CONTINUING TO
INNOVATE, PROTECT
AND GROW
CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022
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CONTENTS
STRATEGIC REPORT
01 2022 performance
02 What we do
04 Sustainability overview
06 Our purpose in action
Investment case
08
10 Chairman’s statement
12 Market overview
14 Group Chief Executive’s review
18 Business model
20 Section 172 statement
21 Stakeholder engagement
24 Strategy
26 Key performance indicators
30 Focus on Sensors & information
34 Focus on Countermeasures & energetics
37
40 Health and safety
42 Environment
45 Task Force on Climate-Related Financial
Introduction to sustainability
Disclosures (“TCFD”) report
50 Our people
57 Ethics and business conduct
59 Financial review
64 Risk management
66 Principal risks and uncertainties
74 Viability statement and going concern
75 Non-financial information statement
GOVERNANCE
76 Chairman’s introduction to governance
78 Board of directors
80 Corporate governance report
90 Audit Committee report
94 Nomination Committee report
96 Directors’ remuneration report
120 Directors’ report
FINANCIAL STATEMENTS
123 Consolidated income statement
124 Consolidated statement of
comprehensive income
125 Consolidated statement of changes in equity
126 Consolidated balance sheet
127 Consolidated cash flow statement
128 Notes to the Group financial statements
153 Parent company balance sheet
154 Parent company statement of
comprehensive income
154 Parent company statement of changes
in equity
155 Notes to the parent company
financial statements
159 Accounting policies
166 Independent auditor’s report to the members
of Chemring Group PLC
172 Five-year record
OUR PURPOSE
Chemring helps make the world a safer place. Across physical and digital environments, our
exceptional teams deliver innovative technologies and products that detect and defeat
ever-changing threats.
Read more on pages 6 to 7
OUR STRATEGY
To be a leading provider of critical and innovative technologies that detect and protect
people, platforms, missions and information against constantly changing threats.
TARGET GROWING
NICHES
WINNING MARKET
SHARE
GROW OUR
US BUSINESS
Read more on pages 24 to 25
OUR ESG PILLARS
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
ETHICS AND
BUSINESS
CONDUCT
Read more on pages 37 to 58
OUR 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.
Read more on page 19
OTHER INFOMATION
173 Corporate information and website
CONTINUING TO
INNOVATE, PROTECT
AND GROW
CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022
DISCOVER MORE ABOUT CHEMRING AT
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2022 PERFORMANCE
FINANCIAL HIGHLIGHTS
REVENUE
CASH CONVERSION
£442.8m
(+13%) (+7% at constant currency)
Increase in revenue at constant
currency driven by strong
performance at Roke and steady
growth in Countermeasures
& Energetics.
109%
(2021: 105%)
Continued strong cash conversion,
with an average of 108% on a
rolling 36-month basis (2021:
107%), driven by a continued focus
on working capital disciplines.
UNDERLYING OPERATING
PROFIT*
STATUTORY OPERATING
PROFIT
£64.0m
(+11%) (+8% at constant currency)
Reflects the growth of the
higher margin Roke business
as well as the increasing
margin in Countermeasures &
Energetics through improving
operational performance.
£53.3m
(+6%) (+3% at constant currency)
The difference to underlying
operating profit reflects the
amortisation of acquired intangible
assets, acquisition expenses and loss
on the movement in fair value of
derivatives which are the only items
treated as non-underlying in 2022.
UNDERLYING OPERATING PROFIT*
GROUP
SENSORS & INFORMATION
£64.0m
£30.0m
COUNTERMEASURES & ENERGETICS
£48.9m
2022
2021
2020
£64.0m
£57.5m
£54.7m
2022
2021
2020
£30.0m
£31.6m
£27.4m
2022
2021
2020
£48.9m
£40.0m
£39.9m
Read more on pages 30 to 33
Read more on pages 34 to 36
HIGHLIGHTS
- 2022 performance exceeded the Board’s initial expectations with
strong performance in both sectors despite a challenging macro-
economic environment
- Roke revenue exceeded £100m for the first time and with order intake
of £168m, up 59%, is well positioned to continue its growth trajectory
in what continues to be a buoyant market
- Post year-end acquisition of Geollect completed on 7 December 2022
- Order intake for Countermeasures & Energetics was £356m, up 40%,
driven by multi-year orders received across the sector
- Investment in the Group’s manufacturing infrastructure continues to
be a key enabler to deliver improved safety and operational excellence,
with the Countermeasures & Energetics margin improving from 16.2%
to 17.4%
- The continued reduction in net debt by 73% to £7.2m was driven by
strong operating cash generation and cash conversion of 109%. Net debt
to underlying EBITDA of 0.09 times
- Proposed final dividend increased by 19% to 3.8p, giving a total dividend
of 5.7p (3.5 times cover)
- Board’s expectations for 2023 are unchanged. Approximately 86%
(2021: 84%) of expected 2023 revenue is covered by the order book
2023 OUTLOOK
The strong market for Roke’s Electronic Warfare products and active Cyber Defence/Mission support services, the projected growth in our niche
precision engineered devices and speciality chemicals businesses, together with strong order book cover, all support a strong medium-term outlook.
* 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 continuing operations of £47.4m (2021: £41.5m). For references to constant currency equivalents of reported numbers please
refer to page 60 for further explanation.
Chemring Group PLC Annual report and accounts 2022
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.
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 (“R&D”), through to design, manufacture and in-service
support for our sensors and detection systems, countermeasures, precision
engineering and energetic products.
Our customer base spans national defence organisations, security and law
enforcement agencies, as well as commercial markets such as space, medical
and transport. We support our customers in more than 50 countries across
the globe.
WHERE WE OPERATE
Our home markets of the UK, US, Australia and Norway have a
substantial and enduring commitment to defence and national security.
We also export our technology solutions to additional markets. The
percentages represent the proportion of sales for that destination in the
year ended 31 October 2022.
UK
EUROPE
34%
In the UK we are well positioned to
benefit from the increased demand
for intelligence and cyber-security
solutions signalled by the Integrated
Review. We are also seeing
accelerated demand for our
Countermeasures & Energetics
capabilities resulting from the conflict
in Eastern Europe.
12%
In Europe, our Norwegian
business is experiencing ever
greater demand for its niche
speciality chemicals as customers
seek to strengthen their defence
capabilities in response to Russia’s
illegal invasion of Ukraine.
US
ASIA PACIFIC
50%
The US remains the single largest defence market in the world and
continues to be our principal home market. Our position in the market is
underpinned by a Special Security Agreement (“SSA”) that enables us to
be a supplier on important and sensitive programmes to US customers.
The continuous support for defence spending in the US provides us with
relatively good visibility for future earnings as we respond to the
customer’s modernisation priorities.
4%
Regional instabilities, capability upgrades and technology advancements
are driving increased spend in the Asia Pacific region. Our Australian
business positions us to contribute towards meeting the defence
requirements of Australia and other countries in the region.
02
Chemring Group PLC Annual report and accounts 2022
CHEMRING IS ORGANISED INTO TWO STRATEGIC SECTORS
© Crown copyright
SENSORS & INFORMATION
Innovation is core to solving our clients’ difficult problems.
With over 700 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, R&D, 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 and SpaceX, 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
£162.3m
(2021: £146.6m)
REVENUE
£280.5m
(2021: £246.7m)
UNDERLYING OPERATING PROFIT
UNDERLYING OPERATING PROFIT
£30.0m
(2021: £31.6m)
2022
2021
2020
£30.0m
£31.6m
£27.4m
£48.9m
(2021: £40.0m)
2022
2021
2020
£48.9m
£40.0m
£39.9m
Chemring Group PLC Annual report and accounts 2022
03
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS SUSTAINABILITY OVERVIEW
COMMITTED TO
A SUSTAINABLE FUTURE
At Chemring we acknowledge and embrace our collective responsibility
to contribute to a sustainable future. We have a strong and recognised
obligation to ensure the responsible operation of our business and are fully
committed to long-term sustainable value creation through safe, sustainable
and ethical business conduct at all times. Our goal is to ensure that we
protect our planet and our people, support our customers and their critical
needs, and that we have a positive impact on the communities in which
we operate.
Improving our sustainability performance plays a key role in the way in
which we run our business today, and plan for the future as we manage our
environmental, social and governance (“ESG”)- related risk. Our sustainability
goals are now directly linked to targets for remuneration and reward across
our leadership teams.
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 as we build a sustainable company of which all our stakeholders
can be proud.
PURPOSE
Chemring helps make the world a safer place. Across physical and digital environments, our exceptional teams deliver innovative technologies
and products that detect and defeat ever-changing threats.
STRATEGY
To be a leading provider of critical and innovative technologies that detect and protect people, platforms, missions and information
against constantly changing threats.
APPROACH
The long-term success of Chemring can only be enhanced by a positive interaction with all of our stakeholders. An engaged and constructive
approach is therefore important to us. Following the stakeholder materiality assessment that was undertaken in 2021, our approach is now
focused on the following key topics and associated areas of focus.
HEALTH AND SAFETY
- Control of major accident hazards
- Injury prevention
- HSE risk management
- Occupational and process safety
Read more on pages 40 to 41
PEOPLE
- Culture
- Diversity and inclusion
- Employee wellbeing and engagement
- Employee learning and development
Read more on pages 50 to 56
MAKING THE
WORLD A SAFER
PLACE
ENVIRONMENT
- Emission reduction
- Waste generation and hazardous materials
management
- Energy usage
- Water consumption
Read more on pages 42 to 49
ETHICS AND BUSINESS CONDUCT
- Operational Framework and Code of Conduct
- Compliance oversight and risk management
- Whistleblowing
- Anti-bribery and corruption
Read more on pages 57 to 58
Our commitment to protection goes beyond our customers and immediate stakeholders,
it includes our planet and broader society and is underpinned by our values and behaviours.
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
04
Chemring Group PLC Annual report and accounts 2022
As of 2022, Chemring Group PLC received an MSCI ESG Rating of AAA.*
PROGRESS IN 2022
Chemring’s purpose is to help make the world a safer place and Russia’s
invasion of Ukraine has tragically highlighted the critical role that the defence
and security industry plays in preserving peace, democracy and freedom in
the western world. It has reinforced the argument that for sustainability to
thrive, it requires global stability at its foundations. We are proud of the role
that Chemring plays in providing that stability and are equally focused on
ensuring that we manage and progress our own sustainability agenda, and
in particular our ESG-related risks.
ESG HIGHLIGHTS
It has been another busy year in which we have built on the good progress
made during FY21.
Our ESG 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.
HEALTH AND SAFETY
Total recordable injury frequency rate 0.78 (2021: 0.67)
High-potential incidents: 13 (2021: 9)
Technical Safety and Occupational, Health, Safety and Wellbeing
Committees formed
ENVIRONMENT
Green House Gas (“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
All new graduates and apprentices will take part in a UK-wide Early Careers
development programme which started in November 2021
Operational assurance process enhanced
* The use by Chemring Group PLC of any MSCI ESG research LLC or its affiliates
(“MSCI”) data, and the use of MSCI logos, trademarks, service marks or index
names herein, do not constitute a sponsorship, endorsement, recommendation,
or promotion of Chemring Group PLC by MSCI. MSCI services and data are the
property of MSCI or its information providers, and are provided ‘as-is’ and without
guarantee. MSCI names and logos are trademarks or services marks of MSCI.
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Chemring Group PLC Annual report and accounts 2022
05
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PURPOSE IN ACTION
WE’RE CONTINUING TO PROTECT
AND GROW BY LIVING OUR VALUES
Innovating to protect lies at the core of our
foundations, underpinned by our values of Safety,
Excellence and Innovation. Every day, our people
play an essential role in protecting armed forces,
national security and commercial operations in
sovereign states across the globe.
SAFETY
CONTINUING OUR JOURNEY TO ZERO HARM
Our 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 regularly review and
strengthen our assets’ integrity. 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.
SPOT IT, STOP IT, SHARE IT
Last 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. This year, the campaign continued with a safety poster
design competition for our colleagues’ children to promote good
behaviours and procedures.
Building a strong, proactive safety culture is our number one priority
at Chemring. We will continue to develop that health and safety
culture as we Journey to Zero Harm, ensuring we protect
our employees every step of the way.
06
Chemring Group PLC Annual report and accounts 2022
OUR PURPOSE IN ACTION
WE’RE CONTINUING TO PROTECT
AND GROW BY LIVING OUR VALUES
EXCELLENCE
COGSWELL AWARD FOR AN EXCEPTIONAL
SECURITY PROGRAMME
Chemring Sensors & Electronic Systems (“CSES”) was awarded a
Cogswell Award in June this year. The award is the most prestigious
honour the US Defense Counterintelligence & Security Agency
(“DCSA”) can bestow on a cleared defence contractor. It was
established in 1966 in honour of the late Air Force Colonel, James S.
Cogswell, the first chief of the United Office of Industrial Security.
Of the nearly 13,000 cleared US defence contractors, like CSES, in the
National Industrial Security Program (“NISP”), only the top 0.5% are
selected to receive a Cogswell Award.
With this award, CSES was recognised for establishing and
maintaining a security programme that exceeds the NISP
requirements, demonstrates a commitment to excellence and
sets a high standard for other organisations to follow.
Amish Mehta, President of CSES, commented:
“ It was an honour to receive a Cogswell Award in recognition of our
exceptional security programme in support of our customers.
Achieving this distinction requires a total team effort and is a
testament to the hard work of our security team and our
organisation-wide commitment to excellence in security. Our top
priority is the safety and security of our people and our customers’
technical advantage and data.”
INNOVATION
HELPING TO ADDRESS UK’S TECHNICAL SKILLS GAP
AND BOOST SCALABLE GROWTH
Earlier this year, the Roke Academy was launched as part of
Roke’s strategy for scalable growth. The business welcomed new
candidates to their intensive six-month programme, the Ignite
Development Pathway (“IDP”). The IDP focuses on life skills and
enthusiasm for technology that candidates bring rather than a
straight career path.
In the face of “the war for talent”, the Academy focuses on developing
transferable life skills and a passion for technology rather than
benefiting those already qualified for hire. This creates an alternate,
fully inclusive pathway into employment for those that might
otherwise have faced barriers to entry.
Targeting the national technical skills gap, the Roke Academy provides
high quality training in key technology areas and the supporting skills
needed to deliver it effectively.
The Academy is designed to be a centre of excellence for learning and
development, focusing on non-traditional areas of recruitment to
embrace undiscovered talent who may not have previously had the
opportunity to enter the technology field. Individuals who have found
the traditional recruitment process a challenge are returning to work
after a break, transitioning from military and law enforcement service,
or looking for a change of career. Candidate selection also seeks to
challenge traditional technology demographics in areas of gender,
ethnicity and neurodiversity.
Paul MacGregor, Roke Managing Director, commented:
“ The Roke Academy provides the opportunity to attract new
candidates who may have faced barriers to work for various
reasons. We support these diverse individuals who can bring unique
strengths to our business in terms of creativity, analysis, innovation
and leadership to then progress in their chosen field.”
Chemring Group PLC Annual report and accounts 2022
07
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INVESTMENT CASE
INVESTING IN SUSTAINABLE
PERFORMANCE AND GROWTH
Chemring delivers profitable growth by operating
in markets where we have differentiators, such as
intellectual property, niche technology and high
barriers to entry.
We continually review our portfolio to ensure that we maintain sustainable
niche positions where technical and qualification barriers to entry enable
high margins. These, along with strong and enduring customer relationships,
provide us with a strong platform for future growth. We will achieve our
growth by total commitment to our enduring purpose, which is to relentlessly
innovate to protect our customers.
WELL POSITIONED IN NICHE SEGMENTS
Against the background of growing defence
budgets, particularly in the US and Europe,
Chemring is well positioned in niche segments
of the defence market which, over time, have the
opportunity to outperform the broader sector.
These include the Group’s global market-leading
positions on airborne and naval countermeasures,
advanced sensors, Electronic Warfare and
software engineering. We are also well placed to
benefit from growth in the space segment where
we are a key supplier of mission critical specialist
devices to customers including NASA and SpaceX.
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.
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
and having technologies and products to address
the next-generation US programmes in explosive
hazard detection, chemical detection and biological
detection – increasingly relevant in a post-
pandemic world.
As Cyber and Electromagnetic Activity (“CEMA”)
becomes increasingly important in today’s threat
environment, and as a consequence of Russia’s
invasion of Ukraine, there are a growing number
of opportunities for our Electronic Warfare
products in the international market.
We are seeing growing customer enquiries for
Roke’s suite of world-leading Electronic Warfare
products and are supporting ongoing customer
demonstrations and field trials in the US to secure
orders from this potentially significant market.
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, secure networks, secret cloud, artificial
intelligence, data science, autonomy and Electronic
Warfare (“EW”). This validates our Sensors &
Information sector strategy, and should increase
the opportunity space for Roke to deploy its
market-leading technologies.
Opportunities exist to expand and accelerate
Roke’s capabilities and offerings, both through
acquisitions and opportunities in adjacent markets
and territories.
08
Chemring Group PLC Annual report and accounts 2022
ORDER BOOK GROWTH – LAST FIVE YEARS (£m)
£651m
£449m
£394m
£476m
£501m
FY18
FY19
FY20
FY21
FY22
MEDIUM-TERM FINANCIAL OBJECTIVES
Since 2019 the Group has communicated certain
medium-term financial objectives, which have been
rolled forward at each set of results. These included:
- Targeting mid-teen return on sales in the
medium term. Margins have progressed from
10.4% in FY18 to 14.5% in FY22
- Improving cash flow. Across the last three
years, operating cash conversion has been 108%
of EBITDA, demonstrating the improvement in
business practices is permanent and sustainable
- Reducing indebtedness. Net debt has
decreased from £81.8m in FY18 to £7.2m in
FY22, while spending c.£150m on capex over
the period
Chemring is focused on building a financially
sustainable and robust Group. These actions
provide strong foundations for future 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,
both organic and inorganic, and sustainable,
growing dividend payments.
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.
The team continues to manage delivering both
organic and inorganic growth, balancing near-term
performance with long-term value creation.
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Chemring Group PLC Annual report and accounts 2022
09
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHAIRMAN’S STATEMENT
DELIVERING CONTINUED PROGRESS
Carl-Peter Forster
Chairman
“ It is pleasing to report that the Group has
continued to make strong progress during
2022, delivering against the needs of all its
stakeholders despite the numerous challenges
that have been faced in another
extraordinary year.”
INTRODUCTION
The past year has seen a number of ongoing challenges, and opportunities
arising from the COVID-19 (“CV-19”) pandemic and a significant conflict in
Europe. These have resulted in changing defence priorities, increasingly
competitive global markets and a business environment that is seeing supply
chain interruption, increased energy costs and a shortage of labour availability.
Despite these challenges the Group has again delivered a robust performance
that exceeded our expectations at the start of the year. Our commitment to
long-term sustainable value creation through safe, sound and ethical business
conduct at all times has ensured that we have met our customers’ critical
needs whilst performing to the highest standards. None of this would be
possible without the commitment and dedication of our people and on behalf
of the Board I wish to acknowledge and thank them for their professionalism
and support.
Russia’s invasion of Ukraine has highlighted the critical role that the defence
industry plays in preserving peace and democracy in the western world, and
that for sustainability to thrive, it requires global stability at its foundations. It
has also highlighted the need for countries to re-equip and modernise their
defence capabilities to meet the threat of peer on peer conflict. With the
global defence market predicted to show strong growth over the next
decade I believe that Chemring is well placed to continue delivering both
organic and inorganic growth, balancing near-term performance with
long-term value creation.
STRATEGY
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.
We will achieve this by continuing to focus our efforts and investment on
those areas of the defence and security market where we see increasing
customer budgets.
The Sensors & Information sector remains Chemring’s principal area of focus
for long-term growth reflecting increasing customer demand and one where
we can capitalise on the opportunity presented by our customers’ pivot
towards the acquisition of high technology capabilities. We will expand 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.
Read more on pages 30 to 33
10
Chemring Group PLC Annual report and accounts 2022
The Countermeasures & Energetics sector strategy is to strengthen and
protect our niche, world-leading positions. We will seek to continuously
improve our technological and operational base, and work closely with our
customers in the development of new solutions to meet emerging needs. We
will continue the process of modernisation and automation across our sites,
improving our competitiveness through investment in lean manufacturing
capabilities and operational alignment to share technology and manufacturing
excellence across the Group.
Read more on pages 34 and 36
As a Board we remain alert for opportunities to expand and accelerate our
growth strategy through incremental acquisitions and by leveraging market
adjacencies. However, any acquisition target must meet a strict set of criteria,
enhance shareholder value and fit in with our wider growth plans. To date
this activity has been principally focused around our Roke business and we
are now considering additional opportunities in the US space and missiles
sectors. Both areas, which play to the Group’s high technology skillsets, offer
significant opportunities for long-term growth.
Elsewhere we will continue to focus our efforts on building a safe, sustainable
and resilient business that is able to deliver 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 further
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
therefore remains 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.
Through the use of enhanced risk assessment techniques, supported by the
roll-out of common asset integrity and electro-static discharge review
programmes, we continue to focus on the control of residual risks within our
high-hazard processes.
In addition, we have extended our current data platform to better assess the
environmental impacts of our operations and performance against the targets
that were set in 2021 in support of our wider ESG commitment. 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 consolidating in a calculative culture we are also keen to ensure
learning is transferred to the relevant parts of the organisation, accelerating
our continuous improvement cycle. To date good progress has been
maintained on our journey to become a proactive organisation.
Read more on pages 40 to 49
PEOPLE AND OUR COMMUNITY
Chemring people are at the heart of our business and 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 2022 we continued to develop Chemring’s culture with actions delivered
both within the individual business units and globally. In doing so we have
continued to develop our people, ensuring that they are able to do their best
work every day. Development programmes are now in place for all colleagues
in management roles and for our Early Careers colleagues. Allied to the
Talent and Succession framework launched in 2021, these programmes
support the development of our future leaders as well as providing a platform
for continuing the development of the Chemring culture.
Chemring is committed to ensuring that we are able to attract and develop
an appropriately diverse workforce. Our programme of education for all
senior leaders continued in the first half of FY22 and was complemented by a
suite of diversity, equity and inclusion (“DE&I”) training modules which form
part of all development programmes from Early Careers to Senior Leadership
Team development. With a specific focus on gender diversity, the global
Women at Chemring Committee was also established in the year to
encourage local women’s networks in each business unit alongside delivering
a global day for Women at Chemring which occurred in September.
Early Careers colleagues form an increasing proportion of our population and
in 2022 we welcomed over 80 graduates and apprentices into our businesses
in the UK. The UK wide Early Careers Development programme, which was
launched in year, complements the technical development provided through
each business unit by providing early leadership and skills development.
Listening to our colleagues is a key pillar of our approach to developing the
Chemring culture. As the non-executive director with responsibility for
employee engagement on behalf of the Board and as Chair of the
Remuneration Committee, Laurie Bowen again met with groups of colleagues
across Chemring to hear their experiences of working at Chemring. These
sessions also provide the opportunity for Laurie to share with colleagues the
work of the Board. This year these groups included colleagues at all levels
from operators to the senior leadership teams at Chemring Countermeasures
in Toone, Tennessee, and at Chemring Energetic Devices in Downers Grove,
Illinois. The groups Laurie met were very positive about their experiences
of working at Chemring and were particularly upbeat about the different
activities and events now possible since the easing of CV-19 restrictions.
Once again Laurie was able to gather input as to how we can continue to
develop, and colleagues provided clear and constructive input on areas of
additional focus which are being acted on.
Read more on pages 50 to 56
GOVERNANCE AND ETHICS
In recent years significant effort has been placed on strengthening the
governance and ethics across the Group, ensuring that we have the necessary
policies and procedures in place to enable the business to operate with
integrity and transparency, and to the highest ethical standards.
On 1 July 2022 we announced that we had been informed by the UK Serious
Fraud Office (“SFO”) that they had closed their investigation into the activities
of the Group, its subsidiary Chemring Technology Solutions Limited and
associated persons. This investigation, which was announced on 18 January 2018,
followed a voluntary report by the Group. Chemring has co-operated fully
with the SFO throughout its investigation and I am pleased that the matter is
now closed, with no fines paid or payable.
Chemring remains committed to conducting its business in an ethical and
responsible manner at all times, and in full compliance with all applicable laws
and regulations. We will continue to strengthen our policies and procedures
to ensure that the Group’s governance remain fit for purpose.
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 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 57 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 continues 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 2022 of 3.8p (2021: 3.2p) per ordinary share. With the interim
dividend of 1.9p per share (2021: 1.6p), this results in a total dividend of 5.7p
(2021: 4.8p) per share, an increase of 19% on the prior year. If approved, the
final dividend will be paid on 14 April 2023 to shareholders on the register on
24 March 2023. In accordance with accounting standards, this final dividend
has not been recorded as a liability as at 31 October 2022.
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 2023 performance are
unchanged, with the balance of its trading performance in 2023 expected to
have a greater bias towards the second half of the financial year as a result of
the delays to order intake in 2022 following the US Continuing Resolution.
The Group order book as at 31 October 2022 was £651m, of which £403m
is currently expected to be recognised as revenue in 2023, giving 86% order
cover, which provides excellent visibility for the full year.
With market-leading innovative technologies and services that are critical to
our customers, together with the flexibility provided by the Group’s strong
balance sheet, the Board is confident that Chemring will continue to deliver
both organic and inorganic growth, balancing near-term performance with
long-term value creation. Chemring’s long-term prospects remain strong.
Carl-Peter Forster
Chairman
13 December 2022
Chemring Group PLC Annual report and accounts 2022
11
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS MARKET OVERVIEW
CHANGING MARKET DYNAMICS
Chemring is an international technology company,
and we have a significant organisational footprint
in the US, the UK, Europe and Australia. Recent
geopolitical and technology trends are rapidly
reshaping many defence markets, with Russia’s
invasion of Ukraine having a profound impact
on defence spending and priorities, including likely,
accelerated NATO expansion.
Simultaneously with this new era of defence spending in Europe, the US is
increasing its investment and action to strengthen its position towards an
assertive China with its own extensive defence and military modernisation
programmes. Alongside the high-intensity, kinematic, conflict between Russia
and Ukraine, sub-threshold “grey-zone” activity – including the extensive
use of digital-based threats e.g. cyber-attacks and disinformation campaigns,
continue to be prevalent. The Group’s diverse and niche capabilities make
it well placed to support our customers’ abilities to address this continuum
of current and emerging threats.
UNITED STATES
The Indo-Pacific region is cemented as the priority theatre for the US DoD,
with China representing the greatest military challenge. The US’s response to
this challenge is seeing a major emphasis on preparing for peer to peer/near-peer
competition in the region, with a consequent shift away from counter-insurgency
doctrines and capabilities.
There are also plans to increase the US presence in Europe to address
the acute threat from Russia, and partnerships with NATO allies will form
part of this response to increased Russian aggression. US modernisation
priorities were already geared toward great power competition before
Russia’s invasion of Ukraine, and these investments will now be accelerated.
OUR CHALLENGES AND OPPORTUNITIES
Our US businesses continue to work under a Continuing Resolution, which
brings with it a level of risk. However, the US’s strong focus on advanced
capability enablers and R&D can create opportunities for us to deploy
Group-wide capabilities and technologies particularly in the customer
priorities of space, hypersonic technology, EW, sensors, biotechnology,
artificial intelligence (“AI”), cyber and quantum computing.
Finally, the advanced capabilities of the F-35 Lightning II is well suited to
highly contested airspaces and our contribution to this core air platform’s
countermeasures suite supports our leadership position in this capability area.
LINK TO STRATEGY (see page 24)
1
2
3
UNITED KINGDOM
TOTAL SPEND
2021
2020
2019
2018
Source SIPRI
US$801bn
US$778bn
US$734bn
US$682bn
OUR POSITION
Our US-based countermeasures business is the market leader in expendable
infra-red (“IR”) pyrotechnic decoys that protect airborne and naval assets from
guided missiles, whereas our US energetics business has a strong position in
the design, development and manufacture of precision engineered devices for
distinct aerospace and defence applications including space and missiles.
We are also the largest provider of advanced chemical and biological sensors
to the US DoD, and supply and sustain ground-penetrating radar systems for
the Husky vehicle. Additionally, our Roke USA business is driving a campaign
to leverage Roke’s UK capabilities for addressing US, mission-critical, land
electronic warfare (“EW”) requirements with growing budgets.
MARKET TRENDS
The US continues to represent the world’s largest defence market, and
at US$813bn President Biden’s 2022 national defence and security budget
request is the largest ever. The US DoD’s element of this overall request is
US$773bn, with the additional US$40bn being used to fund defence-related
activities at the Department of Energy, the Federal Bureau of Investigation
and other agencies.
12
Chemring Group PLC Annual report and accounts 2022
TOTAL SPEND
2021
2020
2019
2018
Source SIPRI
£50bn
£47bn
£45bn
£42bn
OUR POSITION
In the UK, the Group through our Roke business unit, has a significant role
in the design, development and supply of innovative solutions in EW, sensors,
communications, cyber and AI, for national security and defence customers
in particular.
Our UK countermeasures business is the world leader in protecting air and
naval forces from the threat posed by guided missiles, through the design,
development and supply of radio frequency (“RF”) and IR pyrotechnic decoys,
while our UK energetics business has a critical role in the design, manufacture,
assembly, testing and through-life support of advanced energetic products for
defence, security and commercial markets.
MARKET TRENDS
2021’s “Integrated Review of Security, Defence, Development and Foreign
Policy”, and the accompanying “Defence Command Paper” and the “Defence
and Security Industrial Strategy”, outline how national advantage through
Science and Technology (“S&T”) is central to UK defence and security policy.
For the four-year period from November 2020 to 2024 an additional £24.1bn
has been allocated to defence, with this allocation being part of a multi-year
settlement to invest in pioneering technology in areas such as cyber, AI,
data-science, Electronic Warfare (“EW”), uncrewed/autonomous systems
and space.
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 capability for the army.
Additionally, Russia’s invasion of Ukraine has fostered broad support for more
long-term defence investment as part of adapting to a more competitive and
riskier world.
OUR CHALLENGES AND OPPORTUNITIES
For Chemring, the UK Ministry of Defence (“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 as new capability priorities mature.
The enhanced focus on S&T, AI, data science and autonomy as set out in the
Integrated Review, with the creation of new military and security constructs that
are data and intelligence driven, will enlarge the opportunity space for Roke
to deploy its unrivalled capabilities to address these next-generation technology
requirements. Lastly, as the sole-source supplier of countermeasures to the
UK’s F-35 Lightning II fleet, Chemring is well placed to benefit from the UK
MOD’s declared plans to increase the UK F-35 fleet size beyond the initial
tranche of 48 aircraft already on order.
LINK TO STRATEGY (see page 24)
1
1
2
EUROPE
GLOBAL SALES
% of Chemring’s global sales (2018 – 2022)
UK 30%
USA 51%
Europe 12%
Asia Pacific 6%
Middle East and rest of the world 1%30+
OUR POSITION
Although the Group continues 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. Additionally, our Norwegian based business provides energetic
materials to many leading prime contractors across the region.
MARKET TRENDS
Russia’s invasion of Ukraine is driving a dramatic change in the European
geostrategic landscape, with Sweden and Finland formally set to end decades
of neutrality and join NATO. Joining NATO is also under debate in several
other European countries that are presently outside the alliance.
Significant growth in European defence budgets is also being signalled, with
countries looking to make increased capital investments to deter and protect
their national interests. Seven European countries – Belgium, Germany, Italy,
Norway, Poland, Romania and Sweden – have already announced their plans
to increase defence budgets given the invasion, targeting at least the 2% GDP
NATO threshold, and several other countries including Finland, Latvia and
The Netherlands have indicated they will follow suit in the near term.
France has announced it will review its Loi de Programmation (“Programming
Law”) owing to the changed geopolitical situation, and a new era of German
foreign and security policy has been heralded with the creation of a special
fund of €100bn to be spent on defence procurement and a commitment to
allocate more than 2% of German GDP to defence.
OUR CHALLENGES AND OPPORTUNITIES
The medium-term outlook for the European market is positive, and several
opportunities for our niche capabilities can be anticipated. Against the new
geostrategic backdrop, the Group will continue to support the requirements
of European allied nations.
LINK TO STRATEGY (see page 24)
1
1
2
AUSTRALIA
OUR POSITION
Chemring’s in-country capabilities are founded on our integral place in the
F-35 Lightning II international countermeasures supply-chain. Chemring
Australia is the country’s pre-eminent manufacturer and supplier of airborne
countermeasures, and the modern Lara plant is the world’s most advanced
manufacturing facility for such products.
MARKET TRENDS
An enduring emphasis on future great power competition in the Indo-Pacific
region is driving increased Australian defence spending with a focus on force
readiness and capability modernisation. The Australia-United Kingdom-United
States (“AUKUS”) trilateral security alliance of 2021 provides for co-operation
in advanced cyber, AI, autonomy, quantum, undersea, hypersonic and
counter-hypersonic, EW, innovation, and information sharing capabilities,
and can make an important contribution to strengthening the region’s
security and stability.
OUR CHALLENGES AND OPPORTUNITIES
With Chemring having an industrial presence in all three AUKUS nations, the
Group is well placed to respond to relevant opportunities resulting from the
pact, as well as other bi-lateral and tri-lateral co-operation prospects.
LINK TO STRATEGY (see page 24)
1
1
2
“ The Australia – United Kingdom – United States (“AUKUS”)
partnership is maturing trilateral lines of effort within
critical defence and security capabilities including undersea
capabilities, quantum technologies, AI and autonomy,
advanced cyber systems, hypersonic and counter-hypersonic
capabilities, EW, innovation and information sharing.”
The White House Briefing Statement
US President
5 April 2022
Chemring Group PLC Annual report and accounts 2022
13
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS51
+
12
+
6
+
1
+
+
+
+
+
P
GROUP CHIEF EXECUTIVE’S REVIEW
CREATING SUSTAINABLE VALUE AND
OPPORTUNITY FOR ALL OUR STAKEHOLDERS
Michael Ord
Group Chief Executive
“ This has been a year of strong
operational and financial performance
across the Group. Our focus on building
a stronger, higher quality and more
resilient business has enabled us to
negotiate numerous near-term challenges
and the Group remains well placed to
maintain its delivery of sustainable
performance and growth.”
INTRODUCTION
The Group has delivered another year of good growth in 2022.
This was achieved despite pandemic-related operational and supply
chain challenges, higher energy costs, labour market shortages, increased
inflation and the significant disruption within the US defence market caused
by the extended Continuing Resolution that delayed approval of the US
Government budget until the middle of March 2022.
The current geopolitical uncertainty, brought about by both Russia’s invasion
of Ukraine and increased competition with China, has highlighted the essential
role that the defence industry plays in society. Delivering in support of our
customers and their critical needs has never been more important, and I am
again hugely grateful to all my colleagues across Chemring. The response of
our people and their families has been outstanding and this team effort has
delivered results that exceeded our expectations at the start of the year.
In response to the current threat environment, defence spending is expected
to rise and with it we can expect to see strengthening demand for the
Group’s capabilities. Partnerships and alliances, such as Five Eyes, AUKUS and
NATO, are seen as becoming increasingly important, and this is expected to
drive greater co-operation and alignment between allies. In particular, the
increased importance that is being placed on Cyber and EW, information
advantage, intelligent networks and multi-domain integration, is expected to
maintain and accelerate demand for Roke’s market-leading technologies.
The Group is well positioned with a robust strategy and a relentless focus
on safety, operational excellence and growth.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
At Chemring our purpose is to help make the world a safer place, delivering
innovative technologies and products that 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.
14
Chemring Group PLC Annual report and accounts 2022
From an ESG perspective 2022 has seen us make further progress as we
proactively manage our sustainability agenda. Focus areas included health
and safety, diversity and inclusion, reducing climate change, and employee
wellbeing. 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
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. The successful implementation of our
HSE strategy continues, as does our focus of achieving zero harm.
Our safety performance in terms of Total Recordable Injury Frequency Rate
(“TRIF”) is currently at 0.78 which shows a slight increase when compared to
last year’s 0.67 but still below our annual limit of 1. The nature of most
injuries were either slips, trips and falls, or muscular skeletal type of events.
We are proud to report that during 2022 there were no injuries in
connection with or arising from energetic events.
Our HSE strategy this year has focused on three core areas of activity:
CONTROL OF MAJOR ACCIDENT HAZARDS
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
to the highest standard. 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. This year saw the fourth iteration of that review
process, with an increase in the number of hazard scenarios being identified
as the rigour of process hazard analysis matured. As a result of this maturing
process, we continue to deepen our understanding of our residual risks and
throughout the year have taken steps to reduce these to a level as low as is
reasonably practicable.
INJURY REDUCTION
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 consolidated 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. This data has established trends regarding musculoskeletal
disorders due to the manual handling nature of some of our processes
together with cuts to fingers and hands. The relevant businesses have
developed plans to reduce the risk of injuries and it is expected that this
will be reflected in future reporting.
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. The changes made last year to our Operational Assurance
Statement process have helped the businesses focus on strengthening their
processes within the HSE framework requirement, which in turn provides
useful insights when planning the Line of Defence 2 (“LOD2”) audits.
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 Group-wide Healthy
Workplace Sub-Committee.
REVENUE
+13%
2022
2021
£443m
£393m
NUMBER OF ENERGETIC EVENTS
CAUSING HARM OR INJURY
Nil
2022
0
2021
2
We measure our overall HSE performance to reflect both occupational safety
and process safety. In doing this we have multiple data points, one of which
is an external independent review of our safety culture. This year saw the
third review since 2018 by a team of specialist consultants from global subject
matter experts, ERM. The review, which was based on progress made
since 2018 and 2019, has highlighted good progress as we journey towards
becoming a high reliability organisation. In particular the review confirmed
our businesses as approaching a Group-wide calculative status with robust
processes and systems generating data and signals around our high-hazard
operations. The level of collaboration has also increased with many businesses
sharing best practice on a regular basis to help accelerate our performance,
all of which is supported by a positive tone from the top and underpinned
by risk-informed, visible and proactive safety leadership.
ENVIRONMENT
In 2022 we achieved a 7.3% carbon reduction in both scope 1 and 2
emissions as part of our ongoing commitment to becoming Carbon Neutral
by 2030. A key challenge for the Group’s Sustainability Committee is to
manage our ESG-related risks – balancing both the near and longer-term
targets that were set in FY21, with the need to continually look for ways
in which we can improve further.
FY22 sees the Group report for the first time under the Task Force on
Climate-related Financial Disclosures (“TCFD”). In addition, the Group has
committed to further improve its non-mandatory disclosure and in July 2022
completed its first CDP submission. By translating the TCFD recommendations
and pillars into actual disclosure questions and a standardised annual format,
CDP provides investors and disclosers with a unique platform where the
TCFD Framework can be brought into real-world practice in a comparable
and consistent way.
As our disclosure increases, so has the need to ensure that the data
that we report to the market is accurate. We have now put in place an
auditable framework for our emissions reduction activities, with external
subject matter experts appointed to verify the data and to report to the
Group’s Audit Committee.
Chemring is committed to ensuring that we are able to attract and develop
an appropriately diverse workforce. Our programme of education for all
senior leaders continued in the first half of FY22 and was complemented
by a suite of DE&I training modules which form part of all development
programmes from Early Careers to Senior Leadership Team development.
With a specific focus on gender diversity, the global Women at Chemring
Committee has been established to encourage local women’s networks in
each business unit alongside delivering a global day for Women at Chemring
in the second half of the year.
2022 PERFORMANCE
It is pleasing to report a strong set of results for the financial year despite
a number of operational and market headwinds. This performance, which
was ahead of the Board’s expectations at the start of the year, demonstrated
continued progress against our strategic goal of balancing short-term
performance with longer-term value creation.
Revenue was up 13% to £442.8m (2021: £393.3m), underlying operating
profit was up 11% to £64.0m (2021: £57.5m) and statutory profit before tax
was up 6% to £51.8m (2021: £48.8m). Underlying earnings per share was up
20% to 20.2p (2021: 16.9p).
The underlying operating profit from continuing operations of £64.0m
(2021: £57.5m) resulted in an underlying operating margin of 14.5% (2021: 14.6%),
achieving the mid-teen Group margin objective that we set out in early 2019.
The flat margin primarily reflects the improvement in operational execution
in Countermeasures & Energetics offset by the operating expense investment
in Roke Academy, Roke Futures and Roke USA.
In the UK, the markets for EW, Cyber and data science capabilities, in which
Roke is a leading participant, have remained extremely 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.
Roke’s order intake during the year was up 59% to £168m (2021: £106m)
with revenue for the year exceeding £100m for the first time. A significant
order, Hyperion, valued at £26m was awarded under the Serapis framework
contract with the UK Government. It will develop the next generation of
phased array radar technologies to address the challenges associated with
hypersonic missile defence.
In the last four years successful execution of its strategy has seen Roke double
in size. Its headcount has increased from c.400 at the end of 2018 to over
800 today, driven in part by the success of its graduate and apprenticeship
schemes, which saw 71 new joiners in September 2022. Building on this
success, Roke has invested in the launch of the Roke Academy. This unique
offering will be a centre of excellence for learning and development and is
designed to target the recruitment and development of undiscovered talent,
and the enhancement of skillsets within the business.
In order to drive scalable growth and unlock future potential, Roke has
combined its Public Sector, Industry and Cubica business units to create
Roke Futures, which will sit alongside the National Security and Defence
business units. In doing so, it has brought together its market-leading skill
sets in Consulting, Intelligent Sensing, Situational Awareness and Autonomy.
It will focus on building world-class capabilities and the development of new
intellectual property and unique technologies in support of customers in
UK Central Government & Law Enforcement, Aerospace, Digital Health
and Energy markets.
The acquisition of Geollect Limited in December 2022 creates further
opportunities for Chemring to enhance and further accelerate growth in
its Roke business. With demand for open source intelligence (“OSINT”) and
commercially curated intelligence growing at 28% CAGR, Roke’s customers
require an exponential increase in capability to achieve digital advantage
against complex threats.
CAPITAL ALLOCATION POLICY
INVESTMENT CAPEX
Continued investment to support
organic growth through enhanced
capacity and automation to drive
margin improvement
DIVIDENDS
Recognising that dividends are a
key part of total shareholder
return. The Group targets a
medium-term dividend cover of
c.2.5 times underlying EPS, subject
inter alia to maintaining a strong
financial position
MERGERS AND ACQUISITIONS
Focus on Sensors & Information,
in particular Roke, technology
bolt-on acquisition targets to
accelerate growth and
corporate development
SHARE BUY BACK
Low risk, high return on
investment option for excess
cash which creates value for
long-term holders
Chemring Group PLC Annual report and accounts 2022
15
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS GROUP CHIEF EXECUTIVE’S REVIEW continued
2022 PERFORMANCE continued
The acquisition will enable Roke to build on its Intelligence as a Service (“Roke
IaaS”) proposition by utilising the intelligence gathering and analysis capabilities
of Geollect, and enhancing their already impressive processing capabilities
with Roke’s innovative approach to AI, machine learning and data science.
The strategic goal for Roke is to continue to focus on growth across all its
business areas in the UK, and to leverage international markets, especially the
US, to give Roke a wider international presence.
Roke USA continues to support the customer with a view to securing further
EW orders from this potentially significant market. We continue to invest in
establishing our Roke USA business and during the year established a sales
and engineering office in the US, and hired staff with the required security
clearance. This investment has allowed us to support ongoing customer
demonstrations and field trials. Customer feedback remains very positive
albeit anticipated follow-on orders have been delayed as a result of budget
restrictions caused by the US Continuing Resolution, which was lifted in
March 2022.
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 exploiting a growing opportunity in
bio-security and surveillance. In a post-pandemic and contested world,
governments are becoming increasingly concerned by the risks of both
naturally occurring and engineered biological threats. Advances in synthetic
biology now give our national adversaries the capability to deliberately
engineer organisms to create hazards and cause harm.
Chemring’s experience and expertise in fielding biological agent detectors
for its US DoD customers, covered below, provides a strong platform from
which to pursue opportunities in existing and adjacent markets, such as
homeland security. Chemring continues to invest in its Mobius R&D project,
which aims to develop a deployable and cost-effective solution for the
identification of biological threats.
Chemring is also working with the US Department of Homeland Security
Countering Weapons of Mass Destruction (“CWMD”) Office to design,
develop and deliver an aerosol bio-sensor that can detect, classify, and provide
presumptive identification in real time of pathogenic bio-threats in both indoor
and outdoor environments. Chemring’s technology dramatically shortens the
time taken to identify the bio-threat, which is critical to rapidly implementing
an effective response. Chemring’s product is also considerably less expensive
to procure and operate than current equipment, thus allowing the customer
to afford greater unit coverage while remaining within their budget.
Key developments in the year on the major US Programs of Record are
summarised below.
The Enhanced Maritime Biological Detector (“EMBD”), an automated sensor
to rapidly detect, collect, identify and sample airborne biological warfare
agents, has seen a positive start to its full rate production phase. The value
of this sole source framework contract is up to US$99m with an estimated
completion date of December 2027. A further delivery order of US$16m
covering FY23 deliveries was received in the year.
The sole source Joint Biological Tactical Detection System (“JBTDS”)
program is progressing as planned through the Engineering & Manufacturing
Development (“EMD”) phase and we are now working with the customer
to determine timings for the program to transition to Low Rate Initial
Production (“LRIP”) and Full Rate Production (“FRP”) thereafter. The next
customer procurement decision is now expected in H1 2023.
The Aerosol and Vapor Chemical Agent Detector (“AVCAD”) program has
now completed its EMD phase. The next customer procurement decision
point is now also expected to be in H1 2023. Chemring remains one of two
contractors currently selected for this competitive program.
