Half-yearly Report
FOR IMMEDIATE RELEASE 24 June 2008
CHEMRING GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS TO 30 APRIL 2008
FINANCIAL HIGHLIGHTS
- Revenue from continuing operations up 41% to £150.2 million (2007: £106.8 million)
- Record order book of £425 million, up 45% since June 2007
- Underlying operating profit from continuing operations* up 21% to £28.2 million (2007: £23.3 million)
- Underlying profit before tax from continuing operations* up 17% to £23.6 million (2007: £20.2 million)
- Profit after tax up 29% to £14.5 million (2007: £11.2 million)
- Underlying earnings per share* up 24% at 52p (2007: 42p)
- Basic earnings per share from continuing operations up 10% at 45p (2007:41p)
- Interim dividend per ordinary share up 39% at 10.0p (2007: 7.2p)
- £60 million equity issue announced today
DIVISIONAL HIGHLIGHTS
Energetics
- Divisional revenue increased by 64% and underlying operating profit* by 44%
- Order book more than doubled to £291 million at June 2008 (2007: £140 million)
- Organic growth of over 20% achieved over a twelve month period
- Simmel Difesa restart successfully completed
- Continued strong performance from both Technical Ordnance and Chemring Defence
- Conditional acquisition of Martin Electronics, Inc. announced today
Countermeasures
- Divisional revenue increased by 21%
- Chemring Countermeasures (UK) increased revenue by 54%
- Success for Alloy Surfaces and Kilgore Flares in securing significant new five year contracts
RESULTS FOR THE HALF YEAR TO 30 APRIL 2008
2008 2007 % increase
£m £m
Continuing operations:
Revenue 150.2 106.8 41
Underlying operating profit* 28.2 23.3 21
Finance expense (4.7) (3.1)
Share of post-tax results of 0.1 -
associate
Underlying profit before tax* 23.6 20.2 17
Profit after tax 14.5 11.2 29
Underlying earnings per share* 52p 42p 24
Basic earnings per share 45p 41p 10
(continuing)
Dividend per share 10.0p 7.2p 39
* See Note 2 below
Ken Scobie, Chemring Group Chairman, commented:
"The prospects for both of our divisions remain excellent. The Group order book
has now grown to a record level of £425 million, up 45% compared with this time
last year. 36% of the current order book is for delivery in the second half of
the year. Historically, our full year revenue has been split 40%/60% between
the two halves and, given the status of our order book, the Board is confident
that this trend is likely to be repeated.
The strong organic growth achieved in both divisions and the impact of the
latest acquisitions continues to give confidence in the future performance of
the Group.
With an unchanged strategy, clear direction, responsibility and accountability
at each business, and a record order book, I look forward to the Group
delivering a substantial increase in performance in the next six months."
Notes:
1. All comparisons are for the half year to 30 April 2007.
2. Excludes intangible amortisation arising from business combinations of £2.9
million (2007: £0.7 million). Underlying earnings per share is reconciled
to basic earnings per share in note 5 of the interim statement.
3. The interim dividend of 10.0p per ordinary share will be paid on 29 August
2008 to holders on the register at 8 August 2008. The ex-dividend date will
be 6 August 2008.
For further information:
David Price Chief Executive, Chemring Group PLC 0207 930 0777
Paul Rayner Finance Director, Chemring Group PLC 0207 930 0777
Rupert Pittman Cardew Group 0207 930 0777
INTERIM MANAGEMENT REPORT
RESULTS FOR THE HALF YEAR TO 30 APRIL 2008
2008 2007
£m £m
Continuing operations:
Revenue 150.2 106.8
Underlying operating profit* 28.2 23.3
Finance expense (4.7) (3.1)
Share of post-tax results of 0.1 -
associate
Underlying profit before tax* 23.6 20.2
Profit after tax 14.5 11.2
Underlying earnings per share* 52p 42p
Basic earnings per share (continuing) 45p 41p
Dividend per ordinary share 10.0p 7.2p
*Excludes intangible amortisation arising from business combinations of £2.9
million (2007: £0.7 million)
It is a pleasure to report further significant growth in the first half of the
year, with sales up 41% to £150.2 million (2007: £106.8 million) and underlying
profit before tax* up 17% to £23.6 million (2007: £20.2 million), in line with
the Board's expectations. Underlying earnings per share increased 24% to 52p
(2007: 42p). Both divisions, Energetics and Countermeasures, performed well,
with the Energetics business increasing its revenues by 64% and underlying
operating profit* by 44%. The underlying operating margin achieved in the first
half was lower than in the previous year because of the four month gradual
restart programme implemented at Simmel Difesa after the tragic accident in
October 2007. This has delayed a significant amount of revenue and margin into
the second half of this year.
