Final Results

Chemring Group PLC 23 January 2001 CHEMRING GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 OCTOBER 2000 * Group profit before tax increased to £7.1 million from £4.3 million, up 65% * Basic earnings per ordinary share increased to 22.04p from 14.49p, up 52% * Turnover on continuing operations increased to £67.2 million from £62.1 million * Recommended final dividend per ordinary share 4.00p, making a total dividend of 6.30p for the year, up 15% (1999 : 5.50p) * Acquisition of Alliant Kilgore Flares Company LLC for US$23 million Ken Scobie, Chemring Group Chairman, commented: 'The acquisition of Kilgore, announced today, enhances our foremost position in expendable countermeasures, a rapidly expanding area of worldwide defence expenditure. This, together with our technical superiority in certain 'at risk' situations, gives us high levels of confidence for substantial growth in this industry. In addition, the prospects for our Marine Safety and Military Pyrotechnics businesses give your Board confidence that substantial growth can be achieved in the coming year and can be sustained for several years.' Note All comparisons are for the year ended 31 October 1999. For further information: Ken Scobie Chairman, Chemring Group PLC 0207 930 0777 David Evans Chief Executive, Chemring Group PLC 0207 930 0777 Paul Rayner Finance Director, Chemring Group PLC 0207 930 0777 Jonathan Rooper Cardew & Co. 0207 930 0777 STATEMENT BY THE CHAIRMAN I am delighted to inform shareholders of a further substantial improvement in Group profit before tax to £7,127,000 (1999: £4,306,000) and earnings per share of 22.04p (1999: 14.49p), increases of 65% and 52% respectively. The year has seen major progress in the prospects of our two main businesses, Countermeasures and Marine Safety. The acquisition of Kilgore in the US, announced today, will strengthen significantly our position as the world leader in supplying aircraft expendable decoys. Kilgore also manufactures a range of pyrotechnics that complements our existing Military Pyrotechnics activity. Results 2000 1999 £000 £000 % increase Operating profit 8,806 6,215 42 Profit before tax 7,127 4,306 65 Profit after tax 5,261 3,435 53 Earnings per share 22.04p 14.49p. 52 Group interest and finance costs reduced by 14% to £1,709,000. The Group has continued its major investment in research and development, particularly in the areas of Countermeasures and Marine Safety. Business Activities Chemring Countermeasures, Alloy Surfaces and Kilgore, now make your Group the undisputed world leader in expendable countermeasure devices for air, naval and land based systems, an industry with high levels of growth projected for the immediate future. Chemring Countermeasures UK continued its excellent performance, where further growth of 29% for the year followed the total 31% growth achieved in the last year, producing earnings substantially in excess of expectations. Alloy Surfaces' range of products continues to grow as demand from the US Department of Defense for our proprietary products increases, particularly in pre-emptive operational mode. There are also considerable export opportunities. However in the second half of the year, Alloy Surfaces experienced minor quality problems with one product line, the result of which was a major product rework to correct the defect. The impact of these problems was not only the cost of the rework, but disruption to the production programme during the second half, at a time when several new products were entering production. It is estimated that this disruption has cost in excess of US$ 1million in lost profit. The acquisition of Kilgore will have a significant impact on our international Countermeasures capability, bringing to the Group additional annual sales in excess of US$30 million and a range of products complementary to those produced by Alloy Surfaces with considerable potential for exports. Our Marine Safety business is an international market leader in this industry. The business consists of essentially two activities, the rapidly growing electronics business and the more mature marine pyrotechnics business. During the year, electronics growth was 20%, whilst pyrotechnics sales reduced , predominantly due to European competition and the impact of a weak Euro. The substantial research and development programme for our electronic products has already been highly successful and in January 2001 the business received a prestigious award for 'Marine Product of the Year' for one