16
Chemring Group PLC Annual report and accounts 2022
Production continued as expected on the Husky Mounted Detection System
(“HMDS”) program with customer deliveries on schedule throughout the
year. Following a delay in the placement of the annual delivery order, expected
in the first half of the year, our US Sensors team actively engaged with the
US DoD to gain a better understanding of short and medium-term demand
for HMDS. Following withdrawal from Afghanistan, the US Army budget is
realigning its budget priorities from a focus on counter-insurgency operations
to the threat of peer to peer/near-peer competition. This pivot is driving a
re-alignment of DoD funding priorities and our expectations are that the
customer is working to extend the existing US$200m IDIQ contract for an
additional five years as the HMDS program transitions to sustainment mode.
We continue to work with the customer to determine funding levels and
timings moving forward.
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, AI 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 FY22 the focus for our Countermeasures & Energetics sector was to
continue strengthening and protecting our niche, world-leading positions
by continuously improving our technological and operational base, and by
working closely with our customers in the development of new solutions
to meet emerging needs.
In the UK, Chemring Countermeasures UK (“CCM UK”) signed a Strategic
Partnering Arrangement (“SPA”) with the Royal Air Force, Defence
Equipment & Support (“DE&S”) and the Defence Science and Technology
Laboratory (“DSTL”), to ensure long-term provision of optimum air platform
protection, including the exploitation of current capabilities and the
development of new technology. This ten-year SPA will provide a framework
for development, allowing CCM UK to provide the best solutions for
protection of all UK fast jet, transport and helicopter platforms fitted with
self-defence systems. Where appropriate, it will also allow CCM UK to make
such decoy technology available to a wide range of allies and partner nations,
increasing survivability of aircraft and aircrew.
The investment in the expansion and automation of our Tennessee facility to
meet the expected demand for airborne countermeasures continued during
the year. Having completed construction work of the buildings in FY21, FY22
saw the commissioning process progress through characterisation and testing
as production gradually ramped up. We expect customer First Article testing
units to be manufactured and shipped to the customer in the first half of FY23.
Our niche energetic devices businesses enjoyed another strong year of
customer demand and improving operational execution. Order intake for the
year was up 37% to £137m (2021: £100m). The specialised and high reliability
nature of our products was demonstrated in May 2022 when Boeing
launched its passenger spacecraft, CST-100 Starliner, to the International
Space Station (“ISS”). Chemring provided various mission-critical components
on the Atlas V, as well as components for the landing sequence for Starliner’s
return home, all of which were manufactured at our Chicago facility and
all of which were critical to the success of the mission.
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 manufacturing
facilities, and in improving our competitiveness through investment in lean
manufacturing capabilities and developing new products and technologies.
The Group’s order book at 31 October 2022 was £651m (2021: £501m),
of which approximately £403m is scheduled for delivery during 2023,
representing cover of approximately 86% (2021: 84%) of expected 2023
revenue. On a constant currency basis using the 2021 closing exchange
rates the order book would be £604m. The remaining increase since
31 October 2021 is attributable to strong order intake at Roke and
across the Countermeasures & Energetics sector.
This leaves £248m of the order book to be delivered in FY24 and beyond. At
this stage, this provides approximately 40% cover of expected FY24 revenue.
Net debt at the year end was £7.2m (2021: £26.6m), the decrease since
31 October 2021 being largely attributable to strong operating cash generation
offset by the investment in capital projects in the year. Strong operating cash
inflow of £90.1m (2021: £80.0m) represented 109% (2021: 105%) of EBITDA.
Our three-year rolling average cash conversion has been 108% (2021: 107%),
showing that the ongoing focus on working capital improvements is delivering
long-term, sustainable positive results.
CULTURE
Chemring people are at the heart of our business. Engaged, motivated,
empowered and appropriately skilled colleagues are integral to our success
which is founded in the quality of our people. It is imperative that we are able
to sustain an environment where 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. We continue to invest in our people at all levels across every
location and function creating strong foundations for our future success.
Our investment in nurturing a culture built on our core values of Safety,
Excellence and Innovation, continued throughout 2022 and is firmly embedded
in every part of the business. Our determined approach of Global Voice,
Local Accent supports year-on-year progress and we continue to focus
on developing an inclusive, respectful and diverse culture.
2022 saw the gradual easing of the pandemic restrictions in every geography.
This enabled renewed focus on bringing colleagues together both socially and
for professional networking and sharing of ideas. Alongside this we have been
able to meet with customers and third parties at all our locations for the
first time in nearly two years and to re-establish international travel enabling
colleagues to reconnect face to face. Whilst I have been incredibly impressed
at how the whole business has been able to embrace remote working
protocols and virtual interactions, there is no substitute for face-to-face
discussions to further both our approach to operational excellence and to
continue the development of our culture.
Our online Employee Voice tool which measures employee sentiment in real
time, continues to underpin our approach to measuring how far we have
come in achieving our cultural aspirations. Dashboards help business units
understand how colleagues are feeling and where we need to focus.
Participation with the tool and positivity towards the key cultural themes
continue to show improvements throughout 2022 despite the challenges
of the past two years and this positive trend is a testament to the hard work
of the business unit leadership teams in ensuring each business provides a
positive and engaging workplace.
Making sure that we have an appropriately diverse pool of talent within
the organisation is a key enabler and our wider focus on DE&I continued
across 2022.
This year has seen both formal and informal networking groups developing
in each business unit. These are designed to support and connect colleagues
with shared characteristics or interests and complement the more formal
work we are doing around education and awareness of diversity and inclusion.
Notably in 2022 every business has established a Women’s Network to
support our female colleagues at all levels and in all roles. Women make up
30% of the Chemring population overall. These networks are part of our
ongoing focus on this key population and support both engagement and
future success of female colleagues.
DISCOVER MORE ABOUT
OUR CULTURE
CHEMRING WOMEN’S
INCLUSIVITY NETWORK
14 September 2022 marked Chemring’s first International Women’s
Inclusivity Network (WIN@Chemring) day. Celebrated across
Chemring, the day was an opportunity to raise awareness of the
issues surrounding gender diversity in the workplace. It was also a
day to celebrate some of the great things going on locally across the
business in support of and organised by the women of Chemring.
The network is all about building a community locally while sharing
great ideas and knowledge across the Group. The intention of this
event is that it provides a focus for the women’s network groups in
each part of the business – both new and existing networks – and
to leave a legacy that continues far beyond the September event.
These networks form part of the established strategy and framework around
DE&I at Chemring which started in 2021 with a programme of ensuring
corporate and personal awareness of the importance of a diverse population,
an inclusive culture and systems that help support equality and drive equity.
The programme of workshops put in place for all our senior leaders and
managers in 2021 continued across 2022 and was extended to include
first-time line managers and our Early Careers colleagues.
We will continue to focus throughout 2023 on developing an inclusive
and dynamic work environment for all our colleagues in support of our
business goals and to ensure that we continue to invest in our people.
CONCLUSION
Despite a challenging macro-economic environment, I am delighted with
the financial and operational progress that continues to be made across the
Group as we build a stronger, higher quality and technology focused business.
We maintain our relentless focus on living our shared values of Safety, Excellence
and Innovation, and 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 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
13 December 2022
Chemring Group PLC Annual report and accounts 2022
17
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BUSINESS MODEL
CREATING VALUE
We focus on providing innovative capability solutions that reliably
meet our customers’ critical 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.
BIDDING AND WINNING 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 technology
solutions to meet our customers’ needs,
and we continually look for new growth
opportunities to deploy our capabilities.
In Countermeasures & Energetics, we
are the world’s largest supplier of
countermeasures, through 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 leadership position in
multiple technologies to develop
differentiated solutions for meeting ever
more demanding customer requirements.
DELIVER SOLUTIONS
We focus on providing innovative and
competitive solutions that meet our
customer needs 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.
Their expertise is critical to us delivering
innovative solutions to our customers’ challenges.
SUPPLIER COLLABORATION
We maintain close relationships and
collaborate closely with our suppliers to
enhance customer value.
CUSTOMER RELATIONSHIPS
We enjoy long-term, high quality relationships
with defence and intelligence customers in the
member countries of the multilateral “Five Eyes”
(the US, the UK, Canada, Australia and New
Zealand) alliance. We have opportunity-specific
relationships in selected other markets where
we can apply our capabilities.
FACILITIES
We are investing in the resilience of our facilities,
including increasing automation to deliver our
products safely, securely and efficiently.
E S S C
D B U SI N
N
S A
HIC
T
E
O N D U C T
E N S O R S & INFORMATIO
N
S
S AFETY
I NVEST
INNOVATING
TO PROTECT
H
E
A
L
T
H
A
N
D
S
A
F
E
T
Y
D
E
L
I
V
E
R
I
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N
O
V
A
T
I
O
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W IN
E
C
N
E
L
E X CEL
P
E
C
O
U
N
TERMEASURES & E N E R G E
O
P
L
E
Our ESG pillars
Our sectors
Our values
Our strengths
T
M EN
N
O
S
T I C
V I R
N
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18
Chemring Group PLC Annual report and accounts 2022
OUR VALUES
OUTCOMES
SAFETY
We place safety at the heart of
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.
INVESTMENT
Our investment in property, plant and equipment
in the year totalled £38.5m. In addition, we
invested £79.7m in product development, of which
£69.7m 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.
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 world-class solutions and
develop world-class thinking.
- We inspire imaginative solutions.
- We work together to turn ideas into
technologies and solutions.
- We value collaboration and
sharing experience.
Read more about our sustainability
on pages 37 to 39
INVESTMENT
£118.2m
(2021: £88.9m)
CASH FLOW
We aim to convert 100% of underlying EBITDA
underlying operating cash flow over the medium
term, accepting that timing differences will arise at
individual period ends. In 2022, the conversion
ratio was 109%, reflecting strong operating cash
generation and the continued focus on managing
working capital.
UNDERLYING CASH CONVERSION
109%
(2021: 105%)
DIVIDENDS
For the year ended 31 October 2022, our dividend
will be 5.7p per share (2021: 4.8p), an increase of
19% on the prior year, subject to the approval of
the final dividend at the Annual General Meeting.
DIVIDENDS
5.7p
(+19%)
SUSTAINABLE
STAKEHOLDER VALUE
CUSTOMERS
Our customers are governments, prime
contractors and other commercial businesses.
We provide innovative solutions to satisfy
their 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
The skills and experience of our employees
are essential for us delivering our customer
commitments. We provide development
opportunities and a safe, stimulating and rewarding
working environment for all of our people.
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 where our people live and work
by actively supporting the development of local
economic prosperity through providing high
value jobs.
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.
Read more about our stakeholders
on pages 21 to 23
CLIMATE CHANGE
We recognise the profound impact of climate change. We are actively seeking ways to reduce our
effects 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.
Read more on pages 42 to 49
Chemring Group PLC Annual report and accounts 2022
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
80 to 89. 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
- Market overview
- 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
- Market overview
- 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 2022
6
8
18
12
24
6
21
40
50
18
21
12
24
57
37
40
42
50
57
80
8
21
80
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
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.
EMPLOYEES
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 THE BUSINESS ENGAGES
- Regular meetings, teaming arrangements and engagement at all levels of our
HOW THE BUSINESS ENGAGES
- Regular all-hands meetings and team briefings
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
HOW THE BOARD ENGAGES
- 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
- Our US Government Security Committee works closely with the
US Government to ensure that we operate in full compliance with our
Special Security Agreement and updates the Board on a regular basis
- Site visits enable the Board to develop a deeper understanding of our
products, technical capabilities and customer requirements
HOW WE MONITOR
- Order intake
- R&D expenditure
- Capital investment
- Process safety events
OUTCOMES
- Customer-focused inputs into the Group strategy
- Innovation and investment driven by customer requirements
- Collaborative, strategic customer relationships
- Improved customer satisfaction
LINK TO STRATEGY
1
2
3
- Works councils, trade unions, representative bodies and forums which
support and connect people with shared characteristics or interests
- Our real-time employee engagement tool, “Employee Voice”, enables
employees to provide immediate and anonymous feedback on
developments within the business
- 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
- Development programmes and succession planning
HOW THE BOARD ENGAGES
- Monthly reporting to the Board on health and safety matters
- Output from Employee Voice is regularly provided to the Board and
supplemented by periodic culture “check-ins” facilitated by an external
consultant
- 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
- Nomination Committee reviews diversity initiatives, senior leadership
succession plans and talent development programmes
HOW WE MONITOR
- Employee Voice participation and positivity scores
- Safety performance indicators
- Diversity statistics
- CEO pay ratio
- External ESG ratings
OUTCOMES
- Development of people strategy and related investment
- Safe, healthy and motivated workforce
- Focus on diversity and inclusion
- Improved employee retention
- Attractive proposition for potential new employees
LINK TO STRATEGY
1
1
3
Chemring Group PLC Annual report and accounts 2022
21
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STAKEHOLDER ENGAGEMENT continued
SUPPLIERS
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.
SHAREHOLDERS
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 THE BUSINESS ENGAGE
- Day-to-day interaction with suppliers is conducted largely by supply chain
HOW THE BUSINESS ENGAGES
- Engagement with shareholders predominantly led by the Group Chief
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
Executive, the Chief Financial Officer and the Group Director of
Corporate Affairs
- Publication of our interim and full year results statements, along with
regular trading updates throughout the year
- All suppliers are issued with our Supplier Code of Conduct, which sets out
- Sustainability Report published on our website
the standards of ethical business conduct we expect of them
HOW THE BOARD ENGAGES
- Business continuity and supply chain dependency reviews included within
the internal audit programme
- Reports on supplier due diligence and compliance reviewed by the Ethics &
Compliance Committee
- Annual consideration and approval of the Modern Slavery Act Statement
- 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 following the publication of the Group’s interim and full
year results
- Our website provides financial, business and governance information
on the Group and an alerts service enables subscribing shareholders to
receive notification of corporate updates
HOW WE MONITOR
- Payments made within payment terms
- Statistics on issue of the Supplier Code of Conduct and inclusion
of suppliers in the Chemring Compliance Portal
OUTCOMES
- Collaborative, long-term relationships
- Delivery of safe and reliable products and services to customers
- Appropriate working capital management
HOW THE BOARD ENGAGES
- Board receives feedback collated by our brokers and other financial advisers
from our institutional investors, in which their views can be expressed on a
non-attributable basis
- Our Annual General Meeting provides the opportunity for our private
shareholders to hear from and engage directly with the Board
- The Chairman, the Senior Independent Director and Chair of the
Remuneration Committee meet with shareholders to discuss
specific matters
HOW WE MONITOR
- Earnings per share
LINK TO STRATEGY
1
1
3
- Dividends paid
- Total shareholder return
- ESG metrics
- External ESG ratings
OUTCOMES
- Development of capital allocation and dividend policy
- Development of ESG strategy
- Supportive, long-term shareholder base
- Access to funding
LINK TO STRATEGY
1
2
3
22
Chemring Group PLC Annual report and accounts 2022
COMMUNITIES AND THE ENVIRONMENT
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.
HOW THE BUSINESS ENGAGES
- Our community investment policy confirms our commitment to support
selected charitable causes with a focus on the military and armed services,
STEM-related initiatives and those linked to the local communities in which
our businesses operate
- Each business has its own locally held charity budget and at a Group level
charitable donations are considered by the Executive Committee
- In addition to making cash donations, we also encourage and support
employees who undertake voluntary work in the local community
- Our people across the Group are involved with a number of educational
initiatives and as a business we have relationships with several universities,
whereby funding is provided for students’ research activities
- 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
GOVERNING BODIES AND REGULATORS
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 THE BUSINESS ENGAGES
- 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
HOW THE BOARD ENGAGES
- Board oversight of our Code of Conduct, our Operational Framework and
the associated assurance processes ensures our businesses are meeting
governmental and regulatory requirements
- Interaction with the US Board’s Government Security Committee provides
assurance to the Board that the business is operating in accordance with our
Special Security Agreement
HOW WE MONITOR
- Compliance statistics
- Implementation of environmental and carbon reduction initiatives
- Safety-related capital investment
HOW THE BOARD ENGAGES
- Development of ESG strategy, objectives and targets subject to
Board oversight
OUTCOMES
- Ethical and compliant business conduct
- Trusted supplier to government customers
- Sustainability Committee, chaired by the Group Chief Executive, reports
- Government support for proposed acquisitions
regularly to the Board on ESG-related matters
- ESG-related targets included in the annual bonus plan and performance
- Sustainable business operations
LINK TO STRATEGY
1
1
3
share plan
HOW WE MONITOR
- Charitable donations
- Environmental performance indicators
- External ESG ratings
OUTCOMES
- Development of ESG strategy
- Informed communities
- Contribution to local businesses and employment
- Contribution to wider society
- Sustainable business operations
LINK TO STRATEGY
1
1
3
Chemring Group PLC Annual report and accounts 2022
23
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS STRATEGY
SUSTAINABLE GROWTH
At Chemring, our purpose is to help make the world a safer place. Across the
physical and digital environment our exceptional teams deliver innovative
technologies and products that detect and defeat ever-changing threats.
Connected to our purpose, our vision provides a clear definition of the future
state Chemring wishes to attain. It is to be a leading provider of critical and
innovative technologies that detect and protect people, platforms, missions
and information against constantly changing threats.
Our strategy sets out the priorities and actions that underpin us achieving our
vision, and guides the choices that we will make as a company. We will continue
to deliver profitable growth by operating in markets where we see strong
customer demand signals, where we have differentiating technology and where
there are significant barriers to entry. Our strategy is three-fold:
1. Target growing segments
2. Win market share
3. Grow our US business
1 TARGET GROWING SEGMENTS
Against the backdrop of a more uncertain world – including a significant kinematic conflict
in Europe and greater instability in the Asia Pacific region, macro-level world defence budgets
can be expected to grow. Simultaneously, our customers’ strategic context will continue
to evolve, and the enhanced threat context will see a strong demand for multi-domain
capabilities including those in CEMA, artificial intelligence, autonomous systems and space.
With a greater threat of peer-level competition, demand for energetic capabilities can be
anticipated to strengthen as the traditional battlefield continues to feature, alongside the
sub-threshold “Grey Zone”, in customers’ thinking. Countermeasures capabilities will also
continue to remain relevant in this contested environment.
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 requirements and
modernisation priorities. Our investment in innovation and solution development will be
targeted on areas where we see positive demand signals from our customers.
2 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.
3 GROW OUR US BUSINESS
Our US businesses deliver over half the Group’s revenue, and our businesses in both
Countermeasures & Energetics and Sensors & Information are well placed on a number
of critical US customer programmes including highly classified activities and substantial
Programs of Record. This positioning, underpinned by our operational performance and
strategic insight into US customer priorities, is the foundation upon which we will grow
our business in the world’s largest defence market.
24
Chemring Group PLC Annual report and accounts 2022
STRATEGY IN ACTION
In the US, we are building on our established Programs of Record
position in sensors to develop and implement a technology-led
strategy for the capture of future opportunities. We are also
responding to the strong demand signals that we are seeing for
our precision engineered devices for use in space and missile
applications, and are exploring additional opportunities to
complement organic growth.
In the UK, we have a strong pipeline of both organic and inorganic
growth opportunities for Roke – focused in particular on
developing the businesses in its core specialist areas of AI, machine
learning, data science and autonomy.
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 are seeing strong opportunities that support
significant growth for Chemring Energetic Devices. The Chicago
business’ precision-engineered devices being critical to achieving
mission success for increasing customer activities involving space
and missile assets.
STRATEGY IN ACTION
In Countermeasures & Energetics we continue to take a pan-
Group approach to our countermeasures activities. Within the
boundaries of security classifications, we share conventional,
spectral and kinematic flare capabilities 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 new sales and
engineering office for Roke USA, hired staff with the requisite
security clearances and delivered a number of proof-of-concept
trials of our land EW products to a number of distinct US
customer stakeholders.
ORDER BOOK
£651m
+30%
2022
2021
2020
ORDER INTAKE
£551m
+28%
2022
2021
2020
REVENUE
£443m
+13%
2022
2021
2020
£651m
£501m
£476m
£551m
£431m
£437m
£443m
£393m
£402m
Chemring Group PLC Annual report and accounts 2022
25
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
Nil
(2021: 2)
2022
0
2021
2
4,036
(2021: 3,518)
2022
2021
4,036
3,518
17
(2021: 14)
2022
2021
RATE
0.78
(2021: 0.67)
2022
2021
17
14
0.78
0.67
ORDERS
4
ORDER INTAKE
GROUP
£551m
(2021: £431m)
5
ORDER BOOK
GROUP
£651m
(2021: £501m)
REVENUE
6
REVENUE
GROUP
£443m
(2021: £393m)
SENSORS & INFORMATION
SENSORS & INFORMATION
SENSORS & INFORMATION
COUNTERMEASURES
& ENERGETICS
COUNTERMEASURES
& ENERGETICS
COUNTERMEASURES
& ENERGETICS
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.
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 17 employee injuries this
year, compared to 14 last year. This
resulted in a slight increase in our
recordable injury rate, from 0.67 to
0.78, but remains below our limit of
1. There were no fatalities or serious
injuries 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 within
in the next year, gives a degree of confidence in
the state of the end market and our business’s
our markets.
expected future financial performance.
ability to execute orders on time to satisfy
customer needs.
Order intake across the Group has increased by 28% to £551m (2021: £431m) This was driven by Roke
Group revenue was in line with our expectations,
seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services
with strong performance at Roke, steady growth
and products, the receipt of a US$16m delivery order for the second year of EMBD full rate production
in Countermeasures & Energetics and a foreign
and strong order intake across the Countermeasures & Energetics sector where customers are increasingly
currency tailwind.
placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the
previous year.
The order book was up 30% to £651m (2021: £501m), with £403m currently due as revenue in FY23,
approximately 86% coverage of FY23 targeted revenue.
DESCRIPTION
WHY IS IT A KPI?
A process safety event is one of the
key strategic safety risks of the
business. This indicator measures
those events that have caused injury
or harm.
This indicates employee awareness of
hazards and the greater the reporting
the more engaged our people are.
2022 PERFORMANCE
There were no life changing/serious
injuries associated with energetic
events compared to two last year.
Since 2010 the only other time this
has happened was 2017.
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
we have maintained a high level of
near miss reporting this year.
26
Chemring Group PLC Annual report and accounts 2022
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
Nil
(2021: 2)
4,036
(2021: 3,518)
17
(2021: 14)
RATE
0.78
(2021: 0.67)
DESCRIPTION
WHY IS IT A KPI?
those events that have caused injury
or harm.
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.
2022 PERFORMANCE
There were no life changing/serious
As we journey towards our goal of
We had 17 employee injuries this
injuries associated with energetic
events compared to two last year.
is fully engaged and proactive in
Since 2010 the only other time this
reporting unsafe actions and
has happened was 2017.
conditions. One measure is the
resulted in a slight increase in our
recordable injury rate, from 0.67 to
0.78, but remains below our limit of
zero harm we need a workforce that
year, compared to 14 last year. This
reporting of near misses, providing us
1. There were no fatalities or serious
with the opportunity to learn and
injuries during the year.
prevent accidents from happening. It
is very encouraging therefore to see
we have maintained a high level of
near miss reporting this year.
ORDERS
4
ORDER INTAKE
GROUP
£551m
(2021: £431m)
5
ORDER BOOK
GROUP
£651m
(2021: £501m)
REVENUE
6
REVENUE
GROUP
£443m
(2021: £393m)
SENSORS & INFORMATION
SENSORS & INFORMATION
SENSORS & INFORMATION
2022
2021
£195m
£176m
2022
2021
£154m
£114m
2022
2021
£162m
£147m
COUNTERMEASURES
& ENERGETICS
2022
2021
£356m
£255m
COUNTERMEASURES
& ENERGETICS
2022
2021
£497m
£387m
COUNTERMEASURES
& ENERGETICS
2022
2021
£281m
£246m
Number of energetic events causing
Number of near miss and potential
Number of recordable injuries per
harm or injury.
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.
A process safety event is one of the
This indicates employee awareness of
This is the rate for all injuries including
key strategic safety risks of the
hazards and the greater the reporting
medical treatment, restricted workday
business. This indicator measures
the more engaged our people are.
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.
Order intake across the Group has increased by 28% to £551m (2021: £431m) This was driven by Roke
seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services
and products, the receipt of a US$16m delivery order for the second year of EMBD full rate production
and strong order intake across the Countermeasures & Energetics sector where customers are increasingly
placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the
previous year.
The order book was up 30% to £651m (2021: £501m), with £403m currently due as revenue in FY23,
approximately 86% coverage of FY23 targeted revenue.
The trend of revenue gives an indication of both
the state of the end market and our business’s
ability to execute orders on time to satisfy
customer needs.
Group revenue was in line with our expectations,
with strong performance at Roke, steady growth
in Countermeasures & Energetics and a foreign
currency tailwind.
Chemring Group PLC Annual report and accounts 2022
27
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
£64.0m
(2021: £57.5m)
14.5%
(2021: 14.6%)
8
UNDERLYING EARNINGS
PER SHARE
20.2p
(2021: 16.9p)
2022
2021
20.2p
16.9p
9
WORKING CAPITAL
GROUP
£93.9m
(2021: £84.4m)
10
INVENTORY
GROUP
£99.6m
(2021: £80.7m)
11
12
NET DEBT: UNDERLYING
UNDERLYING OPERATING
EBITDA
0.09x
(2021: 0.35x)
2022
0.09x
2021
0.35x
CASH FLOW
£90.1m
(2021: £80.0m)
2022
2021
£90.1m
£80.0m
SENSORS & INFORMATION
SENSORS & INFORMATION
CHANGE FROM PREVIOUS YEAR
SENSORS & INFORMATION
SENSORS & INFORMATION
2022
2021
£30.0m
£31.6m
2022
2021
18.5%
21.6%
COUNTERMEASURES &
ENERGETICS
COUNTERMEASURES &
ENERGETICS
2022
2021
£48.9m
£40.0m
2022
2021
17.4%
16.2%
up 20%
(2021: up 12%)
2022
2021
20%
12%
2022
2021
2022
2021
£30.6m
£38.3m
£63.3m
£46.1m
2022
2021
2022
2021
£27.1m
£19.8m
£72.5m
£60.9m
COUNTERMEASURES &
COUNTERMEASURES &
ENERGETICS
ENERGETICS
CONVERSION OF
UNDERLYING EBITDA INTO
UNDERLYING OPERATING
CASH
109%
(2021: 105%)
2022
2021
109%
105%
DESCRIPTION
WHY IS IT A KPI?
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.
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.
The primary focus for improvement
This is a measure of leverage within
This is a key measure to ensure
in working capital is inventory.
the business and is a banking covenant.
profit turns into cash in short order.
2022 PERFORMANCE
The underlying operating profit increased by 11% 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 20% in
2022, 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
Inventory increased, as did advance
This has decreased in 2022, as
Operating cash conversion again
payments from customers, reflecting
underlying EBITDA has increased
exceeded 100% as our focus on the
the timing of customer procurement
and net debt has decreased.
effective management of working
continued effective management of
in Countermeasures & Energetics.
capital was maintained.
inventories, trade and other receivables,
less trade and other payables excluding
payroll related and other liabilities
totalling £31.4m (2021: £28.8m).
Efficiently turning profit into cash
demands a degree of control over
working capital.
working capital.
28
Chemring Group PLC Annual report and accounts 2022
8
PER SHARE
20.2p
(2021: 16.9p)
2022
2021
20.2p
16.9p
up 20%
(2021: up 12%)
2022
2021
20%
12%
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
£64.0m
(2021: £57.5m)
MARGIN
GROUP
14.5%
(2021: 14.6%)
9
WORKING CAPITAL
GROUP
£93.9m
(2021: £84.4m)
10
INVENTORY
GROUP
£99.6m
(2021: £80.7m)
11
12
NET DEBT: UNDERLYING
EBITDA
UNDERLYING OPERATING
CASH FLOW
0.09x
(2021: 0.35x)
2022
0.09x
2021
0.35x
£90.1m
(2021: £80.0m)
2022
2021
£90.1m
£80.0m
SENSORS & INFORMATION
SENSORS & INFORMATION
CHANGE FROM PREVIOUS YEAR
SENSORS & INFORMATION
SENSORS & INFORMATION
2022
2021
2022
2021
£30.0m
£31.6m
£48.9m
£40.0m
2022
2021
2022
2021
18.5%
21.6%
17.4%
16.2%
COUNTERMEASURES &
COUNTERMEASURES &
ENERGETICS
ENERGETICS
2022
2021
£30.6m
£38.3m
2022
2021
£27.1m
£19.8m
COUNTERMEASURES &
ENERGETICS
COUNTERMEASURES &
ENERGETICS
2022
2021
£63.3m
£46.1m
2022
2021
£72.5m
£60.9m
CONVERSION OF
UNDERLYING EBITDA INTO
UNDERLYING OPERATING
CASH
109%
(2021: 105%)
2022
2021
109%
105%
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
of earnings. Underlying operating margin is calculated as underlying operating profit
in issue.
divided by revenue.
WHY IS IT A KPI?
Underlying operating profit provides a consistent year-on-year measure of
The measurement of underlying EPS
the trading performance of the Group’s operations. A focus on operating margin
reflects all aspects of the Group’s
allows the impact of changes in revenue and cost base to be monitored, enabling
comparisons to be made of management performance and trading effectiveness.
income statement including the
management of interest and tax.
2022 PERFORMANCE
The underlying operating profit increased by 11% 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 20% in
2022, driven by increased underlying
operating profit and lower interest
and taxation costs.
Working capital is defined as
inventories, trade and other receivables,
less trade and other payables excluding
payroll related and other liabilities
totalling £31.4m (2021: £28.8m).
Efficiently turning profit into cash
demands a degree of control over
working capital.
Working capital as a percentage
of revenue was consistent at 21%
year-on-year, demonstrating the
continued effective management of
working capital.
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.
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.
Inventory increased, as did advance
payments from customers, reflecting
the timing of customer procurement
in Countermeasures & Energetics.
This has decreased in 2022, 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 2022
29
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON
SENSORS & INFORMATION
In Chemring’s Sensors & Information sector we
are a leading supplier of consulting and technology
services, trusted by government and industrial
partners worldwide to solve the most technically
challenging defence and security-critical issues.
Our products include core technologies for detecting, intercepting and
jamming electronic communications, and world-leading systems for detecting
improvised explosive devices (“IEDs”), chemical and biological agents.
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, artificial
intelligence, machine learning and information security. We are also focused
on building a technology-based strategy for growth beyond current US
Department of Defense (“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 market. Investing in retaining, developing and
recruiting people, together with expanding our geographical and customer
coverage, is key to long-term profitable growth in this area. We continue to
actively explore opportunities to expand and accelerate Roke’s capabilities
and offerings to drive medium and long-term growth including leveraging
opportunities in adjacent markets and territories. In the short term this will
require continued operating expense investment in Roke Academy, Roke
Futures and Roke USA.
The integration of Cubica Group, acquired in 2021, has progressed extremely
well and has brought significant additional research and development expertise as
we invest in next-generation technologies and expand our product, service and
capability offerings. We continue to actively explore opportunities and have
a healthy pipeline of further potential acquisition targets.
MARKETS
The current geopolitical uncertainty, brought about by both Russia’s invasion
of Ukraine and increased competition with China, has highlighted the need
for increased defence expenditure, particularly amongst European members
of NATO. More broadly it has highlighted the need for countries to re-equip
and modernise their defence capabilities to meet the threat of peer on peer
conflict. Partnerships and alliances, such as Five Eyes, AUKUS, and NATO, are
seen as becoming increasingly important, with greater co-operation and
alignment between allies to the fore.
The US continues to be the largest defence and security market in the world
and remains opportunity-rich for the Sensors & Information sector. The
US$813bn FY23 President’s Budget Request for the US DoD is the largest
ever and has a strong modernisation agenda including investment priorities
for cyber, electronic warfare and chem/bio security. Chemring’s capabilities
should give us the opportunity to address many of these requirements. The
shift in the US Government priorities from counter-insurgency operations to
equipping forces for the expected peer to peer/near-peer competition in the
Pacific, has resulted in a swift and unexpected re-prioritisation of US DoD
budgets. This impacted our expected HMDS FY22 delivery order, which was
not funded, and we are currently working with the customer to appropriately
plan for their expected future requirements which we anticipate will be at
lower volumes.
KEY FACTS
REVENUE
£162.3m
(2021: £146.6m)
UNDERLYING OPERATING PROFIT
£30.0m
(2021: £31.6m)
ORDER BOOK
£154m
(2021: £114m)
UNDERLYING OPERATING MARGIN
18.5%
(2021: 21.6%)
STATUTORY OPERATING PROFIT
£26.3m
(2021: £25.9m)
DISCOVER MORE ABOUT SENSORS &
INFORMATION: CHEMRING.COM/WHAT-WE-DO/
SENSORS-AND-INFORMATION
30
Chemring Group PLC Annual report and accounts 2022
In the UK, the fundamentals of our market position are underpinned by the
2021 Integrated Review of Defence, Security and Foreign Policy (“IR”) and the
subsequent raft of policy papers that were published in support. The IR took
a comprehensive view of the peer-level threats to British interests so its
wholescale refresh is unlikely despite the Russia-Ukraine crisis. The increased
importance that the UK is placing on cyber-security, active cyber effects,
information advantage, intelligent networks, artificial intelligence, machine
learning, and multi-domain integration, when matched with increasing budgets,
is expected to accelerate the demand for Roke’s market-leading technologies.
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
Order intake in the year was up 11% to £195m (2021: £176m). This was driven
by a 59% increase in Roke’s order intake, with a growing number of multi-year
contracts which include an increasing element of “pass-through” products and
services which are included in revenue (see table below for an analysis of the
impact of this), and the receipt of a US$16m delivery order for the second
year of EMBD full rate production. This was offset by orders on the HMDS
Program of Record being significantly lower than in the previous year.
Roke “pass-through” impact
Order intake
Products and services
Pass-through
As reported
Revenue
Products and services
Pass-through
As reported
2022
£m
132
36
168
94
16
110
2021
£m
100
6
106
75
7
82
Change
+32%
+500%
+59%
+25%
+129%
+34%
Revenue for Sensors & Information increased by 11% to £162.3m (2021:
£146.6m) and underlying operating profit fell by 5% to £30.0m (2021: £31.6m),
as underlying operating profit margin declined to 18.5% (2021: 21.6%) driven
by the operating expense investment in Roke Academy, Roke Futures and
Roke USA, and the reduction in HMDS revenue in the year. On a constant
currency basis revenue would have risen 8% to £157.8m and underlying
operating profit would have fallen by 5% to £29.9m. The statutory operating
profit for the year was £26.3m (2021: £25.9m).
In the UK, the markets for EW, cyber and data science capabilities, in which
Roke is a leading participant, have remained buoyant in the period. As shown
above Roke has delivered strong growth in orders and revenue with double
digit growth in underlying operating profit and has maintained strong margins
despite increased investment in people, infrastructure and product development.
OUR PURPOSE IN ACTION
EUROPEAN ELECTRONIC WARFARE (“EW”) REQUIREMENTS
Roke continues to support key European partners with respect to
high performance, networked electronic surveillance capabilities
capable of delivering “find & fix” capabilities against a peer-to-
peer threat.
Our RESOLVE 3 systems provide a mobile, multi-role system that
supports different deployment stances, and Roke has seen initial
orders and significant interest in the latest PERCEIVE mobile
electronic surveillance system.
Our PREFIX/VIPER software suite provides pre, during and post
mission analysis tools and centralised command and control of the
electromagnetic environment. This is drawing interest from
Defence customer’s agnostic of hardware which demonstrates the
functionality and ease of use of this Roke-designed mission toolset.
Roke continues to undertake collaborative development of
these platforms to address the evolving threat and emergent
operational requirements.
LINK TO STRATEGY
1
3
LINK TO OUR VALUES
INNOVATION
Read more on page 19
Chemring Group PLC Annual report and accounts 2022
31
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON continued
PERFORMANCE continued
The acquisition of Geollect Limited was completed in December 2022 having
now received NSIA approval, creates further opportunities for Chemring to
enhance and further accelerate growth in its Roke business. Geollect, based in
Bristol and Virginia USA, is a data analytics company specialising in geospatial
intelligence (“GEOINT”), one of the most exciting and growing areas of
spacetech innovation. GEOINT uses imagery analysis and data to survey and
assess human activity and physical geography anywhere in the world and has
the potential to transform some of the most traditional and complex
industries. With demand for open source intelligence (“OSINT”) and
commercially curated intelligence growing at 25% CAGR, Roke’s customers
require an exponential increase in capability to achieve digital advantage
against complex threats. The acquisition will enable Roke to build on its
Intelligence as a Service (“Roke IaaS”) proposition by utilising the intelligence
gathering and analysis capabilities of Geollect, and enhancing their already
impressive processing capabilities with Roke’s innovative approach to AI,
machine learning and data science. Roke’s unique customer relationships in
National Security and Defence will provide a growth accelerator while
providing new markets for Roke’s Futures business.
In the last four years successful execution of its strategy has seen Roke
double in size. Its headcount increased from c.400 at the end of 2018 to over
800 today, driven in part by the success of its graduate and apprenticeship
schemes. Having seen an intake of 44 recruits in the Autumn of 2021,
Roke has this year grown that number to 71 – consisting of 55 graduates
and 16 engineering apprentices.
Building on this success, Roke invested £2.5m of annualised operating expenses
in the launch of the Roke Academy, to address the challenge of recruiting
appropriately skilled engineers in this competitive market. This unique offering
will be a centre of excellence for learning and development and is designed to
target the recruitment and development of undiscovered talent, and the
enhancement of skill sets within the business. This is a significant step in
Roke’s employee value proposition and will deliver a welcome increase in
workforce diversity and longer-term career progression. The first 24 recruits
joined in July 2022.
Roke continues to invest in high value, cutting-edge technology that is directly
relevant to the rapidly emerging needs of its markets. Roke’s Technology
Roadmap focuses on the delivery of autonomous, intelligent and integrated
capabilities. Historically, Roke has provided ground-breaking technologies in
areas ranging from Electronic Warfare to Precision Navigation and Timing,
Acoustic Sensing and Cyber. Our vision is to enable the integration of all
Roke’s capabilities in an open architecture that enables autonomous tasking
of sensors and effectors. For example, our Omniscient software provides
the autonomous fabric integrating our capabilities together such that an alert
triggered by an EW sensor results in the autonomous tasking of an unmanned
vehicle to locate and classify the source using AI based classifiers. Our focus
is on delivering this level of autonomy at massive scale and we are investing
significantly to ensure our thought leadership proactively drives the market.
In order to drive scalable growth and unlock future potential, Roke has
combined its Public Sector, Industry and Cubica business units to create
Roke Futures, which will sit alongside the National Security and Defence
business units. In doing so, it has brought together its market-leading skill
sets in Consulting, Intelligent Sensing, Situational Awareness, and Autonomy.
It will focus on building world-class capabilities and the development of new
intellectual property and unique technologies in support of customers in
UK Central Government & Law Enforcement, Aerospace, Digital Health
and Energy markets.
As part of its strategy to broaden its geographic spread and access to
different talent pools, Roke has expanded its footprint in Woking and in doing
so has increased its office capacity from 25 to over 150 staff. This will provide
a first class working experience with an improved environmental impact and
32
Chemring Group PLC Annual report and accounts 2022
OUR PURPOSE IN ACTION
GROWING OUR OWN – EARLY CAREERS AT ROKE
In the ever increasing war for talent and alongside ambitious
growth plans, Roke recognises the importance of bringing in
individuals early in their careers to develop alongside the existing
experienced population of Roke experts.
Such was the success of the 2021 intake that the business
aimed higher for the September 2022 cohort, forecasting for
55 graduates and 16 apprentices. Planning for this cohort began
at an early stage as it would equate to more than 10% of the
overall business headcount.
The final preparation for the 2022 intake focused on the
programme itself. Some core principles were applied:
- streamlining the learning experience to meet the needs of the
early career intake through groupings based on their academic
background and future roles;
- maximising classroom time with Roke engineers to make the
most of unique Roke experience and knowledge by using a
partner to deliver introduction or industry standard learning; and
- building in problem solving to provide challenge and collaboration.
the ability to work at a classified level. The Roke Futures business unit and
the Roke Academy will be based out of this office, providing a second HQ
to Roke’s Romsey site, and a hub of technological and skills development.
We are seeing growing customer enquiries for Roke’s suite of world-leading
Electronic Warfare products. The business received an £8m order in
November 2021 from the Swedish Ministry of Defence for the supply of
EW equipment of which part was delivered in H2 2022. This illustrates the
increasing importance of Cyber and Electromagnetic Activity (“CEMA”) in
today’s threat environment, heightened further as a consequence of Russia’s
invasion of Ukraine.
Roke USA continues to support the customer with a view to securing further
EW orders from this potentially significant market. We continue to invest in
establishing our Roke USA business and have now established a sales and
engineering office in the US, and hired staff with the required security
clearance. This has required investment of £1.4m in 2022 which has been
c.1 percentage point margin dilutive in the Sensors & Information sector.
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, AI 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. With increasing customer budgets and growing market opportunities
Roke is a key enabler of our wider growth ambitions. Our vision for the next
five years is to maintain Roke’s recent record of growth, doubling annual
revenue to greater than £200m organically, whilst maintaining strong margins.
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.
Over the next two years we will see the US sensors business transition from
its primary focus being on the delivery of explosive hazard detection systems
to one of biological detection, reflecting the shift in the US Government
priorities from counter-insurgency operations to equipping forces for
peer to peer/near-peer competition in the Pacific. In biological detection
the EMBD program provides good short-term visibility and following the
expected LRIP decision on JBTDS in 2023 we expect this program to
enhance medium-term visibility but first full rate production revenue is
not expected until 2025. In chemical detection we still await the outcome
of the competitive AVCAD program.
The order book for Sensors & Information at 31 October 2022 was £154m
(2021: £114m) driven by strong order intake and an increase in multi-year
contracts in Roke, offset by the reduction in HMDS orders in our US sensors
business. Of this, £112m is expected to be delivered in 2023, providing 67%
cover of expected 2023 revenue. 2023 trading performance for Sensors &
Information is expected to show a continuation of the levels of business seen
in 2022, with continued growing demand for Roke’s products and services,
offset by the expected reduction in HMDS-related revenue. Medium-term
growth opportunities are driven by the Group’s sole source positions on the
biological detection Programs of Record moving into full rate production.
This investment has allowed us to support ongoing customer demonstrations
and field trials. Customer feedback remains very positive albeit anticipated
follow-on orders have been delayed as a result of budget restrictions caused
by the Continuing Resolution.
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 exploiting a growing opportunity in
bio-security and surveillance. In a post-pandemic and contested world,
governments are becoming increasingly concerned by the risks of both
naturally occurring and engineered biological threats. Advances in synthetic
biology now give our national adversaries the capability to deliberately
engineer organisms to create hazards and cause harm.
Chemring’s experience and expertise in fielding biological agent detectors
for its US DoD customers, covered below, provides a strong platform from
which to pursue opportunities in existing and adjacent markets, such as
homeland security. Chemring continues to invest in its Mobius R&D project,
which aims to develop a deployable and cost-effective solution for the
identification of biological threats.
Chemring is also working with the US Department of Homeland Security
Countering Weapons of Mass Destruction (“CWMD”) Office to design,
develop and deliver an aerosol bio-sensor that can detect, classify and provide
presumptive identification in real time of pathogenic bio-threats in both indoor
and outdoor environments. Chemring’s technology dramatically shortens the
time taken to identify the bio-threat, which is critical to rapidly implementing
an effective response. Chemring’s product is also considerably less expensive
to procure and operate than current equipment, thus allowing the customer
to afford greater unit coverage while remaining within their budget.
Key developments in the year on the major US Programs of Record are
summarised below.
Following a delay in the placement of the annual delivery order, expected
in the first half of the year, our US sensors team actively engaged with the
US DoD to gain a better understanding of short and medium-term demand
for HMDS. Following withdrawal from Afghanistan, the US Army is realigning
its budget priorities from a focus on counter-insurgency operations to the
threat of peer to peer/near-peer competition. This pivot is driving a
re-alignment of DoD funding priorities and our expectations are that the
customer will extend the duration of the existing US$200m ID/IQ contract
for an additional four years as the HMDS program transitions to sustainment
mode. We continue to work with the customer to determine funding levels
and timings moving forward.
The EMBD system, an automated sensor to rapidly detect, collect, identify
and sample airborne biological warfare agents, has seen a positive start to its
full rate production phase. The value of this sole source framework contract
is up to US$99m with an estimated completion date of December 2027.
A further delivery order of US$16m covering FY23 deliveries was received
in the year.
The sole source JBTDS program is progressing as planned through the
EMD phase and the next customer procurement decision is now expected
in H1 FY23.
The AVCAD program 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, now expected to be in H1 FY23. Chemring remains one
of two contractors currently selected for this competitive program.
Chemring Group PLC Annual report and accounts 2022
33
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON continued
COUNTERMEASURES & ENERGETICS
In our Countermeasures & Energetics sector,
we have deep technical expertise in high-hazard
precision engineering and manufacturing.
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.
During the course of 2022 the Countermeasures & Energetics sector
has seen a continued improvement in operating margin, as the benefit
of capital investment has delivered improved operational tempo
and efficiency.
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
Russia’s invasion of Ukraine is likely to have a long-term catalytic effect
on defence and security spend as countries look to deter aggression and
protect their international interests. Given the threat environment, several
European countries (NATO and non-NATO members) have already
committed to increasing their defence spend with a large proportion of funds
allocated towards capital investment. In the medium to long term Chemring
has the opportunity to benefit as demand for the Group’s capabilities is
expected to increase.
In the Countermeasures & Energetics sector the need for our niche
capabilities 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.
KEY FACTS
REVENUE
£280.5m
(2021: £246.7m)
UNDERLYING OPERATING PROFIT
£48.9m
(2021: £40.0m)
ORDER BOOK
£497m
(2021: £387m)
UNDERLYING OPERATING MARGIN
17.4%
(2021: 16.2%)
STATUTORY OPERATING PROFIT
£46.8m
(2021: £37.9m)
DISCOVER MORE ABOUT COUNTERMEASURES &
ENERGETICS: CHEMRING.COM/WHAT-WE-DO/
COUNTERMEASURES-AND-ENERGETICS
34
Chemring Group PLC Annual report and accounts 2022
Whilst there is a general trend in defence spending towards modernisation
and new technologies, Chemring continues to maintain a market-leading
position in the addressable air countermeasures market. Demand in the
countermeasures sector over the next five years is primarily being driven
by US and international requirements, coupled with new technologies being
developed in the UK that will be shared across the Group’s businesses.