The Countermeasures business continued to grow in line with the market outlook
published in our last annual report, increasing its revenue by 21% and its
underlying operating profit* by 7%. The operating margins of the business were
lower than in the previous year, due to a change in product mix at Alloy
Surfaces and the increased volume of naval products sold during the period.
Today, the Group has announced the conditional acquisition of Martin
Electronics, Inc. ("MEI") in Florida, USA, for a cash consideration of $70
million (£35.5 million). MEI is one of the leading US manufacturers of training
grenade fuzes and 40mm ammunition. The acquisition of MEI significantly
enhances the Group's position in addressing a $900 million segment of the US
ordnance market.
We have also announced today a £60 million equity issue, comprising a vendor
placing of 1,555,555 new ordinary shares to fund the acquisition of MEI, and a
cash placing of 1,111,112 new ordinary shares, the proceeds of which will be
used to fund the acquisition of Scot, Inc. ("Scot"), which was announced on 27
May 2008. The Group's balance sheet will be significantly strengthened
following this equity issue.
The Board deems it appropriate that dividends continue to move forward ahead of
our growth in earnings. The Board is therefore declaring an interim dividend of
10.0p per ordinary share (2007: 7.2p), an increase of 39%. The interim dividend
will be paid on 29 August 2008 to shareholders on the register at 8 August
2008.
ENERGETICS
The Energetics division continued its rapid growth with an increase in revenue
of 64%. Although recent acquisitions contributed strongly, it was encouraging
to see that the division achieved over 20% organic growth over the last twelve
month period. Our US business, Technical Ordnance, delivered a 34% increase in
revenue over that same period. Record export sales were delivered to the Middle
East and record production levels for high explosive pellets, detonators and
primers were achieved from both our US and European subsidiaries.
The division is making excellent progress in establishing itself as the world
leader for the supply of realistic battlefield training and simulation
cartridge devices. Demand for our multi-effects cartridge system (MECS) and our
US battlefield effects simulation (BES) products continues to increase in all
NATO countries, and recent demonstrations of our new improvised explosive
device (IED) simulators and micro pyrotechnics, which can be used indoors for
urban warfare training, have generated considerable interest from the US Army.
Sales of our portable ordnance-clearance system continue to grow, with
deliveries of large numbers of systems completed to both France and Australia.
Demand for the system from the Middle East and Eastern Europe remains high,
supporting a wide range of coalition and peacekeeping deployments. The division
also continues to make good progress in the supply of weapon aiming and
disrupter technology for both US and European robots used for explosive
ordnance and IED disposal.
The phased re-start of production at Simmel Difesa took place during the first
half of 2008. A careful review of all processes was undertaken, and almost four
months of production of certain products was delayed into the second half.
Sub-contract manufacture of the white light candle for the 81mm mortar
illumination rounds passed qualification tests during the period, and nearly
10,000 rounds were successfully delivered to our UK customer. Simmel Difesa has
also been highly successful at maintaining its global leadership in naval
ammunition with strong sales of 40mm and 76mm ammunition. It has recently
received an Instruction to Proceed (ITP) for the supply of ammunition to France
in support of the latest European multi-mission frigate programme.
COUNTERMEASURES
The Countermeasures division also continues to be highly successful, with
revenue at our UK countermeasures business growing by 54% following strong
demand for its products from the UK and NATO forces operating in Afghanistan.
The UK business has also seen significant growth in its naval countermeasure
products, with strong demand coming from both traditional NATO and Eastern
European nations.
Both Alloy Surfaces and Kilgore Flares performed well in the first half, and
secured significant five year contracts for the supply of helicopter flares,
that could potentially provide in excess of $750 million of future revenue.
Successful flight trials and factory acceptance testing was also achieved for
the B-52 and C-17 advanced flares and a rapid increase to full volume
production is expected during the second half of the year.
I am also delighted to report a major competitive success by Kilgore Flares in
securing a 100% contract award for the supply of M212 helicopter flares, which
are a key component of the Advanced Infrared Countermeasure Munition (AIRCMM)
suite used by the US Department of Defense to protect helicopters from the
threat of IR guided missiles. The contract extends over a five year period and,
with a maximum potential value of $387 million, is the largest framework
contract ever awarded to the Group.