of its new electronic products at the London Boat Show's nautical awards. The business is searching for acquisition opportunities, both to consolidate its position as the market leader and also to establish a more substantial base in the US market. PW Defence, the Group's Military Pyrotechnics business, had a quiet first half whilst it consolidated the majority of its manufacturing operations on one site in Derby. However, the second half was very satisfactory, meeting our expectations for the year. Although this market is not a high growth area, the expectations for this year, when combined with the export potential from the complementary military activities of Kilgore, are good. The business continues to look for co-operation projects with other European manufacturers. Kembrey Wiring Systems received the accolade from both BAE Systems and Rolls-Royce as a Centre of Excellence during the year, securing its future as a preferred sub-contractor for aircraft wiring systems. Unfortunately, this coincided with short term delays in production scheduling by both customers, resulting in a significant shortfall in workload, sales and full year results, turning the profit for the first half into a small loss for the full year. Predictions are that the coming year should return to more acceptable levels of profitability, with strong growth thereafter. Dividends An interim dividend for the year ended 31 October 2000 of 2.30p per ordinary share was paid on 16 August 2000. The directors recommend a final dividend of 4.00p per ordinary share to be paid on 10 April 2001, making a total for the year of 6.30p per ordinary share, up 15% on last year's total dividend of 5.50p. Employees I would like to thank all our employees for another year of hard work and commitment to the Group. Prospects The acquisition of Kilgore, announced today, enhances our foremost position in expendable countermeasures, a rapidly expanding area of worldwide defence expenditure. This, together with our technical superiority in certain 'at risk' situations, gives us high levels of confidence for substantial growth in this industry. In addition, the prospects for our Marine Safety and Military Pyrotechnics businesses, together with the recovery at Alloy Surfaces and return to acceptable profitability of Kembrey Wiring, give your Board confidence that substantial growth can be achieved in the coming year and can be sustained for several years. We intend to strengthen the Group's organisation to ensure management resources keep pace with the growth in the business. Your Group has an exciting future and I am determined that it will be delivered. K C Scobie Chairman (23 January 2001) REVIEW BY THE CHIEF EXECUTIVE The Group's activities are covered under the following headings: Defence Countermeasures: Chemring Countermeasures, Alloy Surfaces, Kilgore, Pains Wessex Australia Military Pyrotechnics and Explosives: PW Defence, Pains Wessex Australia Non-Defence Marine Safety: McMurdo Marine, Pains Wessex Safety Systems, Nova Marine Wiring Harnesses: Kembrey Wiring Systems Chemical Coatings: Alloy Surfaces Defence Businesses It was a good year for our defence businesses where further growth in both sales and order book was achieved. Turnover in defence activities improved by 11% to £39.7million. The policy of investing in new products resulted in several important new defence products entering into the production phase during the year, increasing our product range and underpinning the expected continued organic growth in defence activities. The year ended with a healthy order book of £38 million, up £12 million on 1999. Countermeasures The Group is recognised as an international market leader in the development and manufacture of expendable countermeasures to protect valuable military platform, with operations in the US, the UK and Australia. It continues to develop new products and new markets to maintain its leading position. Turnover increased by 13% to £28.5 million for the year, and the order book increased by 65% over the year to £25.2 million. The acquisition of Kilgore, the leading US IR decoy manufacturer, was also announced today. Kilgore, based in Toone, Tennessee, is the largest supplier of conventional IR decoys to the US Government and exports 30% of its turnover. The product range of this business, along with the complementary products of our other UK and US countermeasure activities, further enhances our position and strengthens considerably the Group's IR air decoy capability worldwide. Kilgore