INNOVATING TOGETHER
TO PROTECT AND GROW
CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2021
OUR PURPOSE
Chemring helps to make the world a safer place.
Across physical and digital environments
our exceptional teams deliver innovative
protective technologies to detect and
defeat ever changing threats.
Read more on pages 4 to 9
OUR STRATEGY
Our strategy is to deliver profitable growth
by operating in markets where we have
differentiators such as niche technology
and high barriers to entry.
Read more on pages 26 and 27
TARGET GROWING
NICHES
WIN MARKET
SHARE
GROW OUR
US BUSINESS
VALUES
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.
TO DISCOVER MORE ABOUT CHEMRING PLEASE GO TO
WWW.CHEMRING.COM
STRATEGIC REPORT
01 2021 performance
02 What we do
04 Our purpose in action
Investment case
10
12 Chairman’s statement
14 Group Chief Executive’s review
18 Business model
20 Section 172 statement
21 Stakeholder engagement
24 Target markets
26 Strategy
28 Key performance indicators
32 Focus on Sensors & Information
35 Focus on Countermeasures & Energetics
38 Introduction to sustainability
43 Health and safety
46 Environment
49 Our people
54 Ethics and business conduct
57 Financial review
62 Risk management
64 Principal risks and uncertainties
72 Viability statement
73 Non-financial information statement
GOVERNANCE
74 Board of directors
76 Chairman’s introduction to governance
78 Corporate governance report
88 Audit Committee report
92 Nomination Committee report
94 Directors’ remuneration report
121 Directors’ report
FINANCIAL STATEMENTS
124 Consolidated income statement
125 Consolidated statement of
comprehensive income
126 Consolidated statement of changes in equity
127 Consolidated balance sheet
128 Consolidated cash flow statement
129 Notes to the Group financial statements
154 Parent company balance sheet
155 Parent company statement of
comprehensive income
155 Parent company statement of changes in equity
156 Notes to the parent company financial statements
160 Five-year record
161 Accounting policies
169 Independent auditor’s report to the members
of Chemring Group PLC
OTHER INFOMATION
176 Corporate information and website
2021 PERFORMANCE
FINANCIAL HIGHLIGHTS
REVENUE
£393.3m
(-2%) (+1% at constant currency)
Increase in revenue at constant currency
driven by strong performance in the Sensors &
Information segment and stable performance
in Countermeasures & Energetics.
CASH CONVERSION
105%
(2020: 110%)
Continued strong cash conversion, with an
average of 108% on a rolling 24 month basis
(2020: 108%), driven by a continued focus
on working capital disciplines.
-4.6%
UNDERLYING OPERATING PROFIT*
STATUTORY OPERATING PROFIT
£57.5m
(+5%) (+10% at constant currency)
Reflects the growth of the higher margin
Sensors & Information segment as well as
the increasing margin in Countermeasures
& Energetics through improving operational
performance, offset by a foreign
currency headwind.
£50.4m
(+9%) (+14% at constant currency)
The difference to underlying operating
profit reflects the amortisation of acquired
intangible assets and acquisition expenses
which are the only items treated as
non-underlying in 2021.
UNDERLYING OPERATING PROFIT*
GROUP
£57.5m
2021
2020
2019
£57.5m
£54.7m
£44.0m
SENSORS & INFORMATION
COUNTERMEASURES & ENERGETICS
£31.6m
£40.0m
2021
2020
2019
£31.6m
£27.4m
£26.3m
2021
2020
2019
£40.0m
£39.9m
£27.5m
Read more on pages 32 to 34
Read more on pages 35 to 37
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.
2022 OUTLOOK
The strong market for Roke’s
products and services, the
opportunities under the US
Programs of Record and the
visibility of the Countermeasures
& Energetics order book all
support improving medium-
term expectations.
KEY POINTS
- 2021 performance was in line with
the Board’s expectations with strong
performance in both segments, despite
an FX translation headwind caused by
the 10 cent weakening of the US dollar
- Roke order intake exceeded £100m
for the first time, with double digit
growth in orders, revenue and
operating profit in a positive market
- Successful acquisition and integration
of the Cubica Group, performing well
since completion in June 2021
- Continued progress in our US Sensors
Programs of Record. Further orders
received in the year for the next phase
of HMDS delivery, valued at $69m,
under the previously announced
$200m IDIQ contract. $99m EMBD
full rate production six-year contract
awarded in October 2021
- Sensors & Information underlying
operating margin increased from
20.0% to 21.6%
- Countermeasures & Energetics
underlying operating margin increased
from 15.0% to 16.2% as the UK
countermeasures site delivered strong
operational and financial performance
- Continued reduction in net debt with
strong operating cash generation and
cash conversion of 105%. Continued
scheduled capital expenditure ahead of
depreciation. Net debt to underlying
EBITDA of 0.35 times
- New policy to target a medium-term
dividend cover of c.2.5 times
underlying EPS. Proposed final dividend
increased by 23% to 3.2p, giving a total
dividend of 4.8p (3.5 times cover)
- Investment in the Group’s
manufacturing infrastructure continues
to be a key enabler to deliver
improved safety and operational
excellence. TRIF rate was down 21%
at 0.67 (2020: 0.85)
- Board’s expectations for 2022 are
unchanged. Approximately 84%
(2020: 78%) of expected 2022
revenue is covered by the order book
* 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 £41.5m (2020: £34.7m). For references to constant currency equivalents
of reported numbers please refer to page 60 for further explanation.
Chemring Group PLC Annual report and accounts 2021
01
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.
WHERE WE OPERATE
Our home markets in the UK, the US, Australia and Norway
represent some of the most advanced customer 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 2021.
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.
We achieve this by innovating at every stage of the value chain, from
research and development, through to design, manufacture and in-service
support for our sensors and detection systems, countermeasures and
energetic products.
Our customer base spans national defence organisations, security and
law enforcement agencies, as well as commercial markets such as space
and transport. We support our customers in more than 50 countries
across the globe.
Chemring is organised into two sectors:
- Sensors & Information; and
- Countermeasures & Energetics.
UK
EUROPE
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.
14%
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.
US
ASIA PACIFIC
51%
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.
5%
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 Australia and other customers
in the Asia Pacific region.
02
Chemring Group PLC Annual report and accounts 2021
SENSORS & INFORMATION
Innovation is core to solving our clients’ difficult problems.
With over 600 scientists, engineers and consultants, our Sensors &
Information sector continues to invest in technologies that
safeguard and protect in an uncertain world.
Operating across defence, national security, law enforcement and
industrial domains, we enable our clients to deliver competitive
advantage, defend their people, assets and information, and defeat
their adversaries.
Our sensor technologies detect threats with a very high degree of
confidence, be they explosive, biological, chemical, radio or cyber.
Our Roke business draws on a 60-year heritage of innovation in
sensors, communications, cyber and artificial intelligence to innovate
and apply these technologies in new ways.
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 achieve mission success. This ranges from
cutting-edge technology to enable our customers to launch rockets
and satellites into orbit, to the provision of aircraft safety systems
including oxygen mask deployment on commercial aircraft and
ejector seats for aircrew egress.
REVENUE
£146.6m
(2020: £137.2m)
REVENUE
£246.7m
(2020: £265.3m)
UNDERLYING OPERATING PROFIT
UNDERLYING OPERATING PROFIT
£31.6m
(2020: £27.4m)
2021
2020
2019
£31.6m
£27.4m
£26.3m
£40.0m
(2020: £39.9m)
2021
2020
2019
£40.0m
£39.9m
£27.5m
Chemring Group PLC Annual report and accounts 2021
03
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PURPOSE IN ACTION
WE’RE PROTECTING...
THROUGH DEVELOPING
MARKET-LEADING TECHNOLOGIES
Across Chemring, our subject matter
experts use our highly specialised facilities
to develop and deliver world-leading
solutions that protect both the physical
and digital environments. Innovation and
technology are at the heart of our approach.
Our expertise and competencies in Sensors & Information make us well
placed to respond to our customers’ priorities of achieving chemical,
biological and cyber resilience and information advantage. Similarly, our
technical know-how and manufacturing capabilities in Countermeasures &
Energetics underpin the development and delivery of products that can
defeat the latest threats to our customers’ airborne and naval platforms
and meet their demanding requirements for precision high energy solutions.
In our Sensors & Information sector, Chemring Sensors & Electronic
Systems (“CSES”) is developing innovative solutions based upon next-
generation sensor capabilities, including integrating sensors onto
unmanned platforms for vapour, liquid, solid and explosive hazard
detection. This use of unmanned systems minimises the direct risk to the
personnel involved. CSES’s other innovations include sensor technologies
for standoff detection and identification, which enable the contactless
detection of chemical and biological threats, thereby avoiding the
possibility of contamination for operators and their equipment.
Roke is also following the customer mission by rapidly producing new
end-to-end capability solutions, right through from initial event detection
to taking the operational decision. This transformative work contributes
to our customers achieving digital superiority, which enables them to
manoeuvre whilst constraining the manoeuvrability of the adversary and
can include Roke’s expertise in machine augmented intelligence and
automation where the human operator is supported by artificial
intelligence technology that increases effectiveness and continually learns.
In our Countermeasures & Energetics sector, we have deep technical
expertise in high-hazard engineering and manufacturing. We are
protecting our leadership position by focusing on facility modernisation,
automation and operational excellence. Our Countermeasures &
Energetics businesses work closely with our customers to ensure that we
have a detailed understanding of their evolving requirements to inform the
development of solutions that can form the basis of future integrated
threat protection systems. For example, in our energetics businesses,
Chemring Energetic Devices (“CED”) is exploring next-generation digital
technology for the missiles and space market where technology evolution
is rapid, and in Chemring Energetics UK (“CEUK”), we are assessing candidate
materials and manufacturing processes for next-generation solutions.
TOTAL RESEARCH AND DEVELOPMENT SPEND
2021
2020
2019
£62m
£62m
£56m
0
10
20
30
40
50
60
70
04
Chemring Group PLC Annual report and accounts 2021
OUR PURPOSE IN ACTION
During the year Chemring acquired Cubica Technology Limited and
Q6 Holdings Limited, collectively the “Cubica Group”. Q6 owns
80% of the issued shares of Vigil AI Limited (“Vigil AI”), which has
technology providing state-of-the-art solutions to enable online
platforms to detect imagery relating to child sexual exploitation
globally. The acquisition of the Cubica Group significantly improves
our ability to develop effective user-driven capabilities, at pace and
scale, so that customers can anticipate and manage new and
emerging threats and risks.
Our products and services are underpinned by our rich intellectual
property. Cubica’s in-depth technical expertise and creativity in
machine learning, artificial intelligence and data fusion will be shared
and leveraged across our business to protect and grow our
positions in defence, national security and commercial sectors in
the UK and abroad. As part of our technology-based strategy, Roke
will continue to prioritise and invest in advanced scientific research
and innovation that drives commercial value, strengthening our
ability to attract and retain the best talent.
Cubica’s autonomy and Sensing for Asset Protection with
Integrated Electronic Networked Technology (“SAPIENT”) related
technology, with support from external and internal investment,
will accelerate digital transformation across the armed forces,
automating the control of unmanned intelligence, surveillance,
target acquisition, and reconnaissance (“ISTAR”) assets such as
unmanned aerial vehicles (“UAVs”) and ground robots. Wider
applications of this technology include international security
markets such as oil and gas pipeline protection and critical
national infrastructure protection.
Chemring Group PLC Annual report and accounts 2021
05
“ Tackling harmful content and activity online
remains a key priority in the UK and
worldwide. Cubica and Vigil AI’s ground-
breaking work in the digital policing and
internet policing domain means we are well
positioned to capitalise on opportunities
with a number of high-profile programmes.”
Paul MacGregor, Roke Managing Director
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PURPOSE IN ACTION continued
WE’RE PROTECTING...
BY INVESTING IN OUR PEOPLE
Chemring people are at the heart of our
business. Engaged, motivated, empowered
and appropriately skilled colleagues are
integral to our success – both individually
and collectively.
The COVID-19 (“CV-19”) crisis continues to impact on our colleagues,
their families and our communities both inside and outside of Chemring
and our ongoing support for all our stakeholders has never been more
important. Our mission is to ensure that all our colleagues are able to
enjoy a safe, inclusive, collaborative environment, where every individual
has the opportunity to grow and develop and contribute to the
development and success of the business. Using our mantra of Innovating
to Protect, we have looked at different ways we can both protect our
colleagues and also help them develop. Investing in developing our people
drives our ability to innovate for our customers.
Our investment in our people spans all levels and roles. From apprentices
starting out on their career, to veterans moving to civilian life, operations
colleagues taking their first steps into management roles, and senior
colleagues taking on the challenge of a different role or a new location.
Our ethos is to ensure that we identify and nurture the capabilities and
ambitions we need to support our Chemring business now and for the
future. Our colleagues are diverse, ambitious and invested in our purpose.
We are committed to ensuring that we continue to support the
identification, attraction, hiring, development and promotion of all talent.
Our continued focus on diversity, equity and inclusion supports us in
ensuring we harness all available talent regardless of race, gender, sexual
orientation or neurodiversity. This is an area where we continue to
develop both globally and locally and which will be central to our success
in the coming years.
Our purpose of Innovating to Protect goes far beyond our products and
services to our customers. Protecting our colleagues and being innovative
in our approach to supporting and developing our people are core to our
business. Here are some examples of how we are putting that into action:
OUR PURPOSE IN ACTION
THE CED CHICAGO COHORTS
The Chemring Energetic Devices (“CED”) team in Chicago is one of
the first cohorts to complete a full year of the Leading our People
development programme. While a global programme, the content
and delivery are localised to suit specific requirements; global voice,
and local accent. Colleagues participating in the programme receive
training in six core topics to support their development as effective
managers and leaders.
“ Each month had a different topic such
as health and safety policies, employee
engagement, and coaching and talent
retention. The main benefit of the
programme to me was getting new
perspectives from my peers within the
programme. Also, I gained a better
understanding of working together with
those people to accomplish specific goals
and add more value to the business.
Leading our People is now live in every
part of the business – one of the first
initiatives of its kind at Chemring.”
Jonathan Cerpa, Production Manager at CED, who participated in
the first programme roll-out
06
Chemring Group PLC Annual report and accounts 2021
OUR PURPOSE IN ACTION
REAL-TIME EMPLOYEE ENGAGEMENT MEASUREMENT
Chemring recognised that an essential part of our cultural journey
and strive for operational excellence was the need to measure
progress, obstacles and milestones as the transformation
progressed. Working with a specialist supplier, a new employee
engagement platform was born, taking the Chemring-specific
cultural blueprint and mapping it directly into a digital platform.
The digital platform, called Employee Voice, provides real-time,
continuous metrics, analysis and insights across all geographies,
business units and employee groups. In doing so, Chemring has
instant answers to the relevant what, where, who and why
questions and can offer data-supported input to local management
teams on what is going well and what might need alternative
interventions or additional support.
Employee Voice provides up-to-the-minute rich data and a
snapshot of what is happening across the Company at any time, a
valuable tool in our drive for operational excellence.
“ Having real-time insights into how
colleagues are feeling has been incredibly
useful. For example, when we introduced
new safety measures on campus, we had
instant feedback from colleagues as to how
they felt about these as well as suggestions
for what else we should consider.”
Sarah-Jayne Richardson, HR Director, Roke
Chemring Group PLC Annual report and accounts 2021
07
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PURPOSE IN ACTION continued
WE’RE PROTECTING...
BY LIVING OUR VALUES
Every day our people live, breathe
and demonstrate our brand values
in everything they do.
Whether working on protecting national security infrastructure,
testing components for missions into space or protecting our people
from harm with health and safety, everyone has a critical role to play.
We are proud of the work our people do and the way they shine
with our brand values of Safety, Excellence and Innovation.
08
Chemring Group PLC Annual report and accounts 2021
SAFETY
OUR JOURNEY TO ZERO HARM
As one of our core values, safety is at the heart of everything we
do at Chemring. We believe that all injuries are preventable and
that everyone should be able to go home safely at the end of every
working day. Our approach is to establish a strong, proactive safety
culture through the interaction between people, plant and process.
This is called our Journey to Zero Harm.
Journey to Zero Harm is about identifying and taking further
actions to reduce the likelihood of anyone getting hurt by focusing
on people, plant and process. For plant, we are regularly reviewing
and strengthening the integrity of our assets. For process, we are
investing in new automated production systems and improving our
processes. For people, that is where our safety culture comes in
and the part all our colleagues play in making sure we operate in
safe conditions using safe behaviours.
During the year, we launched a new internal campaign called Spot
it, Stop it, Share it, encouraging our colleagues to step up their
focus on reporting unsafe conditions, behaviours and near misses.
Following up those near miss reports with corrective actions is
essential, and that is where leadership and the health and safety
teams on site make a real difference.
We need a strong safety culture in Chemring, and we will continue
to build on that as we journey to zero harm, ensuring we protect
our employees every step of the way.
“ My primary role is to ensure that all
of the sites and the businesses across
Chemring have the support they need so
we can ensure people return home safely
to their families, their friends and their
loved ones every single day.”
Steve Messam, Group HSE Director
EXCELLENCE
REINSTATE PROJECT
Roke was chosen as a key technology partner on the REINSTATE
project, led by Rolls-Royce, to accelerate the delivery of future
aerospace servicing capabilities.
Work on the project is supported by the UK Government’s ATI
Programme, which provides funding for research and development,
and will continue for the next three years. The programme is also
supported by other SMEs and a number of UK universities.
Roke engineers will lead on the development of smart algorithms
that use data from engine installed inspection sensors to analyse
and provide rapid in-service diagnostics. Key benefits will include
increased availability of aircraft and reduced through-life expense.
This project builds on the success of another Innovate UK
supported programme, INSPECT, in which Rolls-Royce and its
partners developed a novel optical inspection solution to support
the IntelligentEngine vision. Roke helped to deliver this project,
developing inspection algorithms to enable probes to inspect
engine components automatically every time an aircraft lands.
These initiatives, collectively, look to meet the complex needs of
the sector, and make the UK a competitive centre for the global
aerospace industry.
INNOVATION
CHEMRING COMPONENTS REACH MARS
At 14:55 CST on 18 February 2021, the NASA Mars Perseverance
Rover touched down on Jezero Crater, Mars.
Chemring Energetic Devices (“CED”) was proud to have supplied
this historic mission and incredible feat of engineering with a
number of critical, innovative components. NASA integrated 179
NASA Standard Initiators (“NSIs”) and 54 other CED devices onto
the Mars Perseverance Rover. The components were designed, built
and tested by CED, in a culmination of years of innovation,
dedication and teamwork.
The final descent from the Martian atmosphere to the surface is
commonly referred to as the “seven minutes of terror”. Success
hinges on a complex sequence of events unfolding without a hitch,
from the inflation of a giant, supersonic parachute to the
deployment of a jet-powered “sky crane”. This is where the
majority of CED’s components were integrated, all of which
executed flawlessly during the mission.
The Rover, which weighs 2,260lbs and is 10ft long, will spend the
next two years collecting and caching samples from the Mars
ecosystem, seeking signs of past microbial life and studying Mars’
potential habitability.
CED has been the sole source provider for NSIs, and CED’s
hardware has been on every single Mars Rover that NASA has
sent to the Red Planet.
Chemring Group PLC Annual report and accounts 2021
09
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INVESTMENT CASE
INVESTING IN SUSTAINABLE
PERFORMANCE AND GROWTH
Over the past three years considerable
progress has been made in building a
higher quality technology-based business.
In 2020 Chemring completed the sale of its commoditised energetics
businesses. In doing so, the Group retired significant operational
and reputational risk and repositioned the Group around a common
purpose – helping to make the world a safer place. Across physical and
digital environments, Chemring’s exceptional teams deliver innovative
protective technologies to detect and defeat ever-changing threats. These
actions have been enhanced by a focus on embedding a culture of safety
and continuous improvement across the Group.
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 around the
world. Chemring’s long-term prospects remain strong and are
underpinned by a number of opportunities to drive future growth
in revenues, profit and cash flows. These include:
WELL POSITIONED IN NICHE SEGMENTS
Against the background of stable 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. In a
post-pandemic world, Chemring’s experience in
biological detection also presents further
opportunity as biological security becomes
increasingly important.
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.
The Group’s capabilities are well aligned to both
the US and UK Government’s emphasis on
cyber-security, active cyber effects, secure
networks, secret cloud, artificial intelligence,
data science and autonomy. This validates our
Sensors & Information segment strategy, and
should increase the opportunity space for Roke
to deploy its market-leading technologies.
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.
The acquisition of the Cubica Group
demonstrates our ability to identify suitable
acquisition opportunities to enhance and
accelerate Roke’s technology base and
growth potential.
10
Chemring Group PLC Annual report and accounts 2021
OPPORTUNITIES PIPELINE
SIGNIFICANT
ORGANIC REVENUE
GROWTH
POTENTIAL
STRONG
OPERATING CASH
GENERATION
MARKET-LEADING
NICHE POSITIONS
IN BOTH SECTORS
IMPROVING
OPERATING
MARGINS
IMPROVING
QUALITY AND
VALUE CREATION
GROWING ORDER
BOOK
SUSTAINABLE
AND GROWING
DIVIDEND
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 few 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.
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, growing 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.
Chemring Group PLC Annual report and accounts 2021
11
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHAIRMAN’S STATEMENT
DELIVERING LONG-TERM
SUSTAINABLE GROWTH
PURPOSE AND STRATEGY
Chemring’s purpose is to help make the world a safer place. Across
physical and digital environments, our exceptional teams deliver innovative
protective technologies to detect and defeat ever-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 sustainable, 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.
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, constantly innovating
to enable our customers to deliver competitive advantage and to defend
their people, assets and information.
The Countermeasures & Energetics sector strategy continues to be one
of strengthening and protecting our niche, 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.
Read more on pages 26 and 27
As a Board we remain open to accelerating our growth opportunities
through selective acquisitions that meet a strict set of criteria, enhance
shareholder value and fit in with our wider growth plans. This activity is
principally focused on the Sensors & Information sector where we see
greatest opportunities for long-term growth.
Elsewhere we will continue to focus our efforts 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.
HEALTH, SAFETY AND THE ENVIRONMENT
At Chemring our goal is zero harm. This goes beyond the management of
safety and recognises that we have a duty to ensure that we take
appropriate actions to minimise the impact of our operations on many
different levels, from employee wellbeing to climate change.
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 one of the core values within
Chemring and is central to our operating philosophy. A key part of our
health, safety and environmental (“HSE”) strategy is the collation and
analysis of data at every level to focus on the underlying causes of
incidents and the impact of our operations. This facilitates appropriate
decision making at all levels of our organisation.
Carl-Peter Forster
Chairman
“ In a year in which we have continued to
operate under the restrictions resulting
from the CV-19 pandemic, it is again
pleasing to report on the progress that
the Group has made on all fronts
during 2021.”
The actions taken in recent years to build
a stronger, higher quality business are
clearly demonstrated, both in the Group’s
financial performance, and in the progress
made on our path to long-term
sustainable growth.
BUILDING FOR A BETTER FUTURE
At Chemring we are fully committed to long-term sustainable value
creation through safe, sound and ethical business conduct at all times at all
of our locations. None of this would be possible without the commitment
and dedication of our people who have continued to adapt their behaviour
and working practices, ensuring that we meet our customers’ critical
needs whilst performing to the highest standards.
Despite the challenges brought about by the ever-changing environment,
the Group has once again delivered a strong performance that was in line
with our expectations. On behalf of the Board I wish to acknowledge the
professionalism and loyalty of all our colleagues, at every level, across
Chemring, and we thank them and their families for their ongoing support.
12
Chemring Group PLC Annual report and accounts 2021
of Chemring’s governance framework and ethical business conduct and
compliance. Further details on the Committee’s activities during the year
can be found on page 54 of this report.
Good governance and ethical behaviour underpin our evolving sustainability
agenda and ensure that we operate safely, responsibly and in compliance
with applicable legislation in all of the jurisdictions in which we operate.
DIVIDENDS
The Board continues to recognise that dividends are an important
component of total shareholder returns. The Board’s objective is for a
growing and sustainable dividend and now believes it is appropriate for
the Group to target a medium-term dividend cover of c.2.5 times
underlying EPS, subject inter alia to maintaining a strong financial position.
The Board is recommending a final dividend in respect of the year ended
31 October 2021 of 3.2p (2020: 2.6p) per ordinary share. With the
interim dividend of 1.6p per share (2020: 1.3p), this results in a total
dividend of 4.8p (2020: 3.9p) per share, an increase of 23% on the prior
year. If approved, the final dividend will be paid on 31 March 2022 to
shareholders on the register on 11 March 2022. In accordance with
accounting standards, this final dividend has not been recorded as a
liability as at 31 October 2021.
BOARD OF DIRECTORS
Stephen King, Chairman of the Audit Committee, accepted a second
three-year appointment as a non-executive director in November 2021.
Andrew Davies and I will complete our second three-year terms as
non-executive directors in April 2022 and May 2022 respectively, and
we have both accepted the Board’s offer to take up a third and final
three-year appointment.
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 2022
performance are unchanged, with the balance of its trading performance
in 2022 expected to be similar to 2021 with a slight bias towards the
second half of the financial year.
The Group order book as at 31 October 2021 was £501m, of which
£358m is currently expected to be recognised as revenue in 2022, giving
excellent visibility for the full year.
Whilst there may be some macro-economic uncertainty surrounding the
level and timing of defence spending as a result of the CV-19 pandemic,
our multiple market-leading positions across different geographies and
sectors, together with our investment in high technology niches, provide
attractive long-term growth opportunities. This, together with the
Group’s strong balance sheet, gives the Board confidence that
Chemring’s long-term prospects remain strong.
Carl-Peter Forster
Chairman
14 December 2021
In addition, we are extending our current data platform to better assess
the environmental impact of our operations and the targets we need to
set in support of our wider sustainability commitments. Improving our
sustainability performance plays a key role in the way we both run our
businesses today, and how we plan for the future. Further details on this
can be found in the sustainability section of this report.
Whilst working towards creating a more proactive culture we are also
keen to ensure that we understand and learn more from any incident. To
date good progress has been made on our journey to become a high
reliability organisation.
Read more on pages 43 to 48
PEOPLE AND OUR COMMUNITY
Chemring people are at the heart of our business and they are our
greatest asset. Engaged, motivated, empowered and appropriately skilled
colleagues are integral to our success as it is through them that we will
progress our strategy and deliver long-term growth.
In 2021 we have continued to build on the progress made in developing
the Chemring culture with actions delivered both within the individual
business units and globally to ensure Chemring colleagues are able to do
their best work every day.
Despite the challenges of the pandemic, we have continued our focus on
developing our people. The Leading our People development programme
which was launched for all line managers globally in 2020 continued
throughout 2021 with tailored support being provided as the challenges
of leadership changed through the pandemic. We also developed a formal
Early Careers development programme in the UK for all new graduates
and apprentices joining in autumn 2021. This programme, which runs
alongside the business unit programmes, provides early leadership and
people skills development and the opportunity for building a network
across the business units of this key group.
Finally, 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. Laurie was able
to hear directly from these groups their views on working at Chemring, as
well as being able to share with them the work of the Board. These
groups included colleagues at all levels from operators to the senior
leadership teams at Chemring Countermeasures UK and Roke, as well as
at CSES in the US. The groups Laurie met were overwhelmingly positive
about their experiences of working at Chemring throughout the
pandemic, and pointed to many examples of support from the Group
during the year. Laurie also gathered input as to how we can continue to
develop, and colleagues provided clear and constructive input on areas
such as enhancing cross business collaboration which are being acted on.
Read more on pages 49 to 53
GOVERNANCE AND ETHICS
We continue to strengthen our policies and procedures across the Group
to ensure that our businesses operate with integrity and transparency and
to the highest ethical standards. We have also maintained our focus on
creating an inclusive culture across the Group, where everyone does the
right thing and takes personal responsibility for their actions.
The bedrock of our governance is our Code of Conduct and our
Operational Framework, both of which bind our purpose, values,
behaviour, policies and procedures, and provide the necessary governance
to enable us to operate in a safe, consistent and accountable way. Our
Ethics & Compliance Committee, which meets regularly throughout the
year and is chaired by me, is responsible for the oversight and monitoring
Chemring Group PLC Annual report and accounts 2021
13
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS GROUP CHIEF EXECUTIVE’S REVIEW
CREATING SUSTAINABLE VALUE
AND OPPORTUNITY FOR ALL
OUR STAKEHOLDERS
INTRODUCTION
Despite the many challenges that we have continued to face as a
consequence of the CV-19 pandemic, the strength and resilience of both
our operating model and our people have enabled us to deliver in support
of our customers and their critical needs. Once again, the response of our
people and their families has been outstanding and this collective effort
has delivered results for the year that were in line with our expectations.
The Group is now well positioned with a robust strategy and relentless
focus on safety, operational excellence and growth.
HEALTH AND 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 as
we have continued to operate under the restrictions caused by CV-19.
Whilst the pandemic has placed additional burden on every business with
the need to implement and adhere to strict guidelines in order to maintain
a safe environment, we have delivered good progress in line with our
broader HSE strategy. We continue to focus our efforts across the areas
of control of major accident hazards, injury reduction and HSE risk
management. Alongside this we will ensure that we focus on the right
skills, tools, processes and that support is in place at every level and for all
employees across the business.
Our focus on injury prevention continues to place more emphasis on
safety measures for people working from home and their mental and
emotional wellbeing, and is now supported by the newly formed Healthy
Workplace Committee.
In 2021 our total recordable injury frequency rate was 0.67 compared to
0.85 in 2020, a decrease of 21%.
TOTAL RECORDABLE INJURY FREQUENCY RATE
-21%
2021
2020
0.67
0.85
Michael Ord
Group Chief Executive
“ The focus that we have placed in
recent years on building a higher quality
technology-based business has resulted in
another period of strong operational and
financial performance. Chemring is now
a stronger business with increasing
opportunities for development
and growth.”
14
Chemring Group PLC Annual report and accounts 2021
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
At Chemring our purpose is to help make the world a safer place,
delivering innovative protective technologies to detect and defeat
ever-changing threats. Our commitment to protection goes beyond our
customers. It embraces many different stakeholders including our people
and our suppliers, and it recognises the need for us to contribute towards
a sustainable future.
From an ESG perspective 2020 was a baseline year for Chemring where
we focused our efforts on gaining a better understanding of our data,
identifying gaps within our knowledge, completing the reshaping of the
portfolio to focus on protective technologies and putting in place the
infrastructure and governance to effectively manage our
sustainability agenda.
We continued to build on this progress in 2021 with the overriding goal
of elevating our ESG-related activity.
A crucial first step in this, and a priority goal for the year, was to
undertake a materiality assessment to identify the areas of greatest
concern to our stakeholders, and to identify those areas and activities
where our actions could have greatest positive impact.
The materiality assessment process identified the most significant
environmental, social and governance topics, both risks and opportunities,
and ranked them according to feedback from a selection of stakeholders
including customers, suppliers, employees and investors. Key focus areas
included health and safety, diversity and inclusion, reducing climate change,
and employee wellbeing.
In addition to the materiality exercise we conducted a mapping exercise
to consider the alignment of the organisation to the United Nations
Sustainable Development Goals (“UN SDGs”) and assess the
opportunities to measure and manage Chemring’s contribution to
the UN SDGs going forward.
Both exercises have been fundamental to enabling us to set appropriate
near and longer-term targets, against which our progress can be
measured. These include our commitment to reduce our direct (scope 1)
and indirect (scope 2) emissions year on year, to be carbon neutral by
2030 (scope 1 and 2), and net zero by 2050. Our broader sustainability
goals and near term targets, including our commitment to greater diversity
and representation, are disclosed in greater detail in the sustainability
section of this report.
To facilitate and ensure a consistent approach to sustainability across all
our businesses, a Group Sustainability Committee was formed during the
year. The Committee, which I chair as the Board director responsible for
sustainability across the Group, consists of members of the Group’s
Executive Committee with responsibility for health and safety,
environmental impact, people, ethics and business conduct, supported by
internal subject matter experts. The Committee will shape and monitor
the implementation of our sustainability agenda and ensure that the
Group continues to make progress in the future.
As a business we are committed to building a sustainable company of
which all our stakeholders can be proud, both now and in the future.
2021 PERFORMANCE
It is pleasing to report a strong set of results for the financial year despite
the uncertainty and disruption caused by CV-19. This performance, which
was in line with the Board’s expectations, demonstrated good progress
against our strategic goal of balancing short-term performance with
longer-term value creation.
Revenue was down 2% to £393.3m (2020: £402.5m), underlying operating
profit was up 5% to £57.5m (2020: £54.7m) and statutory profit before
tax was up 13% to £48.8m (2020: £43.3m). Underlying earnings per share
was up 12% to 16.9p (2020: 15.1p).
The US dollar weakened in the year with the average exchange rate to
sterling increasing from $1.28 to $1.38, resulting in a significant headwind
as 53% of the Group’s revenue was US dollar denominated (2020: 54%).
On a constant currency basis the Group’s revenue was up 1% to
£408.0m, underlying operating profit was up 10% to £60.1m and
underlying earnings per share was up 17% to 17.7p.
The underlying operating profit from continuing operations of £57.5m
(2020: £54.7m) resulted in an underlying operating margin of 14.6% (2020:
13.6%). The increase in margin reflects the impact of double digit revenue
growth at the high margin Roke information security business and the focus
on improved operational performance at the UK countermeasures site.
The strategic goal for our Roke business was to focus on growth across all
its business areas in the UK, and leverage international markets, especially
the US, to give Roke a wider international presence.
Roke performed in line with our expectations and again delivered double
digit growth in orders, revenue and underlying operating profit, and
maintained strong margins despite increased investment in people,
infrastructure and product development.
The markets for electronic warfare (”EW”), cyber-security and data
science capabilities, in which Roke is a leading participant, continue to be
buoyant. In order to align with customer needs we opened a Roke office
in the North West of England to align with customers establishing a hub
for national security in that area. This also aligned with Roke’s strategy to
grow talent and develop new hubs across the UK.
The acquisition of the Cubica Group in June 2021 was an excellent
strategic and cultural fit for Roke. It offers leading edge capability in
machine augmented intelligence and autonomy, where Roke’s customers
require an exponential increase in capability to achieve digital advantage
against complex threats. Roke plans to invest c.£1m in Cubica to support
accelerated growth.
We are increasingly focusing our efforts within the US market through
Roke USA, Inc. Following the first EW order to the US Department of
Defense (“US DoD”) that was secured in 2020, Roke USA has continued
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.
Also in the US our sensors business continued its strategic focus on
building winning solutions to convert current US Programs of Record into
low rate and full rate production, and on investing in modifying existing
technologies to enable them to be deployed on a wider number of
platforms including autonomous ground and air systems.
Chemring Group PLC Annual report and accounts 2021
15
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS GROUP CHIEF EXECUTIVE’S REVIEW continued
The specialised and niche nature of our energetic devices products was
demonstrated in February 2021 when the Perseverance Rover landed on
the surface of Mars with 233 Chemring devices on board the mission.
These were designed, developed and manufactured at our Chicago facility
and were all critical to the success of the mission.
Following the change of administration in the US and the continuation of
CV-19 working restrictions, the process of doing business with some
government departments has, on occasion, slowed and has resulted in
some Countermeasures & Energetics orders being delayed.
Nonetheless, during the year Chemring Countermeasures USA received
multiple orders totalling $111m, including a five-year IDIQ contract for the
supply of M206 and MJU-7A/B infra-red decoy flares. Deliveries under
these contracts started in 2021 and will run through to 2024 giving
improved visibility and strengthening our positions in key markets.
In the UK, Chemring Energetics secured a long-term partnering
agreement with Martin Baker Aircraft Company. This 15-year agreement
will see Chemring supply propellants and pyro-mechanical devices for use
in a wide range of Martin Baker’s ejection seats (including those on the
F-35) and is valued at up to £160m.
The future focus for the Countermeasures & Energetics sector remains on
safeguarding and growing the Group’s market-leading positions in niche
markets through the modernisation and automation of our sites, and in
improving our competitiveness through investment in lean manufacturing
capabilities. We will also 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 across the Group.
The Group’s order book at 31 October 2021 was £501m (2020: £476m),
of which approximately £358m is scheduled for delivery during 2022,
representing cover of approximately 84% (2020: 78%) of expected 2022
revenue. The increase since 31 October 2020 is attributable to strong
order intake at Roke which exceeded £100m for the first time in its
history. On a constant currency basis using the 2020 closing exchange
rates the order book would be £514m.
This leaves £143m of the order book to be delivered in FY23 and beyond.
At this stage, this provides approximately 25% cover of expected FY23 revenue.
Net debt at the year end was £26.6m (2020: £48.2m), operating cash
inflow of £80.0m (2020: £82.4m) represented 105% (2020: 110%) of
EBITDA. Our two-year rolling average cash conversion has been 108%
(2020: 108%), showing that the ongoing focus on working capital
improvements is delivering long-term, sustainable positive results.
2021 PERFORMANCE continued
The US DoD’s explosive hazard detection Husky Mounted Detection
System (“HMDS”) program, which encompasses concurrent development
and manufacturing, continues to progress as expected. Further delivery
orders of $69m were received during the year under the previously
awarded $200m IDIQ contract, providing visibility on this Program of
Record well into FY22. The production phase is progressing as planned
and customer deliveries were made on schedule throughout the year.
We expect this program to run for the next decade providing a recurring
level of business as the US Army continues its objective of upgrading and
sustaining its HMDS fleet. The new fleet will comprise both refurbished
and new HMDS and this activity will run alongside technology
upgrade programs.
The sole source Joint Biological Tactical Detection System (“JBTDS”)
program is progressing as planned through the engineering and
manufacturing development (“EMD”) phase and a customer
procurement decision is expected in FY22.
The second biological program is the Enhanced Maritime Biological
Detection System (“EMBD”), an automated sensor system to rapidly
detect, collect and identify airborne biological warfare agents, where the
customer is the US DoD. In October 2021, following the successful
completion of the low rate initial production (“LRIP”) contract that was
awarded in May 2020, the US DoD approved and awarded a full rate
production contract. The value of this sole source framework contract is
up to $99m with an estimated completion date of December 2027. An
initial delivery order of $16m will see deliveries being made in the final
quarter of FY22 and FY23.
The Aerosol and Vapor Chemical Agent Detector program (“AVCAD”) is
also progressing through its EMD phase. The next customer procurement
decision point is still expected to be at the conclusion of the EMD phase
in FY22. Chemring remains one of two contractors currently selected for
this competitive program, expected to be worth up to $800m.
The future focus for the Sensors & Information sector continues to be on
expanding the Group’s product, service and capability offerings in the
areas of national security, artificial intelligence and machine learning,
tactical electronic warfare and information security, and securing positions
on the US DoD Chem/Bio Programs of Record.
We will continue to actively explore opportunities to expand and
accelerate the Sensors & Information sector capabilities and offerings,
both by leveraging opportunities in adjacent markets and through further
bolt-on acquisitions.
In FY21 the focus for our Countermeasures & Energetics sector was to
continue the process of modernisation and automation, and improving its
competitiveness through investment in lean manufacturing capabilities.
The investment in the expansion and automation of our Tennessee facility
to meet the US DoD’s expected demand for countermeasures has
continued during the year. Construction work of buildings was completed
and despite a delay in the supply of complex manufacturing equipment to
site due to suppliers being impacted by CV-19, the new facility began its
commissioning process in October 2021. During the year £6m was spent
on the facility, bringing the total spend to date to £43m. The expected
total cost of the programme remains approximately £50m. The facility will
now go through a period of commissioning and testing as production
gradually ramps up. We expect to generate revenue from the new facility
in the second half of 2022.
16
Chemring Group PLC Annual report and accounts 2021
CONCLUSION
Despite being another challenging year in which we have continued to
operate under the restrictions of CV-19, I am delighted with the financial
and operational progress that has been made across Chemring. We have
continued the process of transformation that was launched in 2019 as we
build a stronger, higher quality and technology focused business. We
maintain our relentless focus on safety and on living our shared values of
Safety, Excellence and Innovation. In doing so we are driving our collective
purpose: delivering innovative protective technologies to help make the
world a safer place.
I would like to thank all my colleagues across Chemring for their
determination, hard work and support. The progress made over the past
few years would not have been possible without their collective efforts.
With market-leading innovative technologies and services that are critical
to our customers, our niche market positions and our strong balance
sheet, I look to the future with excitement and confidence in our
continued success.
Michael Ord
Group Chief Executive
14 December 2021
CULTURE
Our success is built by our people and much of this depends on having the
right people, in the right place, at the right time. This is achieved through a
balance of effective recruitment, opportunities for development, great
managers, and a productive and inspiring culture. The Chemring culture
must ensure that all our colleagues are able to enjoy a safe, inclusive,
collaborative environment, where every individual has the opportunity
to grow and develop and contribute to the development and success
of the business.
Our investment in nurturing a culture built on our core values of Safety,
Excellence and Innovation, which started with a full review in every part
of the business in early 2019, is now embedded in every part of the
business. However, there is still work to do and we continue to review
and enhance our approach to how best to focus on developing an
inclusive, respectful and diverse culture.
The impact of the CV-19 pandemic has been felt in many parts of the
business and the ability to bring colleagues together in person has been
significantly impacted. Similarly the opportunity to meet with customers
and to host third parties at our locations has been reduced with the
primary requirement to keep our colleagues, communities and families
safe. As restrictions ease the opportunity to interact and collaborate in
real time provides the opportunity for more work to be done in support
of the cultural journey.
Making sure that we have an appropriately diverse pool of talent within
the organisation is a key enabler and our wider focus on diversity, equity
and inclusion has further developed this year. The establishment of a
strategy and framework of activity to ensure progress towards this
important cultural and behavioural element has been a key milestone in
2021. Starting with ensuring corporate and personal awareness of the
importance of a diverse population, an inclusive culture and systems that
help support equality and drive equity, a programme of workshops is now
in place for all our senior leaders and managers. This will continue through
2022 when a programme of mentoring and sponsorship for less well
represented populations within the Group will commence.
We will continue to focus throughout 2022 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.
TRANSFORMATION OF THE YEAR
AWARD, 2020 WINNER
In September 2021 Chemring was delighted to receive the
Transformation of the Year Award at the annual PLC Awards.
This award recognises companies that have transformed themselves
during the period under review in a way likely to substantially
improve the business and offer the prospect of long-term value,
while considering the impact on its various stakeholders.
The voting panel looked for companies whose prospects have
been transformed, with a focus on revenue visibility, increased
profitability, improved governance, stakeholder accountability
and sustainable financial results.
Chemring Group PLC Annual report and accounts 2021
17
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BUSINESS MODEL
CREATING VALUE
We focus on providing innovative capability solutions that reliably
meet our customer requirements on time, and every time.
WHAT WE DO
KEY STRENGTHS
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.
WIN ORDERS
We operate in niche segments of the
international defence and security market.
Our focused investments ensure we are
competitively positioned to offer
advanced and dependable 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
performance and superiority of our
products. In Sensors & Information, we
maintain our technological leadership to
meet ever more demanding customer
requirements.
DELIVER SOLUTIONS
We focus on providing innovative and
competitive solutions that meet our
customer requirements efficiently and on
time. In addition to our capital and
technology investments, we also invest in
continuous improvement – a key element
of minimising the cycle time from order
to delivery.
EMPLOYEES
We have a highly skilled and knowledgeable
workforce operating in specialist capability areas.
SUPPLIER COLLABORATION
Key partnerships with our suppliers to enhance
customer value.
CUSTOMER RELATIONSHIPS
We have long-term, high-quality relationships in
“Five Eyes” (the US, the UK, Canada, Australia
and New Zealand) defence and intelligence
markets and opportunity-specific relationships in
selected other markets where we can
apply our capabilities.
FACILITIES
We are investing in our facilities, including
increasing automation to deliver our products
safely, securely and efficiently.
S E N S O R S & INFORMATION
S AFETY
I NVEST
INNOVATING
TO PROTECT
D
E
L
I
V
E
R
I
N
N
O
V
A
T
I
O
N
WIN
E
C
N
E
L
EXCEL
C
O
UNTERMEASURES & E N E R G E
S
T I C
Our sectors
Our values
Our strengths
18
Chemring Group PLC Annual report and accounts 2021
OUR VALUES
OUTCOMES
STAKEHOLDER VALUE
SAFETY
We prioritise safety in everything we do.
- We ensure we operate safely and
manage risk.
- We promote best safety practices
across our operations and beyond.
- We are committed to ensuring we
minimise our impact on the
environment.
EXCELLENCE
We are focused on ensuring we
consistently meet high standards in all
that we do.
- A culture of continuous improvement
is core to our approach.
- We act to ensure that we maintain and
deliver operational excellence.
- We always deliver on our promises.
INNOVATION
We create innovative solutions to our
customers’ challenges.
- We inspire imaginative solutions.
- We work together to turn ideas into
technologies and solutions.
- We value collaboration and sharing
experience.
INVESTMENT
Our investment in property, plant and
equipment in the year totalled £26.9m. In
addition, we invested £62.0m in product
development, of which £51.4m 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
£88.9m
(2020: £98.9m)
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 2021, the
conversion ratio was 105%, reflecting strong
operating cash generation and the continued
focus on managing working capital.
