exercised in the year was 35.0p (2019: 26.9p).
The weighted average share price on exercise of the options during the year was 141.1p (2019: 108.1p).
The fair values of the share options in the UK Sharesave Plan are based on the difference between the exercise price and the share price on the grant
date of the option.
Chemring Group PLC Annual report and accounts 2020
129
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
28. Share-based payments continued
Deferred bonus share awards
Under the deferred bonus share awards, 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.
Outstanding at the beginning of the year
Awarded
Vested
Lapsed
Outstanding at the end of the year
Subject to vesting at the end of the year
The following awards were outstanding at 31 October 2020:
Date of award
18 January 2018
16 December 2019
16 December 2019
Number of deferred shares
2020
246,496
511,947
(116,777)
(26,301)
615,365
—
2019
246,496
—
—
—
246,496
—
Number of
ordinary
shares
under award
132,919
276,870
205,576
Vesting price
per share
Pence
nil
nil
nil
Date when
awards due
to vest
18 January 2021
16 December 2021
16 December 2022
The Group has applied a discount to the share-based payments, to reflect the expected number of leavers over the life of the awards.
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.
As at 31 October 2019, the sale of Chemring Defence UK Limited and Chemring Military Products, Inc. had been completed and Chemring Prime
Contracts Limited closed. Accordingly, the remaining business, Chemring Ordnance, Inc., was presented as held for sale as at 31 October 2019.
In the year ended 31 October 2020, the Group sold Chemring Ordnance, Inc. to Nammo Defense Systems Inc., concluding the Group’s exit from its
commoditised energetics businesses. The Group therefore had no assets or liabilities classified as held for sale as at 31 October 2020.
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:
Inventory
Trade and other receivables
Assets classified as held for sale
Trade and other payables
Liabilities directly associated with assets classified as held for sale
2019
£m
4.7
2.3
7.0
(1.8)
(1.8)
The above items were presented at the lower of carrying amount and fair value less costs to sell. Where the carrying value of the assets and liabilities was
expected to be realised through sale, no fair value adjustments were carried out. None of the assets classified as held for sale and none of the liabilities
classified as held for sale were shown at carrying value.
The assets and liabilities at fair value less costs to sell were 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 was categorised as a Level 3 fair value based on the inputs to the valuation
technique used. In 2019 £7.0m of assets classified as held for sale and £1.8m of liabilities classified as held for sale were shown at fair value.
130
Chemring Group PLC Annual report and accounts 2020
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 £6.1m (2019: £5.2m) 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 2020, using the projected unit credit method. The main assumptions for the scheme are detailed below. The surplus of the Chemring
Group Staff Pension Scheme was £7.6m at 31 October 2020 (2019: £9.6m).
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 at which point 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 2020 by a qualified actuary using the projected unit credit method. The main assumptions used were a discount rate of 1.5% and rate of
increase in deferred pensions of 2%. The net deficit of the Chemring Nobel Scheme was £nil at 31 October 2020 (2019: £nil) and as such is immaterial
for further detailed disclosures.
The movement in the net defined benefit asset is as follows:
At 1 November
Included in profit or loss
Administrative expenses
Past service credit
Net interest (cost)/credit
Included in other comprehensive income
Remeasurement (loss)/gain:
Actuarial (loss)/gain arising from:
– demographic and financial assumptions
– experience adjustment
– return on plan assets excluding interest income
Other
Contributions by the employer
Net benefits paid out
At 31 October
Defined benefit obligations
Defined benefit asset
Net defined benefit asset
2020
£m
(89.1)
—
—
(1.7)
(1.7)
(4.2)
—
—
(4.2)
—
3.7
2019
£m
(83.4)
—
0.3
(2.3)
(2.0)
(7.1)
(0.1)
—
(7.2)
—
3.5
(91.3)
(89.1)
2020
£m
98.7
(0.3)
—
1.9
1.6
—
—
2.3
2.3
—
(3.7)
98.9
2019
£m
90.9
(0.4)
—
2.5
2.1
—
—
8.8
8.8
0.4
(3.5)
98.7
2020
£m
9.6
(0.3)
—
0.2
(0.1)
(4.2)
—
2.3
(1.9)
—
—
7.6
2019
£m
7.5
(0.4)
0.3
0.2
0.1
(7.1)
(0.1)
8.8
1.6
0.4
—
9.6
The Chemring Group Staff Pension Scheme had 934 members at the end of the year (2019: 948). Of these members 57.8% (2019: 55.2%) 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 2020
131
STRATEGIC REPORTGOVERNANCEFINANCIAL 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
2020
£m
18.0
26.5
42.9
1.9
9.6
98.9
2019
£m
42.5
21.8
22.8
2.0
9.6
98.7
2020
%
18.2
26.8
43.4
1.9
9.7
2019
%
43.1
22.1
23.1
2.0
9.7
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 scheme’s liability-matching portfolio is invested in leveraged pooled liability-driven investment (“LDI”) funds and a liquidity fund. The Trustees target
an interest rate and inflation hedge ratio of around 100% (based on the Scheme’s technical provisions funding basis).
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
2020
%
1.7
2.1
2.8
2.9
2.1
2019
%
2.0
2.6
2.8
2.9
2.8
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
– male
– female
Current pensioners – male
– female
2020
89.0
90.6
87.6
89.1
2019
89.0
90.6
87.6
89.1
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 £0.7m and a one-year change to the longevity assumption would change the deficit by approximately £3.5m. 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 2021 will be £nil (2020: £nil).