has recently been awarded a development IR decoy contract for the US F22 aircraft. For aircraft countermeasures in the US, the Group is now the leading supplier to the US Department of Defense of IR decoy flares, providing both conventional and special materials decoys (SMDs). The Group is prime contractor to the UK MoD for its current range of IR flares and RF chaff decoys, and exports its range of products worldwide. Alloy Surfaces' range of products continues to grow as the demand for its proprietary products increases, particularly in pre-emptive operational mode. Alloy's unique IR material features in several advanced IR expendable countermeasure programmes in the US. Production deliveries commenced on the Advanced Strategic and Tactical Expendables (ASTE) programme, where Alloy is the sole source supplier of two out of the family of four flares. As a consequence of the number of new products entering production in the year, Alloy Surfaces experienced problems in ramping up its production facilities. The production management has now been significantly strengthened, and investment has been made in equipment and people to ensure that the production facility meets its future output targets. Alloy currently provides special material decoys (SMDs) for Naval helicopters and has also developed a product for US Army helicopters. This will commence series production in 2001, when the Advanced Threat IR Countermeasures (ATIRCM), which combine missile warning with directable IR countermeasures in a single package, enter service. The use of Alloy's SMDs in pre-emptive mode is attracting increasing interest. This pre-emptive capability has already been demonstrated by the BOL dispenser and in tests with a Raytheon ALE 50 towed decoy containing Alloy's special material. A feasibility study for a pod mounted pre-emptive SMD is underway and we anticipate a growing demand for these types of products, which significantly improve aircraft survival when operating in 'front line' scenarios. The UK business, Chemring Countermeasures ('CCM'), provides decoys to Tornado aircraft users, which include the UK, Germany, Italy and Saudi Arabia, and is also the developer of the chaff and flare decoys for the European Fighter Aircraft 2000 (Typhoon). New aircraft products which entered production this year included the MEB (Modular Expendable Block), which incorporates both flare and chaff materials to increase operational effectiveness on both fixed wing aircraft and helicopters. As well as significantly improving operational capabilities, the MEB also confers significant savings in logistic costs to the user. A version of the IR MEB has been selected for the Swiss Cougar programme, and the RF MEB version has already entered service in numerous NATO and non-NATO countries on C130, F16 and various helicopters, including the GKN Westland's WH64 Apache. In naval countermeasures, development of the MK36 130mm naval IR round and innovative proprietary combined MK36 compatible 130mm RF/IR rounds is complete, and the products are in the process of final acceptance trials ahead of deliveries to the UK MoD and Danish customers. CCM is the only company worldwide that can offer the full range of passive IR and RF decoys for the MK36 decoy launcher, which is standard in most NATO navies. This has been another good year for our Countermeasures business with both orders and sales reaching record highs, and significant opportunities for further increases. Investment will continue in both facilities and R&D to ensure the Group maintains its market position and capitalises on the increasing need to protect valuable military platform. Military Pyrotechnics and Explosives PW Defence is a leading supplier to the UK MoD and an international market leader for its range of specialist pyrotechnic and explosive products used in training and other non-offensive activities. Turnover in the year increased by 5% to £11.2 million. During the year, the manufacture of military pyrotechnics was concentrated at the production facilities in Derby. At the year end, the order book had increased by 22% to £13 million. In the domestic market the UK MoD continue to be the major customer. PW Defence again won the majority share of this business and has a number of long-term contracts with this customer for the supply of a variety of training pyrotechnics. The announcement by the MoD that they wish companies to participate in SMART procurement is seen as an opportunity to participate in discussions with MoD. Export