UNDERLYING CASH CONVERSION
105%
(2020: 110%)
CUSTOMERS
We provide innovative solutions to satisfy
our customers’ requirements.
INVESTORS
We return money to our shareholders
through dividends and, through successfully
executing our strategy, we grow the value of
their investment over time.
EMPLOYEES
We provide development opportunities and
a safe, stimulating and rewarding working
environment for all of our employees.
SUPPLIERS
We form strong relationships with our
suppliers who partner with us to deliver
innovative solutions, and are supported
consequently through our procurement of
their goods and services.
COMMUNITIES
We make a positive contribution to the
communities in which we operate by actively
supporting the development of local
prosperity through highly skilled jobs.
DIVIDENDS
For the year ended 31 October 2021, our
dividend will be 4.8p per share (2020: 3.9p), an
increase of 23% on the prior year, subject to the
approval of the final dividend at the Annual
General Meeting.
GOVERNMENTS
Through paying taxes in the jurisdictions in
which we operate, we support the
development of public infrastructure and
services such as healthcare, transport
systems, policing and education.
DIVIDEND
4.8p
(+23%)
Chemring Group PLC Annual report and accounts 2021
19
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 78 to 87. 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
INTERESTS OF EMPLOYEES
- Our purpose in action
- Investment case
- Business model
- Target markets
- Strategy
- Our purpose in action
- Stakeholder engagement
- Health and safety
- Our people
FOSTERING BUSINESS RELATIONSHIPS WITH
SUPPLIERS, CUSTOMERS AND OTHERS
- Business model
- Stakeholder engagement
IMPACT OF OPERATIONS ON THE
COMMUNITY AND THE ENVIRONMENT
- Target markets
- Strategy
- Ethics and business conduct
- Introduction to sustainability
- 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
20
Chemring Group PLC Annual report and accounts 2021
4
10
18
24
26
4
21
43
49
18
21
24
26
54
38
43
46
49
54
78
10
21
78
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 of
HOW WE ENGAGE
- Regular all-hands meetings and team briefings
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 2021
21
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STAKEHOLDER ENGAGEMENT continued
ENGAGING WITH
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 Chief
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
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.com) 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 of
- Dividends paid
suppliers in the Chemring Compliance Portal
- Total shareholder return
- Environmental, social and governance metrics
OUTCOMES
- Collaborative, long-term relationships
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
22
Chemring Group PLC Annual report and accounts 2021
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. We also
recognise the impact of our business on wider society and our
responsibility to contribute to a sustainable future for all.
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.
HOW WE ENGAGE
- Our community investment policy confirms our commitment to support
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
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 2021
23
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TARGET MARKETS
BUILDING LEADING POSITIONS
Chemring is an international technology
company. Our home markets, where we
have a significant organisational footprint,
are the US, the UK, Europe and Australia.
Despite the economic impact of the CV-
19 global pandemic, overall defence
expenditure has continued to rise, with
only a few countries diverting planned
defence spend to their pandemic
response. Some nations have actually
increased their short-term defence spend
as part of a specific effort to stimulate
their domestic economies.
US
The US has the world’s largest defence budget and our US businesses
are well placed to benefit from this strong market environment.
President Biden’s budget request for FY22 suggests that the new
Biden-Harris administration is looking to create a modernised force
structure with a strong emphasis on technological sophistication and
military readiness. The US DoD’s element of the overall $753bn national
defence and security budget is $715bn with the additional $38bn being
used to fund defence-related activities at the Department of Energy,
Federal Bureau of Investigation and other agencies. This represents a
non-inflation adjusted increase of 1.7%. We note the US budget’s
continuing resolution funds government operations at current levels
through to mid-February 2022. At that point the budget must be adopted
or another continuing resolution passed.
Competition with China and a pivot away from the Middle East towards the
Indo-Pacific region are dominant in the planning assumptions, and throughout
the budget request there is a strong focus on advanced capability enablers and
R&D. Several of the identified priorities for targeted investment such as artificial
intelligence, electronic warfare (“EW”), hypersonic technology, cyber and
quantum computing can create opportunities for us to deploy Group-wide
capabilities and technologies, particularly those in our Sensors & Information
sector. Moreover, the need to counter emerging biological threats through
threat reduction, infectious disease surveillance, biosecurity, and medical
countermeasure R&D will also play into our strengths in the same sector.
The President’s request also includes a $12bn request for an additional 85
F-35 Lightning II aircraft which continues to drive demand in our
countermeasures business. Finally, potential exists for FY22 US defence
spending to be at a level greater than the President’s request, with the
House of Representatives Armed Services Committee having backed a
proposal to increase US DoD spending to $740bn – that is $25bn more
than proposed by the President’s administration. Next, this will require
Senate approval.
GLOBAL SALES
% of Chemring’s global sales (2017 - 2021)
UK 28%
USA 50%
Europe 12%
rest of the world 2%28+
Middle East and
Asia Pacific 8%
24
Chemring Group PLC Annual report and accounts 2021
50
+
12
+
8
+
2
+
+
+
+
+
P
UK
Following November 2020’s £16.5bn uplift for defence spending, the UK
Government’s defence and national security priorities as set out in March
2021’s Integrated Review of Security, Defence, Development and Foreign
Policy (“IR”) align well to those of the US, and signal a strong and growing
demand for our capabilities.
The UK’s future priorities as set out in the IR are very well aligned to
those of the US, and include the creation of new military and security
constructs that are data and intelligence driven, with Science and
Technology (“S&T”) being positioned as a key element of UK soft power.
Against this backdrop there is a strong pivot towards the acquisition of
high technology capabilities in the areas of cyber, artificial intelligence,
data-science, EW, unmanned/autonomous systems and space. Our
capabilities in the Sensors & Information sector, particularly in Roke, fit
very well with these growing requirements.
By means of an example, digital integration across all defence domains will
be key and a £1.5bn investment will be provided over the next decade to
build and sustain a “Digital Backbone” that will be part of underpinning
armed forces modernisation. An investment of some £500m will be made
in Cyber and Electro-Magnetic Activities (“CEMA”) to enhance the UK’s
overall capabilities in this environment, with £200m also provided over ten
years to deliver an enhanced land EW and signal intelligence (“SIGINT”)
capability for the army.
The IR also confirms that the US is the UK’s most important strategic ally,
and our position in the US marketplace enabled through a Special Security
Agreement (“SSA”) reinforces the potential to leverage our capability
across both these markets. As a part of this approach we have formed a
dedicated Roke USA entity, staffed with US nationals, which will play an
important role in developing new opportunities for us.
As the sole source supplier of countermeasures to the UK’s F-35 Lightning
II fleet we are well placed to benefit from the IR’s stated plans to expand
the UK F-35 fleet size beyond the 48 aircraft already ordered.
For Chemring, the UK MOD accounts for less than 10% of Group
revenues; however, it is an important partner for developing and qualifying
new products, a role that will gain increased significance with these new
capability priorities.
EUROPE
Near-term European defence spend is growing as several countries are
looking to approach the recommended NATO commitment.
Real-term European defence expenditure grew about 2% in 2020, with
average spend among European NATO members reaching 1.64% of GDP.
While this figure represents a continuation of the steady increases seen in
recent years, it still falls short of NATO’s recommended target for defence
spend, namely 2% of GDP. This is despite the negative effect of the CV-19
pandemic on the European economy that has caused an overall GDP
contraction of c.7%.
The budgets of the major European defence actors – France, Germany,
Italy and the UK – all have an upwards trend. While the planned UK
budgetary increases and areas of focus have already been outlined it
should also be noted that France and Germany are continuing with their
existing expenditure commitments even after implementing significant
investment programmes to sustain their national industries confronted by
the pandemic.
Although we continue to vie with highly capable competitors and national
champions in Europe, we have succeeded in selling countermeasures, EW
systems and improvised explosive device (“IED”) detectors to several
European customers including Germany, France, Italy and Spain. In
addition, we provide energetic materials and components to several
leading prime contractors across the region. While the ultimate economic
impact of the pandemic on European defence budgets has yet to fully
evolve, the near-term outlook for the European market is potentially
positive, with a number of niche opportunities for our capabilities.
AUSTRALIA
Australia is Chemring’s fourth home market and is investing to modernise
its defence capabilities.
Australia has a well-equipped military, with capability provided by major
international contractors as well as highly capable local suppliers. In
response to what it sees as a deteriorating regional environment, the
Australian Government has plans to increase its total defence spending
over the next decade from AU$195bn to AU$270bn. Associated with this
budgetary increase is a simultaneous objective to foster a robust and
resilient indigenous industrial base. Chemring Australia provides the
Commonwealth with an on-shore capability in countermeasures
manufacture, building on shared manufacturing know-how from across
the Group. It is positioned to benefit from the global F-35 Lighting II
programme as it shares with our countermeasures business in the US the
production of countermeasures for the international F-35 operator base.
The recently announced Australia – United Kingdom – United States
(“AUKUS”) tripartite security alliance confirmed that the UK and the US
intend to share with Australia their expertise in security and defence
related S&T including in cyber, artificial intelligence and quantum
computing. AUKUS covers three of Chemring’s home markets, and the
even greater co-operation that this pact will engender has potential to
create new opportunities for the Group’s capabilities.
Chemring Group PLC Annual report and accounts 2021
25
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STRATEGY
SUSTAINABLE GROWTH
Our strategy is to continue to deliver profitable growth by
operating in markets where we have differentiating technology
and there are significant barriers to entry.
TARGET GROWING SEGMENTS
Despite the CV-19 global pandemic, macro-level world defence
budgets are continuing to grow at a rate of 2–3% per year.
However, at a more granular level some refocusing of specific
capability priorities can be anticipated. Our customers’ strategic
context continues to evolve and the demand for capabilities in
CEMA, artificial intelligence and autonomous systems is growing
significantly. Other capabilities, such as countermeasures, will
continue to remain relevant in the contested environment that
militaries operate in so funding will persist, whereas others,
outside the scope of our solution offerings, are declining as
military needs change.
Our strategy is to continue to focus on growing segments of the
defence and security market based on our in-depth understanding
of our customers’ mission priorities with targeted investment in
innovation and solution development, primarily in the Sensors &
Information sector.
WIN MARKET SHARE
In addition to targeting threat-focused growth segments, we also
aim to win market share by focusing on meeting established
customer needs in an effective and competitive manner. Our largest
current investment is in the Countermeasures & Energetics sector
to expand capacity at our manufacturing operations in the US to
respond to the continuing demand for airborne countermeasures
driven by air platform sales including the F-35 Lighting II.
GROW OUR US BUSINESS
Our US businesses deliver more than half the Group’s revenue, and
our businesses in both Countermeasures & Energetics and Sensors
& Information are well placed on a range of critical US customer
programmes including highly classified activities and substantial
Programs of Record. This positioning provides the basis for
developing strategic relationships across the US defence enterprise
as well as delivering insight into future military requirements, which
will be invaluable as we grow in the world’s largest defence market.
26
Chemring Group PLC Annual report and accounts 2021
Our principal risks are documented on pages 64 to 71
STRATEGY IN ACTION
In the US, we are building on our established position on the
HMDS and EMBD Programs of Record to capture the JBTDS
biological detection and AVCAD chemical detection Programs of
Record, as well as continuing to build our position for growth
markets including unmanned systems and detect-to-treat capabilities.
In the UK, we are building scale and accelerating Roke’s growth as
shown by our bolt-on acquisition of the Cubica Group with
specialist capabilities in artificial intelligence, machine learning, data
fusion and autonomy. Cubica also brings significant additional
research and development expertise as we invest in next-
generation technologies and expand our product, service and
capability offerings.
ORDER BOOK
£501m
+5%
2021
2020
2019
£501m
£476m
£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
the extrusion capacity required for next-generation flare
production. Elsewhere, we continue with our programme of
significant investment in safety and automation as part of creating
a robust group of high-performing manufacturing facilities.
ORDER INTAKE
£431m
-1%
2021
2020
2019
STRATEGY IN ACTION
In Countermeasures & Energetics we take a holistic approach to
our countermeasures activities. 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 we have established a Roke presence in
the US to help leverage our land electronic warfare support
products to the US customer base.
REVENUE
£393m
-2%
2021
2020
2019
£431m
£437m
£411m
£393m
£402m
£335m
Chemring Group PLC Annual report and accounts 2021
27
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.
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.
The KPIs that the Board and senior management utilise to assess Group
performance are set out below. All financial KPIs refer to continuing
operations and therefore exclude businesses classified as discontinued
and held for sale.
STRATEGIC PRIORITY
SAFETY
KPI
1
2
3
NUMBER OF ENERGETIC
EVENTS CAUSING HARM
OR INJURY
NUMBER OF NEAR MISS
AND POTENTIAL HAZARD
REPORTS
TOTAL RECORDABLE
INJURIES NUMBER AND
FREQUENCY RATE
NUMBER
2
(2020: 1)
2021
2020
3,518
(2020: 2,320)
2
1
2021
2020
3,518
2,320
14
(2020: 18)
2021
2020
RATE
0.67
(2020: 0.85)
2021
2020
14
18
0.67
0.85
ORDERS
4
ORDER INTAKE
GROUP
£431m
(2020: £437m)
5
ORDER BOOK
GROUP
£501m
(2020: £476m)
REVENUE
6
REVENUE
GROUP
£393m
(2020: £402m)
SENSORS & INFORMATION
SENSORS & INFORMATION
SENSORS & INFORMATION
COUNTERMEASURES
& ENERGETICS
COUNTERMEASURES
& ENERGETICS
COUNTERMEASURES
& ENERGETICS
DESCRIPTION
WHY IS IT A KPI?
2021 PERFORMANCE
Number of energetic events
causing harm or injury.
Number of near miss and potential
hazards reported.
Number of recordable injuries per
200,000 man hours worked.
Order intake is measured at expected sales value
Order book is measured at expected sales value
Revenue is measured at sales value less any
and represents the last 12 months’ activity.
and indicates future potential.
applicable sales taxes.
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.
There were two events this year,
compared to one last year. One
event resulted in burn injuries that
prevented the employee from
returning to work, while the other
required only first aid treatment.
As we journey towards our goal of
zero harm we need a workforce that
is fully engaged and proactive in
reporting unsafe actions and
conditions. One measure is the
reporting of near misses, providing
us with the opportunity to learn and
prevent accidents from happening. It
is very encouraging therefore to see
a 52% increase in near miss
reporting, resulting in fewer
accidents and incidents this year.
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.
We had 14 employee injuries this
year, compared to 18 last year. This
resulted in a further reduction in our
recordable injury rate, from 0.85 to
0.67. There were no fatalities during
the year.
The trend of order intake gives an indication of
The level of order book, in particular for delivery
The trend of revenue gives an indication of both
market conditions and our competitiveness
in the next year, gives a degree of confidence in
the state of the end market and our businesses
within our markets.
expected future financial performance.
ability to execute orders on time to satisfy
customer needs.
Order intake across the Group has remained robust at £431.0m (2020: £436.6m) despite the impact of
Group revenue was in line with our expectations,
the weaker US dollar, with Roke seeing order intake exceeding £100m for the first time and the release of
with strong performance in the Sensors &
further delivery orders on the HMDS IDIQ contract, as well as orders awarded to the US
Information segment, offset by a foreign
countermeasures businesses. The comparator year benefited from our Australian business receiving a
currency headwind.
$107m multi-year contract for the supply of countermeasures for the F-35. The order book was up 5% to
£501m (2020: £476m), with £358m currently due as revenue in FY22, approximately 84% coverage of
FY22 targeted revenue.
28
Chemring Group PLC Annual report and accounts 2021
STRATEGIC PRIORITY
SAFETY
KPI
1
2
3
NUMBER OF ENERGETIC
EVENTS CAUSING HARM
NUMBER OF NEAR MISS
TOTAL RECORDABLE
AND POTENTIAL HAZARD
INJURIES NUMBER AND
OR INJURY
REPORTS
FREQUENCY RATE
2
(2020: 1)
3,518
(2020: 2,320)
NUMBER
14
(2020: 18)
RATE
0.67
(2020: 0.85)
DESCRIPTION
WHY IS IT A KPI?
2021 PERFORMANCE
A process safety event is one of the
This indicates employee awareness
key strategic safety risks of the
business. This indicator measures
of hazards and the greater the
reporting the more engaged our
those events that have caused injury
people are.
or harm.
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.
There were two events this year,
compared to one last year. One
As we journey towards our goal of
We had 14 employee injuries this
zero harm we need a workforce that
year, compared to 18 last year. This
event resulted in burn injuries that
is fully engaged and proactive in
prevented the employee from
reporting unsafe actions and
returning to work, while the other
conditions. One measure is the
resulted in a further reduction in our
recordable injury rate, from 0.85 to
0.67. There were no fatalities during
required only first aid treatment.
reporting of near misses, providing
the year.
us with the opportunity to learn and
prevent accidents from happening. It
is very encouraging therefore to see
a 52% increase in near miss
reporting, resulting in fewer
accidents and incidents this year.
ORDERS
4
ORDER INTAKE
GROUP
£431m
(2020: £437m)
5
ORDER BOOK
GROUP
£501m
(2020: £476m)
REVENUE
6
REVENUE
GROUP
£393m
(2020: £402m)
SENSORS & INFORMATION
SENSORS & INFORMATION
SENSORS & INFORMATION
2021
2020
£176m
£149m
2021
2020
£114m
£87m
2021
2020
£147m
£137m
COUNTERMEASURES
& ENERGETICS
2021
2020
£255m
£288m
COUNTERMEASURES
& ENERGETICS
2021
2020
£387m
£389m
COUNTERMEASURES
& ENERGETICS
2021
2020
£246m
£265m
Number of energetic events
causing harm or injury.
Number of near miss and potential
Number of recordable injuries per
hazards reported.
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.
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 businesses
ability to execute orders on time to satisfy
customer needs.
Order intake across the Group has remained robust at £431.0m (2020: £436.6m) despite the impact of
the weaker US dollar, with Roke seeing order intake exceeding £100m for the first time and the release of
further delivery orders on the HMDS IDIQ contract, as well as orders awarded to the US
countermeasures businesses. The comparator year benefited from our Australian business receiving a
$107m multi-year contract for the supply of countermeasures for the F-35. The order book was up 5% to
£501m (2020: £476m), with £358m currently due as revenue in FY22, approximately 84% coverage of
FY22 targeted revenue.
Group revenue was in line with our expectations,
with strong performance in the Sensors &
Information segment, offset by a foreign
currency headwind.
Chemring Group PLC Annual report and accounts 2021
29
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS KEY PERFORMANCE INDICATORS continued
A CLEAR INSIGHT INTO OPERATIONAL
AND FINANCIAL PROGRESS
STRATEGIC PRIORITY
UNDERLYING OPERATING PROFIT AND MARGIN
UNDERLYING EARNINGS PER SHARE
WORKING CAPITAL AND INVENTORY
NET DEBT AND CASH FLOW
KPI
7
UNDERLYING OPERATING
PROFIT
GROUP
UNDERLYING OPERATING
MARGIN
GROUP
£57.5m
(2020: £54.7m)
14.6%
(2020: 13.6%)
8
UNDERLYING EARNINGS
PER SHARE
16.9p
(2020: 15.1p)
2021
2020
16.9p
15.1p
9
WORKING CAPITAL
GROUP
£84.4m
(2020: £85.1m)
10
INVENTORY
GROUP
£80.7m
(2020: £91.3m)
SENSORS & INFORMATION
SENSORS & INFORMATION
CHANGE FROM PREVIOUS YEAR
SENSORS & INFORMATION
SENSORS & INFORMATION
2021
2020
£31.6m
£27.4m
2021
2020
21.6%
20.0%
COUNTERMEASURES &
ENERGETICS
COUNTERMEASURES &
ENERGETICS
2021
2020
£40.0m
£39.9m
2021
2020
16.2%
15.0%
up 12%
(2020: up 35%)
2021
12%
2020
35%
COUNTERMEASURES &
COUNTERMEASURES &
ENERGETICS
ENERGETICS
£38.3m
£38.8m
£46.1m
£46.3m
2021
2020
2021
2020
£19.8m
£24.8m
£60.9m
£66.5m
2021
2020
2021
2020
NET DEBT: UNDERLYING
UNDERLYING OPERATING
11
EBITDA
0.35x
(2020: 0.65x)
0.35x
2021
2020
0.65x
CASH FLOW
£80.0m
(2020: £82.4m)
12
2021
2020
£80.0m
£82.4m
CONVERSION OF
UNDERLYING EBITDA INTO
UNDERLYING OPERATING
CASH
105%
(2020: 110%)
2021
2020
105%
110%
DESCRIPTION
Underlying operating profit excludes non-underlying items that, by their size or nature,
need to be separately disclosed to properly understand the Group’s underlying quality
of earnings. Underlying operating margin is calculated as underlying operating profit
divided by revenue.
Calculated as underlying earnings after
tax divided by the number of shares in
issue.
WHY IS IT A KPI?
Underlying operating profit provides a consistent year-on-year measure of the
trading performance of the Group’s operations. A focus on operating margin
allows the impact of changes in revenue and cost base to be monitored, enabling
comparisons to be made of management performance and trading effectiveness.
The measurement of underlying EPS
reflects all aspects of the Group’s
income statement including the
management of interest and tax.
Working capital is defined as
Inventory is measured at cost.
Measured as net debt divided by
Cash flow from operating activities
underlying EBITDA for the previous
before tax outflows, non-underlying
12 months.
items and pension payments.
inventories, trade and other receivables,
less trade and other payables excluding
payroll related and other liabilities
totalling £28.8m (2020: £28.2m).
Efficiently turning profit into cash
demands a degree of control over
The primary focus for improvement in
This is a measure of leverage
working capital is inventory.
within the business and is a
This is a key measure to ensure
profit turns into cash in short order.
working capital.
banking covenant.
2021 PERFORMANCE
The underlying operating profit increased by 5% 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 12% in
2021, driven by increased underlying
operating profit and lower interest and
taxation costs.
Working capital as a percentage of
Inventory decreased, as did advance
This has decreased in 2021, as
Operating cash conversion again
revenue was consistent at 21% year
payments from customers, reflecting
underlying EBITDA has increased
exceeded 100% as our focus on the
on year, demonstrating the continued
the timing of customer procurement in
and net debt has decreased.
effective management of working
effective management of working capital.
Countermeasures & Energetics.
capital was maintained.
30
Chemring Group PLC Annual report and accounts 2021
STRATEGIC PRIORITY
UNDERLYING OPERATING PROFIT AND MARGIN
UNDERLYING EARNINGS PER SHARE
WORKING CAPITAL AND INVENTORY
NET DEBT AND CASH FLOW
UNDERLYING OPERATING
UNDERLYING OPERATING
UNDERLYING EARNINGS
KPI
7
PROFIT
GROUP
£57.5m
(2020: £54.7m)
MARGIN
GROUP
14.6%
(2020: 13.6%)
9
WORKING CAPITAL
GROUP
£84.4m
(2020: £85.1m)
10
INVENTORY
GROUP
£80.7m
(2020: £91.3m)
SENSORS & INFORMATION
SENSORS & INFORMATION
CHANGE FROM PREVIOUS YEAR
SENSORS & INFORMATION
SENSORS & INFORMATION
2021
2020
2021
2020
£31.6m
£27.4m
£40.0m
£39.9m
2021
2020
2021
2020
COUNTERMEASURES &
COUNTERMEASURES &
ENERGETICS
ENERGETICS
21.6%
20.0%
16.2%
15.0%
2021
2020
£38.3m
£38.8m
2021
2020
£19.8m
£24.8m
COUNTERMEASURES &
ENERGETICS
COUNTERMEASURES &
ENERGETICS
2021
2020
£46.1m
£46.3m
2021
2020
£60.9m
£66.5m
8
PER SHARE
16.9p
(2020: 15.1p)
2021
2020
16.9p
15.1p
up 12%
(2020: up 35%)
2021
12%
2020
35%
11
12
NET DEBT: UNDERLYING
EBITDA
UNDERLYING OPERATING
CASH FLOW
0.35x
(2020: 0.65x)
£80.0m
(2020: £82.4m)
0.35x
2021
2020
0.65x
2021
2020
£80.0m
£82.4m
CONVERSION OF
UNDERLYING EBITDA INTO
UNDERLYING OPERATING
CASH
105%
(2020: 110%)
2021
2020
105%
110%
DESCRIPTION
Underlying operating profit excludes non-underlying items that, by their size or nature,
Calculated as underlying earnings after
need to be separately disclosed to properly understand the Group’s underlying quality
tax divided by the number of shares in
of earnings. Underlying operating margin is calculated as underlying operating profit
issue.
divided by revenue.
WHY IS IT A KPI?
Underlying operating profit provides a consistent year-on-year measure of the
trading performance of the Group’s operations. A focus on operating margin
allows the impact of changes in revenue and cost base to be monitored, enabling
comparisons to be made of management performance and trading effectiveness.
The measurement of underlying EPS
reflects all aspects of the Group’s
income statement including the
management of interest and tax.
Working capital is defined as
inventories, trade and other receivables,
less trade and other payables excluding
payroll related and other liabilities
totalling £28.8m (2020: £28.2m).
Inventory is measured at cost.
Measured as net debt divided by
underlying EBITDA for the previous
12 months.
Cash flow from operating activities
before tax outflows, non-underlying
items and pension payments.
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.
2021 PERFORMANCE
The underlying operating profit increased by 5% 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 12% in
2021, driven by increased underlying
operating profit and lower interest and
taxation costs.
Working capital as a percentage of
revenue was consistent at 21% year
on year, demonstrating the continued
effective management of working capital.
Inventory decreased, as did advance
payments from customers, reflecting
the timing of customer procurement in
Countermeasures & Energetics.
This has decreased in 2021, as
underlying EBITDA has increased
and net debt has decreased.
Operating cash conversion again
exceeded 100% as our focus on the
effective management of working
capital was maintained.
Chemring Group PLC Annual report and accounts 2021
31
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
FOCUS ON
SENSORS & INFORMATION
KEY FACTS
REVENUE
£146.6m
(2020: £137.2m)
UNDERLYING OPERATING PROFIT
£31.6m
(2020: £27.4m)
ORDER BOOK
£114m
(2020: £87m)
UNDERLYING OPERATING MARGIN
21.6%
(2020: 20.0%)
STATUTORY OPERATING PROFIT
£25.9m
(2020: £21.0m)
32
Chemring Group PLC Annual report and accounts 2021
OUR PURPOSE IN ACTION
ELECTRONIC WARFARE
Within the electronic warfare sector we deliver complete
electronic surveillance capabilities to detect, identify and locate
radio frequency (“RF”) emissions in the electromagnetic spectrum
(“EMS”). Capabilities range from tactical man-packs to unattended
ground sensors to vehicle-mounted operations, enabling
commanders to sense deeper into the battlespace and identify
threats at long range. Our Resolve and Perceive products are
currently on trial with a number of different US Army divisions
where customer feedback has been excellent. Roke USA continues
to support the customer with a view to securing further orders
from this potentially significant market.
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, law enforcement 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.
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 US 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 and accelerate
Roke’s capabilities and offerings, both through further bolt-on acquisitions
and by leveraging opportunities in adjacent markets and territories. Roke
USA, Inc. now provides the platform from which we are transitioning the
electronic warfare (“EW”) and other technologies created in the UK and
commercialising them in the US. In 2022 we expect to see additional
investment of approximately £2m in business development and marketing
expenses as Roke USA becomes established and pursues EW opportunities.
In the UK, we are building scale and accelerating Roke’s growth as shown
by our bolt-on acquisition of the Cubica Group with specialist capabilities
in artificial intelligence, machine learning, data fusion and autonomy.
Cubica also brings significant additional research and development
expertise as we invest in next-generation technologies and expand our
product, service and capability offerings.
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.
In the US, the $715bn FY22 President’s Budget Request for the US DoD
identifies a need to modernise information and cyber-security systems,
has a focus on research and development (“R&D”) for new technologies,
and specifically highlights the need to counter emerging biological threats.
For this latter priority threat reduction, infectious disease surveillance,
biosecurity and medical countermeasure R&D will be critical.
In the UK, the Integrated Review, Defence Command Paper and Defence
and Security Industrial Strategy were published in March 2021. These
documents provide a comprehensive view of the threats and challenges that
the UK faces, and collectively aggregate to produce a resilience-based policy
framework that fuses defence and security drivers with prosperity drivers.
In both these home markets, the need to keep pace with rapidly evolving
and complex threats aligns well with our Sensors & Information strategy.
The clear emphasis placed on cyber, artificial intelligence, data science, EW
and unmanned/autonomous systems should increase the opportunity
space for Chemring to deploy its market-leading technologies in these
areas of growing requirement.
PERFORMANCE
Revenue for Sensors & Information increased by 7% to £146.6m (2020:
£137.2m) and underlying operating profit increased by 15% to £31.6m
(2020: £27.4m), as underlying operating margin improved to 21.6% (2020:
20.0%). 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 10% to £151.5m and underlying operating profit would
have been up 19% to £32.6m. The statutory operating profit for the year
was £25.9m (2020: £21.0m).
In the UK, the markets for EW, cyber-security and data science
capabilities, in which Roke is a leading participant, have remained buoyant
in the period. Roke delivered double digit growth in orders, revenue and
underlying operating profit and has maintained strong margins despite
increased investment in people, infrastructure and product development.
This includes the establishment of a Roke presence in the North West of
England to align with customers establishing a hub for national security in
that area and aligns with Roke’s strategy to grow talent and develop new
hubs across the UK.
The acquisition of the Cubica Group in June 2021 is an excellent strategic
and cultural fit for our Roke business. It offers leading edge capability in
machine augmented intelligence and autonomy, where Roke’s customers
require an exponential increase in capability to achieve digital advantage
against complex threats. Roke plans to invest c.£1m in Cubica to support
accelerated growth. This investment will be focused on research and
development, infrastructure and security. Cubica has added further
market-leading capabilities to Roke’s technology portfolio. The integration
has progressed to plan and the business is performing well. Tackling
harmful content and activity online remains a key priority in the UK and
worldwide and Cubica’s ground-breaking work in the digital and internet
policing domains means we are well positioned to capitalise on
opportunities with a number of high-profile programmes.
In the US our Sensors business continued to focus on both the delivery
phase of the HMDS Program of Record and on the engineering and
manufacturing development (“EMD”) and testing phases of the biological
and chemical detection Programs of Record.
Key developments in the year on the major US Programs of Record are
summarised below.
Chemring Group PLC Annual report and accounts 2021
33
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON continued
PERFORMANCE continued
The US DoD’s explosive hazard detection HMDS program, which
encompasses concurrent development, trialling and manufacturing,
continues to progress as expected. Further delivery orders of $69m were
received during the year under the previously awarded $200m IDIQ
contract, providing visibility on this Program of Record well into FY22.
The production phase is progressing as planned and customer deliveries
were made on schedule throughout the year.
In the US, the HMDS and EMBD programs provide 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 detection Programs of Record and the EW opportunity. 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.
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 growing and
upgrading its HMDS fleet. The new fleet will comprise both refurbished
and new HMDS and this activity will run alongside technology
upgrade programs.
The sole source Joint Biological Tactical Detection System (“JBTDS”)
program is progressing as planned through the EMD phase and a
customer procurement decision is expected in FY22.
The second biological program is the Enhanced Maritime Biological
Detection System (“EMBD”), an automated sensor to rapidly detect,
collect, identify and sample airborne biological warfare agents, where the
customer is the US Navy. In October 2021, following the successful
completion of the low rate initial production contract that was awarded in
May 2020, the US DoD approved and awarded a full rate production
contract. The value of this sole source framework contract is up to $99m
with an estimated completion date of December 2027. An initial delivery
order of $16m will see deliveries being made in the final quarter of FY22
and FY23.
The Aerosol and Vapor Chemical Agent Detector program (“AVCAD”) is
also progressing through its EMD phase. The next customer procurement
decision point is still expected to be at the conclusion of the EMD phase
in FY22. Chemring remains one of two contractors currently selected for
this competitive program, expected to be worth up to $800m.
We are increasingly focusing our efforts within the US market through
Roke USA, Inc. Following the first EW order to the US DoD that was
secured in 2020, our Resolve and Perceive products are currently on trial
with a number of different US Army divisions where customer feedback
has been excellent. Roke USA continues to support the customer with a
view to securing further orders from this potentially significant market.
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 national
security, artificial intelligence and machine learning, tactical electronic
warfare and information security, and securing positions on the US DoD
Programs of Record.
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 continue to focus its efforts on growing
across all its business areas, delivering research, design, engineering and
advisory services using its high quality people and capabilities.
We will continue to actively explore opportunities to expand and
accelerate the Sensors & Information sector capabilities and offerings,
both by leveraging opportunities in adjacent markets and through further
bolt-on acquisitions. However any acquisition must meet a strict set of
criteria, enhance shareholder value and fit in with our wider growth plans.
34
Chemring Group PLC Annual report and accounts 2021
The order book for Sensors & Information at 31 October 2021 was
£113.6m (2020: £87.3m), of which £103m is expected to be delivered in
2022, providing 65% cover of expected 2022 revenue. 2022 trading
performance for Sensors & Information is expected to show a
continuation of the levels of business seen in 2021, with medium-term
growth opportunities driven by the chemical and biological detection
Programs of Record moving into full rate production and continued
demand for Roke’s products and services.
OUR PURPOSE IN ACTION
EMBD
In October 2021 Chemring was awarded a full rate production
contract for the Enhanced Maritime Biological Detection (“EMBD”)
Program of Record. The EMBD system is an advanced sensor
system to rapidly detect, collect and identify airborne biological
warfare agents. This sole source framework contract is valued at up
to $99m and is the culmination of many years of hard work and
dedication at Chemring Sensors & Electronic Systems in Charlotte,
North Carolina.
COUNTERMEASURES
& ENERGETICS
KEY FACTS
REVENUE
£246.7m
(2020: £265.3m)
UNDERLYING OPERATING PROFIT
£40.0m
(2020: £39.9m)
ORDER BOOK
£387m
(2020: £389m)
UNDERLYING OPERATING MARGIN
16.2%
(2020: 15.0%)
STATUTORY OPERATING PROFIT
£37.9m
(2020: £37.4m)
OUR PURPOSE IN ACTION
PROJECT CHARLIE
The investment in the expansion and automation of our Tennessee
facility, known as “Project Charlie”, will result in the most state-of-
the-art, automated flare manufacturing facility in the world. The
project, which includes investment in people development, new
technologies, processes and equipment, has been designed to meet
the US DoD’s expected future demand for countermeasures. The
new facility began its commissioning process in October 2021.
Chemring Group PLC Annual report and accounts 2021
35
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON continued
OUR PURPOSE IN ACTION
CHEMRING COMPONENTS TO HELP SAMPLES LAND SAFELY
FROM ASTEROID BENNU
NASA has integrated Chemring components onto its OSIRIS-REx
spacecraft for the first ever mission to return a sample from the
ancient asteroid Bennu. Up to almost two kilograms of asteroid
sample will be brought back to Earth, the largest amount of
extra-terrestrial material brought back from space since the
Apollo era.
This mission will help scientists investigate how planets are formed
and how life began, and improve our understanding of asteroids
that could impact Earth. OSIRIS-REx launched from the Atlas V 411
Rocket on September 8th 2016, on a seven-year mission,
successfully rendezvousing with Bennu in 2018. The spacecraft
carried out two rehearsals preparing for the sampling procedure,
which successfully took place on 20th October 2020. After
verifying the sample, OSIRIS-Rex will leave Bennu and return the
samples to Earth.
Chemring components will be crucial to the successful landing of
the spacecraft and the samples’ safe delivery. Just before re-entering
Earth’s atmosphere, the sample return capsule will separate from
the spacecraft body, and this separation will require the use of
cable cutters supplied by our Chicago facility.
36
Chemring Group PLC Annual report and accounts 2021
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.
STRATEGY
The Countermeasures & Energetics sector strategy continues to be
one of strengthening and protecting our niche, 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.
Protection solutions against conventional threats in the traditional domains
of air, sea and land remain vital, and are important areas for the Group to
maintain technology leadership.
Our countermeasures businesses continue to adopt a holistic approach to
their activities, sharing intelligence, products and processes, and promoting
the benefits of these capabilities to our international customers. This
includes the development of multi-shot countermeasures that combine
multiple payloads in one flare body to deliver enhanced aircraft protection.
Our strategy for our energetics businesses remains to focus on the high
value differentiated areas of the market where market demand is most
robust. Our Chicago facility is well placed to benefit from growth in the
space segment.
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. Elsewhere, we
continue with our programme of significant investment in safety and
automation as part of creating a robust group of high-performing
manufacturing facilities.
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, propellants 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.
Our niche energetic devices businesses enjoyed another strong period
driven by favourable market conditions and improving operational
execution. The specialised and niche nature of our products was
demonstrated in February 2021 when the Perseverance Rover landed on
the surface of Mars with 233 Chemring devices on board. These were
designed, developed and manufactured at our Chicago facility and were all
critical to the success of the mission.
OPPORTUNITIES AND OUTLOOK
The focus for Countermeasures & Energetics remains on safeguarding and
growing the Group’s market-leading positions in niche markets.
We will continue the process of modernisation and automation across our
sites, and of improving our competitiveness through investment in lean
manufacturing capabilities. We will also 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 across the Group.
We will continue the process of expanding our capacity at our
countermeasures manufacturing operations in the US in response to the
continuing demand for airborne countermeasures driven by air platform
sales including the F-35 and in the important special material decoy market.
The Group’s niche propellant and devices businesses in Scotland and
Chicago are increasingly securing long-term contracts with customers,
supporting greater short and medium-term visibility and providing a
framework for long-term planning and investment decisions. Similarly,
demand for high quality high explosives has enabled Chemring Nobel in
Norway to work proactively with its customer base on long-term
contracting models, providing much improved visibility.
The Countermeasures & Energetics order book at 31 October 2021 was
£387.2m (2020: £388.7m). The slight decrease compared to the 2020 year
end closing order book is partly attributable to foreign exchange; on a
constant currency basis using the 2020 closing exchange rates the order
book would be £397.3m. The remaining movement is largely attributable
to the delivery of a substantial part of the $107m F-35 two-year
countermeasures contract by our Australian business that was received in
April 2020, offset by increased order intake in our US countermeasures
businesses. Of the 31 October 2021 order book, approximately £255m is
currently expected to be delivered in 2022, representing 95% coverage of
expected 2022 revenue.
Whilst there is a general trend in defence spending towards
modernisation and new technologies, the need for Chemring’s niche
capabilities in areas such as countermeasures will continue to remain
relevant in the contested environment that militaries operate in, so
long-term demand and associated funding are expected to remain robust.
This was evidenced in both the FY22 President’s Budget Request for the
US DoD and the UK’s Integrated Review, which maintained their support
for both legacy and next-generation air platforms including the F-35. This
aircraft remains a driver of growth in the sector with US demand still
expected to be in excess of 2,400 platforms, and the UK has maintained
its commitment to expand its number of F-35 beyond the 48 already
ordered. As a provider of countermeasures for this platform Chemring is
well positioned to benefit from this increase which will contribute to us
maintaining our market-leading position in the addressable air
countermeasures market.
PERFORMANCE
Order intake in the year was lower at £255.1m (2020: £287.8m), primarily
driven by the impact of a weaker US dollar and a strong comparator in
2020 when our Australian business received its $107m two-year order for
the supply of countermeasures for the F-35 under a five-year IDIQ contract.
Following the change of administration in the US and the continuation of
CV-19 working restrictions, the process of doing business with some
government departments has, on occasion, slowed and as a result some
Countermeasures & Energetics orders that were expected in the first half
were delayed until the second half of FY21.
Nonetheless, during the year Chemring Countermeasures USA received
multiple orders totalling $111m, including a five-year IDIQ contract for the
supply of M206 and MJU-7A/B infra-red decoy flares. Deliveries under
these contracts started in 2021 and run through to 2024 giving improved
visibility and strengthening our positions in key markets.
In the UK, Chemring Energetics secured a long-term partnering
agreement with Martin Baker Aircraft Company. This 15-year agreement
will see Chemring supply propellant material and pyro-mechanical devices
for use in a wide range of Martin Baker’s ejection seats (including those on
the F-35 Joint Strike Fighter) and is valued at up to £160m.
Revenue for Countermeasures & Energetics decreased by 7% to £246.7m
(2020: £265.3m), driven by a foreign currency headwind as well as some
timing delays on customer acceptance in the space market and the impact
of CV-19 on the commercial metron market, both within the niche
energetics businesses. The segment reported an underlying operating
profit of £40.0m (2020: £39.9m) as underlying operating margin improved
to 16.2% (2020: 15.0%) driven by improved operational execution, in
particular at the UK countermeasures facility. On a constant currency
basis revenue would have decreased by 3% to £256.5m and operating
profit would have been up 5% to £41.9m.
The statutory operating profit for the year was £37.9m (2020: £37.4m).
The investment in the expansion and automation of our Tennessee facility
to meet the expected demand for F-35 countermeasures has continued
during the year. Construction work of buildings was completed and
despite a delay in the supply of complex manufacturing equipment to site
due to suppliers being impacted by CV-19, the new facility began its
commissioning process in October 2021. During the year £6m was spent
on the facility, bringing the total spend to date to £43m. The expected
total cost of the programme remains approximately £50m. The facility will
now go through a period of characterisation and testing as production
gradually ramps up. We still do not expect to generate revenue from the
new facility until the second half of our 2022 financial year.
Chemring Group PLC Annual report and accounts 2021
37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INTRODUCTION TO SUSTAINABILITY
A RESPONSIBLE APPROACH
OUR PURPOSE IN ACTION
TREATING WASTEWATER ONSITE
Across Chemring, we are developing a sustainable water policy
and seeking further water conservation opportunities throughout
the Group.
One such example is at Chemring Nobel in Norway, which
manufactures specialised energetic chemicals for the defence and
civilian industries.
Wastewater from the chemical industry often contains high concentrations
of organic compounds, and treating it is essential. In 2019, Chemring
Nobel invested in a new, onsite wastewater treatment facility.
The £2.5m facility has two reactors, each with a capacity of 220m3.
The facility processes around 3,000m3 of water per week. To put that
into perspective, the average household uses around 164m3 of water
over the course of a whole year.
The plant consists of two sedimentation tanks in parallel and removes
suspended material from the water. This mostly consists of explosive
residues that are later destroyed at the fireground. The cleared water
goes through for automatic sampling and water volume measurement.
It is then released into the fjord, approximately 120m out and 52m
deep on the seabed.
During the treatment process, bacteria ingest the hydrocarbons
dissolved in the water, and air, heat and nutrients are fed into the
reactors to create a favourable environment for the bacteria. Dead
bacteria turn into sludge, which can then be discarded. The “bacteria-
house” within the plant is the equivalent size of 21 football pitches!
Chemical oxygen demand (“COD”) is used to measure the amount of
organic compounds in the wastewater. The COD test is often used to
monitor water treatment plant efficiency. The lower the COD figure,
the more efficient the treatment plant. Since the plant became
operational in 2019, the amount of COD accumulated weekly has
reduced by 80%.
38
Chemring Group PLC Annual report and accounts 2021
COMMITTED TO A
SUSTAINABLE FUTURE
Michael Ord
Group Chief Executive and Chairman of the Group
Sustainability Committee
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 long-
term sustainable value creation through
safe, values-based and ethical business
conduct at all times.
PURPOSE
Chemring helps make the world a safer place. Across physical and digital
environments, our exceptional teams deliver innovative protective
technologies to detect and defeat ever-changing threats.
VISION
To be a leading provider of critical and innovative technologies that detect
and protect people, platforms, missions and information against constantly
changing threats.
Improving our sustainability performance plays a key role in the way we
both run our businesses today and plan for the future, as we manage our
environmental, social and governance (“ESG”)-related risks. We also recognise
that our ESG credentials are an increasingly important factor in our ability
to attract and retain first-class people. Engaged, motivated, empowered
and appropriately skilled employees are integral to our success.
Whilst our approach to sustainability continues to mature 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. Increasingly this focus
will develop from working as a trusted partner to our many customers
and ensuring that our internal standards are fit for purpose, to working
with our supply chain to ensure that they too work to the same standards.
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.
Chemring Group PLC Annual report and accounts 2021
39
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INTRODUCTION TO SUSTAINABILITY continued
COMMITTED TO A
SUSTAINABLE FUTURE
E
R
O
C
S
T
C
A
P
M
I
E
G
A
R
E
V
A
R
E
D
L
O
H
E
K
A
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S
L
A
N
R
E
T
X
E
PROGRESS IN 2021
From an ESG perspective 2020 was a baseline year for Chemring where we
focused our efforts on gaining a better understanding of our data, identifying
gaps within in our knowledge, completing the reshaping of the portfolio to
focus on protective technologies and putting in place the infrastructure and
governance to effectively manage our sustainability agenda.
We have continued to build on this progress in 2021 with the overriding
goal of elevating our ESG-related activity.