ACQUISITIONS
In November 2007, the Group acquired Richmond Electronics & Engineering Limited
("Richmond"), based in Norfolk, for £12.5 million. Richmond is a supplier of
explosive ordnance disposal (EOD) equipment, which complements that provided by
BDL Systems.
In March, the Group completed its acquisition of Titan Dynamics Systems, Inc.
("Titan"), based in Marshall, Texas, USA, for £2.6 million. Titan is a leading
manufacturer of battlefield training and simulation cartridge-based products
that are incorporated into the US Army's and US Marine Corps' digital training
ranges. Since completion, the Group has used its expertise in automated
production to significantly boost monthly production and, with only 25% of
launchers currently deployed, further increases in production are now expected.
During early July, the Group expects to complete the acquisition of Scot for a
cash consideration of US$40 million (£20 million). Scot, based in Illinois in
the USA, is a leading manufacturer of cartridge-actuated devices used in
aircraft emergency systems, and pyro-mechanisms used in munitions, missiles and
space vehicles, as well as specialist aircraft weapon ejector systems. Its
engineering design capability will complement our high volume production
capabilities at Technical Ordnance.
The Group has today announced the conditional acquisition of MEI in Florida,
USA. MEI already has a long-term collaboration with the Group on the
development of a new family of medium velocity 40mm grenades, which will
provide the infantryman with longer range operation and greater accuracy than
current low velocity in-service products. With a current order book of $62
million and revenue, year to date, up 71% on the previous year, MEI's future
prospects look encouraging.
These three recently announced US acquisitions will significantly enhance the
Group's position in the US market. In combination with our existing Energetics
activities at Technical Ordnance and Kilgore Defense, the Group is now
extremely well-positioned to establish itself as the US leader in both the
pyrotechnic and munition segments of the market.
RESEARCH AND DEVELOPMENT
To support the organic growth achieved by the business over the last few years,
the Group tries to maintain an investment of 3% of its revenue in research and
development. However, the rapid rate of growth has given us a major challenge
to recruit the scientific and engineering resources to deliver the products and
new technologies. We have, therefore, entered into a five year partnership
agreement, worth in excess of £5 million, with Cranfield University to conduct
research and development in energetic materials to advance the underpinning
science base, develop new products, and enhance our UK skill base. Since 50% of
our business is now conducted in the USA, we are looking to establish similar
agreements with a number of US universities. This will become the cornerstone
of our long-term strategy to maintain and develop our skills and competence
over the next ten years.
FINANCIAL POSITION
The Group's net assets increased by 9% to £135.5 million (2007: £124.0 million)
during the period.
The main movements in the balance sheet items were increases to goodwill,
intangibles, property, plant and equipment, and net debt. These increases
relate to the investment in the future of the Group, and strengthen its
financial position.
PEOPLE
The rapid expansion of the Group has placed significant demands on our
production, engineering and management staff. The Group continues to recruit at
the senior management level in both the USA and Europe in order to ensure that
we have the right level of expertise to meet the demands of both our current
business and future strategy.
PENSIONS
The triennial valuation of the UK Staff Pension Scheme as at 6 April 2006 was
agreed with the trustees in February, together with a funding plan which will
continue through to the next valuation.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties which could have a material impact on the
Group's performance over the remaining six months of the financial year and
could cause actual results to differ materially from expected and historical
results have not changed significantly from those set out in the Business
Review included in the Group's 2007 Financial Statements. These can be
summarised as:
* Health and safety risks
* Risks related to the introduction and manufacture of new products
* Risk associated with product design changes
* Risks arising from technology transfers
* Risk associated with the management of prime contracts
* Political risks
Competition was also identified as a risk in the 2007 Financial Statements but,
given the current strength of the Group's order book, with over a third of the
orders deliverable by the year end, we do not perceive this to be a threat to
the remaining six months' performance.
PROSPECTS
The prospects for both of our divisions remain excellent. The Group order book
has now grown to a record level of £425 million, up 45% compared with this time
last year. 36% of the current order book is for delivery in the second half of
the year. Historically, our full year revenue has been split 40%/60% between
the two halves and, given the status of our order book, the Board is confident
that this trend is likely to be repeated.
The strong organic growth achieved in both divisions and the impact of the
latest acquisitions continues to give confidence in the future performance of
the Group.
