Final Results

RNS Number : 5221M

Chemring Group PLC

21 January 2016

FOR IMMEDIATE RELEASE 21 January 2016

CHEMRING GROUP PLC

RESULTS FOR THE YEAR ENDED 31 OCTOBER 2015

	2015	2014
Continuing operations
Revenue	£377.3m	£403.1m
Underlying operating profit¹	£34.4m	£46.7m
Underlying profit before tax¹	£19.8m	£28.1m
Net debt	£154.3m	£135.6m
Underlying earnings per share¹	8.1p	11.6p

Total operating profit	£5.5m	£25.4m
Total loss before tax	£(9.1)m	£(5.2)m
Total loss per share	(2.7)p	(0.7)p

1 Underlying measures referred to in this announcement are stated before costs relating to acquisitions and disposals, business restructuring and incident costs, profit/loss on disposal of businesses, items deemed to be of an exceptional nature, impairment of goodwill and acquired intangibles, impairment of assets held for sale, amortisation of acquired intangibles and gains/losses on the movement in the fair value of derivative financial instruments. A reconciliation of underlying and total operating profit is set out in note 4.

Highlights

· FY15 result in line with revised, lower expectations set out in 26 October 2015 statement

· Solid operational recovery across Countermeasures and Energetic Systems segments

· Key contract wins on US Sensors & Electronics development programmes for IED, chemical and biological detection

· Record year end order book of £569.6 million at 31 October 2015

· Expectations for FY16 unchanged

· Fully underwritten Rights Issue launched today to raise gross proceeds of £80.8 million to reduce

indebtedness (see separate announcement)

· Process underway regarding non-executive Board changes

Michael Flowers, Chemring Group Chief Executive, commented:

"2015 was a disappointing year, with several key export orders in the Sensors & Electronics segment taking longer to materialise than anticipated. In addition, the Energetic Systems segment was heavily impacted in the final quarter of the year by a contract termination and delays to the start of fulfilment of a major order for 40mm ammunition. These events have overshadowed the progress we have made in improving the Group's operations, which have resulted in all of our business units being profitable in FY15. This progress reflects our strong management team and growing collaboration within the Group.

We expect the wider market backdrop for global defence expenditure to be one of slow recovery in 2016. The situation for US defence spending is more stable than it has been for some time, and ongoing geopolitical tensions in the Middle East and elsewhere emphasise the need for robust defence and security measures. The timing of Middle East order placement and contract activity remains difficult to predict, in part due to the impact that recent falls in the oil price are having on Government spending in the region. Nevertheless, our continued customer focus means the Group is well positioned to benefit from any sustained increase in demand in its markets."

For further information:

Michael Flowers	Group Chief Executive, Chemring Group PLC	01794 833901
Steve Bowers	Group Finance Director, Chemring Group PLC	01794 833901
Rupert Pittman	Group Director of Corporate Affairs, Chemring Group PLC	01794 833901
Andrew Jaques John Olsen James White	MHP Communications	0203 128 8100

Cautionary statement

This announcement contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Chemring's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are; increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approvals for engineering or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects. Chemring undertakes no obligation to revise or update any forward-looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulations.

Notes to editors

· Chemring is a global business that specialises in the manufacture of high technology products and the provision of services to the aerospace, defence and security markets

· Employing approximately 3,000 people worldwide, and with production facilities in four countries, Chemring meets the needs of customers in more than fifty countries

· Chemring is now organised under three strategic product segments: Countermeasures, Sensors & Electronics, and Energetic Systems

· Chemring has a diverse portfolio of products that deliver high reliability solutions to protect people, platforms, missions and information against constantly changing threats

· Operating in niche markets and with strong investment in research and development, Chemring has the agility to rapidly react to urgent customer needs

www.chemring.co.uk

Presentation and photography

The presentation slides and a live audio webcast of the presentation to analysts will be available at the Chemring Group results centre www.chemring.co.uk/resultscentre at 09.30 (UK time) on 21 January 2016. A recording of the audio webcast will be available later that day. Original high-resolution photography is available to the media by contacting Tom Horsman, MHP Communications: tom.horsman@mhpc.com / tel: 0203 128 8100.

Overview

2015 was a disappointing year for Chemring, with several key export orders in the Sensors & Electronics segment taking longer to materialise than anticipated. In addition, the Energetic Systems segment was heavily impacted in the final quarter of the year by a contract termination and delays to the start of fulfilment of a major order for 40mm ammunition. These events have overshadowed the progress we have made in improving the Group's operations.

Recent years have seen Chemring undergo significant restructuring and transformation, largely in response to the downturn in the global defence sector. The Group has been streamlined operationally, business units have been integrated, and greater focus has been placed on safety and operational improvement. All of these actions are delivering positive results. Further progress was made in 2015 as we continued our efforts on positioning the Group for future growth.

Today, by separate announcement and by a prospectus sent to shareholders, we explain why we have launched a proposed rights issue to raise gross proceeds of £80.8 million (the "Rights Issue"), for which shareholder approval is being sought. In summary, the Board believes that this capital raising is in the best interests of the Group, significantly reducing its structural indebtedness and providing a more appropriate capital structure. The Board believes that this will allow the Group to pursue certain growth initiatives and further cost reduction over the medium-term, and will provide a stronger platform for the future.

Safety

Safety is our first priority and we continue to strive to improve in this area. The majority of our business units completed FY15 without a single lost time incident, and the lost time incident rate for the year is near our historical best performance. There was one lost time incident in the year involving energetic materials, in which an employee suffered burns at Chemring Australia's facility. As a result of wearing the correct protective personal equipment, the employee made a full recovery and was soon able to return to work. We cannot, and will not, be complacent in this area, and we have reviewed all similar operations at our facilities with the aim of ensuring that this type of incident cannot recur.

Our Safety Leadership Programme continues to address the cultural aspects of safety, and a 40% increase in near miss reporting in the year is an encouraging leading indicator, providing evidence that our employees are embracing the principles of the Programme. We continue to invest to improve operational safety to remove people from exposure to hazardous materials, and have commissioned an automated flare pellet manufacturing capability at Chemring Countermeasures UK's facility in Salisbury, and automated block explosive manufacturing at Chemring Energetics' facility in Ardeer.

Strategy and organisation

It is important not to understate the progress we have made in implementing our strategy, as our home customers in the US, UK and Australia have shifted away from an operational footing. In the Countermeasures segment, the successful launch of new special material decoys by Alloy Surfaces, the award of a qualification contract to Chemring Australia as the second source supplier for F-35 flares, and the qualification of a new naval decoy by Chemring Countermeasures UK all confirm our position as the world leader in the countermeasures market. The proposed acquisition of key assets and technology from Wallop Defence Systems in the UK, announced on 25 November 2015, is expected to further enhance our Countermeasures technology base. In Sensors & Electronics, the migration of the Husky Mounted Detection System ("HMDS") to a long-term Program of Record, and research and development ("R&D") contract wins on US chemical and biological detection programmes, are critical steps to securing the strategic future of this business. Finally, operational improvements delivered by Chemring Energetic Devices, and international successes at Chemring Ordnance and Chemring Defence in pyrotechnic products, demonstrate the benefits of our strategy for the Energetic Systems segment.

In addition, we are encouraged by improved collaboration within and across all three segments. Notable successes include transatlantic collaboration in relation to advanced flare technologies and products for the space market, and the joint development of products to counter improvised explosive devices ("IEDs") and products for the electronic warfare ("EW") market. As we re-shape the Group to match customer needs and expected demand levels, we continue to encourage collaboration, taking the steps necessary to enable and embed this across the Group.

During 2016 we expect to revise our US management structure to improve efficiency and effectiveness. The changes in structure are in the process of being agreed with the US Defense Security Service, who manage the Special Security Agreement under which certain of our US businesses operate.

Operational performance

The year has been one of challenges in achieving progress on major supply contracts at our US businesses. Further progress on the HMDS contract with a Middle East customer that commenced in FY14 has been delayed, and the significant order for 40mm ammunition for an end user in the Middle East failed to deliver revenue in FY15 due to delays in achieving regulatory and funding hurdles. The year was also affected by the termination for convenience by the US Government of a significant contract to deliver non-standard ammunition. Encouragingly, the US Government has subsequently awarded the first of a series of smaller contracts for the same requirement to Chemring, although this was too late to mitigate any of the impact of the termination in FY15.

However, the fact that every business unit was profitable in FY15 is testament to the hard work by all of our people as we restructure our operations to match expected demand levels. These efforts have improved delivery performance and reduced our cost base. For example, the integration of Chemring Energetic Devices' operations in Torrance, California into the Downers Grove, Illinois facility is already improving adherence to our customers' delivery schedules, and the separation of Roke's contract R&D activity from Chemring Technology Solutions' product business is contributing to increased order intake and staff utilisation.

Rights Issue

On 26 October 2015, we announced our intention to undertake a rights issue. The background to this is well documented, and is covered in a separate announcement released today, but it has become clear to the Board that whilst we have made progress in transforming the operations of the Group, further improvement is being hampered by our high level of structural indebtedness and limited headroom on associated financial covenants. We have identified further opportunities to consolidate sites, automate manufacturing and improve our products, and our decision to fundamentally address the high level of debt and provide a competitive capital structure are critical steps in taking advantage of these opportunities.