132
Chemring Group PLC Annual report and accounts 2020
2020
£m
46.3
1.4
8.9
—
0.3
18.5
(0.5)
4.0
78.9
(12.2)
(9.9)
25.2
0.4
82.4
(2.6)
(1.3)
—
(3.9)
14.0
10.1
2020
£m
18.4
16.8
35.2
(0.6)
(0.4)
(0.2)
34.0
(6.5)
(75.7)
(48.2)
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)
31. Cash generated from operating activities
Operating profit from continuing operations
Amortisation of development costs
Amortisation of intangible assets arising from business combinations
Amortisation of patents and licences
Loss on disposal of non-current assets
Depreciation of property, plant and equipment
Non-cash movement of non-underlying items
Share-based payment expense
Operating cash flows before movements in working capital
Increase in inventories
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Increase/(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 (outflow)/inflow from discontinued operating activities
Net cash inflow from discontinued investing activities
Net cash inflow from discontinued operations
32. Reconciliation of net cash flow to movement in net debt
Increase/(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
Lease interest and other non-cash movements
Amortisation of debt finance costs
Movement in net debt
Adoption of IFRS 16 Leases
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
Lease liabilities
Preference shares
At
1 November
2019
£m
(3.3)
(64.6)
(7.7)
—
(0.1)
Adoption of
IFRS 16 Leases
£m
—
—
—
(6.5)
—
Cash flows
£m
18.4
64.6
(49.5)
1.7
—
Non-cash
changes
£m
—
—
(0.2)
(0.4)
—
Exchange
rate effects
£m
(0.4)
—
(0.1)
(0.1)
—
At
31 October
2020
£m
14.7
—
(57.5)
(5.3)
(0.1)
(75.7)
(6.5)
35.2
(0.6)
(0.6)
(48.2)
Accrued interest is included in the carrying amount of interest payable (note 21) measured at amortised cost and therefore is not presented as a separate
line item in the above table.
The Group has adopted IFRS 16 Leases using the modified retrospective transition approach, which does not require the restatement of comparative
figures. Adoption of IFRS 16 resulted in lease liabilities of £6.5m being recognised.
Chemring Group PLC Annual report and accounts 2020
133
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Group financial statements continued
34. Contingent liabilities
At 31 October 2020, 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.
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, with 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.
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. During the year, ASBCA
issued its decision in relation to this matter in favour of Alloy Surfaces Company, Inc. As a result the contingent liability no longer exists as at 31 October 2020.
At 31 October 2019 a provision of £1.0m existed to cover estimated legal costs for the Group with regards to this issue.
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
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.
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. Further information on the remuneration of individual directors is provided in the audited part of the
directors’ remuneration report on pages 85 to 100.
Total emoluments for key management personnel charged to the consolidated income statement were:
Short-term employee benefits
Post-employment benefits
Share-based payment benefits
Total remuneration of key management personnel
36. Events since the end of the year
There have been no events since the end of the year that require disclosure.
2020
£m
2.6
0.2
1.5
4.3
2019
£m
2.5
0.2
1.0
3.7
134
Chemring Group PLC Annual report and accounts 2020
Parent company balance sheet
As at 31 October 2020
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
13
4
6
5
6
5
8
12
9
10
11
2020
£m
£m
2019
£m
£m
0.1
634.6
189.2
4.1
12.6
36.7
—
(17.3)
(57.5)
(1.1)
(6.7)
(0.8)
(0.1)
0.2
634.6
395.1
5.1
828.0
1,035.0
49.3
877.3
21.5
25.1
(64.6)
(322.1)
46.6
1,081.6
(17.3)
(386.7)
—
(25.7)
(2.9)
(0.4)
(0.1)
(66.2)
(83.5)
793.8
2.8
306.7
12.9
474.3
796.7
(2.9)
793.8
(29.1)
(415.8)
665.8
2.8
306.2
12.9
351.7
673.6
(7.8)
665.8
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 2020 of £137.6m (2019: £18.1m).
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
15 December 2020.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC Annual report and accounts 2020
135
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Parent company statement of comprehensive income
For the year ended 31 October 2020
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial (losses)/gains on pension scheme, net of deferred tax
Total comprehensive income attributable to the equity holders of the parent
2020
£m
137.6
(0.8)
136.8
2019
£m
18.1
0.6
18.7
Parent company statement of changes in equity
For the year ended 31 October 2020
At 1 November 2019
Profit after tax
Other comprehensive loss
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Purchase of shares by employee share ownership plan trust
Transactions in own shares
Share capital
£m
2.8
Share
premium
account
£m
306.2
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
—
—
—
0.5
—
—
—
—
—
—
—
—
—
—
—
—
Retained
earnings
£m
351.7
137.6
(0.8)
136.8
—
3.4
(10.4)
(2.3)
(4.9)
Own shares
£m
(7.8)
—
—
—
—
—
—
—
4.9
Total
£m
665.8
137.6
(0.8)
136.8
0.5
3.4
(10.4)
(2.3)
—
At 31 October 2020
2.8
306.7
12.9
474.3
(2.9)
793.8
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
Share capital
£m
2.8
—
—
—
—
—
—
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)
306.2
12.9
351.7
(7.8)
665.8
The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements.