With an unchanged strategy, clear direction, responsibility and accountability
at each business, and a record order book, I look forward to the Group
delivering a substantial increase in performance in the next six months.
K C SCOBIE - CHAIRMAN
24 JUNE 2008
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
a. the condensed set of financial statements has been prepared in accordance
with IAS 34 - Interim Financial Reporting;
b. the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and description of principal risks and uncertainties for the
remaining six months of the year); and
c. the interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and
changes therein).
By order of the Board
D J PRICE P A RAYNER
CHIEF EXECUTIVE FINANCE DIRECTOR
24 JUNE 2008
CONDENSED CONSOLIDATED INCOME STATEMENT
for the half year to 30 April 2008
Note Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Continuing operations
Revenue - continuing 146.4 106.8 254.7
- acquired 3.8 - -
Total revenue 150.2 106.8 254.7
Operating - continuing 24.5 22.6 57.8
profit - acquired 0.8 - -
Total operating profit 2 25.3 22.6 57.8
Operating profit is analysed as:
Underlying operating profit before 28.2 23.3 61.2
intangible amortisation arising from
business combinations
Intangible amortisation arising from (2.9) (0.7) (3.4)
business combinations
Total operating profit 25.3 22.6 57.8
Share of post-tax results of 0.1 - 0.1
associate
Finance expense (4.7) (3.1) (8.1)
Profit before tax for the period/ 20.7 19.5 49.8
year from continuing operations
Tax 4 (6.2) (6.4) (15.9)
Profit after tax for the period/year 2 14.5 13.1 33.9
from continuing operations
Discontinued operations
Loss after tax from discontinued - (1.9) (1.9)
operations
Profit after tax for the period/year 14.5 11.2 32.0
Attributable to:
Equity holders of the 14.5 11.2 32.1
parent
Minority interest - - (0.1)
Earnings per ordinary share 5
From continuing operations:
Underlying 52p 42p 112p
Basic 45p 41p 105p
Diluted 44p 40p 104p
From continuing and discontinued
operations:
Basic 45p 35p 99p
Diluted 44p 34p 98p
CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
for the half year to 30 April 2008
Note Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Profit after tax for the period/year 14.5 11.2 32.0
Other recognised income and expense
(Losses)/gains on cash flow hedges (1.6) 0.1 0.2
Movement on deferred tax relating to 0.4 - (0.1)
cash flow hedges
Exchange differences on translation of 5.2 (3.8) (7.0)
foreign operations
Actuarial (losses)/gains on defined (2.4) 3.5 4.4
benefit pension schemes
Movement on deferred tax relating to 0.7 (1.0) (1.5)
pension schemes
Tax on items taken directly to equity 0.6 0.6 3.1
Total recognised income and expense 17.4 10.6 31.1
for the period/year
Attributable to:
Equity holders of the parent 7 17.4 10.6 31.2
Minority interest - - (0.1)
CONDENSED CONSOLIDATED BALANCE SHEET
as at 30 April 2008
Unaudited Unaudited Audited
As at As at As at
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Non-current assets
Goodwill 108.6 97.3 94.8
Other intangible assets 42.1 36.9 35.4
Development costs 2.2 1.0 1.7
Property, plant and equipment 86.7 60.0 69.8
Investments 1.1 1.0 1.0
Deferred tax 10.1 11.7 9.1
250.8 207.9 211.8
Current assets
Inventories 65.0 51.9 51.2
Trade and other receivables 79.0 57.0 61.9
Cash and cash equivalents 36.0 14.4 38.7
Derivative financial instruments - 0.3 0.9
180.0 123.6 152.7
Assets held for sale - 2.5 -
Total assets 430.8 334.0 364.5
Current liabilities
Bank loans (13.5) (8.7) (9.2)
Bank overdraft - - (13.3)
Obligations under finance leases (1.0) (0.2) (0.7)
Trade and other payables (77.9) (64.6) (71.4)
Provisions (0.4) (1.3) (0.4)
Derivative financial instruments (1.3) - -
Current tax liabilities (6.0) (3.5) (3.3)
Liabilities held for sale - (2.0) -
(100.1) (80.3) (98.3)
Non-current liabilities
Bank loans (84.7) (113.5) (113.5)
Senior notes (75.5) - -
Obligations under finance leases (2.6) (0.1) (1.5)
Trade and other payables (1.5) (0.5) (0.4)
Deferred tax (13.6) (13.7) (12.1)
Provisions (1.3) (4.5) (1.3)
Preference shares (0.1) (0.1) (0.1)
Retirement benefit obligations (15.9) (13.0) (13.3)
(195.2) (145.4) (142.2)
Total liabilities (295.3) (225.7) (240.5)
Net assets 135.5 108.3 124.0
Equity
Share capital 1.6 1.6 1.6
Share premium account 61.6 60.3 60.5
Special capital reserve 12.9 12.9 12.9
Hedging reserve (1.1) 0.3 0.4
Revaluation reserve 1.5 1.6 1.6
Own shares (4.7) - (2.8)
Retained earnings 63.7 31.3 49.8
Equity attributable to equity holders of 135.5 108.0 124.0
the parent
Minority interest - 0.3 -
Total equity 135.5 108.3 124.0