The Rights Issue is expected to raise £80.8 million in gross proceeds. Of the expected approximate £75.2 million of net proceeds from the Rights Issue, the Group expects to use a minimum of £48.5 million in prepayment of loan notes, with the balance to be used for make-whole premiums pursuant to the terms of the loan notes, waiver fees and general corporate purposes. In respect of the latter, the Board will have regard to the scheduled repayment of loan notes due in November 2016.

Board of directors

2015 was not an easy year for Chemring but, nevertheless, the Board remains committed to continuing to drive improvements in Chemring's performance. However, following announcement of the rights issue, we believe it is now time to reshape the membership of the Board. As a consequence, Peter Hickson has decided to stand down as Chairman, and from the Board, as soon as a suitable replacement has been identified and appointed. A process, run by the Nomination Committee using the services of an outside executive search consultancy, is under way and we expect a number of candidates to be considered for the position.

On the non-executive side, we are also seeking new directors. We have retained the services of a different executive search firm in order to identify suitable candidates. The process has been under way for some months but, due to the impending rights issue, we have not yet reached a position of being able to make any appointments. However, the process is continuing with a view to identifying well-qualified candidates.

From the current Board, Ian Much, the Senior Independent Director, will retire at the Annual General Meeting, as reported in last year's annual report. He will be succeeded as Senior Independent Director by Nigel Young, the Chairman of the Audit Committee. We would like to thank Ian for his very significant contribution to the Chemring Board over his many years of service and wish him well for the future. In addition, Andy Hamment has indicated that, for personal reasons, he also intends to stand down from the Board as soon as a replacement can be appointed.

Finally, in what has been a difficult year for the Company, the Board would like to express its thanks to all our employees who continue to contribute so much to the activities of our operations across the world.

Current trading and outlook

The Board's expectations for FY16 remain unchanged.

Trading since the start of FY16 has been below management's expectations, although order intake remains robust. Revenue has been impacted in part due to re-phasing of deliveries. Some customer acceptance delays at the end of FY15 have continued but are expected to be resolved shortly, and specific production and contract finalisation issues will result in the phasing of some revenue to later in FY16. The first quarter of the Group's financial year typically has a low level of revenues and that is again expected in FY16.

The order book as at 31 October 2015 increased 17.0% to £569.6 million, of which £330.9 million is currently expected to be recognised as revenue in FY16, representing almost 75.0% of the expected FY16 revenue of £450.0 million. This level of order cover for FY16 is encouraging. Included within the order book at 31 October 2015 is £103.0 million in respect of the major 40mm order secured by Chemring Ordnance in FY15. The order book as at 31 December 2015 was £600.5 million.

The multi-year revenues associated with the 40mm contract are expected to commence in the first half of FY16, once the cash advance payment is received from our customer, and this contract is expected to provide a significant contribution to FY16. As previously announced, the 40mm contract is expected to result in the Group's financial performance for FY16 being weighted towards the Energetic Systems segment, with a lower contribution from Sensors & Electronics while its US operations focus on R&D activity under long-term Programs of Record.

The expected profile of orders, revenue and margins means that the Group continues to expect FY16 to reflect a significant second-half weighting.

The Board expects the wider market backdrop for global defence spending to be one of slow recovery in 2016. The situation for US defence spending is more stable than it has been for some time, and ongoing geopolitical tensions in the Middle East and elsewhere emphasise the need for robust defence and security measures. The timing of Middle East order placement and contract activity remains difficult to predict, in part due to the impact that recent falls in the oil price are having on Government spending in the region. Nevertheless, our continued customer focus means the Group is well positioned to benefit from any sustained increase in demand in its markets.

Trading summary

Revenue from continuing operations was £377.3 million (2014: £403.1 million) and, including discontinued operations, was £377.3 million (2014: £474.9 million). This revenue generated an underlying operating profit of £34.4 million (2014: £49.0 million), of which £34.4 million (2014: £46.7 million) related to continuing operations. Including non-underlying items, there was a total operating profit of £5.5 million (2014: £28.2 million loss).

Including discontinued operations, underlying profit before tax reduced by 34.7% to £19.8 million, resulting in underlying earnings per share of 8.1p (2014: 12.4p).

The closing order book for continuing operations increased by £82.8 million during the year and at 31 October 2015 was £569.6 million (2014: £486.8 million).

The Group's net debt at 31 October 2015 was £154.3 million (2014: £135.6 million).

Group results

An analysis of underlying and total results is set out below:

	2015 Underlying £m	2015 Total £m	2014 Underlying £m	2014 Total £m
Revenue
- continuing operations	377.3	377.3	403.1	403.1
- discontinued operations	-	-	71.8	71.8

	377.3	377.3	474.9	474.9

Operating profit/(loss)
- continuing operations	34.4	5.5	46.7	25.4
- discontinued operations	-	4.9	2.3	(53.6)

	34.4	10.4	49.0	(28.2)
Net finance expense	(14.6)	(14.6)	(18.7)	(30.7)

Profit/(loss) before tax	19.8	(4.2)	30.3	(58.9)
Tax	(4.1)	3.8	(6.4)	4.0

Profit/(loss) after tax	15.7	(0.4)	23.9	(54.9)

The use of underlying measures, in addition to total measures, is considered by the Board to improve comparability of business performance between periods. Underlying measures referred to are stated before costs relating to acquisitions and disposals, business restructuring and incident costs, profit/loss on disposal of businesses, items deemed to be of an exceptional nature, impairment of goodwill and acquired intangibles, impairment of assets held for sale, amortisation of acquired intangibles and gains/losses on the movement in the fair value of derivative financial instruments. A reconciliation of underlying and total operating profit is set out in note 4.

During the year, changes in foreign exchange rates, principally the depreciation of sterling against the US dollar, increased reported revenue from continuing operations by £7.9 million. At constant exchange rates, revenue from continuing operations was £369.4 million, a reduction of 8.4%.

Chemring's operating segments are Countermeasures, Sensors & Electronics and Energetic Systems. An analysis of segmental revenue and underlying operating profit is set out below:

	2015 Revenue £m	2015 Underlying operating profit £m	2015 Underlying operating margin %	2014 Revenue £m	2014 Underlying operating profit £m	2014 Underlying operating margin %
Countermeasures	125.8	17.5	13.9	96.1	9.7	10.1
Sensors & Electronics	99.1	9.3	9.4	154.4	31.9	20.7
Energetic Systems	152.4	15.1	9.9	152.6	15.0	9.8

	377.3	41.9	11.1	403.1	56.6	14.0
Unallocated corporate costs	-	(7.5)	-	-	(9.9)	-

Continuing operations	377.3	34.4	9.1	403.1	46.7	11.6
Discontinued operations	-	-	-	71.8	2.3	3.2

Including discontinued operations	377.3	34.4	9.1	474.9	49.0	10.3

Countermeasures revenue increased by 30.9%, due to improved demand at our UK and Australian operations. Production volumes in the US were more robust than in 2014, however customer demand remains subdued. Countermeasures operating margin of 13.9% (2014: 10.1%) reflects higher volumes in the UK and Australia, the benefit of further headcount reductions and cost saving measures, together with the release of provisions on the successful completion of customer acceptance tests relating to an advanced countermeasure on which technical problems had previously been encountered.

Sensors & Electronics revenue reduced by 35.8%, reflecting the completion of major production contracts with the US Department of Defense ("DoD") during the comparative period. Significant R&D contracts with the US DoD are on-going in relation to the next generation of ground penetrating radar, and chemical and biological detection systems. Sensors & Electronics' operating margin of 9.4% (2014: 20.7%) reflects the reduced production volumes and the weighting of US revenues to lower margin, customer funded R&D activity. These factors have been partially offset by the benefits of cost saving measures, including the closure of one of our two production sites at Charlottesville, Virginia and a restructuring of Sensors & Electronics' UK operations.

Energetic Systems revenue reflects improved production throughput, offset by lower non-standard ammunition revenue. Underlying operating profit slightly increased to £15.1 million (2014: £15.0 million), with operating margins benefiting from operational improvement. This improvement was particularly marked at Chemring Energetic Devices, where production volumes are being transferred to the Illinois facility from the former Hi-Shear facility in California. This transition is enabling greater production throughput to be achieved and is generating higher margins. Chemring Ordnance delivered improved production, although its result was lower than had been anticipated due to the delays in achieving revenue under the major 40mm contract that was secured during the year.

Unallocated corporate costs were £7.5 million (2014: £9.9 million), with the reduction reflecting the full year benefit of savings from the simplification of the Group's management structure and lower costs of annual bonus schemes.

Underlying operating profit from continuing operations was £34.4 million (2014: £46.7 million), a decrease of 26.3%. The underlying operating margin was 9.1% (2014: 11.6%).

Discontinued operations comprise the European munitions businesses, Mecar, based in Belgium, and Simmel, located in Italy, and Chemring Defence Germany. All these businesses were sold in May 2014.

The total operating profit was £10.4 million (2014: £28.2 million loss). This includes non-underlying costs of £24.0 million (2014: £77.2 million), which are analysed later in this announcement.