A final dividend of 2.6p per ordinary share has been proposed. See note 9 to the Group financial statements.
As at 31 October 2020 the Company had distributable reserves of £474.3m (2019: £351.7m). When required, the Company can receive dividends from
its subsidiaries to further increase distributable reserves.
Included within retained earnings is the Company’s own shares held by the Group’s Employee Share Ownership Plan Trust (“ESOP”), see note 26 of the
Group financial statements for details.
136
Chemring Group PLC Annual report and accounts 2020
Notes to the parent company financial statements
1. Property, plant and equipment
Detailed disclosure of property, plant and equipment was not considered necessary due to its immaterial value. The Company had no capital
commitments as at 31 October 2020 or 31 October 2019.
2. Investments in subsidiaries
Cost
At 1 November 2018 and 31 October 2019
At 31 October 2020
Impairment
At 1 November 2018
Impairment
At 31 October 2019 and 31 October 2020
Carrying amount
At 31 October 2020
At 31 October 2019
Shares in
subsidiary
undertakings
£m
Loans to
subsidiary
undertakings
£m
692.5
692.5
(46.3)
(18.2)
(64.5)
628.0
628.0
6.6
6.6
—
—
—
6.6
6.6
Total
£m
699.1
699.1
(46.3)
(18.2)
(64.5)
634.6
634.6
Investment values are allocated to their respective legal entities. Where the investment value relates to an intermediate holding company, the subsidiaries
of that holding company are used to support the carrying value.
As at 31 October 2020, the net assets of the parent company exceeded the market capitalisation of the group which is an indicator of impairment which
has been considered in the Company’s impairment review.
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.
Stress testing was performed on the forecasts to consider the impact of reasonably worst case scenarios in the first five years, including significant delays
to major contracts and new product lines, followed by a 10% fall in the forecast cash flows. This would not result in an impairment to any of the
investment values being required.
There are no reasonably possible changes in assumptions that would require an impairment of investments in subsidiaries.
3. Investments in Group undertakings
Details of the Group undertakings at 31 October 2020 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
Amounts owed by subsidiary undertakings
Other receivables
Derivative financial instruments (note 22 to the Group financial statements)
Prepayments and accrued income
Within non-current assets
Amounts owed by subsidiary undertakings
2020
£m
11.6
—
0.4
0.6
12.6
189.2
189.2
2019
£m
19.7
1.1
0.2
0.5
21.5
395.1
395.1
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 0% and 8%. No interest is charged on trade and other receivables from the
date of invoice to payment. Of the £189.2m owed by subsidiary undertakings classified within non-current assets, £77.5m is contractually due in 2 to 5
years. The remainder is contractually due in less than 2 years.
Chemring Group PLC Annual report and accounts 2020
137
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the parent company financial statements continued
5. Trade and other payables
Within current liabilities
Corporation tax payable
Derivative financial instruments (note 22 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 22 to the Group financial statements)
Amounts owed to subsidiary undertakings
2020
£m
—
0.7
0.2
5.4
9.0
0.2
1.8
17.3
—
1.1
1.1
2019
£m
1.1
0.9
0.3
313.4
4.6
0.2
1.6
322.1
0.3
25.4
25.7
Interest on amounts owed to subsidiary undertakings attracts interest rates between 0% and 2%. 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
Bank borrowings – US dollar denominated
Borrowings due after more than one year
Total borrowings
An analysis of borrowings by maturity is as follows:
Borrowings falling due:
– less than one year
– within one to two years
– within two to five years
2020
£m
—
—
57.5
57.5
57.5
2020
£m
—
57.5
—
57.5
2019
£m
64.6
64.6
—
—
64.6
2019
£m
64.6
—
—
64.6
The interest incurred on the above borrowings is detailed within notes 7 and 18 to the Group financial statements.
7. Leases
The interest expense on lease liabilities is £nil. In total, payments of £0.1m were made under leasing contracts, of which £0.1m was made to repay the
principal portion of the lease. The total lease liability at 31 October 2020 was less than £0.1m.
8. Provisions
At 1 November 2019
Provided
Paid
At 31 October 2020
Legal
provision
£m
2.9
4.6
(0.8)
6.7
Total
£m
2.9
4.6
(0.8)
6.7
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.
138
Chemring Group PLC Annual report and accounts 2020
9. Preference shares
Cumulative preference shares (62,500 shares of £1 each)
2020
£m
0.1
2019
£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.
10. Share capital
Issued, allotted and fully paid
282,849,930 (2019: 282,489,995) ordinary shares of 1p each
2020
£m
2.8
2019
£m
2.8
During the year, 359,935 ordinary shares (2019: 726,631) 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.
11. Own shares
At the beginning of the year
Transactions
At the end of the year
2020
£m
7.8
(4.9)
2.9
2019
£m
7.8
—
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 (2019: nil) were acquired
and 1,113,118 ordinary shares (2019: nil) were distributed following the vesting of awards under the Chemring Group Performance Share Plan. The total
number of ordinary shares held in treasury at 31 October 2020 was 675,592 (2019: 1,788,710), with an average cost of 439.0p (2019: 439.0p) per share.
This represents 0.2% (2019: 0.6%) of the total issued and fully paid ordinary share capital.
