Interim Results

FOR IMMEDIATE RELEASE 6 July 2004 CHEMRING GROUP PLC Interim Results for the Six Months to 30 April 2004 Chemring Group PLC, leader in Expendable Countermeasures, Military Pyrotechnics and Marine Safety and Security, today announces another set of encouraging interim results: * Underlying operating profit up 32% at Â£7.5 million (2003*: Â£5.7 million) * Underlying earnings per share up 45% at 15.12p (2003*: 10.43p) * Basic earnings per share up 14% at 12.63p (2003*: 11.05p) * Interim dividend per ordinary share up 10% at 2.80p (2003*: 2.55p) * Profit before tax and loss on disposal up 35% at Â£5.8 million (2003*: Â£4.3 million) * Profit before tax up 19% at Â£5.1 million (2003*: Â£4.3 million) * Defence Businesses * 34% increase in turnover * Increased US Department of Defense sales - 51% of total * Record order intake for Alloy Surfaces' proprietary decoy products which are a contender for the US Department of Homeland Security commercial aircraft protection programme * New Alloy Surfaces facility in late 2004 to provide additional production capacity * Â£12 million UK Ministry of Defence naval countermeasures order * Marine Safety and Security * 8% increase in turnover * 28% increase in marine electronics sales Ken Scobie, Chemring Group Chairman, commented: 'The strength of the Group's defence order book and the increasing worldwide recognition of the part decoys play in protecting expensive military platforms, gives considerable confidence for the future performance of our defence businesses, not just in the next six months but also in the longer term. This, together with the anticipated improvement in the Marine business in the second half, should ensure another year of satisfactory performance for the Group.' *See Note 1. Notes: 1. All comparisons are for the half year to 30 April 2003 as restated following the adoption of FRS5 Application Note G and UITF Abstract 38. 2. Underlying operating profit is shown as operating profit from continuing operations in the profit and loss account. Underlying earnings per share excludes the loss on disposal and discontinued operations, as shown in the profit and loss account. 3. The interim dividend of 2.80p per ordinary share will be paid on 24 September 2004 to holders on the register at 10 September 2004. The ex-dividend date will be 8 September 2004. For further information: Ken Scobie Chairman, Chemring Group PLC 0207 930 0777 David Evans Chief Executive, Chemring Group 0207 930 0777 PLC Paul Rayner Finance Director, Chemring Group 0207 930 0777 PLC Jonathan Rooper CardewChancery 0207 930 0777 STATEMENT BY THE CHAIRMAN I am pleased to report another set of encouraging results for the six months to 30 April 2004. Turnover of continuing operations increased by 27% to Â£57.4 million (2003*: Â£45.1 million), operating profit of continuing operations increased by 32% to Â£7.5 million (2003*: Â£5.7 million), and earnings per share of continuing operations increased by 45% to 15.12p (2003*: 10.43p). The directors have recommended an interim dividend of 2.80p per ordinary share (2003*: 2.55p), an increase of 10%. The interim dividend will be paid on 24 September 2004 to shareholders on the register at 10 September 2004. RESULTS FOR THE HALF YEAR TO 30 APRIL 2004 - HIGHLIGHTS 2004 2003* Â£000 Â£000 Turnover Continuing operations 57,441 45,133 Discontinued operations - 4,336 Operating profit Continuing operations 7,463 5,701 Discontinued operations - 244 Profit before tax and loss on 5,803 4,269 disposal Loss on disposal (690) - Profit before tax 5,113 4,269 Basic earnings per share 15.12p 10.43p - continuing operations Basic earnings per share 12.63p 11.05p The depreciation of the US dollar against sterling, from $1.60 (the average rate during the first half of 2003) to $1.80, has reduced sales on conversion by approximately Â£3 million. The adverse impact of this exchange rate movement has been partially hedged and this will continue to provide some benefit to the Company in the second half. The loss on disposal of Â£0.69 million arose on the sale of Kembrey Wiring Systems Limited in November 2003. In March the Company raised approximately Â£5.6 million (net of expenses) by way of a placing of ordinary shares, to ensure adequate funding for the Countermeasures business' capital expenditure programme and to fund increased working capital requirements, whilst maintaining debt at a prudent level. This capital raising would have been unnecessary had the long running dispute over the Kilgore insurance claim been settled. Considerable further work in relation to the claim, using external experts, has taken place in the last six months and we are hopeful that a settlement with Royal & Sun Alliance may soon be achieved. DEFENCE BUSINESSES Strong demand for our defence products supported significant turnover growth of 34% to Â£44.4 million, 51% of which comprised sales into the US Department of Defense. Approximately 85% of the Group's defence sales are made