Net underlying finance expense was £14.6 million (2014: £18.7 million). The reduction principally reflects the repayment of loan note debt during 2014, partly offset by higher levels of interest under our revolving credit facility and by an increase in the amortisation of prepaid facility fees.

Underlying profit before tax from continuing operations was £19.8 million (2014: £28.1 million), a decrease of 29.5%. Tax on underlying profit before tax from continuing operations was £4.1 million (2014: £5.7 million), representing an effective tax rate of 20.7% (2014: 20.3%). The tax rate on underlying profit before tax remains comparable to the UK corporation tax rate, and continues to benefit from the utilisation of R&D and other tax credits. Including non-underlying items, the total loss before tax from continuing operations was £9.1 million (2014: £5.2 million).

The effective tax rate on the total loss before tax from continuing operations was 41.8% (2014: 73.1%) due to the geographic mix of profit and the effect of non-underlying costs that are not deductible for tax purposes.

Analysis of non-underlying items

The use of underlying measures, in addition to the total measures noted above, is considered by the Board to improve comparability of business performance between periods and, consistent with past practice, certain items are classed as non-underlying, as set out below:

	2015 £m	2014 £m
Acquisition and disposal related (credit)/costs	(4.4)	8.6
Business restructuring and incident costs	6.4	7.2
Claim related costs	8.5	-
Loss on disposal of associate	-	0.9
Profit on disposal of businesses	-	(26.5)
Impairment of goodwill	-	45.9
Impairment of acquired intangibles	-	10.7
Impairment of assets held for sale	-	13.6
Intangible amortisation arising from business combinations	14.0	16.1
Loss/(gain) on fair value movements of derivative financial instruments	(0.5)	0.7

Non-underlying items excluded from underlying operating profit	24.0	77.2
Accelerated interest costs	-	12.0

Non-underlying items excluded from underlying profit before tax	24.0	89.2
Analysed as:
Continuing operations	28.9	33.3
Discontinued operations	(4.9)	55.9

Non-underlying items excluded from underlying profit before tax	24.0	89.2

The acquisition and disposal related credit of £4.4 million includes a £4.9 million credit related to disposals of businesses in prior years. This credit results from a review of expected liabilities under the sale agreements relating to the discontinued operations. Business restructuring and incident costs of £6.4 million include £2.5 million of redundancy costs, of which £2.1 million relates to the restructuring of the Roke site in Romsey. The remaining business restructuring and incident costs of £3.9 million principally comprise consultancy fees and provisions for onerous property leases.

Claim related costs of £8.5 million comprise £4.2 million in relation to claims brought by the US Department of Justice relating to historical supplies of product by Kilgore, where a settlement is being negotiated, and £4.3 million in settlement of claims regarding the manufacture of certain components for the Next Generation Light Anti-Tank Weapon ("NLAW") combat weapon by Chemring Energetics UK. The estimated value of these claim related costs has been reflected as a non-underlying item due to their scale and unusual nature. The cash payment associated with settlement of the NLAW claim occurred in November 2015, while the Kilgore claim related costs are expected to be settled over a five year period commencing in 2016.

An impairment analysis, based on value-in-use calculations reflecting current conditions in the defence industry, has been conducted and no impairments are considered to exist at 31 October 2015.

The amortisation of intangible assets arising from business combinations was £14.0 million (2014: £16.1 million), with the decrease principally reflecting amortisation of £2.6 million in the comparative period relating to discontinued operations. The amortisation of intangible assets arising from business combinations is treated as non-underlying to improve comparability and understanding of the results given its large size and non-cash nature.

The cash outflow from non-underlying items was £8.4 million (2014: £25.9 million).

Countermeasures

· Revenue: £125.8 million (2014: £96.1 million)

· Underlying operating profit: £17.5 million (2014: £9.7 million)

· Underlying operating margin: 13.9% (2014: 10.1%)

Revenue in the Countermeasures segment increased by 30.9%, as a result of recovery in the US businesses and strong performance in the UK and Australia.

The closing order book for Countermeasures was £184.1 million, down 4.8% on FY14. This was largely due to improved delivery performance at Kilgore in the year compared with FY14, where production had been halted as a result of the incident in February of that year, resulting in a growth in order backlog. The production issues highlighted in the interim report were successfully resolved and Countermeasures delivered an underlying operating profit of £17.5 million, compared to £9.7 million in FY14.

Alloy Surfaces achieved first deliveries of its new MJU-66 decoy to the US Navy and won a second year's production order for this product. It also launched a new proprietary decoy and has been awarded a contract for this product by the US Army, successfully implementing its strategy of continuous product improvement to sustain its position as a leader in pyrophoric decoy technology. While the order book increased during FY15, demand levels are expected to remain subdued and near-term order intake remains key. As a result of expected production volumes, planning is underway for the closure of one of Alloy Surfaces' two facilities. An investment of approximately $3.0 million at Alloy Surfaces' remaining production facility is expected to be required to support this and is expected to deliver approximately $1.4 million in annual cost savings from FY18.

Kilgore continued to improve its operational performance, after the production re-start that followed the incident in 2014. It successfully resolved production challenges during the second half of FY15, although work remains to be done to ensure greater consistency of countermeasure output. Kilgore's order book is progressively being worked through and FY16 order wins are important in ensuring an efficient level of production activity for future years, given the high fixed cost base at the Kilgore facility.

Chemring Countermeasures UK had a strong second half, successfully resolving the production challenges it faced earlier in the year. It also successfully commissioned its automated flare pellet mixing and pressing complex with the first products being manufactured and delivered to customers during the second half of FY15. This facility provides a step change to flare manufacture in terms of operator safety and flare quality while adding capacity to the Salisbury site. Increasing benefits will be generated from this investment over the coming years, as the range of products manufactured in the complex is broadened.

Following the successful resolution of technical problems associated with the development of a new and advanced countermeasure, highlighted in the 2014 Annual Report and Accounts, delivery of the contract was completed in FY15. With the successful qualification, interest in the product has resulted in a follow-on order being received, with the potential for further orders.

Interest in the CENTURION trainable launcher is growing with detailed discussions having taken place with two separate customers for the inclusion of the launcher on new classes of warship due to enter service in the early 2020s.

Chemring Australia had a very strong year with sustained successful delivery of locally manufactured flares to the Australian Department of Defence. It also manufactured its first flares for the F-35 which were delivered to the US customer for performance testing.

Chemring Australia continues to make technical progress on its electronic attack solution which complements the Group's Resolve portable EW system, and has also received growing interest in the system from a number of key customers.

On 25 November 2015, the Group announced it had reached agreement with Esterline to buy patents, equipment, stock and selected contracts relating to Esterline's UK-based subsidiary, Wallop Defence Systems, for an initial cash consideration of £2.5 million. Additional payments of up to £9.0 million, which are conditional on the receipt of specific orders in the future, may be made over the next three years. The assets to be purchased relate to air countermeasures and pyrotechnic products, which, pending regulatory approval, will be manufactured at Chemring's existing UK operations and further expand the Group's product offerings in Countermeasures. Completion of the transaction, which is subject to approval by the UK Ministry of Defence ("MoD") and the UK Competition and Markets Authority, is expected to occur in the second quarter of FY16.

The market for countermeasures remains subdued, with NATO customers constrained by tight budgets. Steady order intake within the segment confirms the ongoing requirement for Countermeasures' products despite these constraints. In the international market, particularly the Middle East, where political and military tensions are high, there is increased interest in the Group's products and technology, including advanced countermeasures. However, the timing of this international interest translating into orders remains unpredictable.

In the medium term, the Group's qualifications on the F-35 and Typhoon platforms underpin its position for the future, with requirements for a substantial level of war reserves of the unique advanced flares for the growing fleets of these next-generation aircraft. In addition, the approval for the F-15 and Typhoon platforms to use Alloy Surfaces' unique pre-emptive decoy dispensed from Saab's BOL dispenser creates a new opportunity for this solution, with the US Air Force and Navy likely to fit these dispensers in 2017.

Sensors & Electronics

· Revenue: £99.1 million (2014: £154.4 million)

· Underlying operating profit: £9.3 million (2014: £31.9 million)

· Underlying operating margin: 9.4% (2014: 20.7%)

Revenue in the Sensors & Electronics segment decreased by 35.8% to £99.1 million, as a result of extended delays in progressing production contracts with Middle Eastern customers, which had been anticipated to offset the decline in production revenue from the US DoD.

Reduced revenue and an increase in R&D contracts, which have a lower margin than production activity, led to a reduction in underlying operating profit from £31.9 million in FY14 to £9.3 million. The order book was marginally lower at £75.8 million (2014: £77.5 million), reflecting a steady level of business from the US and NATO.

Following the completion of the original HMDS contract in 2014, Chemring Sensors & Electronics' emphasis has been on securing the long-term development contracts for the US Army's Program of Record and developing the international market. It is currently engaged in a sole-source contract for the engineering and manufacturing development ("EMD") phase of the Program of Record for the next-generation HMDS "A2" variant. The customer is conducting a review to confirm the phasing and structure of their requirements, and we continue to expect initial production contracts to be awarded following completion of the EMD phase. There is continued international interest in vehicle mounted mine and IED detection with operators now including the US, Canada, Australia, Italy, and Spain. Following the award of a significant order for HMDS from a customer in the Middle East in FY14, further order intake and contract activity in the Middle East is expected in FY16, as we continue to promote the HMDS solution and our 3d-Radar technology.