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the half year to 30 April 2008
Note Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Cash flows from operating activities
Cash generated from operations (before A 12.2 13.8 60.6
phantom share option payment)
Phantom share option payment * (3.4) - -
8.8 13.8 60.6
Tax paid (2.4) (4.7) (12.0)
Net cash inflow from operating activities 6.4 9.1 48.6
Cash flows from investing activities
Dividends received from associate 0.1 0.1 0.1
Purchases of property, plant and (16.5) (5.1) (14.6)
equipment
Purchases of intangible assets (1.9) (0.2) (1.4)
Proceeds on disposal of subsidiary - 3.2 3.2
undertaking/division
Proceeds on disposal of property, - - 0.2
plant and equipment
Acquisition of subsidiaries (net of 9 (11.4) (37.8) (46.9)
cash acquired)
Net cash outflow from investing (29.7) (39.8) (59.4)
activities
Cash flows from financing activities
Dividends paid (5.8) (3.6) (6.0)
Interest paid (2.7) (2.8) (7.4)
Proceeds on issue of shares 0.2 - 0.1
New borrowings 72.7 47.4 50.7
Repayment of borrowings (31.7) (3.8) (6.4)
New/(repayments of) obligations under 1.7 - (0.7)
finance leases
Purchase of own shares (1.9) - (2.8)
Net cash inflow from financing 32.5 37.2 27.5
activities
Increase in cash and cash equivalents 9.2 6.5 16.7
during the period/year
Cash and cash equivalents at start of 25.4 9.0 9.0
the period/year
Effect of foreign exchange rate 1.4 (1.1) (0.3)
changes
Cash and cash equivalents at end of 36.0 14.4 25.4
the period/year
* The phantom share option payment of £3.4 million relates to the final
settlement of The Chemring Group Phantom Share Option Scheme. This payment,
including tax and national insurance, was made to Mr K C Scobie and full
details were disclosed in the Group's 2007 Financial Statements.
NOTES TO THE CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the half year ended 30 April 2008
A. Cash generated from operations Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Operating profit from continuing operations 24.5 22.1 55.2
Operating profit from acquired operations 0.8 0.5 2.6
Operating loss from discontinued operations - (0.1) (0.4)
Loss on disposal/impairment of - (1.6) (1.5)
discontinued operations
Adjustment for:
Depreciation of property, plant and 4.4 3.5 6.8
equipment
Amortisation of intangible assets arising 2.9 0.7 3.4
from business combinations
Amortisation of other intangible assets 0.7 0.4 0.6
Negative goodwill included in operating profit - - (0.4)
Difference between pension contributions (0.3) (0.1) (0.6)
paid and amount recognised in income
statement
(Decrease)/increase in provisions (1.1) 0.1 (0.5)
Operating cash flows before movements in 31.9 25.5 65.2
working capital
Increase in inventories (12.5) (7.7) (4.6)
Increase in trade and other receivables (16.6) (9.1) (9.0)
Increase in trade and other payables 9.4 5.1 9.0
Cash generated from operations (before 12.2 13.8 60.6
phantom share option payment)
Reconciliation of net cash flow to
movement in net debt
Increase in cash and cash equivalents 9.2 6.5 16.7
during the period/year
Cash inflow from increase in debt and (42.7) (43.6) (43.6)
lease financing
Change in net debt resulting from cash (33.5) (37.1) (26.9)
flows
Decrease/(increase) in debt and finance 0.6 (0.1) (2.1)
leasing
Translation difference (8.6) (0.3) 0.4
Amortisation of debt finance costs (0.3) (0.1) (0.4)
Movement in net debt in the period/year (41.8) (37.6) (29.0)
Net debt at start of the period/year (99.6) (70.6) (70.6)
Net debt at end of the period/year (141.4) (108.2) (99.6)
Analysis of net debt
As at Cash Non-cash Exchange As at
1 Nov flow changes movement 30 April
2007 2008
£m £m £m £m £m
Cash at bank and in hand 38.7 6.2 (10.4) 1.5 36.0
Overdrafts (13.3) 3.0 10.4 (0.1) -
Cash and cash equivalents 25.4 9.2 - 1.4 36.0
Debt due within one year (9.2) 3.5 (7.0) (0.8) (13.5)
Debt due between two and (113.5) 28.2 7.0 (6.4) (84.7)
five years
Debt due after more than - (72.7) - (2.8) (75.5)
five years
Finance leases (2.2) (1.7) 0.3 - (3.6)
Preference shares (0.1) - - - (0.1)
(99.6) (33.5) 0.3 (8.6) (141.4)
INDEPENDENT REVIEW REPORT TO CHEMRING GROUP PLC
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
April 2008 which comprises the Condensed Consolidated Income Statement, the
Condensed Consolidated Statement of Recognised Income and Expense, the
Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow
Statement, the Notes to the Condensed Consolidated Cash Flow Statement and the
related Notes 1 to 14. We have read the other information contained in the
half-yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed
set of financial statements.