overseas, to more than sixty countries worldwide. Our three Countermeasures businesses, Alloy Surfaces (Alloy) and Kilgore Flares (Kilgore) in the US, and Chemring Countermeasures (CCM) in the UK, enjoyed an outstanding first half, with sales increasing by 34% to Â£34.3 million. The Group is the largest supplier of expendable IR and RF decoys worldwide. Alloy and Kilgore are the leading suppliers of decoys to the US Government and have recently received substantial orders to support activities in Iraq. In particular, Alloy received its largest individual order ever for $25 million of special material decoys (SMDs) to protect US Army helicopters and Air Force transport aircraft. The increasing demand for Alloy's SMDs has led to the requirement for Alloy to increase manufacturing output by commissioning a second plant, which should be in production by the end of 2004. In addition to providing additional production capacity, this new plant, which has the full support of the US Department of Defense, will also become Alloy's technology centre. CCM, after an excellent first half, received further encouragement with the award by the UK Ministry of Defence of a Â£12 million contract for the design and supply of improved ship-borne countermeasures for the Royal Navy. Military Pyrotechnics turnover increased by 36% to Â£10.1 million during the period. The business has benefited from our strategy to increase our activity in this area at Kilgore. In the UK, PW Defence also performed well, as did our Australian operation. PW Defence is the main supplier of military pyrotechnics to the UK Ministry of Defence, and is now one year in to a five year partnering agreement as part of a new procurement initiative. I referred in my Statement in February to our participation in one of the three consortia, chosen by the US Department of Homeland Security, to produce a system for commercial aircraft protection against missile threats. The selection of parties to proceed to the next phase of this programme is expected to be announced in August. We are hopeful that our decoy-based system will be one of those selected for the next phase. MARINE SAFETY AND SECURITY BUSINESS In the period under review the Marine business disappointed, achieving only a breakeven result despite good performance from lights and a satisfactory outcome for pyrotechnic products. During the first half, sales of electronic products increased by 23% but profits were adversely affected by external trials of our personal locating beacon, the results of which suggested that a product improvement was necessary to meet the demanding operational specification (which no other manufacturer has achieved). This has now been implemented. Although much improved performance is anticipated in the second half, the outcome for the year is still likely to be unsatisfactory. The executive directors are reviewing how the increased turnover in our Marine electronics business can be translated into increased profitability, given the structure of the industry, the size of the market and our heavy research and development costs with their rapid amortisation. BOARD OF DIRECTORS In May, I was delighted to welcome Sir Peter Norriss as an additional non-executive director of the Company. His experience in the defence industry is already bringing considerable benefit to the Group. PROSPECTS The strength of the Group's defence order book and the increasing worldwide recognition of the part decoys play in protecting expensive military platforms, gives considerable confidence for the future performance of our defence businesses, not just in the next six months but also in the longer term. This, together with the anticipated improvement in the Marine business in the second half, should ensure another year of satisfactory performance for the Group. K C SCOBIE - Chairman 6 July 2004 *All comparisons are for the half year to 30 April 2003 as restated following the adoption of FRS5 Application Note G and UITF Abstract 38. UNAUDITED CONSOLIDATED PROFIT & LOSS ACCOUNT for the half year to 30 April 2004 Unaudited Unaudited Audited Half year Half year Year to to to 31 Oct 2003 30 April 30 April 2004 2003 As restated1 Â£000 As restated1 Â£000 Â£000 Turnover Continuing operations 57,441 45,133 110,170 Discontinued operations - 4,336 8,240 57,441 49,469 118,410 Operating profit/(loss) Continuing operations 7,463 5,701 14,026 Discontinued operations - 244 (216) (Loss)/profit on disposal: 7,463 5,945 13,810 -insurance claim - - 565 -sale of subsidiary undertaking/ (690) - 724 division Associated undertaking - - 178 Profit on ordinary activities before 6,773 5,945 15,277 interest Interest payable (1,660) (1,676) (3,433) Profit on ordinary activities before 5,113 4,269 11,844 taxation Tax on profit on ordinary activities (1,616) (1,260) (3,500) Profit on ordinary activities after 3,497 3,009 8,344 taxation Equity minority interest 13 24 23 Dividends (811) (702) (2,034) Retained profit 2,699 2,331 6,333 Basic earnings