Chemring Sensors & Electronics' hand-held dual sensor detector, Groundshark, has enjoyed early success, with products shipped to Poland and the Middle East. Chemring Sensors & Electronics continues to position itself for key US programmes in this area and has won a follow-on contract in relation to the Next Generation Hand-held Multi-Sensor Explosive program for the detection of buried anti-personnel and anti-vehicular explosive devices.

In chemical and biological detection, Chemring Sensors & Electronics maintained a position on all the strategically important US R&D contracts it is targeting. The Next Generation Chemical Detector programme involves three different sensor developments and Chemring is the only bidder to have won EMD contracts for all of these. In addition, in April 2015, Chemring received a $14.9 million award as the sole contractor for the US DoD's Joint Biological Tactical Detection System ("JBTDS") development programme, which is expected to lead to production contracts from 2018.

In the UK, the restructuring of Chemring Technology Solutions is now complete, with Roke operating as a pure contract development and consultancy business, and Chemring Technology Solutions comprising the explosive ordnance disposal, IED detection and EW products business.

Chemring Technology Solutions continues to promote its Resolve and Locate EW products to the international market, and has won further orders globally.

Chemring Technology Solutions has launched its Groundhunter hand-held IED detector, which incorporates interchangeable sensor heads for command wire and metal detection. This product has achieved initial orders and is complementary to the GroundShark hand-held IED detector, which uses ground-penetrating radar and metal detection technologies.

In the non-defence market, Chemring Technology Solutions has won a contract for the supply of its Perception cyber-protection solution to a major UK services company, and it is seeing considerable interest in its novel approach to information and data protection.

Overall, the near-term outlook for Sensors & Electronics is expected to be constrained. Major US production contracts driven by urgent operational requirements have ended and while international demand is strong, the timing of orders, particularly in non-NATO countries, remains difficult to predict. Receipt of these international orders remains key to near-term performance. Encouragingly, the US DoD has recognised the need for a broad range of detection systems by the inclusion of these capabilities as Programs of Record in the base budget, and continued participation in these Programs of Record underpins our longer-term prospects.

Chemring is therefore well-placed to grow its position in the Sensors & Electronics market through the development and launch of its next-generation products, having already won key R&D contracts for the initial phases of the Programs of Record. In addition, our products and technologies are targeted at detecting and mitigating new, growing threats such as IEDs and cyber-attacks. We believe these capabilities will form a growing proportion of future defence budgets.

Energetic Systems

· Revenue: £152.4 million (2014: £152.6 million)

· Underlying operating profit: £15.1 million (2014: £15.0 million)

· Underlying operating margin: 9.9% (2014: 9.8%)

Revenue for Energetic Systems was broadly unchanged at £152.4 million (2014: £152.6 million). Underlying operating profit and operating margins were also consistent with the prior year at £15.1 million (2014: £15.0 million) and 9.9% (2014: 9.8%), with operational improvement offsetting order delays for 40mm ammunition and the termination for convenience of a US government contract for non-standard ammunition.

The closing order book for Energetic Systems was £309.7 million (2014: £216.0 million), driven by the significant order for 40mm ammunition awarded to Chemring Ordnance during the year.

Chemring Energetic Devices had a strong year, addressing capacity constraints at the California facility and delivering another year of profit improvement. The business has successfully started to diversify its business, with international sales of test equipment for aircrew life-support systems, and sales of explosive separation bolts for a new high-reliability application. The business continues to resolve manufacturing reliability on products for space and missile applications, such as the long-standing Lockheed Martin Patriot PAC-3 missile programme.

Customers are supporting Chemring Energetic Devices in efforts to qualify its Illinois operation to manufacture products, which, once complete, is expected to enable the closure of the California facility in 2018. Investment at the Illinois facility of approximately $7.0 million is required to complete this site rationalisation, which is expected to yield significantly improved operational performance and a cost reduction of approximately $5.0 million per annum from FY19.

Chemring Ordnance had a stable year, delivering good operational performance for its production of the Anti-Personnel Obstacle Breaching System ("APOBS"), despite customer acceptance issues towards the end of FY15. However, Chemring Ordnance suffered a disappointing outcome with the termination for convenience by the US Army of a $62.7 million contract for delivery of non-standard ammunition. Termination for convenience clauses form part of standard DoD contract terms and in this case were used by the DoD to enable a change in procurement strategy. Encouragingly, the US Government has subsequently awarded the first of a series of smaller contracts for the same requirement to Chemring, although this was too late to mitigate the impact in FY15.

Chemring Ordnance also secured a significant multi-year order for 40mm ammunition to be delivered to the Middle East, and its order book now stands at a record level, underpinning its future prospects. Delays in necessary permits and export approvals in respect of the 40mm contract have now been resolved, and contract revenues are expected to commence in the first half of FY16, once the cash advance payment is received from our customer. The 40mm contract is expected to provide a significant contribution to FY16.

In the UK, the reorganisation of Chemring Energetics is delivering positive results, with greater focus on operational effectiveness, collaboration and customer engagement. This was demonstrated by the first deliveries of plastic explosive block for the UK MoD from a newly-commissioned manufacturing facility, strengthening Chemring Energetics UK's position as a leader in the supply of demolition products. This explosive was developed jointly by the teams at Chemring Energetics UK and Chemring Nobel in Norway, where the composition is manufactured.

Chemring Nobel delivered strong levels of profitability, having successfully invested to improve manufacturing yields, remove manufacturing bottle-necks and increase production capacity.

Chemring Defence had a satisfactory year as it fulfilled orders from Middle East customers won in 2014. Prospects with customers in the Middle East remain encouraging, although substantial order intake from these customers is required in 2016 to ensure profitable manufacturing volumes. The UK MoD's requirements remain negligible as it consumes its existing stockpiles, with no order intake expected before 2017. This pause in UK demand has, to date, been offset by orders from the Middle East and by the development of relationships in the Asia Pacific region.

In the short term, Energetic Systems will be dominated by fulfilling the major order for 40mm ammunition. Otherwise, demand for our Energetic Systems products is expected to remain relatively flat until NATO customers deplete current stockpiles and start to re-order pyrotechnics for training and operational use. Growth is being targeted through diversification into non-defence markets, with the development of bespoke products for fire suppression, security and space applications. Against this market backdrop, continued emphasis is being placed on maintaining improvements in operational efficiency and optimising cash conversion.

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 2014 Annual Report and Accounts and the 2015 interim report. A detailed description of the Group's principal risks and uncertainties and the ways they are mitigated can be found at Annex 1. In summary, the principal risks relate to:

· health and safety risks;

· environmental laws and regulations;

· possible defence budget cuts;

· timing and value of orders;

· contract-related risks;

· political risks;

· management resource;

· manufacturing risks;

· technological risks;

· product liability and other customer claims;

· compliance and corruption risks;

· cyber-related risks; and

· financial risks.

Management have detailed mitigation plans and assurance processes to manage and monitor these risks.

Research and development

R&D expenditure, including discontinued operations, was £56.3 million (2014: £52.0 million). Continued investment in R&D is a key aspect of the Group's strategy, and levels of internally-funded R&D are expected to be maintained as investment in product development continues, particularly within Sensors & Electronics. An analysis of R&D expenditure is set out below:

	2015 £m	2014 £m
Customer-funded R&D	38.2	28.5
Internally-funded R&D
- expensed to the income statement	9.2	11.6
- capitalised	8.9	11.9

Total R&D expenditure	56.3	52.0

Amortisation of development and patent costs relating to continuing operations was £6.4 million (2014:£5.8 million), with the increase reflecting a number of previously capitalised projects coming on-stream. A further increase in amortisation of development and patent costs is anticipated for FY16 as additional Sensors & Electronics projects complete their development phase.

Pensions

The deficit on the Group's defined benefit pension schemes was £17.7 million (2014: £21.8 million), measured in accordance with IAS 19 (Revised) Employee Benefits.

The deficit relates to the Chemring Group Staff Pension Scheme (the "Scheme"), a UK defined benefit scheme whose assets are held in a separately administered fund. The Scheme was closed to future accrual in April 2012. A full actuarial valuation for the Scheme as at 6 April 2012 has been prepared and updated to 31 October 2015, using the projected unit credit method. This valuation showed a deficit of £17.8 million (2014: £22.0 million). The reduction reflects the funding structure agreed with the trustees in June 2013, under which contributions of £5.0 million were paid in FY15, partly offset by the effect of changes in actuarial assumptions. The Group has given a bank guarantee and letters of credit totalling £13.5 million (2014: £21.6 million) to the Scheme in respect of future contributions, which are progressively reducing as contributions are paid under the new funding structure.

Cash flow

The cash inflow generated from underlying operations was £35.4 million (2014: £63.5 million). A summary of underlying free cash flow is set out below:

	2015 £m	2014 £m
Underlying operating profit	34.4	49.0
Depreciation and loss/(profit) on disposal of non-current assets	16.6	16.8
Amortisation of development costs, patents and licences	6.4	6.7

	57.4	72.5
Increase in working capital	(18.2)	(2.0)
Other movements	(3.8)	(7.0)

Cash generated from underlying operations	35.4	63.5
Expenditure on capitalised development costs	(8.9)	(12.1)
Expenditure on property, plant and equipment	(8.2)	(10.9)
Tax	(1.3)	(3.4)
Interest	(11.8)	(20.6)

Underlying free cash flow	5.2	16.5

Expenditure on property, plant and equipment was £8.2 million (2014: £10.9 million). This comprised various projects related to health and safety improvements, production automation and systems upgrades, including £0.6 million relating to the implementation of an enterprise resource planning system at Chemring Defence.