Sole source positions on several products and platforms in conjunction
with high barriers to entry are evident in the strong current order book.
Three additional countries, Canada, Finland and Germany, have announced
their intent to acquire the F-35 stealth multi-role combat aircraft, a franchise
US defence programme. This aircraft remains a driver of growth in the sector
with US demand still expected to be in excess of 2,400 aircraft, 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, these
programmes will contribute to us maintaining our market-leading position in
the addressable air countermeasures market.
In the UK, Chemring Countermeasures UK (“CCM UK”) has signed a
Strategic Partnering Arrangement (“SPA”) with the Royal Air Force, Defence
Equipment & Support (“DE&S”) and the Defence Science and Technology
Laboratory (“DSTL”), to ensure long-term provision of optimum air platform
protection, including the exploitation of current capabilities and the development
of new technology. This ten-year SPA will provide a framework for development,
allowing CCM UK to provide the best solutions for protection of all UK fast
jet, transport and helicopter platforms fitted with self-defence systems.
Alongside improving continuity of supply and providing the UK MOD with
the highest level of air platform protection to counter threats, this SPA will
underpin the development of the next generation of countermeasures.
As with other EW-related technology fields, the countermeasures sector
must keep pace with the ever-evolving missile capabilities, anticipating
where and how threat systems can be countered. The SPA will also aid
information sharing to facilitate a collaborative approach and encouraging
co-operation such that the right level of capability is available to the front line
at the right time. Where appropriate, it will also allow CCM UK to make such
decoy technology available to a wide range of allies and partner nations,
increasing survivability of aircraft and aircrew.
In the specialist energetic devices and materials businesses our focus remains
on the high value niche areas of the market where market conditions continue
to strengthen as a consequence of increased global tension. 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.
Whilst the outlook for the global defence market is increasingly positive,
with strong growth predicted over the next decade, the customary time-lag
between announcement and budget increases translating into new orders can
be expected as governments take time to reposition and reallocate funding
in response to the changed threat environment.
PERFORMANCE
Order intake in the year was higher at £356m (2021: £255m), driven by
multi-year orders received across the sector.
Chemring Countermeasures USA (“CCM USA”), has been jointly awarded
a US$225m Indefinite Delivery / Indefinite Quantity (“IDIQ”) five-year
framework contract to manufacture MJU-61A/B infra-red countermeasures.
Initial delivery orders of US$38m were received in the year, and all work will
be performed at CCM USA’s new fully-automated manufacturing facility at
Toone, Tennessee.
OUR PURPOSE IN ACTION
STRATEGIC PARTNERING ARRANGEMENT (“SPA”) WITH
THE ROYAL AIR FORCE, DEFENCE EQUIPMENT & SUPPORT
AND THE DEFENCE SCIENCE AND TECHNOLOGY
LABORATORY (“DSTL”)
Chemring Countermeasures UK (“CCM UK”) announced the
signing of a Strategic Partnering Arrangement (“SPA”) with the
Royal Air Force, Defence Equipment & Support and the Defence
Science and Technology Laboratory (“DSTL”) earlier this year.
The SPA ensures the long-term provision of optimum air platform
protection, including exploiting current capabilities and developing
new technology.
CCM UK provides a wide range of countermeasure decoys that
are used extensively by the UK’s armed forces. They routinely
collaborate with the UK MOD to improve the level of protection
achieved and ensure countermeasures keep pace with ever-
evolving missile capabilities.
The ten-year SPA will underpin the development of the next
generation of countermeasures. It will also allow CCM UK to make
such decoy technology available to a wide range of allies and
partner nations, helping save the lives of more aircrew.
LINK TO STRATEGY
1
LINK TO OUR VALUES
INNOVATION
Read more on page 19
Chemring Group PLC Annual report and accounts 2022
35
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FOCUS ON continued
PERFORMANCE continued
CCM USA’s Pennsylvania facility received contracts totalling US$36m to
manufacture MJU-64/B, MJU-66/B and XM219 aircraft decoy flares. CCM UK
received a five-year contract valued at £34m to supply 55mm MTV air
countermeasures to international customers.
Our three niche energetics businesses, which design and manufacture high
precision engineered devices and specialist materials, have also seen strong
customer demand with order intake up 37% to £137m (2021: £100m),
demonstrating the value our customers place on the high-reliability products
provided by Chemring in the critical areas of space, aerospace, defence and
industrial markets.
The impact of the Continuing Resolution in the US, which was not lifted until
mid-March 2022, slowed the process of doing business with government
departments. As a result some Countermeasures & Energetics orders that
were expected in the first half were delayed until the second half of FY22.
We expect this to result in an increase to the weighting of revenue in the
second half of FY23.
The investment in the expansion and automation of our Tennessee facility to
meet the expected demand for airborne countermeasures continued during
the year. Having completed construction work of the buildings in FY21, FY22
saw the commissioning process progress through characterisation and testing
as production gradually ramped up. We expect customer First Article Test
units to be manufactured and shipped to the customer in the first half of FY23.
Revenue for Countermeasures & Energetics was up by 14% to £280.5m
(2021: £246.7m). The sector reported an underlying operating profit of
£48.9m (2021: £40.0m) as underlying operating margin increased to 17.4%
(2021: 16.2%) driven by continued improved operational execution. On a
constant currency basis revenue would have been up 7% to £263.4m and
operating profit would have been up 17% to £46.6m.
The statutory operating profit for the year was £46.8m (2021: £37.9m).
OPPORTUNITIES AND OUTLOOK
The focus for Countermeasures & Energetics remains on safeguarding
and growing the Group’s market-leading positions in niche markets, in
particular on key platforms such as the F-35 as it begins to enter service
in increasing numbers.
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.
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. Our Chicago facility is well
placed to benefit from growth in the space segment. Similarly, demand for
high quality energetic materials 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 2022 was
£497m (2021: £387m). The increase compared to the 2021 year-end closing
order book is largely attributable to the strong order intake across the sector
where customers are increasingly placing multi-year orders. Foreign exchange
has been a tailwind in the year and on a constant currency basis using the
2021 closing exchange rates the order book would be £456m. Of the
31 October 2022 order book, approximately £291m is currently expected to
be delivered in 2023, representing 96% coverage of expected 2023 revenue.
36
Chemring Group PLC Annual report and accounts 2022
OUR PURPOSE IN ACTION
CHEMRING SUPPORTS THE LAUNCH OF
BOEING CST‑100 STARLINER
On 19 May 2022, Boeing launched its passenger spacecraft,
CST-100 Starliner, to the International Space Station (“ISS”).
Starliner is part of NASA’s Commercial Crew Program, an initiative
tasked with developing spacecraft capable of taking NASA
astronauts to and from the ISS. Starliner took off on a United
Launch Alliance Atlas V launch vehicle at 6:54PM ET out of Cape
Canaveral Air Force Station in Florida and docked with the ISS on
20 May at 7:10PM ET.
The Orbital Flight Test (OFT-2) mission was a dress rehearsal
for future manned missions and Chemring was one of the teams
that supported this test flight. Chemring provided various
mission-critical components on the Atlas V, as well as components
for the landing sequence for Starliner’s return home.
The safe return of the Starliner spacecraft helps to prove the
system is ready to fly astronauts. After NASA and Boeing review
processes data from this test flight, teams will continue plans for
Starliner and its next mission, the Crew Flight Test to the
space station.
INTRODUCTION TO SUSTAINABILITY
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 technologies and
products that 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
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.
PROGRESS IN 2022
Chemring’s purpose is to help make the world a safer place and Russia’s
invasion of Ukraine has tragically highlighted the critical role that the defence
and security industry plays in preserving peace, democracy and freedom in
the western world. It has reinforced the argument that for sustainability to
thrive, it requires global stability at its foundations. We are proud of the role
that Chemring plays in providing that stability and are equally focused on
ensuring that we manage and progress our own sustainability agenda, and
in particular our ESG-related risks.
It has been another busy year in which we have built on the good progress
made during FY21.
ESG forms part of our everyday thinking, from how we run our businesses
from day to day, to long-term strategic planning. Climate-related issues, such
as emissions, are now part of every monthly Board report and ESG is a
scheduled Board agenda item every six months. It is also a standing agenda
item for every meeting of the Group’s Executive Committee and forms part
of the monthly reporting cycle of each of our business units.
Across the Group we continue to actively seek ways to reduce our impact on
the environment and build resilience to climate change by focusing on energy,
waste and water, and understanding the impact of global climate change on
our operations. These four focus areas have been identified based on an
overall evaluation of environmental impacts and risks, with a focus on impacts
that we can influence and have consequently influenced financial planning.
We are setting Group milestones, focusing on energy usage to drive further
improvements in this area. Our strategy is to reduce our global GHG emissions
through improving energy efficiency to reduce consumption and by
purchasing electricity from renewable sources.
Many of our Chemring businesses have environmental management systems and
have undertaken local initiatives and programmes to reduce environmental
impacts. To improve energy efficiency for example, improvements have been
made to operations through the installation of new energy efficient buildings
to replace old buildings, upgrading heating, ventilation and air conditioning
(“HVAC”) systems and improving lighting. In 2022 we improved the steam
heat distribution system at our Scotland facility by replacing valves, installing
new steam traps and improving insulation. This has contributed to significant
reductions in natural gas usage and greenhouse gas emissions. In addition, we
replaced ageing HVAC systems at our Pennsylvania facility, reducing electricity
use and associated scope 2 emissions. We have also increased our use of
biodiesel fuels.
In 2021 we committed to becoming carbon neutral for market-based scope 1
and 2 emissions by 2030 and working to be a net zero organisation by 2050.
Against those longer-term targets we set the near-term target of reducing
scope 1 and 2 GHG emissions year-on-year, with this being linked into
remuneration and rewards across all our senior teams. In 2022 we have
made good progress, reducing our overall emissions by 7.3%.
As our disclosure has increased, so has the need to ensure that the data that
we report to the market is accurate. We have now put in place an auditable
framework for our emissions reduction activities, with external subject
matter experts appointed to verify the data and to report to the Group’s
Audit Committee.
A key focus for both the Board and the Group’s Sustainability Committee has
been to ensure that we not only actively manage our sustainability agenda in
order to meet the near and longer-term targets that were set in FY21, but
that we continually look for ways in which we can improve further.
Chemring Group PLC Annual report and accounts 2022
37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INTRODUCTION TO SUSTAINABILITY continued
OUR PURPOSE IN ACTION
STORAGE FACILITY UPGRADE AT CHEMRING NOBEL
Chemring Nobel (CHN) is further improving its sustainability
credentials by investing in a new storage tank facility. The new
facility will meet future government directives and environmental,
health and security compliance. The tank facility will increase the
storage capacity of essential raw materials helping CHN guarantee
supply to customers, and better protect the surrounding
environment from leaks or emissions.
CHN produces and delivers specialist chemicals to customers for
use in a range of performance and manufacturing applications.
During the production of RDX and HMX, acetic acid is made and
recovered. This is an important part of the process, as the acetic
acid is sold to customers, as well as being used as an ingredient in
the production of other chemicals.
The team recovers the acetic acid through several steps of
evaporation and distillation, resulting in pure acetic acid at the end of
the process. The acid recovery area at the CHN facility originally
had 19 storage tanks, in which the acid was kept ready for sale or
use. These storage tanks needed an upgrade and expansion.
The old storage tank area was built in 1968 and expanded in 1985.
In January 2021, the CHN team started a two-year project to
establish a new storage tank capacity.
This £6m investment will increase the amount of acetic acid that
can be stored and bring the tanks in line with new compliance
directives. It will also help to avoid production downtime during
the life of the project and allow the team to consider and
implement new technology and further improvements to the
recovery and storage area.
CHN buys in the chemical compound acetic acid anhydride, which
is then converted into acetic acid in the production of RDX/HMX.
This project will double the storage capacity of both the incoming
acetic acid anhydride and the outgoing acetic acid. This will secure
production, especially during the winter when shipment to and
from Europe can be challenging.
The project, which is due for completion in 2023, also has the
following benefits:
- More automated operations (health and safety benefits).
- A new system for fire detection and firefighting via a foam system
(health and safety and risk prevention/management benefits).
- A system to purify emissions to air (environmental benefits).
- Safe operations for loading and unloading trucks (health and
safety benefits).
- New retaining walls or “bunding” around the storage facility to
better protect the surrounding environment (environmental and
health and safety benefits).
38
Chemring Group PLC Annual report and accounts 2022
PROGRESS IN 2022 CONTINUED
FY22 sees the Group report for the first time under the Task Force on
Climate-related Financial Disclosures (“TCFD”), the details of which can be
found on pages 45 to 49 of this report. In addition, the Group progressed its
commitment to further improve its non-mandatory disclosure by completing
its first CDP submission (formerly the Carbon Disclosure Project) at the end
of July 2022. By translating the TCFD recommendations and pillars into actual
disclosure questions and a standardised annual format, CDP provides investors
and disclosers with a unique platform where the TCFD Framework can be
brought into real-world practice in a comparable and consistent way.
In addition to our environmental activity, this year has seen us progress our
activities around DE&I and employee wellbeing.
Chemring is committed to ensuring that we are able to attract and develop an
appropriately diverse workforce. Our programme of education for all senior
leaders continued in the first half of FY22 and was complemented by a suite
of DE&I training modules which form part of all development programmes
from Early Careers to Senior Leadership Team development. With a specific
focus on gender diversity, the global Women at Chemring Committee has
been established to encourage local women’s networks in each business unit,
alongside delivering a global day for Women at Chemring in the second half
of the year.
The Board has played an active role in supporting our DE&I activity with
Board members taking part in various employee round-table discussions
and networking events. Laurie Bowen, as the non-executive director with
responsibility for employee engagement on behalf of the Board and as Chair
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 Energetic Devices, as well as at Chemring Countermeasures
USA’s facility in Tennessee. The groups Laurie met were overwhelmingly
positive about their experiences of working at Chemring and pointed to many
examples of support from the Group. 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.
Our ESG 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 remain fully committed to building a sustainable company of which all our stakeholders can be proud, both now and in the future.
OUR SUSTAINABILITY GOALS
UN SDG Sustainability objectives
ENVIRONMENTAL
Respecting and protecting
our planet by actively seeking
ways to reduce our
environmental impact.
- 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 42 to 49
- 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
SOCIAL
The safety, wellbeing and
development of our people is
at the heart of our business.
- Maintain the highest standards of safety and the
- We will set a total recordable injury
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
frequency rate limit of below 1
in line with upper quartile
benchmark performance
- We will continue to reduce the risk
of high-hazard events
- Implement effective policies and procedures and
- We will increase the proportion
Health and safety on
pages 40 to 41
Our people on
pages 50 to 56
GOVERNANCE
Conducting business in
an ethical and responsible
manner at all times.
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
- 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
of women in all senior management
positions across the business to 33%
by 2027
- Chemring will target 40% female
representation on the Board
- 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
Ethics and business
conduct on pages 57
to 58
Goal
Aim
Ensure healthy lives and promote wellbeing
for all at all ages
Goal
Aim
Reduce inequality within and among countries
CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022
CONTINUING TO INNOVATE,
PROTECT AND GROW
Achieve gender equality and empower
all women and girls
Ensure sustainable consumption and
production patterns
Ensure access to affordable, reliable,
sustainable and modern energy for all
Take urgent action to combat climate change
and its impacts
Promote sustained, inclusive and sustainable
economic growth, full and productive
employment and decent work for all
Promote peaceful and inclusive societies for
sustainable development, provide access to
justice for all and build effective, accountable and
inclusive institutions at all levels
READ MORE IN OUR
SUSTAINABILITY REPORT:
CHEMRING.COM/
SUSTAINABILITY
Chemring Group PLC Annual report and accounts 2022
39
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
HEALTH AND SAFETY
ESTABLISHING A STRONG HEALTH
AND SAFETY CULTURE
Our goal is zero harm, not as a statistical target but
as a moral imperative, which will be achieved by
establishing a strong proactive safety culture.
POLICIES AND PRACTICES
The Board recognises that the highest levels of safety are required in order to
protect employees, product users and the general public. The Board believes
that all incidents and injuries are preventable, and that all employees have the
right to expect to return home safely at the end of every working day. The
Group Chief Executive has overall responsibility for health, safety and
environmental (“HSE”) matters across the Group.
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 our 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 limits 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 implementation,
management and ongoing compliance of health and safety within their
business, and for providing adequate resources to satisfy the Board’s
requirements. All managing directors have health, safety and environmental
related objectives incorporated within their annual incentive plan.
Managers and supervisors in the Group’s businesses are required to ensure
compliance with 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 all 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 collaboration at all levels resulting in the sharing of 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 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.”
40
Chemring Group PLC Annual report and accounts 2022
ACHIEVEMENTS
2022 has continued to be a challenging year as we maintained a safe CV-19
environment despite the pandemic. As a result of the restrictions associated
with CV-19, the Management of Change Process was used effectively to
ensure safe and continued operations aligned with in-country requirements.
Whilst this created a need for continued focus, we have been able to progress
our HSE strategy – Journey to Zero Harm, further consolidating the
processes implemented last year:
- control of major accident hazards;
- injury reduction; and
- HSE risk management.
Actions taken in delivering the HSE plan included:
- continued roll-out of the asset integrity management system;
- design and implementation of the electrostatic discharge protocols; and
- deployment of the Spot it, Stop it, Share it campaign.
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?
This year saw the fourth iteration of that review process, with an increase
in the number of hazard scenarios being identified as the rigour of process
hazard analysis matured. As a result of this maturing process, we continue
to develop an understanding of our residual risks and throughout the year
have taken further steps to reduce these to a level as low as is reasonably
practicable. To help reduce our residual risks the implementation of a
common computerised maintenance management system has begun across
selected businesses, improving management and accountability for safety
critical assets.
Towards the end of last year, we established the Technical Safety Committee
with the purpose of sharing best practices and advice on the development of
new standards and guidance. This year the Committee has become more
established, providing the focal point for the delivery of the electrostatic
discharge protocols and oversight regarding the asset integrity management
system deployment.
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 consolidated 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. This data has established trends regarding musculoskeletal
disorders due to the manual handling nature of some of our processes,
together with cuts to fingers and hands. The relevant businesses have
developed plans to reduce the risk of injuries and it is hoped that this will be
reflected in future reporting.
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 supported by the
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. The changes made last year to our Operational Assurance
Statement process has helped the businesses focus on compliance with the
HSE Framework which in turn provides useful insights when planning the
Line of Defence 2 (“LOD2”) audits.
OUR HSE PERFORMANCE
We measure our HSE performance to reflect both occupational and process
safety. In doing so we have several data points, one of which is an external
review of our prevailing safety culture. This year we invited back a team of
experts to review our progress since their previous reviews back in 2018
and 2019. The review has highlighted good progress as we journey towards
becoming a high reliability organisation. In particular the review confirmed
our businesses as approaching a Group-wide calculative status, with robust
processes and systems generating data and signals around our high-hazard
operations. The level of collaboration has also increased, with many
businesses sharing best practice on a regular basis to help accelerate our
performance, all of which is supported by a positive tone from the top and
underpinned by risk-informed, visible and proactive safety leadership.
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 2,828
occupational safety near miss and hazard reports, compared to 2,602 in
2021, We had a total of 13 high-potential (“HIPO”) incidents compared
to 9 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
In addition to our reactive metrics we also measure process safety near miss
events, with a total of 880 recorded in 2022 compared to 625 in the previous
year. Near miss reporting is crucial if we are to understand and prevent
incidents which is why we encourage all our employees to stop, warn and
inform so we can manage any emerging risks. The increase in near miss
reporting represents good progress as an organisation willing to learn and
improve on a continuous basis. During 2021 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 limit of below 2 PSE at level 2 and 3 per 100 production employees,
and this year we achieved 1.86.
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
continue to focus on:
- asset integrity and process safety – relating to the control of major accident
hazards and PSE events including a review of all electrostatic discharge 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.
Chemring Group PLC Annual report and accounts 2022
41
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
In 2022 we installed new HVAC systems at our Pennsylvania facility and
reduced natural gas usage at our Scotland site.
CLIMATE CHANGE RESILIENCE
We recognise that climate change has the potential to have an impact on our
operations, having experienced flooding from a severe weather event at our
Tennessee facility in 2018 and wildfires in areas surrounding our Australia
operations in 2019. We have begun to review the physical and transition risks
of global climate change on our operations and supply chain.
ENERGY USE AND ASSOCIATED GHG EMISSIONS
Our Countermeasures & Energetics businesses in Norway and Scotland are
responsible for 38.8% and 24.4%, respectively, of Group energy usage. This is
followed by our business in Tennessee, which accounted for 18.9% of annual
energy consumption. In 2022 we developed our updated carbon reduction
plans in all of our businesses. Our UK operations account for 74.5% of
our scope 1 emissions, 16.4% of our scope 2 emissions and 33.6% of our
energy use.
In 2022 we have achieved a 7.3% reduction in market-based scope 1 and scope
2 carbon emissions, from 20,684 tCO2e in 2021 to 19,175 tCO2e in 2022.
Location-based emissions increased by 1.4% during the year. When normalised
for gross revenue, market-based scope 1 and 2 emissions reduced 17.7%, from
52.6 to 43.3 tCO2e per £m of revenue.
We made significant improvements in our market-based carbon emissions.
Reductions have been achieved across the businesses through initiatives such
as the use of biofuels at our Roke and Salisbury sites; improved efficiency and
maintenance of our steam systems in Scotland; and the use of renewable
energy in Australia. We also acquired and retired Renewable Energy
Certificates (“RECs”) for some of our US electricity consumption.
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
In 2021 we committed to reduce our total direct and indirect greenhouse gas
(“GHG”) emissions year-on-year and to be carbon neutral by 2030. In this
report we include information on our climate-related risks and opportunities
in alignment with the recommendations of the Task Force on Climate-related
Financial Disclosures (“TCFD”). We have made good progress on our goals,
with a 7.3% reduction in scope 1 and market-based scope 2 emissions from
our 2021 baseline. We also have identified a path to become carbon neutral
by 2030. In 2022 we published our first CDP report and we have begun to
collect and report selected scope 3 carbon emission data. This work is
overseen by our Sustainability Committee with regular progress reports to
the Board.
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 under our operational control.
Our GHG emissions calculations are undertaken in accordance with the GHG
Protocol Corporate Accounting and Reporting Standard. We are reporting
2021 and 2022 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 2022 we began using a new data
collection and dashboard reporting system.
42
Chemring Group PLC Annual report and accounts 2022
2022
US,
Norway,
Australia
UK
Group
total
UK
Scope 1 emissions
Combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the Group
CO2e (tonnes)
Gas
Heating oil
Bio fuels
LPG
4,901
1,000
1
39
460
388
—
239
5,361
1,388
1
278
Fuels consumed by Group-owned and leased vehicles, excluding business travel and employee commuting
CO2e (tonnes)
Diesel
Petroleum
LPG
78
216
25
95
—
—
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
Total emissions CO2e (tonnes)
Electricity – location-based
Electricity – market-based
Total scope 1 and 2 emissions
Location-based CO2e (tonnes)
Market-based CO2e (tonnes)
Total energy consumption (Mwh)
26
25
6,087
2,426
—
8,513
6,087
44,361
160
518
2,084
12,372
11,004
14,456
13,088
87,478
173
216
25
186
543
8,171
14,798
11,004
22,969
19,175
131,839
2021
US,
Norway,
Australia
504
96
—
249
97
77
19
147
488
1,677
10,889
12,013
12,566
13,690
81,689
Group
total
5,807
1,571
—
278
190
77
19
168
561
8,671
13,975
12,013
22,646
20,684
130,062
5,303
1,475
—
29
93
—
—
21
73
6,994
3,086
—
10,080
6,994
48,373
We engaged ERM CVS to provide independent assurance of our 2021 and 2022 total scope 1 and total scope 2 location-based emissions figures as well as total scope 2 market-based
emissions figures. Their Independent Assurance Statement can be found on page 12 of our Sustainability Report 2022. The basis of reporting document can be found on the Group’s
website at www.chemring.com/basisofreporting.
Total scope 1 and scope 2 emissions CO2e (tonnes) – location-based
Total scope 1 and scope 2 emissions CO2e (tonnes) – market-based
Group revenue (£m)
Total CO2e (tonnes) per £m of revenue (location-based)
Total CO2e (tonnes) per £m of revenue (market-based)
2022
22,969
19,175
442.8
51.8
43.3
2021
22,646
20,684
393.3
57.6
52.6
SCOPE 3 CARBON DATA COLLECTION
In 2022 we initiated the collection of a limited set of scope 3 carbon data. Details of this can be found on page 10 of our Sustainability Report 2022.
Chemring Group PLC Annual report and accounts 2022
43
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ENVIRONMENT continued
WATER CONSUMPTION
In 2022 we used a total of 943,769 m3 of freshwater. There was a considerable drop in usage from 2021 (1,220,000 m3) due to reduced water usage in Scotland.
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
2022
US,
Norway,
Australia
UK
Group
total
UK
2021
US,
Norway,
Australia
Group
total
437,274
506,495
943,769
668,000
552,000
1,220,000
WASTE GENERATION
In 2022 we introduced a new reporting system for waste which allow tracking of waste destinations.
Our hazardous waste reporting increased from 2021 due to inclusion of a recycled waste that was not included in previous reports. This accounts for the
significant rise in recycled hazardous waste reported (1,361 tonnes from 33 tonnes). In 2022 our total hazardous and non-hazardous waste was 1,914 and 2,103
tonnes respectively. Of this, 71% of hazardous and 57% of non-hazardous waste was recycled.
Waste (tonnes)
Recycled, non-hazardous
Recycled, hazardous
Not recycled, non-hazardous
Not recycled, hazardous
Total waste (tonnes)
2022
US,
Norway,
Australia
1,064
1,302
739
517
3,622
UK
129
59
172
36
396
Group
total
1,193
1,361
911
553
4,018
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
At our Countermeasures & Energetics businesses we generate unique waste
which is often best managed by destroying it at on-site treatment facilities. In
2022, we continued 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 2022 we also incurred costs in connection with environmental remediation
on the sites of the munitions businesses formerly owned by the Group in
Belgium and Italy in accordance with the terms of sale of those businesses.
The Group carries a £3.9m (2021: £3.0m) provision in respect of environmental
liabilities, which the Board considers to be adequate (see note 22).
44
Chemring Group PLC Annual report and accounts 2022
TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT
The Task Force on Climate-related Financial
Disclosures (“TCFD”) establishes a number of
recommendations for disclosing clear, comparable
and consistent information about the risks and
opportunities presented by climate change.
The Board notes the recommendations in relation to the mandatory
disclosures of climate-related financial risk arising from Listing Rule 9.8.6(8)
and has concluded that the business strategy remains resilient given the
mitigations already implemented and planned.
We consider our disclosure to be consistent with all the TCFD Recommendations
and Recommended Disclosures including section C of the TCFD Annex
entitled “Guidance for all Sectors” excluding full completeness of scope 3
emissions for which we continue to embed the relevant capabilities across
the organisation to track and disclose this data. In 2023, we will focus on
developing our reporting to enable future disclosure.
Our statement to meet these requirements, providing information on the
governance of climate-related issues, integration with overall risk management,
strategy in managing climate-related issues and opportunities, and the metrics
to measure progress towards our targets, is set out in the following pages.
GOVERNANCE
BOARD OVERSIGHT OF
CLIMATE-RELATED RISKS
AND OPPORTUNITIES
MANAGEMENT’S ROLE
IN ASSESSING AND
MANAGING CLIMATE-
RELATED RISKS AND
OPPORTUNITIES
The Board is responsible for overseeing climate-related risks and opportunities in delivering the Group’s strategy and
running the Group’s operations. The Group Chief Executive is the Board director responsible for sustainability across
the Group which includes climate-related risks and opportunities. The Board reviews the Group Risk Register as a
scheduled agenda item every six months in which both physical and transitional climate-related-risks alongside
opportunities are considered.
The Board is informed of progress against the Group’s carbon reduction targets implemented in 2021. Associated
action plans, capital expenditure and budgeting related to targets are overseen and reviewed by the Board.
To facilitate and ensure a centralised approach to sustainability across all our businesses, the Group Sustainability
Committee (consisting of members of the Group’s Executive Committee) was formed during 2021. The Committee
is chaired by the Group Chief Executive and has oversight of all the Group’s ESG-related activity including that of
assessing and managing climate-related risks and opportunities.
The Group Chief Executive, informed by the Sustainability Committee, is responsible for ensuring that the Board is
updated quarterly on all key matters including the impact of climate-related issues. Members of the Committee are
informed through their respective departments on matters relevant to climate-related issues.
Executive directors and members of the senior leadership team within the Group are incentivised to achieve the
Group’s carbon reduction targets through their annual bonus and long-term incentive plan (Performance Share Plan
(“PSP”)) as detailed on pages 96 to 119.
STRATEGY
CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED OVER THE SHORT, MEDIUM AND LONG TERM
THE IMPACT OF CLIMATE-
RELATED RISKS AND
OPPORTUNITIES ON
CHEMRING’S BUSINESSES,
STRATEGY AND
FINANCIAL PLANNING
The risks and opportunities associated with climate are reflected in our strategy and plans, and we strive for
continuous improvement to reflect our purpose, our growth strategy, the external landscape and the expectations
of our stakeholders. Climate risks and opportunities covering both physical and transitional aspects of climate change,
were considered during the year. Associated time horizons associated were viewed as short-term (0 to 2 years),
medium-term (2 to 5 years), or long-term (5 to 30 years). The basis for the time horizons was to align with our
internal strategic and financial planning processes. Short-term being the immediate budget period, medium-term
covering the remaining detailed financial planning period and long-term being outside of these periods. From this, the
key risks and opportunities that could have a material financial impact on the organisation have been identified. Where
material, the Group is committed to managing regulatory, reputational and market risk related to climate change.
Details of the principal risks and uncertainties which could have a material impact on the Group’s business model,
strategy, future performance or reputation, of which climate change has been identified as a risk, are covered in the
risk management section on pages 64 to 73. Climate-related risks and opportunities are outlined in more detail on
pages 46 to 49.
1. IEA (2021), World Energy Model, IEA, Paris https://www.iea.org/reports/world-energy-model.
Chemring Group PLC Annual report and accounts 2022
45
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued
STRATEGY
CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED OVER THE SHORT, MEDIUM AND LONG TERM
THE RESILIENCE OF
CHEMRING’S STRATEGY,
TAKING INTO
CONSIDERATION
DIFFERENT CLIMATE-
RELATED SCENARIOS,
INCLUDING A 2°C OR
LOWER SCENARIO
In 2021/22 the Group began to develop its climate-related scenario analysis to improve understanding of the
behaviour of certain risks given different climate outcomes. We have utilised three public climate-related scenarios
which we deem to be reliable and related to our business operations to aid our understanding of the business
resilience to climate change. We will revisit these scenario analyses to ensure these remain appropriate. The scenarios
are as follows:
- Sustainable Development (SDS)1 outlining a global low carbon transition which limits the global temperatures rise
to 1.65 °C by 2100, with 50% probability;
- Stated Policies (STEPS)1 outlining a combination of physical and transitions risk impacts as temperatures rise
by 2.6°C by 2100, with 50% probability; and
- RCP 8.52 an extreme physical risk scenario, where global temperatures rise between 4.1-4.8°C by 2100.
Scenarios have been supplemented with additional sources that are specific to each risk to inform assumptions
included in projections. The Group continues to refine its approach to quantitative aspects of this modelling and
will report further information as this develops.
Assumptions have been made as part of this scenario analysis:
- Chemring will have the same business activities that are in place today. That means impacts should be considered
in the context of the current financial performance, prices and operational locations.
- Impacts are assumed to occur without the company responding with any mitigation actions, which would reduce
the impact of risks.
- The analysis considered each risk and scenario in isolation, when in practice they may occur in parallel as part
of wider set of potential global impacts.
- Carbon pricing was informed by the Global Energy Outlook 2021 report from the International Energy Agency (“IEA”).
Results of the scenario analysis are outlined on pages 48 to 49.
2. I PCC, 2014: Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.
46
Chemring Group PLC Annual report and accounts 2022
RISK MANAGEMENT
ALL BUSINESS UNITS ARE REQUIRED TO ASSESS RISK IN RELATION TO THE DELIVERY OF THEIR STRATEGY AND OBJECTIVES,
WITH CLIMATE-RELATED RISKS FORMING PART OF THIS CONSIDERATION
CHEMRING’S PROCESSES
FOR IDENTIFYING AND
ASSESSING CLIMATE-
RELATED RISKS
Current and emerging climate-related risks and opportunities are considered, whether they arise within the Group’s
operations or within the value chain, including existing and emerging regulations. In 2021/22, climate risks and
opportunities relevant to the Group were identified and reviewed with the aid of external consultants, and refined
through consultation with key Chemring personnel, including members of the Sustainability Committee, Risk
Management Committee and the Board. Risks and opportunities were assessed in line with the Group’s methodology
to assess principal risks. A probability and impact matrix defines the likelihood of the risk, assessed based on historical
evidence or experience that such consequences have materialised (Very Unlikely, Unlikely, Neutral, Likely, Very Likely).
The magnitude of impact is also classified (Low, Low-Medium, Medium, Medium-High, High) and, where possible, a
single figure estimate for the financial impact was calculated.
CHEMRING’S PROCESSES
FOR MANAGING
CLIMATE-RELATED RISKS
Once each climate-related risk and opportunity was identified, the Group sought to quantify the financial impact,
appropriate strategic response, and the cost of implementing the mitigations. This process includes considering the
long-term impacts arising from the risks identified on our products and services. This in turn helped to determine the
materiality, allowing the Group to prioritise resources to manage its most significant climate-related impacts,
determine the best management response or highlight areas requiring further investigation. All of the Group’s climate
change risks and opportunities are covered by existing or planned mitigation and adaptation strategies.
PROCESSES FOR
IDENTIFYING, ASSESSING,
AND MANAGING
CLIMATE-RELATED RISKS
INTEGRATED INTO
CHEMRING’S OVERALL
RISK MANAGEMENT
Climate is considered as a Group principal risk alongside the risks identified in the wider risk management process.
This ensures climate-related risks are integrated into the Group’s overall enterprise risk management framework.
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 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 completed climate-related
risk and opportunity register was reviewed by the Board during the financial year.
METRICS AND TARGETS
METRICS USED TO ASSESS CLIMATE-RELATED RISKS AND OPPORTUNITIES IN-LINE WITH CHEMRING’S STRATEGY
AND RISK MANAGEMENT PROCESS WITH CLIMATE-RELATED RISKS FORMING PART OF THIS CONSIDERATION
SCOPE 1, 2 AND, IF
APPROPRIATE, 3 GHG
EMISSIONS AND THE
RELATED RISKS
CHEMRING’S TARGETS
FOR MANAGING
CLIMATE-RELATED RISKS
AND OPPORTUNITIES
AND PERFORMANCE
AGAINST TARGETS
Chemring monitors scope 1 and 2 emissions with aspects of scope 3 disclosed on page 43. The Group also discloses
other environmental metrics such as freshwater use and waste generated, as reported on page 44. For the current
year disclosure of scope 3 emissions, please refer to page 10 of the Sustainability Report 2022.
A crucial first step in Chemring’s approach to addressing climate-related risks and opportunities in FY21, Chemring
set appropriate near and longer-term sustainability goals, with targets against which our progress could be measured.
These included but were not limited to reducing our direct (scope 1) and indirect (scope 2) emissions year-on-year,
to be carbon neutral by 2030 (scope 1 and 2) and to be net zero by 2050.
Emissions targets for the Group are outlined on page 42.
Chemring Group PLC Annual report and accounts 2022
47
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued
CLIMATE-RELATED RISKS
Risk
Type
Area
Primary potential financial
impact
Time horizon
Likelihood
Magnitude of impact
Wildfires
Physical
Own operations
Lost revenue
Short-term
Likely
Low
WILDFIRES
Severe weather events
Physical
Own operations
Lost revenue
Short-term
Likely
Low-Medium
Technology
Transition
Own operations/downstream
Higher expenditure
Medium/Long-term
Unlikely
Low
IMPACT ON THE
BUSINESS AND
STRATEGY
Climate change poses an increased risk to the likelihood and severity of grass fires, which have the potential to disrupt
production and product delivery due to physical damage to surrounding infrastructure and Chemring facilities, as well as
creating additional costs of remediation. Wild grass fires that occurred in 2019 on one of the business sites in Victoria,
Australia, which, although did not impact operations, highlighted this threat.
Current mitigations have already been deployed in the form of cutting back grassland close to operations and ensuring local
mitigations in place for activities such as planned burns.
Using analysis conducted for the risk assessment of wildfires in Australia (the area in which the likelihood for the risk
is highest), differences in scenarios were analysed to understand the change in land annually exposed to wildfires in Victoria.
Looking at the worst-case climate change scenario (RCP 8.5), the median shifts by ~0.1% to the SDS scenario. The minimal
impacts from this risk are highlighted within the Australia region in the physical risks table (Table 1).
SEVERE WEATHER EVENTS
Extreme weather events resulting from cyclones and storms are exacerbated by climate change, having the potential to impact
the Group’s operations. Physical damage to Chemring facilities and surrounding infrastructure could result in disruption to
production and product delivery, and impact overall revenue. The Tennessee and Charlotte sites are located in areas with
exposure to tropical storms. For example, in 2018, a severe weather event caused partial flooding at the Tennessee facility.
As a consequence, drainage improvements have been made, with further mitigations planned to reduce the impact of potential
flooding events in the future.
In looking at future scenarios, the physical risk of severe weather events remained localised to sites within the US, particularly
Tennessee. Even in the RCP 8.5 scenario, the risk of expected damage from river flooding projected out to 2050 remains similar
to scenario SDS. This is also summarised within Table 1.
TECHNOLOGY
Climate-related requirements are changing in key customer procurement contracts, which presents a risk that the Group’s
costs could increase in order to comply. This would influence expenditure along with other potential impacts including loss
of contracts and disposal or write-off of legacy/stranded assets.
In response to this risk, Chemring maintains continual assessment of government priorities in terms of technology roadmaps
and procurement requirements as necessary. Additionally, close relationships with customers are maintained to facilitate
effective risk management and long-term planning.
Under the scenario (SDS), the Ministry of Defence has outlined its approach to climate change and sustainability strategy.
At present we do not expect this to affect the Group given the low amount of carbon emitted in the use phase of products.
Future procurement decisions may focus on the sustainability of a supplier’s business operations, for which Chemring has a
roadmap towards becoming a net zero organisation by 2050.
TABLE 1 – OVERALL PHYSICAL RISK IMPACTS SPLIT BY GEOGRAPHIC REGION
AND SCENARIO ANALYSED (STEPS EXCLUDED DUE TO DATA LIMITATIONS)
Scenario
SDS
RCP 8.5
Site location
Australia
Europe
l
l
l
l
UK
l
l
North America
l
l
l Low impact
l Medium impact
l High impact
48
Chemring Group PLC Annual report and accounts 2022
CLIMATE-RELATED OPPORTUNITIES
Opportunity
More efficient production
Sourcing low-emission energy
Supply chain resilience
Type
Area
Primary potential financial
impact
Time horizon
Likelihood
Magnitude of impact
Resource efficiency
Own operations
Reduced costs
Short-term
Likely
Low
Energy source
Own operations
Reduced costs
Resilience
Own operations/upstream
Reduced costs of input goods and
input transportation
Short to Medium-term
Short to Medium-term
Very likely
Low
Very likely
Low-Medium
MORE EFFICIENT PRODUCTION
Improving energy efficiency through initiatives such as upgrading building facilities, and LED lighting retrofits has the benefit of
saving on direct energy costs. Plans for future initiatives are in place with planned financial savings.
This opportunity is largely unaffected by external changing policy scenarios, as future initiatives are already in place with planned
financial savings.
SOURCING LOW-EMISSION ENERGY
Increased renewable energy availability and improvements to technology are leading to renewable energy becoming
increasingly inexpensive. Chemring will benefit from de-linking energy costs to fossil fuel prices through the procurement
of renewable energy for its sites. In addition, this will reduce the Group’s exposure to GHG emissions and therefore lower
sensitivity to changes in the cost of carbon.
The carbon price (US$/tCO2e) is projected to increase as follows:
IMPACT ON THE
BUSINESS AND
STRATEGY
Scenario
STEPS
SDS
Difference
2030
65
120
85%
2040
75
170
127%
2050
90
200
122%
There is an opportunity to benefit from the avoided emissions of sourcing energy from fossil fuel based providers.
Future scenarios that drive up fossil fuel prices such as the phase out of subsidies (SDS) and incentives for clean energy
transitions such as those under the European Green Deal (STEPS) provide further impetus for procuring energy from more
renewable sources.
SUPPLY CHAIN RESILIENCE
Chemring has identified opportunities to improve resilience in the supply chain, including from the physical impact of climate
change by understanding supplier risks and developing redundancy. Some suppliers within the supply chain are sole
suppliers, which requires an understanding of their potential risks and the implementation of mitigations to minimise any
supply disruptions.
Under the worst case scenario RCP 8.5, physical risks of climate change may increase for some suppliers depending on their
geographic location and current risk to extreme weather events. As a further supply chain investigations are developed,
location-based data for sole suppliers will be available and can inform the climate-related risk scenario analysis.
Chemring Group PLC Annual report and accounts 2022
49
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PEOPLE
INVESTING IN OUR PEOPLE
Chemring people are at the heart of our business.
We invest in our people at all levels across every
location and function, creating strong foundations
for our future success.
CULTURE
OUR OVERALL PEOPLE
APPROACH IS FOCUSED ON
FIVE KEY AREAS:
UNDERSTANDING
OUR POPULATION
ENGAGING WITH
OUR PEOPLE
DEVELOPING
AT CHEMRING
DIVERSITY AND
INCLUSION AT
CHEMRING
CHEMRING IN THE
COMMUNITY
CHEMRING CULTURE
Our people approach is underpinned by our culture. 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. Our goal continues to be 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.
The Chemring cultural framework has four pillars and these provide
the structure around which all our actions are set and measured.
These pillars are:
CUSTOMER
CENTRICITY
LEADERSHIP
THE
EMPLOYEE
EXPERIENCE
DIVERSITY,
EQUITY AND
INCLUSION
In 2022 we continued to build on the progress made since 2019. Using a
well-practised blend of global direction and structure, delivered locally
through individual business units, we continue to support our Chemring
colleagues in their mission to do their best work every day.
Since the initial culture review, every part of the business has developed
actions to support progress in each area. Progress each year builds on the
work done previously, as well as putting in place new activity to support
the cultural journey.
The ESG agenda is now well embedded across the business and leadership
support has ensured that the work around the environment, diversity, good
governance and continuous improvement has become a key part of the
culture at Chemring.
During 2022 the HSE teams have worked closely with the people teams
as part of the ongoing work around the safety culture at Chemring.
Our overall culture and our approach to safety are closely linked and
mutual support is key to continuing progress in both areas.
50
Chemring Group PLC Annual report and accounts 2022
We have further embedded our approach to providing development
opportunities at all key career levels – Early Careers, First Line Managers,
Experienced Managers and Senior Leadership Teams – and extended this
to include education, awareness and action planning around diversity and
inclusion appropriate for each level.
With the restrictions of the pandemic easing throughout the year in all
geographies, the focus has been on bringing colleagues back together and
resetting ways of working. Local employee forums have been revitalised
with groups coming together to restart discussions around the experience
of working at Chemring. Hybrid working principles have now been adopted
as appropriate for each part of the business, providing further flexibility
to complete work where it makes most sense to do so. Community and
recognition events, such as charity fundraising, working with veterans’
organisations and the return of social events for colleagues, have provided
further opportunities for in-person interaction and this supports the
development and reinforcement of the Chemring culture.
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 real-time bespoke sentiment
tracking tool creates dashboards of participation and positivity based on the
four cultural pillars. Business unit leaders review these regularly and share
progress with colleagues at all levels through multiple channels.
Wellbeing continued to be a key theme in 2022. In line with the approach
of Global Voice, Local Accent, a global committee focusing on creating and
maintaining a healthy workplace, which was established in 2021, continued
to meet throughout 2022. Many business units have established Wellbeing
Teams locally to focus on areas of local interest and importance, and to
deliver activities and support to promote wellbeing on site.
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. Our strategy is to build this
focus in the early stages of our talent pipelines to ensure these topics become
“business as usual” as colleagues move through the organisation.
TOTAL POPULATION
2022
29%
2021
29%
P71+
Female71+
Male
71%
71%
Mental health first aid training has continued across all business units in 2022,
with some business units also providing specific mental health training on site
throughout the year.
Support through the provision of occupational health services on demand in
each location has been used extensively in 2022. Additionally, the provision
of Employee Assistance Programmes, which have been in place for a number
of years, has been refreshed in 2022, with additional communication and
provision of support to colleagues and managers.
UNDERSTANDING OUR POPULATION
Our Chemring business is highly diverse. Our success depends on
understanding our global population. During 2021 a full review of all
in-place HR technology revealed significant differences in level of provision
and importantly in the ability to derive data to understand the population.
In 2022 these insights were developed and an approach agreed which will
move towards a more consistent systematic approach to managing employee
information. In the US, the people team have commenced work to implement
a single vendor solution for end to end employee lifecycle support using an
existing supplier as the start point. A similar programme will commence for
the UK businesses in 2023.