12. Deferred tax
At the beginning of the year
Charge to income statement
Credit/(charge) to other comprehensive income
Deferred tax liability at the end of the year
The amount provided represents:
Other timing differences
2020
£m
(0.4)
(0.5)
0.1
(0.8)
(0.8)
2019
£m
(0.1)
—
(0.3)
(0.4)
(0.4)
At the balance sheet date, the Company had unrecognised tax losses of £nil (2019: £nil) potentially available for offset against future profits in
certain circumstances.
Chemring Group PLC Annual report and accounts 2020
139
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the parent company financial statements continued
13. 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 balance is
shown below:
At 1 November 2018, retirement benefit surplus
Transfer of retirement benefit surplus from subsidiary
Contributions
Other finance costs
Actuarial movements
At 31 October 2019, retirement benefit surplus
Contributions
Other finance costs
Actuarial movements
At 31 October 2020, retirement benefit surplus
Further details are set out in note 30 to the Group financial statements.
14. 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 82 to 100.
Total
£m
3.1
0.8
0.4
(0.1)
0.9
5.1
—
(0.1)
(0.9)
4.1
2020
Number
29
2019
Number
30
2020
£m
6.7
0.6
0.5
2.3
10.1
2019
£m
4.9
0.6
0.5
1.9
7.9
140
Chemring Group PLC Annual report and accounts 2020
Five-year record
For the year ended 31 October 2020
Revenue
Underlying operating profit
Non-underlying items
Operating profit/(loss)
Finance expense
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year from continuing operations
(Loss)/profit after tax from discontinued operations
Profit/(loss) attributable to equity shareholders
Intangible assets and property, plant and equipment
Working capital
Provisions
Retirement benefit surplus/(deficit)
Net current and deferred tax (liabilities)/assets
Net debt
Other
Net assets employed
Financed by:
Ordinary share capital
Reserves attributable to equity shareholders
Total equity
Basic underlying earnings per ordinary share (continuing operations)
Diluted underlying earnings per ordinary share (continuing operations)
Basic earnings/(loss) per ordinary share (continuing operations)
Diluted earnings/(loss) per ordinary share (continuing operations)
Dividend per share
As presented in the consolidated financial statements for that year.
2020
£m
402.5
54.7
(8.4)
46.3
(3.0)
43.3
(8.6)
34.7
—
34.7
348.9
85.1
(19.0)
7.6
(16.3)
(48.2)
(28.5)
329.6
2.8
326.8
329.6
15.1p
14.8p
12.3p
12.0p
3.9p
2019
£m
335.2
44.0
(12.7)
31.3
(4.6)
26.7
(3.6)
23.1
(1.2)
21.9
329.9
90.5
(17.2)
9.6
(8.5)
(75.7)
(22.8)
305.8
2.8
303.0
305.8
11.2p
11.0p
8.2p
8.1p
3.6p
2018
£m
297.4
31.0
(46.9)
(15.9)
(6.1)
(22.0)
(18.8)
(40.8)
(65.0)
(105.8)
318.9
83.7
(20.7)
7.5
(11.1)
(81.8)
(2.3)
294.2
2.8
291.4
294.2
6.9p
6.7p
(14.6)p
(14.6)p
3.3p
2017 1
£m
307.1
31.5
(26.9)
4.6
(11.3)
(6.7)
2.4
(4.3)
10.9
6.6
376.2
89.0
(15.3)
(0.6)
4.2
(80.0)
27.7
401.2
2.8
398.4
401.2
5.9p
5.8p
(1.5)p
(1.5)p
3.0p
2016 1
£m
307.3
31.1
(16.5)
14.6
(18.2)
(3.6)
1.8
(1.8)
12.9
11.1
430.8
82.0
(16.2)
(17.3)
(2.0)
(87.6)
23.7
413.4
2.8
410.6
413.4
5.0p
4.9p
(0.7)p
(0.7)p
1.3p
1. Comparative figures in the years 2016 and 2017 have been adjusted to reflect the transfer of the commoditised energetics businesses to discontinued operations.
Chemring Group PLC Annual report and accounts 2020
141
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 101 to 104. 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 45.
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
Interpretations Committee. 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 2020 and have materially
impacted the reported results or the financial position:
> IFRS 16 Leases.
The Group adopted IFRS 16 Leases with effect from 1 November 2019.
The standard fundamentally changed the accounting treatment of leased
assets, requiring that all material lease liabilities and corresponding
‘right-of-use’ assets are recognised on the balance sheet. The operating
lease rental expense previously charged to operating profit in the income
statement has been replaced by a depreciation charge for the ‘right-of-use’
assets recognised in operating profit and an interest charge on the lease
liabilities recognised in finance costs and shown in financing activity within
the cash flow. Other than these changes and the practical expedients
discussed below, our policy wording for leased assets disclosed in the
31 October 2019 financial statements remains unchanged.
The Group has adopted IFRS 16 using the modified retrospective transition
approach, which does not require the restatement of comparative figures.
Adoption of IFRS 16 resulted in right-of-use assets of £6.3m and lease
liabilities of £6.5m being recognised on the balance sheet. The weighted
average incremental borrowing rate applied to lease liabilities at the date of
initial application was 3%. The difference between the lease liability
recognised on transition and the operating lease commitments disclosed
under IAS 17 at 31 October 2019, discounted using the incremental
borrowing rate at the date of initial application, is due to the exclusion of
leases relating to low-value assets.