orders increased on last year, and at the year end the company had an order book providing nearly 12 months' sales cover. PW Defence has held it's international market share and we continue to explore collaboration initiatives particularly in Europe, exploring closer working relationships with our industry participants, to position us for possible European-led defence procurement programmes. North America is a difficult market to penetrate from overseas but initial orders have been received direct from the US DoD for some of the company's specialised defence pyrotechnics. The acquisition of Kilgore provides a better opportunity to market PW Defence products in the US and for PW Defence to market Kilgore's products overseas. This relationship has existed on an arms length basis for a number of years and the acquisition will enable the product range for both parties to grow. Pains Wessex Australia's military turnover was at a similar level to last year's high, in support of the Australian government strategy to encourage in-country industrial capability. Non-Defence Businesses Marine Safety The Group is a market leader in providing legislated marine safety products to aid location and rescue, including pyrotechnics, electronic location beacons, location lights and VHF radios. The business is primarily driven by global legislation set by the International Maritime Organisation (IMO) under its Safety of Life at Sea (SOLAS) convention. This mandates the carrying of pyrotechnic products and marine safety lights. Electronic products in support of the legislated Global Maritime Distress and Safety System (GMDSS) include 406 EPIRBs, SARTs and portable VHF radios. Turnover increased by 6% to £17.7 million, with electronic sales increasing by 20%, offsetting a reduction in sales of pyrotechnics into Europe, which were affected by the weakness of the Euro. The emphasis on innovative, low cost products, has helped to improve margins for the business, resulting in increased overall operating profitability. New electronics products will drive the growth of our Marine Safety business. Our continuing development of 406MHz technology has provided an EPIRB with integral Global Positioning Systems (GPS), which has already won a prestigious award for innovation and now has two further award nominations. This is the smallest and most technically advanced GPS EPIRB in the world and makes use of combining two of the world's leading satellite systems to ensure that rescue services can be alerted with an accurate location within three minutes, typically to within 30 metres. Additional 406MHz technology products currently in development, which will provide access to further new market areas include Personal Location Beacons (PLBs) for land use and Emergency Location Transmitters (ELTs) for aviation use, as legislation is introduced in these areas. Sales are expected to increase significantly in these areas following the recent announcement by Cospas-Sarsat that satellite processing on 121.5 and 243 MHz is to be terminated. This will move all product sales to 406 MHz beacons. Forthcoming legislation, both internationally from the IMO and from within the European Union, will further expand our market opportunities. This includes new fishing vessel safety requirements within the EU and additional safety measures, such as voyage data recorders and automatic identification systems. Wiring Harnesses Kembrey Wiring Systems ('Kembrey') is one of the largest UK manufacturers of high specification cable harnesses for the aerospace industry. It has an excellent reputation for supplying quality wiring systems to manufacturers of aircraft and aircraft engines. Kembrey has established 'Strategic Partnership' status with its major customers, including Rolls-Royce, BAE Systems and Hurel Dubois. These relationships help secure the long-term future of the business. In support of BAE Systems, the Hawk programme was completed on time and we achieved 'world class' status on the Tornado update programme. However, delays in commencing activity on the Nimrod programme held overall turnover to a similar level as last year. Engineering support to the Nimrod programme has commenced. Chemical Coatings Alloy Surfaces has a niche market in supplying special chemicals to the aerospace sector for use in diffusion coating of engine components and demand is expected to continue at current levels. D R Evans Chief Executive (23 January 2001) REVIEW BY THE FINANCE DIRECTOR Operating results Group turnover for continuing