Final Results

RNS Number : 6200Z

Chemring Group PLC

18 January 2011

 



FOR IMMEDIATE RELEASE

18 January 2011

CHEMRING GROUP PLC

PRELIMINARY RESULTS

FOR THE YEAR ENDED 31 OCTOBER 2010

·		Revenue up 18% to £597.1 million (2009: £503.9 million)
·		Underlying operating profit* up 18% to £135.6 million (2009: £114.7 million)
·		Year end order book up 44% at £803.3 million (2009: £559.0 million)
·		Order book today at new record high of £902 million, up 54% on January 2010
·		Underlying profit before tax* up 14% to £116.8 million (2009: £102.6 million)
·		Underlying earnings per share* up 15% at 246p (2009: 213p)
·		Profit before tax £89.1 million (2009: £95.8 million)
·		Basic earnings per share 189p (2009: 199p)
·		Dividend per ordinary share up 18% at 59p (2009: 50p)
·		Underlying operating cashflow** up 18% to £126.1 million (2009: £106.7 million)
·		Net debt of £307.5 million (2009: £122.8 million)
·		New four year unsecured bank facilities of £230 million completed on 14 January 2011, which together with the US private placement provides total borrowing facilities of £491 million
Divisional Highlights
Countermeasures
·		Steady growth in revenue, up 7% to £196.3 million
·		Revenue at Kilgore increased 17% to new record of £47 million
·		70% growth in naval countermeasures to £17 million
Counter-IED
·		Outstanding performance from NIITEK, with revenue up 124% to £102 million
·		Strong growth driven by HMDS sales to US and Canadian Armies
·		Order book stands at £99 million, more than double last year
·		Acquisition of Roke provides us with a wide range of technologies for the Counter-IED market
Pyrotechnics
·	Revenue remains steady at £170.0 million, after £19.1 million contribution from Hi-Shear
·	Successful development of new compact smoke grenade and production of 150,000 units per month attained
·	New "blacklight" payload developed for 105mm ammunition in less than six months and initial deliveries made to UK customer
Munitions
·	Revenue grew 35% to £115.9 million
·	Mecar acquisition completed in September
·	$35 million of large calibre ammunition delivered to NATO and Middle East customers
·	33% increase in demand for safety and arming units for ballistic missile defence

Peter Hickson, Chemring Group Chairman, commented:

"These results show another year of strong performance with revenue up 18% to £597 million. Two thirds of our growth was organic, which is very encouraging. The Group's underlying earnings per share grew to 246p, a substantial increase. Our current order book of £902 million, our solid balance sheet and our proven strategy for growth provide clear visibility of the prospects for 2011 and should provide the foundation for further growth in the future."

* Before acquisition related costs, intangible amortisation arising from business combinations and (loss)/gain on fair value movements on derivatives totalling £27.7 million (2009: £6.8 million)

** Before acquisition related costs

For further information:

Dr 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

RESULTS

Total revenue was up £93.2 million to £597.1 million, an increase of 18%. £26.5 million of the increased revenue was generated by acquired companies. Revenue excluding acquisitions was 13% up on 2009. Total underlying operating profit* was £135.6 million (2009: £114.7 million), an increase of 18%. The net underlying margin * was 23% (2009: 23%).

An analysis of revenue and underlying operating profit* is set out below:

	2010			2009
		Underlying	Underlying		Underlying	Underlying
		operating	operating		operating	operating
	Revenue	profit*	margin	Revenue	profit*	margin
	£m	£m		£m	£m
Division
Countermeasures	196.3	58.8	30%	183.5	53.5	29%
Counter-IED	114.9	28.1	25%	61.2	15.6	25%
Pyrotechnics	170.0	40.1	24%	173.2	43.8	25%
Munitions	115.9	20.9	18%	86.0	13.4	16%
Share-based payments	-	(2.3)		-	(2.1)
Restructuring costs	-	(1.5)		-	(2.9)
Incident costs	-	(2.8)		-	-
Provision release	-	2.4		-	-
Unallocated head office costs	-	(8.1)		-	(6.6)
Total	597.1	135.6	23%	503.9	114.7	23%

Restructuring Costs

In the second half of the year a decision was taken to restructure the Group's UK counter-IED business at a cost of £1.5 million. As a result, one of the two sites out of which it operated was closed. The benefits of this closure will be seen in the current financial year.

The £2.9 million of restructuring costs in 2009 related to our UK countermeasures business and Chemring Ordnance in the USA.

Incident Costs

In September two separate incidents stopped production at our Kilgore Flares facility in Tennessee and our newly acquired subsidiary, Mecar, in Belgium. As a result of these incidents approximately £7 million of revenue and £3 million of underlying operating profit* was deferred into the current financial year. In addition, £2.8 million of non-recurring costs arising out of the incidents were incurred in respect of the write-off of damaged stock and destroyed assets.