A crucial first step in this, and a priority goal for the year, was to continue
the process of gathering and validating data and to undertake a materiality
assessment to identify the material topics of greatest concern to our
stakeholders and to identify those areas and activities where our actions
could have greatest impact.
The materiality assessment process identified the most significant economic,
environmental, social and governance topics, both risks and opportunities,
and ranked them according to feedback from a selection of stakeholders
including customers, suppliers, executive directors, employees and investors.
Key focus areas included health and safety, diversity and inclusion, reducing
climate change, and employee wellbeing. The issues were identified and
ranked according to their importance to Chemring (see right).
In addition to the materiality exercise the Group also conducted a
mapping exercise to consider the alignment of the organisation to the
United Nations Sustainable Development Goals (“UN SDGs”), and assess
the opportunities to measure and manage Chemring’s contribution to the
UN SDGs going forward.
Taking into account UN SDG sector relevance, Chemring material topics,
KPIs, and Chemring’s high level business sustainability goals, the UN SDG
mapping process outlined that Chemring’s operations, products and
strategy align most notably with the UN SDGs listed below:
STAKEHOLDER MATERIALITY ASSESSMENT
14.0
IT and cyber-security
Health and safety
Product quality and safety
Systematic risk management
7.0
Innovation and R&D
Emissions
Hazardous
materials
management
Ethical
conduct
and
compliance
oversight
Diversity and inclusion
Waste management
Energy
Environmental management
Employee development
Water
0.0
0.0
7.0
14.0
INTERNAL STAKEHOLDER AVERAGE IMPACT SCORE
Environmental
Social
Governance
Icon
Goal
Good health &
wellbeing
Description
Ensure healthy lives and promote
well-being for all at all ages
Icon
Goal
Reduced
inequalities
Description
Reduce inequality within and
among countries
Gender equality
Achieve gender equality and empower
all women and girls
Responsible
consumption &
production
Ensure sustainable consumption and
production patterns
Affordable & clean
energy
Ensure access to affordable, reliable,
sustainable and modern energy for all
Climate action
Take urgent action to combat climate
change and its impacts
Decent work &
economic growth
Promote sustained, inclusive and
sustainable economic growth, full and
productive employment and decent
work for all
Peace, justice &
strong institutions
Promote peaceful and inclusive societies
for sustainable development, provide
access to justice for all and build
effective, accountable and inclusive
institutions at all levels
40
Chemring Group PLC Annual report and accounts 2021
Both exercises have been core to enabling us to set appropriate near and longer-term targets, against which our progress can be measured. We outline
how these UN SDGs sit alongside our associated objectives and activity in the table below.
OUR SUSTAINABILITY GOALS
ENVIRONMENTAL
Respecting and protecting
our planet by actively seeking
ways to reduce our
environmental impact
SOCIAL
The safety, wellbeing and
development of our people is
at the heart of our business
GOVERNANCE
Conducting business in an
ethical and responsible
manner at all times
UN SDG
Sustainability objectives
- Reduce our impact on the
environment and build resilience to
climate change by focusing on energy,
waste and water, and by
understanding the impact of global
climate change on our operations
- Challenge our business unit leaders to
improve operational, resource and
energy efficiency and to minimise
environmental impact
- Invest in support of product
development and production
techniques that meet our customers’
needs and support their
environmental goals
Supportive actions and activity
- Chemring will be carbon neutral
by 2030
Further information
Environment on
pages 46 to 48
- Chemring is working towards being
a net zero organisation by 2050 and
is committed to supporting its
value chain
- We will reduce our total direct (scope
1) and indirect (scope 2) GHG
emissions year on year
- We will continue to focus our efforts
on reducing energy consumption and
on embracing green technology
- We will target zero waste to landfill
by 2030
Health and safety
on pages 43 to 45
Our people on
pages 49 to 53
- Maintain the highest standards of safety
- We will set a recordable injury
frequency rate limit of below 1 in line
with upper quartile benchmark
performance
- We will continue to reduce the risk of
high hazard events
- We will increase the proportion of
women in all senior management
positions across the business to 33%
by 2027
and the wellbeing of our workforce
- Ensure that, in support of our wider
commitment to ethnic and gender
diversity, our workforce represents
the diversity of the local communities
we operate in
- Implement effective policies and
procedures and continually invest in
support of operational excellence
and the development of our people
- Promote inclusion and diversity at
all levels
- Promote fair employment and skills
development
- Operate with integrity and
transparency and to the highest ethical
standards across all our businesses
- Chemring will maintain the Hampton-
Alexander target of 33% of women
on the Board
Ethics and business conduct
on pages 54 to 56
- We will seek to meet the guidelines of
the Parker Review on ethnic diversity
as we refresh the composition of
the Board
- All Chemring employees and third
parties acting on our behalf must
comply with the Chemring Code of
Conduct, wherever they are located
in the world
- Ensure the highest standards of
product safety and comply with all
relevant standards
- Promote a culture where everyone
does the right thing and takes personal
responsibility for their actions
- Actively seek to increase representation
of ethnicity and gender on our Board,
within our leadership teams and across
all our localities
- Protect information security and
data privacy
- Maintain prudent and responsible
financial and tax planning and
management
Chemring Group PLC Annual report and accounts 2021
41
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INTRODUCTION TO SUSTAINABILITY continued
PROGRESS IN 2021 continued
Good progress has been made to date as our ESG agenda evolves
and matures.
To facilitate and ensure a centralised approach to sustainability across all our
businesses, a Group Sustainability Committee was formed during the year.
Chaired by Michael Ord, the Group Chief Executive and Board director
responsible for sustainability across the Group, the Committee now has
oversight of all the Group’s ESG-related activity. The Committee consists of
members of the Group’s Executive Committee with responsibility for health
and safety, environmental impact, people and ethics and business conduct,
supported by internal subject matter experts. The Committee will shape
and monitor the implementation of our sustainability agenda, and will
propose to the Board for approval key ESG-related targets for the Group.
The Committee will keep the Board regularly briefed, and will ensure that
the Group continues to make progress in the future.
To ensure that our sustainability goals are aligned with both our long-term
strategy and executive remuneration arrangements, ESG-related performance
targets will be included in the Group’s performance share plan for awards
made from FY22 onwards. These targets will supplement the ESG-related
objectives which are already included in our annual bonus plan and which
are cascaded down through the organisation.
ESG HIGHLIGHTS
The work carried out during 2021 has enabled us to gain a better
understanding of our exposure to ESG-related risks and, through active
engagement with our key stakeholders, a better understanding of their
concerns and priorities. Our strategy over the current and future years
will seek to identify those areas where our activities can have most impact.
Plans are now in place to continue this journey and to ensure that we
meet the growing disclosure requirements of our stakeholders and
demonstrate our ability to successfully address ESG-related issues.
We will also continue to work with our advisers and shareholders to
identify how we can constructively feed into and inform the debate on
the future of ESG reporting and the creation of a common set of
standards against which we can be measured.
Chemring is now a business whose evolving purpose is innovating to
protect, and with that we are focused on protecting our customers,
people, platforms, missions and information. Less than 10% of our
revenue relates to the provision of raw material and components that
may be used by our customers in the production of offensive capabilities.
This will reduce further as the focus areas of the Group continue to grow.
As a business we are committed to building a sustainable company of
which all our stakeholders can be proud, both now and in the future.
HEALTH AND SAFETY
0.67 (2020: 0.85) -21%
TRIF rate
High-potential incidents: 9 (2020: 19), down 53%
Technical Safety and Occupational, Health, Safety and Wellbeing
Committees formed
ENVIRONMENT
GHG and carbon emissions flat (<1% difference year on year)
Carbon reduction plans being implemented in every business
Sustainability Committee formed to shape, monitor and ensure
future progress
PEOPLE
100%
of our senior leaders have participated in diversity, equity
and inclusion workshops
ETHICS AND BUSINESS CONDUCT
Updated Code of Conduct and training issued
Continued implementation of Chemring Compliance Portal
Operational assurance process enhanced
All new graduates and apprentices will take part in a UK-wide Early
Careers development programme which started in November 2021
FURTHER DETAIL CAN BE FOUND
IN OUR SUSTAINABILITY REPORT
42
Chemring Group PLC Annual report and accounts 2021
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.
Managers and supervisors in the Group’s businesses are required to
enforce procedures, and to provide leadership and commitment to
promote and embrace a proactive 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.
The Group HSE Director reports directly to the Group Chief Executive,
and is responsible for the ongoing development and assurance of the
Group’s health, safety and environment strategy known as Journey to
Zero Harm. 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 HSE KPIs.
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.
Chemring Group PLC Annual report and accounts 2021
43
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS HEALTH AND SAFETY continued
ACHIEVEMENTS
2021 has continued to be a challenging year as we maintained a safe
CV-19 environment despite the pandemic. Whilst this created a need for
special focus, we have still maintained progress in line with our health,
safety and environmental (“HSE”) strategy of Zero Harm, consolidating
the processes we implemented last year around the themes of:
- control of major accident hazards;
- injury reduction; and
- HSE risk management.
We have also added an additional element to our strategy regarding right
capability which extends to all employees. As a result of the restrictions
associated with CV-19, the Management of Change Process was used
effectively to ensure safe and continued operations. Actions taken in
delivering the HSE plan included:
- consolidation of a travel risk management process;
- implementation of a revised Crisis Management Plan; and
- implementation and consolidation of our three HSE sub-committees
focusing on the following areas:
- environmental;
- occupational health, safety and wellbeing; and
- technical safety, which combines process safety and asset integrity.
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 three 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 our employees
from exposure to energetic hazards. During the design of these processes
we have placed more scrutiny on the application of process hazard analysis.
In 2019 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?
44
Chemring Group PLC Annual report and accounts 2021
This year saw the third 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 as a result of this
maturing process we are now more aware of the residual risks and
throughout the year have taken steps to reduce these to a level as low as
is reasonably practicable. Following last year’s review of asset integrity at
all Countermeasures & Energetics businesses and the development and
implementation of a Group asset integrity standard, a common
computerised maintenance management system has been selected to
implement across the businesses, improving management and accountability.
Towards the end of the year, we established the Technical 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, asset integrity
implementation and the continued 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.
This year we not only consolidated but further developed our corporate
reporting platform to capture better understanding of root causes and
increased levels of assurance. These additional data points will help our
continued focus on becoming a learning organisation.
With regards to leadership on safety, this again has never been more
critical than during the pandemic. Business unit leaders continue to
manage an evolving situation through the Chemring CV-19 Playbook,
ensuring the appropriate rigour and governance through our change
management process. Our focus on injury prevention, in response to
CV-19, continues to place more emphasis on people’s emotional
wellbeing, which is now supported by the newly formed Healthy
Workplace sub-committee.
HSE RISK MANAGEMENT
Safe delivery of our business continues 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 every two years to
ensure compliance, with high-priority non-compliances being reported
and monitored at Executive Committee level. Due to the pandemic,
changes were made to our Operational Assurance Statement process
ensuring alignment to the HSE framework requirements. This provided
more granularity and direction when planning the Line of Defence 2
(“LOD2”) audits.
In addition to our internal assurance process, a review of our electrostatic
discharge (“ESD”) risks is underway to help establish a framework of
protocols designed to enable the development of suitable and sufficient
plans to address the risks at the operational levels.
HSE STRATEGY FORWARD OUTLOOK
In 2021 we reviewed the current three-year strategy focused on the
control of major accident hazards, injury prevention and HSE risk
management. This review resulted in an additional element regarding the
right capability being added as well as a more balanced approach towards
health, wellbeing and the environment. The revised strategy is therefore a
natural evolution and reflects the maturity of the business. As such, during
the next three years we will focus on:
- asset integrity and process safety – relating to the control of major
accident hazards and PSE events including a review of all ESD risks;
- occupational health and safety – focusing on injury and illness prevention,
including psychological health and wellbeing;
- environment and sustainability – to co-ordinate our work on reducing
our environmental impact; and
- improved data – enabling data-driven discussions and decisions leading
to a more proactive culture.
Our progress against this strategy will be reported in the next annual
report and accounts.
OUR HSE PERFORMANCE
We measure our HSE performance to reflect both occupational safety
and process safety.
OCCUPATIONAL SAFETY
We focus not only on actual injuries but also hazards and near miss
events. We therefore place an emphasis on near miss and hazard
reporting as a leading indicator of our maturing safety culture. This year
we had 2,602 occupational safety near miss and hazard reports, compared
to 1,417 in 2020, reflecting an increase in reporting. We had a total of 9
high-potential incidents compared to 19 last year.
We are embedding this learning into the organisation through
quarterly Learning from Incidents reviews with all business leaders and
increased use of safety alerts, not only to share incident learning but
also as good practice.
PROCESS SAFETY
There were two energetic incidents with injuries during the year, both
at our Tennessee facility. In March 2021, a drum overpressurised and
ruptured resulting in minor injuries to an employee that did not require
medical treatment. In May 2021, an operator suffered burn injuries after a
solvent-based energetic solution ignited due to an electrostatic discharge.
The company retained specialist support and worked closely with
operations personnel to redesign the process.
In addition to our reactive metrics we also measure process safety near
miss events, with a total of 796 recorded in 2021 compared to 903 in
the previous year. This reflects progress made as a result of our focus
on process safety and asset integrity. During 2020 we consolidated the
reporting of our leading indicator for process safety events (“PSE”), which
are categorised as level 1, 2 and 3, with 3 being the event with the most
serious potential. We set a target of 2.5 PSE at level 2 and 3 per 100
production employees, and this year we achieved 1.73.
Chemring Group PLC Annual report and accounts 2021
45
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
OUR COMMITMENT
We will reduce our total direct and indirect greenhouse gas (“GHG”)
emissions year on year and will be carbon neutral by 2030.
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 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, 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 2020 and 2021 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.
Our energy and carbon figures are now recorded on a monthly basis
allowing cross checks for anomalies. To ensure a consistent approach
we utilise DEFRA 2020 published conversion factors for all conversions
(except non-UK electricity where US EGRID and IAE factors are used).
Spot checks are conducted against utility bills to validated published figures.
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
understanding the impact of global climate change on our operations.
These three focus areas were updated in 2021 based on a materiality
review of our environmental impacts and risks, with a focus on impacts
that we can influence. These focus areas are periodically reviewed by our
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. In addition, in October 2021 we began collecting
environmental data monthly at a Group level and tracking reduction
progress through a dashboard system.
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 2021 we committed to becoming carbon
neutral for scope 1 and 2 emissions by 2030 and working to be a net zero
organisation by 2050.
To improve our energy efficiency, we continue to make improvements to
our operations, including installing new energy-efficient buildings to
replace old buildings, upgrading HVAC systems and improving lighting.
We continue to implement relamping projects to replace fluorescent
lighting with LED lighting to improve lighting and save energy. In 2021
we conducted relamping in five buildings at our Tennessee facility.
46
Chemring Group PLC Annual report and accounts 2021
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. Measures taken to mitigate these issues
continued in 2021, including improving drainage at our Tennessee facility
and maintaining lower vegetation heights at our Australian and Norwegian
sites. A more thorough review of climate risks was not able to be
conducted due to CV-19; however we intend to review the physical and
transition risks of global climate change on our operations and supply
chain over the next year.
ENERGY USE AND ASSOCIATED GHG EMISSIONS FOR 2021
AND 2020
Our Countermeasures & Energetics businesses in Norway and Scotland
are responsible for 37% and 26%, respectively, of Group energy usage.
This is followed by our business in Tennessee, which accounted for 17% of
annual energy consumption. We are in the process of developing or
updating carbon reduction plans in all of our businesses. Our UK
operations account for 81% of our scope 1 emissions, 22% of our scope 2
emissions and 37% of our energy use.
In terms of GHG emissions, in 2021 we observed a minor (0.7%) increase
in scope 1 and 2 emissions from 22,480 tCO2e in 2020 to 22,646 tCO2e
in 2021 using location-based emission factors. When normalised for gross
revenues, this reflects an increase of 3%, from 55.8 to 57.6 tCO2e per £m
of revenue.
Carbon emissions are stable. This reflects the priority this year being to
understand and ensure robust energy and carbon reporting. Whilst the
carbon intensity has increased from 55.8 to 57.6 tCO2e per £m of
revenue, it is due primarily to sterling strengthening against the US dollar
in the year, decreasing revenue. Based on a constant currency revenue
value of £408.0m (see page 60) our carbon intensity is stable at 55.5
tonnes per £m of revenue compared to 55.8 last year.
20211
US,
Norway,
Australia
UK
Group
total
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
LPG
5,303
1,475
29
504
96
249
5,807
1,571
278
Fuels consumed by Group-owned and leased vehicles, excluding business travel and employee commuting
CO2e (tonnes)
Diesel
Petroleum
LPG
93
—
—
97
77
19
The operation or control of any manufacturing process by the Group
CO2e (tonnes)
On-site waste incineration
Refrigerants discharged
Total scope 1 emissions CO2e (tonnes)
Scope 2 emissions – continuing operations
Total emissions CO2e (tonnes)
Electricity – location-based
Electricity – market-based
Total scope 1 and 2 emissions – continuing operations
Location-based CO2e (tonnes)
Market-based CO2e (tonnes)
Total energy consumption (Mwh)
21
73
6,994
3,086
—
10,080
6,994
48,373
147
488
1,677
10,889
12,013
12,566
13,690
81,689
190
77
19
168
561
8,671
13,975
12,013
22,646
20,684
130,062
20201
US,
Norway,
Australia
443
89
192
184
211
—
4
649
1,772
10,042
11,082
11,814
12,854
78,591
Group
total
6,030
1,793
230
287
211
—
5
737
9,293
13,187
11,082
22,480
20,375
129,613
UK
5,587
1,704
38
103
—
—
1
88
7,521
3,145
—
10,666
7,521
51,022
NOTE:
1. Our 2021 and 2020 data does not include environmental impacts associated with Chemring Ordnance and Chemring Energetic Devices’ Torrance and Santa Clarita sites, which
were sold or closed during the reporting period.
Total scope 1 and scope 2 emissions CO2e (tonnes) – continuing operations and location-based
Group revenue (£m)
Total CO2e (tonnes) per £m of revenue
2021
22,646
393.3
57.6
2020
22,480
402.5
55.8
Chemring Group PLC Annual report and accounts 2021
47
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ENVIRONMENT continued
WATER CONSUMPTION
In 2021 we used a total of 1,220,000 m3 of freshwater. We had a slight reduction from our 2020 use obtained through improved maintenance at our
Norway facility. None of our operations are in water-stressed regions as defined by the United Nations. Our Australian facility continues to collect and
use rainwater that falls on the site for facility needs.
Freshwater (m3)
Freshwater use
2021
US,
Norway,
Australia
UK
Group
total
UK
2020
US,
Norway,
Australia
Group
total
668,000
552,000
1,220,000
578,989
686,823
1,265,812
WASTE GENERATION
In 2021 our total hazardous and non-hazardous waste was 363 and 2,173 tonnes respectively, reflecting a 10% reduction and 39% increase from 2020.
Of this, 9% of hazardous and 47% of non-hazardous waste was recycled. As we continue to improve our data reliability, we have a better baseline for
planning reductions. Our new reporting system will allow tracking of waste destinations in 2022 in support of our zero waste to landfill goal.
Waste (tonnes)
Recycled, non-hazardous
Recycled, hazardous
Not recycled, non-hazardous
Not recycled, hazardous
Total waste (tonnes)
2021
US,
Norway,
Australia
635
1
977
242
1,855
UK
397
32
164
88
681
Group
total
1,032
33
1,141
330
2,536
2020
US,
Norway,
Australia
601
1
625
262
Group
total
792
89
768
313
1,489
1,962
UK
191
88
143
51
473
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.
At our Countermeasures & Energetics businesses we generate unique
waste which is often best managed by destroying it at on-site treatment
facilities. In 2021, we commenced work on upgrading the testing and
treatment facilities at our Scotland 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.
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.
In 2021 we also incurred environmental costs associated with legacy sites
in Belgium and Italy in accordance with the terms of sale of those businesses.
The Group carries a £3.0m (2020: £3.2m) provision in respect of
environmental liabilities, which the Board considers to be adequate
(see note 23).
48
Chemring Group PLC Annual report and accounts 2021
OUR PEOPLE
INVESTING IN OUR PEOPLE
Chemring people are at the heart of our
business. Our goal is to ensure that we
have the right people, in the right place,
at the right time, with the right skills
working in a safe, healthy and inclusive
environment. Investing in our people
has never been more important.
OUR OVERALL PEOPLE APPROACH IS
FOCUSED ON FIVE KEY AREAS:
UNDERSTANDING
OUR POPULATION
CHEMRING CULTURE
The heart of our people approach is having the right people, in the right
place, at the right time. Our people approach is underpinned by our culture.
The Chemring culture is the soil that allows everything else to grow.
Our investment in our culture, which started with a full review in
every part of the business in early 2019, is now embedded in every
part of Chemring.
The 2019 review enabled us to set a clear aspiration for the Chemring
culture, and this was used to create a framework around which all our
actions are set and measured. These aspirations are focused around
four key areas:
ENGAGING WITH
OUR PEOPLE
DEVELOPING
AT CHEMRING
- customer centricity;
- leadership;
- the employee experience; and
- diversity, equity and inclusion.
DIVERSITY AND
INCLUSION AT
CHEMRING
CHEMRING IN THE
COMMUNITY
THESE AREAS ARE UNDERPINNED BY
THE CHEMRING CULTURE
Since 2019 the business has worked to take actions designed to progress
in each of these four areas. Actions have included:
- Leading our People development programme for all line managers
globally in support of developing Chemring leaders;
- performance conversations taking place between line managers and team
members every six to eight weeks replacing the annual review process;
- employee forums run locally to focus on specific areas of concern or
interest in the business and to create actionable solutions. Topics range
from how to support improved collaboration between functional areas,
to developing competency models for operators;
- hybrid working principles agreed for each part of the business and the
development of local hybrid working policies to put these principles
into action;
Chemring Group PLC Annual report and accounts 2021
49
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PEOPLE continued
CHEMRING CULTURE continued
- community and recognition events such as charity fundraising, working
with veterans organisations and hosting thank you events for staff who
have worked tirelessly through the pandemic; and
- Early Careers development programme for all new graduates and
apprentices joining in autumn 2021 in the UK providing early leadership
and people skills development and the opportunity for building a cross
business network.
Measuring progress is key to understanding how far we have come in
achieving our cultural aspirations. Our Employee Voice initiative ensures
that we are regularly checking in with colleagues to track and share our
progress towards the aspirational culture goals. The initiative, which is
underpinned by a real-time bespoke sentiment tracking tool, creates
dashboards of participation and positivity around those cultural markers
we know are important. Business unit leaders review regularly and share
progress with colleagues at all levels through multiple channels.
UNDERSTANDING OUR POPULATION
Our Chemring business is highly diverse. Our colleagues work in diverse
environments across the globe, with skill sets ranging from scientists,
engineers, technicians and operators to deep functional experts in areas
such as health and safety, people and technology.
Our success depends on understanding our global population. Investment
to date has been around understanding levels of engagement and the
employee experience. Technology also enables better understanding of
the employee population and investment in HR technology systems has
been a significant focus in 2021. A full review of all HR systems and
processes in each part of the business has been completed. From this
the identification of opportunities for system simplification and process
streamlining will commence in 2022 including identification and mitigation
of any risks.
Understanding the changing needs of our colleague population is a key
element of our people approach. Accordingly, in 2021 we introduced
hybrid working principles as a benchmark for each business to develop
their own locally tailored hybrid working policy. These will be in place for
every part of the business from the start of 2022. This approach is a
reflection of the success of home working for many non-operational
colleagues through the pandemic which was designed to keep all
colleagues as safe as possible through reducing footfall on site to those
who were critical to the production efforts. The maintenance of some of
these new work routines is in support of the different needs of our
colleagues and enhances our ability to attract and retain talent in an
increasingly competitive market.
TOTAL POPULATION
2021
29%
2020
30%
P70+
Female71+
Male
70%
71%
50
Chemring Group PLC Annual report and accounts 2021
DEVELOPING OUR PEOPLE
340+
line managers and supervisors involved in global Leading our People
management development initiative
>55
graduates and apprentices hired in the year
LISTENING TO OUR PEOPLE
>1,800
colleagues with regular access to bespoke Employee Voice pulse survey
45%
regular response rate of participants
>70%
positivity score
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
messaging and the CEO’s vlog, with an active Q&A encouraging anyone
from across the business to ask a question, as well as regular distribution
of the Chemring magazine, Chemring-i, which has been refreshed and
relaunched in the year.
In 2021 we revisited the culture review work which commenced in 2019.
As part of this review, colleagues from every part of the business had the
opportunity to meet with an external consultant and share their
experiences of being a Chemring employee. The themes from these
discussions were reviewed against the themes from 2019 and the data
from the Employee Voice tool to corroborate progress.
The Employee Voice tool has generated over 40,000 responses during
2021 from our colleague base of 2,300, as well as over 4,000 individual
written comments.
Throughout 2021, positivity – the extent to which a colleague feels positive
about our culture and their experience of working at Chemring – has
stayed consistent at just over 70% with little variation across the year.
Despite the challenges of the pandemic, our colleagues remain positive
about working at Chemring. Work continues to drive as much participation
as possible from all colleagues, from current levels of just under 50%
regularly responding, to ensure that there are no barriers to participation.
A regular review of the responses at business unit level and globally (with
the US and the rest of the world taken as two different groups) ensures
that concerns are identified quickly and addressed in real time.
During the year, Laurie Bowen, as Chairman of the Remuneration Committee
and non-executive director charged with employee engagement on behalf of
the Board, met again 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 were drawn from Countermeasures UK and Roke in the UK, and
Sensors & Electronic Systems in the US. Participants were drawn from across
each level of the business units and met with Laurie in small groups.
Colleagues were positive about the opportunities for development within their
business unit and felt that Chemring provided good levels of support to them
and their families during the CV-19 pandemic. Collaboration, which was a key
theme in 2020, was raised again; however, there was a focus now on collaboration
between business units. Collaboration and communication within the business
units were seen to have improved.
29
+
+
30
+
+
P
DEVELOPING 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 which challenge their
technical expertise every day. 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 remain
up to date. Additionally through different routes, further technical
development, including workplace PhD programmes and MBA study, is
actively undertaken by a number of colleagues.
The line manager and supervisor development programme – Leading Our
People – continued throughout 2021. With over 340 participants in the
Leading our People programme, over 85% of the population are impacted
through participating or being managed by a colleague who has
participated. Despite the challenges of the CV-19 pandemic, all business
units continued with some level of development, supported by centrally
created skills sheets to support the new requirements of managing
remotely or managing teams which were reduced in size due to CV-19
related absence.
KEY ROLE TALENT PIPELINE
19%
TOTAL GRADUATES AND APPRENTICES
2021
2020
26%
P74+
81+
74%
81%
Male
Female
There has been additional focus on development for apprentices and
graduates in 2021. In the year we welcomed over 40 graduates across the
UK business units and 15 apprentices into multiple disciplines. Our business
wide approach to ensuring appropriate development of non-technical
skills from an early point in a graduate or apprentice’s career with
Chemring supports the development of future leaders for the business.
We continue our commitment to sponsoring bursaries for undergraduates
through the Institute of Engineering and Technology which underlines our
commitment to supporting future generations of scientists and engineers.
DEVELOPMENT FRAMEWORK
2021
28%
72+
72%
Male
Female
Internal networks of colleagues are increasingly important to knowledge
sharing and innovation. The Leading our People programme has a focus
on enabling new networks to develop and new relationships to form
within businesses. This underpins our culture of collaborating and sharing
to support the core values of Innovation and Excellence.
Our future senior leaders are supported through the Emerging Leaders
programme which was established in 2018. Whilst a second cohort of
participants was planned to participate in 2021, this programme was paused
due to the challenges of international travel and the restrictions around
bringing groups of colleagues together. The programme was reviewed to
challenge whether it would be successful as a virtual learning intervention.
However, a key element is building networks through shared experiences
and therefore the programme is planned to restart in 2022.
SENIOR LEVEL LEADER
LEADING OUR ORGANISATION
DEVELOPING LEADERS
ACCELERATING TALENT
EARLY CAREERS
MID LEVEL LEADER
FIRST LEVEL LEADER
LEADING OUR LEADERS
LEADING OUR PEOPLE
MANAGING YOURSELF
LEADING OURSELVES
EMERGING LEADERS
PROGRAMME
EARLY CAREERS
NETWORK
EARLY CAREERS
PROGRAMME
Chemring Group PLC Annual report and accounts 2021
51
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS28
+
+
P
19
+
+
26
+
+
P
OUR PEOPLE continued
DEVELOPING AT CHEMRING continued
In 2021 a global framework for assessing and supporting talent and
succession planning was introduced into every business unit. This
framework provides a consistent approach to understanding key roles in
the business and creating an understanding of the talent pipeline for each
role. Action plans for both the individual and the organisation are in place
to ensure progression. Diversity data for talent pipelines shows that there
is some work to do to develop a broad range of talent for key roles and
this is an area for focus in 2022 and is aligned to the ESG work and the
requirements of the Hampton-Alexander Review and the Parker Review
for diversity at senior levels.
Wellbeing continued to be a key theme in 2021. In line with the approach
of Global Voice, Local Accent, a global committee focusing on creating and
maintaining a healthy workplace has been established in the year. This
brings together colleagues from across the Group to consider how best to
support and maintain a healthy workplace for all colleagues.
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 across all business units in 2021.
Support through the provision of occupational health services on demand
in each location has been used extensively in 2021 through the pandemic.
Additionally the provision of Employee Assistance Programmes, which have
been in place for a number of years, has seen higher levels of usage in 2021
and there has been a significant focus on ensuring colleagues understand
the help available to them in a number of areas and how to access it.
DIVERSITY AND INCLUSION AT CHEMRING
We are committed to ensuring that we continue to support the identification,
attraction, hiring, development and promotion of all talent. Chemring strives
for diversity on a broad basis including gender, age, background, education,
disability, neurodiversity and nationality (within the constraints of our
regulatory requirements). This is an area where we continue to develop both
globally and locally and which will be central to our success in the coming years.
Our focus on culture and our ongoing development of our approach to
supporting all colleagues mean that we have an increasing number of formal
and informal groups around the business which support and connect people
with shared characteristics or interests. Alongside the Employee Forums we
also encourage groups representing specific diverse characteristics.
As an employer we make 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.
As part of our review of all HR systems and processes globally, we are
committed to ensuring that all our recruitment procedures, both internal
and external, and our promotion and development approaches incorporate
our commitment to diversity. Today we ensure that any external bodies we
work with to support our hiring efforts have diverse candidate pools and
attraction approaches that are open to all suitably qualified individuals and
we ask questions at appointment around these important areas.
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 are proud to be a Living Wage employer, and are aligned to the local
definition of Living Wage in all our geographies, exceeding this level for all
permanently employed colleagues in all roles. We are aligned to the
regulatory requirements in all geographies around gender pay equality.
52
Chemring Group PLC Annual report and accounts 2021
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. In particular throughout the CV-19
pandemic 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.
BOARD DIRECTORS
38%
22%
EXECUTIVE COMMITTEE
62%
62%
2021
2021
2020
2020
29%
38%
P62+
62+
78+
P71+
P80+
81+
Female
Male
20%
2020
2021
80%
78%
81%
71%
SENIOR MANAGERS
19%
22
+
+
29
+
+
P
38
+
+
38
+
+
P
19
+
+
20
+
+
P
Fundraising for charities of importance to each business unit has been a
focus in 2021 and supports our employee engagement focus.
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. Our
relationship with the Institution of Engineering and Technology now spans
four years with support provided directly to undergraduates studying for
engineering and science-related degrees in the UK who have faced some
level of hardship in achieving a place to study their chosen programme.
These high calibre students are provided with financial support via a
Chemring funded bursary and the opportunity for work experience and
career support from the Chemring businesses in the UK.
Finally we appreciate that the CV-19 pandemic has affected different
groups in different ways. One key challenge was for parents of school
age children who have had to support homeschooling often alongside
working from home themselves or balancing being able to come to work.
One issue many colleagues shared was access to appropriate technology to
support their children with homeschooling. At Chemring we have been
able to provide laptops and tablets which were no longer required within
the business to colleagues who had a clear need to support their children.
We now have an ongoing programme in the UK of providing surplus
hardware to colleagues whose families will benefit from using it.
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.
CASE STUDY
Colleagues at Chemring Countermeasures UK (“CCM UK”) pulled
together over March to raise vital funds for a local homeless charity
by collectively running or walking a marathon.
With eight teams and several individual runners, the full length of a
marathon (26.2 miles) was divided up and split between the
participants. Every runner/walker had the month of March to
complete their allocated distance.
Participants were asked to donate £5 via a JustGiving fundraising
page to support Alabare, the chosen charity. The charity, which is
local to Salisbury, helps ensure that homeless veterans, or those at
risk of becoming homeless, are kept off the streets. They help those
in need to transform their lives, providing accommodation and
support to help them build skills, confidence and opportunities to
live a fulfilled life.
The charity was chosen due to its links with veterans. The
fundraising challenge was selected to help support colleague health
and wellbeing after being in and out of lockdowns for the past year.
After many generous donations, and together with previous
fundraising initiatives, the CCM UK team was able to donate a
much needed £1,000 to Alabare.
It held an awards event in April to recognise everyone’s contribution.
All participants received a thank you bag and medal. Rebecca
Mullen, Alabare’s Fundraising & Development Manager, and Richard
Lord, Alabare’s Ambassador for Wiltshire, visited CCM UK and
handed out the medals by way of a thank you for the donation.
The feedback from marathon March has been positive and this
could become an annual fundraising event!
Chemring Group PLC Annual report and accounts 2021
53
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ETHICS AND BUSINESS CONDUCT
DOING THE RIGHT THING
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.
ETHICS & COMPLIANCE COMMITTEE
During 2020, 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 has oversight of the
Group’s ethical business conduct and compliance framework, including
our anti-bribery processes. It monitors the implementation of the framework
across the Group and recommends areas for future improvement.
The Committee met three times during the year. At every meeting the
Committee reviews and monitors compliance with our anti-bribery
processes and reviews whistleblowing reports received and associated
investigations. During the year the Committee also reviewed:
- the implementation plans and training material for the Chemring
Compliance Portal;
- proposed arrangements for the independent audit of selected third
party sales partners;
- our enhanced procedures for the handling and investigation of
whistleblowing reports, and associated training for members of our
leadership teams;
- an updated US Ethics Code and Chemring Code of Conduct; and
- a new policy on sales to customers located in higher risk territories.
The Chairman reports to the Board on the Committee’s activities
following each meeting.
OPERATIONAL FRAMEWORK
Our Operational Framework, which was implemented in 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.
All of our Operational Framework policies, procedures and associated
training material are now hosted on the Chemring Compliance Portal.
This innovative online system allows us to issue new and updated policies
and training to employees across the Group, targeted to their specific
roles, and enables us to monitor completion of mandatory training on
a timely basis.
Our governance framework also includes a requirement for all businesses
to complete an Operational Assurance Statement on a half-yearly basis,
providing a detailed assessment of their compliance with the Operational
Framework. The operational assurance process was strengthened during
the year with the inclusion of a more comprehensive self-assessment in
relation to compliance with our HSE Management Framework. In addition,
minimum Group-wide standards have now been set for compliance with
key legal and compliance policies, which the businesses are required to
report against.
54
Chemring Group PLC Annual report and accounts 2021
The output from the operational assurance 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, and is providing valuable input to our
internal audit programme.
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
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. The Code is reproduced in Norwegian
for our employees in Norway.
The Code was updated and reissued to all employees during the year,
together with refreshed training material. We intend to supplement this
with more detailed training on specific aspects of the Code, which will
be disseminated through the Chemring Compliance Portal, over the
next year.
CODE OF CONDUCT
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 or email or by accessing an external website.
All issues reported are taken seriously and investigated appropriately in a
confidential manner. Third parties may also access our ethics
reporting services.
During the year we further enhanced 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, with appropriate
oversight from the UK and US legal departments. We also provided
training to members of our leadership teams on how to identify
whistleblowing reports which may emanate through less-obvious channels
and how to engage with employees who make whistleblowing reports.
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.
A new policy on sales to customers located in higher risk territories was
adopted in the year, which requires our businesses to prepare a risk
mitigation plan for any proposed transaction in a territory rated less than
50 on Transparency International’s Corruption Perceptions Index. This
plan is required to address both bribery and corruption risks and broader
risks which may be encountered in doing business in such territories.
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 or in customer-facing roles;
- 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.
Chemring Group PLC Annual report and accounts 2021
55
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ETHICS AND BUSINESS CONDUCT continued
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.com.
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.
ANTI-BRIBERY AND CORRUPTION continued
A BACM “Pocket Guide” is issued to all employees across the Group,
which provides 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 bi-annual basis, confirming that all policies and procedures within
BACM have been complied with and providing supporting information to
demonstrate compliance. BACM Compliance Certificates are reviewed by
the Ethics & Compliance Committee following each submission.
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 there is a genuine business need
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;
- due diligence reports from external consultants for higher risk appointments;
- 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.
The review and approval processes for our third party sales partners have
now been automated through the Chemring Compliance Portal. These
processes were previously paper-based and the new system enables us to
adopt a more consistent approach to the application of our due diligence
and approval processes across the Group. We are also in the process of
transitioning many of our third party service providers and higher risk
suppliers on to the new system.
The Chemring Compliance Portal also incorporates a module for
employees to seek approval online prior to giving or receiving gifts and
hospitality, or making charitable donations on behalf of the business.
During the year we instigated a programme under which certain of
our third party sales partners will be subject to audit by an external
consultant. One audit was completed during the year and a second is
in progress. These audits will help to further strengthen our existing
anti-bribery and corruption processes.
Compliance with BACM procedures continues to be a core aspect of
PricewaterhouseCoopers’ (“PwC”) internal audit programme.
56
Chemring Group PLC Annual report and accounts 2021
FINANCIAL REVIEW
DELIVERING GROWTH, MARGIN
IMPROVEMENT AND STRONG
CASH GENERATION
Andrew Lewis
Group Finance Director
“ Our focus on operational delivery and
cash generation is allowing us to invest for
growth organically, and in 2021 inorganically
for the first time under the leadership of
the current management team.”
NET DEBT
£26.6m
(2020: £48.2m)
UNDERLYING OPERATING PROFIT MARGIN
14.6%
(2020: 13.6%)
Our focus in 2021 continued to be on
improving operational execution and
delivering growth in our Sensors &
Information segment. Overall 2021
performance was in line with our expectations
despite the foreign exchange headwind
caused by the weakening US dollar. On a
constant currency basis both segments
made operational and financial progress.
In the Sensors & Information segment, Roke has again recorded double
digit growth in orders, revenue and operating profit, with the market
continuing to be positive. The acquisition of the Cubica Group was
completed in June 2021, which creates further opportunities to enhance
and further accelerate growth in Roke. In addition, there has been
continued progress on the US Sensors Programs of Record with with
$69m of further delivery orders received for the next phase of the
$200m HMDS IDIQ contract and an initial delivery order of $16m
received in October 2021 for the sole source EMBD framework contract,
which is valued at up to $99m and will see deliveries being made in the
final quarter of FY22 and FY23, with an estimated completion date of
December 2027.
ROKE REVENUE (£m) – LAST FIVE YEARS
90
80
70
60
50
40
FY17
FY18
FY19
FY20
FY21
In Countermeasures & Energetics, good progress was made on securing
new long-term contracts, including Chemring Countermeasures USA
receiving a five-year IDIQ contract for the supply of infra-red decoy flares
and Chemring Energetics UK securing a 15-year long-term partnering
agreement with Martin Baker Aircraft Company. The capital investment
programmes are progressing as planned.
Chemring Group PLC Annual report and accounts 2021
57
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW continued
GROUP FINANCIAL PERFORMANCE
In 2021 the Group successfully navigated a number of operational and financial challenges, including foreign exchange, delays in the US DoD
procurement process, labour (in particular US) availability, various supply chain and inflationary pressures. These headwinds are likely to continue into
2022 and the Group will continue to work to mitigate their impact.
The US dollar has weakened in the year with the average exchange rate to sterling increasing from $1.28 to $1.38. Of the Group’s revenue, 53% was US
dollar denominated (2020: 54%). On a constant currency basis the Group’s revenue was up 1% to £408.0m, underlying operating profit was up 10% to
£60.1m and underlying earnings per share was up 17% to 17.7p. A summary of the impact of the exchange rate movements on the key metrics at a
Group and segmental level is shown in the table below.
At constant currency
As reported
2021
£m
408.0
79.4
60.1
17.7p
151.5
35.4
32.6
256.5
58.4
41.9
Change
+1%
+6%
+10%
+17%
+10%
+15%
+19%
-3%
+3%
+5%
2021
£m
393.3
76.4
57.5
16.9p
146.6
34.4
31.6
246.7
56.1
40.0
Change
-2%
+2%
+5%
+12%
+7%
+12%
+15%
-7%
-1%
+0%
2020
£m
402.5
74.6
54.7
15.1p
137.2
30.7
27.4
265.3
56.5
39.9
UNDERLYING OPERATING PROFIT (£m)
54.7
57.5
44.0
31.5
31.0
FY17
FY18
FY19
FY20
FY21
Total finance expense fell to £1.6m (2020: £3.0m). This was achieved by
the continued focus on the efficient management of working capital and
lower levels of net debt throughout the year.
This resulted in an underlying profit before tax of £55.9m (2020: £51.7m).
The effective tax rate on the underlying profit before tax was 14.8%
(2020: 17.6%). The underlying earnings per share was 16.9p (2020: 15.1p).
Statutory operating profit was £50.4m (2020: £46.3m) and after statutory
finance expenses of £1.6m (2020: £3.0m), statutory profit before tax was
£48.8m (2020: £43.3m). The statutory tax charge totalled £7.3m (2020:
£8.6m), giving statutory profit after tax of £41.5m (2020: £34.7m) and
statutory earnings per share of 14.7p (2020: 12.3p).
A reconciliation of underlying to statutory profit measures is provided in note
3. The non-underlying costs relate to the amortisation of acquired intangibles,
costs relating to acquisitions, gains on the movement in the fair value of
derivative financial instruments and the tax credit associated with these.
Group
Revenue
Underlying EBITDA
Underlying operating profit
Underlying earnings per share
Sensors & Information
Revenue
Underlying EBITDA
Underlying operating profit
Countermeasures & Energetics
Revenue
Underlying EBITDA
Underlying operating profit
Order intake across the Group has remained robust at £431.0m (2020:
£436.6m) despite the impact of the weaker US dollar, with Roke seeing
order intake exceeding £100m for the first time and the release of further
delivery orders on the HMDS IDIQ contract, as well as orders awarded
to the US countermeasures businesses. The comparator year benefited
from our Australian business receiving a $107m multi-year contract for
the supply of countermeasures for the F-35. Following the change of
administration in the US and the continuation of CV-19 working
restrictions, the process of doing business with government departments
has, on some occasions, slowed and as a result some Countermeasures &
Energetics orders expected in 2021 were received later in the year than
expected, which may impact the H1/H2 split in FY22.
Order intake (as reported)
Effect of using prior period foreign
exchange rates
Order intake at constant currency
Impact of Australian multi-year
contracts
Adjusted order intake
2021
£m
431.0
17.6
448.6
(30.4)
418.2
Change
-1%
+3%
+10%
2020
£m
436.6
–
436.6
(55.0)
381.6
Revenue for the year was down 2% to £393.3m (2020: £402.5m), driven
by strong performance in the Sensors & Information segment, offset by a
foreign currency headwind.
The underlying operating profit of £57.5m (2020: £54.7m) resulted in an
underlying operating margin of 14.6% (2020: 13.6%). The improved margin
compared to 2020 primarily reflects the growth of the higher margin
Sensors & Information segment and the continued focus on improved
operational execution throughout the Group, particularly at the UK
countermeasures site.
58
Chemring Group PLC Annual report and accounts 2021
TAX
The underlying tax charge totalled £8.3m (2020: £9.1m) on an underlying
profit before tax of £55.9m (2020: £51.7m). The effective tax rate on
underlying profit before tax for the year was a charge of 14.8% (2020:
17.6%). The reduction in rate is due to the recognition of a deferred tax
asset in respect of future US interest deductions of £4m, offset by the
increase in the UK corporation tax rate from 19% to 25% which increased
our deferred tax liability by £2m. Looking forward into 2022 we expect
the Group effective tax rate to remain in the mid-teens. After which the
change to the UK Corporation Tax rate will impact the annual current tax
charge and this is expected to increase the Group effective tax rate to
approximately 20%. The continuing statutory tax charge totalled £7.3m
(2020: £8.6m) on a statutory profit before tax of £48.8m (2020: £43.3m).
EARNINGS PER SHARE
Underlying earnings per share was 16.9p (2020: 15.1p) and diluted
underlying earnings per share was 16.5p (2020: 14.8p). Statutory basic
earnings per share was 14.7p (2020: 12.3p) and statutory diluted earnings
per share was 14.4p (2020: 12.0p).