DEVELOPING OUR PEOPLE
LISTENING TO OUR PEOPLE
>2,300
colleagues with regular access
to bespoke Employee Voice
pulse survey
40%
regular response rate of
participants in Employee Voice
>75%
positivity score
>5,000
individual comments
>90
graduates and apprentices
hired in the year
120
graduates and apprentices took
part in UK wide Early Careers
Development Programme
and Conference
>340
line managers and supervisors
involved in global Leading our
People programme
80
experienced managers enrolled
on Aspire@Chemring, our first
fully virtual management
development programme
80
senior leaders took part in
quarterly development sessions
as individual senior leadership
teams as part of the Leading our
Organisation initiative, including
DE&I training and safety
development
Chemring Group PLC Annual report and accounts 2022
51
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS29
+
+
29
+
+
P
OUR PEOPLE continued
UNDERSTANDING OUR POPULATION CONTINUED
The adoption of modern HR technology will support our ability to attract,
recruit, on-board and then manage and develop colleagues, as well as reducing
the risk around key activities such as payroll processing. The ability to report
both key static metrics, as well as to interrogate process metrics such as
movements through the organisation, impact of development and pay
progression, will provide the opportunity to leverage further our key asset
– our people.
Our investment in 2019 in the Employee Voice sentiment monitoring
tool means that we are able, in real time, to create an approach of “You said,
we did”. The launch of the Experienced Manager Development Programme in
2022 was in response to both a recognised gap in the development approach
as well as addressing comments raised through the Employee Voice tool.
Similarly, the ongoing focus on Performance Conversations supports requests
from colleagues for regular feedback from their managers. Continuing
improvements in internal communications – such as the programme to put TV
screens across all locations to enable real-time communications to those who
are not able to access email at work – are also in direct response to feedback
from the Employee Voice statements.
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 session encouraging anyone from
across the business to ask a question, as well as regular distribution of the
Chemring magazine, Chemring-i. As pandemic restrictions eased, every
business unit has taken the opportunity to bring colleagues together face to
face for a range of different activities and events – from development, lunch
and learn sessions, fundraisers to community activity.
The recruitment challenge being felt globally has also focused attention in all
businesses. A wide range of colleagues have been involved in supporting
activity to both ensure retention – through communication of the benefits of
working at Chemring, sharing more widely information and updates on
products and customer activities – and to generate new hires. Activities such
as in-person careers events held in local communities, through veterans’
associations and direct through the business units, have created the
opportunity to remind colleagues of what a great place Chemring is to work,
as well as providing much-needed colleague interaction after the past two
years of limited contact.
Despite the challenges of the pandemic, our colleagues remain positive about
working at Chemring. Across 2022 49% of colleagues regularly provided
feedback via the Employee Voice tool through reacting to statements or
providing written feedback. 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 Chair of the Remuneration Committee and
non-executive director charged with employee engagement on behalf of the
Board, met again with groups of colleagues to hear direct from them their
views on working at Chemring as well as sharing the work of the Board.
Laurie visited multiple locations across the UK and US and hosted eight
feedback groups across three different business areas and at different levels of
the organisation from our front line colleagues through to senior leaders.
Feedback from these sessions covered a variety of topics on the minds of our
employees, such as how inflation is impacting the cost of living through to
how our values of Safety, Excellence and Innovation are lived and breathed in
our businesses. Leadership and Communication were specifically raised as
areas where improvements have been made and employee ideas were shared
on how we could further improve.
52
Chemring Group PLC Annual report and accounts 2022
This feedback was shared with our local leadership teams at those locations
to allow them to respond and take action. Employee feedback remains a
key channel for insights into how we can shape Chemring’s employee
engagement priorities.
In 2022 we continued to ensure that all colleagues were able to share in our
corporate success. Discretionary bonus schemes are now in place at all levels
in our organisation for colleagues working in every business area. These
schemes, which are tailored to suit local business requirements and focus,
provide bonus awards quarterly, half yearly or annually tied to the
performance of the individual business unit and ensure our colleagues feel
that they are contributing to the overall success of their business.
Development is at the heart of the people strategy at Chemring. It is essential
in ensuring we have the capabilities today and in the future to appropriately
support the business. This development also underpins our retention and
attraction capability with current colleagues and future candidates becoming
increasingly demanding of the organisation and the investment in their future.
There were some significant additions to the development framework
in 2022, meaning that Chemring now has a fully formed development
framework taking colleagues from their Early Careers as graduates or
apprentices and providing development at key career milestones in
support of both technical and leadership capability.
Highlights of our development approach are:
- A UK-based Early Careers Development Programme which commenced
in 2022 for all new graduates and apprentices who joined in autumn 2021
in the UK, providing early leadership and people skills development and
the opportunity for building a cross business network. This is complemented
by technical development provided within each business unit specific to the
role colleagues have been brought in to learn.
- Continued development of the Leading our People programme for all line
managers globally in support of developing Chemring leadership bench
strength. The initial programme – Leading our People Foundation – is
undertaken by all new line managers as they progress or are hired to ensure
that every colleague in this role has a strong foundational understanding of
what is expected of them. Launched in 2022, Leading our People Futures
provides quarterly learning and networking focused on local as well as
global business challenges.
- The launch of Aspire@Chemring in 2022 supports the development of
managers who have moved beyond supervisor and first line management and
who are identified as future talent for our key senior roles. This creative,
digitally-enabled programme encompasses group learning, networking
through the use of mixed learning “pods” and links to global executive
business schools including Columbia and MIT to leverage a mix of learning.
The focus on Leading Human Performance and Leading Organisational
Performance connects development into the personal, functional and
business goals.
- Leading our Organisation is run quarterly across the year to ensure our
most senior colleagues are also benefiting from the opportunity to reflect
on the areas of culture which they can influence and work together to
develop action plans around their local priorities.
DEVELOPING AT CHEMRING
LEADERSHIP
ACCELERATE TALENT
EARLY CAREERS
SENIOR LEVEL LEADER
LEADING OUR ORGANISATION
ASPIRE@CHEMRING
MID LEVEL LEADER
FIRST LEVEL LEADER
MANAGING YOURSELF
LEADING OUR PEOPLE
EMERGING LEADERS
PROGRAMME
EARLY CAREERS
PARTICIPANTS/
NETWORK
LEADING OURSELVES
PERFORMANCE
CONVERSATIONS
EARLY CAREERS
PROGRAMME
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. Alongside the above programmes for leadership
development, 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.
In 2022 over 30 college undergraduates joined our business units in the UK
throughout the summer to experience working for Chemring as part of our
summer internship programme. Summer placements are a key part of our
outreach to support students pursuing STEM subjects and to encourage them
to establish a career in this important area.
The Chemring Early Careers cohort continues to grow with over
80 graduates and apprentices welcomed to the UK businesses in 2022
(55 in 2021). With Early Careers colleagues now represented in most areas
of the business covering both technical and functional roles, this important
group of colleagues is fundamental to our future success.
Our commitment to apprentices means that we welcomed 25 apprentices
in 2022. We are close to capacity for encouraging this important young talent
to start their career at Chemring and so our attention is now on developing
those colleagues already working with us who might benefit from formalised
development beyond the Leading our People programme. Partnering with an
outside organisation we will be using Apprentice Levy funding in 2023 to
support colleagues in achieving ILM accredited level 3 and 5 apprenticeships
as well as enabling them to benefit from creating an external network.
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.
We currently sponsor 20 students and this year welcomed two sponsored
students as permanent colleagues as part of the Graduate Scheme.
The market for talent remains challenging and nowhere more so than in
providing the type and number of colleagues required by our Roke business.
In response, in 2022 we launched the Roke Academy in partnership with
Hatch, a specialist in digital skills recruitment. The Roke Academy is a
centre of excellence for learning and development, with an initial focus on
non-traditional areas of recruitment to embrace undiscovered talent who
may not have previously had the opportunity to enter the tech field.
In 2022 and 2023 the Roke Academy will look to attract those who may have
faced barriers to work for a variety of reasons; individuals who have found
the traditional recruitment process a challenge, are returning to work after
a break, transitioning from military service, or looking for a change of career.
The Academy supports these diverse individuals who can bring unique
strengths to our business in terms of creativity, data analysis and innovation to
then progress in their chosen field. In 2022 we welcomed 24 new colleagues
through this route and will continue to expand this programme in future
years. The Roke Academy presents a wider opportunity to combine all
development from Early Careers through technical training and to provide
support for the most senior leaders at Roke as a true centre for development
excellence. This will continue to evolve in 2023 and beyond.
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. This process has
continued into 2022 with development plans in place at an organisational
and individual level to support growth into key roles. For example, the
Aspire@Chemring programme content was designed around the outputs
commonly identified in the organisational talent reviews.
Chemring Group PLC Annual report and accounts 2022
53
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS OUR PEOPLE continued
25%
30%
TOTAL GRADUATES AND APPRENTICES
2022
PROGRAMMES IN 2022
COLLEAGUES INVOLVED IN LEADERSHIP DEVELOPMENT
Female
81%
19%
75%
2021
2022
Male
P81+
75+
70+
Female65+
P74+
Male
Male
2022
28%
2021
72%
70%
65%
Female
KEY ROLE TALENT PIPELINE
35%
DIVERSITY AND INCLUSION AT CHEMRING
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. In 2021 we introduced DE&I goals for all of our
senior leaders which form part of our incentive plans.
We have an increasing number of formal and informal groups around the
business which support and connect people with shared characteristics
or interests. In 2022 we launched the Women’s Inclusivity Network,
WIN@Chemring, with a focus on supporting female colleagues globally.
54
Chemring Group PLC Annual report and accounts 2022
OUR PURPOSE IN ACTION
JOE SPIRES’ GRADUATE JOURNEY
Joe Spires is a Graduate Engineer at Roke in Romsey, UK. He
studied nuclear engineering at Lancaster University with support
from The Institution of Engineering and Technology’s (“IET”)
Horizons Bursary. The Bursary provides financial support of up to
£4,000. Through the bursary scheme, Joe was partnered with
Chemring in his second year, completing a summer internship with
Chemring Countermeasures UK (“CCM UK”) and leading him to
his current role at Roke.
Says Joe, “The financial support I gained from the Horizons
Bursary helped with quality resources such as the many expensive
books needed for my course. I come from a low-income
household, so this support also meant that I didn’t have to work
during my degree and could focus on my studies.
“I got the chance to work with a great team with a great culture at
CCM UK, and, following a conversation with the Managing
Director, I applied to the graduate scheme at Roke. Thankfully, I
was offered a position at the end of my degree course and have
been working on special projects with Roke since then. The
mentoring and support I’ve received from the team have been
second to none, and I’m learning so much.
“It’s my hope to continue building my expertise in areas like
robotics and sensors to enable me to architect solutions myself
with confidence. I’m also excited about the travel opportunities
that a role in a global organisation could offer in the future.”
These groups made up of female colleagues from every function and level
have put in place actions to support both male and female colleagues and
provided the opportunity for colleagues to discuss local challenges and issues
affecting this key population.
Across 2022 we have worked to ensure we understand the ethnic diversity
of our population. We are keen to ensure that our Chemring community is
reflective of the communities we operate in and are developing approaches
to more formally monitor this. We are pleased to be able to provide additional
reporting on ethnic diversity at Chemring in this year’s annual report.
Senior managers
Mid-level managers
All other employees
Asian
%
3.8
1.8
3.7
Black
%
5.0
4.2
16.3
Mixed
race
%
0.0
1.5
1.2
White
%
91.2
91.3
75.8
Other *
%
0.0
1.2
3.0
* (Inc Hispanic, NHOPI, Native American).
35
+
+
26
+
+
P
25
+
+
19
+
+
P
30
+
+
P
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.
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. The Executive Committee has a formal
requirement to review the process for appointing all senior team members,
including ensuring processes are without bias and open to all candidates
regardless of characteristics.
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.
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 providing financial support, the Group also encourages and
supports employees who undertake voluntary work in the local community.
Looking to specific communities, 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.
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.
“ 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.”
OUR PURPOSE IN ACTION
MAKING MENTAL HEALTH A PRIORITY
Chemring Energetics UK (“CEUK”) made mental health a priority
in 2022 and employed the services of a company called Headtorch.
Headtorch, based in Glasgow, are a team of specialists in learning,
development and psychology. They work with organisations both
nationally and internationally to build a positive mental health
culture and support mental health in the workplace.
Headtorch delivered a bespoke two-day event with 30 managers,
covering all areas of the site, to help them feel better equipped to
encourage and facilitate mental health conversations with their
teams. In addition, a group of actors from Headtorch filmed
different mental health scenarios in full CEUK uniform and PPE to
really bring the stories to life for those involved.
The aim was to build a positive mental health culture on site so
that colleagues feel able to speak openly if they have issues. We
also want to remove the stigma of talking about mental health and
rather than setting KPIs and targets around mental health, which
are extremely hard to measure, our priority is on supporting line
managers, helping staff feel able to talk openly at work and
providing access to the right professional resources to help people.
The CEUK team also established a Wellbeing Forum on site.
The purpose of the Wellbeing Forum is to optimise the physical,
emotional, social and mental wellbeing of staff by providing a
mechanism for all our colleagues to contribute to the CEUK
wellbeing agenda.
Chemring Group PLC Annual report and accounts 2022
55
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BOARD OF DIRECTORS
38%
EXECUTIVE COMMITTEE
62%
62%
38%
13%
2021
2021
22%
2022
2022
P62+
62+
87+
P78+
P81+
76+
Female
Male
2022
2021
87%
19%
76%
78%
81%
SENIOR MANAGERS
24%
OUR PEOPLE continued
CHEMRING IN THE COMMUNITY CONTINUED
Across Chemring our colleagues support a wide range of charities, both local
and national. Highlights this year include:
Support for Ukraine – Since March 2022, Chemring colleagues have pulled
together across the organisation to fundraise and donate to support the
humanitarian crisis in Ukraine, with Chemring matching all money raised.
Veterans and military charities – A number of charities directly related to
providing support to service veterans are supported across the Group.
Activities range from fundraising to donations and providing time and
resources to initiatives.
Community building projects – In the US, Chemring Energetic Devices
(“CED”) is supporting Habitat for Humanity, an international charity fighting
global poverty and homelessness, by spending a day helping build homes as
well as fundraising in support of the charity.
Other local support – There is much local activity supporting charities
close to our sites. Chemring Australia are supporting a women’s refuge
through the WIN@Chemring team, and at CED colleagues support local
families over the holiday season through the Adopt-a-Family scheme.
Colleagues across Chemring regularly take on individual challenges for causes
special to them with donations often matched by the company. Climbing
mountains, moving large objects and running marathons have all been tackled
in the year.
56
Chemring Group PLC Annual report and accounts 2022
13
+
+
22
+
+
P
38
+
+
38
+
+
P
24
+
+
19
+
+
P
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
The Board has 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:
- reports from PwC on their internal audits of the business’s compliance with
our anti-bribery processes and their review of the implementation of the
Chemring Compliance Portal;
- metrics on the due diligence of third party sales partners, service providers
and suppliers conducted through the Chemring Compliance Portal;
- reports on the independent audit of selected third party sales partners;
- training material on the Code of Conduct; and
- approvals granted under our 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 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:
All of our Operational Framework policies, procedures and associated training
material are 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 an annual basis,
providing a detailed assessment of their compliance with the Operational
Framework. The output from the operational assurance process enables
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 provides 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.
Updated scenario-based training on the Code was provided to employees
during the year.
- every employee, at every level of the organisation, has access to and
understands the requirements of the Operational Framework;
CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022
CONTINUING TO INNOVATE,
PROTECT AND GROW
- 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.
READ MORE IN OUR SUSTAINABILITY
REPORT: CHEMRING.COM/SUSTAINABILITY
Chemring Group PLC Annual report and accounts 2022
57
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ETHICS AND BUSINESS CONDUCT continued
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.
Our internal procedures on the handling of whistleblowing reports are
designed 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. Training is provided 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.
The Group has also adopted a policy on sales to customers located in
higher-risk territories, 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 due diligence 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.
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
an 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 periodic 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 are
automated through the Chemring Compliance Portal, which enables us to
adopt a consistent approach to the application of our due diligence and
approval processes across the Group. Due diligence processes for the third
party service providers and higher risk suppliers engaged by our non-US
businesses are also managed in the Chemring Compliance Portal. The US
businesses have adopted a similar automated system for their service
providers and higher-risk suppliers.
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.
Selected third party sales partners are subject to an independent audit by
an external consultant. These audits provide additional assurance on the
suitability of our sales partners and help to further strengthen our
anti-bribery and corruption processes.
Compliance with BACM procedures continued to be a core aspect of PwC’s
internal audit programme during the year.
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.
58
Chemring Group PLC Annual report and accounts 2022
FINANCIAL REVIEW
DELIVERING GROWTH, STRONG
CASH GENERATION AND
FUNDING INVESTMENT
Andrew Lewis
Chief Financial Officer
“ Our focus in 2022 has been on adapting
to our customers’ needs in what has
been a changing geopolitical landscape,
combined with supply chain challenges,
energy price increases, and other
inflationary cost pressures.”
NET DEBT
£7.2m
(2021: £26.6m)
ORDER BOOK
£651m
(2021: £501m)
We have successfully navigated the changing
geopolitical landscape, supply chain challenges
and inflationary pressures and delivered a 2022
result which exceeded initial expectations,
maintaining the balance of short-term delivery
with long-term investment.
In the Sensors & Information sector, Roke revenue exceeded £100m for the
first time, and in what continues to be a buoyant market, order intake of £168m
was up 59%. We invested in Roke Academy and Roke USA which in the
medium term will enable Roke to continue its track record of strong growth.
In the US sensors business there has been a positive start to the full rate
production phase of the EMBD program. A customer procurement decision
is expected in 2023 on the low rate initial production (“LRIP”) phase of the
JBTDS and AVCAD programs. The shift in the US Government priorities
from counter-insurgency operations to equipping forces for potential peer
to peer/near-peer competition in the Pacific, has resulted in a swift and
unexpected re-prioritisation of US DoD budgets. This impacted our
expected HMDS FY22 delivery order, which was not funded, and we are
currently working with the customer to appropriately plan for their expected
future requirements as we expect the program to move from production to
sustainment earlier than anticipated.
In Countermeasures & Energetics, order intake was £356m, up 40%,
driven by multi-year orders received across the sector. Investment in the
Group’s manufacturing infrastructure continues to be a key enabler to deliver
improved safety and operational excellence, resulting in Countermeasures &
Energetics margin improving from 16.2% to 17.4%. The new Tennessee facility
commissioned in the second half of the year is expected to deliver its first
revenue in the first half of 2023. The market for precision engineered devices
and specialty materials was strong, with order intake up 37% to £137m for
these niche areas of our Countermeasures & Energetics sector.
GROUP FINANCIAL PERFORMANCE
In 2022 the Group successfully navigated a number of operational and
financial challenges: delays in the US DoD procurement process; labour
availability; various supply chain and inflationary pressures, in particular the
cost of energy. These headwinds are likely to continue and the Group will
continue to work to mitigate their impact.
Foreign exchange translation has provided a tailwind to operating profit
compared to last year. While exchange rates have been volatile in the year,
the US dollar has strengthened with the average exchange rate to sterling
decreasing from $1.38 to $1.23. 48% of the Group’s revenue was US dollar
denominated (2021: 53%). On a constant currency basis the Group’s revenue
was up 7% to £421.2m, underlying operating profit was up 8% to £62.2m and
underlying basic earnings per share was up 17% to 19.7p. A summary of the
impact of the exchange rate movements on the key metrics at a Group and
sector level is shown in the table overleaf.
Chemring Group PLC Annual report and accounts 2022
59
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW continued
GROUP FINANCIAL PERFORMANCE CONTINUED
At constant currency
As reported
Group
Order intake
Order book
Revenue
Underlying EBITDA
Underlying operating profit
Underlying basic earnings per share
Sensors & Information
Order intake
Order book
Revenue
Underlying EBITDA
Underlying operating profit
Countermeasures & Energetics
Order intake
Order book
Revenue
Underlying EBITDA
Underlying operating profit
2022
£m
523.1
604.1
421.2
79.9
62.2
19.7
192.3
148.0
157.8
32.8
29.9
330.8
456.1
263.4
61.7
46.6
Change
+21%
+21%
+7%
+5%
+8%
+17%
+9%
+30%
+8%
-5%
-5%
+30%
+18%
+7%
+10%
+17%
2022
£m
551.5
650.9
442.8
82.3
64.0
20.2
195.2
153.7
162.3
33.0
30.0
356.3
497.2
280.5
64.2
48.9
Change
+28%
+30%
+13%
+8%
+11%
+20%
+11%
+35%
+11%
-4%
-5%
+40%
+28%
+14%
+14%
+22%
2021
£m
431.0
500.8
393.3
76.4
57.5
16.9
175.9
113.6
146.6
34.4
31.6
255.1
387.2
246.7
56.1
40.0
Order intake across the Group increased by 28% to £551m (2021: £431m),
with a 59% increase in Roke’s order intake, driven by a growing number of
multi-year contracts which include an increasing element of “pass-through”
products and services which are included in revenue. Countermeasures &
Energetics order intake was £356m, up 40%, driven by multi-year orders
received across the sector.
The impact of the Continuing Resolution in the US, and the continuation of
CV-19 related working restrictions slowed the process of doing business with
government departments, and as a result some orders were received later
than expected which will adversely impact phasing of FY23.
Revenue for the year was up 13% to £442.8m (2021: £393.3m), driven by strong
performance at Roke as well as steady growth in Countermeasures & Energetics.
The underlying operating profit of £64.0m (2021: £57.5m) resulted in an
underlying operating margin of 14.5% (2021: 14.6%). As a result of the
planned investment in Roke operating margin was flat compared to 2021 with
the improved operational execution in Countermeasures & Energetics offset
by the discretionary operating expense investment in Roke Academy, Roke
Futures and Roke USA.
UNDERLYING OPERATING PROFIT (£m)
£54.7m
£57.5m
£64.0m
£44.0m
£31.0m
Total finance expense fell to £1.5m (2021: £1.6m) which resulted in an
underlying profit before tax of £62.5m (2021: £55.9m). The effective tax rate
on the underlying profit before tax was 9.1% (2021: 14.8%). The underlying
basic earnings per share was 20.2p (2021: 16.9p).
Statutory operating profit was £53.3m (2021: £50.4m) and after statutory
finance expenses of £1.5m (2021: £1.6m), statutory profit before tax was
£51.8m (2021: £48.8m). The statutory tax charge totalled £4.4m (2021: £7.3m),
giving statutory profit after tax of £47.4m (2021: £41.5m) and statutory basic
earnings per share of 16.9p (2021: 14.7p).
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, loss on the movement in the fair value of
derivative financial instruments and the tax credit associated with these.
TAX
The underlying tax charge totalled £5.7m (2021: £8.3m) on an underlying
profit before tax of £62.5m (2021: £55.9m). The effective tax rate on
underlying profit before tax for the year was a charge of 9.1% (2021: 14.8%).
The reduction in rate is due to the recognition of a deferred tax asset in
respect of future US interest deductions of £4.3m. Looking forward into
2023 we expect the Group effective tax rate to return to the mid-teens
as the change to the UK Corporation Tax rate, effective 1 April 2023, will
impact the annual current tax charge for seven months. From FY24 we will
see a full year effect and as such the Group effective tax rate is expected to
increase to approximately 20%. The statutory tax charge totalled £4.4m
(2021: £7.3m) on a statutory profit before tax of £51.8m (2021: £48.8m).
FY18
FY19
FY20
FY21
FY22
60
Chemring Group PLC Annual report and accounts 2022
EARNINGS PER SHARE
Underlying basic earnings per share was 20.2p (2021: 16.9p) and diluted
underlying earnings per share was 19.7p (2021: 16.5p). Statutory basic earnings
per share was 16.9p (2021: 14.7p) and statutory diluted earnings per share
was 16.4p (2021: 14.4p).
UNDERLYING DILUTED EPS (PENCE)
19.7p
GROUP FINANCIAL POSITION
NET DEBT AND CASH FLOW
The Group’s net debt at 31 October 2022 was £7.2m (2021: £26.6m),
representing a net debt to underlying EBITDA ratio of 0.09x (2021: 0.35x).
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.
14.8p
11.0p
6.7p
16.5p
UNDERLYING CASH CONVERSION (%)
100%
89%
104%
110%
105%
109%
FY18
FY19
FY20
FY21
FY22
WORKING CAPITAL
Working capital was £93.9m (2021: £84.4m), an increase of £9.5m. At constant
currency, working capital would have been £81.9m. As a percentage of
revenue, working capital has remained consistent at 21% at 31 October 2022,
and would have fallen to 19% at constant currency. Given global supply chain
challenges the Group invested in certain inventory items to mitigate the risk
of shortages on production and delivery to customers. We continued with
our focus on commercial contracting, inventory levels and cash management.
Year-end trade receivable days of 17 (2021: 25) and trade payable days of 18
(2021: 18) demonstrate that working capital has been managed in a balanced
and sustainable manner.
WEEKLY NET DEBT (£m)
FY18
FY19
FY20
FY21
FY22
Underlying operating activities generated cash of £90.1m (2021: £80.0m).
Underlying cash conversion was 109% (2021: 105%) of underlying EBITDA,
and an average of 108% on a rolling 36-month basis (2021: 107%). The
Group has a revolving credit facility of £150m which runs to December 2025
and has an option to extend for a further two years at the lenders’ discretion.
155
130
105
m
£
80
55
30
5
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
FY22
FY21
FY20
FY19
FY18
Aug
Sept
Oct
Jul
FY17
Chemring Group PLC Annual report and accounts 2022
61
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT
R&D expenditure was £79.7m (2021: £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
2022
£m
69.7
7.5
2.5
2021
£m
51.4
8.5
2.1
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 (as reported)
Effect of using prior period
foreign exchange rates
2021
£m
393.3
Growth
%
13%
2022
£m
442.8
(21.6)
Revenue at constant currency
421.2
393.3
7%
Underlying operating profit (as reported)
Effect of using prior period
foreign exchange rates
Underlying operating profit
at constant currency
64.0
57.5
11%
(1.8)
62.2
57.5
8%
FINANCIAL REVIEW continued
DEBT FACILITIES
The Group’s principal debt facilities comprise a £150m revolving credit
facility and a US$10m overdraft. These were established in July 2021 with
a syndicate of six banks and run until December 2025 with two “one-year”
options to extend. The Group had £136.7m (2021: £128.1m) of undrawn
borrowing facilities at the year end. The Group is subject to two key financial
covenants, which are tested quarterly. These covenants relate to the leverage
ratio between underlying EBITDA and net debt, and the interest cover ratio
between underlying EBITDA and finance costs. The calculation of these ratios
involves the translation of non-sterling denominated debt using average,
rather than closing, rates of exchange. The Group was in compliance with
the covenants throughout the year.
RETIREMENT BENEFIT OBLIGATIONS
The surplus on the Group’s defined benefit pension schemes was £11.2m
(2021: £13.7m), 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 surplus as a percentage of scheme liabilities increased from
15% to 19%, the increase being driven by the increase in the AA corporate
bond yield used as the discount rate for IAS 19. The resilience of the Scheme’s
investment strategy , which includes a liability driven investment hedge, was
demonstrated by the limited impact of increased interest rate and inflation
expectations. During the final quarter of the year the Scheme exited its
portfolio of equity investments in anticipation of the need for liquid cash
resources to meet the margin calls on the liability driven investments, as gilt
yields rose rapidly in September 2022. The Group also lent the Scheme £2m
on a short-term basis to cover further margin calls in October 2022, which
was repaid in November 2022.
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, one matter remained open at year end, being the incident that
occurred at the Group’s countermeasures site in Salisbury on 10 August 2018.
Full details are included in note 33.
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 £31.5m (2021: £28.0m) 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, and
a new proofing facility at our Scottish site which has continued during the
period. We still expect to generate revenue from the new Tennessee
facility during the first half of our 2023 financial year.
62
Chemring Group PLC Annual report and accounts 2022
A reconciliation of underlying measures to statutory measures is provided below:
2022
Non-
underlying
Underlying
Statutory
Underlying
2021
Non-
underlying
Statutory
Group:
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)
Sectors:
Sensors & Information EBITDA (£m)
Sensors & Information operating profit (£m)
Countermeasures & Energetics EBITDA (£m)
Countermeasures & Energetics operating profit (£m)
We present a measure of constant currency revenue and operating
profit. This is calculated by translating our results for the year ended
31 October 2022 at the average exchange rates for the comparative
year ended 31 October 2021.
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:
- amortisation of acquired intangibles;
- discontinued operations;
82.3
64.0
62.5
(5.7)
56.8
20.2
19.7
33.0
30.0
64.2
48.9
(6.1)
(10.7)
(10.7)
1.3
(9.4)
(3.3)
(3.3)
(1.2)
(3.7)
—
(2.1)
76.2
53.3
51.8
(4.4)
47.4
16.9
16.4
31.8
26.3
64.2
46.8
76.4
57.5
55.9
(8.3)
47.6
16.9
16.5
34.4
31.6
56.1
40.0
(0.9)
(7.1)
(7.1)
1.0
(6.1)
(2.2)
(2.1)
(1.6)
(5.7)
—
(2.1)
75.5
50.4
48.8
(7.3)
41.5
14.7
14.4
32.8
25.9
56.1
37.9
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 £4.6m (2021: £6.2m);
- costs relating to acquisitions including deferred consideration treated as
an expense under IFRS 2 of £2.0m (2021: £1.6m);
- loss on the movement in the fair value of derivative financial instruments
of £4.1m (2021: £0.7m gain); and
- tax impact of adjustments of £1.3m credit (2021: £1.0m credit).
- 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
Andrew Lewis
Chief Financial Officer
13 December 2022
instruments; and
- the tax impact of all of the above.
Chemring Group PLC Annual report and accounts 2022
63
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 Board reviews the Group risk register on a regular basis and considers
whether the Risk Management Committee has appropriately identified the
principal risks to which the Group is exposed.
The Audit Committee is responsible for reviewing in detail the effectiveness
of the Group’s systems of internal control, including financial, operational and
compliance controls, and its risk management systems. The Audit Committee
also reviews the effectiveness of the Group’s internal audit arrangements.
The Risk Management Committee is responsible for overseeing the
implementation of the Group’s risk management framework and is also
responsible for identifying the principal risks to which the Group is exposed,
monitoring key mitigation plans and maintaining the Group risk register. The
Risk Management Committee also reviews the business unit risk registers on a
regular basis and considers input from the US Risk Management Committee,
which has been constituted to oversee risk within the US operations.
The current members of the Risk Management Committee are:
- Michael Ord (Group Chief Executive);
- Bill Currer (President, US);
- Sarah Ellard (Group Legal Director & Company Secretary);
- Andrew Lewis (Chief Financial Officer); and
- Steven Messam (Group HSE Director).
RISK MANAGEMENT POLICY AND FRAMEWORK
The Group’s risk management policy sets out the Group’s approach to risk
management, including its risk appetite; the framework for assessing, managing
and monitoring risk within the business; and the key roles and responsibilities
for the oversight and implementation of the Group’s risk management
systems and controls.
The Group’s risk management framework draws fundamentally from
the “Three Lines of Defence Methodology”, with the “First Line” being
day-to-day management of risk and maintenance of effective control
procedures at individual businesses. The “Second Line” comprises various
risk management and control functions established at the corporate
management level, which are designed to enhance and monitor the First Line.
The “Third Line” comprises the Group’s internal audit function, utilising an
external firm of auditors, which reports directly to the Audit Committee.
APPROACH TO RISK MANAGEMENT
The management of each business is responsible for the identification,
management and reporting of local risks, in accordance with the Group’s risk
management framework. The management of each business is also
responsible for the maintenance of business risk registers and the
implementation of mitigation plans.
Each business is required to maintain a risk register identifying their key risks.
The risk registers include an analysis of the likelihood and impact of each risk,
before and after mitigation actions are taken to manage the risk, together
with details of the mitigation plans and progress against them. Each risk is
allocated an owner, who has responsibility for managing the risk.
The business risk registers are updated locally on a quarterly basis and are
reviewed in detail by the Group Chief Executive, the Chief Financial Officer
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.
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 BOARD
- Overall responsibility for
the Group’s risk
management framework
and systems of
internal control
- Oversees the effectiveness
of the Group’s internal
audit arrangements
risk management
- Defines the Group’s
risk appetite
64
Chemring Group PLC Annual report and accounts 2022
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 enhance our risk management
systems, with specific focus in the following areas:
- Our HSE Management Framework has been updated and we
have implemented new Group-wide protocols on shared learning,
management of electrostatic discharge and the management of travel risk.
- We have further enhanced our HSE data collection and reporting through
our EcoOnline system.
- Additional IT and cyber-security standards have been implemented, and
members of the senior leadership team participated in a cyber incident
scenario planning workshop.
- We have improved our succession and talent management programmes
to address increasing resource demand and constraints.
- We have established a new project focused on improving business
continuity management across the Group.
- Climate change risks have been considered as key risks to the future
operation of the Group.
- Our internal audit programme has continued to incorporate thematic
reviews in key risk areas.
Our risk management systems were reviewed by PwC in 2021 as part of
the internal audit programme. 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 risk rating methodologies were addressed during the year by the
introduction of an expanded five-by-five matrix for the assessment of the
potential impact and likelihood of individual risks on the Group risk register.
We have also introduced a target risk rating for each risk, and now separately
consider key mitigation controls and ongoing risk reduction actions. These
changes provide greater distinction between relative risks and have enabled
us to better facilitate the 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 66 to 73.
CV-19
The management of risks associated with CV-19 continued to be monitored
during the year. Whilst the Group’s operations have not been significantly
impacted by CV-19, we have continued 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.
RISK REVIEW
The Board carries out an annual review of the effectiveness of the Group’s
systems of internal control and risk management systems. In understanding
this review, the Board considers:
- the operational and financial reports received from the executive
management throughout the year;
- the Group risk register and the mitigation actions being taken to manage
key risks;
- output from the operational assurance process; and
- internal audit reports and reports from the other assurance processes
in place across the Group.
The Board confirms that there is an ongoing process for identifying, evaluating
and managing the principal risks faced by the business, and that 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 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.
The Board carried out an assessment of the principal and emerging risks to
which the Group is exposed as part of its half-yearly review of the Group
risk register. The Board considered whether all applicable risks had been
adequately captured in the Group risk register and whether the requisite
progress had been made on the mitigation actions to address significant risks.
Chemring Group PLC Annual report and accounts 2022
65
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.
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:
- Our understanding of the risks associated with occupational and
process safety continues to improve, reflecting further progress on the
implementation of the Group’s three-year HSE strategy and an increased
focus on asset integrity, and shared learning and reporting of near misses
within our operations.
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.
- Risks associated with environmental issues have increased with the
increased focus on the environmental impact of our businesses.
- Climate change risks and the potential impact of changed weather
patterns on our operations are now included as principal risks on the
Group risk register.
- Market-related risk has reduced, reflecting the increased focus on defence
spending as a result of the recent geopolitical and technology trends.
- People-related risk in relation to resourcing has continued to increase as
a result of buoyant demand in certain parts of the employment market
continuing to make it difficult to recruit and retain employees, and
increased salary expectations in a high-inflationary environment.
- Financial risks have continued to reduce, reflecting the Group’s strong
cash generation and lower levels of indebtedness, albeit cost escalation
and inflation are increasing financial risk in some areas.
- 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.
A
G
h
g
H
i
K
t
c
a
p
m
I
i
m
u
d
e
M
w
o
L
Low
H
F
C
L
D
I
B
J
E
Medium
Likelihood
High
Principal risk/uncertainty
Our values
Strategic
objectives
Change in
risk profile
in the year
A
B
Occupational and
process safety
Environmental laws
and regulations
C Climate change
D Market
E Political
F Contracts
G Technology
H Financial
I Operational
J
People
K
Compliance
and corruption
L Cyber-security
Target growing segments
Safety
Win market share
Grow our US business
Excellence
Innovation
66
Chemring Group PLC Annual report and accounts 2022
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.
- New Group-wide standard on management
of electro-static discharge hazards introduced.
- 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.
- “Spot it, Stop it, Share it” campaign instigated to increase
focus on near miss identification and reporting.
- Continued programme of capital investment in
older facilities to improve safety and reliability.
Example key risk indicators
Link to values
- Total recordable injury frequency rate
- Number of process safety events
- Number of near miss reports
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.
- Environmental consultants retained to
manage 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.
Example key risk indicators
Link to values
- Carbon emissions
- Energy and water utilisation
- Volume of waste produced
- Number of environmental incidents
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 continue to take 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 has
increased slightly from 0.67 in 2021 to 0.78 in 2022,
but remains below our limit of 1.0. There were no
injuries sustained from energetic ignitions during
the year, compared to two such incidents in the
prior year.
We hope to see further improvements in process
safety in FY23 as we continue with our capital
investment programme.
Link to strategy
- Target growing segments
- Win market share
See also: Health and safety on pages 40 to 41
Risk appetite: Low
Change during the year and outlook
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 42 to 44
Chemring Group PLC Annual report and accounts 2022
67
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
HEALTH, SAFETY AND ENVIRONMENT RISKS continued
C. CLIMATE CHANGE
Risk and potential impacts
The Group’s operations and delivery of our
strategy could be impacted by climate change
related risks, including those associated with
wildfires, severe weather events and new
climate-related requirements in relation to the
Group’s manufacturing processes and products.
- Wildfires and severe weather events 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 for
business interruption and/or increased expenditure
for adapting its production facilities and processes
to address climate change-related risks.
Mitigation actions/factors
- Additional measures have been implemented,
such as cutting back grassland close to
manufacturing operations, to mitigate the risk of
wildfires.
- Drainage has been improved on certain sites to
mitigate the impact of potential flooding events.
- Carbon reduction plans and other environmental
performance targets have been established to
reduce the Group’s environmental impact.
- Close relationships are maintained with
customers, which should provide early insight
into new environmental requirements which
are to be imposed by customers.
Example key risk indicators
Link to values
- Wildfires
- Severe weather events
- Technology
STRATEGIC RISKS
D. MARKET
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 initiatives
established in the Countermeasures & Energetics
and Sensors & Information segments.
- Increased collaboration between businesses
across the Group on establishing shared routes
to market.
Defence spending depends on a complex mix of
political considerations, budgetary constraints and
the requirements of the armed forces to address
specific threats and perform certain missions.
Overall defence spending may therefore be
subject to significant yearly fluctuations and there
may also be downward pressure on defence
budgets in certain key programme areas.
The Group’s profits and cash flows are
dependent, to a significant extent, on the timing
of award of defence contracts. In general, the
majority of the Group’s contracts are of a
relatively short duration and, with the exception
of framework contracts with key customers, do
not cover multi-year requirements.
- The Group’s financial performance may be
adversely impacted by lower defence spending
by its major customers, either generally or in
relation to certain programmes.
- Short-term trading and cash constraints may
impact on the Group’s ability to invest in
longer-term technologies and capabilities.
- Unmitigated delays in the receipt of orders or
cancellation of existing contracts could affect the
Group’s financial performance. If the Group’s
businesses are unable to continue trading
profitably during periods of lower order intake,
financial performance will deteriorate and assets
may be impaired.
Risk appetite: Low
Change during the year and outlook
Sustainability Committee established which is
overseeing the identification and management
of climate change and environmental risks.
Carbon reduction plans established across
the Group.
Link to strategy
- Target growing segments
See also: Environment on pages 42 to 44
TCFD report on pages 45 to 49
Risk appetite: Low to moderate
Change during the year and outlook
Ongoing conflict in Eastern Europe is shaping the
threat environment, with a resurgence in demand
for classical kinematic capabilities, alongside the
growing information advantage and intelligence
requirements. However, economic pressures may
place defence spend under pressure.
Example key risk indicators
Link to values
- Defence budget cuts/changes
- Reductions in order intake
- Deterioration in profitability
68
Chemring Group PLC Annual report and accounts 2022
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Market overview on pages 12 to 13
INHERENT RISK:
High
Medium
Low
TREND:
Increasing
Stable
Decreasing
STRATEGIC RISKS
E. 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.
- The Group’s business in certain countries may
be adversely affected in a way that is material to
the Group’s financial position and the results of
its operations.
- Political changes could impact future defence
expenditure strategy and the Group’s ability
to export products to certain countries.
- Relationships maintained at political level
in key countries and with senior
customer representatives.
- Financing arrangements implemented, including
letters of credit and advance payments, for
contracts with high-risk customers.
- Political risks insurance procured in
certain circumstances.
- Continued focus on the development of
commercial business across the Group,
particularly in key home territories.
Example key risk indicators
Link to values
- Political changes
- Suspension/withdrawal of export licences
- Trade embargoes
- Reductions in order intake
F. CONTRACTS
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: Low to moderate
Change during the year and outlook
Political tensions across the world are increasing the
risk of disruption in our non-NATO markets.
We have continued to focus our business
development and sales and marketing activities
on our home markets and their allied countries.
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Market overview on pages 12 to 13
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
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
Chemring Group PLC Annual report and accounts 2022
69
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
STRATEGIC RISKS continued
G. TECHNOLOGY
Risk and potential impacts
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.
Mitigation actions/factors
- 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.
Progressing our technology-led key development
programmes will continue to be a significant area of
focus for the year ahead.
Roke continues to see strong growth in its R&D
service activities. In 2022 we launched the Futures
business unit to focus on capturing the growing
opportunities for Roke’s capabilities in the
commercial sector.
Chemring Sensors & Electronics Systems in the
US has successfully transitioned three laboratory
technologies into prototype products which can
detect and identify biological threats quicker and
cheaper than existing systems.
Example key risk indicators
Link to values
Link to strategy
- 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
H. FINANCIAL
Risk and potential impacts
The Group is exposed to a range of financial risks, both
externally driven, such as an unexpected movement in foreign
exchange rates or increased inflation, 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 33 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 the mitigating factors are set out in the
financial review and note 20 of the Group financial statements.
- Target growing segments
- Win market share
- Grow our US business
Mitigation actions/factors
- Committed banking facilities in place
to December 2025.
- Regular monitoring of actual and
forecast financing covenants.
- Capital approval processes in place,
requiring Board approval for
significant projects.
- Hedging policy applied for significant
foreign transactions.
- Energy bought forward in the
UK and Norway to mitigate
escalating prices.
- 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.
Risk appetite: Moderate
Change during the year and outlook
The Group’s revolving credit facilities were extended
during the year to December 2025.
The year-end bank covenant of net debt: EBITDA was
0.14x, well within the covenant limit of 3.0x.
The Group’s businesses faced inflationary cost
increases during the year and higher energy prices.
These were largely mitigated but could have a further
impact in 2023.
At the year end, the legacy UK defined benefit pension
scheme was £11.2m in surplus (on an IAS 19 basis).
The triennial actuarial valuation of the scheme was
carried out as at April 2021 and 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.
Example key risk indicators
Link to values
Link to strategy
- Deterioration in bank covenants
- Increase in net debt
- Interest rate increases
- Foreign exchange rate movements
- Increase in bad debts
- Increase in inflation
70
Chemring Group PLC Annual report and accounts 2022
- Target growing segments
- Win market share
- Grow our US business
See also: Financial review on page 59
INHERENT RISK:
High
Medium
Low
TREND:
Increasing
Stable
Decreasing
STRATEGIC RISKS
I. OPERATIONAL
Risk and potential impacts
Mitigation actions/factors
The Group’s manufacturing activities may be
exposed to business continuity risks, arising from
plant failures, supplier interruptions, quality issues
or large scale employee absences.
Planned new facility developments may be delayed
as a result of operational issues.
- Interruptions to production and sales could result
in financial loss, reputational damage and loss of
future business.
- A delay in completing new manufacturing facilities
could constrain capacity and limit future
business growth.
- 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.
- Advance purchases made of raw materials where
potential supply chain constraints are identified.
- 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.
Risk appetite: Low to moderate
Change during the year and outlook
A multi-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 has progressed in line with plan.
Capital investment projects progressed at our
facilities in Scotland and Norway, and further
projects are planned for 2023.
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
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 and 40
Chemring Group PLC Annual report and accounts 2022
71
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PRINCIPAL RISKS AND UNCERTAINTIES continued
STRATEGIC RISKS continued
J. PEOPLE
Risk and potential impacts
Mitigation actions/factors
There is a risk that the market for talent in key
areas of expertise becomes more challenging.
Allied to this there is a risk of loss of key personnel.
As the shape of the Group’s business changes and
with an increased focus in high technology areas,
the Group may fail to build and retain an
appropriate skill base to facilitate successful
competition in new markets and product areas.
Employees may not be fully engaged with the
Chemring journey, purpose, products, customers
and values.
- Failure to recruit sufficient suitably qualified
personnel in key areas of the business may
result in the Group failing to achieve its future
growth aspirations.
- Failure to build and retain key skills will lead to
a reduction in the ability to innovate or to win
and deliver new contracts.
- If key personnel are not fully engaged with the
business purpose, values and products, and are
not appropriately incentivised, the ability of the
Group to retain them will be compromised. This
could result in loss of management expertise and
knowledge, and the Group’s operations may
suffer as a consequence.
- Chemring values of Safety, Excellence and
Innovation established.
- 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.
- Increased focus on DE&I.
- Culture review completed, facilitating the
development of a framework to support the
evolution of the Chemring culture.
- Employment 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.
Example key risk indicators
Link to values
- Diversity statistics
- Increase in employee turnover
- Number of unfilled vacancies
- Employee sentiment scores
Risk appetite: Moderate
Change during the year and outlook
Resourcing challenges continued to increase during
the year, particularly in parts of the US where
buoyant demand in the employment market made
it more difficult to recruit and retain employees.
Salary inflation impacted a number of our
businesses and one-off cost-of-living payments were
made to a number of employees across the Group.
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 enables us to monitor employee sentiment on
a continuous basis and gives employees the ability to
provide feedback on changes as they occur.
Link to strategy
- Target growing segments
- Win market share
- Grow our US business
See also: Our people on pages 50 to 56
72
Chemring Group PLC Annual report and accounts 2022
INHERENT RISK:
High
Medium
Low
TREND:
Increasing
Stable
Decreasing
LEGAL AND COMPLIANCE RISKS
K. 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.
- 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
L. CYBER-SECURITY
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 systems
failures, or its intellectual property, or that of its
customers, may fall into the hands of third parties.