Provision Release

During the second half of the year, a third party assessment was carried out of the provision held in respect of the environmental liabilities associated with the Chemring Energetic Devices site in Illinois, USA. After taking into account this assessment and the additional insurance coverage that was secured in respect of this exposure during the year, the Group has released part of the provision.

Analysis of Underlying Profit*

	2010 £m	2010 £m	2009 £m	2009 £m
Underlying operating profit		135.6		114.7
Share of post tax results of associate		0.1		0.1
Finance income	0.5		0.7
Finance expense	(19.4)		(12.9)
Net finance expense		(18.9)		(12.2)
Underlying profit before tax		116.8		102.6
Tax on underlying profit before tax		(29.9)		(27.6)
Underlying profit after tax		86.9		75.0

Finance income in the year was £0.5 million (2009: £0.7 million). Finance expense for the year was £19.4 million (2009: £12.9 million). Included within finance expense is £1.2 million (2009: £1.3 million) for retirement benefit obligations. Net finance expense was covered 7.2 times (2009: 9.4 times) by underlying operating profit*, with the decrease of cover reflecting the fact that all acquisitions in the year were financed by debt.

Underlying profit before tax* was £116.8 million (2009: £102.6 million), an increase of 14%.

Tax on the underlying profit before tax* was £29.9 million (2009: £27.6 million), representing an underlying rate of 26% (2009: 27%).

Underlying profit after tax* was £86.9 million (2009: £75.0 million), an increase of 16%.

Countermeasures 

·	Orders: £219.2 million
·	Revenue: £196.3 million
·	Operating profit: £58.8 million
·	Operating margin: 30%

In 2010, our revenue was £196.3 million, 7% higher than the previous year and equating to a market share of just over 50%. Sales of decoys used on fast-jets increased slightly to £91 million, with increased demand at Kilgore offset by reduced demand elsewhere. Sales of decoys for helicopters and transport aircraft, whose usage is more closely linked to peacekeeping activities, rose 6% to £87 million, driven by increased demand from the US Air Force. Revenue from naval countermeasures grew by 70% to £17 million, driven by an increase in Royal Navy requirements.

The year end order book for the Countermeasures division was £265.4 million, up 14% on the previous year, and should be considered a positive indicator of further steady growth in 2011. This growth is dominated by the order book for decoys used on fast-jet aircraft, which rose 44% compared to 2009. The order book for Kilgore, in particular,  increased by 95% to a record level of $186 million, bolstered by $105 million of multi-year orders for the flare sets used to protect the B-52 and F-22 aircraft. A further $50 million of order book is for the M212 spectral flare.

Kilgore Flares, one of our US subsidiaries, had an encouraging year, with revenue up 17% to a new record on steady production volumes of around 1.1 million flares. This was principally driven by 24% growth in demand for fast-jet flares and, in particular, by a 120% increase in the volume of advanced flares delivered on the F-22 and Joint Strike Fighter (JSF) programmes. Development of the JSF flare set was completed during the year and low rate initial production has now started. Production volumes are expected to gently increase over the next few years before the transition to volume production from 2014 onwards.

On 14 September 2010, there was a serious incident at Kilgore within a specialist assembly facility that undertakes the final assembly on the MJU-7 flare that protects the F-16 and a number of other aircraft. Three of our employees sustained serious injury and our investigations have identified a number of safety improvements that we have implemented across the site. The incident is still under investigation by the US regulatory authorities. There was substantial damage to the facility and it will be several months before it can be returned to operation. The restart of all other production lines was reviewed and a number of important safety improvements implemented. This took several months to complete and resulted in about £7 million of revenue being delayed from 2010 to 2011, which would have added another 15% to Kilgore's full year revenue.

The UK market was a major component of the growth in the naval countermeasures business in 2010, with significant deliveries of both infra-red and chaff decoy rounds. Orders to the value of £24 million were awarded, including the full development of an advanced technology decoy, which is expected to start production in 2011. However, to make full use of the latest variable range technology, we have developed a new launcher system that will significantly enhance the performance of the decoys against a wide range of threats. The new launcher is called Centurion, and a prototype version has recently been demonstrated to the UK Ministry of Defence in live firing trials involving a range of different types of decoy. The performance demonstration was a success and there is considerable interest in qualifying the launcher for use on the Type 45 Destroyer. Significant interest has also been shown in the system by overseas customers and we estimate that there could be a global market of 500 systems over the next ten years.

Counter-IED

·	Orders: £178.5 million
·	Revenue: £114.9 million
·	Operating profit: £28.1 million
·	Operating margin: 25%

Our revenue in 2010 was £114.9 million, 88% higher than the previous year and equating to a market share of 4%. Sales of our detection products were £102 million, 124% higher than last year, principally driven by the demand from the US Army for the Husky Mounted Mine Detection System (HMDS) ground penetrating radar. Revenue from our Defeat products was £12 million, lower than last year and reflecting the delayed order intake from European customers.