UNDERLYING DILUTED EPS (PENCE)
16.5
14.8
11.0
5.8
6.7
FY17
FY18
FY19
FY20
FY21
WEEKLY NET DEBT
GROUP FINANCIAL POSITION
NET DEBT AND CASH FLOW
The Group’s net debt at 31 October 2021 was £26.6m (2020: £48.2m),
representing a net debt to underlying EBITDA ratio of 0.35x (2020: 0.65x).
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. The Group is working to
achieve further improvements over the medium term. No defined benefit
pension contributions were required in the year and none are expected
in 2022, 2023 or 2024.
PENSION AND INTEREST CASH OUTFLOWS (£m)
22.0
14.3
13.9
FY16
FY17
FY18
FY19
3.0
FY20
2.6
FY21
5.3
Underlying operating activities generated cash of £80.0m (2020: £82.4m).
Underlying cash conversion was 105% (2020: 110%) of underlying EBITDA,
and an average of 108% on a rolling 24-month basis (2020: 108%). The
Group has replaced its existing facility with a new £150m revolving credit
facility in 2021, which runs to December 2024 and has an option to extend
for a further three years at the lenders’ discretion.
m
£
225
200
175
150
125
100
75
50
25
0
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
FY21
FY20
FY19
FY18
FY17
Aug
Sept
Oct
Jul
FY16
WORKING CAPITAL
Working capital was £84.4m (2020: £85.1m), a decrease of £0.7m. As a
percentage of revenue, working capital has remained consistent at 21%
at 31 October 2021. We continued with our focus on commercial
contracting, inventory levels and cash management. In absolute terms
inventory and payables have fallen, reflecting the timing of customer
orders in Countermeasures & Energetics, and trade receivables have
remained flat. Year end trade receivable days of 25 (2020: 30) and trade
payable days of 18 (2020: 26) demonstrate that working capital has been
managed in a balanced and sustainable manner.
DEBT FACILITIES
The Group’s principal debt facilities comprised a £150m revolving credit
facility and a $10m overdraft. These were established in July 2021 with a
syndicate of six banks and run until December 2024 with three “one-year”
options to extend. The Group had £128.1m (2020: £86.4m) 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.
Chemring Group PLC Annual report and accounts 2021
59
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW continued
RETIREMENT BENEFIT OBLIGATIONS
The surplus on the Group’s defined benefit pension schemes was £13.7m
(2020: £7.6m), 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 increase in the surplus has been driven by growth in the
return seeking assets. The resilience of the Scheme’s investment strategy
has limited the impact of increased inflation expectations given the liability
driven investment hedging strategy. An updated triennial valuation was
completed as at 6 April 2021 and showed a technical provisions surplus of
£3.8m, which represented a funding level of 104% of liabilities. The Group
agreed with the trustees that no further deficit recovery payments are
required. The next actuarial valuation is due as at 6 April 2024 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:
- 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 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 (included within “legal provisions”), 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.
ACQUISITION
On 2 June 2021, Chemring Group PLC acquired 100% of the issued
shares in Cubica Technology Limited (“Cubica”) and Q6 Holdings Limited
(“Q6”), collectively the “Cubica Group”. The Cubica Group specialises in
machine learning, data fusion and autonomous systems. The acquisition
has strong synergies to Roke and will expand the Group’s existing
capabilities and product offerings.
The acquisition has been completed for an initial cash consideration of
£7.0m, funded from Chemring’s existing bank facilities. Further deferred
consideration of up to £2.0m is payable in Chemring 1p ordinary shares in
two tranches (subject to the former owners remaining employed in the
Chemring Group) on the second and third anniversary of completion. The
operating results and assets and liabilities of the acquired companies have
been consolidated from 3 June 2021.
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 £28.0m (2020: £35.6m) was spent on property, plant and equipment.
The most significant investment, being the Tennessee capacity expansion
programme to meet the expected demand for F-35 countermeasures,
which has continued during the period. Construction work of buildings
has completed and the supply of complex manufacturing equipment to
site continues. We still expect to generate revenue from the new facility
during the second half of our 2022 financial year.
RESEARCH AND DEVELOPMENT
R&D expenditure was £62.0m (2020: £62.0m). 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
2021
£m
51.4
8.5
2.1
2020
£m
52.5
4.5
5.0
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.
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
2021
£m
393.3
2020
£m
402.5
Growth
%
-2%
14.7
—
408.0
402.5
57.5
54.7
2.6
—
1%
5%
60.1
54.7
10%
60
Chemring Group PLC Annual report and accounts 2021
A reconciliation of underlying measures to statutory measures is provided below:
Group – continuing operations:
EBITDA (£m)
Operating profit (£m)
Profit before tax (£m)
Tax charge (£m)
Profit after tax (£m)
Basic earnings per share (pence)
Diluted earnings 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)
2021
Non-
underlying
Underlying
2020
Statutory
Underlying Non-underlying
Statutory
76.4
57.5
55.9
(8.3)
47.6
16.9
16.5
(0.9)
(7.1)
(7.1)
1.0
(6.1)
(2.2)
(2.1)
75.5
50.4
48.8
(7.3)
41.5
14.7
14.4
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)
—
—
—
(0.1)
0.1
34.4
31.6
56.1
40.0
—
(5.7)
—
(2.1)
34.4
25.9
56.1
37.9
30.7
27.4
56.5
39.9
—
(6.4)
—
(2.5)
75.1
46.3
43.3
(8.6)
34.7
12.3
12.0
—
30.7
21.0
56.5
37.4
We present a measure of constant currency revenue and operating profit.
This is calculated by translating our results for the year ended 31 October
2021 at the average exchange rates for the comparative year ended 31
October 2020.
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 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.
Management considers non-underlying items to be:
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. Further details are provided in note 3.
The adjustments comprise:
- amortisation of acquired intangibles of £6.2m (2020: £8.9m);
- costs relating to acquisitions of £1.6m (2020: £nil);
- gain on the movement in the fair value of derivative financial instruments
of £0.7m (2020: £0.5m); and
- tax impact of adjustments of £1.0m credit (2020: £0.5m credit).
- amortisation of acquired intangibles;
- discontinued operations;
- exceptional items, for example relating to acquisitions and disposals,
restructuring costs, impairment charges and legal costs;
- gains or losses on the movement in the fair value of derivative financial
instruments; and
- the tax impact of all of the above.
Andrew Lewis
Group Finance Director
14 December 2021
Chemring Group PLC Annual report and accounts 2021
61
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RISK MANAGEMENT
MANAGING RISK
We continue to manage key risks to ensure
the delivery of the Group strategy.
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 current members of the Risk Management Committee are:
- Michael Ord (Group Chief Executive);
- Bill Currer (President, US);
- Sarah Ellard (Group Legal Director & Company Secretary);
The Board reviews the Group risk register on a regular basis and
considers whether the Risk Management Committee has appropriately
identified the principal risks to which the Group is exposed.
- Andrew Lewis (Group Finance Director);
- Steven Messam (Group HSE Director); and
- Clancy Murphy (Chief People Officer).
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.
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.
THE BOARD
- Overall responsibility for
risk management
- Defines the Group’s
risk appetite
KEY ROLES AND RESPONSIBILITIES FOR THE
GROUP’S RISK MANAGEMENT STRATEGY
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
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
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
62
Chemring Group PLC Annual report and accounts 2021
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:
- In response to the changing environment, our CV-19 Playbook, which
was introduced in 2020 and incorporates all of our Group-wide controls
for the management of CV-19-related risks within our business
operations, has been updated and reissued on a regular basis.
- Our HSE Management Framework has been updated and we have
implemented new standards in relation to asset integrity and the
management of travel risk.
- We have enhanced our HSE data collection and reporting through our
EcoOnline system and are in the process of implementing a new
Group-wide maintenance management system.
- Our anti-bribery and corruption procedures have been further
enhanced by the implementation of the Chemring Compliance Portal.
- A new policy on sales to higher risk customers located in territories has
been introduced under our Operational Framework.
- We have established the Chemring Security Committee and
implemented additional IT and cyber-security standards.
- Our internal audit programme has been refined to include thematic
reviews in key risk areas.
Our risk management systems were reviewed by PwC as part of the
internal audit programme during the year. PwC concluded that our risk
management structures and processes were fit for purpose and a number
of good practice areas were identified. Their recommendations for
further enhancements to our processes were considered by the Risk
Management Committee and, as a consequence, we intend to develop our
risk rating methodology by expanding the number of impact and likelihood
ratings over the year ahead, in order to provide greater distinction
between relative risks and facilitate prioritisation of key mitigation actions.
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 64 to 71.
CV-19
The management of risks associated with CV-19 continued to be a focus
during the year. Whilst the Group’s operations have not been significantly
impacted by CV-19, we continue to take all appropriate actions to protect
and safeguard our employees, and ensure continuity of our businesses.
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 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 we are still endeavouring 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 enhancing our internal risk management
processes to ensure that we are in a position to report against the
recommendations of the Task Force on Climate-related Financial
Disclosures from 2022 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, which
also consider the assurance processes in place for key internal controls.
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 2021
63
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.
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.
OVERVIEW OF PRINCIPAL RISKS
The table below summarises the Group’s principal risks and uncertainties,
and identifies how each links to values and our strategic objectives, and
whether the trend in the risk profile from the Group’s perspective
increased, decreased or remained stable during the year.
Principal risk/uncertainty
Our values
Change in
risk
profile
in the
year
Strategic
objectives
A
B
C
D
E
F
G
H
I
J
K
Occupational and
process safety
Environmental laws
and regulations
Market
Political
Contracts
Technology
Financial
Operational
People
Compliance
and corruption
Cyber-security
RISK PROFILE AND HEAT MAP
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 further progress on the implementation of the
Group’s three-year HSE strategy and an increased focus on asset
integrity within our operations.
- Risks associated with environmental issues have increased with the
increased focus on the environmental impact of our businesses.
- 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.
- Operational risk has increased as the US Government’s proposed
mandatory CV-19 vaccination requirement for employees of certain
US Government contractors has the potential to impact our US
businesses.
- People-related risk in relation to resourcing has increased,
particularly in the US where buoyant demand in the employment
market has made it more difficult to recruit and retain employees.
- Financial risks have continued to reduce, reflecting the Group’s
strong cash generation and lower levels of indebtedness.
- The inherent risk associated with cyber threats and system failures
continues to increase, 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.
The heat map below illustrates the relative inherent and residual
positioning of our principal risks from an impact and likelihood perspective.
h
g
H
i
t
c
a
p
m
I
i
m
u
d
e
M
A
F
J
G
K
E
C
I
B
D
H
Target growing segments
Safety
Win market share
Grow our US business
Excellence
Innovation
w
o
L
Low
64
Chemring Group PLC Annual report and accounts 2021
Medium
Likelihood
High
INHERENT RISK:
High
Medium
Low
TREND:
Increasing
Stable
Decreasing
HEALTH, SAFETY AND ENVIRONMENT RISKS
A. OCCUPATIONAL AND PROCESS SAFETY
Risk and potential impacts
Mitigation actions/factors
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 “Journey to Zero
Harm” and 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 accident hazard analysis process
adopted across the Group.
- Asset integrity review completed using external
consultants at higher-hazard sites and new asset
integrity standard adopted.
- Review of our electro-static discharge (“ESD”)
hazards has commenced, which will enable ESD
protocols and control plans.
- Incident investigation and crisis management
standards adopted.
- Process established for Group-wide review of
learnings from significant incidents.
- Occupational Health, Safety and Wellbeing and
Technical Safety Committees established.
- Increased capital investment in older facilities to
improve safety and reliability.
Risk appetite: Low
Change during the year and outlook
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 have strengthened our asset integrity programmes
and introduced an enhanced process for sharing of
learnings from significant incidents. We continue to
invest in new automated production systems and
improving process controls for our legacy operations.
Our total recordable injury frequency rate reduced to
0.67, compared to 0.85 in 2020. Two injuries were
sustained from energetic ignitions during the year,
compared to one such incident in the prior year.
We hope to see further improvements in process
safety in FY22 as we continue with our capital
investment programme.
Example key risk indicators
Link to values
- Total recordable injury frequency rates
- Number of process safety events
- Number of near miss reports
Link to strategy
- Target growing segments
- Win market share
See also: Health and safety on pages 43 to 45
B. 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.
Risk appetite: Low
- Environmental consultants retained to manage
Change during the year and outlook
legacy indemnification obligations for site
remediations.
- Sustainability and Environmental Committees
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.
The sale or closure of several sites during the last
few years has reduced the Group’s overall exposure
to environmental risks. However, we retain a
financial liability for environmental remediation of
certain sites formerly owned by the Group, most
notably those occupied by the divested munitions
businesses in Belgium and Italy.
Environmental risks continue to increase with the
increased focus on climate change and the
environmental impact of all businesses. We have
implemented a more centralised approach to the
management of our environmental performance as
part of our ESG strategy, recognising that minimising
our environmental impact and addressing climate
change related risks is becoming increasingly important.
Link to strategy
- Target growing segments
See also: Environment on pages 46 to 48
Chemring Group PLC Annual report and accounts 2021
65
Example key risk indicators
Link to values
- Energy and water utilisation
- Volume of waste produced
- Number of environmental incidents
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
STRATEGIC RISKS
C. MARKET RELATED
Risk and potential impacts
Mitigation actions/factors
- 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 to 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.
- Increased collaboration between businesses
across the Group on establishing shared routes
to market.
Risk appetite: Low to moderate
Change during the year and outlook
We recognise that the CV-19 pandemic could
impact 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.
Closer collaboration between our countermeasures
businesses is creating a joined-up customer
approach which is enabling us to better promote
our global capabilities.
Defence spending depends on a complex mix of
political considerations, budgetary constraints and
the requirements of the armed forces to address
specific threats and perform certain missions.
Overall defence spending may therefore be
subject to significant yearly fluctuations and there
may also be downward pressure on defence
budgets in certain key programme areas.
The Group’s profits and cash flows are
dependent, to a significant extent, on the timing of
award of defence contracts. In general, the
majority of the Group’s contracts are of a
relatively short duration and, with the exception
of framework contracts with key customers, do
not cover multi-year requirements.
- The Group’s financial performance may be
adversely impacted by lower defence spending
by its major customers, either generally or in
relation to certain programmes.
- Short-term trading and cash constraints may
impact on the Group’s ability to invest in
longer-term technologies and capabilities.
- Unmitigated delays in the receipt of orders or
cancellation of existing contracts could affect the
Group’s financial performance. If the Group’s
businesses are unable to continue trading
profitably during periods of lower order intake,
financial performance will deteriorate and assets
may be impaired.
Example key risk indicators
Link to values
- Defence budget cuts
- Reductions in order intake
- Deterioration in profitability
D. POLITICAL
Risk and potential impacts
Mitigation actions/factors
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.
- 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.
- The Group’s business in certain countries may
- Political risks insurance procured in certain
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.
circumstances.
- Continued focus on the development of
commercial business across the Group,
particularly in key home territories.
Example key risk indicators
Link to values
- Political changes
- Suspension/withdrawal of export licences
- Trade embargoes
- Reductions in order intake
66
Chemring Group PLC Annual report and accounts 2021
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Target markets on pages 24 and 25
Risk appetite: Low to moderate
Change during the year and outlook
We have refocused our business development and
marketing activities in our key home markets in the
niche segments in which we operate.
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.
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Target markets on pages 24 and 25
STRATEGIC RISKS continued
E. CONTRACT RELATED
Risk and potential impacts
Mitigation actions/factors
The Group’s government contracts may be
terminated at any time and may contain other
unfavourable provisions.
- 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 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.
Risk appetite: Moderate
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.
Example key risk indicators
Link to values
- Number of contract claims/terminations
- Increase in working capital
- Delays in customer payments
- Number of bonds or guarantees called
F. TECHNOLOGY
Risk and potential impacts
Mitigation actions/factors
Link to strategy
- Target growing segments
- Win market share
- Grow our US 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 within Countermeasures & Energetics and
Sensors & Information.
Risk appetite: Moderate
Change during the year and outlook
Innovation is one of our core values.
Good progress continues to be made on the US
Programs of Record 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 commercial sector.
The Group may fail to maintain its position on key
future programmes due to issues with capability
development, technology transfer or cost-effective
manufacture.
The Group needs to continually add new
products to its current range, through innovation
and continuing emphasis on research and
development. New product development may be
subject to delays, or may fail to achieve the
requisite standards to satisfy volume
manufacturing requirements and the production
of products against high reliability and safety
criteria to meet customer specifications.
- Failure to obtain production contracts on major
development programmes may significantly
impact the future performance and value of
individual businesses.
- Failure to complete planned product
development and upgrades successfully may
have financial and reputational impacts, and may
result in obsolescence or loss of future business.
Example key risk indicators
Link to values
- Reduction in R&D expenditure
- Delays in R&D programmes
- Delays in qualification of products
- Loss of production contracts
- Emergence of new competitors and
disruptive technologies
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
Chemring Group PLC Annual report and accounts 2021
67
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
G. FINANCIAL RISKS
Risk and potential impacts
Mitigation actions/factors
- Committed banking facilities in place to
December 2024.
- Regular monitoring of actual and forecast
financing covenants.
Risk appetite: Moderate
- Capital approval processes in place, requiring
Change during the year and outlook
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 Group’s revolving credit facilities were
refinanced during the year and extended to
December 2024.
The year-end bank covenant of net debt: EBITDA
was 0.35x, well within the covenant limit of 3.0x.
At the year end, the legacy UK defined benefit
pension scheme was £13.7m in surplus (on an IAS 19
basis). The triennial actuarial valuation of the scheme
was carried out as at April 2021 confirmed that the
scheme was £3.8m in surplus at that date. No
further contributions will therefore be required
before the next valuation as at April 2024.
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.
Example key risk indicators
Link to values
- Deterioration in bank covenants
- Increase in net debt
- Interest rate increases
- Foreign exchange rate movements
- Increase in bad debts
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Financial review on pages 57 to 61
68
Chemring Group PLC Annual report and accounts 2021
H. OPERATIONAL RISKS
Risk and potential impacts
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.
- A delay in completing new manufacturing
facilities, such as those being built in Tennessee,
could constrain capacity and limit future
business growth.
Mitigation actions/factors
- 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.
- Continued capital investment in legacy facilities
to improve safety and reliability.
- Asset integrity programme implemented.
- Detailed plans developed for all significant capital
investment projects and additional dedicated
resource employed to oversee key projects.
- CV-19 Playbook implemented and supply chains
being actively managed to minimise the impact
of CV-19-related disruption.
- Business interruption risks insured
where appropriate.
Example key risk indicators
Link to values
- Number of process safety events
- Reduction in right first time and on-time
delivery rates
- Increase in supplier-related delays
- Increase in quality issues and customer complaints
- Reduction in capital expenditure
- Delays in commissioning of facilities
Risk appetite: Low to moderate
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.
Commissioning of the new automated
manufacturing facilities in Tennessee continues to
progress in line with plan.
Capital investment projects progressed at our
facilities in Scotland and Norway, and further
projects are planned for 2022.
The US Government intends to mandate that
employees of certain US Government contractors
must be vaccinated against CV-19. This has the
potential to impact our US businesses, which may
be required to terminate the employment of
unvaccinated employees.
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Group Chief Executive’s review and health
and safety on pages 14 to 17 and 43 to 45
Chemring Group PLC Annual report and accounts 2021
69
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
I. PEOPLE RISKS
Risk and potential impacts
Mitigation actions/factors
- Chemring values of Safety, Excellence and
Innovation established.
- 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 Chemring culture.
- Employee Voice real-time engagement tool
deployed across the Group.
- Talent framework and succession planning
process implemented.
- Incentive arrangements enhanced to encourage
collaboration and create a Group focus at
senior level.
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.
Example key risk indicators
Link to values
- Increase in employee turnover
- Number of unfilled vacancies
- Employee sentiment scores
Risk appetite: Moderate
Change during the year and outlook
Resourcing challenges increased over the year,
particularly in the US where buoyant demand in
the employment market made it more difficult to
recruit and retain employees.
We continued to make 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 also continue to focus 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. This was supplemented by a
Group-wide culture “check-in” during the year.
Link to strategy
- Target growing segments
- Win market share
See also: Our people on pages 49 to 53
70
Chemring Group PLC Annual report and accounts 2021
LEGAL AND COMPLIANCE RISKS
J. COMPLIANCE AND CORRUPTION
Risk and potential impacts
Mitigation actions/factors
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.
- New policy adopted to manage risks associated
with sales to customers in higher-risk territories.
Example key risk indicators
Link to values
- Regulatory intervention and penalties
- Non-renewal/revocation of licences and permits
- Breaches of policies
- Non-completion of compliance training
- Increase in whistleblowing reports
REPUTATIONAL RISKS
K. CYBER RELATED
Risk and potential impacts
Mitigation actions/factors
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 system
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.
- Security Committee established.
- Group-wide cyber-security standard adopted
based on the US DFARS “CMMC Level 3”
standard and 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.
- IT and security systems review included within
the internal audit programme.
- Cyber insurance policy in place.
Risk appetite: Low
Change during the year and outlook
The Operational Framework and the associated
operational assurance process has fundamentally
changed the management of legal and compliance
risks across the Group. The assurance process was
enhanced during the year to incorporate minimum
standards which are required to be adopted in key
compliance areas.
Good progress was made during the year on the
implementation of our Group-wide online
compliance system - the Chemring Compliance
Portal. The system hosts our Operational
Framework policies and associated training material,
and automates our anti-bribery processes.
Link to strategy
- Target growing segments
- Win market share
See also: Ethics and business conduct on pages 54
to 56
Risk appetite: Low
Change during the year and outlook
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.
Example key risk indicators
Link to values
- Number of “phishing” emails reported
- Number of system attacks and failures
- Software updates not applied promptly
Link to strategy
- Target growing segments
- Win market share
Chemring Group PLC Annual report and accounts 2021
71
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
VIABILITY STATEMENT
In accordance with the UK Corporate Governance Code, the Board is
required to undertake an assessment of the long-term viability of
the Group.
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 73.
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.
KEY FINANCIAL METRICS
Revolving credit facility and overdraft
Undrawn committed borrowing facilities
Leverage ratio
Interest cover ratio
2021
Covenant
£157.3m
£128.1m
0.37x
Less than 3x
54x Greater than 4x
The revolving credit facility and overdraft run to December 2024 with
three “one-year” options to extend at the lenders’ discretion. The Group
was in compliance with the covenants throughout the year.
ASSESSMENT OF NEAR-TERM PROSPECTS
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 2023,
being at least 12 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.
SENSITIVITY ANALYSIS
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
and considered the principal risks and uncertainties discussed in the
strategic report. 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
with, 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 legislation on social distancing
measures, and the impact of the current situation on the Group’s supply
chain. 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.
CONFIRMATION OF GOING CONCERN
After consideration of the above, the directors have a reasonable
expectation that the Group and Company will have sufficient funds to
continue to meet its liabilities as they fall due for at least 12 months from
the date of approval of the financial statements and therefore have
prepared the financial statements on a going concern basis.
LONG-TERM VIABILITY
ASSESSMENT OF LONG-TERM PROSPECTS
The directors have assessed the Group’s viability over a three-year period
to October 2024 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 2024.
The directors have chosen a three-year period to assess viability to reflect
the characteristics of the Group’s end markets. These range from
multi-year contracts such as the US Programs of Record to shorter-term
orders, such as those awarded to Roke.
PRINCIPAL RISKS
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. Chemring’s operations have been designated as
critical to the defence and national security industrial base in all territories
that we operate in. All our businesses remain open with business
continuity plans mobilised at every location.
SENSITIVITY ANALYSES
Sensitivity analyses were run to model the financial and operational impact
of plausible downside scenarios of these risk events occurring individually
or in combination. These included the impacts of a further deterioration
in the macroeconomic environment, including how CV-19 may impact the
economy and future government policy and spending, under-performance
in executing the Group’s strategy, failure to achieve operational
improvement 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.
CONFIRMATION OF VIABILITY
Based on the consolidated financial impact of the sensitivity analyses and
associated mitigating internal controls and risk management actions that
are either now in place or could be implemented, the Board has been able
to conclude that the Group will be able to maintain sufficient bank facilities
to meet its funding needs over the three-year period and those forecasts
show compliance with covenants under the revolving credit facility.
72
Chemring Group PLC Annual report and accounts 2021
NON-FINANCIAL INFORMATION STATEMENT
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.com.
REPORTING REQUIREMENT
OUR APPROACH
WHERE TO READ MORE
PAGE
RELEVANT POLICIES WHICH GOVERN
ENVIRONMENTAL MATTERS
- Group health, safety and environmental policy
- Introduction to sustainability
- Environment
EMPLOYEES
- People policy
- Stakeholder engagement
- Group health, safety and environmental policy
- Our people
- Directors’ remuneration policy
- Health and safety
- Whistleblowing policy
- Code of Conduct
- Ethics and business conduct
- Directors’ remuneration report
SOCIAL AND COMMUNITY
MATTERS
- Community investment policy
- Our people
- Code of Conduct
- Ethics and business conduct
RESPECT FOR HUMAN RIGHTS
- Modern Slavery Act Statement
- Our people
- People policy
- Supplier Code of Conduct
- Code of Conduct
- Anti-corruption policy
- Bribery Act Compliance Manual
- Policy on sales to customers located in
higher-risk territories
- Offset policy
- Code of Conduct
ANTI-BRIBERY AND
CORRUPTION
BUSINESS MODEL
STAKEHOLDERS
RISK MANAGEMENT
NON-FINANCIAL KEY
PERFORMANCE INDICATORS
- Ethics and business conduct
- Ethics and business conduct
- What we do
- Investment case
- Business model
- Target markets
- Strategy
- Stakeholder engagement
- Corporate governance report
- Risk management
- Principal risks and uncertainties
- Key performance indicators
- Health and safety
- Environment
- Our people
39
46
21
49
43
54
94
49
54
49
54
54
2
10
18
24
26
21
76
62
64
28
43
46
49
Chemring Group PLC Annual report and accounts 2021
73
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BOARD OF DIRECTORS
EXPERIENCED LEADERSHIP
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 14 December 2021):
5 years, 7 months
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
3 years, 6 months
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
4 years, 11 months
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
10 years, 3 months
EXPERIENCE:
- Board experience at Chairman and
EXPERIENCE:
- Extensive senior management
EXPERIENCE:
- Extensive international experience
EXPERIENCE:
- Legal, compliance and
governance expertise
in the defence sector
- 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.
Chief Executive level
- Extensive international experience
within the industrial goods and
engineering sectors
- Expertise in operational excellence
and lean manufacturing
experience in the defence sector
- International experience in both
service and manufacturing
industries
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.
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 Babcock
International Group PLC*, and was
previously a non-executive director
of IMI PLC and 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 Energy
Transition Partners B.V. and holds
advisory roles with Geely Group and
Rock Tech Lithium, Inc. 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.
74
Chemring Group PLC Annual report and accounts 2021
COMMITTEE MEMBERSHIP
A Audit Committee
N Nomination Committee
R Remuneration Committee
Denotes Chairman
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 14 December 2021):
2 years, 5 months
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
5 years, 7 months
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
3 years, 1 month
BOARD LENGTH OF SERVICE
(as at 14 December 2021):
1 year, 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 IOG 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.
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 Signature
Aviation plc and 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.
* Designates a current public company appointment
Chemring Group PLC Annual report and accounts 2021
75
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 2021. The report explains how the
Board operates and how corporate governance is addressed in Chemring.
THE 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 page 98.
PURPOSE, VALUES AND CULTURE
The Board recognises its role in establishing the purpose and values of the
Group, and embedding these throughout the organisation.
Our purpose at Chemring is to help make the world a safer place. Across
physical and digital environments, our businesses and our employees deliver
innovative protective technologies to detect and defeat ever-changing
threats. Our purpose and our core values of Safety, Excellence and Innovation
form the foundation for our strategy, our business and our organisation.
Examples of our purpose in action are set out on pages 4 to 9.
Our Code of Conduct reflects our purpose and our values, and 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. The Code of Conduct was updated
and reissued to all employees during the year.
During the year a culture “check-in” review was conducted on behalf of
the Board. Discussions were held with a wide range of employees from
across the Group in order to assess the changes in culture over the last
two years. The key themes arising from the review were considered by
the Board and action plans developed for driving further improvements
in the culture.
GOVERNANCE AND OPERATIONAL FRAMEWORK
In 2020, we established an Ethics & Compliance Committee, which I chair,
with the other members being the Group Chief Executive, the President
of our US operations and the Group Legal Director & Company Secretary.
Carl-Peter Forster
Chairman
“ Our Operational Framework and our
Code of Conduct promote a set of
policies, practices and behaviours which
are fully aligned with Chemring’s purpose,
values, vision and strategy.”
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Chemring Group PLC Annual report and accounts 2021
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 2021, with the
exception of provision 38 in relation to the alignment of executive
directors’ pensions with those of the wider workforce. As described on
page 96, these will be aligned with effect from 1 November 2022.
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
10, 39
79
22, 82
21, 82
21
83
84
83
84
86, 92
83
74
86
86, 93
88
89
90
62, 87
90
62
94
94
102
The Committee continues to maintain 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 54.
Our Operational Framework, which was implemented in 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, Laurie
Bowen is designated as the non-executive director with responsibility for
employee engagement on behalf of the Board. Mrs Bowen held a number
of 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 these meetings has continued to be 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 20 to 23 and later in this report.
BOARD EFFECTIVENESS
With the easing of CV-19 related restrictions during the year, the Board
was able to resume in-person meetings on a more frequent basis.
However, the Board as a collective was unable to visit as many sites as
planned at the beginning of the year and we intend to resume this activity
during 2022. Notwithstanding this, 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 develop the strong relationship established with our US
Board in recent years, and whilst we were once again 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 significance of our US businesses,
it is imperative that we maintain positive interactions with the US Board
and, subject to any new travel restrictions which may emerge, we plan to
resume our in-person engagement with two meetings in the US
during 2022.
BOARD EVALUATION
Having completed a full externally-facilitated Board performance
evaluation in late 2020, our evaluation this year was conducted internally.
Further details of the process adopted and key actions arising out of the
review are set out on page 86. These will be addressed as part of our
continuing efforts to improve the effectiveness of the Board over the
forthcoming year.
Carl-Peter Forster
Chairman
14 December 2021
Chemring Group PLC Annual report and accounts 2021
77
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.com/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.
See page 88
See page 92
(Audit Committee report)
(Nomination Committee report)
REMUNERATION COMMITTEE
Sets and reviews the directors’
remuneration policy, and oversees
remuneration arrangements for the senior
leadership.
See page 94
(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
Assists the Group Chief Executive with oversight of the delivery of the Group’s strategy, monitoring of the operational and financial performance
of the businesses, allocation of resources across the Group, management of risk, and implementation of the Group’s Operational Framework and
governance policies.
The Group Chief Executive chairs the Executive Committee, which meets bi-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 Group Strategy and
Corporate Development 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.com).
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 62
(Risk management)
See page 54
(Ethics and business conduct)
SUSTAINABILITY COMMITTEE
Oversees the implementation of the
Group’s ESG strategy; monitors progress
against agreed ESG targets and identifies
further ESG-related initiatives.
See page 39
(Introduction to sustainability)
78
Chemring Group PLC Annual report and accounts 2021
PURPOSE
Chemring’s purpose is to help make the world a safer place. Across physical and digital environments, our exceptional teams deliver innovative
protective technologies to detect and defeat ever-changing threats. Further details on our purpose in action and how it links to our strategy and
values can be found on pages 4 to 9.
CULTURE AND VALUES
The Board is responsible for ensuring that the Company’s culture is aligned with its purpose, values and strategy. We are committed to creating an
inclusive culture across Chemring, where everyone does the right thing and takes personal responsibility for their actions. This culture is promoted
through leadership and a strong “tone from the top” and is embedded in our Code of Conduct and our Operational Framework, both of which bind
our purpose, values, behaviour, policies and procedures, and provide the necessary governance to enable us to operate in a safe, consistent and
accountable way.
The Chairman is responsible for ensuring that the Board demonstrates commitment to our values and culture by operating correctly and taking the
right actions on behalf of shareholders and other stakeholders. The Group Chief Executive, supported by the Executive Committee and the business
unit leadership teams, is responsible for ensuring that our values and culture are fully embedded within all aspects of our operations.
During the year a culture “check-in” review was conducted on behalf of the Board. Discussions were held with a wide range of employees from across
the Group in order to assess the changes in culture over the last two years. The key themes arising from the review were considered by the Board and
action plans developed for driving further improvements in the culture. Further details can be found on page 50.
HOW THE BOARD MONITORS CULTURE
ESTABLISHMENT OF CULTURE
MONITORING OF CULTURE
SAFETY
- HSE Policy, Management System Framework
and Strategy
- Focus on “Journey to Zero Harm” and drive towards
a proactive safety culture
- Healthy Workplace Committee
- Technical Safety Committee
EMPLOYEES
- Code of Conduct
- Monthly video-blog by the Group Chief Executive
and Group-wide communication programme
- Diversity, equity and inclusion initiatives
- Employee development programmes
- Sustainability Committee and inclusion of ESG
objectives in short and long-term incentive arrangements
GOVERNANCE
AND BUSINESS
CONDUCT
- Code of Conduct
- Operational Framework
- Ethics & Compliance Committee
- Chemring Compliance Portal
- Mandatory training programmes
- Whistleblowing policy and procedures
INTERNAL
CONTROL
AND RISK
MANAGEMENT
- Operational Framework and operational
assurance process
- Group Finance Manual
- Risk Management Committee
- Risk Management Policy and Framework
- Internal audit programme
- Monthly reporting to the Board on safety performance against
key performance indicators, 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
- 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, and undertakes periodic culture “check-ins”
- Reporting to the Board on progress against established
ESG targets
- Board site visits, albeit these were restricted by CV-19 during
the year
- 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 improvements
- The Group Legal Director 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
- 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
- Operational assurance statements are required to be submitted by
the businesses on a half-yearly basis
Chemring Group PLC Annual report and accounts 2021
79
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CORPORATE GOVERNANCE REPORT continued
BOARD LEADERSHIP AND COMPANY PURPOSE continued
BOARD ACTIVITIES IN 2021
LEADERSHIP
STRATEGY
- Monitored the continuing impact of CV-19 on the Group and the
implementation of crisis management and business continuity plans
- Approved the updated five-year plan and strategy for the Group
- Engaged in reviews of organic and inorganic growth opportunities
- Reviewed the company’s purpose, vision and values
across the Group
- Monitored culture through feedback on employee sentiment measured
- Reviewed progress on the US Programs of Record
through “Employee Voice” and a culture “check-in” review
- Considered the implications for the Group of the UK Government’s
- Completed the annual Board performance evaluation
defence and security review
- Approved the acquisition of the Cubica Group
FINANCIAL
HEALTH, SAFETY, ENVIRONMENT AND SUSTAINABILITY
- Monitored performance of the businesses against the 2021 budget
- Monitored health and safety key performance indicators on a
- Approved the 2022/2023 budgets
monthly basis
- Approved the half year results, and the annual report and accounts
- Approved the refinancing of the Group’s revolving credit facilities
- Reviewed the Group’s capital allocation policy
- Agreed a revised dividend strategy, approved the interim dividend and
made a recommendation for the final dividend
- Received briefings on significant incidents and high potential near misses
- Monitored developments with regards to CV-19 and the potential
impact on the businesses
- Approved the updated Group HSE Strategy and HSE Management
System Framework, and reviewed progress against key objectives
- Approved additional HSE-related investment at the Tennessee, Scottish
and Norwegian facilities
- Approved the Group’s ESG strategy and key targets, and the
establishment of the Sustainability Committee
PEOPLE AND CULTURE
GOVERNANCE, RISK AND REGULATORY
- Received regular reports from the Remuneration Committee
- Reviewed the Group’s risk register, and completed the annual assessment
- Considered feedback from Laurie Bowen, the non-executive director
designated to engage with employees on the Board’s behalf, on issues
raised with Mrs Bowen by employees
of the Group’s internal control and risk management systems
- Received regular updates from the Audit Committee and the Ethics &
Compliance Committee
- Reviewed the Group’s talent framework and succession planning
- Reviewed the Group’s digital transformation and cyber
- Reviewed the Group’s diversity, equity and inclusion strategy
- Received feedback on employee sentiment across the Group
security strategies
- Received updates on key legal issues and regulatory matters impacting
the Group
- Received regular updates on significant whistleblowing reports
- Reviewed the Company’s compliance with the Code
- Approved the Group’s Modern Slavery Act statement for 2021
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
HOW THE BOARD CONSIDERS STAKEHOLDERS IN ITS DECISION MAKING
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;
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Chemring Group PLC Annual report and accounts 2021
- desirability of the company maintaining a reputation for high standards of business conduct; and
- need to act fairly as between members of the company.
The statement of compliance with section 172 is set out on pages 20 to 23, together with details of how the Board engages with stakeholders and how
the Board monitors stakeholder interests. Set out below are some specific examples of how the Board considered stakeholders in their decision making
during the year.
STRATEGY DEVELOPMENT
- The Board received detailed briefings on the UK Government’s defence and security policy documents published in March 2021, comprising the
Integrated Review, the Defence Command Paper and the Defence and Security Industrial Strategy. The UK Ministry of Defence and national security
agencies are key customers for the Group and the policy documents provided valuable input into the Board’s consideration of the Group’s updated
strategy and five-year plan in July 2021. The Board also considered the implications for the Group of the change in administration in the US and how
the reallocation of funding priorities might impact on the Group’s future strategy.
- The Board 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.
ACQUISITION OF THE CUBICA GROUP
- In considering and approving the acquisition of the Cubica group of companies during the year, the Board reflected on how the acquisition would be
viewed by shareholders and how it would contribute to the longer-term success of Roke and the wider Group.
- The Board also considered how the acquisition would enable Roke to better serve its customers, a number of whom were also Cubica’s customers,
and how employees at both Roke and Cubica might benefit from the opportunities provided for development and diversification within the larger
combined organisation.
CAPITAL INVESTMENT PROGRAMMES AT COUNTERMEASURES USA, CHEMRING ENERGETICS UK AND CHEMRING NOBEL
- In approving additional capital investment at the Countermeasures business in Tennessee, at Chemring Energetics UK and at Chemring Nobel during
the year, the Board considered how we could continue to improve safety for the employees on these sites and strive to meet our key customers’
future demand requirements. Feedback received from key customers in the US, the UK and Norway on the strategic importance and criticality of
our operations was also considered by the Board.
DEVELOPMENT OF ESG STRATEGY
- The Board commissioned a materiality assessment during the year as part of the development of the Group’s ESG strategy. This assessment
identified the most significant economic, environmental, social and governance topics, from both a risk and opportunity perspective, for a selection
of our stakeholders including shareholders, customers, suppliers and employees, and ranked them according to importance. This provided a key
input to the the ESG strategy and development of ESG targets. Further details can be found on pages 39 to 42.
DIVIDEND POLICY
- In agreeing a new dividend strategy for the Group, the Board considered feedback received from investors on the overall capital allocation policy
and the need for a sustainable but growing dividend which reflected the performance of the Group.
EXECUTIVE REMUNERATION
- In developing the updated directors’ remuneration policy, the Remuneration Committee considered how the remuneration and incentive
arrangements for the executive directors would align their interests with those of shareholders. Feedback was sought from the Group’s larger
shareholders on the proposed changes to the policy, further details of which are set out on pages 94 to 96.
- The Remuneration Committee also considered how the remuneration arrangements for the executive directors would be flowed down to the
next level of management and how they compared with remuneration arrangements for employees more broadly across the Group, particularly
with regards to salary increases, pension contributions and incentive arrangements.
Chemring Group PLC Annual report and accounts 2021
81
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CORPORATE GOVERNANCE REPORT continued
BOARD LEADERSHIP AND COMPANY
PURPOSE continued
EMPLOYEE ENGAGEMENT
Laurie Bowen is designated as the non-executive director who engages
with employees on behalf of the Board. Mrs Bowen held a number of
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 each meeting was different due to the diversity
of the businesses and the range of employees who participated in the
discussions, the following topics were typically addressed at every meeting:
- the role of the Board and its responsibilities, and, where appropriate, the
interaction between the UK and the US Boards;
- application of the Group’s values, particularly in relation to safety;
As a result of CV-19 related restrictions, we were unable to hold the 2021
Annual General Meeting in person but shareholders were invited to
submit questions to the Board ahead of the meeting. We are planning to
hold the next Annual General Meeting in March 2022 in person in the
usual manner, subject to any new restrictions which may be imposed over
the next few months as a consequence of CV-19. The Notice of Annual
General Meeting, which will be sent to shareholders in January 2022, will
provide confirmation of the arrangements.
BOARD SITE VISITS
During the year, the Board as a collective visited Roke and received a
presentation from the management on their business performance, future
strategy, and key opportunities and challenges. The Board had planned to
visit the Tennessee countermeasures facility in September and to meet
in-person with our US Board but were prevented from doing so by
CV-19-related travel restrictions.
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 intend to resume our programme of site visits in the coming year,
with visits planned to two of our US businesses.
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 four 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
internal stakeholders in the US, and this is a key input into the annual
strategy review.
- leadership and vision;
- communication and employee engagement;
- relationships with customers and other stakeholders;
- collaboration within the Group; and
- resourcing, training and employee development.
Feedback from these meetings was provided to the Board and will be
considered, as appropriate, in future decision making.
The Board believes that Mrs Bowen’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 and
periodic culture “check-ins”, the Board receives meaningful input to its
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 21 and pages 49 and 50.
SHAREHOLDER ENGAGEMENT AND THE ANNUAL GENERAL
MEETING
The Company operates a structured investor relations programme,
focused largely around the half and full year results announcements.
The Board receives reports from the Company’s advisors on feedback
received from existing and potential investors and analysts following
meetings with the executive directors.
During the year, Laurie Bowen engaged with the Company’s larger
institutional shareholders regarding the proposed new directors’
remuneration policy. Further detail on how the Remuneration Committee
responded to the feedback received can be found on pages 94 to 96.
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.
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Chemring Group PLC Annual report and accounts 2021
DIVISION OF RESPONSIBILITIES
COMPOSITION OF THE BOARD AND INDEPENDENCE
The Board currently comprises three executive directors and five
non-executive directors (including the Chairman). The biographical details
of individual directors, including details of their other significant business
commitments, are set out on pages 74 and 75.
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.
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 of Energy Transition Partners B.V.. In approving
this appointment, the Board satisfied itself that, following the cessation of
certain of his other appointments, the Chairman would continue to have
the capacity to fulfil his obligations to the Group.
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 also maintain the appropriate balance of
experience and knowledge of the business to enable them to discharge
their duties and responsibilities effectively.
NUMBER OF DIRECTORS WITH APPLICABLE SPECIFIC EXPERIENCE
8
6
Defence
Technology
Manufacturing
518+
International
Governance
Marketing
Strategy
5
6
5
8
Chemring Group PLC Annual report and accounts 2021
83
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS14
+
14
+
18
+
12
+
12
+
+
12
+
+
P
CORPORATE GOVERNANCE REPORT continued
DIVISION OF RESPONSIBILITIES continued
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
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Chemring Group PLC Annual report and accounts 2021
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 82, at least once a year.
SCHEDULED BOARD AND COMMITTEE MEETINGS HELD DURING THE YEAR
4
3
2
1
0
November
December
January
Board
March
April
May
June
July
September
Audit
Nomination
Remuneration
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS
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
Board
(8 scheduled
meetings and
1 ad hoc
meeting)
Audit Committee
(5 scheduled
meetings)
Nomination
Committee
(1 scheduled
meeting)
Remuneration
Committee
(5 scheduled
meetings)
9(9)
9(9)
9(9)
9(9)
9(9)
9(9)
9(9)
9(9)
—
5(5)
5(5)
—
5(5)
—
5(5)
—
1(1)
1(1)
1(1)
—
1(1)
—
1(1)
—
5(5)
5(5)
5(5)
—
5(5)
—
5(5)
—
The maximum number of meetings which each director could have attended is shown in brackets.
In addition to the scheduled meetings, one ad hoc Board meeting was convened to approve completion of the acquisition of the Cubica group of
companies, which arose between scheduled meetings.
During the year, the Chairman met regularly with the non-executive directors without the executives being present.
Chemring Group PLC Annual report and accounts 2021
85
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CORPORATE GOVERNANCE REPORT continued
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.
PERFORMANCE EVALUATION
The performance evaluation of the Board was externally facilitated in 2020
and an internal evaluation was therefore conducted during the year.
Questionnaires were sent to each of the directors for completion, with a
focus on:
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.
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 at least 33% of Board should be female. We
remain committed to further improving diversity on the Board, the
Executive Committee and the wider senior leadership team.
Further details on the Board’s approach to diversity are set out in the
Nomination Committee report on pages 92 and 93.
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 Group Legal Director & Company Secretary also provides detailed
information on the operation of the Board and its committees, directors’
legal duties, and responsibilities on appointment.
- Board leadership;
- operation of the Board and its committees;
- Board composition and succession;
- the Board’s role in establishing the Company’s purpose and values;
- strategy development;
- performance and risk monitoring;
- audit and internal control; and
- identification of other areas in which the Board could improve
its effectiveness.
The responses were consolidated by the Group Legal Director &
Company Secretary 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 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.