This report is made solely to the Company in accordance with International
Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our
work has been undertaken so that we might state to the Company those matters we
are required to state to them in an independent review report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the Disclosure and Transparency
Rules of the United Kingdom's Financial Services Authority.
As disclosed in Note 1, the annual financial statements of the Group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with International Accounting Standard
34 - Interim Financial Reporting, as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 April 2008 is not prepared, in all
material respects, in accordance with International Accounting Standard 34 as
adopted by the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditor
Southampton, United Kingdom
24 June 2008
NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The Condensed Consolidated Income Statement for each of the six month periods
and the Condensed Consolidated Balance Sheet as at 30 April 2008 do not amount
to full accounts within the meaning of section 240 of the Companies Act 1985
and have not been delivered to the Registrar of Companies. The half-yearly
financial report was approved by the Board of Directors on 24 June 2008. Full
accounts for the year ended 31 October 2007, which include an unqualified audit
report and did not contain statements under section 237(2) or (3) of the
Companies Act 1985, have been delivered to the Registrar of Companies.
The accounting policies applied by the Group in this half-yearly financial
report are the same as those applied by the Group in its consolidated financial
statements for the year ended 31 October 2007.
In the current financial year, the Group will adopt IFRS7 - Financial
Instruments: Disclosures for the first time. As IFRS7 is a disclosure standard
there is no impact on the half-yearly financial report. Full details of the
change will be disclosed in our annual report for the year ended 31 October
2008.
These interim financial statements have been prepared in accordance with IFRSs
as adopted by the European Union. The condensed set of financial statements
included in the half-yearly financial report has been prepared in accordance
with International Accounting Standard 34 - Interim Financial Reporting as
adopted by the European Union.
2. SEGMENTAL ANALYSIS
A segmental analysis of revenue and operating profit is set out below:
Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2008 2007
Continuing operations: £m £m £m
Revenue
Countermeasures 70.9 58.4 126.5
Energetics 79.3 48.4 128.2
Total 150.2 106.8 254.7
Underlying operating profit
Countermeasures 19.0 17.7 38.6
Energetics 12.4 8.6 27.9
Charge for share based payments (0.8) (1.6) (2.4)
Unallocated head office costs (2.4) (1.4) (2.9)
Underlying operating profit before 28.2 23.3 61.2
intangible amortisation arising from business
combinations
Intangible amortisation arising from (2.9) (0.7) (3.4)
business combinations
Total operating profit 25.3 22.6 57.8
Share of post-tax results of associate 0.1 - 0.1
Finance expense (4.7) (3.1) (8.1)
Profit before tax for the period/year 20.7 19.5 49.8
Tax (6.2) (6.4) (15.9)
Profit after tax for the period/year 14.5 13.1 33.9
3. SEASONALITY OF REVENUE
Revenue for both Countermeasures and Energetics businesses is more weighted
towards the second half of the financial year in line with defence spending.
Margins in the second half of the financial year are anticipated to improve as
increased turnover should lead to higher gross profit whilst fixed costs should
remain at similar levels to the first half of the financial year.