Expenditure on capitalised development projects was £8.9 million (2014: £12.1 million), of which £7.2 million (2014: £9.8 million) related to the Sensors & Electronics segment, where significant investment has been made in technology developed in association with DoD Programs of Record and for UK product launches. The carrying value of capitalised development costs at 31 October 2015 of £36.1 million included £12.1 million in respect of US Sensors & Electronics projects, £3.6 million in relation to the Perception cyber-protection product and £3.8 million in respect of the CENTURION launcher.

Tax payments were £1.3 million (2014: £3.4 million), with the reduction reflecting the lower profitability of the Group.

Working capital

A summary of working capital in respect of continuing operations is set out below:

	2015 £m	2014 £m
Inventories	96.2	78.1
Trade receivables	66.1	59.3
Contract receivables	15.2	20.2
Trade payables	(46.7)	(37.1)
Advance payments	(11.5)	(4.5)
Other items	(37.5)	(46.0)

Working capital	81.8	70.0

Working capital was £81.8 million (2014: £70.0 million). Inventory increased in each operating segment. The rise in Energetic Systems was due in part to the customer acceptance issues at Chemring Ordnance relating to APOBS units towards the end of FY15, which led to an increase in inventory of £2.6 million. These issues are expected to be resolved in the first half of FY16. Sensors & Electronics inventory increased in relation to newly-launched hand-held chemical detection products (£1.9 million) and procurement of inventory relating to the Resolve EW system in anticipation of orders to be received in FY16 (£2.4 million).

Trade receivables increased due to the concentration of revenue towards the final quarter of the year, and also included £6.8 million in respect of FY14 sales for which collection is linked to receipt of the advance payment associated with the major 40mm ammunition contract secured in FY15.

Contract-accounted revenues represented 3.4% (2014: 22.0%) of revenue from continuing operations, with the decline reflecting an absence of major production activity within Sensors & Electronics.

Working capital continues to be a key focus area and the operational improvement at sites such as Chemring Energetic Devices will drive greater efficiency, notably through the reduction of inventories. In the near term, the principal drivers of working capital will be the timing of major contracts within Energetic Systems.

Net debt and covenants

Net debt at 31 October 2015 was £154.3 million (2014: £135.6 million). The Group's principal debt facilities comprise £166.5 million of private placement loan notes and a £70.0 million revolving credit facility. The revolving credit facility was established in July 2014, is with a syndicate of three banks and has a four year term. Together with a smaller US facility, the Group had £78.5 million (2014: £75.7 million) of undrawn borrowing facilities at the year end.

In addition to borrowing facilities, the Group had £62.4 million (2014: £62.3 million) of facilities in respect of bonding and trade finance requirements. At 31 October 2015, £28.0 million (2014: £31.4 million) of these facilities were utilised.

The Group is subject to two key financial covenants, which are tested quarterly. These covenants relate to the leverage ratio, being the ratio between underlying earnings before interest, tax, depreciation and amortisation ("underlying EBITDA") and debt; and the interest cover ratio between underlying EBITDA and finance costs. The calculation of these ratios involves the translation of non-sterling denominated debt using average, rather than closing, rates of exchange. The revolving credit facility and the loan notes have differing covenant compliance calculations.

In respect of the revolving credit facility, leverage is measured by reference to net debt. The maximum permitted ratio of net debt to underlying EBITDA under the revolving credit facilities was 3.00x at January 2015, 3.75x at April 2015, 3.50x at July 2015 and 3.00x at October 2015. The increased permitted ratios at April and July 2015 were agreed with the revolving credit facility syndicate in May 2015 and a ratio of 3.00x applied at those dates prior to that revision.

The provisions of the private placement loan notes contain two leverage tests, each of which are tested quarterly. The first test measures leverage by reference to total gross debt, with a maximum permitted ratio of total gross debt to underlying EBITDA of 3.75x. The second test measures leverage by reference to adjusted debt, which is calculated as total gross debt less proceeds from the sale of the European munitions businesses that were offered to note holders in 2014 to repay outstanding notes at par, but in relation to which such offer was not accepted. The value of such proceeds at 31 October 2015 was £4.6 million (2014: £4.5 million). The maximum permitted ratio of adjusted debt to underlying EBITDA was 3.00x at January 2015, 3.75x at April 2015, 3.50x at July 2015 and 3.00x at October 2015. The increased permitted ratios at April and July 2015 were agreed with loan note holders in May 2015 and a ratio of 3.00x applied at those dates prior to that revision.

The Group complied with these covenants throughout the year and the results of covenant tests at the year end are detailed below:

	2015	2014
Covenant ratios - revolving credit facility
Maximum allowed ratio of net debt to underlying EBITDA	3.00x	3.00x
Actual ratio of net debt to underlying EBITDA	2.83x	1.93x

Minimum allowed ratio of underlying EBITDA to finance costs	4.00x	4.00x
Actual ratio of underlying EBITDA to finance costs	4.75x	4.28x

Covenant ratios - loan note agreements
Maximum allowed ratio of adjusted debt to underlying EBITDA	3.00x	3.00x
Actual ratio of adjusted debt to underlying EBITDA	2.84x	2.25x

Maximum allowed ratio of total debt to underlying EBITDA	3.75x	3.75x
Actual ratio of total debt to underlying EBITDA	2.92x	2.31x

Minimum allowed ratio of underlying EBITDA to finance costs	3.50x	3.50x
Actual ratio of underlying EBITDA to finance costs	4.67x	4.39x

During January 2016, changes were made to covenants under the revolving credit facility and loan notes in respect of the permitted ratios at the 31 October 2015 and 31 January 2016 test dates.

Certain of these changes, in respect of the 31 January 2016 test date only, are in effect whether or not the Rights Issue proceeds. These unconditional changes are an increase in the permitted leverage ratio under the revolving credit facility from 3.00x to 3.50x at the 31 January 2016 test date and an increase in the permitted adjusted debt leverage ratio under the private placement loan notes from 3.00x to 4.00x.

The remaining amended covenant ratios, summarised in the table below, will be in effect only if the Rights Issue proceeds and, in the case of the amendments relating to the loan notes, if not less than 60% of the gross proceeds of the Rights Issue are applied in prepayment of amounts outstanding under the loan notes no later than 29 April 2016:

	31 October 2015		31 January 2016
	Original	Amended	Original	Amended
Covenant ratios - revolving credit facility
Maximum allowed ratio of net debt to underlying EBITDA	3.00x	3.90x	3.00x	3.90x

Minimum allowed ratio of underlying EBITDA to finance costs	4.00x	3.50x	4.00x	3.50x

Covenant ratios - loan note agreements
Maximum allowed ratio of adjusted debt to underlying EBITDA	3.00x	4.00x	3.00x	4.00x

Maximum allowed ratio of total debt to underlying EBITDA	3.75x	4.00x	3.75x	4.00x

Minimum allowed ratio of underlying EBITDA to finance costs	3.50x	3.50x	3.50x	3.50x

The composition of gross and net debt is set out below:

	2015 £m	2014 £m
Loan notes, net of facility fees	(161.3)	(155.6)
Revolving credit facility	-	-
Other loans and finance leases	(0.6)	(1.8)

Gross debt	(161.9)	(157.4)
Cash	7.6	21.8

Net debt	(154.3)	(135.6)

Going concern and long-term viability statement

The Group's business activities, key performance indicators, and principal risks and uncertainties are described within the 2015 Annual Report and Accounts. In light of the continued trading volatility, and as part of a regular assessment of the Group's working capital and financing position, the directors have prepared a detailed bottom-up two year trading budget and cash flow forecast for the period through to October 2017, being at least 12 months after the date of approval of the financial statements. This is in addition to the Group's longer-term strategic planning process. In assessing the forecast, the directors have considered:

· trading risks presented by economic conditions in the defence market, particularly in relation to government budgets and spends;

· the timing of delivering key contracts, in particular the HMDS and 40mm orders for end users in the Middle East;

· the impact of macroeconomic factors, particularly interest rates and foreign exchange rates;

· the status of the Group's existing financial arrangements and associated covenant requirements; and

· the availability of mitigating actions should business activities fall behind current expectations, including the deferral of discretionary overheads and restricting cash flows.

Additional detailed sensitivity analysis has been performed on the forecasts to consider the impact of severe, but plausible, reasonable worse case scenarios on the covenant requirements. These scenarios, which sensitised the forecasts for specific identified risks, modelled the reduction in anticipated levels of underlying EBITDA and the associated increase in net debt. These scenarios included significant delays to major contracts and new product launches, and the temporary closure of a major facility. This sensitised scenario included mitigating actions that can be taken if needed and, based on the application of these shows minimal headroom on all covenant test dates for the foreseeable future.