ACTIONS FOR THE YEAR AHEAD
- Further development of the Board and Nomination Committee’s focus
on diversity, equity and inclusion and succession planning.
- Continuing focus on future strategic growth.
- Resumption of the Board’s site visit programme.
The Company meets the cost of appropriate external training for directors,
the requirement for which is kept under review by the Chairman.
- Further strengthening of the Board’s interactions with key stakeholders.
- Increased interactions between the non-executive directors outside of
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.
scheduled Board meetings.
- Review of monthly Board reporting.
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.
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Chemring Group PLC Annual report and accounts 2021
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 123.
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 2021,
taken as a whole, is fair, balanced and understandable. Furthermore, the
Board believes that the disclosures set out on pages 1 to 73 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 2021 are
set out on page 63.
OPERATIONAL FRAMEWORK
Our Operational Framework, which was implemented in January 2019,
incorporates a broad range of policies and procedures which have 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, there is 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 is
now an important input to our internal audit and risk management activities.
AUDIT
Details of the Group’s external and internal audit activities can be found in
the Audit Committee report on pages 88 to 91.
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 72.
Chemring Group PLC Annual report and accounts 2021
87
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
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Chemring Group PLC Annual report and accounts 2021
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 2020 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 2021 half year and full year results, and the
external and internal audit activity during 2021.
MEMBERSHIP OF THE AUDIT 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 85.
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 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.
THE COMMITTEE’S ACTIVITIES DURING THE YEAR
AREAS OF FOCUS
MATTERS CONSIDERED
FINANCIAL
REPORTING
- Content of the Group’s interim and
preliminary results announcements and
the annual report, and in particular,
whether the annual report was fair,
balanced and understandable
- Appropriateness and disclosure of
accounting policies, key judgements and
key estimates
- The presentation of alternative
performance measures
- The Group’s going concern status and
viability statements
- Financial Reporting Council thematic
reviews
RISK AND CONTROL
ENVIRONMENT
- Effectiveness of the Group’s systems of
internal control
- Implementation of new ERP systems
across the Group
- Department for Business, Energy and
Industrial Strategy consultation on audit
and corporate governance reforms
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 strategy and plan
- Effectiveness of the internal auditors and
their key findings
FINANCIAL REPORTING
A summary of the significant issues considered in relation to the 2021
financial statements is set out overleaf.
The Committee also reviewed the following reports issued by the
Financial Reporting Council (the “FRC”) on their thematic reviews of:
- financial reporting disclosures in relation to cash flows and liquidity risk;
- interim reporting;
- alternative performance measures; and
- going concern and viability.
and considered how the matters raised had been addressed in the 2021
half year results statement and the 2021 financial statements.
In May 2021, the Company received a letter from the FRC detailing the
findings of their review of the Group’s 2020 financial statements. The
FRC’s review was based on the annual report and accounts and did not
benefit from detailed knowledge of the business or an understanding of
the underlying transactions entered into. It was, however, conducted by
staff of the FRC who have an understanding of the relevant legal and
accounting framework. The Committee considered the matters raised by
the FRC, which principally related to the disclosures in respect of the
Group’s legacy UK defined benefit pension scheme, the designation of key
management personnel and tax charges on non-underlying items. The
outcome of the findings raised by the FRC did not have a significant impact
on the Group’s 2020 financial statements and no adjustment to the prior
year disclosures were required. The Committee approved the response to
the FRC, who subsequently confirmed that their review had been closed.
The FRC’s observations were reviewed again by the Committee as part of
the preparation of the 2021 financial statements to ensure that disclosure
improvement points raised by the FRC were actioned.
Chemring Group PLC Annual report and accounts 2021
89
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT COMMITTEE REPORT continued
SIGNIFICANT ISSUES 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 2021 and 31 October 2021, against the latest forecasts for the
businesses concerned and the future strategic plan for the Group.
CAPITALISED DEVELOPMENT COSTS
The Committee continued to monitor the level of development costs
capitalised during the year and the periods over which such costs are to be
amortised. Detailed reviews of the Group’s most significant research and
development projects, and their associated capitalised development costs,
were undertaken by the Committee in April 2021 and September 2021. It
was concluded that no impairment charges were required in 2021.
ALTERNATIVE PERFORMANCE MEASURES
The Committee reviewed the use of alternative performance measures
in the interim results statement 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.
CONTINGENT LIABILITIES
The Committee considered the appropriate accounting treatment of the
Group’s potential tax liability which might have arisen 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 continue to
treat this as a contingent liability at the half year. HM Revenue &
Customs confirmed that the Group had no liability in respect of this
matter in October 2021.
The Committee is required to consider whether it is appropriate to adopt
the going concern basis in preparing the interim and full year results. In order
to satisfy itself that the Group has sufficient financial resources to enable it to
continue trading for the foreseeable future, the Committee regularly reviews
the adequacy of the Group’s financing facilities against future funding
requirements and working capital projections. Based on its review of the
Group’s forecasts during the year and discussions with the external auditor,
the Committee recommended to the Board the adoption of the going
concern basis for the preparation of the interim and full year results.
The Group is also required to make a statement on its long-term viability
in the financial statements. The Committee considered the period over
which the Group’s viability would be assessed and having concluded that a
three-year period was appropriate, the Committee undertook a review of
the analysis and projections which supported the viability assessment prior
to submission to the Board. 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 72.
90
Chemring Group PLC Annual report and accounts 2021
Since the year end, the Committee has reviewed the form and content of
the 2021 annual report and accounts, and recommended to the Board
that, taken as a whole, the annual report and accounts should be
considered as fair, balanced and understandable. The Committee also
concluded that the annual report and accounts provides the information
necessary to assess the Group’s position and performance, business
model and strategy.
In making this assessment, the Committee considered:
IS THE REPORT FAIR?
- Is the narrative in the strategic report consistent with the financial
statements?
- Have any significant matters been omitted?
IS THE REPORT BALANCED?
- 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?
PROPOSED AUDIT AND CORPORATE GOVERNANCE REFORMS
The Committee has reviewed the consultation on proposed audit and
corporate governance reforms published by the Department for Business,
Energy and Industrial Strategy in March 2021 and considered the potential
implications for the Group. Developments with regards to the proposed
reforms are being closely monitored by the Committee.
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.
There are no contractual or similar obligations to restrict the choice of
external auditor.
KPMG was appointed as the Group’s external auditor in March 2018,
following a tender process, and Andrew Campbell-Orde has acted as
audit partner since the appointment.
The audits of the Group’s US businesses 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. KPMG’s UK
and US audit teams need to co-ordinate their work to ensure that the
audit of the consolidated Group results at the year end can be completed
efficiently. In order to facilitate this, the annual audit plan provided for
planning work for the 2021 year end audits of the US businesses to
commence in the first half year of the financial year, which enabled the
Group audit to be completed within the requisite timeframe following
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.
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 arrangements, 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 Committee has recommended to the Board that KPMG be
reappointed as the Group’s auditor at the 2022 Annual General Meeting.
The internal audit plan for 2021 included specific focus on:
- the key financial and operating controls within the business;
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.
- IT and cyber-security governance and controls;
- ERP system implementations;
- the Group’s risk management systems and processes;
- compliance with the US International Traffic in Arms Regulations
(“ITAR”) in the Group’s non-US businesses; and
- implementation of the Chemring Compliance Portal.
Restrictions on travel and visitor access to our sites as the result of CV-19
continued to restrict PwC’s ability to carry out on-site internal audits in
person but PwC completed all planned reviews during the year remotely
where necessary.
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 auditor, 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 2022. 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 2022 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
14 December 2021
Chemring Group PLC Annual report and accounts 2021
91
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
92
Chemring Group PLC Annual report and accounts 2021
INTRODUCTION
I am pleased to present the Nomination Committee’s report for the year
ended 31 October 2021.
The main focus of the Committee during the year was on succession
planning for the Board and the wider leadership team. The Committee
also considered the reappointments of various members of the Board.
Further details are set out below.
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 my 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, the Executive Committee and the
wider leadership team
OPERATION OF THE COMMITTEE
The Committee’s responsibilities are set out in its terms of reference,
which are available on the Company’s website. The Committee reviews its
terms of reference and its effectiveness annually, and recommends to the
Board any changes required as a result of the review.
Meetings of the Committee are attended, at the invitation of the Chairman,
by the Group Chief Executive and the Chief People Officer 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 one meeting held during the year are
shown on page 85.
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.
DIVERSITY, EQUITY AND INCLUSION
The Committee recognises the importance of diversity, equity 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,
neurodiversity, sexual orientation, social and cultural background,
and belief.
The Board performance evaluation completed during the year, further
details of which are set out on page 86, 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.
APPOINTMENTS TO THE BOARD
The Committee is responsible for reviewing and recommending new
appointments to the Board, and for considering the re-appointment of
current directors.
Stephen King’s first three-year appointment as a non-executive director
expired in November 2021 and, after due consideration of his valuable
contribution to the Board and the Audit Committee, the Committee
recommended to the Board that Mr King be re-appointed for a second
three-year term.
My second three-year appointment as Chairman and a non-executive
director and Andrew Davies’ second three-year appointment as a
non-executive director will expire in April 2022 and May 2022
respectively. The Committee has concluded that we both continue to
demonstrate commitment to our roles and make an effective contribution
to the Board, and we have both accepted the Board’s offer to take up
further three-year appointments on expiry of our current terms.
With regards to the appointment of new non-executive directors to the
Board, the Committee has an established process for identifying the
attributes, skills and experience required of potential candidates. External
recruitment consultants are engaged to undertake the search and provide
an initial long list of potential candidates, which is reviewed by the
Committee. Members of the Committee then meet with short-listed
candidates, before selecting a small number of preferred candidates to
meet with other members of the Board. A similar external search will also
generally be undertaken for new executive directors, with any internal
candidates being required to participate in this process.
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.
A new succession planning framework was adopted across the Group
during the year. Utilising this framework, an assessment of the succession
plans for individuals in key leadership roles at the Group level and within
the businesses, including details of the internal talent pipeline, was
developed and presented to the Committee for consideration. The need
for more diversity within the talent pipeline was acknowledged by the
Committee and this will be a key focus of our people strategy over the
next few years.
The Committee is satisfied that appropriate succession plans are in place
for the Board and key members of the Executive Committee covering
emergency replacements. Longer-term appointments will be considered
on a case-by-case basis, including internal candidates where available or
external recruitment where deemed more appropriate.
Further details on our approach to succession planning are set out on
page 52.
The Committee is cognisant of the voluntary targets set out in the
Hampton-Alexander Review that at least 33% of Board and Executive
Committee members, and their direct reports, should be female. We
have met this target from a Board perspective 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.
Further details on our approach to diversity, equity and inclusion are set
out on page 52.
The charts below 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.
Carl-Peter Forster
Chairman of the Nomination Committee
14 December 2021
DIVERSITY
BOARD
3
5
Male
Female63+
Female80+
SENIOR MANAGERS
Male
72
18
EXECUTIVE COMMITTEE
7
2
Male
Female78+
Female71+
ALL EMPLOYEES
Male
1,609
646
Chemring Group PLC Annual report and accounts 2021
93
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
+
20
+
+
P
+
29
+
+
P
+
22
+
+
P
+
37
+
+
P
DIRECTORS’ REMUNERATION REPORT
REMUNERATION OVERVIEW
INTRODUCTION
The directors’ remuneration report for the year ended 31 October 2021
comprises:
- my annual report on the activities of the Remuneration Committee
during the year;
- the updated directors’ remuneration policy which will be put to
shareholders for approval at the Annual General Meeting on
3 March 2022;
- the annual report on remuneration, which explains how the current
directors’ remuneration policy was implemented in 2021;
- additional statutory information on remuneration arrangements; and
- an overview of how the new policy will be implemented in 2022.
THE REMUNERATION COMMITTEE’S
ACTIVITIES DURING THE YEAR
During the year the Committee carried out its triennial review of the
executive directors’ remuneration policy. This review was undertaken in the
context of the transformation of the Group successfully implemented by
our Chief Executive, Michael Ord, since his appointment in 2018. The
outputs of his leadership have included double digit organic revenue growth
and a 370 basis point margin expansion over the period to 2021, in addition
to delivering over £400m of shareholder value and enabling the Company
to join the FTSE 250 Index. The changes proposed to our remuneration
policy and practice recognise the growth of Chemring since our last policy
review in 2019, and ensure our remuneration policy is right-sized and
strategically aligned as we look to deliver against our growth strategy.
As part of the review, the Committee engaged with our major shareholders
and the leading advisory agencies to explain and provide context for the
proposed changes to policy and implementation for 2022. The feedback the
Committee received was generally supportive of the proposed revisions
and our implementation for 2022. However, to reflect the preference of
some of our investors, and in particular the shareholder advisory bodies, we
made a number of changes to our original proposals, including (i) phasing
the proposed increase to the Group Chief Executive’s salary, (ii) taking into
account the increased annual bonus quantum when we set the range of
earnings per share (“EPS”) targets and (iii) replacing the personal objective
targets with consistent structured strategic objective targets for our
executive directors, which has resulted in a more demanding overall bonus
structure. Details of the revisions to policy and implementation are
summarised below and included in detail within the following directors’
remuneration report.
As part of the policy review, the Committee also considered the cascade of
remuneration below Board and the structure of incentives taking into
account the markets we operate in and the businesses we compete against.
This review has resulted in increased flexibility in the types of long-term
incentives that can be granted below the Board level to ensure we are able
to recruit and retain the best talent.
The new policy will be put to a shareholder vote at the 2022 Annual
General Meeting and, if approved, will apply for a three-year period.
Laurie Bowen
Chairman of the Remuneration Committee
REMUNERATION COMMITTEE MEMBERS
Laurie Bowen (Chairman)
Andrew Davies
Carl-Peter Forster
Stephen King
Fiona MacAulay
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.
Details of the attendance of members of the Committee at
meetings held during the year are shown on page 85. 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.
94
Chemring Group PLC Annual report and accounts 2021
In assessing remuneration outcomes this year, the Committee continued to
consider the ongoing impact of CV-19. Chemring has not been adversely
impacted by CV-19 and as such did not receive any government support
during the year.
There was continued strong performance during 2021 in both Sensors &
Information and Countermeasures & Energetics, demonstrating the ongoing
progress made in transforming Chemring into a higher quality technology-
based business. Looking forward, whilst our modernisation and operational
excellence programmes will continue, our focus is now shifting towards the
growth of our Sensors & Information segment, where our market-leading
positions and investment in high technology niches position us well in this
area of growing customer requirement – the acquisition of the Cubica
group of companies demonstrating a small but important first step in driving
further scale to grow the Roke business.
The table below summarises the Committee’s key activities and decisions
made during the year.
SUMMARY OF MAJOR ACTIVITIES
AND DECISIONS OF THE COMMITTEE IN 2021
SALARY
- 2021 salary reviews for the executive directors and
members of the senior leadership team
ANNUAL BONUS
- Consideration of the 2020 annual bonus plan
outturn
- Approval of the 2021 annual bonus plan financial
targets and strategic objectives for the executive
directors
- Approval of the 2021 annual bonus plan payments
PERFORMANCE
SHARE PLAN
(“PSP”)
- Consideration of vesting outcomes for PSP
awards made in 2018 and 2019 (in part, as the
TSR performance condition is yet to be finalised)
- Approval of 2021 PSP awards and performance
conditions
GOVERNANCE
AND POLICY
- Development of new directors’ remuneration
policy and consultation with shareholders on the
proposed policy
PERFORMANCE OUTCOMES
Performance against the 2021 annual bonus and PSP targets is explained
in more detail on pages 111 to 114 but in summary:
- Annual bonus: The annual bonus for 2021 was subject to EPS, operating
cash flow and strategic objective measures. As a result of the strong
financial performance during 2021, 100% of the EPS metric and 100% of
the operating cash flow metric will pay out. The Committee carefully
assessed the performance of the executive directors against their
individual personal objectives set at the beginning of the financial year
and concluded that 90% of the objectives had been satisfied.
The total bonus payments for 2021 are therefore 98% of maximum for
each of the executive directors.
- PSP award for Group Chief Executive (subject to performance over the three
years ended 30 April 2021): Michael Ord was granted a one-off award on
appointment which was subject to stretching EPS and total shareholder
return (“TSR”) performance conditions. Strong EPS performance over
the period and TSR performance ranking Chemring between median
and upper quartile of the peer group resulted in 86.4% of maximum vesting.
- PSP awards (subject, in part, to performance in the year ended 31 October 2021):
The PSP awards granted to the executive directors on 22 March 2019
are subject 50% to EPS targets and 50% to relative TSR targets. Based
on strong EPS growth over the three-year performance period and TSR
performance to date, it is currently expected that these awards will vest
in full but a final determination can only be made following the
conclusion of the TSR performance period in March 2022.
The Committee is satisfied the remuneration policy has operated as
intended in relation to performance and remuneration outcomes for 2021,
and did not use any discretion. In concluding that the remuneration
payments and policy have operated appropriately, the Committee
considered the bonuses payable across the Group in the context of wider
stakeholder views, individual businesses’ performance and the relativities
between employees and executive directors in light of their roles and
potential impact on the Group performance (this included considering
pay ratios).
REMUNERATION POLICY REVIEW
During the year the Committee spent time reviewing the remuneration
policy in the context of our current strategy and the transformation and
growth of Chemring since the appointment of our Chief Executive in
June 2018.
This transformation followed a rigorous strategic review in 2019 and
included the implementation of a simplified organisational structure and
business model, a reinvigoration of business processes, and a strengthening
of the governance and management teams.
The outputs have been substantial, enabling double digit organic revenue
growth and a 370 basis point margin expansion through the period from
2018 to 2021, resulting in a re-rating of our shares and the creation of
shareholder value (in excess of £400m since 2018). Furthermore, this
growth resulted in Chemring’s promotion to the FTSE 250 Index in March
2020. Chemring is now well set for future growth through our market-
leading positions in Sensors & Information and Countermeasures &
Energetics. Our strength in these business sectors is built on world-class
technologies and teams, and a culture of innovation and operational
excellence. With these fundamentals in place under the leadership of the
current executive team, our strategy is to balance short-term
performance with sustainable longer-term value creation so that we can
deliver on our core purpose.
The conclusion of the remuneration policy review was that the current
structure, subject to modest refinements, remained appropriate in light of
our current strategy. However, in recognition of the growth in the size of
the business driven from the successful business transformation
implemented by our Chief Executive, we are proposing to adjust quantum
so that remuneration is both “right sized” for the next phase of our
growth, more balanced in terms of the weighting between short-term and
long-term performance incentives and is set at a level that will enable the
retention and motivation of our talented executive team. We are also
proposing an adjustment to the provision of pension benefits for
executive directors to reflect current “best practice” expectations.
Chemring Group PLC Annual report and accounts 2021
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REMUNERATION OVERVIEW continued
REMUNERATION POLICY REVIEW continued
The key changes to policy that we are proposing to make are:
(i)
Reducing executive directors’ pensions to align with the typical
workforce rate from 1 November 2022. Incumbent executive
directors’ pensions are currently set at 20% of salary for the Group
Finance Director and Group Legal Director & Company Secretary
and 10% of salary for the Group Chief Executive, which is also the
current policy for new appointments. In line with best practice, both
incumbent executive directors’ pension provision and the provision
for any new appointments will reduce to the typical workforce rate
from 1 November 2022. With work ongoing in relation to pension
provision across the UK workforce, the applicable rate from
1 November 2022 is expected to be in the region of 7% to 8%
of salary;
(ii) Increasing the annual bonus opportunity so that it is (a) more aligned
with our long-term incentive quantum to support our strategy of
balancing short-term performance with long-term value creation and
(b) market competitive given the current size and complexity of
Chemring. The maximum annual bonus opportunity will increase to
150% of salary from 125% of salary for the Group Chief Executive
and from 100% of salary to 125% of salary for the Group Finance
Director and Group Legal Director & Company Secretary; and
(iii) Introducing ESG targets into our long-term incentive plan. The
inclusion of ESG targets reflects Chemring’s commitment to being a
socially and environmentally responsible business.
As part of the review, the Committee also reviewed the policy against
current best practice expectations and concluded that the current policy
is fully aligned with corporate governance best practice and investor and
proxy advisory guidance.
IMPLEMENTATION OF THE UPDATED POLICY FOR 2022
Base salaries were reviewed as part of the policy review and increases will
be made effective from 1 January 2022.
In reviewing the Group Chief Executive’s salary for 2022, the Committee
took into full account the fact that he was appointed on a below-market
base salary, in recognition that this was his first PLC Chief Executive role,
and the exceptional performance and leadership that he has subsequently
delivered, resulting in the business transformation noted above. In this
context, the Committee considered it appropriate to increase his base
salary to a rate that reflected his current calibre and experience. Having
considered rates of pay in similarly-sized and complex businesses, the
Committee concluded that the appropriate salary level should be £550,000.
However, having discussed the salary increase during consultation with
institutional investors, whilst the majority of those consulted noted that the
increase was well justified in our particular circumstances, it was suggested
that the Committee should consider phasing the increase in recognition of
the current executive pay environment and, in particular, the expectations
of the leading shareholder advisory bodies. As a result of the investor
feedback, the increase to salary will be phased such that the Group Chief
Executive’s salary will therefore be set at £520,000 with effect from
1 January 2022 and then increased to £555,000 with effect from
1 January 2023. The Committee will retain flexibility to adjust the
£555,000 in line with a workforce-related cost-of-living increase.
From 2024, it is expected that any future increases for the Group Chief
Executive will be limited to a workforce-related cost-of-living increase for
the remainder of the policy period.
The Group Finance Director and the Group Legal Director & Company
Secretary will both receive a cost-of-living related salary increase of 3% of
salary effective 1 January 2022, which is in line with the rate awarded to the
wider workforce for 2022. Across the workforce, rates of increase varied
and whilst the overall salary increase budget was set at 3%, individual
increases ranged from 0% to more than 10%, where individuals were
identified as being below the rate their performance in post, calibre and
experience warranted.
Pension will be unchanged at 10% of salary for the Group Chief Executive
and 20% of salary for the Group Finance Director and Group Legal Director
& Company Secretary. As previously disclosed, pension provision for the
executive directors will align to the workforce rate by 1 November 2022.
Subject to approval of the policy at the 2022 Annual General Meeting, the
annual bonus opportunity for the Group Chief Executive will be 150% of
salary and for the Group Finance Director and the Group Legal Director
& Company Secretary, 125% of salary. Performance will be based 40% on
EPS, 40% on operating cash flow and 20% on strategic objectives. 40% of
any bonus payable will be deferred in shares for three years. The increase
to bonus opportunity, as noted above, recognises the growth in size and
complexity of the business during the past three-year policy period and
has been taken into account when setting the bonus targets for 2022.
The Committee intends to grant PSP awards over 150% of salary to all
executive directors in 2022. As part of the policy review, the Committee
reviewed the PSP performance metrics in the context of strategy and
Chemring’s commitment to being a socially and environmentally
responsible business. The Committee is cognisant of the growing
importance of ESG and, as such, proposes that 20% of the awards will be
subject to defined, measurable ESG targets. The balance of the PSP
awards will continue to be subject to challenging EPS growth targets
(50%) and relative TSR targets measured versus the FTSE All-Share
excluding investment trusts (30%). Full details of the long-term incentive
plan targets are set out in the directors’ remuneration report.
CONCLUSION
I hope you will find this report helpful and informative, and that you will
support the resolutions on the directors’ remuneration policy and 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
14 December 2021
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Chemring Group PLC Annual report and accounts 2021
DIRECTORS’ REMUNERATION POLICY
This part of the directors’ remuneration report sets out the remuneration policy for the executive directors and has been prepared in accordance with
The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and the Companies (Miscellaneous
Reporting) Regulations 2018 (the “Regulations”).
This directors’ remuneration policy will be put to a binding shareholder vote at the Company’s Annual General Meeting on 3 March 2022. If approved,
the policy will apply for a three-year period from the date of the Annual General Meeting, unless shareholder approval is sought for earlier changes.
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.
DECISION MAKING PROCESS
The Committee periodically reviews the policy and its implementation to ensure it continues to allow us to incentivise and reward the executive
directors to achieve our strategy in both the short and long-term. The views of our shareholders and investor representative bodies are taken into
account in determining the policy and implementation each year as well as the UK Corporate Governance Code and market practice. The Committee
also has regard to the general pay levels and policies across the Group and takes these into account when setting executive director pay.
Operation of the policy is considered annually for the year ahead in light of the strategy and wider stakeholder experience, including the level of salary
increase, the types of performance metrics, and the weightings and target ranges for incentives.
Chemring Group PLC Annual report and accounts 2021
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DIRECTORS’ REMUNERATION POLICY continued
CONSIDERATION OF CODE PROVISIONS IN DETERMINING POLICY
When determining the directors’ remuneration policy for the executive directors, the Remuneration Committee also addressed the following factors
outlined in the 2018 UK Corporate Governance Code:
FACTOR
HOW THIS HAS BEEN ADDRESSED
CLARITY
Remuneration arrangements should be
transparent and promote effective
engagement with shareholders and
the workforce.
SIMPLICITY
Remuneration structures should avoid
complexity and their rationale and
operation should be easy to understand.
RISK
Remuneration arrangements should ensure
reputational and other risks from excessive
rewards, and behavioural risks that can
arise from target-based incentive plans, are
identified and mitigated.
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 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.
The Company operates only two incentive plans for the executive directors - an annual bonus plan to
incentivise and reward short-term performance and the PSP, which incentivises long-term
performance and aligns management’s interests with shareholder interests. The annual bonus plan
structure for the executive directors is broadly replicated in the bonus arrangements for the business
unit leaders and their direct reports.
The annual bonus plan includes non-financial strategic 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 strategic objectives which embrace the Company’s
values of Safety, Excellence and Innovation, and which are also aligned to the delivery of the Group’s
agreed strategy. The performance conditions under the PSP also incentivise long-term performance
through the delivery of strategy and shareholder value.
SUMMARY OF PROPOSED CHANGES TO POLICY
The key changes to the directors’ remuneration policy are set out below.
PENSION
- Pension for executive directors will be aligned with the workforce rate by 1 November 2022. Incumbent executive director pension is currently set at
20% of salary for the Group Finance Director and the Group Legal Director & Company Secretary and 10% of salary for the Group Chief Executive,
which is also the current policy for new appointments. In line with best practice, the executive directors’ pension provision will reduce to the typical
workforce rate from 1 November 2022 and new executive directors will also be appointed on this rate.
- A review of pension provision in the UK is currently being undertaken, with the applicable employer contribution rate expected to be in the region of
7% to 8% of salary.
ANNUAL BONUS
- The maximum bonus opportunities for the executive directors are to be increased to 150% of salary from 125% of salary for the Group Chief
Executive and to 125% of salary from 100% of salary for the Group Finance Director and the Group Legal Director & Company Secretary.
PERFORMANCE SHARE PLAN
- Reflecting Chemring’s commitment to being a socially and environmentally responsible business, there will be flexibility under the policy to use ESG
performance metrics.
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Chemring Group PLC Annual report and accounts 2021
REMUNERATION POLICY
The table below sets out each element of the executive directors’ remuneration policy, how the element is operated and the link to the
Company’s strategy.
Element
Salary
Purpose and link to strategy
Operation
Maximum
Performance assessment
- Reflects the performance of the
- Normally reviewed annually with
individual, their skills and experience
over time, and the responsibilities of
the role
- Provides an appropriate level of basic
fixed income, avoiding excessive risk
arising from over-reliance on
variable income
effect from 1 January
- Benchmarked periodically against
companies with similar
characteristics and companies
within the same sector
- Salaries take account of complexity
of the role, market competitiveness,
Group performance and the
increases awarded to the wider
workforce
- None, although overall individual and
Company performance is a factor
considered when setting and
reviewing salaries
- Salary increases will normally be in
line with those received by the
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
- Incentivises annual delivery of
- Paid in cash, with up to 40%
- Chief Executive - 150% of salary
- Mix of Group financial and
deferred as a conditional award of
deferred shares
- Other executive directors - 125%
of salary
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
- 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
non-financial objectives; financial
objectives will determine the majority
of the award and will typically include
a measure of profitability and cash
flow, although the Committee has
discretion to select other metrics
- Non-financial objectives will be
measurable and linked to goals that
are consistent with the Group’s
strategy
- Payment of the non-financial
objectives element will be subject to
an underpin based on the
Committee’s assessment of
underlying business performance,
including inter alia levels of
profitability and cash flow, as well as
health and safety performance
- Performance below the threshold for
each financial target results in zero
payment in respect of that element.
Payment rises from 0% to 100% of
the maximum opportunity for levels
of performance between threshold
and maximum with 50% of the
maximum normally payable for
on-target performance
- Includes a malus and clawback
mechanism6
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DIRECTORS’ REMUNERATION POLICY continued
REMUNERATION POLICY continued
Element
Purpose and link to strategy
Operation
Maximum
Performance assessment
Long-term
incentive plan
(performance
share plan
- “PSP”)
- Incentivises executives to achieve
- Annual grants of shares, which vest
- Normally 150% of base salary
- Awards will be subject to a
(although grants of up to 200%
of base salary may be made in
exceptional circumstances such
as on recruitment)
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
subject to the Group’s
performance measured over at
least three years
- Any shares vesting must be held by
the executives for a further period
of two years
- Executives are entitled to receive
the value of dividend payments that
would otherwise have been paid on
vested awards
- All awards are subject to the
discretions given to the Committee
in the plan rules during the vesting
period
combination of long-term measures
which are aligned to the shareholder
experience and may include financial
metrics (such as EPS), shareholder
value metrics (such as TSR), capital
efficiency measures (such as ROCE)
and ESG or strategic measures
- The Committee will have discretion
to set different measures and
weightings for awards in future years
to best support the strategy of the
business at that time
- Targets for each performance
measure are set by the Remuneration
Committee prior to each grant.
Targets will be based on a sliding scale
where appropriate
- For each measure, performance
below threshold results in zero
payment. Payment rises from 25% to
100% of the maximum opportunity
for that measure for levels of
performance between threshold and
maximum
- Includes a malus and clawback
mechanism6
All-employee
share scheme
- UK employees, including executive
- The UK Sharesave Plan has
- Participation limits are those set by
- N/A
directors, are encouraged to acquire
shares by participating in the Group’s
all-employee share plan - the UK
Sharesave Plan
standard terms
HM Revenue & Customs from
time-to-time
Pension
- Provides retirement benefits that
reward sustained contribution
- Ongoing pension provision is in the
form of a cash supplement, subject
to auto-enrolment in the Group’s
defined contribution scheme
- Legacy arrangements: 20% of base
- N/A
salary cash supplement contribution
paid in lieu of occupational pension
scheme membership
- Longer-serving employees have
- New appointments: 10% of base
accrued benefits under the Group’s
defined benefit scheme, which was
closed to future accrual for the
executive directors on 6 April 2010
salary cash supplement contribution
paid in lieu of occupational pension
scheme membership
- All UK employees, including the
executive directors, are subject to
auto-enrolment into the Group’s
defined contribution scheme, with an
employer contribution of a minimum of
4% of base salary. If executives do not
opt out of this scheme, their cash
supplement will be reduced by 4%
- From 1 November 2022, incumbent
executive director pensions will
reduce to the typical workforce rate
via a cliff-edge reduction
- Any new executive directors will
be appointed on the typical
workforce rate
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Chemring Group PLC Annual report and accounts 2021
Element
Purpose and link to strategy
Operation
Maximum
Performance assessment
Other benefits
- Provides a competitive package of
benefits that assists with recruitment
and retention
- Main benefits currently provided to
UK executives include but are not
limited to a car allowance, life
assurance and private medical
insurance
- Executive directors are eligible for
other benefits which may also be
introduced for the wider workforce
on broadly similar terms
- Cash allowance in lieu of company
car of up to £25,000 per annum
- N/A
- Other benefits will be in line with
market. The value of each benefit is
based on the cost to the Company
and is not pre-determined
- Any reasonable business-related
expenses (including tax thereon) can
be reimbursed if determined to be a
taxable benefit
Minimum
shareholding
requirements
- Aligns the interests of the executive
directors with those of shareholders
- Executive directors are expected to
build up and maintain a
shareholding in the Company
equivalent to 200% of base salary,
by retaining at least 50% of the
after-tax gain on vested PSP awards
until such time as the guidelines
have been met
- From November 2021, the
executive directors will be required
to hold shares to the value of the
shareholding guideline (i.e 200% of
base 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
NOTES:
1. A description of how the Company intends to implement the policy set out in this table for the forthcoming year is set out in the annual report on remuneration on pages 106 and 107.
2. The all-employee share plan does not have performance conditions. UK-based executive directors are eligible to participate in the UK Sharesave Plan on the same terms as other employees.
3. The Committee may make minor amendments to the policy set out above for regulatory, exchange control, tax or administrative purposes or to take account of a change in
legislation, without obtaining shareholder approval for that amendment.
4. The Regulations and investor guidance encourages companies to disclose a cap within which each element of the directors’ remuneration policy will operate. Where maximum
amounts for elements of remuneration have been set within the policy, these will operate simply as caps and are not indicative of any aspiration.
5. While the Committee does not consider it to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality, whether paid for by the
Company or another, and business travel for directors and in exceptional circumstances their families, may technically come within the applicable rules, and so the Committee
expressly reserves the right for the Committee to authorise such activities within its agreed policies (and to discharge any related tax liability).
6. The annual bonus and PSP are subject to malus and clawback provisions in the event of misconduct, error in calculation of performance, material misstatement of results, company
insolvency or serious reputational damage to the Group.
Chemring Group PLC Annual report and accounts 2021
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DIRECTORS’ REMUNERATION POLICY continued
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 policy table above);
- 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).
Ultimately, the payment of any bonus is entirely at the discretion of the
Committee. Equally, the operation of share incentive schemes is at the
discretion of the Committee. In conjunction with malus and clawback
provisions, the Committee has the flexibility to override formulaic
outcomes and recover and/or withhold sums. In choosing to use this
discretion, the Committee will consider the specific circumstances at the
time. Where such action is considered necessary, this will be clearly stated
in the relevant directors’ remuneration report.
SELECTION OF PERFORMANCE METRICS AND TARGETS
The performance-related elements of remuneration will take into account
the Group’s risk policies and systems, and will be designed to align the
senior executives’ interests with those of shareholders. The Committee
reviews the metrics used and targets set for all of the Group’s senior
executives (not just the executive directors) every year, in order to ensure
that they are aligned with the Group’s strategy and to ensure an
appropriate level of consistency of arrangements amongst the senior
executive team. All financial targets will (where appropriate) be set on a
sliding scale. Non-financial targets are set based on individual and
management team responsibilities.
The annual bonus plan performance metrics include a mix of financial
targets and non-financial objectives, reflecting the key annual priorities of
the Group. The financial metrics determine the majority of the bonus and
normally include operating cash flow - a key measure of the Group’s ability
to invest in the business, and a measure of profitability, which together
reflect the Group’s financial performance and are key measures for
shareholders. The non-financial objectives agreed on an annual basis will
be measurable and based on individual and/or team performance, and will
be consistent with the achievement of the Group’s strategy.
The Committee has previously applied EPS and TSR performance
conditions to awards made under the PSP. EPS is a measure of the Group’s
overall financial success and TSR provides an external assessment of the
Company’s performance against a peer group. TSR also aligns the rewards
received by executives with the returns received by shareholders. From
2022, the Committee will include an ESG-related performance measure to
recognise Chemring’s commitment to being a socially and environmentally
responsible business. Other performance measures, such as capital
efficiency, are also considered important within the business and may be
considered appropriate for inclusion in the PSP by the Committee.
The Committee will review the choice and relative balance of
performance measures and the appropriateness of performance targets
prior to each grant of awards under the PSP. Financial targets are reset
prior to each grant, following a review of internal and external
expectations of growth for the Group, and are based on underlying
performance assessment. The Committee retains discretion to set
different targets for future awards, providing that, in the opinion of the
Committee, the new targets are no less challenging in light of the prevailing
circumstances than those set previously. If substantially different targets to
those used previously are proposed, major shareholders will be consulted.
HOW THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY
RELATES TO THE WIDER GROUP
In addition to determining the remuneration arrangements for the
executive directors, the Committee considers and approves the base
salaries for nine other non-US senior executives. 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.
During the year, the designated non-executive director for employee
engagement held a number of remote meetings with employees from
across the Group in which the Group’s key priorities going forward and
the business strategy were discussed. Topics discussed during these
meetings also included remuneration with the designated non-executive
director sharing with employees how the annual bonus links to business
strategy and how performance is determined. Employees are encouraged
to ask questions and share their views during these meetings. During 2022,
the Committee will review its approach to employee engagement, with a
focus on remuneration matters and explaining how executive pay policy
and practices align to the pay practices for the workforce generally.
The remuneration policy described above provides an overview of the
structure that operates for the most senior executives in the Group.
Lower aggregate incentive quanta are applied at below executive level,
with levels driven by market comparatives and the impact of the role.
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Chemring Group PLC Annual report and accounts 2021
HOW THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY
RELATES TO THE WIDER GROUP continued
Employees are provided with a competitive package of benefits, which typically
includes participation in the Group’s defined contribution pension arrangements.
Long-term incentives are provided to the most senior executives and
those identified as having the greatest potential to influence performance
within the Group. However, in order to encourage wider employee share
ownership, the Company also operates a Sharesave Plan in the UK, in
which all UK employees are eligible to participate on completion of six
months’ service.
HOW SHAREHOLDERS’ VIEWS ARE TAKEN INTO ACCOUNT
The Remuneration Committee considers shareholder feedback received
on the directors’ remuneration report each year and guidance from
shareholder representative bodies more generally. Shareholders’ views are
key inputs when shaping remuneration policy, with the Company’s major
shareholders being consulted in advance in connection with proposed
changes to policy.
In relation to the formulation of this proposed pay policy, shareholders’
views were sought at an early opportunity. Feedback was generally
supportive of the changes being made. However, in recognition of
feedback from certain shareholders, certain changes were made to the
original proposals as detailed on page 96. More general comments on the
policy structure and implementation were considered by the
Remuneration Committee and will be kept under review.
LEGACY ARRANGEMENTS
For the avoidance of doubt, authority is given to the Company to honour
any commitments entered into with current or former directors (such as
the payment of a pension or the unwinding of legacy share schemes)
permitted under the current policy or which have been disclosed to
shareholders in previous directors’ remuneration reports. Details of any
payments to former directors will be set out in the annual report on
remuneration as they arise.
EXTERNAL APPOINTMENTS
The Company’s policy is to permit an executive director to serve as a
non-executive director elsewhere when this does not conflict with the
individual’s duties to the Company, and where an executive director takes
such a role they may be entitled to retain any fees which they earn from
that appointment. The executive directors do not currently have any
external appointments for which they receive fees.
POTENTIAL REMUNERATION SCENARIOS FOR
EXECUTIVE DIRECTORS
The chart below details the hypothetical composition of each executive
director’s remuneration package and how it could vary at different levels
of performance under the policy set out above.
£3,000k
£2,500k
£2,000k
£1,500k
£1,000k
£500k
£0
£2,543k
£2,153k
36%
36%
£1,178k
17%
33%
£593k
100%
50%
28%
£1,808k
£1,522k
£857k
17%
28%
55%
£476k
100%
38%
31%
31%
£1,273k
£1,073k
£607k
16%
28%
56%
£340k
100%
37%
31%
32%
Below target
Target
Maximum
Below target
Target
Maximum
Below target
Target
Maximum
Group Chief Executive
Group Finance Director
Group Legal Director
& Company Secretary
Fixed pay
Annual bonus
PSP
PSP with 50% share price growth
ASSUMPTIONS:
1. Minimum = fixed pay only (salary as at 1 January 2022 plus benefits plus pension provision of 10% of salary for Michael Ord and 20% of salary for Andrew Lewis and Sarah Ellard).
On target = fixed pay plus target annual bonus of 75% of salary for the Group Chief Executive and 62.5% for the other executive directors plus target PSP awards of 37.5% of
salary for the Group Chief Executive and the other executive directors.
Maximum = fixed pay plus maximum annual bonus of 150% of salary for the Group Chief Executive and 125% for the other executive directors plus maximum PSP awards of 150%
of salary for the Group Chief Executive and the other executive directors.
Maximum + share price growth = as maximum above, but with the value of the PSP awards increased by 50% to reflect potential share price growth.
2. The executive directors may participate in all-employee share schemes on the same basis as other employees. The value that may be received under these schemes is subject to
tax-approved limits. For simplicity, the value that may be received from participating in these schemes has been excluded from the above chart.
Chemring Group PLC Annual report and accounts 2021
103
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
POLICY ON PAYMENTS FOR LOSS OF OFFICE
All new executive directors appointed will have service contracts which are terminable on a maximum of twelve months’ notice. Provisions permitting
the Company to make any termination payments by instalments, and requiring directors to mitigate their loss in such circumstances, will be included in
each contract. The Remuneration Committee will exercise discretion in determining whether termination payments should be paid by instalments,
taking account of the reason for the departure of the director and their prior performance. Other than in gross misconduct situations, the Company
would expect to honour the contractual entitlements of terminated directors.
Other than in certain “good leaver” circumstances (including, but not limited to, redundancy, ill-health or retirement), no bonus would be payable under
the annual bonus plan unless the individual remains employed and is not under notice at the payment date. Any bonus paid to a “good leaver” would be
based on an assessment of their individual and the Company’s performance over the period, and would normally be pro-rated for the proportion of the
year worked.
Deferred bonus share awards will also normally lapse on cessation of employment, unless the executive director is deemed to be a “good leaver” by the
Remuneration Committee, as referred to above, in which case they would vest in full on the normal vesting date.
With regards to long-term incentive awards, the PSP rules provide that other than in certain “good leaver” circumstances, awards lapse on cessation of
employment. Where an individual is a “good leaver”, the Remuneration Committee’s policy for PSP awards is normally to permit awards to remain
outstanding until the end of the original performance period, when a pro-rata reduction will be made to take account of the proportion of the vesting
period that lapsed prior to termination of employment, although the Committee has the discretion to partly or completely disapply pro-rating in
exceptional circumstances. The Committee has discretion to deem an individual to be a “good leaver”. In doing so, it will take account of the reason for
their departure and the performance of the individual. Holding periods will normally continue to apply to awards post-cessation of employment.
The Committee will have authority to pay any statutory entitlements and settle claims against the Company (e.g. for unfair dismissal, discrimination or
whistleblowing) that arise on termination. The Committee may also authorise the provision of outplacement services and settle legal fees where
considered appropriate.
EXECUTIVE DIRECTORS’ SERVICE AGREEMENTS AND LOSS OF OFFICE PAYMENTS
The current executive directors have rolling service contracts, details of which are summarised in the table below:
Provision
Contract dates
Detailed terms
Michael Ord - 30 April 2018 (effective 1 June 2018)
Andrew Lewis - 12 December 2016 (effective 9 January 2017)
Sarah Ellard - 2 November 2011 (effective 7 October 2011)
Notice period
Twelve months from both the Company and from the executive
Termination payments
Contracts may be terminated without notice by the payment of a sum equal to the sum of salary due for the unexpired notice
period plus the fair value of any contractual benefits (including pension)
Payments may be made in instalments and in these circumstances, there is a requirement to mitigate loss
The Company’s policy on service agreements reflects the approach described above (e.g. notice periods will normally be twelve months or less).
The executive directors’ service contracts are available for inspection at the Company’s registered office.
RECRUITMENT OF EXECUTIVE DIRECTORS
Salaries for new hires (including internal promotions) will be set to reflect their skills and experience, the Company’s intended pay positioning, and the
market rate for the applicable role.
Where it is appropriate to offer a below-market salary initially, the Committee has the discretion to allow higher phased salary increases over a period
of time for newly-appointed directors, even though this may involve increases in excess of the rate for the wider workforce and inflation.
Benefits will be provided in line with those offered to other executive directors, taking account of local market practice, with relocation expenses or
arrangements provided if necessary. Tax equalisation may also be considered if an executive is adversely affected by taxation due to their employment
with the Company. Legal fees and other costs incurred by the individual may also be paid by the Company.
The aggregate incentive opportunity offered to new recruits will normally be no higher than that set out in the remuneration policy table. Different
performance measures and targets may be set initially for the annual bonus plan, taking into account the responsibilities of the individual and the point of
the financial year at which they join. A PSP award may be granted shortly following appointment (assuming the Company is not in a closed period). Any
incentive quantum offered above the limits set out in the existing incentive plans and policy will (save as set out below) be contingent on the Company
receiving shareholder approval for an amendment to its approved policy at its next general meeting.
Current entitlements of a new joiner from their previous employer that are forfeited (e.g. benefits, bonus and share schemes) may be bought out on
terms that take due account of the nature of the entitlements in terms of (for example) type of award, time horizon, fair value and performance
conditions. The Group’s existing incentive arrangements will be used to the extent possible, although awards may also be granted outside of these
arrangements if necessary, and as permitted under the Listing Rules, reflecting the above parameters. Such awards will not, in accordance with the
Regulations, be subject to the limits of the remuneration policy for incentive pay.