4. TAX
The estimated tax rate for the Group for continuing operations for the year
ending 31 October 2008 is 30% (2007: 33%), representing the best estimate of
the average effective income tax rate expected for the full year, applied to
the pre-tax income for the six month period.
5. EARNINGS PER SHARE
Earnings per share are based on the average number of shares in issue of
32,577,899 (2007: 32,305,968) and profit on ordinary activities after tax and
minority interests of £14.5 million (2007: £11.2 million). Diluted earnings per
share has been calculated using a diluted average number of shares in issue of
32,765,516 (2007: 32,531,707) and profit on ordinary activities after tax and
minority interests of £14.5 million (2007: £11.2 million).
The earnings and shares used in the calculations are as follows:
2008 2007
From continuing operations Ordinary Ordinary
shares shares
Earnings Number EPS Earnings Number EPS
£m 000s Pence £m 000s Pence
Basic 14.5 32,578 45 13.1 32,306 41
Additional shares issuable
other than at fair value in
respect of options - 208 (1) - 226 (1)
outstanding
Diluted 14.5 32,786 44 13.1 32,532 40
Reconciliation from basic earnings per share to underlying earnings per share:
Underlying earnings has been defined as earnings before intangible amortisation
arising from business combinations. The directors consider this measure of
earnings allows a more meaningful comparison of earnings trends.
2008 2007
From continuing operations Ordinary Ordinary
shares shares
Earnings Number EPS Earnings Number EPS
£m 000s Pence £m 000s Pence
Basic 14.5 32,578 45 13.1 32,306 41
Intangible amortisation 2.3 - 7 0.5 - 1
arising from business
combinations (after tax)
Underlying 16.8 32,578 52 13.6 32,306 42
2008 2007
From continuing and discontinued operations
Ordinary Ordinary
shares shares
Earnings Number EPS Earnings Number EPS
£m 000s Pence £m 000s Pence
Basic 14.5 32,578 45 11.2 32,306 35
Additional shares issuable
other than at fair value in
respect of options outstanding - 208 (1) - 226 (1)
Diluted 14.5 32,786 44 11.2 32,532 34
Details of earnings per share for the year ended 31 October 2007 are disclosed
in the Group's audited 2007 Financial Statements. Underlying earnings per share
from continuing operations was 112p. Basic earnings per share was 105p from
continuing operations and 99p from continuing and discontinued operations.
6. DIVIDENDS
2008 2007
£m £m
Dividends on ordinary shares of 5p each
Interim dividend for the half year ended 30 April 2007 7.2p - 2.4
Final dividend for the year ended 31 October 2007 17.8p 5.8 3.6
(2006:11.2p)
Total dividends 5.8 6.0
The interim dividend declared by the Board in respect of the half year ended 30
April 2008 of 10.0p per share will absorb approximately £3.5 million of
shareholders' funds. No liability for the interim dividend has been included in
these interim financial statements.
7. STATEMENT OF CHANGES IN EQUITY
Unaudited Unaudited Audited
Half year Half year Year
to to to
30 April 30 April 31 Oct
2008 2007 2007
£m £m £m
Total recognised income and expense for the 17.4 10.6 31.1
period/year
Dividends (5.8) (3.6) (6.0)
Retained profit for the period/year 11.6 7.0 25.1
Share capital and share premium arising 1.1 6.8 6.9
Net cost of share-based payments 0.7 - 0.9
Purchase of minority interest - - (0.2)
Own shares (1.9) - (2.8)
Other recognised gains/losses - 0.4 -
Net addition to shareholders' funds 11.5 14.2 29.9
Opening shareholders' funds 124.0 94.1 94.1
Closing shareholders' funds 135.5 108.3 124.0
During the period, the Group issued 50,107 ordinary shares as part
consideration for the acquisition of Richmond Electronics & Engineering
Limited. In addition, 50,000 ordinary shares were issued under the Chemring
1998 Executive Share Option Scheme.
8. BANK LOANS AND OVERDRAFTS
During the period, the Group refinanced part of its borrowing facilities with a
private placement of senior loan notes in the USA. The new financing
arrangements reflect the Group's investment structure in overseas businesses.
Senior loan notes (repayable in full in 2017) of £72.7 million were issued in
the period and £31.7 million of existing loans were repaid. The Group now has £155 million
of committed facilities with Bank of Scotland.
9. ACQUISITIONS
On 2 November 2007, the Group acquired the entire share capital of Richmond
Electronics & Engineering Limited for a total consideration of £12.5 million.