On transition the Group applied the following available practical
expedients permitted by the standard:
> the exclusion of leases relating to low-value assets (less than £50,000
when new); and
> the exclusion of short-term leases, being those with a lease term of
12 months or less.
ii)
The following IFRIC interpretations, amendments to existing standards and
new standards were adopted in the year ended 31 October 2020 but
have not materially impacted the reported results or the financial position:
> Amendments to IAS 19 Employee Benefits;
> Annual Improvements to IFRSs 2015–2017 Cycle; and
> IFRIC 23 Uncertainty over Income Tax Treatments.
iii) 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 2020
> Amendments to IFRS 7 Financial Instruments: Disclosures;
> Amendments to IFRS 16 Leases;
> Amendments to IAS 1 Presentation of Financial Statements; and
> Amendments to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors.
Effective for periods beginning on or after 1 January 2021
> IFRS 17 Insurance Contracts.
Effective for periods beginning on or after 1 January 2022
> Amendments to IAS 16 Property, Plant and Equipment;
> Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent
Assets; and
> Annual Improvements to IFRSs 2018-2020 Cycle.
Effective for periods beginning on or after 1 January 2023
> Amendments to IAS 1 Presentation of Financial Statements.
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.
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 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.
142
Chemring Group PLC Annual report and accounts 2020
3. Group accounting policies continued
Basis of preparation continued
In accordance with IFRS 5, the 2019 comparative figures in the consolidated
income statement and consolidated statement of cash flows and related
notes show only continuing operations. Discontinued operations are
shown as a single line item in the consolidated income statement as
required by the standard.
The financial statements are prepared under the historical cost
convention, except as described below under the heading of
“Derivative financial instruments”.
The 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.
Revenue recognition
Chemring is organised into two sectors, Sensors & Information and
Countermeasures & Energetics.
From a revenue recognition perspective, whilst Chemring operates across
the whole life cycle of its products and services, these are generally awarded
by its customers as individual contracts for the different stages rather than
being large, complex, long-term framework agreements requiring extensive
consideration of price allocation and performance obligations. As a result
we are less susceptible to judgements over revenue recognition regarding
contract performance, modifications and cancellations.
Whilst as a group we aim to develop products which can be sold on to
multiple end users and markets, in some instances, the nature of products
and services are unique to a customer and may not have an alternative use
at the point of production. In such cases, where an enforceable right to
payment exists, revenue will be recognised over time.
In a smaller number of cases, revenue also arises from milestone contracts
that contain multiple performance obligations. Often these contracts are
already divided into milestones for payment purposes, 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. In some cases milestones are achieved in one period but not
billed until the next period, leading to a timing difference with the recognition
of revenue in advance of customer billing. In this instance accrued income is
recognised as described in note 16. 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, with no
material claims and incentive payment terms, and therefore significant
judgement to determine the transaction price is not required. Typically our
contracts do not have any material variable consideration and no significant
judgement has been required around the extent to which this ought to be
recognised. The total transaction price is allocated to the performance obligations
identified in the contract in proportion to their relative stand-alone selling
prices, where stand-alone selling prices are typically estimated based on
expected costs plus contract margin.
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.
Qualifying costs to obtain a contract are not material across the Group.
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;
From time to time we enter into contracts for ‘customer-funded R&D’ where
Chemring provide a service towards the development of a technology for a
customer resulting in revenue. In certain instances, Chemring partly fund the
development effort and these can result in the recognition of a controlled asset.
• 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.
Contracts
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. Certain contracts may also require customer
acceptance testing. Once the relevant delivery obligation has been met, and
as applicable, customer acceptance received, revenue can be recognised.
The timing of payment from customers is generally aligned to revenue
recognition, though on certain contracts advance receipts are received as
disclosed in note 20. 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 where there is no enforceable right to payment for
work in progress.
Performance obligations are satisfied when the customer gains control of
promised goods or services from the contract. Customers do not typically
gain a right of return of goods.
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 the proportion of contract costs incurred for work performed to
date or completion of relevant milestones where this faithfully depicts the
transfer of control of the goods and services to the customer and does not
significantly differ from using the proportion of contract costs incurred basis.
Another significant source of Group revenue, especially within the Sensors &
Information segment, arises from time and materials contracts, where revenue
is typically accrued and billed in the following month based on work performed
to date, following which payment is typically promptly received.
Chemring Group PLC Annual report and accounts 2020
143
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Accounting policies continued
3. Group accounting policies continued
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.
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
• customer relationships
–
–
average of ten years
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
ten years (2019: 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
seven years (2019: 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
• leasehold buildings
• plant and equipment
–
–
–
up to fifty years
the period of the lease
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.
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Chemring Group PLC Annual report and accounts 2020
3. Group accounting policies continued
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to prepare for their intended use, are added to
the cost of those assets, until such time as the assets are ready for their
intended use. Once the assets are ready for their intended use, these capitalised
borrowing costs are depreciated in line with the underlying asset.
All other borrowing costs are recognised in the income statement in the
period in which they are incurred.
Government grants
Government grants are not recognised until there is reasonable assurance
that the Group will comply with the conditions attaching to them and that
the grants will be received.
Government grants for staff retraining costs are recognised as income over
the periods necessary to match them with the related costs and are
deducted in reporting the related expense.