In the case of an internal hire, any outstanding variable pay awarded in relation to the previous role will be allowed to pay out according to its terms of
grant (and may be adjusted as relevant to take into account the Board appointment).
104
Chemring Group PLC Annual report and accounts 2021
Maximum
Performance
assessment
- N/A
- N/A
POLICY IN RESPECT OF THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS
Element
Purpose and link to strategy
Operation
The
Chairman’s and
non-executive
directors’ fees
Takes account of recognised
practice and set at a level that is
sufficient to attract and retain
high-calibre non-executives
- 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, the Senior
Independent Director and the non-executive director responsible for
employee engagement 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 January of each year
- Non-executive directors do not participate in any pension, bonus or
share incentive plans
- Non-executive directors may be compensated for travel,
accommodation or hospitality-related expenses in connection with
their roles and any tax thereon
- In exceptional circumstances, additional fees may be paid where there
is a substantial increase in the temporary time commitment required of
non-executive directors
CHAIRMAN’S AND NON-EXECUTIVE DIRECTORS’ LETTERS OF APPOINTMENT
Non-executive directors do not receive compensation for loss of office but are appointed for a fixed term of three years, renewable for further
three-year terms if both parties agree and subject to annual re-election by shareholders. The Chairman’s appointment may be terminated on six months’
notice by either party and the other non-executive directors’ appointments may be terminated on three months’ notice by either party. The non-executive
directors’ letters of appointment are available for inspection at the Company’s registered office.
The following table provides details of the terms of appointment for the Chairman and the current non-executive directors:
Non-executive
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Stephen King
Fiona MacAulay
Date original term commenced
Date current term commenced
Expected expiry date of current term
1 May 2016
1 August 2019
17 May 2016
1 December 2018
3 June 2020
1 May 2019
1 August 2019
17 May 2019
1 December 2021
3 June 2020
30 April 2022
31 July 2022
16 May 2022
30 November 2024
2 June 2023
Chemring Group PLC Annual report and accounts 2021
105
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
APPLICATION OF THE REMUNERATION POLICY IN 2022
This part of the report sets out how the approved directors’ remuneration policy will be implemented in 2022.
EXECUTIVE DIRECTORS
Element
Salary
Implementation
- The executive directors’ salaries were reviewed in November 2021, and the following salary increases were agreed, effective
1 January 2022:
- Michael Ord – £520,000
- Andrew Lewis – £380,358
- Sarah Ellard – £266,646
- 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 4.6% to recognise his
strong leadership role in transforming the business.
Benefits
- No changes are proposed to the structure of pension and benefits provision for 2022.
- Pension provision for all executive directors will be aligned to the typical workforce rate on 1 November 2022.
Bonus
- The maximum bonus opportunity, subject to approval of the new policy, will be 150% of salary for the Group Chief Executive
and 125% of salary for the Group Finance Director and the Group Legal Director & Company Secretary.
- The financial performance measures and weightings for the annual bonus plan will be unchanged. Following a review of
performance measures, the personal objectives will be replaced by structured strategic objectives.
- Earnings per share
- Operating cash flow
- Strategic objectives
40%
40%
20%
- Strategic 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 rate and frequency of
process safety events
- Sustainability, including deployment of the Group’s carbon reduction plans and delivery of reductions in the Group’s scope 1
and scope 2 emissions
- Ongoing implementation of the Operational Framework and demonstration of progress in operational assurance improvement plans
- Implementation of the Chemring Compliance Portal
- Deployment 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”
- Delivery of diversity, equity and inclusion objectives
- Commission new production facilities in Tennessee and develop enterprise plan for the wider site
- Delivery of organic and inorganic growth strategies for Roke and Roke USA
- Development of a chemical/biological detection growth strategy
- Achieve down-selection on the chemical/biological detection Programs of Record
- 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 strategic 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 strategic 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
106
Chemring Group PLC Annual report and accounts 2021
APPLICATION OF THE REMUNERATION POLICY IN 2022 continued
EXECUTIVE DIRECTORS continued
Element
Implementation
Performance
Share Plan
(“PSP”)
- Executive directors will be granted PSP awards over 150% of salary in 2022.
- Performance conditions for 2022 have been reweighted to take into account the introduction of an ESG measure. The performance
conditions (tested over a three-year performance period to 31 October 2024) and weightings are therefore 50% EPS, 30% relative
TSR and 20% ESG targets. 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 2022 awards will be measured as follows:
Total compound EPS growth
over the three-year performance period1
Less than 5% p.a.
5% p.a.
Between 5% p.a. and 10% p.a.
10% p.a. or more
% of EPS part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
- The TSR performance condition for the 2022 awards will be measured as follows:
Rank of the Company’s TSR against the TSR of the FTSE All-Share (excluding
investment trusts)
% of TSR part that may vest
Below median
Median
0%
25%
Between median and upper quartile
On a straight-line basis between 25% and 100%
Upper quartile or above
100%
- The ESG performance condition for the 2022 awards will be measured as follows:
Reduction in scope 1 and scope 2 emissions
over the three-year performance period2
Less than 15%
15%
Between 15% and 25%
25% or more
% of ESG part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
NOTES:
1. The EPS target range is considered stretching when viewed against internal forecasts and a broader reflection of prevailing macroeconomic factors.
2. The reduction in scope 1 and scope 2 emissions target is aligned with our strategy of becoming carbon neutral by 2030 and takes into account the
expected glidepath to reaching this goal.
- The choice of EPS, TSR and emissions reduction targets aligns with Chemring’s long-term strategic objectives of delivering
profitable growth and shareholder returns on a sustainable basis.
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.
The Chairman’s fee and the non-executive directors’ base fee will be increased by 3% effective 1 January 2022, which is in line with the budgeted
increase to be awarded to the workforce in 2022.
Details of the fees that will apply for 2022 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
Fee as at
1 January 2022
Percentage
increase
£206,000
£56,650
£10,000
£10,000
£10,000
£5,000
3%
3%
0%
0%
0%
0%
Chemring Group PLC Annual report and accounts 2021
107
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
2021 REMUNERATION AT A GLANCE
2021 REMUNERATION YEAR IN SUMMARY
SALARY
Salary increases effective 1 January 2021 were as follows:
- Michael Ord - 9.6% increase to £483,000
- Andrew Lewis - 5% increase to £369,280
- Sarah Ellard - 3% increase to £258,880
ANNUAL BONUS
Bonuses payable for 2021 performance as follows:
- Michael Ord - 122.5% of salary (£591,675)
- Andrew Lewis - 98% of salary (£361,894)
- Sarah Ellard - 98% of salary (£253,702)
PERFORMANCE
SHARE PLAN
AWARDS GRANTED
Awards made in December 2020, 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 June 2018 to Michael Ord, which were subject to performance conditions measured over the three years
ended 30 April 2021, vested at 86.4% of award value on 15 July 2021.
Awards made in March 2019 to all three executive directors, which are subject to performance conditions measured over the
three years ended 31 October 2021 for the EPS condition and over the three years ended 21 March 2022 for the TSR
condition, are currently estimated to vest at 100% of award value. Actual vesting will be determined on 22 March 2022 and will
be disclosed in next year’s annual report.
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.
108
Chemring Group PLC Annual report and accounts 2021
EXECUTIVE DIRECTORS’ TOTAL PAY
This chart illustrates the total remuneration received by the executive directors in 2021.
Michael Ord
Andrew Lewis
Sarah Ellard
Total pay
£3,549k
£1,929k
£1,295k
£0.0m
£0.50m
£1.0m
£1.5m
£2.0m
£2.5m
£3.0m
£3.5m
£4.0m
Salary
Pension and benefits
Annual bonus
PSP
ANNUAL BONUS PLAN OUTCOME
This chart illustrates the bonuses payable for performance in 2021. 60% of the bonus amount is payable in cash and 40% will be satisfied by way of an
award of shares deferred for three years.
Michael Ord
Andrew Lewis
Sarah Ellard
75%
122.5%
125%
60%
98%
100%
60%
98%
100%
Total bonus
£592k
£362k
£254k
£0.0m
£0.1m
£0.2m
£0.3m
£0.4m
£0.5m
£0.6m
£0.7m
Target (% of salary)
Actual (% of salary)
Maximum (% of salary)
PERFORMANCE SHARE PLAN OUTCOME
This chart illustrates the total value of the performance share plan award granted to Michael Ord on 26 June 2018, which vested on 15 July 2021, and
the estimated value of the awards made to all three executive directors on 22 March 2019 that will vest on 22 March 2022, based on 100% vesting of
awards. The grant value in each case 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 110.
Michael Ord
(26 June 2018
award)
Michael Ord
(22 March 2019
award)
Andrew Lewis
(22 March 2019
award)
Sarah Ellard
(22 March 2019
award)
Grant £860k
Actual vesting
value £1,024k
Value of shares vesting
Accrued dividends
Grant £589k
Grant £470k
Estimated vesting
value £1,388k
Estimated vesting
value £1,108k
Grant £302k
Estimated vesting
value £712k
£0.0m
£0.2m
£0.4m
£0.6m
£0.8m
£1.0m
£1.2m
£1.4m
Chemring Group PLC Annual report and accounts 2021
109
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REMUNERATION REPORT continued
ANNUAL REPORT ON REMUNERATION
This part of the report explains how the directors’ remuneration policy was implemented in 2021. 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 Ellard
Non-executives
Carl-Peter Forster
Laurie Bowen5
Andrew Davies6
Stephen King
Fiona MacAulay7
Total remuneration
Year
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
476
440
366
350
258
225
200
200
69
62
63
58
65
65
55
23
1,552
1,423
21
21
20
20
20
20
—
—
—
—
—
—
—
—
—
—
61
61
48
44
73
70
51
45
—
—
—
—
—
—
—
—
—
—
545
505
459
440
329
290
200
200
69
62
63
58
65
65
55
23
592
540
362
345
254
222
—
—
—
—
—
—
—
—
—
—
2,412
—
1,108
859
712
553
—
—
—
—
—
—
—
—
—
—
3,004
540
1,470
1,204
966
775
—
—
—
—
—
—
—
—
—
—
Total
£’000
3,549
1,045
1,929
1,644
1,295
1,065
200
200
69
62
63
58
65
65
55
23
172
159
1,785
1,643
1,208
1,107
4,232
1,412
5,440
2,519
7,225
4,162
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 June 2018 to Michael Ord, which were based on performance over the three years ended 30 April 2021, vested on 15 July 2021 at 86.4% of the award value.
The value of this award has been included based on the share price on date of vesting of 289.5p. The PSP awards granted in March 2019 were based 50% on EPS performance,
measured over the three years ended 31 October 2021 and 50% on TSR performance, measured over the three years from the date of grant. These awards have been included
for 2021 based on an estimate of the vesting value which comprises actual vesting for the EPS part of the award at 100% of maximum and estimated vesting of 100% of maximum
for the TSR part of the award. The actual vesting level and value will be included in next year’s report based on final vesting once TSR performance has been determined in March
2022. The estimated values are based on the average share price over the three-month period ended 31 October 2021, equating to 318p per share. The value of accrued dividends
on each award has also been included in the 2021 emoluments.
5. 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 2020 figures on a pro-rated basis. Mrs Bowen also received an additional fee of £5,000
per annum with effect from 1 January 2021 in respect of her appointment as the non-executive director responsible for employee engagement.
6. Andrew Davies received an additional fee of £10,000 per annum, included in the 2020 figures on a pro-rated basis, in respect of his Chairmanship of the Remuneration Committee
up until 4 March 2020. Mr Davies also received an additional fee of £10,000 per annum for his appointment as Senior Independent Director with effect from 1 January 2021.
7. Fiona MacAulay was appointed as a non-executive director on 3 June 2020.
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.
BASE SALARY AND BENEFITS PAID DURING THE YEAR (AUDITED)
Salaries for the executive directors were reviewed in November 2020 and increases were approved by the Remuneration Committee effective 1 January 2021.
The salaries of the executive directors during the year were therefore as follows:
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
NOTE:
1. Sarah Ellard’s salary reverted to a full-time rate of £251,340 with effect from 1 November 2020.
110
Chemring Group PLC Annual report and accounts 2021
Annual salary from
1 January 2020 to
31 December 2020
Annual salary from
1 January 2021 to
31 October 21
£440,750
£351,696
£226,2061
£483,000
£369,280
£258,880
BASE SALARY AND BENEFITS PAID DURING THE YEAR (AUDITED) continued
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.
DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR
ANNUAL BONUS (AUDITED)
80% of the annual bonus opportunity for 2021 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 2021 bonus plan,
compared with actual performance, were as follows:
Underlying diluted earnings per share
(continuing operations)
Underlying operating cash flow
(continuing operations)
Weighting
(80% of overall bonus)
50%
50%
Performance
Threshold
Target
Stretch
Threshold
Target
Stretch
Target
14.2p
14.9p
15.6p
£71.5m
£75.3m
£79.1m
Actual
16.5p
£80.0m
The personal objectives set in respect of the 2021 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 Framework
Standard and associated assurance processes
- Minimising the Group’s total recordable injury frequency rate
- Reducing the number of process safety events
STRATEGY AND CORPORATE DEVELOPMENT
- Strengthen the Group’s strategy and corporate development capability
- Commission new production facilities in Tennessee
- Secure down-selection on the AVCAD Program of Record
- Develop M&A roadmap for Roke
- Establish Roke US business development capability
- Deliver chemical/biological detection growth plan
OPERATIONS
- Strengthen the Group’s continuous improvement plans across all businesses
- Deploy the Information Technology Roadmap and implement enhanced cyber
security arrangements
FINANCING
- Refinance bank facilities
- Manage the EU State Aid contingent liability
- Reduce liabilities associated with the legacy UK defined benefit pension scheme
Key achievements
- HSE Management Systems Framework further strengthened by the
introduction of a Group-wide asset integrity standard and
assurance process strengthened utilising the EcoOnline platform.
- Total recordable injury frequency rate reduced to 0.67 (2020: 0.85).
- Process safety event rate (Level 3 & 2) 1.73 against a target of 2.5.
- Group Technical Safety Committee established.
- Group Health, Safety and Wellbeing Committee established.
- New Group Director of Strategy & Corporate Development
appointed.
- Roke M&A process established and acquisition of the Cubica group
of companies completed.
- Growth plans developed to address chemical/biological detection
and electronic warfare opportunities.
- Roke USA business unit established.
- Commissioning of new countermeasures production facility in
Tennessee commenced October 2021.
- AVCAD progressing through the EMD phase as expected, with
down-selection decision on the LRIP contract anticipated in 2022.
- Good progress made across the Group in deployment of
continuous improvement frameworks and underlying operating
margin increased to 14.6% (2020: 13.6%).
- Numerous new information systems deployed across the Group,
including new ERP systems in two US businesses and new
Microsoft M365 systems at the UK and US head offices.
- Action plan implemented to deliver compliance with the US
Government’s “CMMC” Level 3 standards.
- Revolving credit facility refinanced in July 2021, with an increased
facility limit of £150m running through to December 2024 and with
three one-year options to extend.
- Year end net debt reduced to £26.6m (2020: £48.2m).
- HMRC confirmed their investigation into the Group’s potential
exposure in relation to the EU State Aid claim had concluded in
October 2021, with the Group having no liability.
- Triennial actuarial valuation of the defined benefit pension scheme
showed technical provisions funding level of 104% as at April 2021.
Chemring Group PLC Annual report and accounts 2021
111
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
Strategic objective
Key achievements
PEOPLE
- Implementation of enhanced processes for talent development and
succession planning
- Deliver improvements in business leadership and line management capabilities
- Talent framework and succession planning process implemented
across the Group, with key leadership, subject matter experts and
functional roles identified; succession plans for the executive and
senior leadership teams reviewed with the Nomination Committee.
- Leading Our People training programme deployed Group-wide,
- Ensuring all employees have a voice in the business to strengthen our
with over 340 participants.
values-based culture
- Performance conversations framework deployed to each business.
- Employee Voice adoption rates improved and culture “check-in”
review completed.
In addition to the common strategic objectives, Andrew Lewis and Sarah Ellard were also set additional objectives in their respective areas of functional
responsibility as follows:
Andrew Lewis
- Refinance bank facilities
- Implement enhanced investor relations programme
- Oversight of the IT modernisation programme
- Implement enhanced cyber security arrangements
- Continued development of the central finance team
- Manage the EU State Aid contingent liability
Sarah Ellard
- Implement an updated operational assurance process including internal
audit standards
- Development of additional training programmes to support the
Operational Framework
- Implement further enhancements to the Group’s anti-bribery policies
and procedures
- Implement the third party due diligence module of the Chemring Compliance Portal
- Develop proposals for liability management exercises for the legacy UK defined
benefit pension scheme and progress the GMP equalisation project
- Assist with development of cyber incident crisis response plan
Key achievements
- Refinance achieved in July 2021 at a higher level of £150m,
introducing two new banks, demonstrating the importance of
ongoing relationships and, despite harder credit markets post
CV-19, at improved pricing/terms.
- Investor relations programme maintained through 2021, resulting in
a further broadening of the investor base in 2021.
- Successful oversight of IT modernisation completed with new
system live in the UK head office.
- Strong financial team successfully strengthened during year with
two new international finance directors in role.
- State Aid contingent liability successfully managed with
expectations exceeded.
Key achievements
- Operational assurance process updated and reissued in June 2021,
with more robust assurance requirements for demonstrating
compliance with key HSE, finance and legal/regulatory policies.
- Updated Code of Conduct and training programme issued.
- New policy and risk management arrangements introduced to
address sales to customers located in higher-risk territories.
- Chemring Compliance Portal deployed. Policies, training and gifts &
hospitality modules fully operational across the Group. Third party
due diligence module operational for sales partners, and good
progress made on transition of service providers and suppliers to
the new system.
- Feasibility work completed on the potential buy-in of pension
scheme liabilities.
- Chemring Security Committee established and initial phase of
cyber incident crisis response plan successfully implemented.
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. During 2021, the Committee concluded that all but a small number of objectives had been achieved in full and so the strategic
and personal targets were met at 90% of the maximum.
Based on the above performance, bonuses are payable to the executive directors under the 2021 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
strategic
objectives
(% of salary)
22.5%
18%
18%
Total bonus
payment(£) 1
£591,675
£361,894
£253,702
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.
112
Chemring Group PLC Annual report and accounts 2021
DEFERRED BONUS SHARES GRANTED DURING THE YEAR IN RESPECT OF THE 2020 BONUS
Details of the deferred bonus share awards granted on 15 December 2020 in relation to the bonus for the year ended 31 October 2020 are set out in the table below.
The awards will vest subject to continued employment in three years.
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Date of grant
Shares awarded
Face value of award1
15 December 2020
15 December 2020
15 December 2020
71,989
45,954
29,557
£215,967
£137,862
£88,671
1. Value based on the closing share price of 300p on the date of grant.
PERFORMANCE SHARE PLAN (AUDITED)
Vesting of June 2018 PSP awards
The PSP awards granted to Michael Ord on 26 June 2018 were made subject to the following performance conditions:
Measure
Total compound EPS growth per annum over the three-year period from 1 May 2018 to 30 April 2021
(50% of award)
Rank of the Company’s TSR against the TSR of the members of the comparator group over the
three-year period from 1 May 2018 to 30 April 2021 (50% of award)
Threshold vesting
5% p.a.
(25% vests)
Median ranking
(25% vests)
Full vesting
10% p.a.
(100% vests)
Upper quartile ranking
(100% vests)
The Group’s compound EPS growth on continuing operations over the three-year period ended 30 April 2021 was 55% p.a. and 100% of the part
of the award subject to the earnings per share measure therefore vested. 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 TSR over the performance period ranked 3.2 against a median of 4.5 for the comparator group and therefore 72.8% of the part of
the award subject to the TSR measure vested.
86.4% of the total award granted to Mr Ord on 26 June 2018 vested on 15 July 2021.
Details of the award granted to Mr Ord on 26 June 2018 and the amount that vested are provided below (audited):
Executive
Michael Ord
Executive
Michael Ord
Vesting date
15 July 2021
Number of shares
at grant
Number of shares
vested
Number of shares
lapsed
394,495
340,843
53,652
Value of shares
vested 1
£986,740
Value of accrued
dividends
Total value of awards
vested
£36,811
£1,023,551
NOTE:
1. Value based on the closing share price of 289.5p on 15 July 2021.
Vesting of March 2019 PSP awards
The PSP awards granted to all three executive directors on 22 March 2019 were made subject to the following performance conditions:
Measure
Total compound EPS growth per annum over the three financial years ended 31 October 2021
(50% of award)
Rank of the Company’s TSR against the TSR of the members of the comparator group over the three-year
period from 22 March 2019 to 21 March 2022 (50% of award)
Threshold vesting
5% p.a.
(25% vests)
Median ranking
(25% vests)
Full vesting
10% p.a.
(100% vests)
Upper quartile ranking
(100% vests)
The Committee set an adjusted baseline EPS of 11.3p for the year ended 31 October 2018 for the purpose of measuring the EPS performance condition,
in view of the fact that the reported EPS for that year was lower than expected as a result of an incident at the UK countermeasures business. The Group’s
compound EPS growth on continuing operations over the three financial years ended 31 October 2021 was 13.5% p.a. and 100% of the part of the
award subject to the EPS measure will therefore vest.
The Company’s TSR over the performance period cannot be ascertained until March 2022. Based on current performance to date, the TSR performance
measure is expected to vest at 100% of maximum. Total estimated vesting for the award is therefore 100% of maximum. The actual TSR performance
and vesting level will be provided in the 2022 directors’ remuneration report.
Chemring Group PLC Annual report and accounts 2021
113
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
ANNUAL REPORT ON REMUNERATION continued
DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR continued
PERFORMANCE SHARE PLAN (AUDITED) continued
Vesting of March 2019 PSP awards continued
Details of the awards granted to the executive directors on 22 March 2019 are provided below (audited):
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Vesting date
22 March 2022
22 March 2022
22 March 2022
Number of shares
at grant
Number of shares
to vest (estimated)
Number of shares
to lapse (estimated)
421,568
336,391
216,361
421,568
336,391
216,361
—
—
—
Value of shares
to vest (estimated) 1
Value of accrued
dividends
Total value of awards
to vest (estimated)
£1,340,586
£1,069,723
£688,028
£47,637
£38,012
£24,449
£1,388,223
£1,107,735
£712,477
NOTE:
1. Value estimated based on actual EPS performance over the three years ended 31 October 2021 and TSR performance over the period from 22 March 2019 to date. Value based
on the average closing share price of 318p over the three-month period ended 31 October 2021.
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
Value of award
16 December 2020
16 December 2020
16 December 2020
150% of salary
150% of salary
150% of salary
Closing
share price
on date
of grant
300p
300p
300p
Number of
conditional
shares
awarded
220,375
175,848
125,670
Face
value
£661,125
£527,544
£377,010
% 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 2020 are based as to one half of each award on the Company’s compound EPS
growth over three financial years commencing 1 November 2020 and as to the other half of each award on the Company’s TSR performance over the
same three-year period.
The EPS performance condition will be measured as follows:
Total compound EPS 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
NOTE:
1. EPS is calculated on an underlying, fully diluted and normalised basis, as specified by the Committee prior to grant.
The TSR performance condition will be measured as follows:
Rank of the Company’s TSR against the
TSR of the FTSE All-Share (excluding investment trusts)
Below median
Median
Between median and upper quartile
Upper quartile or above
% of EPS part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100
% of TSR 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 2020 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).
114
Chemring Group PLC Annual report and accounts 2021
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
48
73
51
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
Total benefit accrued at
31 October 2021
Pension
£’000 p.a.
—
—
24
Cash
£’000
—
—
72
Transfer value
of accrued
benefit at
31 October
2021
£’000
Increase in
transfer value
during year
(less members’
contributions)
£’000
—
—
461
—
—
—
Value of
benefit
for single
figure
£’000
48
73
51
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
NOTES:
1. Michael Ord receives a 10% cash supplement in lieu of pension and the other executive directors receive a 20% cash supplement.
2. Transfer values represent liabilities of the applicable scheme, and do not represent sums paid to individuals.
3. Transfer values have been calculated in accordance with the Occupational Pension Scheme (Transfer Value) Regulations 1996.
4. Sarah Ellard left pensionable service on 6 April 2010 and therefore has not accrued additional pension over the year. The accrued benefits shown are the benefits at the date of exit.
5. The scheme provided pension at a rate of 1/80th of final pensionable salary plus a cash lump sum of 3/80ths for each year of membership. Final pensionable salary was capped at
the HMRC notional earnings cap, and the scheme assumed a normal retirement age of 65. Early retirement is permissible from age 55 but accrued benefits are reduced accordingly
using the early retirement factors in force at the date of early retirement.
PAYMENTS TO PAST DIRECTORS (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 65,981 shares granted to
Mr Flowers in part satisfaction of his annual bonus for the year ended 31 October 2017 vested in full on 18 January 2021. Mr Flowers received £6,730
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 nine
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 80 employees 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.
As part of the policy review, the Committee also considered the cascade of remuneration below Board and the structure of incentives taking into
account the markets we operate in and the businesses we compete against. Prior to the policy review, Chemring operated the PSP below Board,
typically covering around 40 employees, who were 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. Having reviewed the long-term incentive structures below Board, the Committee
concluded that the sole use of a PSP limits our ability to recruit and retain the best talent versus those offered within our peer set. Accordingly, for 2022
the ability to grant restricted stock to employees below Board level will be introduced to address this competitive disadvantage.
All UK employees are encouraged to participant in the UK Sharesave Plan. At present over 200 employees participate in the UK Sharesave Plan.
Chemring Group PLC Annual report and accounts 2021
115
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
ADDITIONAL STATUTORY INFORMATION ON REMUNERATION ARRANGEMENTS
DIRECTORS’ SHAREHOLDINGS (AUDITED)
Shareholding guidelines apply to executive directors during employment and post cessation of employment as set out in the directors’ remuneration
policy on page 101.
The interests of the directors in the ordinary shares of the Company at 31 October 2021 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)
225,559
249,272
161,975
30,000
15,000
—
35,500
—
Value of
legally
owned
shares as %
of salary 1
137%
197%
183%
—
—
—
—
—
Unvested and subject to performance
conditions under the PSP
Guideline
met
Mar 2019
award
Dec 2019
award
Dec 2020
award
Total at
31 October
2021
Deferred bonus
share
awards
No
No
No
—
—
—
—
—
421,568
336,391
216,361
—
—
—
—
—
307,142
245,085
157,635
—
—
—
—
—
220,375
175,848
125,670
—
—
—
—
—
949,085
757,324
499,666
—
—
—
—
—
172,322
110,002
70,752
—
—
—
—
—
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 292.5p at 31 October 2021.
The directors’ share interests at 31 October 2021 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 2021.
OUTSTANDING PSP AWARDS (AUDITED)
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2020
394,495
421,568
307,142
__
1,123,205
265,791
336,391
245,085
__
847,267
170,952
216,361
157,635
—
544,948
Awarded
during
the year
—
—
—
220,375
220,375
—
—
—
175,848
175,848
—
—
—
125,670
125,670
Number of shares under award
Lapsed
during
the year
(53,652)
—
—
—
Vested
during
the year
(340,843)
—
—
—
At
31 October
2021
—
421,5681
307,142
220,375
(53,652)
(340,843)
949,085
Date of
vesting
Closing
share price on
date of grant (p)
15 July 2021
22 March 2022
17 December 2022
16 December 2023
—
—
—
—
—
—
—
—
—
—
(265,791)
—
—
—
—
336,3911
245,085
175,848
19 January 2021
22 March 2022
17 December 2022
16 December 2023
(265,791)
757,324
(170,952)
—
—
—
—
216,3611
157,635
125,670
19 January 2021
22 March 2022
17 December 2022
16 December 2023
(170,952)
499,666
218.0
139.6
225.5
300.0
190.8
139.6
225.5
300.0
190.8
139.6
225.5
300.0
NOTE:
1. As explained above, these awards are currently expected to vest on 22 March 2022.
116
Chemring Group PLC Annual report and accounts 2021
OUTSTANDING PSP AWARDS (AUDITED) continued
PERFORMANCE CONDITIONS FOR OUTSTANDING PSP AWARDS
Awards made on
22 March 2019
Awards made on
17 December 2019
Awards made on
16 December 2020
Measure
Director
Executive directors’
award values
Threshold
vesting
Full
vesting
Total compound EPS growth per annum over the
three financial years ended 31 October 20211
(50% of award)
Rank of the Company’s TSR of the members of the
comparator group over the three-year period from
22 March 2019 to
21 March 2022 (50% of award)
Total compound EPS growth per annum over the
three financial years ended 31 October 2022
(50% of award)
Rank of the Company’s TSR against the TSR of the
FTSE All-Share (excluding investment trusts) over the
three financial years ended 31 October 2022
(50% of award)
Total compound EPS growth per annum over the
three financial years ended 31 October 2023
(50% of award)
Rank of the Company’s TSR against the TSR of the
FTSE All-Share (excluding investment trusts) over the
three financial years ended 31 October 2023
(50% of award)
Michael Ord
Andrew Lewis
Sarah Ellard
140% of salary
Michael Ord
Andrew Lewis
Sarah Ellard
150% of salary
Michael Ord
Andrew Lewis
Sarah Ellard
150% 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)
5% p.a.
(25% vests)
10% p.a.
(100% vests)
Median ranking
(25% vests)
Upper quartile
ranking
(100% vests)
NOTE:
1. 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 EPS growth would be measured was not inappropriately low, the Committee decided to set an adjusted EPS 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
2020
100,333
—
100,333
41,143
64,048
—
105,191
25,795
41,195
—
66,990
Awarded
during
the year
—
71,989
71,989
—
—
45,954
45,954
—
—
29,557
29,557
Lapsed
during
the year
—
—
—
—
—
—
—
—
—
—
—
Vested
during
the year
—
—
—
(41,143)
—
—
(41,143)
(25,795)
—
—
(25,795)
At
31 October
2021
Date of
vesting
Closing
share price on
date of grant (p)
100,333
16 December 2022
71,989
15 December 2023
172,322
—
64,048
45,954
110,002
18 January 2021
16 December 2022
15 December 2023
—
18 January 2021
41,195
29,557
70,752
16 December 2022
15 December 2023
210.0
300.0
188.0
210.0
300.0
188.0
210.0
300.0
Chemring Group PLC Annual report and accounts 2021
117
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
ADDITIONAL STATUTORY INFORMATION ON REMUNERATION ARRANGEMENTS continued
OUTSTANDING SHARESAVE OPTIONS (AUDITED)
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2020
16,853
16,853
8,910
8,910
8,910
8,910
Number of shares under award
Awarded
during
the year
Lapsed
during
the year
Vested
during
the year
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
At
31 October
2021
16,853
16,853
8,910
8,910
8,910
8,910
Exercise
price
178p
202p
202p
Exercise
date
1 October 2023 -
31 March 2024
1 October 2023 -
31 March 2024
1 October 2023 -
31 March 2024
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 2021, of £100 invested in Chemring Group PLC on 31 October 2011 compared with the value of £100
invested in the FTSE 250 and FTSE SmallCap. The other points are the values at intervening financial year ends.
)
£
(
l
e
u
a
V
350
300
250
200
150
100
50
0
31 Oct 11
31 Oct 12
31 Oct 13
31 Oct 14
31 Oct 15
31 Oct 16
31 Oct 17
31 Oct 18
31 Oct 19
31 Oct 20
31 Oct 21
Chemring
FTSE 250
FTSE SmallCap
Source: Datastream (Thomson Reuters)
CHIEF EXECUTIVE’S REMUNERATION TABLE
The total remuneration figures for the Group Chief Executive during each of the last ten financial years are shown in the table below. Mark Papworth
replaced David Price as Group Chief Executive on 5 November 2012, Michael Flowers replaced Mark Papworth on 24 June 2014 and Michael Ord
replaced Michael Flowers on 1 July 2018.
The total remuneration figures for 2012 and 2014 include the payments for loss of office made to David Price and Mark Papworth respectively. The
figures for 2018 include a full year’s salary and benefits for Michael Flowers.
The total remuneration figure for each year includes the annual bonus based on that year’s performance and, where applicable, vested PSP awards
based on the three-year performance period ending in the relevant year. The annual bonus payout and PSP award vesting level as a percentage of the
maximum opportunity are also shown for each of these years.
David Price
Mark
Papworth
2012
1,325
0%
54.375%
2013
785
40%
0%
Mark
Papworth/
Michael
Flowers
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%
2021
3,549
98%
86.4%
/100%1
Total remuneration £’000
Annual bonus
(% of maximum)
PSP awards vesting
(% of maximum)
NOTE:
1. The PSP award granted to Michael Ord on 26 June 2018 vested at 86.4% on 15 July 2021. The PSP award granted to Mr Ord on 22 March 2019 is currently expected to vest in full.
118
Chemring Group PLC Annual report and accounts 2021
PERCENTAGE CHANGE IN THE 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 directors between the 2019 and 2020 and 2020 and 2021 financial years, compared to that of the average for all eligible employees of the Group.
2019 vs 2020
2020 vs 2021
Group Chief Executive
Group Finance Director
Group Legal Director & Company Secretary
Carl-Peter Forster
Laurie Bowen
Andrew Davies
Stephen King
Fiona MacAulay
Average of other employees
Salary
2.3%
2.6%
2.3%
0%
N/A 2
(12.1)% 3
0%
N/A
4.0%
Benefits
Annual bonus
0%
0%
0%
N/A
N/A
N/A
N/A
N/A
0%
2.5%
2.7%
2.8%
N/A
N/A
N/A
N/A
N/A
3.0%
Salary
8.2%
4.6%
14.7% 1
0%
11.3% 2
8.6% 3
0%
N/A 4
5.2%
Benefits
Annual bonus
0%
0%
0%
N/A
N/A
N/A
N/A
N/A
5.2%
9.6%
4.9%
14.4%
N/A
N/A
N/A
N/A
N/A
34.8%
NOTES:
1. The Group Legal Director & Company Secretary’s salary was increased pro-rata to reflect her resumption of full-time working hours with effect from 1 November 2020.
2. Laurie Bowen was appointed as a non-executive director on 1 August 2019. Non-executive directors’ fees did not increase between 2019 and 2020. The percentage increase in
fees paid to Mrs Bowen between 2020 and 2021 reflects the additional fees paid to her following her appointment as Chair of the Remuneration Committee on 4 March 2020
and the fee paid to her as the non-executive director with responsibility for employees engagement from 1 January 2021.
3. The reduction in fees paid to Andrew Davies between 2019 and 2020 reflects his cessation as Chair of the Remuneration Committee on 4 March 2020. The percentage increase in
fees paid to Mr Davies between 2020 and 2021 reflects the additional fee paid to him as Senior Independent Director with effect from 1 January 2021.
4. Fiona MacAulay was appointed as a non-executive director on 3 June 2020. Non-executive directors’ fees did not increase between 2020 and 2021.
CHIEF EXECUTIVE’S PAY RATIO
The table below shows how the Group Chief Executive’s single remuneration figure for the 2021 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 2021 for UK employees as at 31 October 2021,
with salaries for part-time employees annualised on a full-time equivalent basis to allow equal comparisons; and
- employer pension contributions.
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
2021
2020
Year
2021
Methodology
Method A
Method A
Total remuneration
25th percentile (lower
quartile) pay ratio
50th percentile (median)
pay ratio
75th percentile (upper
quartile) pay ratio
116.3
39.9
76.1
25.0
49.2
15.8
Salary
Total remuneration
25th percentile
50th percentile
75th percentile
25th percentile
50th percentile
75th percentile
£27,898
£43,161
£65,000
£30,513
£46,650
£72,113
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.
The pay ratios have increased for 2021 as a result of the inclusion of two PSP awards vesting in respect of 2021 for the Group Chief Executive, coupled
with the greater emphasis on performance-related pay for the executive directors. Total remuneration for 2021 for Michael Ord includes the value
derived from his PSP award which vested in July 2021 and the estimated value of his PSP award which is expected to vest in March 2022. No PSPs were
eligible to vest for Mr Ord in 2020 given he only joined the Group in June 2018.
The reward policies and practices across the Group are considered by the Committee in the design process and implementation of the remuneration
policy each year for the executive directors. On this basis, the Committee is satisfied that the median pay ratio is consistent with the pay, reward and
progression polices across all employees.
Chemring Group PLC Annual report and accounts 2021
119
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
ADDITIONAL STATUTORY INFORMATION ON REMUNERATION ARRANGEMENTS continued
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
2021
£m
146.0
11.9
56.2
2020
£m
139.4
10.4
28.0
% change
4%
14%
101%
The dividends figures relate to amounts payable in respect of the relevant financial year.
Retained profits reflect the underlying success of the Group and the profit generated in the relevant financial year.
ADVISERS TO THE REMUNERATION COMMITTEE
FIT Remuneration Consultants LLP (“FIT”) were retained by the Remuneration Committee to advise on remuneration and incentive plan related matters
until 4 March 2021 and Korn Ferry were appointed as advisors to the Committee thereafter. Both FIT and Korn Ferry are signatories to the Remuneration
Consultants’ Group Code of Conduct. The Committee has reviewed the nature of the services provided by both FIT and Korn Ferry and is satisfied that
no conflict of interest exists in the provision of these services. The Company received no other services from FIT or Korn Ferry during the year. The
total fees payable to FIT in respect of services to the Committee during the year were £10,667 (2020: £32,000) and the total fees payable to Korn Ferry
for the year were £52,500 (2020: £nil). 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%
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 2021 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 2021, 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)
234,753,766
378,934
235,132,700
763,929
235,896,629
99.84%
0.16%
100.0%
NOTE:
1. A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast “for” and “against” a resolution.
APPROVAL OF THE DIRECTORS’ REMUNERATION REPORT
The directors’ remuneration report was approved by the Board on 14 December 2021.
Signed on behalf of the Board
Laurie Bowen
Chairman of the Remuneration Committee
14 December 2021
120
Chemring Group PLC Annual report and accounts 2021
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 2021.
The following sections of the annual report are incorporated into the
directors’ report by reference:
- strategic report on pages 1 to 73;
- corporate governance report on pages 76 to 87;
- Audit Committee report on pages 88 to 91;
- directors’ remuneration report on pages 94 to 120; and
- notes to the Group financial statements as detailed in this section.
BUSINESS REVIEW
The strategic report on pages 1 to 73 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
£41.5m (2020: £34.7m).
The directors are recommending the payment of a final dividend of 3.2p
per ordinary share which, together with the interim dividend of 1.6p per
share paid in September 2021, gives a total for the year of 4.8p (2020:
3.9p). The final dividend is subject to approval by shareholders at the
Annual General Meeting on 3 March 2022 and has not therefore been
included as a liability in these financial statements.
DIRECTORS AND THEIR INTERESTS
The current directors are shown on pages 74 and 75.
In accordance with the Company’s Articles of Association, all directors are
required to submit themselves for re-election at every Annual General
Meeting. All directors will therefore be seeking re-election at the Annual
General Meeting on 3 March 2022.
Details of the service contracts entered into between the Company and
the executive directors are set out in the directors’ remuneration report
on page 104. 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 2021.
Information required in relation to directors’ shareholdings is set out in
the directors’ remuneration report on page 116.
EMPLOYEES AND EMPLOYEE CONSULTATION
Details of the Group’s employment policies and employee consultation
practices are set out on pages 49 to 53.
POLITICAL DONATIONS
No political donations were made during the year (2020: £nil).
CONTRACTUAL ARRANGEMENTS
The Group contracts with a wide range of customers, comprising
governments, armed forces, prime contractors and OEMs across the
globe. The US Department of Defense is the largest single customer and
procures the Group’s products under a significant number of separate
contracts placed with individual Group businesses.
The Group’s businesses utilise many suppliers across the world and
arrangements are in place to ensure that businesses are not totally reliant
on single suppliers for key raw materials or components.
RESEARCH AND DEVELOPMENT
The Group’s research and development expenditure for the year is
detailed in the financial review on page 60.
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.
The cumulative preference shares, which are also publicly traded on the
London Stock Exchange, 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. There are no
restrictions on the transfer of the cumulative preference shares.
Chemring Group PLC Annual report and accounts 2021
121
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT continued
SHARE CAPITAL AND SHAREHOLDER RIGHTS continued
GENERAL continued
The Company is not aware of any agreements between shareholders that
may result in restrictions on the transfer of securities and/or voting rights.
The Company’s Articles may only be amended by special resolution at a
general meeting of shareholders.
ISSUE OF SHARES
Under the provisions of section 551 of the Companies Act 2006 (the
“Act”), the Board is prevented from exercising its powers under the
Articles to allot shares without an authority contained either in the
Articles or in a resolution of the shareholders passed in general meeting.
The authority, when given, can last for a maximum period of five years,
but the Board proposes that renewal should be sought at each Annual
General Meeting. An ordinary resolution, seeking such authority, will be
proposed at the forthcoming Annual General Meeting.
Section 561 of the Act requires that an allotment of shares for cash may
not be made unless the shares are first offered to existing shareholders on
a pre-emptive basis in accordance with the terms of the Act.
In accordance with general practice, to ensure that small issues of shares
can be made without the necessity of convening a general meeting, the
Board proposes that advantage be taken of the provisions of section 571
of the Act not to apply the Act’s pre-emptive requirements. Accordingly, a
special resolution will be proposed at the forthcoming Annual General
Meeting which, if passed, will have the effect of granting the directors the
power to allot not more than 5% of the issued ordinary share capital at
the date of the Annual General Meeting free of the requirements of
section 561 of the Act. No issue of these shares will be made which
would effectively alter the control of the Company without the prior
approval of the shareholders in general meeting.
PURCHASE OF OWN SHARES
The Company did not purchase any of its ordinary shares (2020: nil)
during the year. All of the Company’s 1p ordinary shares held in treasury
were issued in satisfaction of awards under the Company’s share-based
incentive plans during the year and no shares were held in treasury at
31 October 2021 (2020: 675,592).
A special resolution will be proposed at the forthcoming Annual General
Meeting to renew the Company’s authority to purchase its own shares in
the market up to a limit of 10% of its issued ordinary share capital. The
maximum and minimum prices will be stated in the resolution at the date
of the Annual General Meeting. The directors believe that it is
advantageous for the Company to have this flexibility to make market
purchases of its own shares. The directors of the Company may consider
holding repurchased shares pursuant to the authority conferred by this
resolution as treasury shares. This will give the Company the ability to
reissue treasury shares quickly and cost effectively, and will provide the
Company with additional flexibility in the management of its capital base.
Any issues of treasury shares for the purposes of the Company’s
employee share schemes will be made within the 10% anti-dilution limit
set by The Investment Association. The directors will only exercise this
authority if they are satisfied that a purchase would result in an increase
in expected earnings per share and would be in the interests of
shareholders generally.
SUBSTANTIAL SHAREHOLDINGS
At 13 December 2021, 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.
122
Chemring Group PLC Annual report and accounts 2021
NAME
% INTEREST
Jupiter Fund Management PLC
Invesco Limited
Royal London Asset Management Limited
Old Mutual Asset Managers
Schroders Plc
BlackRock, Inc.
Ameriprise Financial, Inc. and its Group
J O Hambro Capital Management Limited
AXA Investment Managers S.A.
Aviva PLC and its subsidiaries
FIL Limited
Norges Bank
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
8.4
8.1
5.2
5.1
5.1
5.1
5.0
5.0
5.0
5.0
Below 5.0
4.9
4.9
4.9
4.8
4.8
4.8
4.8
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 26 July 2021.
THE CHEMRING GROUP PERFORMANCE SHARE PLAN 2016 (THE
“2016 PSP”)
The 2016 PSP is the primary long-term incentive plan for executive
directors and senior employees. Discretionary awards are granted under
the PSP over a fixed number of shares by reference to salary, with awards
ordinarily vesting, subject to meeting performance criteria, on the third
anniversary of the grant date. Awards were granted under the plan
on 16 December 2020.
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. Awards were granted
under the plan on 14 July 2021.
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 72.
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 3 March 2022, 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
the requirements of 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.
The Group financial statements are required under the UK Disclosure
Guidance and Transparency Rules to be prepared in accordance with IFRS
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU
(“IFRSs as adopted by the EU).
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 international accounting standards in
conformity with the requirements of the Companies Act 2006 and
IFRSs as adopted by the EU;
- for the parent company financial statements, state whether applicable
UK accounting standards have been followed, subject to any material
departures disclosed and explained in the parent company financial
statements;
- assess the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent company or to cease operations, or
have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent company’s transactions
and disclose with reasonable accuracy at any time the financial position of
the parent company and enable them to ensure that its financial
statements comply with the Companies Act 2006. They are responsible
for such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the directors are also responsible
for preparing a strategic report, directors’ report, directors’ remuneration
report and corporate governance report that comply with that law and
those regulations.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF
THE ANNUAL FINANCIAL REPORT
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
- the strategic report and directors’ report include 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 14 December 2021 and is signed on its behalf by:
Michael Ord
Sarah Ellard
Group Chief Executive
14 December 2021
Group Legal Director
14 December 2021
Chemring Group PLC Annual report and accounts 2021
123
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the year ended 31 October 2021
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.