The closing order book for Counter-IED was £99.3 million, up 169% on 2009, and a clear indicator of continued revenue growth in 2011. The availability of qualified demolition stores product with Insensitive Munitions (IM) characteristics in 2011 is also expected to enhance this year's prospects.  

The detection of IEDs continued to dominate the activities of our Counter-IED division during the year, and resulted in the delivery of 107 HMDS ground penetrating radars to the US and Canadian Armies for high reliability route clearance in support of peacekeeping operations. Feedback from customers on the performance of the system has been very positive and has confirmed that it makes an important contribution to the safety of coalition forces. To meet the increased demand, an additional production facility was brought into operation, raising the monthly production rate to over twenty HMDS units.  Revenues did, therefore, grow by 124% compared with the previous year. 

In August 2010, the US Army placed a new production contract, worth $217 million, on our US subsidiary, NIITEK, for the supply of 76 HMDS, together with the necessary spares, in-country maintenance and training. A contract for a further 64 systems has recently been placed, covering both the US Army and US Marine Corps requirements for 2011. This contract will take the number of delivered systems above 240. The US Army intends to place a multi-year, sustainment contract for the support of these systems, which is expected to be worth in excess of $60 million per annum, and will provide the necessary funding to maintain the sixty support staff that are currently located at forward operating bases. A multi-sensor, next generation product is expected to be competitively procured in the second half of 2012.

Demolition stores, which are used to destroy suspect packages or unwanted ordnance and for forced entry into buildings, are another important product range for the Group. Chemring Energetics is currently developing a suite of products, such as the SABREX flexible linear cutting charge, the Bangalore Torpedo and plastic sheet explosive, which all have IM explosive characteristics.

The remote initiation of disrupters and explosives is also a key capability for the Group, and we continue to see a steady market for our BREACH secure-coded RF initiation system.  A derivative, called the Forced Rapid Entry Device (FRED), that better meets the needs of Special Forces has been developed, and there is considerable interest in its application to Remote Operating Vehicle counter-IED operation.

Our recent acquisition of UK-based Roke provides us with a wide range of technologies that will enhance our opportunities in the counter-IED market. Their wide-band technology is a key component in UK jamming systems that are used to counter remote initiation. They also provide detection sensors across the full range of the electro-magnetic spectrum for close-range and stand-off applications. They have substantial data fusion and network enabled capabilities to support distributed operation.

Roke also produces a range of technologies for cyber warfare, including the Vanguard system that provides a scalable modular lawful intercept product that is deployed on five continents.  A new generation system is currently under development and will be launched into the market in 2011.

Pyrotechnics

·	Orders: £181.4 million
·	Revenue: £170.0 million
·	Operating profit: £40.1 million
·	Operating margin: 24%

Our revenue in 2010 was £170.0 million, which is slightly lower than the previous year and represents a market share of nearly 11%. Sales of smoke and illumination products were £112 million, 7% lower than the previous year, principally due to the timing of order intake from our UK and European customers. Sales of training and simulation products were £16 million, substantially down on the previous year, reflecting reduced US production levels due to the timing of product improvement and manufacturing transfer. These were compensated for by growth in safety systems and space products sales of £34 million and £8 million respectively.

The closing order book was £171.9 million, similar to the previous year, providing a clear indication of the stable outlook for 2011. The resumption of volume production in the USA of training grenades and Battlefield Effects Simulations (BES) cartridges should lead to a recovery in that part of the market, and the growing order book for safety systems and space should ensure growth in the future.  

Deliveries of "black light" and conventional illumination mortar rounds remained fairly stable throughout the year, with reductions in UK deliveries offset by the requirements from other NATO countries.

A new compact smoke grenade completed development during the year and was qualified by the UK Ministry of Defence. A multi-year contract, worth over £40 million, which included the supply of this new grenade, was awarded in March 2010.  Production was increased rapidly in the second half of the year and reached its maximum capacity of 150,000 units per month. 

Munitions

·	Orders: £245.2 million
·	Revenue: £115.9 million
·	Operating profit: £20.9 million
·	Operating margin: 18%

In 2010, our revenue from components was £54 million, representing 47% of our total Munitions revenue, an increase of 8% compared with the previous year and equating to a market share of 3%.  The global market for ammunition, excluding small calibre, is estimated to be £4 billion. Our total revenue in 2010 was £62 million, a 72% increase on last year and equating to a market share of 2%.  This growth was driven by the award of a number of multi-year contracts from Middle East customers, which increased sales volumes by 270%.

The year end order book for the Munitions division was £266.7 million, an increase of 126% on the previous year and a clear indication of further growth in 2011. The improvement in the order book was well-distributed, with the Middle East growing by 207%, the Far East by 127%, Europe by 140% and the USA by 53%.