operations grew by 8% to £67,169,000 (1999: £62,082,000). The continued introduction of lower cost products and the consolidation of the Military Pyrotechnics business into the Derby site contributed an improvement in gross profits of 11% to £19,005,000 (1999: £17,097,000). Gross profit margins increased to 28% (1999: 27%) Total overheads have been well controlled in the year and represent 15% of sales (1999: 15%). £2,622,000 was expended on research and development activities during the year. Operating margins continued to improve and were at 13% for 2000 (1999: 12%). There were no losses on discontinued businesses in the year (1999: £1,551,000 loss). Interest The interest charge for the year was £1,709,000 (1999: £1,979,000). Interest cover generated by continuing operations was 5.2 times (1999: 3.9 times). Taxation The tax charge of £1,866,000 is at an effective rate of 26%, which represents tax arising on overseas operations and a reduced charge on the UK operations, due to the utilisation of brought forward tax losses. Next year it is anticipated that the tax rate will increase to around 31%. Shareholder returns Basic earnings per ordinary share increased to 22.04p (1999: 14.49p). The dividend per ordinary share of 6.30p (1999: 5.50p) is covered 3.48 times (1999: 2.63 times). Post tax return on capital employed was 15.8% (1999: 11.9%) Goodwill Goodwill of £18.3 million arose in previous years on acquisitions made in the Countermeasures, Marine Safety and Military Pyrotechnics businesses. The Board has carried out an annual impairment test that has demonstrated that no amortisation is necessary on the constituent parts of the goodwill balance. Cash flow and gearing Operating cash flow was £7,937,000 (1999: £5,340,000), representing a conversion rate to operating profit of 90% (1999: 86%). The sharp increase in stock levels is attributable to the production costs associated with the manufacture of naval rounds in our Countermeasures business. After offsetting contract advance payments, net stock in relation to the naval rounds, is approximately £1.9 milion. These naval rounds are anticipated to be sold in the first half of the current financial year. Stock levels at Alloy Surfaces increased in support of future business. Capital expenditure on tangible assets and development costs of £3,139,000 (1999: £2,842,000) in support of continued growth was financed through cash flow and leasing. Net debt stood at £20,118,000 at the year end (1999: £20,681,000). Gearing was 60% (1999: 72%). Post balance sheet events and funding The acquisition of Alliant Kilgore Flares Company LLC ('Kilgore') for US$23 million is to be financed as follows: US$m Issue of 1,200,000 new ordinary Shares 5.2 Balancing cash payment 17.8 Consideration 23.0 The consideration will be subject to adjustment depending on the audited net assets of Kilgore at completion. In order to finance the acquisition and provide working capital for the Group, total new facilities of £38.5 million have been agreed with The Royal Bank of Scotland plc, supported by the Bank of Scotland. Facilities of US$8.2 million are in place with Wilmington Trust and the Pennsylvania Industrial Development Authority, to provide funding for Alloy Surfaces. Facilities of A$1.4 million exist to provide funding for Pains Wessex Australia. The Board has reviewed the latest guidance on going concern and considers the above facilities provide the Group with sufficient resources. New accounting developments The following accounting standards have been adopted in the year and the financial information amended as appropriate: * FRS 15 Tangible Fixed Assets * FRS 16 Current Tax P A Rayner Finance Director (23 January 2001) SUMMARY FINANCIAL INFORMATION For the year ended 31 October 2000 Audited Unaudited Audited Year 6 month Year ended period ended 31 Oct ended 31 Oct 2000 28 April 1999 2000 £000 £000 £000 Turnover : Continuing operations Defence Countermeasures 28,538 11,311 25,180 Military pyrotechnics and explosives 11,169 4,535 10,616 39,707 15,846 35,796 Non-defence Marine safety 17,700 8,522 16,765 Wiring harnesses 7,608 3,968 7,197 Chemical coatings 2,154 1,204 2,324 27,462 13,694 26,286 67,169 29,540 62,082 Turnover: Discontinued operations - - 3,316 67,169 29,540 65,398 Operating profit/(loss) Continuing operations 8,806 4,011 7,766 Discontinued operations - - (1,551) Profit before taxation 7,127 3,223 4,306 Dividend per ordinary share 6.30p 2.30p 5.50p Basic earnings per ordinary share 22.04p 10.02p 14.49p CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 October 2000 Year Year ended ended 31 Oct 2000 31 Oct 1999 Total Continuing Discontinued Total operations operations operations Operations £000 £000 £000 £000 Turnover 67,169 62,082 3,316 65,398 Cost of sales (48,164) (44,985) (2,064) (47,049) Gross profit 19,005 17,097 1,252 18,349 Distribution costs (2,693) (2,648) (149) (2,797) Administrative expenses (7,506) (6,683) (2,654) (9,337) Operating profit/(loss) 8,806 7,766 (1,551) 6,215 Associated undertaking 30 70 Profit on ordinary activities before interest 8,836 6,285 Interest payable (1,709) (1,979) Profit on ordinary activities before taxation 7,127 4,306 Tax on profit on ordinary activities (1,866) (871) Profit on ordinary activities after taxation 5,261 3,435 Dividends (1,511) (1,308) Retained profit 3,750 2,127 Basic earnings per ordinary share 22.04p 14.49p Diluted earnings per ordinary share 21.19p 13.98p ADDITIONAL FINANCIAL PERFORMANCE STATEMENTS For the year ended 31 October 2000 Year ended Year ended 31 Oct 2000 31 Oct 1999 £000 £000 Statement of total recognised gains and losses Profit on ordinary activities after taxation 5,261 3,435 Currency translation differences on foreign currency net investments 388 (118) Total recognised gains and losses 5,649 3,317 Reconciliation of movements in shareholders' funds Profit on ordinary activities after taxation 5,261 3,435 Dividends (1,511) (1,308) Retained profit 3,750 2,127 Other recognised profits/ (losses) 388 (118) Ordinary shares issued 11 1 Share premium arising 306 24 Net addition to shareholders' funds 4,455 2,034 Shareholders' funds at 1 November 1999 28,849 26,815 Shareholders' funds at 31 October 2000 33,304 28,849 CONSOLIDATED BALANCE SHEET As at 31 October 2000 As at As at 31 31 Oct 2000 Oct 1999 £000 £000 £000 £000 Fixed assets Intangible assets Development costs 1,002 549 Goodwill 18,246 18,246 19,248 18,795 Tangible assets 19,199 17,219 Investments 883 880 39,330 36,894 Current assets Stock 14,235 9,597 Debtors 20,794 17,928 Cash at bank and in hand 2,062 2,408 37,091 29,933 Creditors due within one year (25,760) (20,449) Net current assets 11,331 9,484 Total assets less current liabilities 50,661 46,378 Creditors due after more than one year (17,089) (17,089) Provisions for libilities and charges (268) (440) 33,304 28,849 Capital and reserves Called-up share capital 1,258 1,247 Reserves Share premium account 11,119 10,813 Special capital reserve 12,939 12,939 Revaluation reserve 2,554 2,590 Revenue reserves 5,434 1,260 32,046 27,602 Shareholders' funds 33,304 28,849 Attributable to equity shareholders 33,242 28,787 Attributable to non-equity shareholders 62 62 33,304 28,849 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 October 2000 Year Year ended ended 31 Oct 2000 31 Oct 1999 £000 £000 £000 £000 Net cash inflow from 5,340 operating activities 7,937 Returns on investments and servicing of finance (1,694) (2,006) Taxation (881) (495) Capital expenditure (3,130) (2,842) Acquisitions and disposals - 2,813 Equity dividends paid (1,380) (1,186) Cash inflow before use of liquid resources and financing 852 1,624 Financing - issue of shares 317 25 - (decrease)/increase in debt (884) 318 (567) 343 Increase in cash 285 1,967 Reconciliation of net cash flow to movement in net debt Increase in cash 285 1,967 Cash outflow/(inflow) from the (decrease)/increase in debt and lease financing 884 (318) Change in net debt resulting from cash flows 1,169 1,649 New finance leases (259) - Translation difference (347) 49 Disposals - 193 563 1,891 Notes 1. The financial information set out above does not constitute the company's statutory accounts for the year ended 31 October 2000 or 31 October 1999 but is derived from those accounts. Statutory accounts for 1999 have been delivered to the Registrar of Companies, and those for 2000 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The financial information has been prepared in accordance with the accounting policies adopted for the 1999 accounts. 2. The financial statements for the year ended 31 October 2000 will be posted to shareholders on 5 February 2001 and will also be available from that date at the registered office, 1645 Parkway, Whiteley, Fareham, Hampshire PO15 7AH. 3. Subject to shareholder approval, the final dividend of 4.00p per ordinary share will be paid on 9 April 2001 to all shareholders registered at the close of business on 16 March 2001. The ex-dividend date will be 14 March 2001.

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