2021
Non-
underlying
items 1
£m
Underlying
performance
£m
393.3
57.5
(1.6)
55.9
(8.3)
47.6
—
47.6
—
(7.1)
—
(7.1)
1.0
(6.1)
—
(6.1)
Note
1,2
2,4
7
8
5
Total
£m
Underlying
performance
£m
393.3
402.5
50.4
(1.6)
48.8
(7.3)
41.5
—
41.5
54.7
(3.0)
51.7
(9.1)
42.6
(0.1)
42.5
2020
Non-
underlying
items 1
£m
—
(8.4)
—
(8.4)
0.5
(7.9)
0.1
(7.8)
2021
2020
Underlying
performance
Note
10
10
10
10
16.9p
16.5p
16.9p
16.5p
Total
14.7p
14.4p
14.7p
14.4p
Underlying
performance
15.1p
14.8p
15.1p
14.7p
Total
£m
402.5
46.3
(3.0)
43.3
(8.6)
34.7
—
34.7
Total
12.3p
12.0p
12.3p
12.0p
124
Chemring Group PLC Annual report and accounts 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 October 2021
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial gains/(losses) on 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
2021
£m
41.5
6.2
(2.2)
4.0
(8.3)
—
0.1
(8.2)
37.3
2020
£m
34.7
(1.9)
0.7
(1.2)
(0.2)
(1.4)
0.5
(1.1)
32.4
Chemring Group PLC Annual report and accounts 2021
125
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 October 2021
At 1 November 2020
Profit after tax
Other comprehensive (loss)/income
Tax relating to components of other
comprehensive (loss)/income
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
Transfer between reserves
At 31 October 2021
At 1 November 2019
Profit after tax
Other comprehensive loss
Tax relating to components of 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
At 31 October 2020
2.8
307.1
(27.1)
56.2
Share
premium
account
£m
306.7
Special
capital
reserve
£m
12.9
Revaluation
reserve
£m
Translation
reserve
£m
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
—
—
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
—
2.8
—
—
—
—
0.4
—
—
—
—
—
Share
premium
account
£m
306.2
—
—
—
—
0.5
—
—
—
—
Retained
earnings
£m
28.0
41.5
6.2
(2.2)
45.5
—
4.5
(11.9)
(7.1)
(2.9)
0.1
(18.9)
—
(8.3)
0.1
(8.2)
—
—
—
—
—
—
1.0
—
—
—
—
—
—
—
—
—
(0.1)
0.9
Revaluation
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
1.0
—
—
—
—
—
—
—
—
—
1.0
(17.8)
—
(1.6)
0.5
(1.1)
—
—
—
—
—
(18.9)
8.5
34.7
(1.9)
0.7
33.5
—
3.6
(10.4)
(2.3)
(4.9)
28.0
—
—
—
—
—
—
—
—
—
—
12.9
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
—
306.7
12.9
Own
shares
£m
(2.9)
—
—
—
—
—
—
—
—
2.9
—
—
Own
shares
£m
(7.8)
—
—
—
—
—
—
—
—
4.9
(2.9)
Total
£m
329.6
41.5
(2.1)
(2.1)
37.3
0.4
4.5
(11.9)
(7.1)
—
—
352.8
Total
£m
305.8
34.7
(3.5)
1.2
32.4
0.5
3.6
(10.4)
(2.3)
—
329.6
126
Chemring Group PLC Annual report and accounts 2021
CONSOLIDATED BALANCE SHEET
As at 31 October 2021
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
Total assets
Current liabilities
Borrowings
Lease liabilities
Trade and other payables
Provisions
Current tax
Derivative financial instruments
Non-current liabilities
Borrowings
Lease liabilities
Provisions
Deferred tax
Preference shares
Total liabilities
Net assets
Equity
Share capital
Share premium account
Special capital reserve
Revaluation reserve
Translation reserve
Retained earnings
Own shares
Total equity
2021
Note
£m
£m
2020
£m
£m
11
12
12
13
30
24
15
16
17
22
18
19
20
23
22
18,33
19
23
24
18,25
25
26
26
26
26
27
108.7
30.0
14.1
198.7
13.7
18.2
80.7
60.6
5.8
1.0
(0.4)
(1.4)
(85.7)
(2.6)
(12.0)
(0.4)
(28.1)
(2.4)
(14.9)
(30.7)
(0.1)
108.5
29.8
16.6
194.0
7.6
15.7
383.4
372.2
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)
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
148.1
531.5
(102.5)
(76.2)
(178.7)
352.8
2.8
307.1
12.9
0.9
(27.1)
56.2
352.8
—
352.8
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
14 December 2021.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC Annual report and accounts 2021
127
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 October 2021
Cash flows from operating activities
Cash generated from continuing underlying operations
Cash impact of continuing non-underlying items
Cash utilised in discontinued underlying operations
Cash impact of discontinued non-underlying items
Cash flows from operating activities
Tax (paid)/received
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
Acquisition of subsidiary net of cash acquired
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
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year (including bank overdraft)
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year (including bank overdraft)
Note
31
29
9
32
17,33
2021
£m
80.0
(1.3)
—
(0.4)
78.3
(2.6)
75.7
(2.2)
(28.0)
—
(5.1)
0.4
(34.9)
(11.9)
(7.1)
0.4
(2.6)
(1.1)
29.2
(55.7)
(1.6)
(50.4)
(9.6)
14.7
0.3
5.4
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
128
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS
1. REVENUE
All of the Group’s revenue is derived from the sale of goods and the provision of services. The following table provides an analysis of the Group’s
revenue by destination:
UK
US
Europe
Asia Pacific
Rest of the world
UK
US
Europe
Asia Pacific
Rest of the world
Sensors
& Information
£m
Countermeasures
& Energetics
£m
75.7
62.9
5.1
2.1
0.8
146.6
44.4
137.3
48.6
13.7
2.7
246.7
Sensors
& Information
£m
Countermeasures
& Energetics
£m
69.5
61.0
1.7
1.1
3.9
137.2
48.9
156.3
39.3
14.0
6.8
265.3
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
& Information
£m
Countermeasures
& Energetics
£m
56.4
90.2
146.6
242.8
3.9
246.7
Sensors
& Information
£m
Countermeasures
& Energetics
£m
52.0
85.2
137.2
263.4
1.9
265.3
2021
£m
120.1
200.2
53.7
15.8
3.5
393.3
2020
£m
118.4
217.3
41.0
15.1
10.7
402.5
2021
£m
299.2
94.1
393.3
2020
£m
315.4
87.1
402.5
All revenues recognised arose from contracts with customers.
As at 31 October 2021 £500.8m (2020: £476.0m) of revenue was outstanding in respect of obligations that were unfulfilled or only partially fulfilled
as at the year end. £358.0m (2020: £326.0m) of this revenue is expected to be recognised in the next financial year and £142.8m (2020: £150.0m) 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.
Chemring Group PLC Annual report and accounts 2021
129
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 2. BUSINESS SEGMENTS continued
A segmental analysis of revenue and operating profit is set out below:
Year ended 31 October 2021
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
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
Sensors
& Information
£m
Countermeasures
& Energetics
£m
146.6
246.7
34.4
(2.7)
(0.1)
31.6
(4.1)
(1.6)
(5.7)
25.9
56.1
(15.5)
(0.6)
40.0
(2.1)
—
(2.1)
37.9
Sensors
& Information
£m
137.2
Countermeasures
& Energetics
£m
265.3
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
Unallocated*
£m
—
(14.1)
—
—
(14.1)
—
0.7
0.7
(13.4)
(1.6)
(15.0)
(7.3)
(22.3)
Unallocated*
£m
—
(12.6)
—
—
(12.6)
—
0.5
0.5
(12.1)
(3.0)
(15.1)
(8.6)
(23.7)
Total
£m
393.3
76.4
(18.2)
(0.7)
57.5
(6.2)
(0.9)
(7.1)
50.4
(1.6)
48.8
(7.3)
41.5
Total
£m
402.5
74.6
(18.5)
(1.4)
54.7
(8.9)
0.5
(8.4)
46.3
(3.0)
43.3
(8.6)
34.7
* Unallocated items are specific corporate level costs that cannot be allocated to a business segment.
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, excluding retirement benefit surplus and deferred tax, is shown below:
Non-current assets by location
UK
US
Norway
Australia
2021
£m
143.4
178.1
12.4
17.6
351.5
2020
£m
135.1
185.1
8.8
19.9
348.9
INFORMATION ON MAJOR CUSTOMERS
Included in segmental revenues for continuing operations are revenues of £166.9m (2020: £154.2m), 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 for the year.
130
Chemring Group PLC Annual report and accounts 2021
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 on the movement in the fair value of derivative financial instruments (note 22)
Acquisition expenses (note 29)
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
2021
£m
0.7
(1.6)
(0.9)
(6.2)
(7.1)
1.0
(6.1)
—
(6.1)
47.6
41.5
2020
£m
0.5
—
0.5
(8.9)
(8.4)
0.5
(7.9)
0.1
(7.8)
42.5
34.7
The Alternative Performance Measures used may not be comparable across companies. 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. The cash impact of non-underlying items includes the
impact of exceptional items from prior years where the income statement and cash flow timings differ.
AMORTISATION OF ACQUIRED INTANGIBLES
Included in non-underlying items is the amortisation charge arising from business combinations of £6.2m (2020: £8.9m). 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 £0.7m gain (2020: £0.5m gain) on the movement in fair value of derivative financial instruments. This is excluded
from underlying earnings to ensure the recognition of the gain or loss on the derivative matches the timing of the underlying transaction.
ACQUISITION EXPENSES
Included in non-underlying items is £1.6m (2020: £nil) of acquisition expenses. This includes £0.4m (2020: £nil) relating to deferred consideration
contingent on continued employment of the former owners of Cubica, which has been accounted for as equity-settled share-based payments under
IFRS 2 Share-based Payments. We have classified this cost as a non-underlying item as it is a non-recurring cost relating to an acquisition. See note 29
for further details. The acquisition expenses 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 costs of acquiring a business rather than organically developed, these costs have been excluded from the
underlying measures.
TAX
The tax impact of continuing non-underlying items comprises a £1.0m tax credit (2020: £0.5m credit) on the above non-underlying items.
DISCONTINUED OPERATIONS
Further details on the results of discontinued operations are presented in note 5.
NET DEBT
A reconciliation and analysis 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 12)
Amortisation of development costs (note 12)
Amortisation of patents and licences (note 12)
Depreciation of property, plant and equipment (note 13)
EBITDA
Non-underlying items
Underlying EBITDA
2021
£m
50.4
6.2
0.6
0.1
18.2
75.5
0.9
76.4
2020
£m
46.3
8.9
1.4
—
18.5
75.1
(0.5)
74.6
Chemring Group PLC Annual report and accounts 2021
131
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 3. ALTERNATIVE PERFORMANCE MEASURES continued
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 2021 at the average exchange rates for the comparative year ended 31 October 2020.
4. OPERATING PROFIT
Operating profit from continuing operations is stated after charging/(crediting):
– internally-funded
– arising from business combinations
– development costs
– patents and licences
– owned assets
– leased assets
Research and development costs
Amortisation
Depreciation of property, plant and equipment
Loss on disposal of non-current assets
Government grant amortisation
Foreign exchange (gains)/losses
Staff costs (note 6)
Cost of inventories recognised as an expense
2021
£m
8.5
6.2
0.6
0.1
16.8
1.4
0.1
(0.5)
(0.8)
146.0
128.0
2020
£m
4.5
8.9
1.4
—
16.9
1.6
0.3
—
1.5
139.4
134.7
The remaining items within operating profit predominantly relate to general and administrative expenses and production overheads.
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
2021
£m
2020
£m
0.3
0.7
1.0
0.1
1.1
0.2
0.6
0.8
0.1
0.9
Included in the fees for the audit of the Company’s annual accounts is £0.1m (2020: £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 88 to 91, 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 after tax
Loss after tax is analysed as:
Before exceptional items
Exceptional items
Tax on exceptional items
Loss for the year from discontinued operations
132
Chemring Group PLC Annual report and accounts 2021
2021
£m
—
—
—
—
—
—
—
—
—
2020
£m
9.5
(0.1)
—
(0.1)
(0.1)
0.1
—
0.1
—
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.
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.
Consideration received in cash
Total disposal consideration
Net working capital adjustment
Net assets and liabilities disposed of
Disposal costs
Profit on disposal before tax
Reclassification of foreign currency translation reserve
Profit on disposal after tax
The carrying amount of assets and liabilities as at the date of sale were:
Trade and other receivables
Total assets
Trade and other payables
Total liabilities
Net assets
The cash flow from discontinued operations is disclosed in note 31.
6. STAFF COSTS
The average monthly number of employees, including executive directors, was:
Direct
Indirect
Continuing operations
Discontinued operations
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
2020
£m
Total
13.8
13.8
(0.8)
(9.3)
(1.6)
2.1
1.4
3.5
2020
£m
Total
10.5
10.5
(0.4)
(0.4)
10.1
2021
Number
2020
Number
1,381
905
2,286
—
2,286
2021
£m
121.4
12.9
6.0
5.7
146.0
1,381
899
2,280
104
2,384
2020
£m
116.9
12.4
6.1
4.0
139.4
Chemring Group PLC Annual report and accounts 2021
133
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 7. FINANCE EXPENSE
Bank overdraft and loan interest
Amortisation of debt finance costs
Interest cost on retirement benefit obligations (note 30)
Lease liability interest
Amount capitalised
Finance expense
2021
£m
1.3
0.6
0.1
0.1
2.1
(0.5)
1.6
2020
£m
3.3
0.2
0.1
0.2
3.8
(0.8)
3.0
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 1.3% (2020: 3.0%). During the year £0.5m (2020: £0.8m) of interest was capitalised in relation to the
Tennessee capacity expansion programme.
8. TAXATION
Current tax charge – current year
Current tax credit – prior year
Deferred tax charge – current year (note 24)
Deferred tax charge – prior year (note 24)
Tax charge for continuing operations
2021
£m
7.2
(1.9)
1.2
0.8
7.3
2020
£m
5.8
(1.1)
3.0
0.9
8.6
Income tax in the UK is calculated at 19.0% (2020: 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% (2020: 19.0%)
Expenses not deductible/(income not taxable) for tax purposes
Changes in tax rates
Tax losses not previously recognised
Prior period adjustments
Overseas profits taxed at rates different to the UK standard rate
Tax charge for continuing operations
2021
£m
48.8
9.3
—
1.7
(4.4)
(1.1)
1.8
7.3
2020
£m
43.3
8.2
(0.9)
(0.4)
—
(0.2)
1.9
8.6
In addition to the tax charge in the income statement, a tax charge of £2.2m (2020: £1.2m credit) has been recognised in equity in the year.
The effective rate of tax on the profit before tax of the Group is 15.0% (2020: 19.9%), and the effective rate of tax on the underlying profit before tax
of the Group is 14.8% (2020: 17.6%). The effective rate of tax on the underlying profit before tax is lower than the 2020 effective tax rate due to the
recognition of a deferred tax asset in respect of future US interest deductions.
Included within the tax charge for continuing operations is a current year non-underlying deferred tax credit of £1.0m (2020: £0.5m), predominantly
relating to tax on amortisation of acquired intangibles.
The UK Finance Bill 2021 was published on 11 March 2021 and substantively enacted on 24 May 2021. The bill provides for an increase in the rate of
corporation tax from 19% to 25% with effect from 1 April 2023. As a result of this, the deferred tax liability has increased by £2.2m and the deferred
tax asset has increased by £0.5m as at 31 October 2021.
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.
134
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 9. DIVIDENDS
Dividends paid on ordinary shares of 1p each
Final dividend of 2.6p per share for the year ended 31 October 2020 (2.4p per share for the year ended 31 October 2019)
Interim dividend of 1.6p per share for the year ended 31 October 2021 (1.3p per share for the year ended 31 October 2020)
Total dividends
2021
£m
7.4
4.5
11.9
2020
£m
6.8
3.6
10.4
Subject to approval at the Annual General Meeting, the final dividend of 3.2p per ordinary share will be paid on 31 March 2022 to all shareholders
registered at the close of business on 11 March 2022. The estimated cash value of this dividend is £9.0m. The total dividend for the year will therefore
be 4.8p (2020: 3.9p) 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 2021.
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 2021 and 31 October 2021.
10. EARNINGS PER ORDINARY SHARE
Earnings per share is based on the average number of shares in issue, excluding own shares held, of 281,555,716 (2020: 281,447,284).
Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 287,985,451
(2020: 288,416,915).
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:
2021
Basic EPS
(Pence)
Diluted EPS
(Pence)
16.9
16.5
14.7
14.4
£m
47.6
(6.1)
41.5
£m
42.6
(7.9)
34.7
Underlying profit after tax
Non-underlying items (note 3)
Total profit after tax
11. GOODWILL
Cost
At 1 November 2019
Disposals
Foreign exchange adjustments
At 31 October 2020
Acquisitions through business combinations (note 29)
Foreign exchange adjustments
At 31 October 2021
Accumulated impairment losses
At 1 November 2019
Disposals
Foreign exchange adjustments
At 31 October 2020
Foreign exchange adjustments
At 31 October 2021
Carrying amount
At 31 October 2021
At 31 October 2020
2021
Ordinary
shares
Number
millions
281.6
6.4
288.0
2020
Basic EPS
(Pence)
15.1
12.3
2020
Ordinary
shares
Number
millions
281.4
7.0
288.4
Diluted EPS
(Pence)
14.8
12.0
£m
196.2
(8.9)
0.5
187.8
3.1
(6.4)
184.5
(87.7)
8.9
(0.5)
(79.3)
3.5
(75.8)
108.7
108.5
Chemring Group PLC Annual report and accounts 2021
135
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 11. GOODWILL continued
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 32 to 37.
The Group tests goodwill at least annually for impairment. Tests are conducted more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the value-in-use calculations have been
individually estimated for each CGU and include the discount rates and expected changes to cash flows during the period for which management has
detailed plans, which are underpinned by the winning and execution of key contracts.
Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to
each of the CGUs. Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital of 7.1% (2020: 6.2%) 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% (2020: 1% to 3%).
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 1.75% (2020: 1.50%) 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
2021
%
11.7
9.7
10.6
10.6
2020
%
10.6
8.6
9.5
11.5
2021
£m
31.5
14.6
34.3
15.2
13.1
2020
£m
28.4
14.6
36.4
16.1
13.0
108.7
108.5
The goodwill arising from the acquisition of the Cubica Group of £3.1m during the year is allocated to the Roke Manor Research Limited CGU as it will
form part of this operating company going forward (see note 29 for further details).
The pre-tax discount rates used for other CGUs ranged from 8.6% to 11.3% (2020: 8.6% to 10.6%).
Following a detailed review, no impairment losses were recognised in the years ended 31 October 2021 and 31 October 2020 for continuing operations.
Stress testing was performed on the forecasts to consider the impact of reasonably possible worst case scenarios over the forecast period, including a
1% increase in discount rate, a 1% reduction in long-term growth rate, a 10% fall in the forecast cash flows or a $0.10 weakening in the sterling to US
dollar exchange rate. Even under any of 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.
136
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 12. DEVELOPMENT COSTS AND OTHER INTANGIBLE ASSETS
Cost
At 1 November 2019
Additions
Disposals
Foreign exchange adjustments
At 31 October 2020
Acquisitions through business combinations (note 29)
Additions
Disposals
Foreign exchange adjustments
At 31 October 2021
Amortisation
At 1 November 2019
Charge
Disposals
Foreign exchange adjustments
At 31 October 2020
Charge
Disposals
Foreign exchange adjustments
At 31 October 2021
Carrying amount
At 31 October 2021
At 31 October 2020
Development
costs
£m
Acquired
technology
£m
Acquired
customer
relationships
£m
Patents and
licences
£m
52.0
5.0
(1.2)
0.1
55.9
—
2.1
(0.5)
(1.9)
55.6
(25.9)
(1.4)
1.2
—
(26.1)
(0.6)
0.5
0.6
(25.6)
30.0
29.8
94.8
—
(1.1)
0.1
93.8
2.5
—
—
(4.8)
91.5
(82.5)
(5.3)
1.1
(0.1)
(86.8)
(3.8)
—
4.4
79.0
—
(31.8)
1.4
48.6
2.1
—
—
(1.9)
48.8
(66.1)
(3.6)
31.8
(1.4)
(39.3)
(2.4)
—
1.4
0.4
0.2
—
—
0.6
—
0.1
(0.1)
(0.1)
0.5
(0.3)
—
—
—
(0.3)
(0.1)
0.1
0.1
(86.2)
(40.3)
(0.2)
5.3
7.0
8.5
9.3
0.3
0.3
Total
£m
174.2
0.2
(32.9)
1.5
143.0
4.6
0.1
(0.1)
(6.8)
140.8
(148.9)
(8.9)
32.9
(1.5)
(126.4)
(6.3)
0.1
5.9
(126.7)
14.1
16.6
Included within the development costs of £30.0m, individually material balances relate to Joint Biological Tactical Detection System of £8.1m (2020: £8.6m),
Next Generation Chemical Detector of £13.0m (2020: £12.5m) and Perceive of £4.7m (2020: £4.0m). 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 £5.3m includes individually material balances relating to Chemring Sensors & Electronic Systems of £1.2m (2020: £4.2m),
Chemring Energetic Devices of £1.2m (2020: £1.7m) and Roke (including the Cubica Group) of £2.9m (2020: £1.0m). The remaining amortisation
periods for these assets are two years, three years and ten years respectively.
Acquired customer relationships of £8.5m include individually material balances relating to Chemring Energetic Devices of £5.3m (2020: £7.2m),
Chemring Sensors & Electronic Systems of £1.2m (2020: £1.9m) and Roke (including the Cubica Group) of £2.0m (2020: £nil). The remaining
amortisation periods for these assets are five years, two years and ten years respectively.
Chemring Group PLC Annual report and accounts 2021
137
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 13. PROPERTY, PLANT AND EQUIPMENT
Cost or valuation
At 1 November 2019
Recognition of right-of-use asset on initial application of IFRS 16
Reclassification
Additions
Disposals
Foreign exchange adjustments
At 31 October 2020
Reclassification
Additions
Disposals
Foreign exchange adjustments
At 31 October 2021
Depreciation
At 1 November 2019
Charge
Disposals
Foreign exchange adjustments
At 31 October 2020
Charge
Disposals
Foreign exchange adjustments
At 31 October 2021
Carrying amount
At 31 October 2021
At 31 October 2020
Land and
buildings
£m
Plant and
equipment
£m
Right-of-use
land and
buildings
£m
Right-of-use
plant and
equipment
£m
128.3
—
(2.4)
14.9
(14.8)
0.6
126.6
0.6
7.4
(0.3)
(3.1)
127.5
—
2.4
21.7
(9.2)
—
142.4
(0.6)
19.2
(10.1)
(3.1)
131.2
147.8
(30.1)
(3.4)
14.8
(0.6)
(19.3)
(3.4)
0.3
0.6
(55.7)
(13.5)
9.0
(0.3)
(60.5)
(13.4)
10.0
1.8
—
5.9
—
0.1
(0.4)
0.1
5.7
—
0.3
(0.2)
(0.3)
5.5
—
(1.5)
0.1
—
(1.4)
(1.3)
0.2
0.1
—
0.4
—
0.2
—
—
0.6
—
—
—
0.1
0.7
—
(0.1)
—
—
(0.1)
(0.1)
—
—
Total
£m
255.8
6.3
—
36.9
(24.4)
0.7
275.3
—
26.9
(10.6)
(6.4)
285.2
(85.8)
(18.5)
23.9
(0.9)
(81.3)
(18.2)
10.5
2.5
(21.8)
(62.1)
(2.4)
(0.2)
(86.5)
109.4
107.3
85.7
81.9
3.1
4.3
0.5
0.5
198.7
194.0
During the year, £0.5m (2020: £0.8m) of interest was capitalised, as set out in note 7. £1.1m (2020: £1.1m) of capitalised interest was charged
as depreciation and £nil (2020: £0.1m) was disposed of. This results in a net book value for capitalised interest of £9.0m (2020: £9.6m).
Included within land and buildings and plant and equipment are assets under construction of £20.8m and £24.2m respectively (2020: £21.7m and £15.5m).
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
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.
2021
£m
4.0
127.2
131.2
2021
£m
130.4
(21.9)
108.5
2020
£m
4.0
122.6
126.6
2020
£m
124.7
(18.4)
106.3
At 31 October 2021, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £10.4m
(2020: £16.9m).
Cash flows from purchases of property, plant and equipment are £28.0m (2020: £35.6m). The difference to the additions total presented above is
predominantly the movement in accrued capital expenditure.
138
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 14. SUBSIDIARY UNDERTAKINGS
All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2021, 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,
unless otherwise stated.
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
Cubica Technology Limited*
Greys Exports Limited
Kembrey Engineering Limited*
Parkway No 10 Limited
Q6 Holdings Limited*
Richmond EEI Limited
Richmond Electronics & Engineering Limited
Roke Manor Research Limited*
Vigil AI 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
England
England
Norway
Scotland
US
US
US
US
US
US
US
US
US
US
Countermeasures & Energetics
Dormant
Countermeasures & Energetics
Dormant
Dormant
Non-trading
Dormant
Dormant
Dormant
Non-trading
Countermeasures & Energetics
Non-trading
Holding company
Non-trading
Sensors & Information
Dormant
Dormant
Dormant
Non-trading
Dormant
Dormant
Sensors & Information
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
* Shares directly held by Chemring Group PLC.
** 80% indirectly owned by Chemring Group PLC (see note 29).
CHG Overseas Limited, Chemring Finance Europe Limited, Chemring UAE Limited, CHG Overseas Investments Limited, Cubica Technology Limited
and Q6 Holdings Limited are exempt from the requirement to file audited accounts for the year ended 31 October 2021 by virtue of section 479A of
the Companies Act 2006. See page 176 for the registered offices of the subsidiary undertakings.
Chemring Group PLC Annual report and accounts 2021
139
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 15. INVENTORIES
Raw materials
Work in progress
Finished goods
2021
£m
36.6
27.2
16.9
80.7
2020
£m
50.3
25.2
15.8
91.3
There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised £2.3m
(2020: £5.5m) 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
2021
£m
41.2
(0.3)
40.9
0.5
3.7
5.5
10.0
60.6
2020
£m
46.4
(0.5)
45.9
0.2
3.2
4.0
9.5
62.8
All amounts shown above are due within one year.
The average credit period taken by customers on sales of goods, calculated using a countback basis, is 25 days (2020: 30 days). No interest is charged on
receivables from the date of invoice to payment.
Given the Group’s customer base, expected credit losses are typically not material; however, the Group’s policy is to provide in full for trade receivables
outstanding for more than 120 days beyond agreed terms, unless there are facts and circumstances that support recoverability. As at 31 October 2021,
£0.8m of gross trade receivables were aged greater than 30 days past due (2020: £1.5m).
The directors consider that the carrying amount of trade and other receivables approximates to their fair values.
Of the £9.5m of accrued income at 31 October 2020, £9.5m had been billed and paid in the year. Of the £10.0m of accrued income at 31 October 2021,
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 £5.8m (2020: £14.7m) less the bank overdraft included in short-term borrowings of £0.4m (2020: £nil), as the overdraft is held for the purpose
of meeting short-term cash commitments.
– US dollar denominated
18. BORROWINGS
Within current liabilities
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
140
Chemring Group PLC Annual report and accounts 2021
2021
£m
0.4
0.4
28.1
0.1
28.2
28.6
2021
£m
0.1
28.5
28.6
2020
£m
—
—
57.5
0.1
57.6
57.6
2020
£m
0.1
57.5
57.6
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 18. BORROWINGS continued
The weighted average interest rates paid were as follows:
Bank overdrafts
UK bank loans
– Sterling denominated
– US dollar denominated
An analysis of borrowings by maturity is as follows:
2021
%
1.0
—
1.9
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
2021
Preference
shares
£m
0.4
—
28.1
—
28.1
28.5
—
—
—
0.1
0.1
0.1
Bank
loans and
overdrafts
£m
2020
Preference
shares
£m
—
57.5
—
—
57.5
57.5
—
—
—
0.1
0.1
0.1
Total
£m
0.4
—
28.1
0.1
28.2
28.6
2020
%
1.5
1.5
3.3
Total
£m
—
57.5
—
0.1
57.6
57.6
The Group’s principal debt facilities comprised a £150m revolving credit facility and a $10m overdraft. These were established in July 2021 with a
syndicate of six banks and run until December 2024 with three “one-year” options to extend at the lenders’ discretion. 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
2021
£m
128.1
2020
£m
86.4
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, and therefore the leverage ratio of 0.37 times differs to the ratio
of 0.35 times that is disclosed elsewhere in the annual report and accounts, which is calculated using the closing rates of exchange. The Group was in
compliance with the covenants throughout the year. The year-end leverage ratio was 0.37 times (covenant limit of 3 times) and the year-end interest
cover ratio was 54 times (covenant floor of 4 times).
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 £0.8m (2020: £0.9m). In total, payments of £1.6m (2020: £1.7m) were made
under leasing contracts. Included in the financing activities section of the cash flow is £1.5m (2020: £1.5m) to repay the principal portion of the lease and
£0.1m (2020: £0.2m) to repay lease interest. Included in the operating activities section of the cash flow is £0.8m (2020: £0.9m) relating to short-term
and low-value leases.
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
Impact of discounting
Lease liabilities included in balance sheet as at 31 October
2021
£m
1.4
1.6
1.0
2.6
(0.2)
3.8
2020
£m
1.5
1.8
2.3
4.1
(0.3)
5.3
Chemring Group PLC Annual report and accounts 2021
141
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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
2021
£m
13.1
29.0
—
4.7
17.1
17.3
4.5
85.7
2020
£m
19.9
25.4
1.8
3.7
22.8
17.1
6.5
97.2
Other payables of £29.0m (2020: £25.4m) includes payroll related creditors of £21.7m (2020: £15.8m).
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 £22.8m included in advance receipts from customers recognised at 31 October 2020 has been recognised as revenue in 2021 (2020:
£15.3m). Of the £17.1m of advanced receipts from customers at 31 October 2021, £17.1m is relevant to goods and services that will be delivered and
provided within a year. No revenue was recognised in 2021 from performance obligations satisfied in previous years.
The average credit period taken on purchases of goods is 18 days (2020: 26 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 with which the Group has long-term business relationships. The Group’s principal customers are
government defence departments, such as the US Department of Defense (“US DoD”) and the UK Ministry of Defence (“UK MOD”), 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 2021 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.
The Group’s principal debt facilities comprised a £150m revolving credit facility and a $10m overdraft. These were established in July 2021 with a syndicate of
six banks and run until December 2024 with three “one-year” options to extend. As at 31 October 2021, the RCF was drawn by £29.2m (2020: £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.
142
Chemring Group PLC Annual report and accounts 2021
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 2021, 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
Liabilities carried at fair value
Derivative financial instruments
Liabilities carried at amortised cost
Trade payables
Other payables
Interest payable
Accruals
Lease liabilities
Borrowings
2021
2020
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
40.9
10.0
3.7
5.8
40.9
10.0
3.7
5.8
1.0
1.0
45.9
9.5
3.2
14.7
0.4
45.9
9.5
3.2
14.7
0.4
(0.4)
(0.4)
(0.7)
(0.7)
(13.1)
(29.0)
—
(17.3)
(3.8)
(28.6)
(13.1)
(29.0)
—
(17.3)
(3.8)
(28.6)
(19.9)
(25.4)
(1.8)
(17.1)
(5.3)
(57.6)
(19.9)
(25.4)
(1.8)
(17.1)
(5.3)
(57.6)
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
Forward foreign exchange contracts
2021
£m
1.0
(0.4)
0.6
2020
£m
0.4
(0.7)
(0.3)
There was a £0.7m gain (2020: £0.5m gain) on the movement in the fair value of derivative financial instruments recognised in the income statement.
Chemring Group PLC Annual report and accounts 2021
143
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 22. FINANCIAL INSTRUMENTS continued
The table below details the remaining contractual maturities of the Group’s derivative financial instruments and loans at the reporting date. The
amounts are gross and undiscounted and include interest payments estimated based on the conditions existing at the reporting date.
Falling due:
– within one year
– within one to two years
– within two to five years
Derivative
instruments
£m
2021
Loans and
overdrafts
£m
0.6
—
—
0.6
(0.7)
(0.3)
(28.4)
(29.4)
Derivative
instruments
£m
2020
Loans and
overdrafts
£m
(0.3)
—
—
(0.3)
—
(57.5)
(0.1)
(57.6)
Total
£m
(0.1)
(0.3)
(28.4)
(28.8)
Total
£m
(0.3)
(57.5)
(0.1)
(57.9)
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
Derivative financial instruments – liabilities
Fair value
hierarchy
Level 2
Level 2
2021
Carrying
amount
£m
Fair value
£m
2020
Carrying
amount
£m
Fair value
£m
1.0
(0.4)
0.6
1.0
(0.4)
0.6
0.4
(0.7)
(0.3)
0.4
(0.7)
(0.3)
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 2021 the closing exchange rate for the US dollar was 1.37 (2020: 1.29) and the average exchange rate was 1.38
(2020: 1.28).
For the year ended 31 October 2021 a 10 cent strengthening in the US dollar exchange rate would have increased reported net debt by approximately
£2.6m (2020: £4.5m).
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
2021
£m
(14.2)
(2.4)
—
(2.4)
2020
£m
(12.8)
(2.1)
0.1
(2.0)
2021
£m
15.8
2.8
—
2.8
2020
£m
15.0
2.6
(0.1)
2.5
As at 31 October 2021, 87% of the Group’s gross debt was at a fixed rate of 1.12% 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 2021.
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 £0.3m.
144
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 23. PROVISIONS
At 1 November 2020
Transfer between categories
Provided
Foreign exchange adjustments
Paid
At 31 October 2021
These provisions are classified on the balance sheet as follows:
Included in current liabilities
Included in non-current liabilities
Legal
provision
£m
Environmental
provision
£m
Restructuring
provision
£m
Disposal
provision
£m
Other
provision
£m
5.8
—
—
—
(0.2)
5.6
3.2
—
—
(0.2)
—
3.0
0.5
(0.3)
—
—
(0.2)
—
9.0
0.3
0.2
(0.3)
(0.3)
8.9
0.5
—
—
—
(0.5)
—
2021
£m
2.6
14.9
17.5
Total
£m
19.0
—
0.2
(0.5)
(1.2)
17.5
2020
£m
3.3
15.7
19.0
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. 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 £1.2m and £6.8m. There are uncertainties regarding the timing of cash outflows, dependent on the outcome of regulatory proceedings.
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 £28.2m, and the risk of economic outflow relating to these reduces with the passage of time. These are
expected to be utilised over the next five 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.
24. DEFERRED TAX
The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:
At 1 November 2019
(Charge)/credit to income
Credit to other comprehensive income
Transfers
At 1 November 2020
(Charge)/credit to income
Charge to other comprehensive income
Recognised on acquisition
Transfers
At 31 October 2021
Analysed as:
Deferred tax assets
Deferred tax liabilities
At 31 October 2021
Deferred tax assets
Deferred tax liabilities
At 31 October 2020
Accelerated
tax
depreciation
£m
Pensions
£m
US interest
deductions
£m
(7.2)
(1.2)
0.1
(0.3)
(8.6)
(3.2)
0.2
—
(7.8)
(1.9)
(0.2)
0.7
(0.1)
(1.5)
—
(2.2)
—
—
(19.4)
(3.7)
0.4
(19.8)
(19.4)
0.4
(9.0)
(8.6)
—
(3.7)
(3.7)
—
(1.5)
(1.5)
—
—
—
—
—
4.0
(0.2)
—
—
3.8
3.8
—
3.8
—
—
—
Tax
losses
£m
7.5
1.7
—
—
9.2
(3.3)
(0.2)
—
(0.1)
5.6
5.6
—
5.6
9.2
—
9.2
Acquired
intangibles
£m
Other
£m
(7.8)
(0.5)
0.3
0.1
(7.9)
1.8
0.2
(1.1)
—
(7.0)
—
(7.0)
(7.0)
0.5
(8.4)
(7.9)
4.9
(3.7)
0.1
0.3
1.6
(1.3)
—
—
7.9
8.2
8.4
(0.2)
8.2
5.6
(4.0)
1.6
Total
£m
(4.5)
(3.9)
1.2
—
(7.2)
(2.0)
(2.2)
(1.1)
—
(12.5)
18.2
(30.7)
(12.5)
15.7
(22.9)
(7.2)
Chemring Group PLC Annual report and accounts 2021
145
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 24. DEFERRED TAX continued
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 Finance Bill 2021 was published on 11 March 2021 and substantively enacted on 24 May 2021. The bill provides for an increase in the rate of
corporation tax from 19% to 25% with effect from 1 April 2023. As a result of this, the deferred tax liability has increased by £2.2m and the deferred
tax asset has increased by £0.5m as at 31 October 2021.
At the balance sheet date, the Group had unrecognised deferred tax of £4.5m (2020: £2.1m) on gross tax losses of £45.3m (2020: £11.0m) and
unrecognised deferred tax of £16.5m (2020: £22.7m) on gross interest deductions of £77.3m (2020: £108.1m) as a result of US interest limitation
regulations, potentially available for offset against future profits in certain circumstances. The Group also had unrecognised deferred tax of £1.2m
(2020: £1.2m) on gross capital losses of £5.9m (2020: £5.9m). No deferred tax asset has been recognised in respect of these amounts because of the
unpredictability of future taxable qualifying profit streams.
The Group has not recognised any deferred tax liability on temporary differences relating to potentially taxable unremitted earnings of overseas
subsidiaries because the Group is in a position to control the timing of the reversal of the temporary differences and none are expected to reverse in
the foreseeable future.
During the year £7.9m (2020: £nil) of deferred tax liabilities relating to development costs were reclassified to accelerated tax depreciation via the
transfers line.
25. SHARE CAPITAL
Issued and fully paid
283,149,511 (2020: 282,849,930) ordinary shares of 1p each
2021
£m
2.8
2020
£m
2.8
During the year, 299,581 ordinary shares (2020: 359,935) 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.
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.
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations and the
accumulation of gains or losses from the effective portion of hedges of net investments in foreign operations.
Included within retained earnings is £7.6m (2020: £2.7m) 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 2,242,342 shares during the year (2020: 1,015,104) and 846,369
shares (2020: 116,777) 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 3.2p per ordinary share for the year ended 31 October 2021.
27. OWN SHARES
At 1 November 2020
Transactions
At 31 October 2021
2021
£m
2.9
(2.9)
—
2020
£m
7.8
(4.9)
2.9
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 (2020: nil) were acquired during the year and
675,592 ordinary shares (2020: 1,113,118) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in
treasury at 31 October 2021 was nil (2020: 675,592). As at 31 October 2020 the shares held had an average cost of 439.0p per share and represented
0.2% of the total issued and fully paid ordinary share capital.
146
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 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 £5.7m (2020: £4.0m) in respect of share-based payments during the year, of which £0.4m is included in non-
underlying costs.
Details of the four schemes which operated during the year are set out below.
THE CHEMRING GROUP PERFORMANCE SHARE PLAN 2016 (THE “2016 PSP”)
Under 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.
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 2021:
Date of award
22 March 2019
17 December 2019
16 December 2020
2016 PSP
Number of conditional shares
2021
2020
6,185,176
1,791,635
(1,358,817)
(399,033)
5,924,866
2,404,522
(1,113,118)
(1,031,094)
6,218,961
6,185,176
—
—
Number of
ordinary
shares
under award
2,374,231
2,107,187
1,737,543
Vesting price
per share
Pence
Date when
awards due
to vest
nil
nil
nil
22 March 2022
17 December 2022
16 December 2023
The Group has applied a discount to the share-based payments, to reflect the anticipated achievement of the stipulated targets for each 2016 PSP
award based on the predicted figures within the Group’s financial projections and the expected number of leavers over the life of the awards.
The 2016 PSP awards made in the year ended 31 October 2021 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
16 December
2020
17 December
2019
22 March
2019
300p
nil
0.5%
29.1%
246.4p
210p
nil
0.5%
29.1%
172.5p
140p
nil
0.6%
30.0%
98.2p
The weighted average fair value of awards made during the year was 246.4p (2020: 172.5p).
In the year ended 31 October 2021 1,358,817 awards vested (2020: 1,113,118). The charge recognised in respect of the awards is based on their fair
value at the grant date.
THE CHEMRING GROUP 2008 AND 2018 UK SHARESAVE PLAN (THE “UK SHARESAVE PLAN”)
Options were granted during the year on 26 July 2021.
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
2021
2020
Number
of share
options
1,773,742
481,085
(299,581)
(184,866)
1,770,380
22,243
Weighted
average
exercise
price
Pence
177.7
240.0
158.1
183.0
197.4
178.0
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
Chemring Group PLC Annual report and accounts 2021
147
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 28. SHARE-BASED PAYMENTS continued
THE CHEMRING GROUP 2008 AND 2018 UK SHARESAVE PLAN (THE “UK SHARESAVE PLAN”) continued
The following options were outstanding at 31 October 2021:
Date of award
27 July 2017
30 July 2018
30 July 2018
29 July 2019
29 July 2019
30 July 2020
30 July 2020
26 July 2021
26 July 2021
Number
of ordinary
shares under
award
Exercise price
per share
Pence
49,863
22,243
48,532
432,190
26,881
617,388
94,448
405,810
73,025
148.0
178.0
178.0
154.0
154.0
202.0
202.0
240.0
240.0
Dates between which
options may be exercised
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
1 October 2024–31 March 2025
1 October 2026–31 March 2027
The weighted average fair value of options granted in the year was 57.0p (2020: 39.5p). The weighted average fair value of options exercised in the year
was 38.6p (2020: 35.0p). The weighted average share price on exercise of the options during the year was 158.1p (2020: 141.1p).
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.
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 2021:
Date of award
16 December 2019
16 December 2019
15 December 2020
15 December 2020
Number of deferred shares
2021
2020
615,365
351,832
(132,919)
(68,107)
246,496
511,947
(116,777)
(26,301)
766,171
615,365
—
—
Number of
ordinary
shares
under award
230,795
205,576
182,300
147,500
Share price
at valuation
Pence
Vesting price
per share
Pence
Date when
awards are due
to vest
210p
210p
300p
300p
nil
nil
nil
nil
16 December 2021
16 December 2022
15 December 2022
15 December 2023
The fair value of the deferred bonus share awards is based on the share price on the grant date of the award. The weighted average fair value of awards
made during the year was 300p (2020: 210p). The Group has applied a discount to the share-based payments, to reflect the expected number of
leavers over the life of the awards.
DEFERRED SHARES RELATED TO ACQUISITION
Deferred consideration in relation to the acquisition of the “Cubica Group” of up to £2.0m has been accounted for as equity-settled share-based
payments under IFRS 2. See note 29 for further detailed disclosure.
The deferred consideration is comprised of two tranches of 326,792 Chemring ordinary shares each, valued at £2.0m based on the share price on 2
June 2021 of 307p. The first tranche will vest on the second anniversary of completion, 2 June 2023, and the second tranche will vest on the third
anniversary of completion, 2 June 2024, subject to continued employment with Chemring Group PLC.
A total of 653,584 of awards were granted during the year ended 31 October 2021 (2020: nil). Nil vested or lapsed in the year (2020: nil) and 653,584
are outstanding at the end of the period. Nil were subject to vesting at the end of the year (2020: nil). The fair value of the deferred share awards is
based on the share price on the grant date of the award. The weighted average fair value of awards made during the year was 307p (2020: £nil).
148
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 29. ACQUISITION OF SUBSIDIARY
ACQUISITION OF THE CUBICA GROUP
On 2 June 2021, Chemring Group PLC acquired 100% of the issued shares in Cubica Technology Limited (“Cubica”) and Q6 Holdings Limited (“Q6”),
collectively the “Cubica Group”. The Cubica Group specialises in machine learning, data fusion and autonomous systems. The acquisition has strong
synergies to Roke and will expand the Group’s existing capabilities and product offerings.
The acquisition has been completed for an initial cash consideration of £7.0m, funded from Chemring’s existing bank facilities. Further deferred
consideration of up to £2.0m is payable in Chemring 1p ordinary shares in two tranches (subject to the former owners remaining employed in the
Chemring Group) on the second and third anniversary of completion. The operating results and assets and liabilities of the acquired company have been
consolidated from 3 June 2021.
The deferred consideration of £2.0m is contingent on continued employment of the former owners. In accordance with IFRS 3 these costs have been
treated as post-acquisition expenses and accounted for as equity-settled share-based payments under IFRS 2. See note 3 for further details.
Acquisition-related costs of £1.6m have been classified as non-underlying costs in the statement of profit or loss in the reporting period ended
31 October 2021.
Since acquisition to 31 October 2021, the Cubica Group contributed revenue of £0.6m and an operating profit of £0.3m to the Group’s results. If the
acquisition had occurred on 1 November 2020, we estimate that its revenue would have been £1.4m, and operating profit for the year would have been
£0.8m. In determining these amounts, we have assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition
would have been the same if the acquisition had occurred on 1 November 2020.