- In addition to business interruption and financial
loss, the Group may suffer reputational damage,
and its business of providing cyber-security services
to customers may be irreparably damaged.
- Threat assessment completed and an action
plan to counter the Group’s identified major
threats implemented.
- Security Committee established.
- Group-wide cyber-security standard adopted
based on the US DFARS “CMMC Level 2”
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 incident scenario planning workshop held.
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.
Further progress was made during the year on fully
embedding 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 57 and 58
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.
Good progress was made towards achieving CMMC
Level 2 compliance at a number of businesses during
the year.
Example key risk indicators
Link to values
- Number of “phish” emails reported
- Number of system attacks and failures
Link to strategy
- Target growing segments
- Win market share
Chemring Group PLC Annual report and accounts 2022
73
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
VIABILITY STATEMENT AND GOING CONCERN
In accordance with the UK Corporate Governance Code, the Board
is required to undertake an assessment of the long-term viability of
the Group and going concern basis of accounting.
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 75.
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
2022
Covenant
£159m
£137m
0.14x
Less than 3x
57x Greater than 4x
The revolving credit facility and overdraft run to December 2025 with two
“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 2024. This
has allowed the directors to assess going concern for a period of 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 inflationary pressures,
supply chain challenges, 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 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 the 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 2025 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 2025.
The directors have chosen a three-year period to assess viability to reflect
the characteristics of the Group’s end markets and their contracting
arrangements. These range from multi-year contracts such as the US Programs
of Record to shorter-term orders, such as those awarded to Roke.
PRINCIPAL RISKS
In considering our viability statement 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. The Group’s operations have been designated as critical to the
defence and national security industrial base in all territories in which we
operate. All our businesses remain open with business continuity plans
mobilised at every location.
SENSITIVITY ANALYSIS
Sensitivity analyses were run to model the financial and operational impact
of plausible downside scenarios of these risk events occurring individually
or in combination. These included the impacts of a further deterioration
in the macro-economic environment, including how CV-19 may impact the
economy and future government policy and spending, underperformance in
executing the Group’s strategy, failure to deliver operational improvements,
the impact of a potential climate-related risk causing business interruption 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 the Group’s forecasts
show compliance with covenants under the revolving credit facility.
74
Chemring Group PLC Annual report and accounts 2022
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.
READ OUR CODE OF CONDUCT
POLICY: CHEMRING.COM/
SUSTAINABILITY/ETHICS-AND-
BUSINESS-CONDUCT
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
- TCFD report
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
- Market overview
- Strategy
- Stakeholder engagement
- Corporate governance report
- Risk management
- Principal risks and uncertainties
- Key performance indicators
- Health and safety
- Environment
- Our people
37
42
45
21
50
40
57
96
50
57
50
57
57
2
8
18
12
24
21
80
64
66
26
40
42
50
Chemring Group PLC Annual report and accounts 2022
75
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHAIRMAN’S INTRODUCTION TO GOVERNANCE
SUSTAINING A ROBUST
GOVERNANCE FRAMEWORK
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.”
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 governance report
for the year ended 31 October 2022. The report explains how the Board
operates and how corporate governance is addressed in Chemring.
The report comprises:
- Board of directors
- Corporate governance report
- Audit Committee report
- Nomination Committee report
- Directors’ remuneration report
- Directors’ report
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 the governance report sets out how we have complied with
the Code.
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
– an endeavour which has been clearly validated over the past year. Across
physical and digital environments, our businesses and our employees deliver
innovative technologies and products that 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 how we are living our values can be found on pages 6 and 7.
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 late
2021, and supplemented with ongoing scenario-based training during the year.
GOVERNANCE AND OPERATIONAL FRAMEWORK
Our Operational Framework 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.
The Board has established an Ethics & Compliance Committee, which
I currently Chair, with the other members being the Group Chief Executive,
the President of our US operations and the Group Legal Director & Company
Secretary. The Committee continues to maintain oversight of our ethical
business conduct and compliance arrangements across the Group, and its
activities reinforce 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 57.
STRATEGY
The delivery and evolution of the Group’s strategy, which is articulated in
my statement on page 10 and in the strategy section on pages 24 to 25,
continues to be a key area of focus for the Board. In addition to our annual
review of the updated Group strategy, which is completed in July each year,
the Board addressed specific strategic topics in each of our meetings during
the year. This regular drumbeat of strategic discussions is greatly enhancing
the Board’s understanding of the potential opportunities available to our
businesses and ensuring that the requisite resources are allocated to the
realisation of these opportunities.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
The Board clearly recognises that long-term value creation can only be
delivered through safe, sustainable and responsible business operations.
The Board has established a Sustainability Committee, which is chaired by the
Group Chief Executive, to oversee the delivery of our ESG strategy. ESG-related
objectives are now widely reflected in the incentive arrangements for our
leadership teams and performance against agreed ESG targets is monitored
by the Board at every meeting. Further details on our ESG-related activities
and the progress made in the year can be found on pages 37 to 39.
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Chemring Group PLC Annual report and accounts 2022
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 2022, 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 97, these have
been 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
80
81
84
84
83
85
86
86
86
94-95
85
78-79
88
95
90
91-92
92
64
92
66
96
112
96
DIVERSITY
In acknowledgement of the benefits associated with having a diverse range
of skills, experience and backgrounds amongst members of the Board, the
Nomination Committee has agreed that it would be beneficial to appoint an
additional non-executive director in order to further improve diversity on the
Board. Further details on the search process which has been instigated are set
out in the Nomination Committee report on pages 94 to 95.
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. Laurie held a number of meetings with
employees at all levels of the organisation at three of our US businesses
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 generally positive, with employees welcoming
the opportunity to meet with a non-executive member of the Board and to
be able to provide honest feedback to a senior member of the organisation
outside of their direct line management. Insights from these interactions,
which are reported to the Board following the engagement sessions, 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 the US site
visits can be found on page 84.
BOARD EFFECTIVENESS
With the further easing of CV-19 travel-related restrictions during the
year, the Board was able to resume more regular site visits and took the
opportunity to visit the US twice during the year. In April the Board visited
our Chicago facility and in September we were able to see first-hand the final
commissioning of the automated countermeasures facility in Tennessee.
We continue to develop the strong relationship established with our
US Board in recent years, and in addition to meetings with the US Board
members whilst the Board was in the US, the President of the US Board
attended two of our Board meetings in the UK. Given the significance of
our US businesses, it is imperative that we maintain positive interactions
with the US Board.
These engagement activities are very beneficial to aiding the Board’s
understanding of both the challenges and opportunities within our businesses,
and we will continue with our scheduled programme of site visits in 2023.
Following the feedback received during the Board performance evaluation
during 2021, a new format was adopted in the year for the executive
management’s monthly report to the Board. The report now includes
more information on strategic developments and opportunities, and a
section dedicated to ESG-related matters. The new format provides
more concise information for the Board and is enabling us to monitor
performance in a range of areas more effectively.
BOARD EVALUATION
Having completed a full externally-facilitated Board performance evaluation
in late 2020, our evaluation this year was again conducted internally. Further
details of the process adopted and key actions arising out of the review are
set out on page 88. 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
13 December 2022
Chemring Group PLC Annual report and accounts 2022
77
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS BOARD OF DIRECTORS
EXPERIENCED LEADERSHIP
CHAIRMAN
EXECUTIVE DIRECTORS
CARL-PETER FORSTER N R
Non-Executive Chairman
MICHAEL ORD
Group Chief Executive
ANDREW LEWIS
Chief Financial Officer
SARAH ELLARD
Group Legal Director
& Company Secretary
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
6 years, 7 months
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
4 years, 6 months
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
5 years, 11 months
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
11 years, 3 months
EXPERIENCE:
- Board experience at Chairman and
EXPERIENCE:
- Extensive senior management
EXPERIENCE:
- Extensive international experience
Chief Executive level
experience in the defence sector
in the defence sector
EXPERIENCE:
- Legal, compliance and
governance expertise
- Extensive international experience
within the industrial goods and
engineering sectors
- International experience
in both service and
manufacturing industries
- Board experience at Finance
- Chartered Secretary
Director level
- Chartered Accountant
Andrew Lewis joined the Group on
9 January 2017 and was appointed
to the Board as Chief Financial Officer
on 19 January 2017.
Sarah Ellard was appointed as Group
Legal Director on 7 October 2011,
having been Group Company Secretary
since 1998.
Prior to joining the Group, Sarah
trained and worked at Ernst & Young
LLP. She is a Fellow of the Chartered
Governance Institute.
Andrew spent eight years as Group
Finance Director of Avon Rubber p.l.c.,
where he also performed the Interim
CEO role during 2015, following the
retirement of the previous CEO.
Prior to joining Avon, Andrew was
Group Financial Controller of Rotork
plc and before that he was a Director
at PricewaterhouseCoopers in Bristol
and New Zealand.
- Expertise in operational excellence
and lean manufacturing
Carl-Peter Forster joined the Group as
an independent non-executive director
and Chairman-designate on 1 May
2016, and was appointed Chairman of
the Board on 1 July 2016.
Carl-Peter formerly held senior
leadership positions in some of the
world’s largest automotive manufacturers,
including BMW, General Motors and Tata
Motors (including Jaguar Land Rover).
Carl-Peter is currently the Senior
Independent Director at Babcock
International Group PLC* and the
Chairman of Vesuvius plc*. He is
also a member of the Kinexon GmbH
Advisory Board and a member of the
Boards of The Mobility House AG,
LeddarTech Inc., Envisics Ltd, and
Gordon Murray Design Ltd. He was
previously a non-executive director of
IMI plc, Rexam PLC, Rolls-Royce plc
and Cosworth Ltd, and Chairman of
the Hella KGaA Shareholder
Committee, The London Electric
Vehicle Company Ltd and Friedola Tech
GmbH, and a member of the Boards of
Volvo Cars Corporation and Geely
Automobile Holdings.
Michael Ord was appointed to the
Board on 1 June 2018 and appointed as
Group Chief Executive on 1 July 2018.
Michael formerly held a number of
senior management roles with BAE
Systems including Managing Director of
their Naval Ships and F-35 Joint Strike
Fighter businesses. Prior to his 1996
move to industry, Michael had a
successful career in the Royal Navy
serving for 12 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 member of the Royal Aeronautical
Society. He previously served as
a trustee of The Education &
Training Foundation.
* Designates a current public company appointment.
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Chemring Group PLC Annual report and accounts 2022
NON-EXECUTIVE DIRECTORS
LAURIE BOWEN A N R
Non-Executive Director
ANDREW DAVIES A N R
Senior Independent
Non-Executive Director
STEPHEN KING A N R
Non-Executive Director
FIONA MACAULAY A N R
Non-Executive Director
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
3 years, 5 months
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
6 years, 7 months
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
4 years, 1 month
BOARD LENGTH OF SERVICE
(as at 13 December 2022):
2 years, 6 months
EXPERIENCE:
- Board experience at Chief
Executive level
EXPERIENCE:
- Board experience at Chief
Executive level
- International experience in the
- Extensive knowledge of the
EXPERIENCE:
- Executive and non-executive
board experience in public and
private companies
technology sector
international defence industry
- Chartered Accountant
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 Chair of the Remuneration
Committee on 4 March 2020. She is
also a non-executive director and
Chair 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.
EXPERIENCE:
- Board experience at
Chief Executive level and
in non-executive positions
- 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*,
Costain Group PLC* and EPI Group Ltd.
She was previously a non-executive
director of Coro Energy Plc.
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.
Length of service
13%
0–2 years (1)
3–4 years (3)
5+ years (4) 13+
37%
50%
COMMITTEE MEMBERSHIP
A Audit Committee
N Nomination Committee
R Remuneration Committee
Denotes Chair
Chemring Group PLC Annual report and accounts 2022
79
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS+
37
+
50
+
+
P
P
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, with the aim of delivering 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 BOARD
Responsible for promoting the long-term sustainable success of the Group; directing its purpose, values and strategy; oversight of financial and
organisational control; ensuring that the Group’s businesses have appropriate and effective internal control and risk management systems; and ensuring
effective engagement with stakeholders.
AUDIT COMMITTEE
Monitors the integrity of the financial
statements, and the effectiveness of the
external and internal audit processes.
NOMINATION COMMITTEE
Evaluates the size, structure and composition
of the Board, and oversees Board
appointments.
REMUNERATION COMMITTEE
Sets and reviews the directors’ remuneration
policy, and oversees remuneration
arrangements for the senior leadership.
See page 90
See page 94
See page 96
(Audit Committee report)
(Nomination Committee report)
(Directors’ remuneration report)
THE CHIEF EXECUTIVE
Responsible for the leadership and day-to-day management of the business, and development and implementation of the Group’s strategy.
EXECUTIVE COMMITTEE
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 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 64
(Risk management)
See page 57
(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 objectives.
See page 37
(Introduction to sustainability)
80
Chemring Group PLC Annual report and accounts 2022
PURPOSE
Chemring’s purpose is to help make the world a safer place. Across physical
and digital environments, our exceptional teams deliver innovative
technologies and products that detect and defeat ever-changing threats.
Further details on our purpose and how it links to our strategy and values can
be found on pages 6 to 7.
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.
Further details on how our values drive behaviours are set out on
pages 18 and 19.
HOW THE BOARD ESTABLISHES AND 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
- Fundamental Safety Rules
- “Spot It, Stop It, Share It” campaign
- Occupational Health, Safety and Wellbeing 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 policy and 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 and operational
assurance process
- 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 and internal control framework
- 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 embedding
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”
facilitated by an external consultant
- Reporting to the Board on progress against established ESG targets
- Board site visits
- 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
- Review of compliance with key policies under the Operational
Framework is included within the internal audit programme
- 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 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 2022
81
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CORPORATE GOVERNANCE REPORT continued
BOARD LEADERSHIP AND COMPANY PURPOSE continued
BOARD ACTIVITIES IN 2022
LEADERSHIP
STRATEGY
- Reviewed the company’s purpose, vision and values
- Approved the updated five-year plan and strategy for the Group
- Visited businesses in the UK and the US
- Engaged in reviews of organic and inorganic growth opportunities across
- Monitored culture through feedback on employee sentiment measured
the Group
through “Employee Voice”
- Reviewed potential acquisition targets for Roke and approved the
- Completed the annual Board performance evaluation
acquisition of Geollect
- Considered the implications for the Group of changes to the US
Department of Defense’s budget funding priorities and the reshaping of
other key defence markets
- Reviewed the “Data Strategy for Defence” and the “Defence AI Strategy”
published by the UK MOD and assessed the potential opportunities
for Roke
- Reviewed priorities for capital and operational investment
FINANCIAL
HEALTH, SAFETY, ENVIRONMENT AND SUSTAINABILITY
- Monitored performance of the businesses against the 2022 budget
- Monitored health, safety and environmental key performance indicators on
- Approved the 2023/2024 budgets
a monthly basis
- Approved the half year results, and the annual report and accounts
- Approved an extension to the Group’s revolving credit facilities
- Reviewed the Group’s capital allocation policy
- Approved the interim dividend and made a recommendation for the final
dividend
- Received briefings on significant incidents and high potential near misses
- Monitored developments with regards to CV-19 and the potential impact
on the businesses
- Agreed and reviewed progress against key health, safety and
environmental objectives
- Received regular updates from the Sustainability Committee
- Approved the Group’s approach to TCFD reporting and the management
of climate change risks
- Approved the Sustainability Report
PEOPLE AND CULTURE
GOVERNANCE, RISK AND REGULATORY
- Received regular reports from the Remuneration Committee
- Reviewed the Group 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, development programmes and
- Received updates on key legal issues and regulatory matters impacting the
succession plans
Group
- Reviewed the Group’s diversity, equity and inclusion policy and strategy
- Received regular updates on significant whistleblowing reports
- Received feedback on employee sentiment across the Group
- Reviewed the Company’s compliance with the Code
- Reviewed and updated the Schedule of Matters Reserved for the Board
and associated delegated levels of authority
- Approved the Group’s Modern Slavery Act statement for 2022
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
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Chemring Group PLC Annual report and accounts 2022
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;
- 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 changing market dynamics in key defence markets, with particular focus on the shift in funding priorities in the
US in preparation for a peer to peer conflict, and the implications for the Group’s future strategy. The Board also reviewed the “Data Strategy for Defence”
and the “Defence AI Strategy” published by the UK MoD and considered how the identified requirements aligned with Roke’s strategic objectives.
- The Board receives updates from the Group Chief Executive on his regular interactions with the UK MoD and from the President of the US operations on
his interactions with key US customers.
- In addition, the Board receives regular feedback from the businesses on the emerging technology requirements of their principal customers and future
budget allocations. These inputs are all reflected in the development of strategy, and 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, and allocates resources accordingly.
- The Board also considers feedback from shareholders when reviewing strategy, particularly with regards to capital allocation and future growth plans.
ACQUISITION OF GEOLLECT
- In reviewing and approving the acquisition of Geollect during the year, the Board considered how the technologies developed by the business could be
leveraged by Roke in meeting the increasing demand from Roke’s existing customers for open source intelligence.
- The Board also considered the culture of the Geollect and Roke organisations, and how the combined organisation could provide development
opportunities for employees going forward.
OPERATIONAL INVESTMENT IN ROKE
- A significant level of operational investment has been allocated to Roke over the last two years, including £2.5m of investment in the Roke Academy to
attract new talent and create a centre of excellence for learning and development. The business has also invested in its infrastructure, including a new office
in Woking to accommodate 150 staff, and in the value proposition for its existing workforce. In approving this investment, the Board considered how it
would contribute to the longer-term success of Roke and the wider Group, and the benefits that would be derived by customers and employees, particularly
in relation to workforce diversity and career development prospects.
IMPLEMENTATION OF ESG STRATEGY
- During the year, the Board continued to monitor progress against the ESG strategy adopted during 2021, with a particular focus on health and safety,
diversity and inclusion, climate change and employee wellbeing. This has driven investment in a number of areas, from capital investment in upgraded new
facilities to improve safety and reduce our environmental impact, to the establishment of development and networking programmes focused on promoting
diversity across the Group. In approving these investments, the Board has considered the impacts on a wide range of stakeholders, including employees,
customers, regulators and our local communities.
Further details on our approach to ESG can be found on pages 37 to 58
EXECUTIVE REMUNERATION
- Following shareholder approval of the updated directors’ remuneration policy in March 2022, the Remuneration Committee considered how the
remuneration and incentive arrangements for the executive directors would be appropriately flowed down to the next level of management.
- In reviewing the executive directors’ remuneration arrangements for the current financial year, the Remuneration Committee assessed 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 2022
83
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. Laurie held a number of meetings with
employees at all levels of the organisation in the US businesses 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;
- 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 is provided to the Board and is reflected on, as
appropriate, in future decision making. Laurie also provides a high-level overview
of the feedback received, on a non-attributable basis, to the leadership of the
business involved. Further details on the key themes arising during the year
are set out on page 52.
During the two Board visits to the US in the year, the Board members met
informally with employees from Chemring Energetic Devices (“CED”) and
Chemring Countermeasures USA (“CCM USA”). At CED, the Board members
met for lunch with small groups of employees from different areas of the
business, which provided an informal opportunity for open discussions on the
operation of the Board and the Group’s strategic priorities, and enabled the
employees to talk about the opportunities and challenges in their own area
of the business.
The Group Chief Executive engages in regular discussion forums with
employees during routine visits to the businesses, and other directors also
engage with employees during individual site visits.
The Board believes that its current mechanisms for engagement with
employees, including Laurie Bowen’s appointment as the non-executive
director lead on employee engagement, is currently proving effective, as
evidenced by the openness and quality of the discussions with employees.
When combined with the feedback on employee sentiment the Board
receives through Employee Voice and periodic culture “check-ins”, the Board
is confident that it 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 on an ongoing basis.
Further details on employee engagement more broadly
can be found on page 52
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.
Engagement with shareholders during these sessions is predominantly led
by the Group Chief Executive, the Chief Financial Officer and the Group
Director of Corporate Affairs. Meetings were held with over 120 current
and potential institutional shareholders during the year, covering 88 individual
institutions in the UK, the US and Japan. In addition to reviewing the results
announcements, discussions typically also cover the development of the
Group’s strategy and ESG-related matters.
The Board receives reports from the Company’s advisers on feedback
received from existing and potential investors and analysts following meetings
with the executive directors. Investor sentiment is a key input into
development of the Group’s strategy.
During the early part of the year, Laurie Bowen engaged with the Company’s
larger institutional shareholders regarding the new directors’ remuneration
policy which was presented to shareholders for approval at the Annual
General Meeting in March 2022. Further detail on how the Remuneration
Committee responded to the feedback received can be found in the
directors’ remuneration report included within the 2021 annual report.
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.
Further details on the Board’s engagement with shareholders can be found
on page 22.
BOARD SITE VISITS
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.
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. As referred to above, the
Board also visited CED in Chicago in April 2022 and CCM USA in Tennessee
in September 2022.
During the visit to the Chicago facility, the Board met with members of the
CED leadership team and received a briefing on current business operations
and future strategy. The Board was also able to participate in a detailed tour
of the facilities and individual Board members met with groups of employees
over lunch. The Board also met with members of the CHG Group, Inc.
leadership team during the visit and received a briefing from members of
the US Board on developments within the US defence sector.
During the CCM USA visit, the Board visited the new automated
countermeasure manufacturing facility and received a detailed briefing on
its planned operation. The Board also received a presentation from
management on the future strategy for the business.
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 Chief Financial Officer are both members of the
US Board.
The Chairman of the US Board and/or 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.
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Chemring Group PLC Annual report and accounts 2022
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 78 and 79.
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.
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:
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.
- 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
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 proposed appointment of the
Chairman as a non-executive director and Chairman-designate of Vesuvius plc.
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. The Board also
approved the appointment of Fiona MacAulay as a non-executive director
of Costain Group PLC following her resignation as a non-executive director
of Coro Energy Plc.
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
6
5
8
5
Chemring Group PLC Annual report and accounts 2022
85
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
CHIEF FINANCIAL OFFICER
- 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 2022
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 84, at least once a year.
BOARD AND COMMITTEE MEETINGS HELD DURING THE YEAR
4
3
2
1
0
November
December
January
March
April
May
July
September
The following table shows the attendance of all directors who served during the year at the meetings of the Board and its committees:
Board
Audit
Nomination
Remuneration
Board member
CARL-PETER FORSTER
LAURIE BOWEN
ANDREW DAVIES
SARAH ELLARD
STEPHEN KING
ANDREW LEWIS
FIONA MACAULAY
MICHAEL ORD
Board
(8 scheduled
meetings and
8 ad hoc
meetings)
Audit Committee
(5 scheduled
meetings)
Nomination
Committee
(2 scheduled
meetings and
2 ad hoc meetings)
Remuneration
Committee
(3 scheduled
meetings)
16(16)
16(16)
16(16)
16(16)
15(16)
15(16)
15(16)
16(16)
—
5(5)
5(5)
—
5(5)
—
5(5)
—
4(4)
4(4)
4(4)
—
4(4)
—
4(4)
—
3(3)
3(3)
3(3)
—
3(3)
—
3(3)
—
The maximum number of meetings which each director could have attended is shown in brackets. All directors attended all scheduled Board meetings.
In addition to the scheduled meetings, eight ad hoc Board meetings were convened to deal with matters 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 2022
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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.
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, and we remain
committed to further improving diversity on the Board, the Executive
Committee and the wider senior leadership team. Against this background,
we have instigated a search for an additional non-executive director, further
details of which are set out in the Nomination Committee report on pages
94 to 95.
Further details on the Board’s policy and approach to diversity are also set
out in the Nomination Committee report.
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.
The Company meets the cost of appropriate external training for directors,
the requirement for which is kept under review by the Chairman.
Directors are continually updated on the Group’s businesses and the matters
affecting the markets in which they operate. The Group Legal Director &
Company Secretary updates the Board on a regular basis with regards to
regulatory changes affecting the directors and the Group’s operations
generally, and briefings are provided by the Group’s advisers on key
developments in areas such as financial reporting and executive remuneration
practice.
INDEPENDENT ADVICE
All directors are entitled to take independent professional advice in
furtherance of their duties at the Company’s expense, should the need arise.
No director had reason to seek such advice during the year.
PERFORMANCE EVALUATION
The performance evaluation of the Board was externally facilitated in 2020
and an internal evaluation was therefore conducted during the year following
the approach adopted in 2021.
Questionnaires were sent to each of the directors for completion,
with a focus on:
- 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;
- key objectives for the Board in 2023; and
- identification of other areas in which the Board could improve its
effectiveness.
The individual responses were collated and 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 and the Board committees had continued
to work well together during the year and concurred that the resumption
of site visits and more regular, focused discussions on strategy had been
beneficial. The Board agreed that whilst the current balance of skills and
experience on the Board was appropriate, the diversity of the Board could
be further improved with the appointment of an additional non-executive
director. The Board also agreed it would be beneficial to initiate succession
planning for the Chairman and the Senior Independent Director, who are
both serving their third three-year terms. Further details on the actions being
taken to address these matters are set out in the Nomination Committee report
on pages 94 and 95. The following additional actions were also agreed to be
taken to further improve the effectiveness of the Board in the year ahead:
- continued focus of the Board and Nomination Committee on diversity,
equity and inclusion, and succession planning;
- regular and focused reviews of future strategic growth opportunities, with
input from the US Board members on the US defence market;
- continuation of the Board’s site visit programme, with at least one visit to
the US;
- further strengthening of the Board’s interactions with key stakeholders; and
- increased interactions between the non-executive directors outside of
scheduled Board meetings.
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 2022
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 Group is set out
on page 122.
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 2022, taken
as a whole, is fair, balanced and understandable. Furthermore, the Board
believes that the disclosures set out on pages 1 to 75 provide the information
necessary to assess the Group’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 2022 are set out
on page 65.
OPERATIONAL FRAMEWORK
Our Operational Framework 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
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 90 to 93.
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 74.
Chemring Group PLC Annual report and accounts 2022
89
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
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
INTRODUCTION
I am pleased to present my report as Chairman of the Audit Committee.
The Audit Committee continues to play a key 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 2021
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 2022 half year and full year results, and the external and internal
audit activity during 2022.
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.
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 Chief Financial Officer, 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 87.
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 Chief Financial
Officer, 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.
90
Chemring Group PLC Annual report and accounts 2022
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 proposals on audit and
corporate governance reforms
EXTERNAL AUDIT
- Interim review and full year audit plans
- Effectiveness and independence of the
external auditor
- Non-audit services provided by the external
auditor
- External auditor’s reports on the half year
and full year results, and consideration of
points raised by the auditor
and considered how the matters raised had been addressed in the 2022
half year results statement and the 2022 financial statements.
The Company is required to produce the 2022 financial statements in a
structured electronic format, known as the “European Single Electronic
Format” or “ESEF”, for the first time this year. The Committee considered
the FRC Lab’s guidance for companies implementing ESEF and reflected on
this in agreeing the approach to ESEF during the year.
SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE
IN RELATION TO THE FINANCIAL STATEMENTS
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 2022
and 31 October 2022, against the latest forecasts for the businesses
concerned and the future strategic plan for the Group. As a result of
these reviews, an impairment loss of £71.7m was recognised in the parent
company financial statements in respect of the carrying value of CHG
Overseas Limited, the holding company for the Group’s overseas
subsidiaries. The impairment loss does not impact the Group’s
consolidated balance sheet.
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 2022 and
September 2022. As a result of these reviews, an impairment charge of
£2.2m was recognised in April 2022 in respect of development costs
which had been capitalised for a Roke product for which there were no
sales forecast for the forseeable future.
- Transition to a new external audit partner
ALTERNATIVE PERFORMANCE MEASURES
in 2023
INTERNAL AUDIT
- Internal audit strategy and plan
- Effectiveness of the internal auditors and
their key findings
The Committee relies on regular reports from the executive directors,
the wider management team, and the external and internal auditors in order
to discharge its responsibilities. The Committee is satisfied that it received
timely, sufficient and reliable information to enable it to fulfil its obligations
during the year.
FINANCIAL REPORTING
A summary of the significant issues considered in relation to the 2022
financial statements is set out below.
The Committee also reviewed the following reports issued by the Financial
Reporting Council (the “FRC”) on their thematic reviews of financial
reporting and disclosures relating to:
- alternative performance measures;
- going concern and viability;
- deferred tax assets;
- earnings per share;
- business combinations;
- judgements and estimates; and
- Task Force on Climate-related Financial Disclosures requirements
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 that they were presented in
a fair, balanced and understandable manner.
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 and
the Group’s long-term viability statement are set out in the strategic report
on page 74.
Chemring Group PLC Annual report and accounts 2022
91
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT COMMITTEE REPORT continued
SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE
IN RELATION TO THE FINANCIAL STATEMENTS continued
Since the year end, the Committee has reviewed the form and content of the
2022 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?
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 willingness of the auditor to challenge management;
- the effectiveness of co‑ordination of the individual business unit audits
on a global basis;
- Is there an appropriate balance between the disclosure of
- the content of the external auditor’s reports and internal control
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
In May 2022, the Department of Business, Energy & Industrial Strategy
(“BEIS”) issued the Government’s response to last year’s White Paper on
“Restoring trust in audit and corporate governance”, summarising the
feedback received on the White Paper and setting out the measures the
Government intends to pursue.
In late 2021, in response to the White Paper, the Group initiated a project
focused on the development of an improved internal control framework to
ensure that processes, risks and controls were established and documented
in a consistent way across the Group. Process flows and control matrices
were developed and reviewed by PwC as part of their internal audit thematic
review of the Group’s preparedness for the potential new requirements set
out in the original BEIS consultation. The new control framework was reviewed
by the Committee and approved for implementation by the businesses with
effect from 1 November 2022. We believe that this will assist the businesses
in complying with the potential new requirements set out in the White Paper
and will help to improve the effectiveness of our internal control environment
and lead to more focused internal audit activities in future.
Further developments with regards to the proposed BEIS reforms are being
closely monitored by the Committee.
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. Mr Campbell-Orde has now completed
his fifth year as the lead audit partner and following discussions with the
Committee, it has been agreed that a new audit partner, James Childs-Clarke,
will assume responsibility for the Group’s audit for the 2023 financial year.
Mr Childs-Clarke was the Director on the Group’s audit from 2018 to 2020
and therefore has a good level of knowledge of the Group’s businesses and
their financial reporting arrangements. Having not been involved in the 2021
and 2022 audits, Mr Childs-Clarke is considered independent.
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 2022 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. In addition, in 2022 the
UK Senior Audit Manager from KPMG visited the audit team at KPMG US to
ensure the US audits were progressing as planned and in line with
international auditing standards.
The Committee did not ask the auditor to review any specific areas
of concern, outside of the normal audit process, during the year.
The Committee reviewed KPMG’s overall effectiveness in fulfilling the
external audit during the year and concluded that KPMG had conducted
a comprehensive, appropriate and effective audit.
The Committee has recommended to the Board that KPMG be reappointed
as the Group’s auditor at the 2023 Annual General Meeting.
The company is in compliance with the provisions of The Statutory Audit
Services for Large Companies Market Investigation Order 2014.
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Chemring Group PLC Annual report and accounts 2022
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:
The internal audit programme was managed by PwC during the year,
who were appointed by the Committee in 2018. In accordance with the
established practice, the programme covered 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 internal audit plan for 2022 included specific focus on:
- whether the provision of the proposed services might compromise
- the key financial and operating controls within the business;
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 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 Chief Financial Officer, ensures that
the Group maintains relationships with a sufficient choice of appropriately
qualified alternative audit firms for the provision of non-audit services.
INTERNAL AUDIT
The Audit Committee is responsible for reviewing the work undertaken
by the Group’s internal auditor, assessing the adequacy of the internal audit
resource, and recommending changes for increasing the scope of the internal
audit activities.
The Group’s internal audit programme incorporates a review of all sites
on a two or three-year rotational basis, and focuses on both financial and
non-financial controls and procedures. The Committee approves the annual
internal audit plan and receives regular reports from the internal auditor.
- IT and cyber-security governance and controls;
- the effectiveness of business continuity plans across the Group;
- compliance with the Group’s Bribery Act Compliance Manual;
- the Group’s plan for addressing the proposed audit and corporate
governance reforms set out in the BEIS consultation;
- compliance with the US International Traffic in Arms Regulations (“ITAR”)
in the Group’s non-US businesses; and
- compliance with the Group’s Commercial Policy.
No significant internal control failings or weaknesses were identified during
the year.
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 Chief Financial Officer
in their quarterly reviews with each of the businesses.
Since their appointments in 2018, PwC have completed the full cycle of
site reviews and have audited every trading business within the Group at
least once during their tenure, and conducted thirteen thematic reviews.
With the implementation of the new internal control framework across the
Group with effect from 1 November 2022, the financial control requirements
are now more clearly defined, removing a layer of subjectivity to the internal
audit scoping that existed previously. Against this background, the Committee
has agreed that, going forward, a new Internal Audit Manager will be
appointed, who will report functionally to the Chairman of the Committee
and will conduct internal audits across the Group in place of PwC, with the
support of in-house Group employees where appropriate. These activities
will be supplemented in specialist areas, such as IT and cyber security, with
more focused assurance reviews by external experts. The Committee will
review the new arrangements at the end of 2023 to ensure that they have
been implemented appropriately.
Stephen King
Chairman of the Audit Committee
13 December 2022
Chemring Group PLC Annual report and accounts 2022
93
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
INTRODUCTION
I am pleased to present the Nomination Committee’s report for the year
ended 31 October 2022.
The main focus of the Committee during the year was on the development
of the Group’s diversity, equity and inclusion (“DE&I”) strategy and succession
planning for the Board and the wider leadership team.
The Committee reviewed the changes to the Listing Rules regarding diversity
which will apply to the Group in the financial year ending 31 October 2023.
We have increased our disclosures on ethnic and gender diversity amongst our
employees in this year’s annual report in preparation for compliance with the
new requirements next year and as detailed below, we have instigated a search
for a new non-executive director to further improve diversity on the Board.
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 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
- Oversight of the Group’s diversity policy
- Succession planning for the Board, the Executive Committee and the
wider leadership team
94
Chemring Group PLC Annual report and accounts 2022
OPERATION OF THE COMMITTEE
The Committee’s responsibilities are set out in its terms of reference, which
are available on the Company’s website. The Committee reviews its terms
of reference and its effectiveness annually, and recommends to the Board
any changes required as a result of the review.
Meetings of the Committee are attended, at the invitation of the Chairman,
by the Group Chief Executive when considered appropriate. Members of
the Committee do not participate in any discussions relating to their own
reappointment or replacement. The 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 two scheduled
and two ad hoc meetings held during the year are shown on page 87.
BOARD COMPOSITION
The Committee regularly reviews the composition and balance of the Board
and its committees, and considers non-executive directors’ independence,
whether the balance between non-executive and executive directors remains
appropriate, and whether the Board has the requisite skills and experience to
oversee delivery of the agreed strategy for the Group.
The Board performance evaluation completed during the year, further details
of which are set out on page 88, considered the potential requirement for
additional appointments to the Board. Whilst we are satisfied with the
current composition, we agreed that it would be beneficial to appoint an
additional non-executive director to further improve diversity on the Board.
Odgers Berndtson have recently been engaged to undertake the search for
suitable candidates on our behalf.
APPOINTMENTS TO THE BOARD
The Committee is responsible for reviewing and recommending new appointments
to the Board, and for considering the reappointment of current directors.
Stephen King’s first three-year appointment as a non-executive director
expired in November 2021 and Laurie Bowen’s first three-year appointment
as a non-executive director expired in July 2022. After due consideration of
their valuable contribution to the Board and their roles as chair of the Audit
Committee and the Remuneration Committee respectively, the Committee
recommended to the Board that both Stephen and Laurie be reappointed 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 expired in April 2022 and May 2022 respectively. The Committee
concluded that we both continue to demonstrate commitment to our roles
and make an effective contribution to the Board, and we both therefore
accepted further three-year appointments. The Committee recognises that
we are both now serving our third three-year terms and has agreed that we
will start to develop orderly succession plans for both of us in 2023.
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.
It is intended that our current search for an additional non-executive director,
which is referenced above, will be conducted in this manner. A similar external
search will also generally be undertaken for new executive directors, with any
internal candidates being required to participate in this formal process.
GENDER IDENTITY OR SEX OF THE BOARD AND EXECUTIVE MANAGEMENT
Men
Women
Not specified/prefer not to say
Number of
Board members
Percentage of
the Board
5
3
—
62
38
—
ETHNIC BACKGROUND OF THE BOARD AND EXECUTIVE MANAGEMENT
Board member
White British or other white (including minority-white groups)
Mixed multiple ethnic groups
Asian/Asian British
Black/African/Caribbean/Black British
Other ethnic group, including Arab
Number of
Board members
Percentage of
the Board
8
—
—
—
—
100
—
—
—
—
Number of
senior positions
on the Board
(CEO, CFO,
SID and Chair)
4
0
—
Number of
senior positions
on the Board
(CEO, CFO,
SID and Chair)
4
—
—
—
—
Number on the
Executive Committee
Percentage of
Executive Committee
7
1
—
87
13
—
Number on the
Executive Committee
Percentage of
Executive Committee
8
—
—
—
—
100
—
—
—
—
DIVERSITY, EQUITY AND INCLUSION
DIVERSITY POLICY
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, education, social and
cultural background, and belief.
From an overall Group perspective, we have set a target of increasing
the proportion of females in all senior management positions across the
businesses to 33% by 2027. Various initiatives were instigated during the year,
including the provision of diversity and inclusion training for all of our senior
leaders and the participants in our various development programmes, and the
establishment of the Women’s Inclusivity Network (WIN@Chemring).
A number of these activities were supported by our female Board members.
Further details of the progress made during the year are set out on pages 54
and 55.
With regards to the Board, the Committee is cognisant of the diversity targets
set out in the updated Listing Rules which will apply to the Group in the financial
year ending 31 October 2023. As referenced above, we have instigated a
search for an additional non-executive director to further increase diversity
on the Board. The Committee will also have due regard for the diversity
targets when considering the replacements for the Senior Independent
Director and I when our third three-year terms expire in 2025.
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.
During the year, an assessment of the succession plans for individuals in key
leadership roles at the Group level and within the businesses, developed
utilising the Group’s established succession planning framework, was considered
by the Committee. The need for more diversity within the talent pipeline was
acknowledged by the Committee and this has now become a key focus of our
people and DE&I strategy. Further details on the actions we are taking to
address this are set out on pages 54 and 55.
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. The Committee will commence planning
for my replacement and the replacement of the Senior Independent Director
in 2023.
Further details on our approach to succession planning and talent
management are set out on pages 52 and 53.
Carl-Peter Forster
Chairman of the Nomination Committee
13 December 2022
Chemring Group PLC Annual report and accounts 2022
95
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT
REMUNERATION OVERVIEW
Laurie Bowen
Chair of the
Remuneration
Committee
REMUNERATION COMMITTEE MEMBERS
Laurie Bowen (Chair)
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 87. The Group Legal Director
& Company Secretary acts as secretary to the Committee, and the
Group Chief Executive, attends meetings by invitation, but no
executive director or other employee is present during discussions
relating directly to their own remuneration.
INTRODUCTION
The directors’ remuneration report for the year ended
31 October 2022 comprises:
- my annual report on the activities of the Remuneration Committee during
the year;
- the annual report on remuneration, which explains how the current
directors’ remuneration policy was implemented in 2022;
- additional statutory information on remuneration arrangements;
- a summary of the directors’ remuneration policy which was approved in
March 2022; and
- an overview of how the policy will be implemented in 2023.
Our directors’ remuneration policy was approved by shareholders at the
2022 Annual General Meeting, with 98.45% of shareholders having voted in
favour. A summary of the approved policy which applied during the year is set
out on pages 112 to 114. The full policy can be found in the 2021 directors’
remuneration report in the 2021 annual report and accounts, which is
published on the Company’s website.
96
Chemring Group PLC Annual report and accounts 2022
THE REMUNERATION COMMITTEE’S
ACTIVITIES DURING THE YEAR
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 2022
SALARY
- 2022 salary reviews for the executive directors and
members of the senior leadership team
ANNUAL BONUS
- Consideration of the 2021 annual bonus
plan outturn
PERFORMANCE
SHARE PLAN
(“PSP”)
GOVERNANCE
AND POLICY
- Approval of the 2022 annual bonus plan
financial targets and strategic objectives for the
executive directors
- Approval of the 2022 annual bonus plan payments
- Consideration of vesting outcomes for PSP awards
made in 2019
- Approval of 2022 PSP awards and
performance conditions
- Development of new directors’ remuneration
policy and consultation with shareholders on
the policy which was approved at the Annual
General Meeting in March 2022
- Reduction of the executive directors’ pension
contributions to align with those of the wider
workforce
PERFORMANCE FOR 2022 AND REMUNERATION OUTCOMES
Despite the challenging macro-economic environment in which we continue
to operate, 2022 has been another strong year of growth for Chemring, with
revenue up by 13% on 2021 and both profit before tax and EPS growing by
11% and 19% respectively. This is despite operational and supply chain
challenges as a result of the continuing impact of the legacy of CV-19, higher
energy costs, labour market shortages, increased inflation and disruption
within the US defence market. Overall, the Group has delivered robust
performance, exceeding the expectations set at the start of the financial year
and progressing against our strategic goal of balancing short-term
performance with longer-term value creation.
Further progress has also been made in 2022 in relation to our sustainability
agenda, with the continued successful implementation of our HSE strategy,
improvement in our climate and carbon related disclosures, and continued
focus on DE&I. It is in this context that the Remuneration Committee has
reviewed the 2022 outturns.
Performance against the 2022 annual bonus and PSP targets is explained in
more detail on pages 101 and 103 but in summary:
- Annual bonus: The annual bonus for 2022 was subject to EPS, operating cash
flow and strategic objective measures. As a result of the strong financial
performance during 2022, which resulted in both the stretch EPS growth
and the operating cashflow targets being exceeded, 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 the
common set of safety, people, governance, growth and strategic targets set
at the beginning of the financial year and, as a result of all the targets either
being achieved or exceeded, determined that the targets had been met at
90% of the maximum.
The total bonus payments for 2022 are therefore 98% of maximum for
each of the executive directors.
- PSP awards made on 22 March 2019 (subject, in part, to TSR performance over
the three-year period ended 21 March 2022): The PSP awards granted to the
executive directors on 22 March 2019 were subject 50% to EPS targets and
50% to relative TSR targets. As disclosed in last year’s report, based on
strong compound EPS growth over the three-year EPS performance period
to 31 October 2021 of circa 13.5% p.a., this part of the award was met in
full. The three-year TSR performance period ended on 21 March 2022, and
based on strong TSR performance, well into the top quartile versus the
comparator companies, this part of the award also vested in full.
- PSP awards made on 17 December 2019 (subject to performance over the three
years ended 31 October 2022): The PSP awards granted to the executive
directors on 17 December 2019 were subject 50% to EPS targets and 50% to
relative TSR targets. Based on strong EPS growth of circa 18.0% p.a. over the
three-year performance period and TSR performance over the same period
placing Chemring well into the top quartile versus the comparator group
(ranking circa 30th out of the entire FTSE All Share companies excluding
investment trusts), these awards will vest in full.
The Committee is satisfied the remuneration policy has operated as intended
in relation to performance and remuneration outcomes for 2022, and did not
use any discretion. In particular, with regards to the December 2019 PSP awards
vesting, the Committee considered whether there was the potential for windfall
gains on vesting. The Committee noted that Chemring had not been adversely
impacted by CV-19 prior to the grant of the awards in December 2019 and
that the share price performance over the full performance period had been
underpinned by robust financial performance. As a result, the Committee
determined that the level of payout was appropriate and reflective of Chemring’s
strong performance. In addition, in concluding that remuneration payments
overall and the policy have operated appropriately, the Committee considered
the bonuses payable across the Group, 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) and the wider stakeholder experience.
IMPLEMENTATION OF THE POLICY FOR 2023
Base salaries were reviewed in November 2022 and increases will be made
effective from 1 January 2023.
As disclosed in full detail in the 2021 directors’ remuneration report, the
Committee undertook a full review of the Group Chief Executive’s base salary
in late 2021 and concluded that the appropriate salary level for his role should
be £555,000. This salary recognised the growth in size and complexity of the
Group that had taken place since the Group Chief Executive’s appointment in
July 2018 and his role in delivering the transformational change achieved
through the period. Increasing his base salary followed a detailed consultation
with institutional investors, and in recognition of the prevailing executive pay
environment and the expectations of the leading shareholder advisory bodies, it
was agreed that the increase would be phased and set at £520,000 with effect
from 1 January 2022 and then increased to £555,000 with effect from 1
January 2023. The Committee retained discretion to further increase the salary
beyond the £555,000 in line with a workforce-related cost-of-living increase.
The Committee considered the continued growth of the Group and
exceptional performance during the year alongside institutional investors calls
for restraint in executive pay in the current high inflation environment and,
following feedback from the Group Chief Executive, concluded that it would
not be appropriate to further increase salary beyond £555,000. As a result his
salary will be £555,000 from 1 January 2023. From 2024, save for any material
change to the size and complexity of the Group, 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 current policy period.
With regard to pay increases for the Chief Financial Officer and the Group
Legal Director & Company Secretary, they will both receive a cost-of-living
related salary increase of 5% of salary effective 1 January 2023. The rate of
increase was within the range of budgeted increases of 4% to 6% that were set
by, and then agreed with, each individual operating business for 2023. In setting
the rate of increase at 5% the Committee noted the Board’s expectation that
the salary budgets set within each business may need to be revised through
2023 as a result of the ongoing levels of CPI and inherent challenges in
recruiting and retaining the best talent within the businesses. The Committee
also considered it important to recognise the continued growth in the size and
complexity of the Group relative to the market in their salary increases, and the
exceptional performance of both individuals during the year. In light of the
above, and consistent with other similarly high performing Group employees,
the Committee was comfortable with the 5% of salary award.