Our Italian subsidiary, Simmel Difesa, had an excellent year, with a substantial increase in the number of large calibre tank ammunition rounds sold to a variety of customers. 

Interest in ballistic missile defence systems continues to grow internationally, with many countries expressing concern about the threat from nuclear, biological or chemical payloads. Hi-Shear's revenue from electronic safety and arming systems for the Mk3 Patriot missile grew by 33% compared to 2009, and further growth over the next few years is now expected.

The new lead azide manufacturing facility was completed in South Dakota and a broad set of samples manufactured for qualification testing by the US Army. This should complete in 2011 and we expect to rapidly expand our production to cater for the growing demand for both military and commercial applications.

Principal Risks and Uncertainties

The principal risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results have not changed significantly from those set out in the Group's 2009 Financial Statements and the 2010 Interim Report. These can be summarised as:

·           Health and safety risks

·           Political, economic and financial risks

·           Risks associated with the timing of receipt of orders

·           Risks related to the strength and breadth of management resource

·           Risks associated with the introduction of new manufacturing facilities

·           Risks associated with the introduction of new products

·           Competitive risks

·           Compliance and corruption risks

Acquisitions

The following acquisitions were completed during the year:

			Proportion
			of shares	Acquisition
Name of business acquired	Activity	Date of acquisition	acquired	consideration
			%	£m
Hi-Shear Technology Corporation	Pyrotechnics	25 November 2009	100	78.7
Mecar S.A.	Munitions	1 September 2010	100	29.6
Roke Manor Research Ltd	Countermeasures/ Counter-IED	30 September 2010	100	56.7
Other acquisitions	Munitions	Various		19.2
Cash paid for acquisitions in the year				184.2
Net cash acquired with acquisitions				(7.4)
Cash outflow from investing activities				176.8
Acquisition related costs included within cash generated from operations				6.7
Net cash outflow				183.5

The combined net assets acquired are shown below:

	Book value	Provisional fair value adjustments	Fair value
	£m	£m	£m
Intangible assets	13.5	98.1	111.6
Property, plant and equipment	22.6	(0.6)	22.0
Cash	7.4	-	7.4
Regional development loan	(5.0)	-	(5.0)
Finance leases	(0.2)	(0.2)	(0.4)
Working capital (net of advance payments)	1.1	(11.6)	(10.5)
Deferred tax	0.2	(26.0)	(25.8)
Net assets acquired	39.6	59.7	99.3
Goodwill	-	84.9	84.9
Total	39.6	144.6	184.2
Total cash paid for acquisitions during the year			184.2

Research and Development

Research and development expenditure totalled £34.2 million (2009: £18.9 million), 81% higher than last year. An analysis of expenditure is set out below:

	2010 £m	2009 £m
Customer funded research and development	20.6	9.7
Internally funded research and development	5.8	4.4
Capitalised development costs	7.8	4.8
Total research and development expenditure	34.2	18.9

The Group's policy is to write-off capitalised development costs over a three year period. Amortisation of development costs was £2.4 million (2009: £1.5 million).

Pensions

The deficit on the Group's defined benefit pension schemes before associated tax credits, as defined by IAS19 Accounting for pension costs, was £23.0 million (2009: £28.1 million). The deficit reduced by 18% during the year due largely to the increase in the fair value of scheme assets as a result of the improvement in equity markets during the year.

During the year, the 2009 triennial actuarial valuation for the UK Chemring Group Staff Pension Scheme was concluded.

In accordance with the agreed funding plan, during the year the Group placed an additional £10.0 million in an escrow account (giving a total of £15.0 million) to provide additional funding for the Staff Pension Scheme in the event of a default. The bank guarantee for the Staff Pension Scheme, which may be drawn upon only in certain events of default by the Company, was maintained at £7.2 million during the year. Although the Staff Pension Scheme currently remains open for future accrual for existing members, most of our UK employees are now offered membership of a defined contribution pension scheme. The majority of our overseas pension arrangements are also defined contribution, save in those European countries where certain defined benefit pension arrangements are required.

Foreign Exchange

The results of overseas subsidiary undertakings are translated into sterling at weighted average exchange rates. Currency denominated net assets are translated at year end rates.

Effective translation rates were as follows:

	2010	2009
Average rates
US dollar	1.53	1.55
Euro	1.16	1.13
Year end rates
US dollar	1.60	1.65
Euro	1.15	1.12

The movements in the currencies against sterling were broadly neutral in the year.

Cash Flow

Underlying operating cash flow was £126.1 million (2009: £106.7 million), which represents a conversion rate of underlying operating profit* to operating cash of 93% (2009: 93%). Working capital was well controlled in the year and was kept below increases in Group revenues.