Government grants relating to property, plant and equipment are treated
as deferred income and released to the income statement over the
expected useful economic lives of the assets concerned.
Tax
The tax expense represents the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year. Taxable profit differs
from profit as reported in the income statement because it excludes items
of income or expense that are taxable or deductible in other years, and it
excludes items of income or expense that are never taxable or deductible.
The Group’s liability for current tax is calculated using tax rates that have
been enacted or substantively enacted at the balance sheet date.
Deferred tax represents amounts expected to be payable or recoverable
on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the
computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognised for all
taxable temporary differences, and deferred tax assets are recognised to
the extent that it is probable taxable profits will be available in the future
against which deductible temporary differences can be utilised. Such assets
and liabilities are not recognised if the temporary difference arises from
goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction that affects
neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to
be recovered. Deferred tax is calculated at the tax rates that are expected
to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except where
it relates to items charged or credited directly to equity, in which case the
deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities,
when they relate to income taxed by the same tax authority, and when the
Group intends to settle its current tax assets and liabilities on a net basis.
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.
Chemring Group PLC Annual report and accounts 2020
145
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Accounting policies continued
3. Group accounting policies continued
Financial liabilities and derivative financial instruments continued
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.
Leased assets
At the lease commencement date (i.e. the date the underlying asset is
available for use), the Group recognises a right-of-use asset and a lease
liability on the balance sheet.
The lease liability is initially measured at the present value of future lease
payments, discounted using the Group’s incremental borrowing rate. The
right-of-use asset is initially measured at cost, comprising the initial value of
the lease liability, any lease payments made before commencement of the
lease, any initial direct costs and any restoration costs. The asset is recorded
as property, plant and equipment, and is depreciated over the shorter of
its estimated useful economic life and the lease term on a straight-line basis.
The finance cost is charged to the income statement over the lease term to
produce a constant periodic rate of interest on the lease liability. The lease
payment is allocated between repayment of the lease liability and finance cost.
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.
The Group has elected to account for short-term leases and leases of
low-value assets using the practical expedients. Instead of recognising a
right-of-use asset and lease liability, the payments in relation to these are
recognised as an expense in the income statement on a straight-line basis
over the lease term.
Hedge accounting principles are used for forward foreign exchange
contracts where appropriate, with movements in fair value taken to equity,
until such time as the underlying amounts of the contract mature. At
maturity or disposal of the net investment, the amounts held in equity will
be recycled to the income statement. Changes in fair value of any
ineffective portion of net investment hedges and interest rate swap
contracts are recognised in the income statement immediately.
Where derivative financial instruments do not meet the criteria for hedge
accounting principles, the changes in fair value are immediately recognised
in the income statement.
Hedges of net investments in foreign operations
Any gain or loss on the hedging instrument relating to the effective portion
of the hedge is recognised in the statement of comprehensive income and
accumulated in the translation reserve. The gain or loss relating to the
ineffective portion is recognised immediately in the income statement.
Retirement benefit costs
Payments to defined contribution retirement benefit schemes are charged
as an administrative expense in the period to which they relate. For defined
benefit schemes, the cost of providing benefits is determined using the
projected unit credit method, with actuarial valuations being carried out
at each balance sheet date. Actuarial gains and losses are recognised in the
statement of comprehensive income in full in the period in which they occur.
Past service cost is recognised immediately to the extent that the benefits
are already vested, and otherwise is amortised on a straight-line basis over
the average period until the benefits become vested.
The discount on scheme liabilities less the expected return on scheme
assets on defined benefit obligations is included within finance expense.
The retirement benefit obligation recognised in the balance sheet
represents the present value of the defined benefit obligation as adjusted
for unrecognised past service cost and as reduced by the fair value of
scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus the present value of available refunds and reductions in
future contributions to the scheme.
Share-based compensation
The Group operates equity-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.
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.
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Chemring Group PLC Annual report and accounts 2020
3. Group accounting policies continued
Provisions continued
Warranty provisions
Provisions for the expected cost of warranty obligations under local sale of
goods legislation are recognised at the date of sale of the relevant products,
based upon the best estimate of the expenditure required to settle the
Group’s obligations.
Disposal provisions
Disposal provisions relate to estimated liabilities faced by the Group in
respect of discontinued operations and other disposed entities under the
terms of their respective sale agreements.
Contingent liabilities
The Group exercises judgement in recognising exposures to contingent
liabilities related to pending litigation or other outstanding claims subject to
negotiated settlement, mediation, arbitration or government regulation, as
well as other contingent liabilities. Judgement may be necessary in assessing
the likelihood that a pending claim will succeed, or a liability will arise, and/
or to quantify the possible range of the financial settlement.
Alternative Performance Measures
In the analysis of the Group’s financial performance and position, operating
results and cash flows, APMs are presented to provide readers with additional
information. The principal APMs presented are underlying measures of
earnings including underlying operating profit, underlying profit before tax,
underlying profit after tax, underlying EBITDA, underlying earnings per
share and underlying operating cash flow. In addition, EBITDA, net debt
and constant currency 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 assists 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;
• 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 Reporting Period, the Group
continues to disclose events that it considers material, non-disclosure of which
can influence the economic decisions of users of the financial statements.