The directors have acknowledged the latest guidance on going concern. They have made appropriate enquiries and taken into account factors which are detailed in the strategic report within the 2015 Annual Report and Accounts. As a consequence, the directors believe that the Company is well placed to manage its risks.

The Group is seeking to raise £80.8 million via a Rights Issue in order to achieve a more appropriate capital structure with reduced indebtedness, and also to increase the headroom on its near-term covenants to an appropriate level. This is subject to shareholder approval, and the subsequent repayment of private placement loan note debt is expected to complete by April 2016. Both of these events will provide further headroom at all future covenant test dates.

In making these statements, the directors have made the following key assumptions:

· the right issue is approved by shareholders and completes during February 2016; and

· at least 60% of the gross proceeds from the Rights Issue are used to repay private placement loan note debts during April 2016.

If the Rights Issue does not proceed to completion, certain of the amendments to the financial covenants under the Group's existing finance agreements will not become effective. While the Group is, as at the most recent test date of 31 October 2015, in compliance with the unmodified financial covenants in its existing finance agreements, and has agreed an unconditional variation of certain maximum leverage ratios under its existing finance agreements for the 31 January 2016 test date, there is minimal headroom under a reasonable worst case with no Rights Issue proceeds and therefore a risk, in this scenario, that the Group will exceed the unmodified maximum leverage ratios permitted under the existing finance agreements as at 30 April 2016 and subsequent quarterly test dates if the Rights Issue does not proceed.

The directors having considered the forecasts, the risks, associated mitigating actions and probability of the Rights Issue proceeding, have a reasonable expectation that adequate financial resources will continue to be available for the foreseeable future. Thus, they continue to support the going concern basis in preparing the financial statements.

The directors have assessed the Group's viability over a three year period to October 2018 based on the above assessment, combined with the Group's strategic planning process, which gives greater certainty over the forecasting assumptions used. Based on this assessment and probability of the Rights Issue proceeding, the directors have a reasonable expectation that the Group will be able to continue in operation and meet all its liabilities as they fall due up to October 2018.

Shareholder returns

Underlying earnings per share from continuing operations were 8.1p (2014: 11.6p), a decrease of 30.2%. The total loss per share from continuing operations was 2.7p (2014: 0.7p).

Shareholders' funds were £290.6 million (2014: £300.3 million), with the decrease principally comprising the loss after tax for the year and dividends paid.

Dividends

In view of the proposed Rights Issue, the Board is not recommending a final dividend in respect of FY15. The total dividend in respect of FY15 will therefore be the interim dividend of 2.4p per share (2014: 4.1p).

In addition, the Board does not currently intend to propose an interim dividend in respect of the six month period ending 30 April 2016.

The Board recognises that dividends are an important component of total shareholder returns. The Board intends to propose a final dividend for FY16, assuming it is prudent to do so, and to continue paying dividends thereafter.

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 2015. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

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;

the strategic report includes 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; and

the annual report and financial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board of directors on 21 January 2016, and has been signed on its behalf by Michael Flowers and Steve Bowers.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 October 2015

	2015			2014

	Underlying	Non-underlying		Underlying	Non-underlying
	performance*	items	Total	performance*	items	Total
	£m	£m	£m	£m	£m	£m
Continuing operations
Revenue	377.3	-	377.3	403.1	-	403.1

Operating profit/(loss)	34.4	(28.9)	5.5	46.7	(21.3)	25.4

Finance income	-	-	-	0.1	-	0.1
Finance expense	(14.6)	-	(14.6)	(18.7)	(12.0)	(30.7)

Profit/(loss) before tax	19.8	(28.9)	(9.1)	28.1	(33.3)	(5.2)
Tax (charge)/credit on profit/(loss)	(4.1)	7.9	3.8	(5.7)	9.5	3.8

Profit/(loss) after tax	15.7	(21.0)	(5.3)	22.4	(23.8)	(1.4)

Discontinued operations
Profit/(loss) after tax from discontinued operations	-	4.9	4.9	1.5	(55.0)	(53.5)

Profit/(loss) after tax	15.7	(16.1)	(0.4)	23.9	(78.8)	(54.9)


Earnings/(loss) per ordinary share
Continuing operations
Basic	8.1p	(10.8)p	(2.7)p	11.6p	(12.3)p	(0.7)p
Diluted	7.9p	(10.6)p	(2.7)p	11.3p	(12.0)p	(0.7)p

Continuing operations and discontinued operations
Basic	8.1p	(8.3)p	(0.2)p	12.4p	(40.8)p	(28.4)p
Diluted	7.9p	(8.1)p	(0.2)p	12.1p	(40.5)p	(28.4)p

* Further information about non-underlying items is set out in note 4.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 October 2015


	2015	2014
	£m	£m

Loss after tax attributable to equity holders of the parent as reported	(0.4)	(54.9)

Items that will not be reclassified subsequently to profit or loss
Actuarial losses on defined benefit pension schemes	-	(4.8)
Movement on deferred tax relating to pension schemes	-	1.1

	-	(3.7)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations	(2.6)	(14.6)
Current tax on items taken directly to equity	0.6	-
Deferred tax on exchange differences on translation of foreign operations	(0.6)	0.5

	(2.6)	(14.1)
Total comprehensive loss attributable to equity holders of the parent	(3.0)	(72.7)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 October 2015

		Share	Special
	Share	premium	capital	Revaluation	Translation	Retained	Own
	capital	account	reserve	reserve	reserve	earnings	shares	Total
	£m	£m	£m	£m	£m	£m	£m	£m

At 1 November 2014	2.0	230.7	12.9	1.2	(32.6)	95.7	(9.6)	300.3
Loss after tax	-	-	-	-	-	(0.4)	-	(0.4)
Other comprehensive income/(loss)	-	-	-	-	0.3	(2.9)	-	(2.6)
Tax relating to components of other comprehensive income	-	-	-	-	-	-	-	-
Total comprehensive income/(loss)	-	-	-	-	0.3	(3.3)	-	(3.0)
Dividends paid	-	-	-	-	-	(7.9)	-	(7.9)
Share-based payments (net of settlement)	-	-	-	-	-	1.2	-	1.2

At 31 October 2015	2.0	230.7	12.9	1.2	(32.3)	85.7	(9.6)	290.6

		Share	Special
	Share	premium	capital	Revaluation	Translation	Retained	Own
	capital	account	reserve	reserve	reserve	earnings	shares	Total
	£m	£m	£m	£m	£m	£m	£m	£m

At 1 November 2013	2.0	230.7	12.9	1.3	(26.0)	172.5	(9.6)	383.8
Loss after tax	-	-	-	-	-	(54.9)	-	(54.9)
Other comprehensive loss	-	-	-	-	(6.6)	(12.8)	-	(19.4)
Tax relating to components of other comprehensive income	-	-	-	-	-	1.6	-	1.6
Total comprehensive loss	-	-	-	-	(6.6)	(66.1)	-	(72.7)
Dividends paid	-	-	-	-	-	(12.0)	-	(12.0)
Share-based payments (net of settlement)	-	-	-	-	-	1.2	-	1.2
Transfers between reserves	-	-	-	(0.1)	-	0.1	-	-

At 31 October 2014	2.0	230.7	12.9	1.2	(32.6)	95.7	(9.6)	300.3

CONSOLIDATED BALANCE SHEET

as at 31 October 2015

		2015		2014
	£m	£m	£m	£m
Non-current assets
Goodwill	121.2		119.7
Development costs	36.1		33.2
Other intangible assets	74.2		85.9
Property, plant and equipment	168.0		177.1
Deferred tax	47.5		31.9
		447.0		447.8
Current assets
Inventories	96.2		78.1
Trade and other receivables	93.1		90.7
Cash and cash equivalents	7.6		21.8
Derivative financial instruments	0.5		0.7
		197.4		191.3

Total assets		644.4		639.1

Current liabilities
Borrowings	-		(0.3)
Obligations under finance leases	(0.5)		(1.0)
Trade and other payables	(96.2)		(86.0)
Provisions	(5.1)		(2.9)
Current tax	(7.9)		(6.7)
Derivative financial instruments	(1.6)		(1.7)
		(111.3)		(98.6)
Non-current liabilities
Borrowings	(161.3)		(155.6)
Obligations under finance leases	-		(0.4)
Trade and other payables	(1.7)		(2.0)
Provisions	(16.3)		(24.1)
Deferred tax	(45.1)		(35.5)
Preference shares	(0.1)		(0.1)
Retirement benefit obligations	(17.7)		(21.8)
Derivative financial instruments	(0.3)		(0.7)
		(242.5)		(240.2)

Total liabilities		(353.8)		(338.8)

Net assets		290.6		300.3

Equity
Share capital		2.0		2.0
Share premium account		230.7		230.7
Special capital reserve		12.9		12.9
Revaluation reserve		1.2		1.2
Translation reserve		(32.3)		(32.6)
Retained earnings		85.7		95.7
		300.2		309.9
Own shares		(9.6)		(9.6)
Equity attributable to equity holders of the parent		290.6		300.3

Total equity		290.6		300.3

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 October 2015

	2015	2014
	£m	£m

Cash flows from operating activities
Cash generated from continuing underlying operations	35.4	45.9
Cash generated from discontinued underlying operations	-	17.6