Fixed asset expenditure across the Group was £48.7 million (2009: £38.2 million), which includes £18.8 million related to the construction of new facilities at our sites in Salisbury and Australia. These facilities will be completed during 2011, at a further cost of approximately £16 million.

Cash flow before financing activities and acquisitions was £40.7 million (2009: £49.8 million), which represents a conversion rate of underlying operating profit* to cash flow of 30% (2009: 43%). 

A summary of Group cash flow is set out below:

	2010 £m	2009 £m
Underlying operating cash flow	126.1	106.7
Acquisition related costs	(6.7)	-
Fixed asset expenditure	(48.7)	(38.2)
Tax	(30.0)	(18.7)
Cash flow before financing activities and acquisitions	40.7	49.8
Interest	(14.0)	(10.5)
Dividends	(18.7)	(13.8)
Net cash inflow before acquisitions	8.0	25.5

Net Debt, Facilities and Going Concern

Net debt at the year end was £307.5 million (2009: £122.8 million), an increase of 150%, which was predominantly due to the debt-funding of acquisitions during the year. The Group had £104.6 million (2009: £106.9 million) of undrawn borrowing facilities at the year end.

Gearing at the year end was 95% (2009: 45%).  A summary of debt is set out below:

	2010 £m
Cash	58.4
Loans	(104.7)
Loan notes	(261.2)
	(307.5)

In November 2009 the Group completed a $280 million private placement of loan notes. The proceeds were used to fund the acquisitions of Hi-Shear and Mecar.

The Group's two main bank covenants require that interest cover to EBITDA be maintained at not less than four times, and debt to EBITDA be maintained at not more than three times. At the year end, there was in excess of £80 million of headroom on both of these covenants.

The directors have acknowledged the latest guidance on going concern. Whilst the current volatility in financial markets has created general uncertainty, the Group has significant working capital headroom, strong covenant compliance and a record order book. Accordingly, the directors have a reasonable expectation that adequate financial resources will continue to be available for the foreseeable future. The going concern assumption is further supported by the recent bank refinancing, as noted in the post balance sheet events section below.

Post Balance Sheet EventS

Bank refinancing

On 14 January 2011, the Group completed a refinancing of its bank facilities with a syndicate of five banks. The new Group facilities, which are unsecured, total £230 million, which is a £55 million increase on the previous secured facilities. In addition, the term of the facilities has been extended from April 2012 to April 2015.

The increase in the level of the facility and the tenure, together with the introduction of several new banks to the Group, will provide greater capacity and capability to support the Group's future requirements.

Share split

At the forthcoming Annual General Meeting, shareholder approval will be sought to sub-divide the Company's 5p ordinary shares into ordinary shares of 1p each. Further details are set out in the Notice of the Annual General Meeting.

Dividends

The Board is recommending a final dividend of 42p per ordinary share, a 17% increase on the final dividend for 2009. This, together with the interim dividend of 17p paid in August 2010, gives a total dividend for the year of 59p, an 18% increase over 2009. The dividend is over 4.2 times covered on underlying profits after tax. The shares will be marked "ex dividend" on 23 March 2011 and the dividend is payable on 15 April 2011 to shareholders on the register at the close of business on 25 March 2011. 

Prospects

Over the last twelve months, the European defence market has weakened considerably with many nations reducing or deferring defence expenditure as they struggle to cope with rising deficit problems. Recent announcements from the US Government on their 2012 budget intentions have provided greater assurance in the future prospects for that market. We remain confident that the USA represents an area of future growth in all of our market segments. However, it is our non-NATO customers that represent the largest opportunity for growth over the next five years. In 2010, our revenues from Middle East and Far East customers grew by over 60% and we believe that future growth in these regions should be substantial.

Our closing order book increased substantially to £803 million and, since the year end, it has increased further to £902 million. This strong order book, our solid balance sheet and our proven strategy provide clear visibility of the prospects for 2011 and should provide the foundation for further growth in the future.

Responsibility Statement of the Directors on the Annual Report and Accounts

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 October 2010. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

1.	The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, 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
2.	The Statement by the Chairman, the Review by the Chief Executive and the Review by the Finance Director, together with the sections of the Annual Report on each of the business segments, key performance indicators and principal risks, and the Corporate Responsibility Review, which are incorporated into the Directors' Report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board of Directors on 18 January 2011 and has been signed on its behalf by Dr D J Price and Mr P A Rayner.