per ordinary share - 15.12p 10.43p 29.51p continuing operations Basic earnings per ordinary share 12.63p 11.05p 30.48p Diluted earnings per ordinary share 12.56p 10.93p 30.05p Dividend per ordinary share 2.80p 2.55p 7.40p 1 See Note 4 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Unaudited Unaudited Audited Half year Half year Year to to to 31 Oct 2003 30 April 30 April 2004 2003 As restated1 Â£000 As restated1 Â£000 Â£000 Profit on ordinary activities after 3,497 3,009 8,344 taxation Currency translation differences on (696) 60 (1,636) foreign currency net investments 2,801 3,069 6,708 Prior year adjustment 1 (1,097) - - 1,704 3,069 6,708 1 See Note 4 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Unaudited Unaudited Audited Half year Half year Year to to to 31 Oct 2003 30 April 30 April 2004 2003 As restated1 Â£000 As restated1 Â£000 Â£000 Profit on ordinary activities after 3,497 3,009 8,344 taxation Equity minority interest 13 24 23 Dividends (811) (702) (2,034) 2,699 2,331 6,333 Ordinary shares issued 73 - - Share premium 5,752 - - Other recognised (losses)/profits (696) 60 (1,636) Net addition to shareholders' funds 7,828 2,391 4,697 Opening shareholders' funds 52,423 47,726 47,726 Closing shareholders' funds 60,251 50,117 52,423 1 See Note 4 UNAUDITED CONSOLIDATED BALANCE SHEET as at 30 April 2004 Unaudited Unaudited Audited As at As at As at 30 April 30 April 31 Oct 2003 2004 2003 As Â£000 As restated1 restated1 Â£000 Â£000 Fixed assets Development costs 2,384 2,881 2,996 Goodwill 28,442 28,343 28,442 Tangible assets 41,525 43,229 42,879 Investments 1,063 972 1,063 73,414 75,425 75,380 Current assets Stock 24,456 23,172 24,962 Debtors 31,498 32,142 30,059 Cash at bank and in hand 4,093 1,812 5,821 60,047 57,126 60,842 Creditors due within one year Bank loans and overdrafts 24,021 22,130 22,986 Loan stock 40 40 40 Other 21,893 29,922 34,173 45,954 52,092 57,199 Net current assets 14,093 5,034 3,643 Total assets less current liabilities 87,507 80,459 79,023 Creditors due after more than one year (21,638) (28,421) (21,489) Provisions for liabilities and charges (5,352) (1,644) (4,832) Equity minority interest (266) (277) (279) 60,251 50,117 52,423 Capital and reserves Called-up share capital 1,507 1,434 1,434 Reserves 58,744 48,683 50,989 Shareholders' funds 60,251 50,117 52,423 1 See Note 4 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT for the half year to 30 April 2004 Unaudited Unaudited Audited Half year Half year Year to to to 31 Oct 2003 30 April 30 April 2004 2003 As restated1 Â£000 As restated1 Â£000 Â£000 Net cash (ouflow)/inflow from operating (5,715) 5,001 18,084 activities Returns on investments and servicing of (1,276) (2,060) (3,420) finance Taxation (748) (414) (686) Net capital expenditure (2,323) (2,696) (5,497) Acquisitions 645 - 1,475 Equity dividends paid - - (1,866) Cash (outflow)/inflow before use of (9,417) (169) 8,090 liquid resources and financing Financing -issue of shares 5,825 - - -decrease in debt (1,688) (2,196) (5,645) (Decrease)/increase in cash (5,280) (2,365) 2,445 Reconciliation of operating profit to net cash flow from operating activities Operating profit 7,463 5,945 13,810 Amortisation charge 1,044 589 1,210 Depreciation charge 1,891 1,860 3,295 Increase in stock (535) (2,568) (4,757) Increase in debtors (3,347) (2,880) (1,606) (Decrease)/increase in creditors (12,231 2,055 6,132 Net cash (outflow)/inflow from (5,715) 5,001 18,084 operating activities Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash (5,280) (2,365) 2,445 Cash outflow from the decrease in debt 1,688 2,196 5,645 and lease financing Change in net debt resulting from cash (3,592) (169) 8,090 flows New finance leases (231) (650) (1,153) Translation difference 808 442 1,964 Amortisation of debt finance costs (48) (55) (305) (3,063) (432) 8,596 1 See Note 4 Analysis of net debt As at Cash Non cash Exchange As at 1 Nov flow changes movement 30 April 2003 2004 Â£000 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 5,821 (1,576) - (152) 4,093 Overdrafts (16,766) (3,704) - 156 (20,314) (10,945) (5,280) - 4 (16,221) Debt due within one year (6,260) 7 2,507 - (3,746) Debt due after one year (18,065) 1,023 (2,555) 722 (18,875) Finance leases (3,411) 658 (231) 82 (2,902) (38,681) (3,592) (279) 808 (41,744) INDEPENDENT REVIEW REPORT BY THE AUDITORS To Chemring Group PLC Introduction We have been instructed by the Company to review the financial information for the six months ended 30 April 2004 which comprises the consolidated profit and loss account, statement of total recognised gains and losses, reconciliation of movements in shareholders' funds, consolidated balance sheet, consolidated cash flow statement and associated notes, and the related notes 1 to 8. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with Bulletin 1999/4 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 interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Uncertainty relating to insurance claim In arriving at our review conclusion, we have considered the adequacy of disclosures made in note 3 concerning the possible outcome in respect of amounts recoverable under an insurance claim relating to an incident at Kilgore Flares, a subsidiary undertaking of the Company, in April 2001. The future settlement of this claim could result in a shortfall, or a surplus, when compared with the recorded debtor at 30 April 2004. It is not possible to quantify the effect, if any, of this uncertainty. Details of the circumstances relating to this uncertainty, profit and loss account treatment and the amount of the related debtor recorded at 30 April 2004 are disclosed in note 3. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 April 2004. DELOITTE & TOUCHE LLP, Chartered Accountants, 6 July 2004 Southampton NOTES TO THE INTERIM STATEMENT 1. BASIS OF PREPARATION The interim accounts to 30 April 2004 have been prepared on the basis of the accounting policies set out in the audited full year accounts to 31 October 2003, except for the adoption of FRS5 Application Note G Revenue recognition and the adoption of UITF Abstract 38 Accounting for ESOP trusts. See Note 4. The unaudited consolidated profit and loss account for each of the six month periods and the unaudited consolidated balance sheet as at 30 April 2004 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 interim report was approved by the Board of Directors on 6 July 2004. 2. SEGMENTAL ANALYSIS OF TURNOVER Unaudited Unaudited Audited Half year Half year Year to to to 31 Oct 2003 30 April 30 April 2004 2003 As restated1 Â£000 As restated1 Â£000 Â£000 Countermeasures 34,303 25,678 64,264 Military pyrotechnics 10,113 7,410 19,540 Marine safety and security 13,025 12,116 26,366 Continuing operations 57,441 45,204 110,170 Discontinued operations - 4,265 8,240 Total 57,441 49,469 118,410 1 See Note 4 3. INSURANCE CLAIM As reported in the financial statements for the year ended 31 October 2003 the Group has lodged a claim with its insurers in respect of property damage and business interruption arising out of an incident at Kilgore in April 2001. To date Â£5,700,000 has been received from the insurers. At 31 October 2003 a balance of Â£7,486,000 (2002: Â£9,633,000) was recognised within other debtors. This outstanding balance has been reduced by Â£340,000 since the year end, as a result of exchange rate movements against the US dollar. At 30 April 2004 the Board increased its estimate of the additional proceeds receivable to Â£7,717,000, an increase of Â£571,000. There is no net impact on operating profit as legal costs of a similar amount were incurred. 4. PRIOR YEAR ADJUSTMENT As explained in Note 1, FRS5 Application Note G has been adopted in the period. As a result a prior year adjustment of Â£771,000 to reduce shareholders' funds at 31 October 2002 is required. Prior to adoption, the Group recognised a sale, under bill and hold arrangements, when production of goods had been completed but external testing and acceptance of products by US Government agencies was awaited. Following the adoption of FRS5 Application Note G, sales are now recognised upon acceptance by US Government agencies. The adoption of FRS5 Application Note G also resulted in a reduction to the previously reported profits for the financial year ended 31 October 2003 by Â£ 152,000, a reduction to the previously reported profits for the half year to 30 April 2003 by Â£25,000 and an increase in profits for the current half year by Â£ 296,000. In addition, as stated in Note 1, UITF Abstract 38 has been adopted in the period. As a result a prior year adjustment of Â£174,000 to reduce shareholders' funds at 31 October 2002 is required. 5. 2003 RESULTS The figures for the year to 31 October 2003 are abridged from the Group's full Financial Statements for that period which carry an unqualified Auditors' Report and have been filed with the Registrar of Companies. 6. TAXATION The estimated tax rate for the Group for the year ending 31 October 2004 is 32% (2003: 30%). 7. EARNINGS PER SHARE Earnings per share are based on the average number of shares in issue of 27,765,886 (2003: 27,435,972) and profit on ordinary activities after taxation, minority interests and preference dividends of Â£3,508,000 (2003: Â£3,031,000). Diluted earnings per share has been calculated using a diluted average number of shares in issue of 27,922,564 (2003: 27,726,796) and profit on ordinary activities after taxation, minority interests and preference dividends of Â£ 3,508,000 (2003; Â£3,031,000). Earnings per share - continuing operations of 15.12p is based on the average number of shares in issue of 27,765,886 (2003: 27,435,972) and represents a basic earnings per share of 12.63p and an increase of 2.49p per share for discontinued operations. 8. CORPORATE WEBSITE Further information on the Group and its activities can be found on the corporate website at www.chemring.co.uk. 10

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