Pension contributions for the executive directors have been reduced to 7.5%
of salary, effective from 1 November 2022. The previous company pension
contribution rates were 10% of salary in the case of the Group Chief Executive
and 20% of salary in the case of the other two executive directors. The revised
pension provision aligns with majority practice across the UK workforce.
The annual bonus opportunity will continue to be 150% of salary for the
Group Chief Executive and 125% of salary for the Chief Financial Officer and
the Group Legal Director & Company Secretary. Performance measures are
unchanged for 2023, with 40% subject to EPS, 40% operating cash flow and
20% common strategic objectives.
PSP awards will be granted in 2023 over 150% of salary for all directors.
Performance will be subject 50% to EPS, 30% to relative TSR and 20% ESG
metrics related to scope 1 and scope 2 emissions.
With regard to non-executive director fees, the Board Chair fee and the
wider non-executive director base fee will be increased with effect from
1 January 2023 at 5% in line with the typical 4% to 6% increases being
awarded across the Group.
EMPLOYEE PAY AND STAKEHOLDER ENGAGEMENT
With exceptionally high levels of inflation, especially in the UK and the US,
we took a range of actions to support our employees in 2022. Given the
nature of our operating model, which necessitates a level of independence
within our US operations, our salary management responses varied by
location based on our understanding of local needs. The actions taken
included targeted salary increases, one-off payments and temporary salary
increases, as well as increased financial education.
Outside of pay, as the designated non-executive director, I visited employees in
numerous locations in the US and UK to understand their perception of working
for Chemring and take their feedback for the Board. During these meetings,
which included front line employees, supervisors, and middle and senior
management, the topics covered included Chemring’s approach to governance,
including the workings of the Remuneration Committee, and how remuneration
links to strategy through the business. Participants in these discussions had the
opportunity to feed back on remuneration as well as wider employment
considerations and all feedback received was presented to the appropriate
divisional leadership, the relevant Board committees and the full Board. My role
supplements the wider employee engagement process at Chemring, which
includes regular all-hands meetings and team briefings and our on-line “Employee
Voice” engagement tool. The above processes ensure that we understand the
employee perspective and can take appropriate action as we did during 2022.
With regards to engagement with shareholders, we concluded a wide-ranging
shareholder consultation process in early 2022 as part of seeking shareholder
approval for our 2022 directors’ remuneration policy and the changes noted
above to the Group Chief Executive’s salary. As a result of our engagement,
and the refinements made to our policy and its application based on shareholder
feedback, we received well over 95% support for our current policy and the
2021 directors’ remuneration report. The Committee welcomes shareholder
feedback and will continue to proactively engage in relation to any major
changes to the application of our remuneration policy.
CONCLUSION
I hope you will find this report helpful and informative, and that you will
support the resolution on the directors’ remuneration 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
Chair of the Remuneration Committee
13 December 2022
Chemring Group PLC Annual report and accounts 2022
97
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
2022 REMUNERATION AT A GLANCE
2022 REMUNERATION YEAR IN SUMMARY
SALARY
Salary increases effective 1 January 2022 were as follows:
- Michael Ord – 7.7% increase to £520,000
- Andrew Lewis – 3% increase to £380,358
- Sarah Ellard – 3% increase to £266,646
ANNUAL BONUS
Bonuses payable for 2022 performance as follows:
- Michael Ord – 147% of salary (£764,400)
- Andrew Lewis – 122.5% of salary (£465,939)
- Sarah Ellard – 122.5% of salary (£326,641)
PERFORMANCE
SHARE PLAN
AWARDS GRANTED
Awards made in December 2021, valued at 150% of salary, with EPS, TSR and ESG-related performance conditions measured over
a three-year period, and a two-year holding period post vesting.
AWARDS VESTING
Awards made in December 2019 to all three executive directors, which were subject to EPS and TSR performance conditions
measured over the three years ended 31 October 2022, will vest in full.
SHAREHOLDING
Shareholding guideline of 200% of base salary (both in and post-employment, with the post-employment guideline based on the lower
of the guideline and shares held on cessation of employment, which are held for two years).
CHAIRMAN AND
NON-EXECUTIVE
DIRECTOR FEES
Base fees for the Chairman and non-executive directors increased by 3% effective 1 January 2022.
EXECUTIVE DIRECTORS’ TOTAL PAY
This chart illustrates the total remuneration received by the executive directors in 2022.
Michael Ord
Andrew Lewis
Sarah Ellard
Total pay
£2,336k
£1,728k
£1,171k
£0.0m
£0.50m
£1.0m
£1.5m
£2.0m
£2.5m
Salary
Pension and benefits
Annual bonus
PSP
ANNUAL BONUS PLAN OUTCOME
This chart illustrates the bonuses payable for performance in 2022. 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.
Total bonus
Michael Ord
Andrew Lewis
Sarah Ellard
90%
147%
150%
£764k
75%
122.5%
125%
75%
122.5%
125%
£466k
£327k
£0.0m
£0.1m
£0.2m
£0.3m
£0.4m
£0.5m
£0.6m
£0.7m
£0.8m
Target (% of salary)
Actual (% of salary)
Maximum (% of salary)
98
Chemring Group PLC Annual report and accounts 2022
PERFORMANCE SHARE PLAN OUTCOME
This chart illustrates the total value of each of the performance share plan awards granted to all three executive directors on 17 December 2019, which will vest
in full. The grant value is based on the share price on the grant date and the vesting value is calculated on the same basis as in the directors’ emoluments table on
page 100.
Michael Ord
Andrew Lewis
Sarah Ellard
Grant £693k
Estimated vesting value £986k
Grant £553k
Estimated vesting value £787k
Grant £355k
Estimated vesting value £506k
Value of shares vesting
Accrued dividends
£0.0m
£0.1m
£0.2m
£0.3m
£0.4m
£0.5m
£0.6m
£0.7m
£0.8m
£0.9m
£1.0m
Chemring Group PLC Annual report and accounts 2022
99
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 2022. 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 King7
Fiona MacAulay
Total remuneration
Year
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
514
476
379
366
265
258
205
200
71
69
66
63
66
65
56
55
1,622
1,552
21
21
20
20
20
20
—
—
—
—
—
—
—
—
—
—
61
61
51
48
76
73
53
51
—
—
—
—
—
—
—
—
—
—
586
545
475
459
338
329
205
200
71
69
66
63
66
65
56
55
764
592
466
362
327
254
—
—
—
—
—
—
—
—
—
—
986
2,446
787
1,135
506
730
—
—
—
—
—
—
—
—
—
—
1,750
3,038
1,252
1,497
833
984
—
—
—
—
—
—
—
—
—
—
Total
£’000
2,336
3,583
1,728
1,956
1,171
1,313
205
200
71
69
66
63
66
65
56
55
180
172
1,863
1,785
1,557
1,208
2,279
4,311
3,836
5,519
5,699
7,304
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 received a cash supplement of 10% of salary in lieu of occupational pension scheme membership and the other executive directors received a cash supplement of 20%
of salary during the 2021 and 2022 financial years.
3. 40% of any bonus is delivered as an award of deferred shares.
4. The PSP awards granted in March 2019 to all three executive directors 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 ended 21 March 2022. These awards vested in full on 22 March 2022 and their value, which was included in the 2021 emoluments
on an estimated basis, has been restated based on the share price on the date of vesting of 323p. The 2021 emoluments figure for Michael Ord also includes the PSP award granted
in June 2018 which vested at 86.4% of maximum. The PSP awards granted in December 2019 to all three executive directors were also based 50% on EPS performance and 50%
on TSR performance, both measured over the three years ended 31 October 2022. These awards will vest in full and their estimated values have been included in the 2022
emoluments based on the average share price over the three-month period ended 31 October 2022, equating to 308p per share. Of the PSP values for 2022, £253,392 of the
value is attributable to share price appreciation for Michael Ord, £202,195 for Andrew Lewis and £130,049 for Sarah Ellard. The value of accrued dividends on each award has also
been included in the 2022 emoluments.
5. Laurie Bowen 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, which is included in the 2021 figures on a pro-rated basis. Mrs Bowen also receives an additional fee of £10,000 per annum for her appointment as
Chair of the Remuneration Committee.
6. Andrew Davies received an additional fee of £10,000 per annum for his appointment as Senior Independent Director with effect from 1 January 2021, which is included in the
2021 figures on a pro-rated basis.
7. Stephen King receives an additional fee of £10,000 per annum for his appointment as Chairman of the Audit Committee.
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.
100
Chemring Group PLC Annual report and accounts 2022
BASE SALARY AND BENEFITS PAID DURING THE YEAR (AUDITED)
Salaries for the executive directors were reviewed in November 2021 and increases were approved by the Remuneration Committee effective 1 January 2022.
The salaries of the executive directors during the year were therefore as follows:
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Annual salary from
1 January 2021 to
31 December 2021
Annual salary from
1 January 2022 to
31 October 2022
£483,000
£369,280
£258,880
£520,000
£380,358
£266,646
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 2022 was based on financial targets (namely earnings per share and operating cash flow), with 20% based on strategic
objectives. No bonus is 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, 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 2022 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
Payout
(% of element)
0%
50%
100%
0%
50%
100%
Target
15.96p
16.80p
17.64p
£78.38m
£82.50m
£86.63m
Actual
19.7p
Payout achieved
(% of element)
100%
£90.1m
100%
The strategic objectives set in respect of the 2022 bonus plan were set on a consistent basis across 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 strategic objectives are set out below:
Strategic objective target
SAFETY
- Continued delivery of the Group’s 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
- Deliver organic and inorganic growth plans for Roke.
- Progress Roke USA customer penetration and sales, and identify inorganic growth
acceleration options.
- Secure down-selection on the JBTDS and AVCAD Programs of Record.
- Commission new production facilities in Tennessee.
- Develop value-creating opportunities for the Energetics portfolio.
- Identify opportunities for expansion of the Sensors & Information portfolio.
Performance against targets
- Total recordable injury frequency rate of 0.78 (2021: 0.67), against
a targetted limit of 1.0.
- Process safety event rate (Level 3 & 2) 1.86 (2021: 1.73), against
a targetted limit of 2.0.
Achieved in full.
- Delivered double digit revenue and profit growth at Roke and
completed the Geollect acquisition to establish a position in the
open-source intelligence sector and further advance inorganic growth.
- Roke Futures formed to expand opportunities in law enforcement
and government agencies, digital healthcare, civil aerospace, and
critical infrastructure.
- Good progress made by Roke USA with US DoD customers to
build brand awareness and recognition and validate the technical
performance of the Resolve and Perceive electronic warfare
systems; however, despite strong performance, the challenging
sales target set for Roke USA was not met.
- Completed in-depth assessment of inorganic growth acceleration
options for Roke USA.
- Down-selected for low-rate initial production contract on the
JBTDS program.
- New production facilities in Tennessee commissioned and
commenced first article production.
- Continuing development of inorganic growth plans for the
Energetics businesses to capture the opportunities resulting in
market demand increasing following the invasion of Ukraine.
- Significantly increased order intake across space and missiles markets.
- Progress made on the development of new biological
detection technologies.
Achieved at 75% of maximum in light of the Roke USA sales
target not being achieved and delays in the AVCAD Program
of Record.
Chemring Group PLC Annual report and accounts 2022
101
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 target
Performance against targets
PEOPLE
- Ensure all employees have a voice in the business to strengthen our values-based culture
– increase engagement and improve management responses to employee feedback.
- Deliver improvements in business leadership and line management capabilities.
- Develop more robust and diverse talent development and succession capabilities.
GOVERNANCE
- Continue to embed and strengthen the Group’s governance framework.
- Employee Voice participation continues to improve, with output
now shared at senior teams’ meetings in each business and at
all-hands briefings; however, despite strong participation rates,
providing access to all operational employees who do not have
access to work email remains a work-in-progress.
- Leading Our People and Aspire@Chemring development
programmes deployed Group-wide.
- Talent framework and succession planning process implemented
across the Group, with associated personal and professional
development plans in place for key roles.
- Diversity, equity and inclusion training deployed Group-wide.
Achieved at 75% of maximum in light of the Employee Voice
participation target not being met.
- Updated Operational Framework issued in March 2022.
- Two training modules on the Code of Conduct developed and
- Demonstrate progress in operational assurance statement improvement plans.
rolled out.
- Complete implementation of the Chemring Compliance Portal (“the CCP”).
- Continue deployment of common standards and practices to safeguard our people,
information and technology.
- Operational Assurance Statement process completed twice during
the year, with scoring demonstrating progress in the businesses.
- Third party due diligence module on the CCP fully operational for
sales partners, and entry of service providers and suppliers into the
CCP now substantially complete for non-US businesses.
- US BACM SharePoint system (US equivalent of the CCP)
established for the approval of US service providers and suppliers.
- Group Security Committee established and appropriate
governance arrangements implemented.
- New standards issued on cyber-security, travel security and
information security.
Achieved in full.
SUSTAINABILITY
- Develop and deploy carbon reduction plans to deliver the Group’s commitment to be
- Group-wide carbon reduction plan in-place and being delivered
by all businesses.
carbon neutral by 2030.
- Reduce Group scope 1 and 2 emissions by 5%.
- Sustainability Committee established and co-ordinating
Group-wide carbon reduction activities.
- Group scope 1 and 2 emissions reduced by 7.3% and
independently verified by ERM.
Achieved in full.
The Committee assesses performance against the targets using both qualitative and quantitative data. The above reflects a full summary of the targets set and
achievements delivered within the bounds of commercial confidentiality. Based on the performance against the five strategic targets detailed, the targets were
met at 90% of the maximum.
Based on the above performance, bonuses are payable to the executive directors under the 2022 bonus plan as follows (audited):
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Maximum bonus
(% of salary)
150%
125%
125%
Bonus paid in
respect of
financial targets
(% of salary)
120%
100%
100%
Bonus paid in
respect of
strategic
objectives
(% of salary)
27.0%
22.5%
22.5%
Total bonus
payment(£) 1
£764,400
£465,939
£326,641
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 stakeholder experience during the year and was satisfied
that no discretion was necessary.
102
Chemring Group PLC Annual report and accounts 2022
DEFERRED BONUS SHARES GRANTED DURING THE YEAR IN RESPECT OF THE 2021 BONUS
Details of the deferred bonus share awards granted on 14 December 2021 in relation to the bonus for the year ended 31 October 2021 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
14 December 2021
14 December 2021
14 December 2021
83,481
51,060
35,795
£236,669
£144,755
£101,479
NOTE:
1. Value based on the closing share price of 283.5p on the date of grant.
PERFORMANCE SHARE PLAN (AUDITED)
Vesting of March 2019 PSP awards
The PSP awards granted to all three executive directors on 22 March 2019 were subject 50% to EPS and 50% to TSR performance conditions. Details of the
performance against the EPS performance condition, which was met in full, is set out in the 2021 directors’ remuneration report.
The performance period for the TSR performance condition ended on 21 March 2022. The Company’s TSR over the TSR performance period ranked 1.4
against a median of 8.5 for the comparator group and therefore the TSR part of the award vested in full.
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
vested
Number of shares
lapsed
421,568
336,391
216,361
421,568
336,391
216,361
—
—
—
Value of shares
vested
Value of accrued
dividends
Total value of awards
vested 1
£1,361,664
£1,086,543
£698,846
£61,127
£48,777
£31,372
£1,422,791
£1,135,320
£730,218
NOTE:
1. Value based on the closing share price of 323p on 22 March 2022.
Vesting of December 2019 PSP awards
The PSP awards granted to all three executive directors on 17 December 2019 were made subject to the following performance conditions:
Measure
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 members of the comparator group over
the three financial years ended 31 October 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 Group’s compound EPS growth on continuing operations over the three financial years ended 31 October 2022 was 18.0% p.a. and 100% of the part of the
award subject to the EPS measure will therefore vest on 17 December 2022. The Company’s TSR over the same performance period was 70.9% against an
upper quartile TSR of 24.9% for the comparator group, ranking the Group at 30.5 out of 378, and therefore the TSR part of the award will also vest in full on
17 December 2022.
Details of the awards granted to the executive directors on 17 December 2019 are provided below (audited):
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
Vesting date
17 December 2022
17 December 2022
17 December 2022
Number of shares
at grant
Number of shares
to vest
Number of shares
to lapse
307,142
245,085
157,635
307,142
245,085
157,635
—
—
—
Value of shares
to vest
Value of accrued
dividends
Total value of awards
to vest1
£945,997
£754,862
£485,516
£39,928
£31,861
£20,493
£985,925
£786,723
£506,009
NOTE:
1. Value estimated based on the average closing share price of 308p over the three-month period ended 31 October 2022.
Chemring Group PLC Annual report and accounts 2022
103
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
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
15 December 2021
15 December 2021
15 December 2021
150% of salary
150% of salary
150% of salary
Closing
share price
on date
of grant
286.5p
286.5p
286.5p
Number of
conditional
shares
awarded
255,555
195,386
136,973
Face
value
£732,165
£559,781
£392,428
% that
vests at
threshold
25%
25%
25%
Vesting
determined by
50% EPS growth,
30% relative
TSR performance and
20% ESG performance,
as detailed below
The performance conditions applying to the awards made in December 2021 will be measured over three financial years commencing 1 November 2021 and are
weighted 50% EPS growth, 30% relative TSR performance and 20% ESG performance.
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
% of EPS part that may vest
0%
25%
On a straight-line basis between 25% and 100%
100%
NOTE:
1. Earnings per share is calculated on an underlying, 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) over the three-year performance period
% of TSR part that may vest
Below median
Median
Between median and upper quartile
Upper quartile or above
The ESG performance condition will be measured as follows:
Reduction in scope 1 and scope 2 emissions (market-based) over the three-year performance period
Less than 15%
15%
Between 15% and 25%
25% or more
0%
25%
On a straight-line basis between 25% and 100%
100%
% of ESG 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 2021 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).
104
Chemring Group PLC Annual report and accounts 2022
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
51
76
53
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
—
—
461
Total benefit accrued at
31 October 2022
Pension
£’000 p.a.
—
—
24
Cash
£’000
—
—
72
Transfer value
of accrued
benefit at
31 October
2022
£’000
Increase in
transfer value
during year
(less members’
contributions)
£’000
—
—
461
—
—
—
Value of
benefit
for single
figure
£’000
51
76
53
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
NOTES:
1. Michael Ord received a 10% cash supplement in lieu of pension and the other executive directors received a 20% cash supplement during the 2021 and 2022 financial years.
With effect from I November 2022 the cash supplement paid to all of the executive directors has been reduced to 7.5% to align with the workforce rate.
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 with the Chemring Group Staff Pension Scheme 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. 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 AND PAYMENTS FOR LOSS OF OFFICE
No payments were made to past directors and no payments were made for loss of office during the year.
REMUNERATION IN THE WIDER WORKFORCE
In addition to determining the remuneration arrangements for the executive directors, the Committee considers and approves the base salaries for eight senior
executives, excluding those based in the US. The Committee also receives information on general pay levels and policies across the Group. The Committee,
therefore, has due regard to salary levels across the Group in applying its remuneration policy.
The Group comprises a number of businesses, some of which have been developed through organic growth, others of which have been acquired over time.
As a result there are diverse remuneration arrangements in place across the Group. An example of this is pension provision, where contributions range from
4% to 20% of salary depending on location and length of service. Where possible the business aims to consolidate and normalise its remuneration approach,
particularly in relation to fixed pay arrangements, taking into account regional and sector-related variations.
In the US, the US Board has established a Compensation Committee to set the remuneration arrangements for the senior leadership of the US businesses,
in accordance with the requirements of our Special Security Agreement with the US Government. The US Compensation Committee consults with the
Remuneration Committee where appropriate.
The annual bonus plan for the senior leadership is typically operated for around 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.
Below Board, the performance share plan is also operated, in order to allow us to recruit and retain the best talent. Employees who are considered to have
a direct influence on Group level performance participate in this plan and in 2022 this included 52 employees.
All UK employees are encouraged to participant in the UK Sharesave Plan. At present over 500 employees participate in the UK Sharesave Plan.
Chemring Group PLC Annual report and accounts 2022
105
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. 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 after-tax vested PSP awards until such time as the guidelines
have been met. The executive directors are also 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 time of stepping down from the Board.
The interests of the directors in the ordinary shares of the Company at 31 October 2022 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)
447,994
401,152
222,135
30,000
15,000
—
35,500
—
Value of
legally
owned
shares as %
of salary 1
Guideline
met
260%
319%
252%
—
—
—
—
—
Yes
Yes
Yes
—
—
—
—
—
Unvested and subject to performance
conditions under the PSP
Dec 2019
award
307,142
245,085
157,635
—
—
—
—
—
Dec 2020
award
220,375
175,848
125,670
—
—
—
—
—
Dec 2021
award
255,555
195,386
136,973
—
—
—
—
—
Total at
31 October
2022
Deferred bonus
share
awards
783,072
616,319
420,278
—
—
—
—
—
255,803
161,062
106,547
—
—
—
—
—
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 302p at 31 October 2022.
The directors’ share interests at 31 October 2022 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 2022.
OUTSTANDING PSP AWARDS (AUDITED)
Number of shares under award
Date of
vesting
Closing
share price on
date of grant (p)
Vested
during
the year
(421,568)
—
—
—
At
31 October
2022
—
307,1421
220,375
255,555
22 March 2022
17 December 2022
16 December 2023
15 December 2024
(421,568)
783,072
(336,391)
—
—
—
—
245,0851
175,848
195,386
22 March 2022
17 December 2022
16 December 2023
15 December 2024
(336,391)
616,319
(216,361)
—
—
—
—
157,6351
125,670
136,973
22 March 2022
17 December 2022
16 December 2023
15 December 2024
(216,361)
420,278
139.6
225.5
300.0
286.5
139.6
225.5
300.0
286.5
139.6
225.5
300.0
286.5
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2021
421,568
307,142
220,375
—
949,085
336,391
245,085
175,848
—
757,324
216,361
157,635
125,670
—
499,666
Awarded
during
the year
—
—
—
255,555
255,555
—
—
—
195,386
195,386
—
—
—
136,973
136,973
Lapsed
during
the year
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
NOTE:
1. As explained above, these awards will vest in full on 17 December 2022.
106
Chemring Group PLC Annual report and accounts 2022
PERFORMANCE CONDITIONS FOR OUTSTANDING PSP AWARDS
Measure
Director
Executive directors’
award values
Threshold
vesting
Full
vesting
Awards made on
17 December 2019
Awards made on
16 December 2020
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)
Total compound EPS growth per annum over the
three financial years ended 31 October 2024
(50% of award)
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)
Awards made on
15 December 2021
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 2024
(30% of award)
Michael Ord
Andrew Lewis
Sarah Ellard
150% of salary
Median ranking
(25% vests)
Upper quartile
ranking
(100% vests)
Reduction in scope 1 and scope 2 emissions (market
based) over the three financial years ended
31 October 2024
(20% of award)
15%
(25% vests)
25%
(100% vesting)
OUTSTANDING DEFERRED BONUS SHARE AWARDS (AUDITED)
Number of shares under award
Executive
Michael Ord
Andrew Lewis
Sarah Ellard
At
1 November
2021
100,333
71,989
—
172,322
64,048
45,954
—
110,002
41,195
29,557
—
70,752
Awarded
during
the year
—
—
83,481
83,481
—
—
51,060
51,060
—
—
35,795
35,795
Lapsed
during
the year
Vested
during
the year
At
31 October
2022
Date of
vesting
Closing
share price on
date of grant (p)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
100,333
16 December 2022
71,989
83,481
255,803
64,048
45,954
51,060
161,062
41,195
29,557
35,795
106,547
15 December 2023
14 December 2024
16 December 2022
15 December 2023
14 December 2024
16 December 2022
15 December 2023
14 December 2024
210.0
300.0
283.5
210.0
300.0
283.5
210.0
300.0
283.5
Chemring Group PLC Annual report and accounts 2022
107
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
2021
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
2022
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 TSR 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 2022, of £100 invested in Chemring Group PLC on 31 October 2012 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.
£350
£300
£250
£200
£150
£100
£50
£0
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
31 Oct 22
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. Michael Flowers replaced
Mark Papworth as Group Chief Executive on 24 June 2014 and Michael Ord replaced Michael Flowers on 1 July 2018.
The total remuneration figure for 2014 includes the payments for loss of office made to Mark Papworth. The figure for 2018 includes 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.
Mark
Papworth/
Michael
Flowers
Mark
Papworth
2013
785
40%
0%
2014
841
50%
0%
Michael Flowers
2015
507
0%
0%
2016
855
2017
831
68.3%
59.5%
0%
0%
Michael
Flowers/
Michael Ord
2018
969
0%
35%
Michael Ord
2019
1,021
2020
1,045
98%
98%
0%
0%
2021
3,583
98%
86.4%/
100%
2022
2,336
98%
100%
Total remuneration (£’000)
Annual bonus
(% of maximum)
PSP awards vesting
(% of maximum)
108
Chemring Group PLC Annual report and accounts 2022
PERCENTAGE CHANGE IN THE DIRECTORS’ REMUNERATION
The table below shows the annual 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 2022 financial years, compared to that of the average for all eligible employees of the Group.
2019 vs 2020
2020 vs 2021
2021 vs 2022
Group Chief Executive
Chief Financial Officer
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
(12.6%)
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%
Salary
8.0%
3.6%
2.7%
1.0%
2.9%
4.8%
1.5%
1.8%
3.2%
Benefits
Annual bonus
0%
0%
0%
N/A
N/A
N/A
N/A
N/A
(18.0%)
29.1%
28.7%
28.7%
N/A
N/A
N/A
N/A
N/A
5.0%
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. The percentage increase in the fees paid to Laurie 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 employee engagement from 1 January 2021.
3. The percentage increase in the fees paid to Andrew Davies between 2020 and 2021 reflects the additional fees paid to him as Senior Independent Director 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 from the 2022 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 2022 for UK employees as at 31 October 2022, 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
2022
2021
2020
Year
2022
Methodology
Method A
Method A
Method A
Total remuneration
25th percentile (lower
quartile) pay ratio
50th percentile
(median) pay ratio
75th percentile
(upper quartile) pay ratio
68.3
116.3
39.9
46.8
76.1
25.0
29.7
49.2
15.8
Salary
Total remuneration
25th percentile
50th percentile
75th percentile
25th percentile
50th percentile
75th percentile
£29,768
£42,600
£56,004
£34,196
£49,941
£78,523
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 increased in 2021 as a result of, exceptionally, the inclusion of two PSP awards vesting in relation to the year. One of the PSP awards related to a
one-off award granted to the Group Chief Executive on appointment, which vested at 86.4% of maximum, and the second PSP award related to the normal PSP
grant, which vested at 100% of maximum. For 2022, there is only one PSP award included in the Group Chief Executive’s total single figure of remuneration,
which vested in full. Whilst the Group Chief Executive also received a salary increase for 2022 and an increase to his annual bonus entitlement, the pay ratio has
decreased primarily as a result of the total PSP value reducing this year.
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 policies
against all employees.
Chemring Group PLC Annual report and accounts 2022
109
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
2022
£m
169.7
14.4
87.2
2021
£m
146.0
11.9
56.2
% change
+16%
+21%
+55%
The dividends figures relate to amounts payable in respect of the relevant financial year.
Retained profits reflect the underlying success of the Group and includes the profit generated in the relevant financial year.
ADVISERS TO THE REMUNERATION COMMITTEE
Korn Ferry were appointed by the Remuneration Committee to advise on remuneration and incentive plan related matters from 4 March 2021. Korn Ferry is a
signatory to the Remuneration Consultants’ Group Code of Conduct. The Committee has reviewed the nature of the services provided by Korn Ferry and is
satisfied that no conflict of interest exists in the provision of these services. The Company received no other services from Korn Ferry during the year. The total
fees paid to Korn Ferry in respect of the services to the Committee during the year were £25,720 (2021: £52,500). 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) and the Group Legal Director & Company Secretary (Sarah Ellard). No
executive is involved in discussions on their own pay.
SHAREHOLDER VOTING ON THE DIRECTORS’ REMUNERATION POLICY AT THE 2022 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 3 March 2022, 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)
231,710,461
3,654,614
235,365,075
7,154,172
242,519,247
98.45%
1.55%
100.0%
0.01%
NOTE:
1. A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast “for” and “against” a resolution.
SHAREHOLDER VOTING ON THE DIRECTORS’ REMUNERATION REPORT AT THE 2022 ANNUAL GENERAL MEETING
The directors’ remuneration report is subject to an advisory vote by shareholders every year. At the Annual General Meeting held on 3 March 2022, 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)
233,755,408
1,598,867
235,354,275
7,164,972
242,519,247
99.32%
0.68%
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.
110
Chemring Group PLC Annual report and accounts 2022
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION POLICY
KEY OBJECTIVES
In developing a policy for the executive directors’ remuneration, the Remuneration Committee seeks to:
- maintain a competitive package of rewards required to promote the long-term success of the Company, without being excessive by reference to market rates
across comparator companies, and neither encouraging or rewarding inappropriate risk taking;
- ensure performance-related elements:
> are transparent, stretching and rigorously applied;
> form a significant proportion of the total remuneration package of each executive director; and
> align the interests of executives with those of shareholders, by ensuring that a significant proportion of remuneration is performance related and delivered
in shares; and
- set remuneration in the context of the core values of the business and with the aim of alignment with culture.
The remuneration policy for the executive directors and other senior executives is also designed with regard to the policy for employees across the Group as a
whole. However, there are some differences in the structure of the remuneration policy for executive directors and other senior executives. In general, these
differences arise from the development of remuneration arrangements that are market-competitive for the various categories of individuals. They also reflect the
fact that, in the case of the executive directors and other senior executives, a greater emphasis tends to be placed on performance-related pay in the market.
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.
CONSIDERATION OF CODE PROVISIONS IN DETERMINING POLICY
When developing the current directors’ remuneration policy for the executive directors, the Remuneration Committee also addressed the following factors
outlined in the 2018 Code:
FACTOR
HOW THIS HAS BEEN ADDRESSED
CLARITY
Remuneration arrangements should
be transparent and promote effective
engagement with shareholders and
the workforce.
The Chair of the Remuneration Committee consults with major shareholders on the directors’
remuneration policy, which is subject to shareholder approval every three years, and on any significant
proposed changes to the policy.
The employee engagement initiatives implemented by the Board provide an opportunity for employees to
express their views on a wide range of topics, including directors’ remuneration arrangements.
SIMPLICITY
Remuneration structures should avoid
complexity and their rationale and operation
should be easy to understand.
The Company operates only two incentive plans for the executive directors – an annual bonus plan to
incentivise and reward short-term performance and the PSP, which incentivises long-term performance and
aligns management’s interests with shareholder interests. The annual bonus plan structure for the executive
directors is broadly replicated in the bonus arrangements for the business unit leaders and their direct reports.
RISK
Remuneration arrangements should ensure
reputational and other risks from excessive
rewards, and behavioural risks that can arise
from target-based incentive plans,
are identified and mitigated.
PREDICTABILITY
The range of possible values of rewards
to individual directors and any other limits of
discretions should be identified and explained
at the time of approving the policy.
PROPORTIONALITY
The link between individual awards, the
delivery of strategy and the long-term
performance of the company should be clear.
Outcomes should not reward
poor performance.
The annual bonus plan includes non-financial 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.
Chemring Group PLC Annual report and accounts 2022
111
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
POLICY SUMMARY
The table below provides a summary of the current directors’ remuneration policy. The full policy was approved by shareholders at the Annual General
Meeting held on 3 March 2022 and can be found in the 2021 directors’ remuneration report included in the 2021 report and accounts on our website
(https://www.chemring.com/investors/annual-reports/2021). The policy remains valid until the 2025 Annual General Meeting.
Further details of the policy are set out on pages 115 to 116, and an explanation of how the policy will be applied in 2023 is set out on pages 117 to 119.
EXECUTIVE DIRECTORS
Element
Purpose and link to strategy
Operation
Maximum
Performance assessment
Salary
- 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 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
- 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
deferred as a conditional award
of deferred shares
- Vesting of deferred shares is subject
to continued employment (save in
“good leaver” scenarios) at the end
of three years from the award of
the bonus
- The payment of any earned bonus
remains ultimately at the discretion
of the Committee
- Non‑pensionable
- Executives are entitled to receive,
on vesting of deferred share
awards, the value of dividend
payments that would otherwise
have been paid on the deferred
shares during the deferral period
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 mechanism8
112
Chemring Group PLC Annual report and accounts 2022
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 mechanism8
All-employee
share scheme
- UK employees, including executive
- The UK Sharesave Plan has
directors, are encouraged to acquire
shares by participating in the Group’s
all-employee share plan – the UK
Sharesave Plan
standard terms
- Participation limits are those set
out by HM Revenue & Customs
from time to time
- N/A
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 6%.
- From 1 November 2022, incumbent
executive director pensions will
reduce to the typical workforce
rate via a cliff-edge reduction
- 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
Other benefits
- Provides a competitive package of
benefits that assists with recruitment
and retention
Chemring Group PLC Annual report and accounts 2022
113
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
POLICY SUMMARY continued
EXECUTIVE DIRECTORS continued
Element
Purpose and link to strategy
Operation
Maximum
Performance assessment
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 on pages 117 to 119.
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.
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Chemring Group PLC Annual report and accounts 2022
COMMITTEE DISCRETIONS
The Committee operates the Group’s variable incentive plans according to their respective rules and in accordance with governing legislation and HM Revenue &
Customs rules where relevant. To ensure the efficient administration of these plans, the Committee will apply certain operational discretions. These include the
following:
- selecting the participants in the plans on an annual basis;
- determining the timing of grants of awards and/or payment;
- determining the quantum of awards and/or payments (within the limits set out in the remuneration policy);
- determining the extent of vesting based on the assessment of performance;
- making the appropriate adjustments required in certain circumstances (e.g. change of control, rights issues, corporate restructuring events
and special dividends);
- determining “good leaver” status for incentive plan purposes and applying the appropriate treatment; and
- undertaking the annual review of weighting of performance measures, and setting targets for the annual bonus plan and the PSP from year to year.
If an event occurs which results in the annual bonus plan or PSP performance conditions and/or targets being deemed no longer appropriate by the Committee
(e.g. a material acquisition or divestment), the Committee will have the ability to adjust appropriately the measures and/or targets and alter weightings, provided
that the revised conditions or targets are not materially less difficult to satisfy (taking account of the relevant circumstances).
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.
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 eight 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 remuneration links to business strategy and how performance is determined. Employees are
encouraged to ask questions and share their views during these meetings.
The remuneration policy described above provides an overview of the structure that operates for the most senior executives in the Group. Lower aggregate
incentive quanta are applied at below executive level, with levels driven by market comparatives and the impact of the role.
Employees are provided with a competitive package of benefits, which typically includes participation in the Group’s defined contribution pension arrangements.
Long-term incentives are provided to the most senior executives and those identified as having the greatest potential to influence performance within the Group.
However, in order to encourage wider employee share ownership, the Company also operates a Sharesave Plan in the UK, in which all UK employees are eligible
to participate.
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 executive directors’ service contracts are available for inspection at the Company’s registered office.
Chemring Group PLC Annual report and accounts 2022
115
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
POLICY IN RESPECT OF THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS
Element
Purpose and link to strategy
Operation
Maximum
Performance
assessment
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-
- N/A
- N/A
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 2022
1 August 2022
17 May 2022
1 December 2021
3 June 2020
30 April 2025
31 July 2025
16 May 2025
30 November 2024
2 June 2023
116
Chemring Group PLC Annual report and accounts 2022
APPLICATION OF THE REMUNERATION POLICY IN 2023
This part of the report sets out how the approved directors’ remuneration policy will be implemented in 2023.
EXECUTIVE DIRECTORS
Element
Salary
Implementation
- The executive directors’ salaries were reviewed in November 2022, and the following salary increases were agreed, effective 1 January 2023:
> Michael Ord – £555,000
> Andrew Lewis – £399,376
> Sarah Ellard – £279,978
- As detailed in the Chair’s introductory statement, the increase to the Group Chief Executive’s salary was the second phase of a pre-agreed
increase arising from the 2022 directors’ remuneration policy review process with no further cost-of-living related adjustment. The other
executive directors’ increases were agreed at 5%, with the rate of increase within the range of budgeted increases of 4% to 6% that were
set by, and then agreed with, each individual operating business for 2023.
Benefits
- No changes are proposed to the benefits provision for 2023.
Pension
- Pension provision has been reduced from 10% of salary for the Group Chief Executive and 20% of salary for the other executive directors
to 7.5% of salary with effect from 1 November 2022 to achieve alignment with the typical rate of workforce pension provision.
Bonus
- The maximum bonus opportunity will be 150% of salary for the Group Chief Executive and 125% of salary for the Chief Financial Officer
and the Group Legal Director & Company Secretary.
- The financial performance measures and weightings of financial performance measures and strategic objectives for the annual bonus plan
will be unchanged:
> 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 ensuring that the Group’s total recordable injury frequency rate and frequency of process safety events remain below
the targeted maximum rates
> Sustainability, including development of infrastructure options to support 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
> Deployment of common standards for the protection of people, information and technology, with specific emphasis on cyber-security
> People management, including talent management, succession planning and leadership development, and strengthening of employee
engagement activities
> Delivery of diversity, equity and inclusion objectives
> Delivery of organic and inorganic growth strategies for Roke and Roke USA
> Progress growth opportunities in the biosecurity sector
> Develop organic and inorganic growth opportunities in the US space and missiles sectors
> Develop growth options in the European and US propellant and specialty materials markets
- 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 The range of financial targets
approved for 2023 have been set in the context of current business planning and the current economic outlook, which is different than
was the case looking into 2022. Overall, the targets are considered similarly challenging to those set in prior years in the current market
context.
- 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.
Chemring Group PLC Annual report and accounts 2022
117
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REMUNERATION REPORT continued
DIRECTORS’ REMUNERATION POLICY continued
APPLICATION OF THE REMUNERATION POLICY IN 2023 continued
EXECUTIVE DIRECTORS continued
Element
Implementation
Performance
Share Plan
(“PSP”)
- Executive directors will be granted PSP awards over 150% of salary in 2023.
- Performance conditions for 2023 (tested over a three-year performance period to 31 October 2025) and weightings will be 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 2023 awards will be measured as follows:
Total compound EPS per share 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 2023 awards will be measured as follows:
Rank of the Company’s TSR against the TSR of the FTSE All-Share
(excluding investment trusts) over the three-year performance period
% 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 2023 awards will be measured as follows:
Reduction in scope 1 and scope 2 emissions (market-based)
over the three-year performance period
% of ESG part that may vest
Less than 15%
15%
Between 15% and 25%
25% or more
0%
25%
On a straight-line basis between 25% and 100%
100%
- The choice of EPS, TSR and emissions reduction targets aligns with the Group’s long-term strategic objectives of delivering profitable
growth and shareholder returns on a sustainable basis. The range of EPS and emissions reduction targets were set with reference to
internal plans, market expectations and current economic circumstances. The overall targets are similarly challenging to those set in prior
years in the context of current market conditions.
NOTES:
1. The EPS target range is considered stretching when viewed against internal forecasts and a broader reflection of prevailing macro-economic 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.
118
Chemring Group PLC Annual report and accounts 2022
APPLICATION OF THE REMUNERATION POLICY IN 2023 continued
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.
Details of the fees that will apply for 2023 are set out below:
Chairman’s fee
Other non-executive directors’ base fee
Audit Committee Chair fee
Remuneration Committee Chair fee
Senior Independent Director fee
Non-executive directors’ fee for employee engagement
APPROVAL OF THE DIRECTORS’ REMUNERATION REPORT
The directors’ remuneration report was approved by the Board on 13 December 2022.
Signed on behalf of the Board
Laurie Bowen
Chair of the Remuneration Committee
13 December 2022
Fee as at
1 January 2023
Percentage
increase
£216,300
£59,483
£10,000
£10,000
£10,000
£5,000
5%
5%
—
—
—
—
Chemring Group PLC Annual report and accounts 2022
119
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 2022.
The following sections of the annual report are incorporated into the
directors’ report by reference:
- strategic report on pages 1 to 75;
- corporate governance report on pages 80 to 89;
- Audit Committee report on pages 90 to 93;
- directors’ remuneration report on pages 96 to 119; and
- notes to the Group financial statements as detailed in this section.
BUSINESS REVIEW
The strategic report on pages 1 to 75 provides a review of the Group’s
business development, performance and position during and at the end of the
financial year, its strategy and likely future developments, key performance
indicators, and a description of the principal risks and uncertainties facing the
business. Further information regarding financial risk management policies and
financial instruments is given in note 20 to the Group financial statements.
There have been no significant events since the balance sheet date.
RESULTS AND DIVIDENDS
The profit attributable to the Group’s shareholders for the year was £47.4m
(2021: £41.5m).
The directors are recommending the payment of a final dividend of 3.8p per
ordinary share which, together with the interim dividend of 1.9p per share
paid in September 2022, gives a total for the year of 5.7p (2021: 4.8p). The final
dividend is subject to approval by shareholders at the Annual General
Meeting on 15 March 2023 and has not therefore been included as a liability
in these financial statements.
DIRECTORS AND THEIR INTERESTS
The current directors are shown on pages 78 and 79.
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 15 March 2023.
Details of the service contracts entered into between the Company and
the executive directors are set out in the directors’ remuneration report
on page 115. 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 2022.
Information required in relation to directors’ shareholdings is set out in the
directors’ remuneration report on page 106.
EMPLOYEES AND EMPLOYEE CONSULTATION
Details of the Group’s employment policies and employee consultation
practices are set out on pages 50 to 56.
POLITICAL DONATIONS
No political donations were made during the year (2021: £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 62.
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 24 to the Group financial statements.
Details of the rights attaching to shares are set out in the Articles of
Association (the “Articles”). All holders of ordinary shares are entitled to
attend, speak and vote at any general meeting of the Company, and to
appoint a proxy or proxies to exercise these rights. At a general meeting,
every shareholder present in person, by proxy or (in the case of a corporate
member) by corporate representative has one vote on a show of hands, and
on a poll has one vote for every share held. The Notice of Annual General
Meeting specifies deadlines for exercising voting rights and appointing a proxy
or proxies to vote in respect of the resolutions to be passed at the Annual
General Meeting.
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.
120
Chemring Group PLC Annual report and accounts 2022
The Company is not aware of any agreements between shareholders that
may result in restrictions on the transfer of securities and/or voting rights.
NAME
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 (2021: nil) during
the year and no shares were held in treasury at 31 October 2022 (2021: nil).
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 12 December 2022, 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 Guidance 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.
Invesco Limited
BlackRock. Inc.
Old Mutual Asset Managers
Ameriprise Financial, Inc. and its group
J O Hambro Capital Management Limited
AXA Investment Managers S.A.
Aviva PLC and its subsidiaries
FIL Limited
Jupiter Fund Management PLC
Schroders Plc
Majedie Asset Management Limited
J P Morgan Chase & Co
Royal London Asset Management Limited
Neptune Investment Management Limited
Prudential Plc
Investec Asset Management Limited
Standard Life Investments Limited
Norges Bank
BT Pension Scheme Trustees Limited as Trustee
of the BT Pension Scheme
% INTEREST
8.1
7.9
5.1
5.0
5.0
5.0
5.0
Below 5.0
Below 5.0
Below 5.0
4.9
4.9
4.9
4.8
4.8
4.8
4.8
4.0
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 27 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 1 September 2022.
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 15 December 2021.
THE CHEMRING GROUP RESTRICTED SHARE PLAN (THE “RSP”)
The RSP provides for the discretionary grant of deferred share awards to
selected key employees. Executive directors are not eligible to participate.
Awards typically vest on the second or third anniversary of the grant date,
subject to meeting continuous service criteria. Awards under the RSP may
only be satisfied with market-purchased shares.
GOING CONCERN
Details of the conclusions arrived at by the directors in preparing the financial
statements on a going concern basis are set out in the statement on going
concern on page 74.
Chemring Group PLC Annual report and accounts 2022
121
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT continued
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 6);
- long-term incentive schemes (see directors’ remuneration report);
- allocation of equity securities for cash (see note 27);
- 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
15 March 2023, 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 UK-adopted
international accounting standards and applicable law and have elected to
prepare the parent company financial statements in accordance with
UK accounting standards and applicable law, including FRS 101 Reduced
Disclosure Framework.
Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and parent company and of the Group’s 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, reliable
and prudent;
- for the Group financial statements, state whether they have been prepared
in accordance with UK-adopted international accounting standards;
- 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 statement that complies with that law
and those regulations.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company’s website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the
financial statements will form part of the annual financial report prepared
using the single electronic reporting format under the TD ESEF Regulation.
The auditor’s report on these financial statements provides no assurance over
the ESEF format.