* Before acquisition related costs, intangible amortisation arising from business combinations and (loss)/gain on fair value movements on derivatives totalling £27.7 million (2009: £6.8 million) - see Note 3

SUMMARY FINANCIAL INFORMATION

		Note	2010	2009	2008
			£m	£m	£m
Revenue
Countermeasures			196.3	183.5	157.5
Counter-IED			114.9	61.2	15.2
Pyrotechnics			170.0	173.2	95.7
Munitions			115.9	86.0	85.8
Total revenue		2	597.1	503.9	354.2
Underlying operating profit*
	- continuing operations		124.6	114.7	84.9
	- acquired		11.0	-	-
Total underlying operating profit*			135.6	114.7	84.9
Underlying profit before tax*			116.8	102.6	74.2
Underlying basic earnings per ordinary share*			246p	213p	160p
Operating profit			107.9	107.9	68.4
Profit before tax			89.1	95.8	57.7
Basic earnings per ordinary share			189p	199p	123p
Diluted earnings per ordinary share			187p	197p	123p
Dividend per ordinary share			59p	50p	35p
Net debt (£m)			307.5	122.8	116.7
Shareholders' funds (£m)			323.2	273.6	230.6

* Before acquisition related costs, intangible amortisation arising from business combinations and (loss)/gain on fair value movements on derivatives totalling £27.7 million (2009: £6.8 million) - see Note 3

CONSOLIDATED INCOME STATEMENT

for the year ended 31 October 2010

		Note	2010	2009
			£m	£m
Continuing operations
Revenue	- continuing		570.6	503.9
	- acquired		26.5	-
Total revenue			597.1	503.9
Operating profit	- continuing		105.9	107.9
	- acquired		2.0	-
Total operating profit		3	107.9	107.9
Operating profit is analysed as:
Underlying operating profit*			135.6	114.7
Acquisition related costs			(6.7)	-
Intangible amortisation arising from business combinations			(17.0)	(13.8)
(Loss)/gain on fair value movements on derivatives			(4.0)	7.0
			107.9	107.9
Share of post-tax results of associate			0.1	0.1
Finance income			0.5	0.7
Finance expense			(19.4)	(12.9)
Profit before tax for the year		3	89.1	95.8
Profit before tax is analysed as:
Underlying profit before tax*			116.8	102.6
Acquisition related costs			(6.7)	-
Intangible amortisation arising from business combinations			(17.0)	(13.8)
(Loss)/gain on fair value movements on derivatives			(4.0)	7.0
			89.1	95.8
Tax			(22.4)	(25.7)
Profit after tax for the year attributable to equity holders of
the parent			66.7	70.1
Earnings per ordinary share		4
Underlying*			246p	213p
Basic			189p	199p
Diluted			187p	197p

* Before acquisition related costs, intangible amortisation arising from business combinations and (loss)/gain on fair value movements on derivatives

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 October 2010

		2010	2009
		£m	£m
Profit after tax for the year attributable to equity holders of
the parent		66.7	70.1
Other recognised income
Gains/(losses) on cash flow hedges		1.0	(1.0)
Movement on deferred tax relating to cash flow hedges		(0.3)	0.2
Exchange differences on translation of foreign operations		0.4	(3.1)
Actuarial gains/(losses) on defined benefit pension schemes		4.0	(14.1)
Movement on deferred tax relating to pension schemes		(1.4)	4.0
Current tax on items taken directly to equity		0.2	(1.2)
Deferred tax on items taken directly to equity		(0.5)	0.3
Total comprehensive income for the year attributable to
equity holders of the parent		70.1	55.2

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 October 2010

		2010	2009
		£m	£m
Total comprehensive income for the year (see above)		70.1	55.2
Dividend		(18.7)	(13.8)
		51.4	41.4
Ordinary shares issued		-	-
Share premium arising		0.1	0.5
Credit to equity-settled share-based payments		0.1	0.9
Deferred tax on share-based payment transactions		-	(0.3)
Transactions in own shares		(2.0)	0.5
Net addition to shareholders' funds		49.6	43.0
Opening shareholders' funds		273.6	230.6
Closing shareholders' funds		323.2	273.6

CONSOLIDATED BALANCE SHEET

as at 31 October 2010

			2010		2009
		£m	£m	£m	£m
Non-current assets
Goodwill		236.4		149.5
Other intangible assets		195.4		90.4
Property, plant and equipment		188.7		135.0
Interest in associate		1.1		1.1
Deferred tax		16.6		17.7
			638.2		393.7
Current assets
Inventories		142.3		96.9
Trade and other receivables		166.3		98.8
Cash and cash equivalents		58.4		61.3
Derivative financial instruments		1.9		0.4
			368.9		257.4
Total assets			1,007.1		651.1
Current liabilities
Borrowings		(65.6)		(34.3)
Obligations under finance leases		(2.6)		(0.5)
Trade and other payables		(219.7)		(115.1)
Short term provisions		(1.9)		(1.2)
Current tax liabilities		(8.0)		(14.6)
Derivative financial instruments		(1.6)		(1.1)
			(299.4)		(166.8)
Non-current liabilities
Borrowings		(294.6)		(148.3)
Obligations under finance leases		(3.0)		(0.9)
Trade and other payables		(1.0)		(1.8)
Long term provisions		(3.1)		(5.2)
Deferred tax		(52.4)		(22.6)
Preference shares		(0.1)		(0.1)
Retirement benefit obligations		(23.0)		(28.1)
Derivative financial instruments		(7.3)		(3.7)
			(384.5)		(210.7)
Total liabilities			(683.9)		(377.5)
Net assets			323.2		273.6
Equity
Share capital			1.8		1.8
Share premium account			120.4		120.3
Special capital reserve			12.9		12.9
Hedging reserve			(2.7)		(3.4)
Revaluation reserve			1.4		1.4
Retained earnings			196.6		145.8
			330.4		278.8
Own shares			(7.2)		(5.2)
Equity attributable to equity holders of the parent			323.2		273.6
Total equity			323.2		273.6