Details of the consideration transferred are:
Cash paid
Total purchase consideration
Less cash acquired
Net cash outflow
The provisionally determined fair values of the assets and liabilities of the Cubica Group as at the date of acquisition are as follows:
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Current tax
Intangible assets: customer relationships
Intangible assets: technology
Deferred tax liability
Net identifiable assets
Less: non-controlling interests
Add: Goodwill
Net assets acquired
£m
7.0
7.0
(1.9)
5.1
Fair value
£m
1.9
0.4
(1.4)
(0.5)
2.1
2.5
(1.1)
3.9
—
3.1
7.0
Goodwill is attributable to the skills and technical talent of the assembled workforce and synergies expected to arise after the Group’s acquisition of the
new subsidiary. None of the goodwill is expected to be deductible for tax purposes.
The fair value of the trade receivables amounts to £0.3m. The gross amount of trade receivables is £0.3m and it is expected that the full contractual
amounts can be collected.
If new information obtained within one year of the date of acquisition about facts and circumstances that existed at the date of acquisition identifies
adjustments to the above amounts, or any additional provisions that existed at the date of acquisition, then the accounting for the acquisition will
be revised.
Q6 owns 80% of the issued shares of Vigil AI Limited (“Vigil AI”), which has technology providing state-of-the-art solutions to enable online platforms
to detect imagery relating to child sexual exploitation globally. The Group has chosen to measure the non-controlling interests at the proportionate
share of the value of net identifiable assets acquired. See page 162 for further detail.
Vigil AI has established a joint venture in the US, Krunam Technologies PBC, Inc., a public benefit corporation (“Krunam”), in conjunction with Just
Business Management, LLC, a US-based social enterprise firm. Krunam is leading the sales and deployment of the Vigil AI technology into the global
commercial market. See page 162 for further detail.
Chemring Group PLC Annual report and accounts 2021
149
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 £6.0m (2020: £6.1m) 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 2021 has been prepared and updated
to 31 October 2021, 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 £13.7m at 31 October 2021 (2020: £7.6m).
Under the funding plan agreed with the trustees following the 2021 actuarial valuation, no further deficit recovery payments are required. 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 2024 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 2021 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 2.5%. The net deficit of the Chemring Nobel Scheme was £nil at 31 October 2021 (2020: £nil) and as such is
immaterial for further detailed disclosures.
The movement in the net defined benefit asset is as follows:
Defined benefit obligations
Defined benefit asset
Net defined benefit asset
At 1 November
Included in profit or loss
Administrative expenses
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
2021
£m
(91.3)
—
(1.5)
(1.5)
(2.4)
0.9
—
(1.5)
—
3.4
2020
£m
(89.1)
—
(1.7)
(1.7)
(4.2)
—
—
(4.2)
—
3.7
2021
£m
98.9
(0.3)
1.7
1.4
—
—
7.7
7.7
—
(3.4)
(90.9)
(91.3)
104.6
2020
£m
98.7
(0.3)
1.9
1.6
—
—
2.3
2.3
—
(3.7)
98.9
2021
£m
7.6
(0.3)
0.2
(0.1)
(2.4)
0.9
7.7
6.2
—
—
13.7
2020
£m
9.6
(0.3)
0.2
(0.1)
(4.2)
—
2.3
(1.9)
—
—
7.6
The Chemring Group Staff Pension Scheme had 884 members at the end of the year (2020: 934). Of these members 57.8% (2020: 57.8%) 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.
The pension schemes’ assets are analysed as follows:
Equities
Liability driven investment
Diversified alternatives
Multi-asset credit
Assets held by insurance company
Cash
2021
£m
18.4
24.7
27.3
23.3
1.5
9.4
104.6
2020
£m
17.9
26.5
22.8
20.2
1.9
9.6
98.9
2021
%
17.6
23.6
26.1
22.3
1.4
9.0
2020
%
18.1
26.8
23.1
20.4
1.9
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 scheme’s
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.
150
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 30. RETIREMENT BENEFIT OBLIGATIONS continued
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
2021
%
1.8
2.7
3.2
3.4
2.7
2020
%
1.7
2.1
2.8
2.9
2.1
In determining defined benefit obligations, the Group uses mortality assumptions which are based on published mortality tables. For the Chemring
Group Staff Pension Scheme, the actuarial table currently used is SAPS Normal Health pensioner tables with future improvements in line with CMI
2018 and a 1.25% long-term trend rate.
This results in the following life expectancies at age 65:
Future pensioners
Current pensioners
– male
– female
– male
– female
2021
88.6
90.6
87.7
89.2
2020
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 £0.8m and a one-year change to the longevity assumption would change the deficit by approximately £3.7m. The principal risks to the
schemes are that the investments do not perform as well as expected, the discount rate continues to fall driven by lower market interest rates and the
rate of improvement in mortality assumed is insufficient and life expectancies continue to rise.
The Group anticipates contributions to the defined benefit schemes for the year ending 31 October 2022 will be £nil (2021: £nil).
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
Decrease/(increase) in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
(Decrease)/increase in provisions
Operating cash flow from continuing underlying operations
Discontinued operations
Operating cash flow from discontinued underlying operations
Cash impact of non-underlying items from discontinued operations
Net cash outflow from discontinued operating activities
Net cash inflow from discontinued investing activities
Net cash inflow from discontinued operations
Notes
12
12
12
13
28
2021
£m
50.4
0.6
6.2
0.1
0.1
18.2
0.9
5.3
81.8
7.9
0.9
(10.3)
(0.3)
80.0
—
(0.4)
(0.4)
0.4
—
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
Chemring Group PLC Annual report and accounts 2021
151
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
32. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase 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
New leases entered into, 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 after one year
Lease liabilities
Preference shares
2021
£m
(9.6)
29.2
19.6
2.7
(0.1)
(0.6)
21.6
—
(48.2)
(26.6)
2020
£m
18.4
16.8
35.2
(0.6)
(0.4)
(0.2)
34.0
(6.5)
(75.7)
(48.2)
At
1 November
2020
£m
14.7
(57.5)
(5.3)
(0.1)
(48.2)
Cash flows
£m
Non-cash
changes
£m
Exchange
rate effects
£m
(9.6)
27.6
1.6
—
19.6
—
(0.6)
(0.1)
—
(0.7)
0.3
2.4
—
—
2.7
At
31 October
2021
£m
5.4
(28.1)
(3.8)
(0.1)
(26.6)
Accrued interest is included in the carrying amount of interest payable (note 20) measured at amortised cost and therefore is not presented as a
separate line item in the above table.
34. 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.
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 (included within “legal provisions”), 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.
152
Chemring Group PLC Annual report and accounts 2021
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 35. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this
note. Transactions with the Group’s pension schemes are disclosed in note 30.
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 110 to 120.
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.
2021
£m
2.8
0.2
1.7
4.7
2020
£m
2.6
0.2
1.5
4.3
Chemring Group PLC Annual report and accounts 2021
153
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS PARENT COMPANY BALANCE SHEET
As at 31 October 2021
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
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
2021
Note
£m
£m
2020
£m
£m
1
2
3
12
3
0.2
786.6
69.2
7.2
5.1
—
4
(11.1)
(42.5)
—
(7.1)
(0.9)
(0.1)
5
4
7
11
8
9
10
863.2
5.1
868.3
(11.1)
(50.6)
(61.7)
806.6
2.8
307.1
12.9
483.8
806.6
—
806.6
0.1
634.6
189.2
4.1
12.6
36.7
(17.3)
(57.5)
(1.1)
(6.7)
(0.8)
(0.1)
828.0
49.3
877.3
(17.3)
(66.2)
(83.5)
793.8
2.8
306.7
12.9
474.3
796.7
(2.9)
793.8
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 2021 of £24.6m (2020: £137.6m).
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
14 December 2021.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
154
Chemring Group PLC Annual report and accounts 2021
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 October 2021
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Actuarial gains/(losses) on pension scheme, net of deferred tax
Total comprehensive income attributable to the equity holders of the parent
2021
£m
24.6
2.1
26.7
2020
£m
137.6
(0.8)
136.8
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 October 2021
At 1 November 2020
Profit after tax
Other comprehensive income
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
At 31 October 2021
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
At 31 October 2020
Share capital
£m
Share
premium
account
£m
Special
capital
reserve
£m
Retained
earnings
£m
Own shares
£m
Total
£m
2.8
—
—
—
—
—
—
—
—
2.8
Share capital
£m
2.8
—
—
—
—
—
—
—
—
2.8
306.7
12.9
474.3
(2.9)
793.8
—
—
—
0.4
—
—
—
—
—
—
—
—
—
—
—
—
24.6
2.1
26.7
—
4.7
(11.9)
(7.1)
(2.9)
307.1
12.9
483.8
—
—
—
—
—
—
—
2.9
—
Share
premium
account
£m
306.2
—
—
—
0.5
—
—
—
—
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
306.7
12.9
Retained
earnings
£m
351.7
137.6
(0.8)
136.8
—
3.4
(10.4)
(2.3)
(4.9)
474.3
Own shares
£m
(7.8)
—
—
—
—
—
—
—
4.9
(2.9)
24.6
2.1
26.7
0.4
4.7
(11.9)
(7.1)
—
806.6
Total
£m
665.8
137.6
(0.8)
136.8
0.5
3.4
(10.4)
(2.3)
—
793.8
The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements.
A final dividend of 3.2p per ordinary share has been proposed. See note 9 to the Group financial statements.
As at 31 October 2021 the Company had distributable reserves of £483.8m (2020: £474.3m). 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.
Chemring Group PLC Annual report and accounts 2021
155
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
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 2021 or 31 October 2020.
2. INVESTMENTS IN SUBSIDIARIES
Cost
At 1 November 2019 and 31 October 2020
Additions
At 31 October 2021
Impairment
At 1 November 2019 and 31 October 2020
Impairment
At 31 October 2021
Carrying amount
At 31 October 2021
At 31 October 2020
Shares in
subsidiary
undertakings
£m
699.1
152.0
851.1
(64.5)
—
(64.5)
786.6
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.
During the year ended 31 October 2021, Chemring Group PLC acquired the Cubica Group for a cost of investment of £7.0m. See note 29 of the
Group financial statements for further details. In addition, the Company increased its investments in Chemring Countermeasures UK Limited and CHG
Overseas Limited by £30.0m and £115.0m respectively.
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.
Stress testing was performed on the forecasts to consider the impact of reasonably possible worst case scenarios over the forecast period, including a
1% reduction in long-term growth rate, a 10% fall in the forecast cash flows or a $0.10 weakening in the GBP to USD exchange rate. Even under any of
these circumstances, no investment would require an impairment. A 1% increase in discount rate would result in an impairment of £19.1m in CHG
Overseas Limited being required.
There are no other reasonable possible changes in assumptions that would require an impairment of investments in subsidiaries.
Details of the Group undertakings at 31 October 2021 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.
3. TRADE AND OTHER RECEIVABLES
Within current assets
Amounts owed by subsidiary undertakings
Derivative financial instruments (note 22 to the Group financial statements)
Prepayments and accrued income
Within non-current assets
Amounts owed by subsidiary undertakings
2021
£m
3.4
1.0
0.7
5.1
69.2
69.2
2020
£m
11.6
0.4
0.6
12.6
189.2
189.2
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 8.5%. No interest is charged on trade and other receivables from the
date of invoice to payment. Of the £69.2m owed by subsidiary undertakings classified within non-current assets, £62.7m is contractually due in two to
five years. The remainder is contractually due in less than two years.
156
Chemring Group PLC Annual report and accounts 2021
4. TRADE AND OTHER PAYABLES
Within current liabilities
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
Amounts owed to subsidiary undertakings
2021
£m
0.4
0.2
2.0
8.2
0.3
—
2020
£m
0.7
0.2
5.4
9.0
0.2
1.8
11.1
17.3
—
—
1.1
1.1
Other payables of £8.2m (2020: £9.0m) includes payroll related creditors of £5.7m (2020: £4.2m).
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.
5. BORROWINGS
Borrowings due after more than one year
Bank borrowings – US dollar denominated
Bank borrowings – sterling denominated
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
2021
£m
28.0
14.5
42.5
2021
£m
—
—
42.5
42.5
2020
£m
57.5
—
57.5
2020
£m
—
57.5
—
57.5
The interest incurred on the above borrowings is detailed within notes 7 and 18 to the Group financial statements. Sterling denominated borrowings
relate to stand-alone Company bank overdraft which carries interest at 1.2%.
6. LEASES
The interest expense on lease liabilities is £nil (2020: £nil). In total, payments of £0.1m (2020: £0.1m) were made under leasing contracts, of which £0.1m
(2020: £0.1m) was made to repay the principal portion of the lease. The total lease liability at 31 October 2021 was £nil (2020: less than £0.1m).
7. PROVISIONS
At 1 November 2020
Provided
Paid
Foreign exchange movements
At 31 October 2021
Total
£m
6.7
1.0
(0.3)
(0.3)
7.1
It is not possible to estimate more accurately the expected timing of any resulting outflows of economic benefits. Total provisions include legal
provisions, which represent the estimated legal costs relating to ongoing investigations, and disposal provisions, which relate to estimated liabilities faced
by the Company in respect of the disposal of its commoditised energetics businesses under the terms of their respective sale agreements. See note 23
to the Group financial statements for further details.
Chemring Group PLC Annual report and accounts 2021
157
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
8. PREFERENCE SHARES
Cumulative preference shares (62,500 shares of £1 each)
2021
£m
0.1
2020
£m
0.1
The cumulative preference shares carry an entitlement to a dividend at the rate of 7p per share per annum, payable in equal instalments on 30 April and
31 October each year. Holders of the preference shares have the right on a winding-up to receive, in priority to any other classes of shares, the sum of
£1 per share together with any arrears of dividends.
9. SHARE CAPITAL
Issued, allotted and fully paid
283,149,511 (2020: 282,849,930) ordinary shares of 1p each
2021
£m
2.8
2020
£m
2.8
During the year, 299,581 ordinary shares (2020: 359,935) were issued for cash to employees under the Group’s approved savings-related share
schemes.
The preference shares are presented as a liability and accordingly are excluded from called-up share capital in the balance sheet.
SHARE-BASED INCENTIVE SCHEMES
Full details of the schemes are set out in note 28 to the Group financial statements.
10. OWN SHARES
At the beginning of the year
Transactions
At the end of the year
2021
£m
2.9
(2.9)
—
2020
£m
7.8
(4.9)
2.9
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 (see note 28 to the Group financial statements). Nil ordinary shares (2020: nil) were acquired during the year
and 675,592 ordinary shares (2020: 1,113,118) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held
in treasury at 31 October 2021 was nil (2020: 675,592). As at 31 October 2020 the shares held had an average cost of 439.0p per share and
represented 0.2% of the total issued and fully paid ordinary share capital.
11. DEFERRED TAX
At the beginning of the year
Credit/(charge) to income statement
(Charge)/credit to other comprehensive income
Deferred tax liability at the end of the year
The amount provided represents:
Other timing differences
2021
£m
(0.8)
1.0
(1.1)
(0.9)
2020
£m
(0.4)
(0.5)
0.1
(0.8)
(0.9)
(0.8)
At the balance sheet date, the Company had unrecognised tax losses of £nil (2020: £nil) potentially available for offset against future profits in
certain circumstances.
12. PENSIONS
The Company has assumed its share of the assets and liabilities of the Group’s defined benefit pension scheme. An analysis of the surplus balance is
shown below:
At 31 October 2019, retirement benefit surplus
Contributions
Other finance costs
Actuarial movements
At 31 October 2020, retirement benefit surplus
Contributions
Other finance costs
Actuarial movements
At 31 October 2021, retirement benefit surplus
Further details are set out in note 30 to the Group financial statements.
158
Chemring Group PLC Annual report and accounts 2021
Total
£m
5.1
—
(0.1)
(0.9)
4.1
—
(0.1)
3.2
7.2
13. STAFF COSTS
Average monthly number of total employees (including executive directors)
The costs incurred in respect of these employees (including share-based payments) were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment
Disclosures in respect of directors’ emoluments can be found in the directors’ remuneration report on pages 94 to 120.
2021
Number
31
2020
Number
29
2021
£m
6.5
0.9
0.6
2.9
10.9
2020
£m
6.7
0.6
0.5
2.3
10.1
Chemring Group PLC Annual report and accounts 2021
159
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FIVE-YEAR RECORD
For the year ended 31 October 2021
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.
2021
£m
393.3
57.5
(7.1)
50.4
(1.6)
48.8
(7.3)
41.5
—
41.5
351.5
84.4
(17.5)
13.7
(24.5)
(26.6)
(28.2)
352.8
2.8
350.0
352.8
16.9p
16.5p
14.7p
14.4p
4.8p
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
1. Comparative figures in the year 2017 have been adjusted to reflect the transfer of the commoditised energetics businesses to discontinued operations.
160
Chemring Group PLC Annual report and accounts 2021
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 121 to 123. 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 72.
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)
ii)
There were no IFRS Interpretations Committee (“IFRIC”)
interpretations, amendments to existing standards and new standards
adopted in the year ended 31 October 2021 that have materially
impacted the reported results or the financial position.
The following IFRIC interpretations, amendments to existing
standards and new standards were adopted in the year ended 31
October 2021 but have not materially impacted the reported results
or the financial position:
> Amendments to IFRS 3 Business Combinations;
> Amendments to IFRS 7, 9 and IAS 39 Financial Instruments;
> Amendments to IFRS 16 Leases;
> Amendments to IAS 1 Presentation of Financial Statements;
> Amendments to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors; and
> Amendments to IAS 16 Property, Plant and Equipment - Proceeds
before Intended Use (early adopted).
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 2021
> IFRS 17 Insurance Contracts.
EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2022
> Amendments to IFRS 3 Business Combinations;
> 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 and IFRS
Practice Statement 2;
> Amendments to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors;
> Amendments to IAS 12 Income Taxes;
> Amendments to IAS 16 Property, Plant and Equipment; and
> IFRS 17 Insurance Contracts.
The directors do not expect the adoption of these standards and
interpretations will have a material impact on the results of the Group in
future periods.
3. GROUP ACCOUNTING POLICIES
BASIS OF PREPARATION
These financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union and in
accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006. 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.
In accordance with IFRS 5, the 2020 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. Subsidiaries are entities controlled by the Group. The
Group ‘controls’ an entity when it is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. The financial statements
of subsidiaries are included in the consolidated financial statements
from the date on which control commences until the date on which
control ceases.
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.
Chemring Group PLC Annual report and accounts 2021
161
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
BASIS OF CONSOLIDATION continued
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.
Non-controlling interest
The Group recognises non-controlling interest in an acquired entity either
at fair value or at the non-controlling interest’s proportionate share of the
acquired entity’s net identifiable assets. This decision is made on an
acquisition-by-acquisition basis. For non-controlling interests that the
Group holds, the Group elected to recognise the non-controlling interests
at its proportionate share of the acquired net identifiable assets.
Q6 Holdings Limited, a wholly owned subsidiary of Chemring Group PLC,
owns 80% of the issued shares of Vigil AI Limited. Disclosure of the minority
interest on the face of the primary statements has not been included as
this is considered immaterial to the Group. As at 31 October 2021, profit,
total comprehensive income and equity attributable to minority interests
were less than £0.1m.
Joint venture
Vigil AI Limited has established a joint venture in the US, Krunam
Technologies PBC, Inc. in which it holds 50% of the voting rights. The joint
venture is accounted for using the equity method. It has been initially
recognised at cost, which includes transaction costs. Subsequent to initial
recognition, the consolidated financial statements include the Group’s
share of the profit or loss and OCI of equity accounted investees, until the
date on which significant influence or joint control ceases.
The initial cost of investment and value as at 31 October 2021 was less
than £0.1m. The Group’s share of profit of the equity accounted investee
net of tax for the period was less than £0.1m. All amounts were
considered immaterial to the Group financial statements and therefore no
separate disclosure has been provided in the primary statements.
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.
From time to time we enter into contracts for “customer-funded R&D”
where Chemring provides a service towards the development of a
technology for a customer resulting in revenue. In certain instances,
Chemring partly funds the development effort and these can result in the
recognition of a controlled asset.
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.
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.
162
Chemring Group PLC Annual report and accounts 2021
3. GROUP ACCOUNTING POLICIES continued
REVENUE RECOGNITION continued
Sale of goods
Revenue from the sale of goods is recognised when all of the following
conditions are satisfied:
- the Group has identified a sales contract with a customer;
- the performance obligations within this contract have been identified;
- the transaction price has been determined;
- this transaction price has been allocated to the performance obligations
in the contract; and
- revenue is recognised as or when each performance obligation
is satisfied.
Performance obligations are satisfied when the customer gains control of
promised goods or services from the contract. 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.
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:
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.
- 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
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:
- assets (or disposal groups) that are classified as held for sale, in
- technology
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
- 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 (2020: ten 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 (2020: seven years).
Chemring Group PLC Annual report and accounts 2021
163
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
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.
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
164
Chemring Group PLC Annual report and accounts 2021
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.
3. GROUP ACCOUNTING POLICIES continued
FOREIGN CURRENCIES continued
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.
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.
In order to hedge its exposure to certain foreign exchange risks, the Group
enters into forward foreign exchange contracts which are accounted for
as derivative financial instruments (see below for details of the Group’s
accounting policies in respect of such derivative financial instruments).
For the purpose of presenting these financial statements, the assets and
liabilities of the Group’s foreign operations are translated at exchange
rates prevailing on the balance sheet date. Income and expense items are
translated at the average exchange rates for the period.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised in the Group’s balance
sheet when the Group becomes a party to the contractual provisions
of the instrument.
FINANCIAL ASSETS
Trade receivables
Trade receivables do not carry any interest and are stated at their fair
value and amortised cost as reduced by appropriate allowances for
expected credit losses.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits,
and other short-term highly liquid investments that are readily convertible
to a known amount of cash and are subject to an insignificant risk of
change in value.
FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
Financial liabilities
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into.
Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption, and direct issue costs are accounted
for on an accruals basis in the income statement using the effective interest
method, and are added to the carrying amount of the instrument to the
extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are not interest bearing and are stated at their fair value
and amortised cost.
Derivative financial instruments
The Group’s activities expose it to the financial risks of foreign currency
transactions, and it uses forward foreign exchange contracts to hedge its
exposure to these transactional risks. The Group does not use derivative
financial instruments for speculative purposes.
Derivative financial instruments are recognised at fair value on the date
the derivative contract is entered into and are revalued to fair value at
each balance sheet date. The fair values of derivative financial instruments
are calculated by external valuers.
The Group does not apply hedge accounting for derivative financial
instruments, with changes in the fair value of derivatives being recognised in
the income statement immediately.
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.
When the benefits of a plan are changed or when a plan is curtailed, the
resulting change in benefit that relates to past service or the gain or loss
on curtailment is recognised immediately in profit or loss.
The discount on scheme liabilities less the expected return on scheme
assets on defined benefit obligations is included within finance expense.
The retirement benefit obligation recognised in the balance sheet
represents the present value of the defined benefit obligation as adjusted
for unrecognised past service cost and as reduced by the fair value of
scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus the present value of available refunds and reductions in
future contributions to the scheme.
LEASED ASSETS
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 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.
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.
Chemring Group PLC Annual report and accounts 2021
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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
PROVISIONS
Provisions are recognised when the Group has a present obligation, either
legal or constructive, as a result of a past event, it is probable that the
Group will be required to settle that obligation, and a reliable estimate
can be made of the amount of the obligation. The amount recognised as
a provision is the best estimate of the consideration required to settle the
present obligation at the balance sheet date, taking into account the risks
and uncertainties surrounding the obligation. Where a provision is
measured using the estimated cash flows to settle the present obligation,
its carrying amount is the present value of those cash flows.
When some or all of the economic benefits required to settle a provision
are expected to be recovered from a third party, a receivable is
recognised as an asset if it is virtually certain that reimbursement will be
received and the amount of the receivable can be measured reliably.
Environmental provisions
Where the Group is liable for decontamination work or the restoration of
sites to their original condition, an estimate is made of the costs needed to
complete these works, discounted back to present values, relying upon
independent third party valuers where appropriate.
Restructuring provisions
A restructuring provision is recognised when the Group has developed a
detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by
starting to implement the plan or announcing its main features to those
affected by it. The measurement of a restructuring provision includes only
the direct expenditures arising from the restructuring and not those
associated with the ongoing activities of the entity.
Warranty provisions
Provisions for the expected cost of warranty obligations under local sale
of goods legislation are recognised at the date of sale of the relevant
products, based upon the best estimate of the expenditure required to
settle the Group’s obligations.
Disposal provisions
Disposal provisions relate to estimated liabilities faced by the Group in
respect of discontinued operations and other disposed entities under the
terms of their respective sale agreements.
CONTINGENT LIABILITIES
The Group exercises judgement in recognising exposures to contingent
liabilities related to pending litigation or other outstanding claims subject
to negotiated settlement, mediation, arbitration or government regulation,
as well as other contingent liabilities. Judgement may be necessary in
assessing the likelihood that a pending claim will succeed, or a liability will
arise, and/or to quantify the possible range of the financial settlement.
ALTERNATIVE PERFORMANCE MEASURES
In the analysis of the Group’s financial performance and position,
operating results and cash flows, APMs are presented to provide readers
with additional information. The principal APMs presented are underlying
measures of earnings including underlying operating profit, underlying
profit before tax, underlying profit after tax, underlying EBITDA,
underlying earnings per share and underlying operating cash flow. In
addition, EBITDA, net debt and constant currency 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
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Chemring Group PLC Annual report and accounts 2021
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 considers 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 need to be separately disclosed
to properly understand 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 defined benefit scheme including employees of
other Group companies (a Group plan). 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.
4. CHEMRING GROUP PLC – PARENT COMPANY ACCOUNTING
POLICIES continued
FRS 101 REDUCED DISCLOSURE FRAMEWORK continued
Investment in Group undertakings
Investments are stated at cost less any provision for impairment in value.
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:
Critical accounting judgements and sources of estimation uncertainty
There are no critical accounting judgements for the Company. The other
non-significant areas that include a degree 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 £786.6m at 31 October 2021.
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.
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.
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 2021 are set out in note 23.
OTHER NON-SIGNIFICANT AREAS THAT INCLUDE A DEGREE OF
ESTIMATION UNCERTAINTY OR JUDGEMENTS
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 £108.7m at
31 October 2021.
Capitalised development costs impairment
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 £30.0m at 31 October 2021. Included in
this balance are individually material balances relating to Joint Biological
Tactical Detection System (£8.1m), Next Generation Chemical
Detector (£13.0m) and Perceive (£4.7m).
Chemring Group PLC Annual report and accounts 2021
167
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
5. ACCOUNTING JUDGEMENTS AND SOURCES OF
ESTIMATION UNCERTAINTY continued
OTHER NON-SIGNIFICANT AREAS THAT INCLUDE A DEGREE OF
ESTIMATION UNCERTAINTY OR JUDGEMENTS continued
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 2021 there was a provision of £5.2m in respect of
uncertain tax positions. Due to the uncertainties noted above, there is a
risk that the Group’s judgements are challenged, resulting in a different tax
payable or recoverable from the amounts provided. Management
estimates that the reasonably possible range of outcomes is between £nil
and £5.2m.
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, or to the extent that the existing taxable temporary
differences, of an appropriate type, reverse in an appropriate period 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.
Defined benefit pension scheme
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.
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Chemring Group PLC Annual report and accounts 2021
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 2021 which comprise the
consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated balance
sheet, consolidated cash flow statement, parent company balance sheet, parent company statement of comprehensive income, parent company
statement of changes in equity, and the related notes, including the accounting policies in notes 1-5.
IN OUR OPINION:
- the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 October 2021 and of the
Group’s profit for the year then ended;
- the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006;
- 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 to the extent applicable.
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 four financial years ended
31 October 2021. 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
£2.75m (2020: £2.5m)
Coverage
Key audit matters
Recurring risks
4.9% (2020: 4.8%) of normalised profit before tax, normalised to exclude this year’s
non-underlying items
85% (2020: 89%) of total profits and losses that made up Group profit before tax including
continuing operations only
Revenue recognition
Recoverability of parent company’s investments in subsidiaries
vs 2020
◄►
◄►
Chemring Group PLC Annual report and accounts 2021
169
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 (unchanged from 2020), in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit
procedures to address those matters and our findings from those procedures in order that the company’s members, as a body, may better understand
the process by which we arrived at our audit opinion. These matters were addressed, and our findings 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 FROM
PROVISION OF SERVICES OVER
TIME
(£2.1m within £10m accrued
income, in relation to open fixed
price contracts; 2020: £2.5m within
£8.0m accrued income)
Refer to page 90 (Audit Committee
Report), page 163 (accounting
policy) and page 140 (financial
disclosures).
The risk
‘OVER TIME’ REVENUE ESTIMATE:
There is a risk over the accuracy of services
revenue due to pressures on the Group to
increase profitability and other key metrics,
increasing the risk of fraudulent premature
revenue recognition.
A number of service contracts (5% of total
group revenue from continuing operations) 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 materiality.
We continue to perform work over point in
time recognition, but no longer consider this to
be part of the key audit matter because of the
low level of estimation or judgement involved
in those transactions.
Our response
We performed the tests below rather than seeking to rely on
any of the Group’s controls because the nature of the balance
is such that we would expect to obtain audit evidence
primarily through the detailed procedures described below;
— Corroborating terms: We assessed the Group’s assumptions
behind the timing of revenue recognition based on percentage
of completion of the revenue contacts, and reviewed a sample
of ‘over time’ service contracts to the proportion of revenue
recognised relative to the stage of completion;
— Independent re-performance: We recalculated progress
towards satisfaction of performance obligations to assess the
expected revenue and profit recognition and compared this
to the amounts recorded.
— Tests of detail: For a risk-based sample of ‘over-time’ service
contracts we assessed the cost allocation and further cost
forecasts to assess stage of completion and compared this to
other indicators such as customer certified milestones and
settled invoices;
— Contract documentation: We inspected the contract
documents and challenged the identification of performance
obligations, contract clauses and the method of revenue
recognition in accordance with IFRS 15;
— Challenge key judgements: We obtained the latest forecasts
of contract revenue and costs, and challenged the estimates in
respect of contract forecasts, costs to complete and the
recoverability of contract assets via agreement to third-party
certifications, confirmations and other documentation,
challenge of senior operational and financial management, and
with reference to our own expertise;
— Journals: We considered a high risk criteria sample for the
journals which looked at credits to revenue from services
over time with unusual debits and any top side journals
related to this;
— Historical comparisons: We made 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; and
— Forecasting accuracy: We performed 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. We considered contract progress after
the reporting date to determine if the outturn result had
been accurately forecast.
OUR FINDINGS
We found the resulting estimates to be mildly cautious
(2020: balanced).
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Chemring Group PLC Annual report and accounts 2021
2. KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT continued
RECOVERABILITY OF PARENT
COMPANY’S INVESTMENTS IN
SUBSIDIARIES
(Investments in subsidiaries:
£786.6m; 2020: £634.6m)
Refer to page 90 (Audit Committee
report), page 167 (accounting
policy) and page 156 (financial
disclosures).
The risk
SUBJECTIVE ESTIMATE:
A history of business combinations has resulted
in significant parent company investments
in subsidiaries.
Our response
We performed the tests below rather than seeking to rely on
any of the Group’s controls because the nature of the balance
is such that we would expect to obtain audit evidence
primarily through the detailed procedures described below;
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.
— Extrapolating past forecasting accuracy: We assessed three
years’ historical accuracy of the cash flows forecasting and
building comparable variations in forecasting accuracy into our
own models that were built to re-perform the valuation;
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
involves 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
concluded that reasonably possible changes
to the recoverable amount would not be
expected to result in a material impairment.
— Our sector experience: We evaluated assumptions used, in
particular those relating to operating cash flow forecasts
when compared with our business understanding;
— Benchmarking assumptions: We benchmarked 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: We performed sensitivity analysis by
reviewing the impact of reasonable downward changes to the
assumptions noted above;
— Comparing valuations: We compared 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: We assessed whether the parent
company’s disclosures about the estimation uncertainty
related to the impairment assessment reflect the risks
inherent in the recoverability of the parent company’s
investments in subsidiaries.
OUR FINDINGS
— We found the assessment of the resulting estimate to be
balanced (2020: acceptable).
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171
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 £2.75m
(2020: £2.5m), determined with reference to a benchmark of normalised
Group profit before tax, normalised to exclude this year’s non-underlying
items as disclosed in note 3, of which it represents 4.9% (2020: 4.8%).
Materiality for the parent company financial statements as a whole was set
at £1.0m (2020: £1.4m) determined with reference to a benchmark of
parent company total assets, of which is represents 0.1% (2020: 0.2%).
In line with our audit methodology, our procedures on individual account
balances and disclosures were performed to a lower threshold,
performance materiality, so as to reduce to an acceptable level the risk
that individually immaterial misstatements in individual account balances
add up to a material amount across the financial statements as a whole.
Performance materiality was set at 74.5% (2020: 75.2%) of materiality for
the financial statements as a whole, which equates to £2.05m (2020:
£1.88m) for the Group and £0.75m (2020: £1.05m) for the parent
company. We applied this percentage in our determination of
performance materiality because we did not identify any factors indicating
an elevated level of risk.
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £135k (2020: £125k), in
addition to other identified misstatements that warranted reporting on
qualitative grounds. We agreed on a higher threshold of £270k for
matters only related to reclassification.
Of the Group’s thirteen reporting components, we subjected nine (2020:
nine) to full scope audits for Group purposes, and one (2020: one) to
specified risk-focused audit procedures. The latter was not individually
financially significant enough to require a full scope audit for Group
purposes, but did present specific individual risks that needed to be
addressed. We conducted reviews of financial information (including
enquiry) at a further one (2020: one) non-significant component 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 8% (2020: 9%) of total Group revenue, 15% (2020: 9%) of
total profits and losses that made up Group profit before tax and 11%
(2020: 5%) of total Group assets is represented by three components. None
of these three components individually represented more than 8% (2020:
9%) of any of total Group revenue, total profits and losses that made up
Group profit before tax or total Group assets. For these residual
components, we performed analysis at an aggregated group level to
re-examine our assessment that there were no significant risks of material
misstatement within these.
The Group team instructed component auditors as to the significant areas
to be covered, including the relevant risks detailed above and the
information to be reported back. The Group team approved the
component materialities, which ranged from £0.05m to £1.7m, having
regard to the mix of size and risk profile of the Group across the
components. The work on 8 of the 13 (2020: 8 of the 11) 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 normalised
Group profit before tax.
We performed inspection of the work covering key audit matters at all
component audit teams performing audits for Group reporting purposes.
172
Chemring Group PLC Annual report and accounts 2021
NORMALISED PROFIT BEFORE TAX
£55.9m (2020: £51.7m)
GROUP MATERIALITY
£2.75m (2020: £2.5m)
£2.75m
Whole financial
statements materiality
(2020: £2.5m)
(2020: £450k to £1.4m)9393+7+7++MM
£2.05m
Whole financial statements
performance materiality
(2020: £1.88m)
£1.7m
Range of materiality at 10
components (£50k-£1.7m)
Normalised profit before tax
Group materiality
GROUP REVENUE
7
9
85
82
(2020: 91%)
92%
GROUP TOTAL ASSETS
85+
82+
78+
83+
12
89%
(2020: 95%)
78
83
11
£135k
Misstatements reported
to the Audit Committee
(2020: £125k)
TOTAL PROFITS AND LOSSES
THAT MADE UP GROUP PROFIT
BEFORE TAX
TOTAL PROFITS AND LOSSES THAT
MADE UP GROUP PROFIT BEFORE
NON-UNDERLYING ITEMS AND TAX
2
6
89
79
(2020: 91%)
85%
79+
89+
82+
89+
88%
(2020: 90%)
82
89
1
6
Full scope for Group audit purposes 2021
Specified risk-focused audit procedures 2021
Residual components 2021
Full scope for Group audit purposes 2020
Specified risk-focused audit procedures 2020
Residual components 2020
7
+
8
+
P
11
+
11
+
P
+
9
+
+
9
+
+
P
+
12
+
+
5
+
+
P
6
+
15
+
P
6
+
12
+
P
2
+
9
+
P
1
+
10
+
P
3. OUR APPLICATION OF MATERIALITY AND AN OVERVIEW
OF THE SCOPE OF OUR AUDIT continued
Video conference 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. GOING CONCERN
The directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Group or the
Company or to cease their operations, and as they have concluded that
the Group’s and the Company’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”).
We used our knowledge of the Group, its industry, and the general
economic environment to identify the inherent risks to its business model
and analysed how those risks might affect the Group’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, EBITDA and net debt, and
therefore covenants over this period were:
- delays to significant revenue contracts.
- manufacturing facilities safety incidents.
- the potential outcome of the provisions and contingent liabilities related
to regulatory investigations.
We considered whether these risks could plausibly affect the liquidity or
covenant compliance in the going concern period by assessing the
directors’ sensitivities over the level of available financial resources and
covenant thresholds indicated by the Group’s financial forecasts taking
account of severe, but plausible adverse effects that could arise from these
risks individually and collectively.
We assessed completeness of the going concern disclosure.
Our conclusions based on this work:
- we consider that the directors’ use of the going concern basis of
accounting in the preparation of the financial statements is appropriate;
- we have not identified, and concur with the directors’ assessment that
there is not, a material uncertainty related to events or conditions that,
individually or collectively, may cast significant doubt on the Group’s
or Company’s ability to continue as a going concern for the going
concern period;
- we have nothing material to add or draw attention to in relation to the
directors’ statement in 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 the going concern period, and we found the going concern
disclosure on page 72 to be acceptable; and
- the related statement under the Listing Rules set out on page 123
is materially consistent with the financial statements and our
audit knowledge.
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 above
conclusions are not a guarantee that the Group or the Company will
continue in operation.
5. FRAUD AND BREACHES OF LAWS AND REGULATIONS –
ABILITY TO DETECT
IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL
MISSTATEMENT DUE TO FRAUD
To identify risks of material misstatement due to fraud (“fraud risks”) we
assessed events or conditions that could indicate an incentive or pressure
to commit fraud or provide an opportunity to commit fraud. Our risk
assessment procedures included:
- Enquiring of directors, and internal audit and inspection of policy
documentation as to the Group’s high-level policies and procedures to
prevent and detect fraud, including the internal audit function, and the
Group’s channel for “whistleblowing”, as well as whether they have
knowledge of any actual, suspected or alleged fraud.
- Reading Board, Audit Committee, Executive Committee, Remuneration
Committee and Risk Committee meeting minutes.
- Considering remuneration incentive schemes and performance targets
for management and directors including the EPS target for management
remuneration.
- Using analytical procedures to identify any unusual or unexpected
relationships.
- Using our own forensic specialists to assist us in identifying fraud risks
based on discussions of the circumstances of the Group and Company.
We communicated identified fraud risks throughout the audit team and
remained alert to any indications of fraud throughout the audit. This
included communication from the Group to full scope component audit
teams of relevant fraud risks identified at the Group level and request to
full scope component audit teams to report to the Group audit team any
instances of fraud that could give rise to a material misstatement at
Group level.
As required by auditing standards, and taking into account possible
pressures to meet profit targets, we perform procedures to address the
risk of management override of controls and the risk of fraudulent
revenue recognition, in particular the risk that the provision of services
over time is recorded in the wrong period and the risk that Group and
component management may be in a position to make inappropriate
accounting entries, and the risk of bias in accounting estimates and
judgements such as those used in revenue recognition, certain provisions
and pension assumptions.
We did not identify any additional fraud risks.
Further detail in respect of revenue recognition is set out in the key audit
matter disclosure in section 2 of this report.
We performed procedures including:
- Identifying journal entries and other adjustments to test for all full scope
components based on risk criteria and comparing the identified entries
to supporting documentation. These included those posted to
unusual accounts.
- Assessing significant accounting estimates for bias.
We assessed the disclosures in note 34 related to the ongoing Serious
Fraud Office investigation compared to our knowledge based on
discussion with the Company’s legal advisors.
Chemring Group PLC Annual report and accounts 2021
173
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF CHEMRING GROUP PLC continued
5. FRAUD AND BREACHES OF LAWS AND REGULATIONS –
ABILITY TO DETECT continued
IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL
MISSTATEMENT DUE TO NON-COMPLIANCE WITH LAWS
AND REGULATIONS
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, through discussion with the
directors (as required by auditing standards), from inspection of the
Group’s regulatory and legal correspondence and discussed with the
directors the policies and procedures regarding compliance with laws
and regulations.
As the Group is regulated, our assessment of risks involved gaining an
understanding of the control environment including the entity’s
procedures for complying with regulatory requirements.
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 the Group level, and a
request for component auditors to report to the Group team any
instances of non-compliance with laws and regulations that could give rise
to a material misstatement at Group.
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, taxation
legislation and pension 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. We identified the following areas as
those most likely to have such an effect: health and safety, environmental
protection legislation, and anti-bribery and corruption, recognising the
regulated nature of the Group’s activities and its legal form. Auditing
standards limit the required audit procedures to identify non-compliance
with these laws and regulations to enquiry of the directors and inspection
of regulatory and legal correspondence, if any. Therefore if a breach of
operational regulations is not disclosed to us or evident from relevant
correspondence, an audit will not detect that breach.
For the Serious Fraud Office investigation matter discussed in note 34,
and for the Health and Safety Executive matter discussed in note 34, we
assessed disclosures against our understanding from legal correspondence,
including discussions held with the lawyers as well as inspection of
relevant documentation.
CONTEXT OF THE ABILITY OF THE AUDIT TO DETECT FRAUD OR
BREACHES OF LAW OR REGULATION
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 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 fraud, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls. Our
audit procedures are designed to detect material misstatement. We are
not responsible for preventing non-compliance or fraud and cannot be
expected to detect non-compliance with all laws and regulations.
6. WE HAVE NOTHING TO REPORT ON THE OTHER
INFORMATION IN THE ANNUAL REPORT
The directors are responsible for the other information presented in the
annual report together with the financial statements. Our opinion on the
financial statements does not cover the other information and, accordingly,
we do not express an audit opinion or, except as explicitly stated below,
any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the
financial statements or our audit knowledge. Based solely on that work we
have not identified material misstatements in the other information.
STRATEGIC REPORT AND DIRECTORS’ REPORT
Based solely on our work on the other information:
- we have not identified material misstatements in the strategic report and
the directors’ report;
- in our opinion the information given in those reports for the financial
year is consistent with the financial statements; and
- in our opinion those reports have been prepared in accordance with the
Companies Act 2006.
DIRECTORS’ REMUNERATION REPORT
In our opinion the part of the directors’ remuneration report to be
audited has been properly prepared in accordance with the Companies
Act 2006.
DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER-
TERM VIABILITY
We are required to perform procedures to identify whether there is a
material inconsistency between the directors’ disclosures in respect of
emerging and principal risks and the viability statement, and the financial
statements and our audit knowledge.
Based on those procedures, we have nothing material to add or draw
attention to in relation to:
- the directors’ confirmation within the viability statement 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 how emerging
risks are identified, and explaining how they are being managed and
mitigated; and
- the directors’ explanation in the 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.
We are also required to review the viability statement, set out on page 72
under the Listing Rules. Based on the above procedures, we have
concluded that the above disclosures are materially consistent with the
financial statements and our audit knowledge.
174
Chemring Group PLC Annual report and accounts 2021
6. WE HAVE NOTHING TO REPORT ON THE OTHER
INFORMATION IN THE ANNUAL REPORT continued
DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER-
TERM VIABILITY continued
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.
CORPORATE GOVERNANCE DISCLOSURES
We are required to perform procedures to identify whether there is a
material inconsistency between the directors’ corporate governance
disclosures and the financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following
is materially consistent with the financial statements and our audit knowledge:
- 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;
- the section of the annual report describing the work of the Audit
Committee, including the significant issues that the Audit Committee
considered in relation to the financial statements, and how these issues
were addressed; and
- the section of the annual report that describes the review of the
effectiveness of the Group’s risk management and internal
control systems.
We are required to review the part of the corporate governance report
relating to the Group’s compliance with the provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in this respect.
7. 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.
8. RESPECTIVE RESPONSIBILITIES
DIRECTORS’ RESPONSIBILITIES
As explained more fully in their statement set out on page 123, 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 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 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.
9. 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 and
the terms of our engagement by the company. 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 the
further matters we are required to state to them in accordance with the
terms agreed with the company, 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
14 December 2021
Chemring Group PLC Annual report and accounts 2021
175
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CORPORATE INFORMATION AND WEBSITE
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FIND OUT MORE ONLINE
For more information about Chemring Group PLC, please visit www.chemring.com where the latest shareholder information can be accessed, including:
- Current share price
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- Financial calendar
- Shareholder services and notices
- Corporate governance
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Chemring Group PLC’s 2021 annual report and accounts and the notice for the Annual General Meeting can also be viewed and downloaded at
www.chemring.com/investors.
© CHEMRING GROUP PLC 2021
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.
176
Chemring Group PLC Annual report and accounts 2021
CBP010013
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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.com
www.chemring.com