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 13 December 2022 and is signed on its behalf by:
Michael Ord
Group Chief Executive
13 December 2022
Sarah Ellard
Group Legal Director
13 December 2022
122
Chemring Group PLC Annual report and accounts 2022
CONSOLIDATED INCOME STATEMENT
For the year ended 31 October 2022
Continuing operations
Revenue
Operating profit
Finance expense
Profit before tax
Taxation
Profit after tax
Earnings per ordinary share
Basic
Diluted
1. Further information about non-underlying items is set out in note 3.
2022
Non-
underlying
items 1
£m
Underlying
performance
£m
Total
£m
Underlying
performance
£m
442.8
—
442.8
393.3
64.0
(1.5)
62.5
(5.7)
56.8
20.2p
19.7p
(10.7)
—
(10.7)
1.3
(9.4)
53.3
(1.5)
51.8
(4.4)
47.4
57.5
(1.6)
55.9
(8.3)
47.6
16.9p
16.4p
16.9p
16.5p
Note
1,2
2,4
6
7
9
9
2021
Non-
underlying
items 1
£m
—
(7.1)
—
(7.1)
1.0
(6.1)
Total
£m
393.3
50.4
(1.6)
48.8
(7.3)
41.5
14.7p
14.4p
Chemring Group PLC Annual report and accounts 2022
123
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 October 2022
Profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Remeasurement of the defined benefit pension schemes
Movement on deferred tax relating to pension schemes
Items that may be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations
Tax on exchange differences on translation of foreign operations
Total comprehensive income attributable to equity holders of the parent
Note
29
23
2022
£m
47.4
(2.3)
0.8
(1.5)
35.0
(0.4)
34.6
80.5
2021
£m
41.5
6.2
(2.2)
4.0
(8.3)
0.1
(8.2)
37.3
124
Chemring Group PLC Annual report and accounts 2022
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 October 2022
At 1 November 2021
Profit after tax
Other comprehensive income/(loss)
Tax relating to components of other comprehensive income/(loss)
Total comprehensive income
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Purchase of shares by employee share ownership plan trust
At 31 October 2022
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
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
—
—
2.8
Share
capital
£m
2.8
—
—
—
—
—
—
—
—
2.8
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
—
—
Share
premium
account
£m
306.7
—
—
—
—
0.4
—
—
—
—
—
307.1
12.9
Share
premium
account
£m
307.1
—
—
—
—
0.6
—
—
—
307.7
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
12.9
Revaluation
reserve
£m
Translation
reserve
£m
1.0
—
—
—
—
—
—
—
—
—
(0.1)
0.9
(18.9)
—
(8.3)
0.1
(8.2)
—
—
—
—
—
—
(27.1)
Translation
reserve
£m
(27.1)
—
35.0
(0.4)
34.6
—
—
—
—
7.5
Retained
earnings
£m
28.0
41.5
6.2
(2.2)
45.5
—
4.5
(11.9)
(7.1)
(2.9)
0.1
56.2
Retained
earnings *
£m
57.1
47.4
(2.3)
0.8
45.9
—
5.6
(14.4)
(7.0)
87.2
Own
shares
£m
(2.9)
—
—
—
—
—
—
—
—
2.9
—
—
Total
£m
352.8
47.4
32.7
0.4
80.5
0.6
5.6
(14.4)
(7.0)
418.1
Total
£m
329.6
41.5
(2.1)
(2.1)
37.3
0.4
4.5
(11.9)
(7.1)
—
—
352.8
* Retained earnings as at 1 November 2021 includes £0.9m that was previously classified as a revaluation reserve. This balance has been amalgamated into the retained earnings
balance from 1 November 2021 on the basis that it is immaterial.
Chemring Group PLC Annual report and accounts 2022
125
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET
As at 31 October 2022
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
Derivative financial instruments
Preference shares
Total liabilities
Net assets
Equity
Share capital
Share premium account
Special capital reserve
Revaluation reserve
Translation reserve
Retained earnings
Total equity
2022
Note
£m
£m
2021
£m
£m
10
11
11
12
29
23
14
15
16
21
17
18
19
22
21
17,32
18
22
23
21
17,24
24
25
25
25
25
118.1
34.6
11.4
231.3
11.2
32.3
99.6
61.1
19.8
0.7
—
(1.8)
(98.2)
(1.6)
(7.9)
(4.2)
(20.9)
(4.2)
(16.8)
(45.2)
(1.1)
(0.1)
108.7
30.0
14.1
198.7
13.7
18.2
438.9
383.4
181.2
620.1
148.1
531.5
80.7
60.6
5.8
1.0
(0.4)
(1.4)
(85.7)
(2.6)
(12.0)
(0.4)
(113.7)
(102.5)
(28.1)
(2.4)
(14.9)
(30.7)
—
(0.1)
(76.2)
(178.7)
352.8
2.8
307.1
12.9
0.9
(27.1)
56.2
352.8
(88.3)
(202.0)
418.1
2.8
307.7
12.9
—
7.5
87.2
418.1
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
13 December 2022.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
126
Chemring Group PLC Annual report and accounts 2022
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 October 2022
Cash flows from operating activities
Cash generated from continuing underlying operations
Cash impact of continuing non-underlying items
Cash impact of discontinued non-underlying items
Cash flows from operating activities
Tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Purchases of intangible assets
Purchases of property, plant and equipment
Acquisition of subsidiary net of cash acquired
Proceeds on disposal of subsidiary
Short-term funding to defined benefit pension scheme
Proceeds on disposal of property, plant and equipment
Net cash outflow from investing activities
Cash flows from financing activities
Dividends paid
Purchase of own shares
Net proceeds for transactions in own shares
Finance expense paid
Capitalised facility fees paid
Drawdown of borrowings
Repayments of borrowings
Payment of lease liabilities
Net cash outflow from financing activities
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year (including bank overdraft)
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year (including bank overdraft)
Note
30
28
34
8
31
16,32
2022
£m
90.1
(1.1)
—
89.0
(8.5)
80.5
(3.0)
(31.5)
—
—
(2.0)
6.0
(30.5)
(14.4)
(7.0)
0.1
(1.3)
—
30.0
(41.0)
(2.2)
(35.8)
14.2
5.4
0.2
19.8
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
Chemring Group PLC Annual report and accounts 2022
127
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE GROUP FINANCIAL STATEMENTS
1. REVENUE
All of the Group’s revenue is derived from the sale of goods and the provision of services. The following table provides an analysis of the Group’s revenue
by destination:
UK
US
Europe
Asia Pacific
Rest of the world
UK
US
Europe
Asia Pacific
Rest of the world
Sensors
& Information
£m
Countermeasures
& Energetics
£m
100.3
54.9
5.7
1.2
0.2
162.3
51.5
166.8
48.8
10.4
3.0
280.5
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
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
53.1
109.2
162.3
274.3
6.2
280.5
Sensors
& Information
£m
Countermeasures
& Energetics
£m
56.4
90.2
146.6
242.8
3.9
246.7
2022
£m
151.8
221.7
54.5
11.6
3.2
442.8
2021
£m
120.1
200.2
53.7
15.8
3.5
393.3
2022
£m
327.4
115.4
442.8
2021
£m
299.2
94.1
393.3
All revenues recognised arose from contracts with customers.
As at 31 October 2022 £651m (2021: £501m) of revenue was not yet recognised in respect of obligations that were unfulfilled or only partially fulfilled as
at the year end. £403m (2021: £358m) of this revenue is expected to be recognised in the next financial year and £248m (2021: £143m) 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
Provision of consulting and technology services to solve security-critical issues. Development and manufacture of electronic
countermeasures, chemical and biological threat detection equipment and explosive hazard detection (“EHD”) equipment.
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.
128
Chemring Group PLC Annual report and accounts 2022
2. BUSINESS SEGMENTS continued
A segmental analysis of revenue and operating profit is set out below:
Year ended 31 October 2022
Revenue
Segment result before depreciation, amortisation and non-underlying items
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 2021
Revenue
Segment result before depreciation, amortisation and non-underlying items
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
162.3
33.0
(3.0)
—
30.0
(2.5)
(1.2)
(3.7)
26.3
280.5
64.2
(15.1)
(0.2)
48.9
(2.1)
—
(2.1)
46.8
Sensors
& Information
£m
146.6
34.4
(2.7)
(0.1)
31.6
(4.1)
(1.6)
(5.7)
25.9
Countermeasures
& Energetics
£m
246.7
56.1
(15.5)
(0.6)
40.0
(2.1)
—
(2.1)
37.9
Unallocated*
£m
—
(14.9)
—
—
(14.9)
—
(4.9)
(4.9)
(19.8)
(1.5)
(21.3)
(4.4)
(25.7)
Unallocated*
£m
—
(14.1)
—
—
(14.1)
—
0.7
0.7
(13.4)
(1.6)
(15.0)
(7.3)
(22.3)
Total
£m
442.8
82.3
(18.1)
(0.2)
64.0
(4.6)
(6.1)
(10.7)
53.3
(1.5)
51.8
(4.4)
47.4
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
* 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
2022
£m
149.4
211.5
18.0
16.5
395.4
2021
£m
143.4
178.1
12.4
17.6
351.5
INFORMATION ON MAJOR CUSTOMERS
Revenues of £166.2m (2021: £166.9m) arose from sales to the Group’s largest customer, the US DoD. 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.
Chemring Group PLC Annual report and accounts 2022
129
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
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
(Loss)/gain on the movement in the fair value of derivative financial instruments (note 21)
Acquisition expenses (note 28)
Impact of non-underlying items on EBITDA
Amortisation of acquired intangibles arising from business combinations (note 11)
Impact of non-underlying items on profit before tax
Tax impact of non-underlying items
Impact of non-underlying items on profit after tax
Underlying profit after tax
Statutory profit after tax
2022
£m
(4.1)
(2.0)
(6.1)
(4.6)
(10.7)
1.3
(9.4)
56.8
47.4
2021
£m
0.7
(1.6)
(0.9)
(6.2)
(7.1)
1.0
(6.1)
47.6
41.5
The Alternative Performance Measures (“APMs”) 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 9. 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 30. 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 £4.6m (2021: £6.2m). 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 £4.1m loss (2021: £0.7m gain) on the movement in fair value of derivative financial instruments. This is excluded from
underlying earnings to ensure the recognition of the gain or loss on the derivative matches the timing of the underlying transaction.
ACQUISITION EXPENSES
Included in non-underlying items is £2.0m (2021: £1.6m) of acquisition expenses. This includes £1.0m (2021: £0.4m) 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 28 for further details. The
remaining expense of £1.0m (2021: £1.2m) primarily includes professional fees incurred in relation to the Group’s mergers and acquisitions activity during the
year. 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 non-underlying items comprises a £1.3m tax credit (2021: £1.0m credit) on the above non-underlying items.
NET DEBT
A reconciliation and analysis of net debt is presented in notes 31 and 32.
EBITDA
In our financial review we present measures of EBITDA, which is calculated as follows:
Operating profit
Amortisation arising from business combinations (note 11)
Amortisation of development costs (note 11)
Amortisation of patents and licences (note 11)
Depreciation of property, plant and equipment (note 12)
EBITDA
Non-underlying items
Underlying EBITDA
130
Chemring Group PLC Annual report and accounts 2022
2022
£m
53.3
4.6
0.1
0.1
18.1
76.2
6.1
82.3
2021
£m
50.4
6.2
0.6
0.1
18.2
75.5
0.9
76.4
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 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 2022 at the average exchange rates for the comparative year ended 31 October 2021.
4. OPERATING PROFIT
Operating profit is stated after charging/(crediting):
Research and development costs
Amortisation
Depreciation of property, plant and equipment
Impairment of development costs
(Profit)/loss on disposal of non-current assets
Government grant amortisation
Foreign exchange losses/(gains)
Staff costs (note 5)
Cost of inventories recognised as an expense
– internally-funded
– arising from business combinations
– development costs
– patents and licences
– owned assets
– leased assets
2022
£m
7.5
4.6
0.1
0.1
16.5
1.6
2.2
(1.9)
—
2.0
169.7
144.3
2021
£m
8.5
6.2
0.6
0.1
16.8
1.4
—
0.1
(0.5)
(0.8)
146.0
128.0
The remaining items within operating profit predominantly relate to general and administrative expenses and production overheads, and includes £4.8m of other
income.
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
2022
£m
2021
£m
0.4
0.7
1.1
0.1
1.2
0.3
0.7
1.0
0.1
1.1
Included in the fees for the audit of the Company’s annual accounts is £0.1m (2021: £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 90 to 93, 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. STAFF COSTS
The average monthly number of employees, including executive directors, was:
Direct
Indirect
The costs incurred in respect of employees, including share-based payments, were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment charge
Staff costs
2022
Number
1,435
899
2,334
2022
£m
141.8
14.2
7.3
6.4
169.7
2021
Number
1,381
905
2,286
2021
£m
121.4
12.9
6.0
5.7
146.0
The share-based payment charge of £6.4m (2021: £5.7m) excludes £1.0m (2021: £0.4m) of deferred consideration in relation to acquisitions accounted for as
equity-settled share-based payments. These amounts are included in non-underlying costs, see notes 3 and 27 for details.
Chemring Group PLC Annual report and accounts 2022
131
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
6. FINANCE EXPENSE
Bank overdraft and loan interest
Amortisation of debt finance costs
Interest cost on retirement benefit obligations (note 29)
Lease liability interest
Amount capitalised
Finance expense
2022
£m
1.6
0.3
0.1
0.1
2.1
(0.6)
1.5
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% (2021: 1.3%). During the year £0.6m (2021: £0.5m) of interest was capitalised in relation to the
Tennessee modernisation and automation programme.
7. TAXATION
Current tax charge – current year
Current tax credit – prior year
Deferred tax charge – current year (note 23)
Deferred tax charge – prior year (note 23)
Tax charge
2022
£m
5.0
(1.7)
0.7
0.4
4.4
Income tax in the UK is calculated at 19.0% (2021: 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 can be reconciled to the income statement as follows:
Profit before tax
Tax at the UK corporation tax rate of 19.0% (2021: 19.0%)
Expenses not deductible for tax purposes
Changes in tax rates
Tax losses/future interest deductions not previously recognised
Release of tax risk provision
Prior period adjustments
Overseas profits taxed at rates different to the UK standard rate
Tax charge
2022
£m
51.8
9.8
0.1
—
(4.6)
(1.7)
(1.3)
2.1
4.4
2021
£m
1.3
0.6
0.1
0.1
2.1
(0.5)
1.6
2021
£m
7.2
(1.9)
1.2
0.8
7.3
2021
£m
48.8
9.3
—
1.7
(4.4)
—
(1.1)
1.8
7.3
In addition to the tax charge in the income statement, a tax credit of £0.4m (2021: £2.1m charge) has been recognised in other comprehensive income in the year.
The effective rate of tax on the profit before tax of the Group is 8.5% (2021: 15.0%), and the effective rate of tax on the underlying profit before tax of the
Group is 9.1% (2021: 14.8%). The effective rate of tax on the underlying profit before tax is lower than the 2021 effective tax rate due to the recognition of
a deferred tax asset in respect of future US interest deductions, which is included in tax losses not previously recognised above.
Included within the tax charge is a current year non-underlying deferred tax credit of £1.3m (2021: £1.0m), 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. UK deferred tax balances were recalculated in accordance with these rate changes during the year ended 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.
132
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
8. DIVIDENDS
Dividends paid on ordinary shares of 1p each
Final dividend of 3.2p per share for the year ended 31 October 2021 (2.6p per share for the year ended 31 October 2020)
Interim dividend of 1.9p per share for the year ended 31 October 2022 (1.6p per share for the year ended 31 October 2021)
Total dividends
2022
£m
9.1
5.3
14.4
2021
£m
7.4
4.5
11.9
Subject to approval at the Annual General Meeting, the final dividend of 3.8p per ordinary share will be paid on 14 April 2023 to all shareholders registered at
the close of business on 24 March 2023. The estimated cash value of this dividend is £10.7m. The total dividend for the year will therefore be 5.7p (2021: 4.8p)
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 2022.
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 2022
and 31 October 2022.
9. EARNINGS PER ORDINARY SHARE
Earnings per share is based on the average number of shares in issue, excluding own shares held, of 280,506,245 (2021: 281,555,716).
Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 288,218,004 (2021: 287,985,451).
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:
2022
Basic EPS
(Pence)
Diluted EPS
(Pence)
20.2
19.7
16.9
16.4
£m
56.8
(9.4)
47.4
£m
47.6
(6.1)
41.5
Underlying profit after tax
Non-underlying items (note 3)
Total profit after tax
10. GOODWILL
Cost
At 1 November 2020
Acquisitions through business combinations (note 28)
Foreign exchange adjustments
At 31 October 2021
Foreign exchange adjustments
At 31 October 2022
Accumulated impairment losses
At 1 November 2020
Foreign exchange adjustments
At 31 October 2021
Foreign exchange adjustments
At 31 October 2022
Carrying amount
At 31 October 2022
At 31 October 2021
2022
Ordinary
shares
Number
millions
280.5
7.7
288.2
2021
Basic EPS
(Pence)
16.9
14.7
2021
Ordinary
shares
Number
millions
281.6
6.4
288.0
Diluted EPS
(Pence)
16.5
14.4
£m
187.8
3.1
(6.4)
184.5
20.4
204.9
(79.3)
3.5
(75.8)
(11.0)
(86.8)
118.1
108.7
Chemring Group PLC Annual report and accounts 2022
133
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
10. 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, being the individual operating companies within the operating segment descriptions on page 128.
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. Based on our assessment, there is no reasonable possible change in a key
assumption which would result in the impairment of goodwill.
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 7.2% (2021: 7.1%) 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 2% (2021: 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 2.25% (2021: 1.75%) 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 CGUs are:
Roke Manor Research Limited
Chemring Energetics UK Limited
Chemring Sensors & Electronic Systems, Inc.
Chemring Energetic Devices, Inc.
Other
2022
%
11.2
10.2
10.5
10.5
2021
%
11.7
9.7
10.6
10.6
2022
£m
31.5
14.6
40.8
18.0
13.2
2021
£m
31.5
14.6
34.3
15.2
13.1
118.1
108.7
The goodwill arising from the acquisition of the Cubica Group of £3.1m during the year ended 31 October 2021 was 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 10.2% to 12.3% (2021: 8.6% to 11.3%).
Following a detailed review, no impairment losses were recognised in the years ended 31 October 2022 and 31 October 2021 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.
134
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
11. DEVELOPMENT COSTS AND OTHER INTANGIBLE ASSETS
Cost
At 1 November 2020
Acquisitions through business combinations (note 28)
Additions
Disposals
Foreign exchange adjustments
At 31 October 2021
Additions
Disposals
Foreign exchange adjustments
At 31 October 2022
Amortisation
At 1 November 2020
Charge
Disposals
Foreign exchange adjustments
At 31 October 2021
Charge
Impairment
Disposals
Foreign exchange adjustments
At 31 October 2022
Carrying amount
At 31 October 2022
At 31 October 2021
Development
costs
£m
Acquired
technology
£m
Acquired
customer
relationships
£m
Patents and
licences
£m
55.9
—
2.1
(0.5)
(1.9)
55.6
2.5
(0.4)
6.2
63.9
(26.1)
(0.6)
0.5
0.6
(25.6)
(0.1)
(2.2)
0.3
(1.7)
(29.3)
34.6
30.0
93.8
2.5
—
—
(4.8)
91.5
0.4
—
15.2
107.1
(86.8)
(3.8)
—
4.4
(86.2)
(2.0)
—
—
(14.8)
48.6
2.1
—
—
(1.9)
48.8
—
—
6.2
55.0
(39.3)
(2.4)
—
1.4
(40.3)
(2.6)
—
—
(5.1)
0.6
—
0.1
(0.1)
(0.1)
0.5
—
(0.3)
0.3
0.5
(0.3)
(0.1)
0.1
0.1
(0.2)
(0.1)
—
0.3
(0.2)
(103.0)
(48.0)
(0.2)
4.1
5.3
7.0
8.5
0.3
0.3
Total
£m
143.0
4.6
0.1
(0.1)
(6.8)
140.8
0.4
(0.3)
21.7
162.6
(126.4)
(6.3)
0.1
5.9
(126.7)
(4.7)
—
0.3
(20.1)
(151.2)
11.4
14.1
Included within the development costs of £34.6m, individually material balances relate to Joint Biological Tactical Detection System of £9.7m (2021: £8.1m), Next
Generation Chemical Detector of £16.5m (2021: £13.0m) and Perceive of £5.6m (2021: £4.7m). 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 £4.1m includes individually material balances relating to Chemring Sensors & Electronic Systems of £1.0m (2021: £1.2m), Chemring
Energetic Devices of £0.9m (2021: £1.2m) and Roke (including the Cubica Group) of £2.1m (2021: £2.9m). The remaining amortisation periods for these assets
are one year, two years and nine years respectively.
Acquired customer relationships of £7.0m include individually material balances relating to Chemring Energetic Devices of £4.6m (2021: £5.3m), Chemring
Sensors & Electronic Systems of £0.6m (2021: £1.2m) and Roke (including the Cubica Group) of £1.8m (2021: £2.0m). The remaining amortisation periods
for these assets are four years, one year and nine years respectively.
Chemring Group PLC Annual report and accounts 2022
135
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT
Cost or valuation
At 31 October 2020
Reclassification
Additions
Disposals
Foreign exchange adjustments
At 31 October 2021
Reclassification
Additions
Disposals
Foreign exchange adjustments
At 31 October 2022
Depreciation
At 31 October 2020
Charge
Disposals
Foreign exchange adjustments
At 31 October 2021
Reclassification
Charge
Disposals
Foreign exchange adjustments
At 31 October 2022
Carrying amount
At 31 October 2022
At 31 October 2021
Land and
buildings
£m
Plant and
equipment
£m
Right-of-use
land and
buildings
£m
Right-of-use
plant and
equipment
£m
126.6
0.6
7.4
(0.3)
(3.1)
131.2
0.2
9.2
(5.7)
10.4
142.4
(0.6)
19.2
(10.1)
(3.1)
147.8
(0.3)
25.6
(3.7)
13.4
5.7
—
0.3
(0.2)
(0.3)
5.5
—
3.7
(0.2)
1.1
145.3
182.8
10.1
(19.3)
(3.4)
0.3
0.6
(21.8)
0.3
(3.5)
2.5
(2.4)
(60.5)
(13.4)
10.0
1.8
(62.1)
(0.2)
(13.0)
3.1
(5.7)
(1.4)
(1.3)
0.2
0.1
(2.4)
—
(1.4)
—
(0.6)
0.6
—
—
—
0.1
0.7
—
—
—
—
0.7
(0.1)
(0.1)
—
—
(0.2)
—
(0.2)
—
—
Total
£m
275.3
—
26.9
(10.6)
(6.4)
285.2
(0.1)
38.5
(9.6)
24.9
338.9
(81.3)
(18.2)
10.5
2.5
(86.5)
0.1
(18.1)
5.6
(8.7)
(24.9)
(77.9)
(4.4)
(0.4)
(107.6)
120.4
109.4
104.9
85.7
5.7
3.1
0.3
0.5
231.3
198.7
During the year, £0.6m (2021: £0.5m) of interest was capitalised, as set out in note 6. £0.8m (2021: £1.1m) of capitalised interest was charged as depreciation and
£nil (2021: £nil) was disposed of. This results in a net book value for capitalised interest of £8.8m (2021: £9.0m).
Included within land and buildings and plant and equipment are assets under construction of £13.6m and £11.5m respectively (2021: £20.8m and £24.2m).
These assets are not depreciated.
Land and buildings were revalued at 30 September 1997 by Chestertons Chartered Surveyors, independent valuers not connected with the Group, on the basis
of depreciated replacement cost for two pyrotechnic sites and on open market for the remainder, which represent Level 2 measurements in the fair value hierarchy.
30 September 1997 depreciated replacement cost
Freehold at cost
Cost of land and buildings as at 31 October
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.
2022
£m
4.0
141.3
145.3
2022
£m
144.5
(25.2)
119.3
2021
£m
4.0
127.2
131.2
2021
£m
130.4
(21.9)
108.5
At 31 October 2022, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £6.9m (2021: £10.4m).
Cash flows from purchases of property, plant and equipment are £31.5m (2021: £28.0m). The difference to the additions total presented above includes £3.8m
(2021: £0.1m) non-cash movements related to right of use assets as well as the movement in accrued capital expenditure.
136
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
13. SUBSIDIARY UNDERTAKINGS
All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2022, 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 North America Unlimited
Chemring Prime Contracts Limited*
Chemring Technology Solutions Limited
CHG Overseas Investments Limited*
CHG Overseas Limited*
Cubica Technology Limited*
Greys Exports 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
Norway
Scotland
US
US
US
US
US
US
US
US
US
US
Countermeasures & Energetics
Dormant
Countermeasures & Energetics
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Countermeasures & Energetics
Dormant
Holding company
Sensors & Information
Dormant
Dormant
Dormant
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, Cubica Technology Limited and Chemring Technology Solutions Limited are exempt from the requirement to file audited accounts for
the year ended 31 October 2022 by virtue of section 479A of the Companies Act 2006. See page 173 for the registered offices of the subsidiary undertakings.
Chemring Group PLC Annual report and accounts 2022
137
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
14. INVENTORIES
Raw materials
Work in progress
Finished goods
2022
£m
48.1
38.8
12.7
99.6
2021
£m
36.6
27.2
16.9
80.7
There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised £0.7m (2021: £2.3m)
as a write down of inventories to net realisable value. See note 4 for details of cost of inventories recognised as an expense.
15. TRADE AND OTHER RECEIVABLES
Trade receivables
Allowance for doubtful debts
Advance payments to suppliers
Other receivables
Prepayments
Accrued income
2022
£m
33.8
(0.5)
33.3
1.7
8.5
6.2
11.4
61.1
2021
£m
41.2
(0.3)
40.9
0.5
3.7
5.5
10.0
60.6
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 17 days (2021: 25 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 2022,
£0.1m of gross trade receivables were aged greater than 30 days past due (2021: £0.8m).
The directors consider that the carrying amount of trade and other receivables approximates to their fair values.
Of the £10.0m of accrued income at 31 October 2021, £10.0m had been billed and paid in the year. Of the £11.4m of accrued income at 31 October 2022, 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.
Of the £8.5m (2021: £3.7m) of other receivables at 31 October 2022, £2.0m (2021: £nil) related to a short-term loan due from the Chemring Group Staff
Pension Scheme to fund margin calls on liability driven investments, which was repaid in November 2022, and £4.8m (2021: £2.9m) related to research and
development expenditure credits receivable.
16. 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 bank of £19.8m
(2021: £5.8m) less the bank overdraft included in short-term borrowings of £nil (2021: £0.4m), as the overdraft is held for the purpose of meeting short-term
cash commitments.
17. 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
138
Chemring Group PLC Annual report and accounts 2022
2022
£m
—
—
20.9
0.1
21.0
21.0
2021
£m
0.4
0.4
28.1
0.1
28.2
28.6
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
17. BORROWINGS continued
Analysis of borrowings by currency:
Sterling
US dollar
The weighted average interest rates paid were as follows:
Bank overdrafts
UK bank loans
An analysis of borrowings by maturity is as follows:
– Sterling denominated
– US dollar denominated
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
2022
Preference
shares
£m
—
—
20.9
—
20.9
20.9
—
—
—
0.1
0.1
0.1
Bank
loans and
overdrafts
£m
Total
£m
—
0.4
—
20.9
0.1
21.0
21.0
—
28.1
—
28.1
28.5
2022
£m
0.1
20.9
21.0
2022
%
2.3
2.3
1.4
2021
Preference
shares
£m
—
—
—
0.1
0.1
0.1
2021
£m
0.1
28.5
28.6
2021
%
1.0
—
1.9
Total
£m
0.4
—
28.1
0.1
28.2
28.6
The Group’s principal debt facilities comprised a £150m revolving credit facility and a US$10m overdraft. These were established in July 2021 with a syndicate of
six banks and run until December 2025 with two “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
2022
£m
136.7
2021
£m
128.1
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 includes liabilities on foreign exchange forward contracts within its definition of net
debt. Therefore the leverage ratio of 0.14 times differs to the ratio of 0.09 times that is disclosed elsewhere in the annual report and accounts, which is calculated
using the closing rates of exchange and does not include liabilities on foreign exchange forward contracts within its definition of net debt. The Group was in
compliance with the covenants throughout the year. The year-end leverage ratio was 0.14 times (covenant limit of 3 times) and the year-end interest cover ratio
was 57 times (covenant floor of 4 times).
18. LEASES
The carrying amount, additions and depreciation charge for right-of-use assets by class of underlying asset is included in note 12.
The expense relating to short-term and low-value leases in the year was £0.9m (2021: £0.8m). In total, payments of £2.2m (2021: £1.6m) were made
under leasing contracts. Included in the financing activities section of the cash flow is £2.1m (2021: £1.5m) to repay the principal portion of the lease and
£0.1m (2021: £0.1m) to repay lease interest. Included in the operating activities section of the cash flow is £0.9m (2021: £0.8m) relating to short-term and
low-value leases.
Chemring Group PLC Annual report and accounts 2022
139
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
18. LEASES continued
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
– more than five years
Impact of discounting
Lease liabilities included in balance sheet as at 31 October
19. TRADE AND OTHER PAYABLES
Within current liabilities
Trade payables
Other payables
Interest payable
Other tax and social security
Advance receipts from customers
Accruals
Deferred income
2022
£m
1.8
0.8
1.4
2.1
4.3
(0.1)
6.0
2022
£m
14.7
28.5
0.1
6.8
26.6
17.6
3.9
98.2
2021
£m
1.4
1.6
1.0
—
2.6
(0.2)
3.8
2021
£m
13.1
29.0
—
4.7
17.1
17.3
4.5
85.7
Other payables of £28.5m (2021: £29.0m) includes payroll related creditors of £18.0m (2021: £21.7m).
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 £17.1m included in advance receipts from customers recognised at 31 October 2021 has been recognised as revenue in 2022 (2021: £22.8m). Of the £26.6m
of advanced receipts from customers at 31 October 2022, £26.6m is relevant to goods and services that will be delivered and provided within a year. No revenue
was recognised in 2022 from performance obligations satisfied in previous years.
The average credit period taken on purchases of goods is 18 days (2021: 18 days) using year-end trade payables divided by cost of sales. No interest is payable
on trade payables from the date of invoice to payment.
20. FINANCIAL RISK MANAGEMENT
The Group uses financial instruments to manage financial risk wherever it is appropriate to do so. The main risks addressed by financial instruments are liquidity
risk, foreign currency risk, interest rate risk and credit risk. The Group’s policies in respect of the management of these risks, which remained unchanged
throughout the year, are set out below.
(A) CREDIT RISK
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises
principally from the Group’s receivables from customers.
The impairment provisions for financial assets disclosed in note 15 “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 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 revenue in 2022 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.
140
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
20. FINANCIAL RISK MANAGEMENT continued
(B) CAPITAL MANAGEMENT
The Group manages its capital to ensure that all entities in the Group will be able to continue as a going concern while meeting the returns to stakeholders.
The capital structure of the Group consists of equity (as disclosed in the consolidated statement of changes in equity), retained earnings, cash and cash
equivalents (note 16) and a revolving credit facility (“RCF”) (note 17). 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 US$10m overdraft. These were established in July 2021 with a syndicate
of six banks and run until December 2025 with two “one-year” options to extend. As at 31 October 2022, the RCF was drawn by £21.7m (2021: £29.2m).
(C) FINANCIAL RISK MANAGEMENT
The primary risks that the Group is exposed to are liquidity risk, foreign currency risk, interest rate risk and credit risk. It is the Group’s policy to manage these
risks under the following policies:
i. Liquidity risk management
Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due. The Group manages liquidity risk by
maintaining adequate reserves and by continually monitoring forecast and actual cash flows. The Group’s policy is to maintain continuity of funding through
available cash and cash equivalents and the RCF.
ii. Foreign currency risk management
The Group’s presentational currency is sterling. The Group is subject to exposure on the translation of the assets of foreign subsidiaries, whose functional
currencies differ from the Group. The Group’s primary balance sheet translation exposures are to the US dollar, Australian dollar and Norwegian krone.
The Group minimises the balance sheet translation exposures, where it is practical to do so, by funding subsidiaries with long-term loans, on which exchange
differences are taken to reserves. US dollar borrowings held by the Group are treated as a net investment hedge against the US dollar assets of the Group.
The Group faces currency exposures arising from the translation of profits earned in foreign currency. These exposures are not hedged. Exposures also arise
from foreign currency denominated trading transactions undertaken by subsidiaries deemed transactional exposures. The Group’s policy is to hedge transactional
exposures above £250,000 in the banking market on a one-to-one basis using forward contracts. Below £250,000, the exposures are netted across subsidiaries
and any surplus or deficit hedged in the banking market using spot or forward contracts. The Group’s policy is that there is no speculative trading in financial
instruments. During the year ended 31 October 2022, 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 to
derivatives 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
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
Borrowings
2022
2021
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
33.3
19.8
33.3
19.8
40.9
5.8
0.7
0.7
1.0
40.9
5.8
1.0
(5.3)
(5.3)
(0.4)
(0.4)
(14.7)
(28.5)
(0.1)
(21.0)
(14.7)
(28.5)
(0.1)
(21.0)
(13.1)
(29.0)
—
(28.6)
(13.1)
(29.0)
—
(28.6)
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).
Chemring Group PLC Annual report and accounts 2022
141
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
21. FINANCIAL INSTRUMENTS
The following table details the fair value of derivative financial instrument assets/(liabilities) recognised in the balance sheet:
Included in current assets
Included in current liabilities
Included in non-current liabilities
Forward foreign exchange contracts
2022
£m
0.7
(4.2)
(3.5)
(1.1)
(4.6)
2021
£m
1.0
(0.4)
0.6
—
0.6
There was a £4.1m loss (2021: £0.7m gain) on the movement in the fair value of derivative financial instruments recognised in the income statement.
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
2022
Loans and
overdrafts
£m
Total
£m
Derivative
instruments
£m
(3.5)
(1.1)
—
(4.6)
(0.3)
(0.3)
(21.3)
(21.9)
(3.8)
(1.4)
(21.3)
(26.5)
0.6
—
—
0.6
2021
Loans and
overdrafts
£m
(0.7)
(0.3)
(28.4)
(29.4)
Total
£m
(0.1)
(0.3)
(28.4)
(28.8)
A maturity analysis of the contracted cash outflows on lease liabilities is provided in note 18.
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 hierarchy,
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
2022
Carrying
amount
£m
Fair value
£m
2021
Carrying
amount
£m
Fair value
£m
0.7
(5.3)
(4.6)
0.7
(5.3)
(4.6)
1.0
(0.4)
0.6
1.0
(0.4)
0.6
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 2022 the closing exchange rate for the US dollar was 1.15 (2021: 1.37) and the average exchange rate was 1.23 (2021: 1.38).
For the year ended 31 October 2022 a 10 cent strengthening in the US dollar exchange rate would have increased reported net debt by approximately £1.9m
(2021: £2.6m).
142
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
21. FINANCIAL INSTRUMENTS continued
SENSITIVITY ANALYSIS continued
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
2022
£m
(14.2)
(0.8)
—
(0.8)
2021
£m
(14.2)
(2.4)
—
(2.4)
2022
£m
20.6
1.0
—
1.0
2021
£m
15.8
2.8
—
2.8
As at 31 October 2022, 78% of the Group’s gross debt was at a fixed rate of 1.37% 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 2022.
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 £0.2m.
22. PROVISIONS
At 31 October 2021
Transfer from trade and other payables
Transfer
Foreign exchange adjustments
Paid
At 31 October 2022
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
Disposal
provision
£m
5.6
—
(1.8)
—
(0.3)
3.5
3.0
0.3
—
0.7
(0.1)
3.9
8.9
—
1.8
0.4
(0.1)
11.0
2022
£m
1.6
16.8
18.4
Total
£m
17.5
0.3
—
1.1
(0.5)
18.4
2021
£m
2.6
14.9
17.5
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 33.
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 £1.4m and £9.1m. 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 £25.7m, 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. Disposal provisions will be utilised based on the outcome of certain events which are specified in sale and purchase agreements. It is not possible to
estimate more accurately the expected timing of any resulting outflows of economic benefits.
Chemring Group PLC Annual report and accounts 2022
143
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
23. DEFERRED TAX
The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:
At 1 November 2020
(Charge)/credit to income
Credit/(charge) to other comprehensive income
Recognised on acquisition
Transfers
At 31 October 2021
(Charge)/credit to income
(Charge)/credit to other comprehensive income
Transfers
At 31 October 2022
Analysed as:
Deferred tax assets
Deferred tax liabilities
At 31 October 2022
Deferred tax assets
Deferred tax liabilities
At 31 October 2021
Accelerated
tax
depreciation
£m
Pensions
£m
US interest
deductions
£m
(8.6)
(3.2)
0.2
—
(7.8)
(19.4)
(11.5)
(2.2)
0.1
(33.0)
0.3
(33.3)
(33.0)
0.4
(19.8)
(19.4)
(1.5)
—
(2.2)
—
—
(3.7)
—
0.8
—
(2.9)
—
(2.9)
(2.9)
—
(3.7)
(3.7)
—
4.0
(0.2)
—
—
3.8
3.5
0.8
—
8.1
8.1
—
8.1
3.8
—
3.8
Tax
losses
£m
9.2
(3.3)
(0.2)
—
(0.1)
5.6
6.3
1.0
—
Acquired
intangibles
£m
(7.9)
1.8
0.2
(1.1)
—
(7.0)
(0.6)
(0.7)
(0.1)
Other
£m
1.6
(1.3)
—
—
7.9
8.2
1.2
1.0
—
12.9
(8.4)
10.4
12.9
—
12.9
5.6
—
5.6
—
(8.4)
(8.4)
—
(7.0)
(7.0)
11.0
(0.6)
10.4
8.4
(0.2)
8.2
Total
£m
(7.2)
(2.0)
(2.2)
(1.1)
—
(12.5)
(1.1)
0.7
—
(12.9)
32.3
(45.2)
(12.9)
18.2
(30.7)
(12.5)
Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. Deferred tax balances after offset are analysed on
the balance sheet as per the table above.
Deferred tax balances of £10.4m (2021: £8.2m) within the “Other” category above include temporary differences arising on provisions and accruals.
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. UK deferred tax balances have been calculated in accordance with these rate changes.
At the balance sheet date, the Group had unrecognised deferred tax of £3.7m (2021: £4.5m) on gross tax losses of £21.2m (2021: £45.3m) and unrecognised
deferred tax of £18.2m (2021: £16.5m) on gross interest deductions of £72.2m (2021: £77.3m) 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 £1.5m (2021: £1.2m) on gross capital losses
of £6.9m (2021: £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 aforementioned gross interest deductions are available indefinitely with no fixed expiry date, while the gross tax losses and gross capital losses
expire in 2031 and 2026 respectively.
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 ended 31 October 2021 £7.9m of deferred tax liabilities relating to development costs were reclassified to accelerated tax depreciation via the
transfers line.
24. SHARE CAPITAL
Issued and fully paid
283,541,742 (2021: 283,149,511) ordinary shares of 1p each
2022
£m
2.8
2021
£m
2.8
During the year, 392,231 ordinary shares (2021: 299,581) 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.
144
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
25. RESERVES
The share premium account, the special capital reserve and the revaluation reserve are not distributable.
The special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premium account which was approved
by the Court in 1986, in accordance with the requirements of the Companies Act 1985.
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 £7.3m (2021: £7.6m) of the Company’s own shares held by the Group’s Employee Share Ownership Plan Trust (“ESOP”) which
is treated as a branch of the parent company. The ESOP purchased 2,467,329 shares during the year (2021: 2,242,342) and 2,607,129 shares (2021: 846,369)
were distributed following the vesting of awards under the deferred bonus and PSP schemes. The total number of ordinary shares held by the ESOP at
31 October 2022 was 2,443,709 (2021: 2,583,509).
Group dividends (note 8) 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 3.8p per ordinary share for the year ended 31 October 2022.
26. OWN SHARES
At 1 November 2021
Transactions
At 31 October 2022
2022
£m
—
—
—
2021
£m
2.9
(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 27. Nil ordinary shares (2021: nil) were acquired during the year and nil ordinary shares
(2021: 675,592) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at 31 October 2022
was nil (2021: nil).
27. 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 £7.4m (2021: £5.7m) in respect of share-based payments during the year, of which £1.0m (2021: £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 2022:
Date of award
17 December 2019
16 December 2020
15 December 2021
2016 PSP
Number of conditional shares
2022
2021
6,218,961
2,386,342
(2,374,231)
(243,743)
6,185,176
1,791,635
(1,358,817)
(399,033)
5,987,329
6,218,961
—
—
Number of
ordinary
shares
under award
2,027,806
1,658,830
2,300,693
Vesting price
per share
Pence
Date when
awards due
to vest
nil
nil
nil
17 December 2022
16 December 2023
15 December 2024
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.
Chemring Group PLC Annual report and accounts 2022
145
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
27. SHARE-BASED PAYMENTS continued
THE CHEMRING GROUP PERFORMANCE SHARE PLAN 2016 (THE “2016 PSP”) continued
The 2016 PSP awards made in the year ended 31 October 2022 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
15 December
2021
16 December
2020
17 December
2019
284p
nil
0.5%
29.1%
232.9p
300p
nil
0.5%
29.1%
246.4p
210p
nil
0.5%
29.1%
172.5p
The weighted average fair value of awards made during the year was 232.9p (2021: 246.4p).
In the year ended 31 October 2022 2,374,231 awards vested (2021: 1,358,817). 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 1 September 2022.
Outstanding at the beginning of the year
Granted
Exercised
Lapsed
Outstanding at the end of the year
Subject to exercise at the end of the year
The following options were outstanding at 31 October 2022:
Date of award
27 July 2017
30 July 2018
29 July 2019
29 July 2019
30 July 2020
30 July 2020
26 July 2021
26 July 2021
1 September 2022
1 September 2022
2022
2021
Number
of share
options
1,770,380
664,054
(362,049)
(194,040)
Weighted
average
exercise
price
Pence
197.4
264.0
153.4
198.3
Number
of share
options
1,773,742
481,085
(299,581)
(184,866)
1,878,345
229.3
1,770,380
5,056
178.0
22,243
Weighted
average
exercise
price
Pence
177.7
240.0
158.1
183.0
197.4
178.0
Number
of ordinary
shares under
award
Exercise price
per share
Pence
2,432
46,847
76,196
26,881
541,211
83,162
361,185
73,025
553,821
108,529
148.0
178.0
154.0
154.0
202.0
202.0
240.0
240.0
264.0
264.0
Dates between which
options may be exercised
1 October 2022–31 March 2023
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
1 October 2025–31 March 2026
1 October 2027–31 March 2028
The weighted average fair value of options granted in the year was 34.0p (2021: 57.0p). The weighted average fair value of options exercised in the year was
30.7p (2021: 38.6p). The weighted average share price on exercise of the options during the year was 153.4p (2021: 158.1p).
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.
146
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 27. SHARE-BASED PAYMENTS continued
DEFERRED BONUS SHARE AWARDS
Under the deferred bonus share awards, deferred awards of ordinary shares are made at nil cost to employees. Awards ordinarily vest on the second or third
anniversary of the award date.
Outstanding at the beginning of the year
Awarded
Vested
Lapsed
Outstanding at the end of the year
Subject to vesting at the end of the year
The following awards were outstanding at 31 October 2022:
Date of award
16 December 2019
15 December 2020
15 December 2020
14 December 2021
14 December 2021
Number of deferred shares
2022
2021
766,171
456,232
(225,621)
(59,727)
615,365
351,832
(132,919)
(68,107)
937,055
766,171
—
—
Number of
ordinary
shares
under award
205,576
156,431
147,500
231,491
170,336
Share price
at valuation
Pence
Vesting price
per share
Pence
Date when
awards are due
to vest
210p
300p
300p
284p
284p
nil
nil
nil
nil
nil
16 December 2022
15 December 2022
15 December 2023
14 December 2023
15 December 2024
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 284p (2021: 300p). 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 28 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.
No further awards were granted during the year ended 31 October 2022 (2021: 653,584) in respect of the Cubica Group acquisition. Nil vested or lapsed in the
year (2021: nil) and 653,584 are outstanding at the end of the period. Nil were subject to vesting at the end of the year (2021: 653,584).
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 prior year was 307p.
28. ACQUISITION OF SUBSIDIARY
ACQUISITIONS IN THE PRIOR YEAR ENDED 31 OCTOBER 2021
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.
Chemring Group PLC Annual report and accounts 2022
147
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 28. ACQUISITION OF SUBSIDIARY continued
ACQUISITIONS IN THE PRIOR YEAR ENDED 31 OCTOBER 2021 continued
Details of the consideration transferred were:
Cash paid
Total purchase consideration
Less cash acquired
Net cash outflow
The fair values of the assets and liabilities of the Cubica Group as at the date of acquisition were 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
The net assets recognised in the 31 October 2021 annual report were based on a provisional assessment of their fair value. The Group stated that if new
information were obtained within one year of the date of acquisition about facts and circumstances that existed at the date of acquisition and identifies
adjustments to the above amounts, or any additional provisions that existed at the date of acquisition, then the accounting for the acquisition would be revised.
The Group has not identified any such information that therefore no changes were required to the accounting for the acquisition.
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 amounted to £0.3m. The gross amount of trade receivables were £0.3m and the full contractual amounts were collected.
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 159 for further detail.
29. RETIREMENT BENEFIT OBLIGATIONS
In the UK, the Group operates a defined benefit scheme (the “Chemring Group Staff Pension Scheme”). The Group’s other UK and overseas pension
arrangements are all defined contribution schemes, with a combined cost of £7.3m (2021: £6.0m) for continuing operations. Chemring Nobel operated a defined
benefit pension scheme that was closed in October 2022 and the liability transferred to an insurance company. The net deficit of the Chemring Nobel Scheme as
at 31 October 2021 was £nil and as such was immaterial for disclosure in the prior year comparisons.
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 2022, 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
£11.2m at 31 October 2022 (2021: £13.7m).
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 are given 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.
148
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued 29. RETIREMENT BENEFIT OBLIGATIONS continued
The movement in the net defined benefit asset is as follows:
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
Settlements
Net benefits paid out
At 31 October
Defined benefit obligations
Defined benefit asset
Net defined benefit asset
2022
£m
(90.9)
—
(1.6)
(1.6)
29.9
(1.8)
—
28.1
0.9
3.3
2021
£m
(91.3)
—
(1.5)
(1.5)
(2.4)
0.9
—
(1.5)
—
3.4
(60.2)
(90.9)
2022
£m
104.6
(0.3)
1.8
1.5
—
—
(30.4)
(30.4)
(1.0)
(3.3)
71.4
2021
£m
98.9
(0.3)
1.7
1.4
—
—
7.7
7.7
—
(3.4)
104.6
2022
£m
13.7
(0.3)
0.2
(0.1)
29.9
(1.8)
(30.4)
(2.3)
(0.1)
—
11.2
2021
£m
7.6
(0.3)
0.2
(0.1)
(2.4)
0.9
7.7
6.2
—
—
13.7
The Chemring Group Staff Pension Scheme had 828 members at the end of the year (2021: 884). Of these members 58.9% (2021: 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 scheme’s assets are analysed as follows:
Equities
Liability driven investment
Diversified alternatives
Multi-asset credit
Assets held by insurance company
Cash
2022
£m
—
25.3
26.9
7.8
1.1
10.3
71.4
2021
£m
18.4
24.7
27.3
23.3
1.5
9.4
2022
%
—
35.4
37.6
10.9
1.5
14.6
2021
%
17.6
23.6
26.1
22.3
1.4
9.0
104.6
100.0
100.0
Liability driven investments, diversified alternatives and multi-asset credit assets are either pooled or unpooled investment vehicles. Unpooled investment vehicles
which are not quoted on active markets, have been valued at the latest available bid price or single price provided by the pooled investment manager. Where
funds are valued weekly the value is taken as at the week ending immediately before or after the year end date. Shares in other pooled arrangements have been
valued at the latest available net assets value, determined in accordance with fair value principles, provided by the pooled investment manager.