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 October 2010

		2010	2009
	Note	£m	£m
Cash flows from operating activities
Underlying cash generated from operations	A	126.1	106.7
Acquisition related costs		(6.7)	-
Cash generated from operations		119.4	106.7
Tax paid		(30.0)	(18.7)
Net cash inflow from operating activities		89.4	88.0
Cash flows from investing activities
Dividends received from associate		0.1	-
Purchases of intangible assets		(7.8)	(4.8)
Purchases of property, plant and equipment		(40.9)	(33.4)
Acquisition of subsidiary undertakings (net of cash acquired)		(176.8)	(27.6)
Net cash outflow from investing activities		(225.4)	(65.8)
Cash flows from financing activities
Dividends paid		(18.7)	(13.8)
Interest paid		(14.0)	(10.5)
Proceeds on issues of shares		0.1	0.5
New borrowings		208.8	14.9
Repayments of borrowings		(41.7)	(20.7)
Repayment of finance leases		(0.7)	(1.6)
Proceeds from sale and finance leaseback		4.5	-
Purchase of own shares		(3.9)	(1.5)
Net cash inflow/ (outflow) from financing activities		134.4	(32.7)
Decrease in cash and cash equivalents during the year		(1.6)	(10.5)
Cash and cash equivalents at start of the year		61.3	69.6
Effect of foreign exchange rate changes		(1.3)	2.2
Cash and cash equivalents at end of the year		58.4	61.3

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 October 2010

	2010	2009
	£m	£m
A. Cash generated from operations
Operating profit from continuing operations	105.9	107.9
Operating profit from acquired operations	2.0	-
Adjustment for:
Depreciation of property, plant and equipment	11.6	13.3
Impairment charge	-	1.1
Amortisation of other intangibles	2.4	1.5
Loss on disposal of intangible assets	0.2	-
Amortisation of intangible assets arising from business combinations	17.0	13.8
Loss/(gain) on fair value movements on derivatives	4.0	(7.0)
Share-based payment expense	2.3	2.1
Difference between pension contributions paid and amount
recognised in Income Statement	0.7	0.1
(Decrease)/increase in provisions	(1.4)	0.5
Operating cash flows before movements in working capital	144.7	133.3
Increase in inventories	(19.2)	(8.4)
Increase in trade and other receivables	(44.0)	(10.0)
Increase/(decrease) in trade and other payables	37.9	(8.2)
Cash generated from operations	119.4	106.7
Acquisition related costs	6.7	-
Cash generated from underlying operations	126.1	106.7
Reconciliation of net cash flow to movement in net debt
Decrease in cash and cash equivalents during the year	(1.6)	(10.5)
(Increase)/decrease in debt and lease financing due to cash flows	(171.1)	7.5
Change in net debt resulting from cash flows	(172.7)	(3.0)
Acquired debt	(5.4)	-
New finance leases	-	0.5
Translation difference relating to loans	(5.4)	(3.1)
Amortisation of debt finance costs	(1.2)	(0.5)
Movement in net debt in the year	(184.7)	(6.1)
Net debt at start of the year	(122.8)	(116.7)
Net debt at end of the year	(307.5)	(122.8)

Analysis of net debt
	As at				As at
	1 Nov	Cash	Non-cash	Exchange	31 Oct
	2009	flow	changes	movement	2010
	£m	£m	£m	£m	£m
Cash at bank and in hand	61.3	(1.6)	-	(1.3)	58.4
Debt due within one year	(34.3)	(10.1)	(20.5)	(0.7)	(65.6)
Debt due after one year	(148.3)	(157.2)	14.3	(3.4)	(294.6)
Finance leases	(1.4)	(3.8)	(0.4)	-	(5.6)
Preference shares	(0.1)	-	-	-	(0.1)
	(122.8)	(172.7)	(6.6)	(5.4)	(307.5)

Notes

1.	ACCOUNTS AND AUDITORS' REPORT

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 October 2010 or 31 October 2009 but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies, and those for 2010 will be delivered following the company's Annual General Meeting. The auditors have reported on these accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report,  and did not contain any statements required under either s498(2) or s498(3) of the Companies Act 2006. 