On 17 March 2008, the Group acquired the entire stock capital of Titan Dynamics
Systems, Inc. for a cash consideration of £2.6 million.
A summary of the assets acquired and consideration paid in respect of these two
acquisitions is set out below:
Book Fair value Fair
value adjustments value
£m £m £m
Intangible assets 0.2 6.1 6.3
Property, plant and equipment 1.7 - 1.7
Net cash 2.7 - 2.7
Working capital (0.1) (0.5) (0.6)
Deferred tax (0.1) (1.9) (2.0)
Provisions falling due within one year (0.1) (1.0) (1.1)
Net assets acquired 4.3 2.7 7.0
Goodwill - 8.1 8.1
Total 4.3 10.8 15.1
Consideration
Cash 13.5
Share issue 1.0
Directly attributable costs 0.6
Total consideration 15.1
Adjustments from book value to fair value arise principally from the
application of Group accounting policies and the recognition of intangible
assets under IFRS3 - Business Combinations and Fair Value Adjustments to
Inventories, Receivables, Property, Plant and Equipment. Intangible assets
relate principally to customer relationships and technology.
At 30 April 2008, the estimated fair value of assets and liabilities are
provisional and will be updated as necessary within the twelve month period
following the acquisitions.
Summary of cash flows:
£m
Cash paid for acquisitions in the period (14.1)
Cash acquired 2.7
Net cash outflow (11.4)
The acquisitions during the period contributed £3.8 million of revenue and £0.8
million to the Group's operating profit for the period between the date of
acquisition and the Balance Sheet date.
If the acquisitions had been completed on the first day of the current period,
Group revenues and operating profit for continuing operations for the period
would have been approximately £151.0 million and £25.4 million respectively.
This information is not necessarily indicative of the results of operations
that would have occurred had the operations been acquired at the start of the
current period, nor of the future results of the combined operations.
During the prior year the Group acquired Simmel Difesa S.p.A. The fair value of
net assets acquired of £19.2 million was recognised at 31 October 2007 based on
provisional values. The fair values have been finalised since October 2007 and
in accordance with IFRS3 a decrease of £1.4 million has been made
retrospectively to the value of net assets. Accordingly, goodwill has been
retrospectively increased by £1.4 million. This is the only adjustment relating
to prior periods.
10. POST BALANCE SHEET EVENTS
On 27 May 2008, the Group announced the conditional acquisition of the entire
issued stock capital of Scot, Inc. ("Scot") from SMS Industries, Inc. for a
cash consideration of $40 million (£20 million), with a working capital
adjustment at completion. The consideration for Scot, together with transaction
costs and expenses, is being retrospectively funded by a cash placing of
1,111,112 new ordinary shares to raise £25 million. The acquisition is expected
to complete in early July and hence the full acquisition information is not yet
available.
Today the Group announced the conditional acquisition of the entire issued
stock capital of MEI Holdings, Inc. and its wholly-owned subsidiary, Martin
Electronics, Inc. (collectively referred to as "MEI"), for a cash consideration
of $70 million (£35.5 million), with a net asset adjustment at completion. The
acquisition will be funded by a vendor placing of 1,555,555 new ordinary shares
at 2,250p per share, raising £35 million. The acquisition is expected to
complete during August and hence the full acquisition information is not yet
available.
11. INSURANCE CLAIM
During the reporting period the case against the Group's former insurance
broker for alleged negligence in relation to an insurance claim was settled. At
the beginning of the period, the balance of the claim that had not been
recovered from the broker was £2.4 million. After incurring legal costs in the
period of £0.6 million, releasing specific provisions of £0.4 million and a
related tax reserve of £0.8 million, a net write-off of £0.6 million has been
charged to unallocated head office costs in Note 2 following settlement.
12. PENSIONS
The defined benefit obligation is calculated using an actuarial valuation as at
30 April 2008. The deficit has increased as a result of changes to the schemes'
asset values from falling equity markets and from the adjustment in assumptions
to reflect current market conditions. The difference between the expected
return on assets and the actual return on assets has been recognised as an
actuarial loss in the Condensed Consolidated Statement of Recognised Income and
Expense in accordance with the Group's accounting policy.
13. RELATED PARTY TRANSACTIONS
The Group had no related party transactions during the period requiring
disclosure.
14. CORPORATE WEBSITE
Further information on the Group and its activities can be found on the
corporate website at www.chemring.co.uk.
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