The scheme’s 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 diversified assets and a matching portfolio of leveraged liability driven pooled funds.
The scheme’s liability matching portfolio is invested in leveraged pooled liability driven investment (“LDI”) funds and a liquidity fund. The trustees target an
interest rate and inflation hedge ratio of around 100% (based on the scheme’s technical provisions funding basis).
As at 31 October 2022, the Group loaned £2.0m to the Chemring Group Staff Pension Scheme representing a short-term loan to fund margin calls on liability
driven investments. This is included in the cash amount above and was repaid in November 2022.
The principal assumptions used in the actuarial valuation of the Chemring Group Staff Pension Scheme were as follows:
Discount rate
Inflation
– RPI
– CPI
2022
%
4.9
3.1
2.7
2021
%
1.8
3.4
2.7
Chemring Group PLC Annual report and accounts 2022
149
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
29. RETIREMENT BENEFIT OBLIGATIONS continued
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 S3PA tables (series 3 of the SAPS tables) with future improvements in line with CMI 2021 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
2022
88.2
90.4
87.4
89.0
2021
88.6
90.6
87.7
89.2
While the vaccination programme has significantly reduced the number of deaths directly attributable to CV-19, the impact of the pandemic on future mortality
rates remains uncertain. At this stage the Group has assumed CV-19 will have no lasting impact on mortality rates and that life expectancies will return to
pre-pandemic expectations. We will continue to monitor and assess this at future reporting dates.
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 £0.8m. A change in the rate of inflation by 0.1% is predicted to change the deficit by approximately £0.4m and a 10%
change to the mortality assumption would change the deficit by approximately £1.7m. The principal risks to the scheme are that the investments do not perform
as well as expected, the discount rate continues to rise driven by higher market interest rates, short-term movements in inflation, and the rate of improvement in
mortality assumed is insufficient and life expectancies continue to rise.
The Group anticipates contributions to the defined benefit scheme for the year ending 31 October 2023 will be £nil (2022: £nil).
30. 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
Impairment of development costs
(Profit)/loss on disposal of non-current assets
Depreciation of property, plant and equipment
Non-cash movement of non-underlying items
Share-based payment expense
Operating cash flows before movements in working capital
(Increase)/decrease in inventories
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Increase/(decrease) in provisions
Operating cash flow from continuing underlying operations
Discontinued 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
31. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash and cash equivalents
Decrease in debt and lease financing due to cash flows
Decrease in net debt resulting from cash flows
Effect of foreign exchange rate changes
New leases entered into, lease interest and other non-cash movements
Amortisation of debt finance costs
Movement in net debt
Net debt at the beginning of the year
Net debt at the end of the year
150
Chemring Group PLC Annual report and accounts 2022
Notes
11
11
11
12
27
2022
£m
53.3
0.1
4.6
0.1
2.2
(1.9)
18.1
6.1
6.4
89.0
(6.4)
4.5
2.9
0.1
90.1
—
—
—
—
2022
£m
14.2
13.2
27.4
(4.2)
(3.5)
(0.3)
19.4
(26.6)
(7.2)
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
—
2021
£m
(9.6)
29.2
19.6
2.7
(0.1)
(0.6)
21.6
(48.2)
(26.6)
NOTES TO THE GROUP FINANCIAL STATEMENTS continued
32. ANALYSIS OF NET DEBT
Cash and cash equivalents (including bank overdraft)
Debt due after one year
Preference shares
Lease liabilities
At
1 November
2021
£m
Cash flows
£m
Non-cash
changes
£m
Exchange
rate effects
£m
At
31 October
2022
£m
5.4
(28.1)
(0.1)
(22.8)
(3.8)
(26.6)
14.2
11.0
—
25.2
2.2
27.4
—
(0.3)
—
(0.3)
(3.5)
(3.8)
0.2
(3.5)
—
(3.3)
(0.9)
(4.2)
19.8
(20.9)
(0.1)
(1.2)
(6.0)
(7.2)
Accrued interest is included in the carrying amount of interest payable (note 19) measured at amortised cost and therefore is not presented as a separate line
item in the above table.
33. 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.
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.
34. 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 29. As at 31 October 2022, £2.0m was due from the Chemring Group Staff Pension
Scheme representing a short-term loan to fund margin calls on liability driven investments which was repaid in November 2022. The amount receivable has
been classified in other receivables on the consolidated balance sheet.
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 96 to 119.
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
2022
£m
3.2
0.2
2.4
5.8
2021
£m
2.8
0.2
1.7
4.7
Chemring Group PLC Annual report and accounts 2022
151
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
35. EVENTS SINCE THE END OF THE YEAR
(A) ACQUISITION OF GEOLLECT
On 7 December 2022, Chemring Group PLC acquired 100% of the issued shares in Geollect Limited (“Geollect”). Geollect is an international provider of
geospatial intelligence consultancy and subscription services. 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 £7.3m, funded from Chemring’s existing bank facilities. Further deferred consideration
of up to £7.5m 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.
Given the close proximity of the completion date of the transaction and the date of issuing the financial statements, the Group had not yet completed the
accounting for the acquisition. The financial effects of this transaction have not been recognised at 31 October 2022. The operating results and assets and
liabilities of the acquired company will be consolidated from 7 December 2022.
Based on unaudited accounts, in the 12 months to 31 October 2021, Geollect reported a loss before tax of £0.3m (2020: £0.3m) on revenue of £0.8m
(2020: £0.7m). The gross assets of Geollect at 31 October 2021 were £0.4m (2020: £0.5m), and net assets at 31 October 2021 were £0.0m (2020: £0.1m).
Costs in relation to this acquisition for the year ended 31 October 2022 have been classified as non-underlying costs in the statement of profit or loss and are
included within the acquisition costs of £2.0m, see note 3.
A full provisional fair value exercise, completed in accordance with IFRS 3, is expected to be available for the Group’s interim financial statements to 30 April 2023.
152
Chemring Group PLC Annual report and accounts 2022
NOTES TO THE GROUP FINANCIAL STATEMENTS continued PARENT COMPANY BALANCE SHEET
As at 31 October 2022
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Amounts owed by subsidiary undertakings
Retirement benefit surplus
Deferred tax
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
Total equity
2022
Note
£m
£m
2021
£m
£m
1
2
3
12
11
3
0.2
766.6
10.7
5.8
0.8
23.2
—
0.2
786.6
69.2
7.2
—
784.1
863.2
5.1
—
23.2
807.3
5.1
868.3
4
(30.7)
(11.1)
(30.7)
(11.1)
5
4
7
11
8
9
(21.8)
(1.1)
(8.2)
—
(0.1)
(42.5)
—
(7.1)
(0.9)
(0.1)
(31.2)
(61.9)
745.4
2.8
307.7
12.9
422.0
745.4
(50.6)
(61.7)
806.6
2.8
307.1
12.9
483.8
806.6
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 loss for the year ended 31 October 2022 of £45.1m (2021: £24.6m profit).
These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on
13 December 2022.
Signed on behalf of the Board
Michael Ord
Director
Andrew Lewis
Director
Chemring Group PLC Annual report and accounts 2022
153
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 October 2022
(Loss)/profit after tax attributable to equity holders of the parent as reported
Items that will not be reclassified subsequently to profit and loss
Remeasurement of the defined benefit pension scheme, net of deferred tax
Total comprehensive (loss)/income attributable to the equity holders of the parent
2022
£m
(45.1)
(0.9)
(46.0)
2021
£m
24.6
2.1
26.7
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 October 2022
At 1 November 2021
Loss after tax
Other comprehensive loss
Total comprehensive loss
Ordinary shares issued
Share-based payments (net of settlement)
Dividends paid
Purchase of shares by employee share ownership plan trust
At 31 October 2022
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
Share capital
£m
2.8
—
—
—
—
—
—
—
—
2.8
Share capital
£m
2.8
—
—
—
—
—
—
—
2.8
Share
premium
account
£m
306.7
—
—
—
0.4
—
—
—
—
Share
premium
account
£m
307.1
—
—
—
0.6
—
—
—
307.7
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
—
Special
capital
reserve
£m
12.9
—
—
—
—
—
—
—
Retained
earnings
£m
483.8
(45.1)
(0.9)
(46.0)
—
5.6
(14.4)
(7.0)
Total
£m
806.6
(45.1)
(0.9)
(46.0)
0.6
5.6
(14.4)
(7.0)
12.9
422.0
745.4
Retained
earnings
£m
474.3
Own shares
£m
(2.9)
24.6
2.1
26.7
—
4.7
(11.9)
(7.1)
(2.9)
—
—
—
—
—
—
—
2.9
—
Total
£m
793.8
24.6
2.1
26.7
0.4
4.7
(11.9)
(7.1)
—
806.6
307.1
12.9
483.8
The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements.
A final dividend of 3.8p per ordinary share has been proposed. See note 8 to the Group financial statements.
As at 31 October 2022 the Company had distributable reserves of £422.0m (2021: £483.8m). 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 25 of the Group
financial statements for details.
154
Chemring Group PLC Annual report and accounts 2022
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 2022 or 31 October 2021.
2. INVESTMENTS IN SUBSIDIARIES
Cost
At 31 October 2021
Additions
At 31 October 2022
Impairment
At 31 October 2021
Impairment
At 31 October 2022
Carrying amount
At 31 October 2022
At 31 October 2021
Shares in
subsidiary
undertakings
£m
851.1
51.7
902.8
(64.5)
(71.7)
(136.2)
766.6
786.6
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 2022, the additions of £51.7m represent a capital contribution to CHG Overseas Limited.
During the year ended 31 October 2021, Chemring Group PLC acquired the Cubica Group for a cost of investment of £7.0m. See note 28 of the Group financial
statements for further details. In addition, the Company increased its investments in Chemring Countermeasures 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 10 of the Group financial statements.
During the year ended 31 October 2022, the Company concluded that the carrying value relating to CHG Overseas Limited was higher than its recoverable
amount and therefore an impairment charge of £71.7m was recorded. The recoverable amount for CHG Overseas Limited was calculated using discount rates
that 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 2% (2021: 1% to 3%). The calculations assume the performance of
the CGUs will grow at a nominal annual rate of 2.25% (2021: 1.75%) in perpetuity.
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 US dollar exchange rate. A 1% increase in discount
rate is the most sensitive assumption and would result in an additional impairment of £94.8m in CHG Overseas Limited being required. A $0.10 weakening in the
GBP to US dollar exchange rate is the least sensitive assumption and would result in an additional impairment of £37.1m in CHG Overseas Limited being
required. In determining the value in use, we have allocated central costs necessary to generate the underlying cash flows however there is judgement in this
allocation. Had we increased the allocation by 10%, this would have resulted in an additional impairment of £10.4m in CHG Overseas Limited being required.
Details of the Group undertakings at 31 October 2022 are set out in note 13 to the Group financial statements. The Company has given a parental guarantee
under section 479A of the Companies Act 2006 to certain subsidiary undertakings, details of which are also set out in note 13 to the Group financial statements.
The directors consider that the carrying value of the investments does not exceed their fair value.
Chemring Group PLC Annual report and accounts 2022
155
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
3. TRADE AND OTHER RECEIVABLES
Within current assets
Amounts owed by subsidiary undertakings
Derivative financial instruments (note 21 to the Group financial statements)
Prepayments and accrued income
Other debtor
Within non-current assets
Amounts owed by subsidiary undertakings
2022
£m
19.7
0.7
0.8
2.0
23.2
10.7
10.7
2021
£m
3.4
1.0
0.7
—
5.1
69.2
69.2
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.
As at 31 October 2022, Chemring Group PLC loaned £2.0m to the Chemring Group Staff Pension Scheme to fund margin calls on liability driven investments,
this is a related party transaction for further details refer to note 34. This short-term loan is included in Other debtors above and was repaid in November 2022.
4. TRADE AND OTHER PAYABLES
Within current liabilities
Derivative financial instruments (note 21 to the Group financial statements)
Trade payables
Amounts owed to subsidiary undertakings
Other payables
Other tax and social security
Accruals and deferred income
Within non-current liabilities
Derivative financial instruments (note 21)
2022
£m
4.1
0.5
19.2
6.8
—
0.1
30.7
1.1
31.8
2021
£m
0.4
0.2
2.0
8.2
0.3
—
11.1
—
11.1
Other payables of £6.8m (2021: £8.2m) includes payroll related creditors of £4.4m (2021: £5.7m).
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
2022
£m
20.9
0.9
21.8
2022
£m
—
—
21.8
21.8
2021
£m
28.0
14.5
42.5
2021
£m
—
—
42.5
42.5
The interest incurred on the above borrowings is detailed within notes 6 and 17 to the Group financial statements. Sterling denominated borrowings relate to
stand-alone Company bank overdraft which carries interest at 1.2%.
156
Chemring Group PLC Annual report and accounts 2022
6. LEASES
The interest expense on lease liabilities is £nil (2021: £nil). In total, payments of £nil (2021: £0.1m) were made under leasing contracts, of which £nil (2021: £0.1m)
was made to repay the principal portion of the lease. The total lease liability at 31 October 2022 was £nil (2021: £nil).
7. PROVISIONS
At 31 October 2021
Provided
Paid
At 31 October 2022
Total
£m
7.1
1.6
(0.5)
8.2
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 22 to the Group financial statements for
further details.
8. PREFERENCE SHARES
Cumulative preference shares (62,500 shares of £1 each)
2022
£m
0.1
2021
£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
283,541,742 (2021: 283,149,511) ordinary shares of 1p each
2022
£m
2.8
2021
£m
2.8
During the year, 392,231 ordinary shares (2021: 299,581) 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 27 to the Group financial statements.
10. OWN SHARES
At the beginning of the year
Transactions
At the end of the year
2022
£m
—
—
—
2021
£m
2.9
(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 27 to the Group financial statements). Nil ordinary shares (2021: nil) were acquired during the year and nil ordinary shares
(2021: 675,592) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at 31 October 2022 was nil
(2021: nil).
11. DEFERRED TAX
At the beginning of the year
Credit to income statement
Credit/(charge) to other comprehensive income
Deferred tax asset/(liability) at the end of the year
The amount provided represents:
Pension
Other temporary differences
2022
£m
(0.9)
1.2
0.5
0.8
(2.0)
2.8
0.8
2021
£m
(0.8)
1.0
(1.1)
(0.9)
(2.5)
1.6
(0.9)
At the balance sheet date, the Company had unrecognised tax losses of £nil (2021: £nil) potentially available for offset against future profits in
certain circumstances.
Chemring Group PLC Annual report and accounts 2022
157
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
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 2020, retirement benefit surplus
Contributions
Other finance costs
Actuarial movements
At 31 October 2021, retirement benefit surplus
Contributions
Other finance costs
Actuarial movements
At 31 October 2022, retirement benefit surplus
Further details are set out in note 29 to the Group financial statements.
13. STAFF COSTS
Average monthly number of total employees (including executive directors)
The costs incurred in respect of these employees (including share-based payments) were:
Wages and salaries
Social security costs
Other pension costs
Share-based payment
Disclosures in respect of directors’ emoluments can be found in the directors’ remuneration report on pages 96 to 119.
Total
£m
4.1
—
(0.1)
3.2
7.2
—
(0.1)
(1.3)
5.8
2022
Number
34
2021
Number
31
2022
£m
5.0
1.0
0.6
4.2
10.8
2021
£m
6.5
0.9
0.6
2.9
10.9
158
Chemring Group PLC Annual report and accounts 2022
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 120 to 122.
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 74 which forms part of these financial statements.
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 2022 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 2022 but
have not materially impacted the reported results or the financial position:
> Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment
to IFRS 16 Leases); and
> Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16).
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 UK Endorsement Board):
EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2022
> Reference to the Conceptual Framework (Amendments to IFRS 3);
> Property, Plant and Equipment – Proceeds before Intended Use
(Amendments to IAS 16);
> Onerous Contracts – Cost of Fulfilling a Contract (Amendments to
IAS 37); and
> Annual Improvements to IFRS Standards 2018–2020.
EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2023
> IFRS 17 Insurance Contracts;
> Classification of Liabilities as Current or Non-Current (Amendments
to IAS 1);
> Disclosure of Accounting Policies (Amendments to IAS 1 and
IFRS Practice Statement 2);
> Definition of Accounting Estimates (Amendments to IAS 8); and
> Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12).
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 UK-adopted
international accounting standards (“UK-adopted IFRS”) in conformity with the
requirements of the Companies Act 2006.
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.
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 2022, profit, total
comprehensive income and equity attributable to minority interests were
less than £0.1m.
Chemring Group PLC Annual report and accounts 2022
159
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
REVENUE RECOGNITION
Chemring is organised into two sectors, Sensors & Information and
Countermeasures & Energetics.
From a revenue recognition perspective, whilst Chemring operates across the
whole lifecycle 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 19. 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 15. 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.
160
Chemring Group PLC Annual report and accounts 2022
A number of sales contracts allow for bill and hold arrangements, where the
customer has bought the goods but has not yet taken physical possession. This
usually arises when the customer has limited storage space or there have been
delays in their own production schedule. For such revenue to be recognised
the bill and hold arrangement must be substantive and the relevant goods
must be clearly identified as belonging to the customer and ready for immediate
shipment at the customer’s request. These categories of sales are common
across all segments.
Qualifying costs to obtain a contract are not material across the Group.
Sale of goods
Revenue from the sale of goods is recognised when all of the following
conditions are satisfied:
- the Group has identified a sales contract with a customer;
- the performance obligations within this contract have been identified;
- the transaction price has been determined;
- 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.
Principal versus agent assessment
The Group enters into certain arrangements which involve a consortium of
service providers. The Group acts as a “Prime” contractor in certain contracts
with customers and utilises sub-contractors to undertake the work. Under
these contracts the Group is considered to be primarily responsible for
fulfilling the service to the customer. The Group performs a technical
assessment of the work before it is delivered to the customer and is
responsible for quality and performance of the sub-contractor. As such the
Group is considered to be the principal to the arrangement with the customer
and includes sub-contractor costs within revenue. However, where the Group
is merely acting as an agent of a sub-contractor then no revenue is recognised
in respect of sub-contractor costs.
All consortium arrangements are assessed by the Group to determine if it is
the principal or agent considering who is responsible for fulfilling the performance
obligation, who bears inventory risk and who has price discretion.
3. GROUP ACCOUNTING POLICIES continued
ACQUISITIONS AND DISPOSALS
On acquisition of a subsidiary, associate or jointly controlled entity, the cost
is measured as the fair value of the consideration. The assets, liabilities and
contingent liabilities of subsidiary undertakings that meet the IFRS 3 (Revised)
Business Combinations recognition criteria are measured at the fair value at the
date of acquisition, except that:
- deferred tax assets or liabilities, and liabilities or assets relating to employee
benefit arrangements, are recognised and measured in accordance with IAS
12 Income Taxes and IAS 19 (Revised) Employee Benefits respectively;
- liabilities or equity instruments related to the replacement by the Group of
an acquiree’s share-based payment awards are measured in accordance with
IFRS 2 Share-based Payments; and
- assets (or disposal groups) that are classified as held for sale, in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, are
measured in accordance with that standard.
Where cost exceeds fair value of the net assets acquired, the difference
is recorded as goodwill.
Where the fair value of the net assets exceeds the cost, the difference
is recorded directly in the income statement. The accounting policies of
subsidiary undertakings are changed where necessary to be consistent with
those of the Group.
If the initial accounting for a business combination is incomplete by the end of
the reporting period in which the combination occurs, the Group reports
provisional amounts for the items for which the accounting is incomplete.
Those provisional amounts are adjusted during the measurement period (see
below), or additional assets or liabilities recognised, to reflect new information
obtained about facts and circumstances that existed as at the acquisition date
that, if known, would have affected the amounts recognised as at that date.
The measurement period runs from the date of acquisition to the date the
Group obtains complete information about facts and circumstances that
existed as at the acquisition date, subject to a maximum period of one year.
In accordance with IFRS 3 (Revised) Business Combinations, acquisition and
disposal-related items are recognised through the income statement.
Acquisition and disposal-related items refer to credits and costs associated
with the acquisition and disposal of businesses, together with the costs of
aborted bids and the establishment of joint ventures.
DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
When the Group makes a decision to exit a significant business unit or separate
major line of business, the associated operations and cash flows are classified
as discontinued operations in the financial statements, in accordance with the
provisions of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
These discontinued operations may represent components of the Group that
have already been disposed of or are classified as held for sale.
Non-current assets and disposal groups classified as held for sale are measured
at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sales transaction rather than
continuing use. This condition is regarded as met only when the sale is highly
probable and the asset or disposal group is available for immediate sale in its
present condition. Management must be committed to the sale which should
be expected to qualify as a completed sale within one year from the date of
classification.
INTANGIBLE ASSETS – GOODWILL
The purchased goodwill of the Group is regarded as having an indefinite
useful economic life and, in accordance with IAS 36 Impairment of Assets,
is not amortised but is subject to annual tests for impairment. On disposal
of a subsidiary, associate or jointly controlled entity, the amount attributable
to goodwill is included in the determination of the profit or loss on disposal.
ACQUIRED INTANGIBLES
The Group recognises, separately from goodwill, intangible assets that are
separable or arise from contractual or other legal rights and whose fair value can
be measured reliably. These intangible assets are amortised at rates calculated
to write down their cost or valuation to their estimated residual values by
equal instalments over their estimated useful economic lives, which are:
- technology
–
average of ten years
- customer relationships –
average of ten years
DEVELOPMENT COSTS
Development costs that qualify as intangible assets are capitalised as incurred
and, once the relevant intangible asset is ready for use, are amortised on a
straight-line basis over their estimated useful lives, averaging ten years
(2021: 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
(2021: seven years).
PROPERTY, PLANT AND EQUIPMENT
Other than historically revalued land and buildings, property, plant and
equipment is held at cost less accumulated depreciation and any recognised
impairment loss. Borrowing costs on significant capital expenditure projects
are capitalised and allocated to the cost of the project.
No depreciation is provided on freehold land. On other assets, depreciation
is provided at rates calculated to write down their cost or valuation to their
estimated residual values by equal instalments over their estimated useful
economic lives, which are:
- 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.
Chemring Group PLC Annual report and accounts 2022
161
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
GOVERNMENT GRANTS
Government grants are not recognised until there is reasonable assurance that
the Group will comply with the conditions attaching to them and that the
grants will be received.
Government grants for staff retraining costs are recognised as income over
the periods necessary to match them with the related costs and are deducted
in reporting the related expense.
Government grants relating to property, plant and equipment are treated as
deferred income and released to the income statement over the expected
useful economic lives of the assets concerned.
TAX
The tax expense represents the sum of current tax and deferred tax.
Current tax is based on taxable profit for the year. Taxable profit differs from
profit as reported in the income statement because it excludes items of
income or expense that are taxable or deductible in other years, and it
excludes items of income or expense that are never taxable or deductible.
The Group’s liability for current tax is calculated using tax rates that have been
enacted or substantively enacted at the balance sheet date.
Deferred tax represents amounts expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in the
computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognised for all taxable
temporary differences, and deferred tax assets are recognised to the extent
that it is probable taxable profits will be available in the future against which
deductible temporary differences can be utilised. Such assets and liabilities are
not recognised if the temporary difference arises from goodwill or from the
initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising
on investments in subsidiaries and associates, and interests in joint ventures,
except where the Group is able to control the reversal of the temporary
difference and it is probable that the temporary difference will not reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered. Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except where it
relates to items charged or credited directly to equity, in which case the
deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable
right to set off current tax assets against current tax liabilities, when they relate
to income taxed by the same tax authority, and when the Group intends to
settle its current tax assets and liabilities on a net basis.
SPECIAL CAPITAL RESERVE
The special capital reserve was created as part of a capital reduction scheme
involving the cancellation of the share premium account which was approved
by the Court in 1986, in accordance with the requirements of the Companies
Act 1985.
FOREIGN CURRENCIES
The individual financial statements of each Group company are presented in its
functional currency, being the currency of the primary economic environment
in which it operates. For the purpose of these Group financial statements, the
results and financial position of each Group company are expressed in pounds
sterling, which is the functional currency of the Company, and the
presentation currency for these financial statements.
In preparing the financial statements of each Group company, transactions in
foreign currencies, being currencies other than the entity’s functional currency,
are recorded at the rates of exchange prevailing on the dates of the
transactions. At each balance sheet date, monetary assets and liabilities that
are denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Non-monetary items carried at fair value that are
denominated in foreign currencies are translated at the rates prevailing at the
date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated.
Exchange differences arising on the settlement of monetary items and on
the retranslation of monetary items are included in the income statement
for the period.
In order to hedge its exposure to certain foreign exchange risks, the Group
enters into forward foreign exchange contracts which are accounted for as
derivative financial instruments (see below for details of the Group’s
accounting policies in respect of such derivative financial instruments).
For the purpose of presenting these financial statements, the assets and
liabilities of the Group’s foreign operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated
at the average exchange rates for the period.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and translated at
the closing rate.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised in the Group’s balance sheet when
the Group becomes a party to the contractual provisions of the instrument.
FINANCIAL ASSETS
Trade receivables
Trade receivables do not carry any interest and are stated at their fair value
and amortised cost as reduced by appropriate allowances for expected
credit losses.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits,
and other short-term highly liquid investments that are readily convertible
to a known amount of cash and are subject to an insignificant risk of change
in value.
FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
Financial liabilities
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into.
Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums payable
on settlement or redemption, and direct issue costs are accounted for on an
accruals basis in the income statement using the effective interest method, and
are added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
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3. GROUP ACCOUNTING POLICIES continued
FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS
continued
Trade payables
Trade payables are not interest bearing and are stated at their fair value and
amortised cost.
Derivative financial instruments
The Group’s activities expose it to the financial risks of foreign currency
transactions, and it uses forward foreign exchange contracts to hedge its
exposure to these transactional risks. The Group does not use derivative
financial instruments for speculative purposes.
Derivative financial instruments are recognised at fair value on the date the
derivative contract is entered into and are revalued to fair value at each
balance sheet date. The fair values of derivative financial instruments are
calculated by external valuers.
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.
Hedges of net investments in foreign operations
Any gain or loss on the hedging instrument relating to the effective portion of
the hedge is recognised in the statement of comprehensive income and
accumulated in the translation reserve. The gain or loss relating to the
ineffective portion is recognised immediately in the income statement.
RETIREMENT BENEFIT COSTS
Payments to defined contribution retirement benefit schemes are charged as
an administrative expense in the period to which they relate. For defined
benefit schemes, the cost of providing benefits is determined using the
projected unit credit method, with actuarial valuations being carried out at
each balance sheet date. Remeasurement of the defined benefit pension
scheme, which comprise actuarial gains and losses, the return on plan assets
(excluding interest) and the effect of the asset ceiling (if any, excluding interest),
are recognised in the statement of comprehensive income in full in the period
in which they occur.
The Group determines the net interest income on the net defined benefit
asset for the period by applying the discount rate used to measure the defined
benefit obligation at the beginning of the annual period to the then-net defined
benefit asset, taking into account any changes in the net defined benefit asset
during the year as a result of contributions and benefit payments. Net interest
income and other expenses related to defined benefit plans are recognised in
profit or loss.
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 retirement benefit obligation recognised in the balance sheet represents
the present value of the defined benefit obligation 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.
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. The Group uses the “expected value” or “most likely
outcome” method on a case-by-case bases to estimate the value of provisions.
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.
Chemring Group PLC Annual report and accounts 2022
163
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ACCOUNTING POLICIES continued
3. GROUP ACCOUNTING POLICIES continued
CONTINGENT LIABILITIES
The Group exercises judgement in recognising exposures to contingent
liabilities related to pending litigation or other outstanding claims subject to
negotiated settlement, mediation, arbitration or government regulation, as well
as other contingent liabilities. Judgement may be necessary in assessing the
likelihood that a pending claim will succeed, or a liability will arise, and/or to
quantify the possible range of the financial settlement.
ALTERNATIVE PERFORMANCE MEASURES
In the analysis of the Group’s financial performance and position, operating
results and cash flows, APMs are presented to provide readers with additional
information. The principal APMs presented are underlying measures of
earnings including underlying operating profit, underlying profit before tax,
underlying profit after tax, underlying EBITDA, underlying earnings per share
and underlying operating cash flow. In addition, EBITDA, net debt and
constant currency metrics are presented which are also considered non-IFRS
measures. These measures are consistent with information regularly reviewed
by management to run the business, including planning, budgeting and
reporting purposes and for its internal assessment of the operational
performance of individual businesses.
The directors believe that the use of these APMs assists in providing additional
information on the underlying trends, performance and position of the Group.
APMs are used to improve the comparability of information between
reporting periods by adjusting for items that are non-recurring or otherwise
non-underlying. Management 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 UK
accounting standards and applicable law, including 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, in accordance with the Group’s internal policy.
The following exemptions from the requirements of IFRS have been applied in
the preparation of these financial statements, in accordance with FRS 101:
- share-based payments;
- financial instruments;
- fair value measurements;
- IFRS 16 Leases (paragraphs 52 and 58);
- presentation of comparative information in respect of certain assets;
- IFRSs issued but not yet effective;
- related party transactions;
- assumptions and sensitivities for impairment review; and
- cash flow.
Investment in Group undertakings
Investments are stated at cost less any provision for impairment in value.
Critical accounting judgements and sources of estimation uncertainty
There are no critical accounting judgements for the Company. The 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 10). 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
£766.6m at 31 October 2022.
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.
KEY SOURCES OF ESTIMATION UNCERTAINTY
There are no 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.
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Deferred tax assets on tax losses and US interest deductions
The category of deferred tax asset which contains significant estimation
uncertainty and which requires management judgement in assessing its
recoverability relates to US interest limitations and tax losses carried forward
(see note 23).
Applicable accounting standards permit the recognition of deferred tax assets
only to the extent that it is probable that future taxable profits will be
available, 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 scheme. 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 29 provides information on the key
assumptions and analysis of their sensitivities.
CLIMATE CHANGE
In preparing the financial statements, we have considered the impact of climate
change. As our climate risks (discussed earlier in the annual report) identified
predominantly manifest in business interruption, the main areas effected from
a financial perspective have been our impairment and going concern and
viability assessments where we have ensured that these potential risks have
been appropriately considered in forecast cash flows used.
5. ACCOUNTING JUDGEMENTS AND SOURCES OF
ESTIMATION UNCERTAINTY continued
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:
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 2022 are set out in note 22.
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 10). 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 10,
which shows a carrying value of £118.1m at 31 October 2022.
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 11, which shows a carrying
value of £34.6m at 31 October 2022. Included in this balance are individually
material balances relating to Joint Biological Tactical Detection System (£9.7m),
Next Generation Chemical Detector (£16.5m) and Perceive (£5.6m).
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 2022 there was a provision of £3.5m 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 £3.5m.
Chemring Group PLC Annual report and accounts 2022
165
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC
1 OUR OPINION IS UNMODIFIED
We have audited the financial statements of Chemring Group PLC
(“the Company”) for the year ended 31 October 2022 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 3 and 4.
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 2022 and of the
Group’s profit for the year then ended;
- the Group financial statements have been properly prepared in accordance
with UK-adopted international accounting standards;
- 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.
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 23 March 2018. The
period of total uninterrupted engagement is for the five financial years ended
31 October 2022. 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
£3.0m (2021: £2.75m)
Coverage
Key audit matters
Recurring risks
New
4.8% (2021: 4.9%) of normalised profit before tax, normalised to exclude this year’s
non-underlying items
85% (2021: 85%) of total profits and losses that made up Group profit before tax including
continuing operations only
Recoverability of parent company’s investments in subsidiaries
Recoverability of goodwill
vs 2021
◄►
▲
2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL
MISSTATEMENT
Key audit matters are those matters that, in our professional judgement, were
of most significance in the audit of the financial statements and include the
most significant assessed risks of material misstatement (whether or not due
to fraud) identified by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and directing the
efforts of the engagement team. We summarise below the key audit matters,
in decreasing order of audit significance, in arriving at our audit opinion above,
together with our key audit procedures to address those matters and our
findings from those procedures in order that the parent 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.
RECOVERABILITY OF GOODWILL
(Goodwill: £118.1m; 2021: £108.7m)
Refer to page 91 (Audit Committee report), page 161 (accounting policy) and
pages 133 and 134 (financial disclosures).
THE RISK
Forecast based assessment
A history of business combinations results in significant Group goodwill. We
determined that the forecast future cash flows used in calculating the value in
use of each CGU involves a degree of estimation uncertainty, with a potential
range of reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount. The estimated
recoverable amount of the Group is subjective due to inherent uncertainty
involved in forecasting and discounting future cash flows for CGUs.
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:
- 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;
- 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 sum of the discounted cash flows
to the aggregate of the Group’s market capitalisation and the fair value of the
net debt to assess the reasonableness of those cash flows; and
- Assessing transparency: We assessed whether the Group’s disclosures about
the estimation uncertainty related to the impairment assessment reflect the
risks inherent in the valuation of goodwill.
Our findings
We found the Group’s conclusion that there is no impairment of Group
goodwill to be balanced.
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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 £3.0m
(2021: £2.75m), determined with reference to a benchmark of normalised
Group profit before tax, normalised to exclude non-underlying items as
disclosed in note 3 to the group financial statements, of which it represents
4.8% (2021: 4.9%).
Materiality for the parent Company financial statements as a whole was set
at £1.5m (2021: £1.0m) determined with reference to a benchmark of parent
Company total assets, of which it represents 0.2% (2021: 0.1%).
In line with our audit methodology, our procedures on individual account
balances and disclosures were performed to a lower threshold of 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 75% (2021: 74.5%) of materiality for the
financial statements as a whole, which equates to £2.25m (2021: £2.05m) for
the Group and £1.13m (2021: £0.75m) 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 £150k (2021: £135k), in addition to other
identified misstatements that warranted reporting on qualitative grounds.
We agreed on a higher threshold of £300k (2021: £270k) for matters only
related to reclassification.
Of the Group’s fourteen reporting components, we subjected seven
(2021: nine) to full scope audits for Group purposes, and one (2021: 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
three (2021: one) non-significant components in order to provide further
coverage over the Group’s results.
2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL
MISSTATEMENT continued
RECOVERABILITY OF PARENT COMPANY’S INVESTMENTS IN
SUBSIDIARIES
(Investments in subsidiaries: £766.6m; 2021: £786.6m)
Refer to page 91 (Audit Committee report), page 164 (accounting policy) and
page 155 (financial disclosures).
THE RISK
Forecast based assessment
The carrying amount of the parent Company’s investments in subsidiaries are
significant and at risk of irrecoverability due to changes in product demand and
forecast cash flows. The estimated recoverable amount of these balances is
subjective due to the inherent uncertainty involved in forecasting and
discounting future cash flows.
The effect of these matters is that, as part of our risk assessment, we
determined that the recoverable amount of the cost of investment in
subsidiaries has a high degree of estimation uncertainty, with a potential range
of reasonable outcomes greater than our materiality for the financial
statements as a whole, and possibly many times that amount. Note 2 to the
parent Company financial statements disclose the sensitivity estimated by the
parent Company.
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 as
described below:
- 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;
- 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 specialists;
- 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 balance of the parent Company’s investments in subsidiaries and
the related impairment charge to be balanced (2021:found the Company’s
conclusion that there is no impairment of its investments in subsidiaries to be
balanced).
We continue to perform procedures over revenue recognition from provision
of services over time. However, following our risk assessment procedures in
the current year, we have not assessed this as one of the most significant risks
in our current year audit and, therefore, it is not separately identified in our
report this year.
Chemring Group PLC Annual report and accounts 2022
167
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued
NORMALISED PROFIT BEFORE TAX
£62.5m (2021: £55.9m)
GROUP MATERIALITY
£3.0m (2021: £2.75m)
£3.0m
Whole financial statements
materiality (2021: £2.75m)
(2021: £50k to £1.7m)9393+7+7++MM
£2.25m
Whole financial statements
performance materiality
(2021: £2.05m)
£1.9m
Range of materiality at 10
components (£0.9m–£1.8m)
Normalised profit before tax
Group materiality
£150k
Misstatements reported to
the Audit Committee
(2021: £135k)
7
GROUP REVENUE
85
14
73
(2021: 92%)
87%
GROUP TOTAL ASSETS
73+
85+
79+
78+
89%
(2021: 89%)
79
10
78
11
TOTAL PROFITS AND LOSSES
THAT MADE UP GROUP PROFIT
BEFORE TAX
3
6 85%
P79+
82+
Full scope for Group audit
(2021: 85%)
82
79
purposes 2022
Specified risk-focused audit
procedures 2022
Residual components 2022
Full scope for Group audit
purposes 2021
Specified risk-focused audit
procedures 2021
Residual components 2021
3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW OF THE
SCOPE OF OUR AUDIT continued
The components within the scope of our work accounted for the percentages
illustrated opposite.
The remaining 13% (2021: 8%) of total Group revenue, 15% (2021: 15%)
of total profits and losses that made up Group profit before tax and 11%
(2021: 11%) of total Group assets is represented by three components. None
of these three components individually represented more than 8% (2021: 8%)
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 £0.9m to £1.8m (2021: £0.05m to £1.7m), having regard
to the mix of size and risk profile of the Group across the components.
The work on 6 of the 14 (2021: 8 of the 13) 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.
The Group team visited 4 (2021: 4) component locations in the UK and US
(2021: in the UK), to assess the audit risk and strategy. Video and telephone
conference meetings were also held with these component auditors and all
others that were not physically visited. At these visits and meetings, the
findings reported to the Group team were discussed in more detail, and any
further work required by the Group team was then performed by the
component auditor.
We were able to rely upon the Group’s internal control over financial
reporting in several areas of our audit, where our controls testing supported
this approach, which enabled us to reduce the scope of our substantive
audit work; in the other areas the scope of the audit work performed
was fully substantive.
4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT
In planning our audit, we considered the potential impacts of climate
change on the Group’s business and its financial statements, based on
our knowledge of the Group’s operations and their stated strategy with
respect to climate change.
THE CONTEXT OF CLIMATE CHANGE FOR THE GROUP
Climate change impacts the Group in a variety of ways including the impact
of climate risk on manufacturing and procurement, potential reputational
risk associated with the Group’s delivery of its climate related initiatives,
and greater emphasis on climate related narrative and disclosure in the
annual report.
The Group’s exposure to climate change is primarily through the acquisition
of materials in its supply chain and increased costs in relation to manufacturing
end products. As part of our audit we have made enquiries of management
to understand the extent of the potential impact of climate change risk on the
Group’s financial statements and the Group’s preparedness for this.
The Group emits greenhouse gases directly from energy used in its production
operations. As explained on page 42 of the Group’s annual report, the Group
announced updated targets to reduce scope 1 and 2 carbon emissions to
become carbon neutral by 2030 and then working towards being a net zero
organisation by 2050.
168
Chemring Group PLC Annual report and accounts 2022
14
+
13
+
P
10
+
11
+
P
+
7
+
+
8
+
+
P
+
11
+
+
11
+
+
P
3
+
15
+
6
+
15
+
P
4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT continued
THE GROUP’S ASSESSMENT OF ACCOUNTING CONSEQUENCES
IFRS requires the Group’s financial reporting to be based, amongst other
things, on the Group’s best estimate of assumptions that are reasonable and
supportable as at the date of reporting. Those assumptions may not align with
the ways in which the global economy, society and government policies will
need to change to meet the relevant targets.
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 also assessed completeness of the going concern disclosure.
The Group has set carbon emission targets and estimated the incremental
capital and operational expenditure required to deliver those targets.
The Group has considered the potential for asset obsolescence or shorter
economic lives of its existing property, plant and equipment, and this does
not result in any material changes to accounting estimates as a result.
The Group has provided more detail on how they have considered
climate change in their financial reporting on page 165 of the Group’s
financial statements.
OUR AUDIT RESPONSE
Risk assessment procedures
As part of our risk assessment procedures, we made enquiries, with the
assistance of our sustainability specialists, of key members of management.
Our enquiries focused on understanding the Group’s climate related strategy
and identifying those areas where climate change could have a potential
material impact on the financial statements. We did not identify the impact
of climate risk as a separate Key Audit Matter in our audit given the nature of
the Group’s operations and knowledge gained of its impact on significant
accounting estimates and judgements during our risk assessment procedures
and testing.
Audit procedures in relation to Key Audit Matters
We did not consider the impact of climate change to be significant to our audit
response for the Key Audit Matters relating to recoverability of goodwill and
the parent Company’s investments in subsidiaries.
Other audit procedures
During the course of our audit, we carried out the following additional
audit procedures:
- we considered the Group’s processes around climate change related
disclosures in the Annual Report and read the disclosures in the Strategic
Report and Directors’ Report and considered its consistency with the
financial statements and our audit knowledge; and
- we assessed the appropriateness of climate-related financial disclosures,
including TCFD recommended disclosures.
The audit procedures were performed principally by the Group engagement
team with the support of our sustainability specialists.
5 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 parent Company or
to cease their operations, and as they have concluded that the Group’s and the
parent 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 and parent Company’s financial
resources or ability to continue operations over the going concern period. The
risks that we considered most likely to adversely affect the Group’s and parent
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; and
- the potential outcome of the provisions and contingent liabilities related to
regulatory investigations.
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 parent
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 accounting policies note on the use of
the going concern basis of accounting with no material uncertainties that may
cast significant doubt over the Group and parent Company’s use of that
basis for the going concern period, and we found the going concern
disclosure in note 1 to the accounting policies notes to be acceptable; and
- the related statement under the Listing Rules set out on page 74 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 parent Company will
continue in operation.
6 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; and
- Using our own forensic specialists to assist us in identifying fraud risks based
on discussions of the circumstances of the Group and parent 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 audit team 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.
Chemring Group PLC Annual report and accounts 2022
169
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued
6 FRAUD AND BREACHES OF LAWS AND REGULATIONS –
ABILITY TO DETECT continued
IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL
MISSTATEMENT DUE TO FRAUD continued
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 control, in particular 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 provisions
and pension assumptions. On this audit, we do not believe there is a fraud risk
related to revenue recognition because there are no complexities or significant
areas of estimation within the revenue recognition.
We did not identify any additional fraud risks.
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; and
- Assessing whether the judgements made in making significant accounting
estimates are indicative of a potential bias.
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 audit team 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 level.
The potential effect of these laws and regulations on the financial statements
varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the
financial statements including financial reporting legislation (including related
companies legislation), distributable profits legislation, 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 Health and Safety Executive matter discussed in note 33, 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.
7 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, on page 65, 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
170
Chemring Group PLC Annual report and accounts 2022
7 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
- 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 74
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.
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 parent 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.
8 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.
9 RESPECTIVE RESPONSIBILITIES
DIRECTORS’ RESPONSIBILITIES
As explained more fully in their statement set out on page 122, 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.
The Company is required to include these financial statements in an annual
financial report prepared using the single electronic reporting format specified
in the TD ESEF Regulation. This auditor’s report provides no assurance over
whether the annual financial report has been prepared in accordance with
that format.
10 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
13 December 2022
Chemring Group PLC Annual report and accounts 2022
171
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
FIVE-YEAR RECORD
For the year ended 31 October 2022
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
Net current and deferred tax liabilities
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
2022
£m
442.8
64.0
(10.7)
53.3
(1.5)
51.8
(4.4)
47.4
—
47.4
395.4
93.9
(18.4)
11.2
(20.8)
(7.2)
(36.0)
418.1
2.8
307.7
310.5
20.2p
19.7p
16.9p
16.4p
5.7p
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
172
Chemring Group PLC Annual report and accounts 2022
CORPORATE INFORMATION AND WEBSITE
HEADQUARTERS AND REGISTERED OFFICE
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
T: +44 (0)1794 463401
F: +44 (0)1794 463374
E: info@chemring.com
Website: www.chemring.com
REGISTERED NUMBER
86662
REGISTRARS
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
SUBSIDIARY UNDERTAKINGS’ REGISTERED OFFICES
SUBSIDIARY UNDERTAKINGS IN ENGLAND:
Roke Manor
Old Salisbury Lane
Romsey
Hampshire
SO51 0ZN
SUBSIDIARY UNDERTAKING IN SCOTLAND:
Troon House
Ardeer Site
Stevenston
Ayrshire
KA20 3LN
SUBSIDIARY UNDERTAKINGS IN THE US:
23031 Ladbrook Drive
Dulles
Virginia
20166
SUBSIDIARY UNDERTAKING IN AUSTRALIA:
230 Staceys Road
Lara
Victoria
Australia
3212
SUBSIDIARY UNDERTAKING IN NORWAY:
Engeneveien 7
N-3475 Sætre
Norway
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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
- Key financial information
- Financial calendar
- Shareholder services and notices
- Corporate governance
- Results and presentations
- Analysts’ forecasts
- Regulatory news
Chemring Group PLC’s 2022 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 2022
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.
CBP016288
Chemring’s commitment to environmental issues is reflected in this Annual Report,
which has been printed on Magno Satin, an FSC® certified material. This document
was printed by Park Communications using its environmental print technology, which
minimises the impact of printing on the environment, with 99% of dry waste diverted
from landfill. Both the printer and the paper mill are registered to ISO 14001.
Chemring Group PLC Annual report and accounts 2022
173
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
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