4. Chemring Group PLC – parent company
accounting policies
FRS 101 Reduced Disclosure Framework
The financial statements have been prepared in accordance with FRS 101
Reduced Disclosure Framework.
The Company operates a multi-employer defined benefit scheme including
employees of other Group companies. Following FRS 101, the scheme
assets and liabilities have been allocated across the Group companies using
a method that management considers to be the most appropriate, based
on scheme membership.
The following exemptions from the requirements of IFRS have been
applied in the preparation of these financial statements, in accordance
with FRS 101:
• share-based payments;
• financial instruments;
• fair value measurements;
• IFRS 16 Leases (paragraphs 52 and 58);
• 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 for the Company. The key
sources of estimation uncertainty are below.
Investments in subsidiaries impairment
Determining whether investments in subsidiaries are impaired requires an
estimation of the value-in-use of the legal entities to which the investments
relate. Where the investment value relates to an intermediate holding
company, the subsidiaries of that holding company are used to support the
carrying value. The value-in-use calculation requires the entity to estimate
the future cash flows expected to arise from the legal entity, and to determine
a suitable discount rate in order to calculate present value (see note 11).
In reviewing the carrying value of investments in subsidiaries, 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 investments in subsidiaries is set out in note 2
of the parent company financial statements, which shows a carrying value
of £634.6m at 31 October 2020.
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.
Chemring Group PLC Annual report and accounts 2020
147
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Accounting policies continued
5. Accounting judgements and sources of
estimation uncertainty continued
Accounting judgements
Revenue recognition
Following IFRS 15 Revenue from Contracts with Customers,
the Group 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, stage of
completion, contract terms and delivery arrangements.
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 2020 there was a provision of £5.4m 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 £5.4m.
The key uncertainties impacting taxation arise from potential changes
to legislation such as the OECD’s Base Erosion and Profit Shifting
(“BEPS”) project.
Key sources of estimation uncertainty
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:
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 2020 are set out in note 23.
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Chemring Group PLC Annual report and accounts 2020
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.
Other non-significant areas that include a degree of estimation
uncertainty
While these areas do not present a significant risk resulting in a material
adjustment, they are areas of focus for management and include:
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 2020.
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 £29.8m at 31 October 2020. Included in this balance are
individually material balances relating to Joint Biological Tactical Detection
System (£8.6m), Next Generation Chemical Detector (£12.5m) and
Perceive (£4.0m).
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 24).
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.
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 2020 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 related notes, including the accounting policies.
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 2020 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 three financial years
ended 31 October 2020. 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
£2.5m (2019: £1.8m)
4.8% (2019: 5%) of underlying profit before tax, normalised to exclude this year’s
non-underlying items
89% (2019: 94%) of total profits and losses that made up Group profit before tax
including continuing operations only
Coverage:
Key audit matters
Recurring risks
Revenue recognition
Recoverability of parent company’s investments in subsidiaries
vs 2019
◄►
◄►
Chemring Group PLC Annual report and accounts 2020
149
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Independent auditor’s report to the
members of Chemring Group PLC continued
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the
most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on:
the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit
matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters
and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures
undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and
consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Revenue recognition
(£402.5m; 2019: £335.2m)
Accrued income (£9.5m; 2019: £8.3m)
Refer to page 76 (Audit Committee Report),
page 143 (accounting policy) and page 110
(financial disclosures).
The risk
Revenue cut-off
There is a cut-off risk over the existence of
goods and services revenue due to pressures
on the Group to increase profitability and other
key metrics, increasing the risk of fraudulent
premature revenue recognition.
‘Point in time’ contracts require the Group to
determine 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 the current accounting period.
As part of our risk assessment for audit planning
purposes, we determined that accrued income
had a high degree of estimation uncertainty,
with a potential range of reasonable outcomes
greater than our materiality for the financial
statements as a whole. In conducting our final
audit work, we reassessed the degree of estimation
uncertainty to be less than that materiality.
Our response
Our procedures included
Control design: evaluating controls over the revenue
process for sale of goods recognised at a point of
time and services delivered over time, including
their operating effectiveness;
Corroborating terms: comparing the Group’s
judgement behind the timing of when control
transfers to the customer against the customer
contract for a sample of ‘point in time’ contracts.
Assessing the Group’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 forecasted to assess
stage of completion and comparing this to other
indicators such as customer certified milestones
and settled invoices;
Historical comparisons: 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 a forecasting accuracy
check to challenge the Group’s assumptions 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 forecast; and
Assessing transparency: assessing the adequacy of
the Group’s disclosures about the degree of
judgement 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 (2019: acceptable).
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Chemring Group PLC Annual report and accounts 2020
Recoverability of parent company’s
investments in subsidiaries
(£634.6m; 2019: £634.6m)
2. Key audit matters: our assessment of risks of material misstatement continued
Our response
Our procedures included
Extrapolating past forecasting accuracy: assessing
four 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:
The risk
Subjective estimate
A history of business combinations results
in significant parent company’s investments
in subsidiaries.
Refer to page 76 (Audit Committee Report),
page 144 (accounting policy) and page 137
(financial disclosures).
The Group identified an impairment indicator;
as at the balance sheet date the parent
company net assets exceeded the total market
capitalisation of the Group.
The recoverability of the carrying amount of
parent company investments is subjective
due to the inherent uncertainty involved in
forecasting and discounting future cash flows.