	35.4	63.5
Acquisition and disposal related costs	(0.7)	(7.5)
Business restructuring and incident costs	(7.6)	(6.4)
Claim related costs	(0.1)	-

	27.0	49.6
Tax paid	(1.3)	(3.4)

Net cash inflow from operating activities	25.7	46.2

Cash flows from investing activities
Purchases of intangible assets	(8.9)	(12.1)
Purchases of property, plant and equipment	(8.2)	(10.9)
Receipt of finance income	-	0.2
Receipts from sales of businesses, net of cash transferred	-	137.1
Acquisition of subsidiary undertaking, net of cash acquired	-	(1.4)
Proceeds on disposal of property, plant and equipment	-	0.4

Net cash (outflow)/inflow from investing activities	(17.1)	113.3

Cash flows from financing activities
Dividends paid	(7.9)	(12.0)
Finance expense paid	(11.8)	(32.8)
Capitalised facility fees paid	(1.8)	(2.8)
Repayments of borrowings	(0.3)	(102.1)
Repayments of obligations under finance leases	(0.9)	(1.6)

Net cash outflow from financing activities	(22.7)	(151.3)

(Decrease)/increase in cash and cash equivalents	(14.1)	8.2
Cash and cash equivalents at beginning of the year	21.8	14.2
Effect of foreign exchange rate changes	(0.1)	(0.6)

Cash and cash equivalents at end of the year	7.6	21.8

Notes

1.	ACCOUNTS AND AUDITOR'S REPORT

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 October 2015 or 31 October 2014 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies, and those for 2015 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 section 498(2) or section 498(3) of the Companies Act 2006.

This announcement has been prepared on the basis of the accounting policies set out in the Company's financial statements for the year ended 31 October 2015.

Whilst the financial information included in this 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 post full financial statements that comply with IFRSs on its website today (see note 12 below).

2.	ANALYSIS OF REVENUE

				2015			2014
		Continuing	Discontinued	Total	Continuing	Discontinued	Total
		£m	£m	£m	£m	£m	£m

Countermeasures		125.8	-	125.8	96.1	-	96.1
Sensors & Electronics		99.1	-	99.1	154.4	-	154.4
Energetic Systems		152.4	-	152.4	152.6	-	152.6
Discontinued operations		-	-	-	-	71.8	71.8

		377.3	-	377.3	403.1	71.8	474.9

3.	ANALYSIS OF UNDERLYING OPERATING PROFIT AND PROFIT BEFORE TAX

				2015			2014
		Continuing	Discontinued	Total	Continuing	Discontinued	Total
		£m	£m	£m	£m	£m	£m

Countermeasures		17.5	-	17.5	9.7	-	9.7
Sensors & Electronics		9.3	-	9.3	31.9	-	31.9
Energetic Systems		15.1	-	15.1	15.0	-	15.0
Discontinued operations		-	-	-	-	2.3	2.3
		41.9	-	41.9	56.6	2.3	58.9
Unallocated corporate costs		(7.5)	-	(7.5)	(9.9)	-	(9.9)

Underlying operating profit		34.4	-	34.4	46.7	2.3	49.0
Net finance expense		(14.6)	-	(14.6)	(18.6)	(0.1)	(18.7)

Underlying profit before tax		19.8	-	19.8	28.1	2.2	30.3

4.	RECONCILIATION OF TOTAL OPERATING PROFIT TO UNDERLYING OPERATING PROFIT

Underlying measures are used by the Board to monitor the underlying performance of the Group. Underlying measures are stated before costs relating to acquisitions and disposals, business restructuring and incident costs, profit/loss on disposal of businesses, items deemed to be of an exceptional nature, impairment of goodwill and acquired intangibles, impairment of assets held for sale, amortisation of acquired intangibles and gains/losses on the movement in the fair value of derivative financial instruments.

Set out below is a reconciliation of total operating profit from continuing operations to underlying operating profit from continuing operations:

	2015	2014
	£m	£m

Total operating profit from continuing operations	5.5	25.4
Add back:
Acquisition and disposal related costs	0.5	0.6
Business restructuring and incident costs	6.4	7.2
Claim related costs	8.5	-
Profit on disposal	-	(0.5)
Intangible amortisation arising from business combinations	14.0	13.5
(Gain)/loss on the movement in the fair value of derivative financial instruments	(0.5)	0.5

Underlying operating profit from continuing operations	34.4	46.7

Further details on the non-underlying items are provided earlier in this announcement.

5.	EARNINGS PER SHARE

Earnings per share are based on the average number of shares in issue, excluding own shares held, of 193,297,912 (2014: 193,296,666) and the loss on continuing operations after tax of £5.3 million (2014: £1.4 million). Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 193,297,912 (2014: 193,296,666) and the loss on continuing operations after tax of £5.3 million (2014: £1.4 million). No dilution has been recognised for the purposes of basic earnings per share due to there being a loss per share for both the years ended 31 October 2015 and 31 October 2014. Dilution has, however, been recognised in the calculation of underlying earnings per share for the years ended 31 October 2015 and 31 October 2014, using a diluted average number of shares in issue, excluding own shares held, of 197,653,532 (2014: 197,285,824).

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

			2015			2014
		Ordinary	Earnings		Ordinary	Earnings
		shares	per		shares	per
	Loss	Number	share	Loss	Number	share
	£m	000s	Pence	£m	000s	Pence

Basic - continuing operations	(5.3)	193,298	(2.7)	(1.4)	193,297	(0.7)
Additional shares issuable other than at fair value in respect of options outstanding	-	-	-	-	-	-

Diluted - continuing operations	(5.3)	193,298	(2.7)	(1.4)	193,297	(0.7)

The number of shares in issue differs from the number held by third parties due to the fact that the Company holds some of its shares in treasury.

Reconciliation from basic earnings per share to underlying earnings per share

Underlying basic earnings are defined as earnings before acquisition and disposal related costs, business restructuring and incident costs, profit/loss on disposal of business, items deemed to be of an exceptional nature, impairment of goodwill and acquired intangibles, impairment of assets held for sale, intangible amortisation arising from business combinations and gains/losses on the movement in the fair value of derivative financial instruments, net of related tax effects. The directors consider this measure of earnings allows a more meaningful comparison of earnings trends.

			2015			2014
		Ordinary	Earnings		Ordinary	Earnings
	(Loss)/	shares	per	(Loss)/	shares	per
	profit	Number	share	profit	Number	share
	£m	000s	Pence	£m	000s	Pence

Basic	(5.3)	193,298	(2.7)	(1.4)	193,297	(0.7)
Non-underlying items	21.0	-	10.8	23.8	-	12.3

Underlying	15.7	193,298	8.1	22.4	193,297	11.6

6.	CASH GENERATED FROM UNDERLYING OPERATIONS

	2015	2014
	£m	£m

Operating profit from continuing operations	5.5	25.4
Operating profit/(loss) from discontinued operations	4.9	(53.6)

	10.4	(28.2)
Impairment of goodwill	-	45.9
Impairment of acquired intangibles	-	10.7
Impairment of assets held for sale	-	13.6
Amortisation of development costs	6.2	6.5
Intangible amortisation arising from business combinations	14.0	16.1
Amortisation of patents and licences	0.2	0.2
Loss/(profit) on disposal of non-current assets	0.3	(0.2)
Depreciation of property, plant and equipment	16.3	17.0
(Gain)/loss on the movement in the fair value of derivative financial instruments	(0.5)	0.7
Share-based payment expense	1.2	1.2
Employer contributions to retirement benefit obligations	(5.0)	(8.2)

Operating cash flows before movements in working capital	43.1	75.3
(Increase)/decrease in inventories	(19.1)	2.3
(Increase)/decrease in trade and other receivables	(3.1)	24.0
Increase/(decrease) in trade and other payables	9.3	(26.8)
Decrease in provisions	(5.3)	(1.5)

	24.9	73.3
Add back non-underlying items:
Acquisition and disposal related costs	(4.4)	8.6
Business restructuring and incident costs	6.4	7.2
Claim related costs	8.5	-
Profit on disposal of business	-	(26.5)
Loss on disposal of associate	-	0.9

Cash generated from underlying operations	35.4	63.5



7. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

	2015	2014
	£m	£m

(Decrease)/increase in cash and cash equivalents during the year	(14.1)	8.2
Decrease in debt and lease financing due to cash flows	3.0	106.5

(Increase)/decrease in net debt resulting from cash flows	(11.1)	114.7
Effect of foreign exchange rate changes	(5.5)	1.3
Amortisation of debt finance costs	(2.1)	(2.9)

Movement in net debt	(18.7)	113.1
Net debt at beginning of the year	(135.6)	(248.7)

Net debt at end of the year	(154.3)	(135.6)

8. ANALYSIS OF NET DEBT

	As at			Exchange	As at
	1 Nov 2014	Cash flows	Non-cash changes	rate effects	31 Oct 2015
	£m	£m	£m	£m	£m

Cash at bank and in hand	21.8	(14.1)	-	(0.1)	7.6
Debt due within one year	(0.3)	0.3	-	-	-
Debt due after one year	(155.6)	1.8	(2.1)	(5.4)	(161.3)
Finance leases	(1.4)	0.9	-	-	(0.5)
Preference shares	(0.1)	-	-	-	(0.1)

	(135.6)	(11.1)	(2.1)	(5.5)	(154.3)

DIVIDEND

No final dividend is being proposed. The total dividend for the year will therefore be 2.4p (2014: 4.1p).