The preliminary announcement has been prepared on the basis of the accounting policies as stated in the financial statements for the year ended 31 October 2010.

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs on 18 February 2011 (see Note 8 below).

2.	ANALYSIS OF REVENUE
				2010
		Continuing	Acquired	Total
		£m	£m	£m
Countermeasures		195.2	1.1	196.3
Counter-IED		113.8	1.1	114.9
Pyrotechnics		150.9	19.1	170.0
Munitions		110.7	5.2	115.9
		570.6	26.5	597.1

3.	RECONCILIATION OF STATUTORY OPERATING PROFIT TO
	UNDERLYING OPERATING PROFIT

Underlying profit is used by the Board to measure and monitor the underlying performance of the Group. Set out below is a reconciliation of statutory operating profit and underlying operating profit.

	2010	2009
	£m	£m
Statutory operating profit	107.9	107.9
Add back:
Acquisition related costs	6.7	-
Intangible amortisation arising from business combinations	17.0	13.8
Loss/(gain) on fair value movements on derivatives	4.0	(7.0)
Underlying operating profit	135.6	114.7

During 2010 a revision of IFRS3 Business Combinations was adopted relating to the treatment of costs incurred in relation to acquisitions. Accordingly, with effect from 1 November 2009, due diligence and other acquisition related costs have been charged to the Income Statement. In the past these costs have been charged to cost of investment. 

Profit before tax and underlying profit before tax also vary by the above amounts.

4.	EARNINGS PER ORDINARY SHARE

Earnings per share are based on the average number of shares in issue of 35,320,445 (2009: 35,266,616) and profit on ordinary activities after tax of £66.7 million (2009: £70.1 million). Diluted earnings per share has been calculated using a diluted average number of shares in issue of 35,677,687 (2009: 35,601,379) and profit on ordinary activities after tax of £66.7 million (2009: £70.1 million).

The earnings and shares used in the calculations are as follows:

From continuing operations			2010			2009
		Ordinary			Ordinary
		shares			shares
	Earnings	Number	EPS	Earnings	Number	EPS
	£m	000s	Pence	£m	000s	Pence
Basic	66.7	35,320	189	70.1	35,267	199
Additional shares issuable
other than at fair value in
respect of options outstanding	-	358	(2)	-	334	(2)
Diluted	66.7	35,678	187	70.1	35,601	197

The number of shares in issue differs from the number held by third parties due to the fact that the Group holds Chemring Group PLC shares in treasury.

Reconciliation from basic earnings per share to underlying earnings per share:

Underlying basic earnings are defined as earnings before acquisition related costs, intangible amortisation arising from business combinations and (loss)/gain on fair value movements on derivatives. The directors consider this measure of earnings allows a more meaningful comparison of earnings trends.

			2010			2009
		Ordinary			Ordinary
		shares			shares
	Earnings	Number	EPS	Earnings	Number	EPS
	£m	000s	Pence	£m	000s	Pence
Basic	66.7	35,320	189	70.1	35,267	199
Acquisition related costs,
intangible amortisation arising
from business combinations
and (loss)/gain on fair value
movements on derivatives
(after tax)	20.2	-	57	4.9	-	14
Underlying	86.9	35,320	246	75.0	35,267	213

5.

DIVIDEND

The final dividend of 42p per ordinary share will be paid on 15 April 2011 to all shareholders registered at the close of business on 25 March 2011. The ex-dividend date will be 23 March 2011. The total dividend for the year will be 59p (2009: 50p). The final dividend is subject to approval by the shareholders at the Annual General Meeting, and accordingly, has not been included as a liability in the financial statements for the year ended 31 October 2010.

6.	RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed.

7.	POST BALANCE SHEET EVENTS

Bank refinancing

On 14 January 2011, the Group completed a refinancing of its bank facilities with a syndicate of five banks. The new Group facilities, which are unsecured, total £230 million, which is a £55 million increase on the previous secured facilities. In addition, the term of the facilities has been extended from April 2012 to April 2015.

The increase in the level of the facility and the tenure, together with the introduction of several new banks to the Group, will provide greater capacity and capability to support the Group's future requirements.

Share split

At the forthcoming Annual General Meeting, shareholder approval will be sought to sub-divide the Company's 5p ordinary shares into ordinary shares of 1p each. Further details are set out in the Notice of the Annual General Meeting.

8.	2010 FINANCIAL STATEMENTS

The financial statements for the year ended 31 October 2010 will be posted to shareholders on 18 February 2011. They will also be available from that date at the registered office, Chemring House, 1500 Parkway, Whiteley, Fareham, Hampshire PO15 7AF and will be posted on the Company's website at www.chemring.co.uk the following morning.

 

END

 

 

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