The effect of these matters is that, as part of
our risk assessment for audit planning purposes,
we determined that the carrying amount of
parent company investments had a high degree
of estimation uncertainty, with a potential range
of reasonable outcomes greater than our
materiality for the financial statements as a
whole. In conducting our final audit work, we
reassessed the degree of estimation uncertainty
to be less than materiality.
Our sector experience: evaluating assumptions
used, in particular those relating to operating
cash flow forecasts, when compared with our
business understanding;
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 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 estimation
uncertainty related to the impairment assessment
reflected the risks inherent in the recoverability of
the parent company’s investment in subsidiaries.
Our results
We found the Group’s assessment of the carrying
amount of parent company’s investment in
subsidiaries to be acceptable (2019: acceptable).
Chemring Group PLC Annual report and accounts 2020
151
STRATEGIC REPORTGOVERNANCEFINANCIAL 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 £2.5m (2019: £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 4.8% (2019: 5%).
Materiality for the parent company financial statements as a whole was set at £1.4m (2019: £1.35m) determined with reference to a benchmark of parent
company net assets, of which it represents 0.2% (2019: 0.2%).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.125m (2019: £0.09m), in addition to other
identified misstatements that warranted reporting on qualitative grounds. We agreed a higher threshold of £0.25m for matters only related to reclassification.
Of the Group’s eleven components, we subjected eight trading components and one non-trading component to full scope audits for Group purposes,
and one to specified risk-focused audit procedures over fixed assets 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 9% of total Group revenue, 9% 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 £0.45m to £1.4m, having regard to the mix of size and risk
profile of the Group across the components. The work on eight of the eleven 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.
We performed inspection of the work covering key audit matters at all component audit teams performing audit for Group reporting purposes.
Videoconference 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 detail, and any further work required by the Group team was then
performed by the component auditors.
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 CV-19, 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 in the accounting policies note 1 to the financial
statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and
Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
• the related statement under the Listing Rules set out on page 103 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.
152
Chemring Group PLC Annual report and accounts 2020
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.
Underlying profit before tax
£51.7m (2019: £39.4m)
Group materiality
£2.5m (2019: £1.8m)
£2.5m
Whole financial
statements materiality
(2019: £1.8m)
(2019: £0.05m to £1.35m)9393+7+7++MM
£1.4m
Range of materiality
at ten components,
including parent
(£0.45m-£1.4m)
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 emerging and 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 45 that they have carried out a robust assessment of the emerging
and 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 judgements 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.
Underlying profit before tax
Group materiality
Group revenue
£0.125m
Misstatements reported
to the Audit Committee
(2019: £0.09m)
Total profits and losses
that made up Group
2
9
2
2
[•]
[•]
82
89
94
78
(2019: 96%)
(2019: 90%)
91%
Group total assets
12 91%
profit before tax*8282+
8989+
9494+
7878+
8888+
8383+
8989+
8484+
Full scope for Group audit purposes 2020
95%
90%
Specified risk-focused audit procedures 2020
(2019: 93%)
(2019: 95%)
89
84
11
89
11
12
83
[•]
[•]
[•]
4
1
Total profits and losses
that made up Group profit
before non-underlying
items and tax*
Full scope for Group audit purposes 2019
Specified risk-focused audit procedures 2019
Residual components
*
In 2020 and 2019 audit coverage has been calculated on the above measures on
continuing operations only.
Chemring Group PLC Annual report and accounts 2020
153
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS+
9
9
+
+
9
9
+
+
L
L
+
12
12
+
+
5
5
+
+
L
L
+
2
2
+
+
9
9
+
+
L
L
+
1
1
+
+
11
11
+
+
L
L
+
12
12
+
+
10
10
+
+
L
L
+
11
11
+
+
5
5
+
+
L
L
+
2
2
+
+
4
4
+
+
L
L
+
4
4
+
+
7
7
+
+
L
L
Independent auditor’s report to the
members of Chemring Group PLC continued
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 from inspection of the Group’s regulatory and legal correspondence
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.
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, 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.
5. We have nothing to report on the other
information in the annual report and accounts
continued
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 statement
does not properly disclose a departure from the provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
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 page 104, 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.
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Chemring Group PLC Annual report and accounts 2020
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
15 December 2020
Chemring Group PLC Annual report and accounts 2020
155
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate information and website
Headquarters and registered office
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
T: +44 (0)1794 463401
F: +44 (0)1794 463374
E: info@chemring.co.uk
Website: www.chemring.co.uk
Registered number
86662
Registrars
Computershare Investor Services plc
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Bridgwater Road
Bristol
BS13 8AE
Subsidiary undertakings’ registered offices
Subsidiary undertakings in England:
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
Subsidiary undertaking in Scotland:
Troon House
Ardeer Site
Stevenston
Ayrshire
KA20 3LN
Subsidiary undertakings in the US:
23031 Ladbrook Drive
Dulles
Virginia
20166
Subsidiary undertaking in Australia:
230 Staceys Road
Lara
Victoria
Australia
3212
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 2020 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 2020
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.
156
Chemring Group PLC Annual report and accounts 2020
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Chemring Group PLC
Roke Manor
Old Salisbury Lane
Romsey
Hampshire SO51 0ZN
United Kingdom
Tel: +44 (0)1794 463401
Email: info@chemring.co.uk
www.chemring.co.uk