10.	RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed. The directors of the Company had no material transactions with the Company during the year, other than in connection with their service agreements.

11.	EVENTS AFTER THE BALANCE SHEET DATE

On 24 November 2015, the Group reached agreement with Esterline to buy patents, equipment, stock and selected contracts relating to Esterline's UK-based subsidiary, Wallop Defence Systems Limited, for an initial cash consideration of £2.5 million. Additional payments of up to £9.0 million, which are conditional on the receipt of specific orders in the future, may be made over the next three years. The assets to be purchased relate to air countermeasures and pyrotechnic products, which, pending regulatory approval, will be manufactured at Chemring's existing UK operations and further expand the Group's product offerings in Countermeasures. Completion of the transaction, which is subject to approval by the MoD and the CMA, is expected to occur in early 2016. The asset purchase agreement contains customary warranties, representations, indemnities and covenants for a transaction of this nature.

Further to the announcement on 26 October 2015, the Board announced on 21 January 2016 a fully underwritten rights issue to raise gross proceeds of approximately £80.8 million to reduce its indebtedness. The Rights Issue is being pursued in order to assist the Group with reducing its indebtedness, thereby enabling additional time and resources to be made available for further operational improvement and capturing the longer-term growth opportunities available to the Group. As set out earlier, the Group's debt providers have agreed to waive any event of default and amend the operation of the relevant covenants to ensure the Group remains in compliance with its facility agreements. These changes represent only a one-time modification that does not fundamentally address the Group's balance sheet and capitalisation concerns over the longer term. The Board believes that a medium-term net debt to EBITDA target ratio of between 1.0x and 1.5x as an average annual is appropriate for the Group; the proposed rights issue is a critical step towards achieving this target.

Net proceeds of £75.2 million will be used to redeem £48.5 million in aggregate principal amount of the loan notes, with the balance used for make-whole premiums, waiver fees and general corporate purposes, with the Board having regard to future debt maturities.

The Rights Issue is a fully underwritten 4 for 9 Rights Issue at a price of 94 pence per new share issued. The issue price represents a 38.2% discount to the theoretical ex-rights price of an existing share, when calculated by reference to the closing middle-market price of 178 pence per existing share on 20 January 2016 (being the last business day prior to the date of the announcement of the Rights Issue). The Rights Issue is subject to shareholder approval.

12.	2015 ANNUAL REPORT AND ACCOUNTS

The annual report and accounts for the year ended 31 October 2015 will be posted to shareholders on 19 February 2016. They will also be available from that date at the registered office, Roke Manor, Old Salisbury Lane, Romsey, Hampshire, SO51 0ZN. A copy will be posted on the Company's website, www.chemring.co.uk, today.

Annex 1

PRINCIPAL RISKS AND UNCERTAINTIES

The Board has constituted a Risk Management Committee, which meets quarterly, to review the key risks associated with the achievement of the annual budget and the five year plan for each business, the most significant health and safety risks identified at each site, and the risk control procedures implemented. The Committee reports quarterly to the Board, and through this process, the Board has identified the following principal risks currently facing the Group. The mitigating actions taken by the Group management to address these risks are also set out below. The Group's key performance indicators also give insight into how these risks and uncertainties are being managed. The Group mitigates certain elements of its risk exposure through an insurance programme that covers property and liability risks, where it is appropriate and cost effective to do so.

· Health and safety risks - The Group's operations which utilise energetic materials are subject to inherent health and safety risks. Upset conditions can occur during manufacturing operations which may expose employees to increased quantities of hazardous materials. The handling and disposal of energetics waste can result in unplanned ignitions.

Incidents may occur which could result in harm to employees, the temporary shutdown of facilities or other disruption to manufacturing processes. The Group may be exposed to financial loss, regulatory action, potential liabilities for workplace injuries and fatalities.

The Board believes that responsibility for the delivery of world-class safety standards is an integral part of operational management accountability. The Board is committed to ensuring that the Group's leadership operates with health and safety as the top priority, and that the strength of the Group's safety culture and the quality of its protective systems deliver operations where all employees and visitors feel and are absolutely safe.

The Group's Safety Leadership Programme continues to be rolled-out across the businesses, and has now been attended by more than 130 senior employees. A "train-the-trainer" module has been developed to enable the business units to run the programme locally.

All employees receive a booklet setting out the Group's statements of intent in relation to delivery of its health and safety strategy and the behaviours required of them as individuals. All employees are encouraged to report potential hazards, and to raise any health and safety concerns through the appropriate channels.

A culture assessment tool has been developed for the internal health and safety audit programme.

The Group continues to invest in state-of-the-art process safety systems and equipment. The Group's safety and loss prevention programmes require detailed pre-construction reviews of process changes and new operations, and safety audits of operations are undertaken on a regular basis.

Improved processes for managing upset conditions have been adopted.

Following an incident at Chemring Australia's burning ground, all waste burning sites and associated processes were audited during the year, and an improvement programme has since been implemented to raise standards across the Group.

All businesses are expected to pro-actively manage their own risks but, in addition, the most significant site risks at each business and their associated mitigation programmes are reviewed quarterly by the Risk Management Committee.

Health and safety is included on the agenda at every Board meeting and is discussed at the monthly Group Executive Committee meeting.

· Environmental laws and regulations - The Group's operations and ownership or use of real property are subject to a number of federal, state and local environmental laws and regulations, including those relating to discharge of hazardous materials, remediation of contaminated sites, and restoration of damage to the environment. At certain sites that the Group owns or operates, or formerly owned or operated, there is known or potential contamination for which there may be a requirement to remediate or provide resource restoration. The Group could incur substantial costs, including remediation costs, resource restoration costs, fines and penalties, or be exposed to third party property damage or personal injury claims, as a result of liabilities associated with past practices or violations of environmental laws or non-compliance with environmental permits.

All of the Group's businesses are certified to the environmental management system ISO14001, which requires the setting of environmental goals and objectives focused on local aspects and impacts.

The Group has monitoring programmes at certain sites, for which appropriate financial provision has been made. In certain circumstances, the Group procures environmental liability insurance, subject to applicable insurance conditions.

· Possible defence budget cuts - Defence spending depends on a complex mix of political considerations, budgetary constraints and the requirements of the armed forces to address specific threats and perform certain missions. Defence spending may therefore be subject to significant fluctuations from year to year. Given the large budget deficits and the prevailing economic conditions in many NATO countries, there may be continued downward pressure on defence budgets.

The Group's financial performance may be adversely impacted by lower defence spending by its major customers. Short-term trading and cash constraints may impact on the Group's ability to invest in longer-term technologies and capabilities.

In recognition of the issues affecting the Group's traditional NATO markets, business development activities are being focused on non-NATO markets, where defence expenditure is forecast to grow strongly over the next five to ten years. The Group continues to make progress on developing its routes to market in the Middle East, India and the Far East.

The Group continually assesses whether its planned organic growth strategies and product developments align with government priorities for future funding. Opportunities for development of commercial products are being explored in some areas.

Actions have been taken to restructure and "right-size" the businesses, and reduce overheads, to ensure the businesses remain sustainable. Further site consolidation continues to be explored, within the constraints imposed by export control legislation and customer requirements.

· Timing and value of orders - The Group's profits and cash flows are dependent, to a significant extent, on the timing of award of defence contracts. In general, the majority of the Group's contracts are of a relatively short duration and, with the exception of framework contracts with key customers, do not cover multi-year requirements. The Group anticipates that delays in the placement of orders by NATO customers, as a result of budgetary constraints, are likely to continue in the short to medium term.

An unmitigated delay in the receipt of orders could affect the Group's earnings and achievement of its budget, in any given financial year.

If the Group's businesses are unable to continue trading profitably during periods of lower order intake, financial performance will deteriorate and assets may be impaired.

To mitigate the order placement dynamics within NATO markets, the Group continues to focus on the expansion of its business in non-NATO markets, where defence expenditure is forecast to increase.

Maximising order intake remains a key objective for the businesses, and they continue to address this through the strengthening of their sales and marketing resources. The businesses also continue to pursue long-term, multi-year contracts with their major customers wherever possible.

The Group has undertaken various restructuring projects over the last year, aimed at restoring the profitability of those Group businesses which have suffered most from order delays.

Site optimisation plans continue to be refined to ensure that the Group utilises its manufacturing facilities as efficiently as possible, within the constraints imposed by export control legislation and customer requirements.

· Contract-related risks - The Group's government contracts may be terminated at any time and may contain other unfavourable provisions. The Group may need to commit resources in advance of contracts becoming fully-effective, to ensure prompt fulfilment of orders or to enable conditions precedent to be met.

The Group may suffer financial loss if its contracts are terminated by customers, or a termination arising out of the Group's default may have an adverse effect on its ability to re-compete for future contracts and orders.

The Group negotiates with customers to ensure that the most favourable contractual terms are agreed. Areas of significant judgment or enhanced risk require the review and approval of the executive directors. The Group endeavours to negotiate stage payments with its customers wherever possible, in order to minimise exposure to significant cash outflows on contracts which may be terminated at short notice.

· Political risks - The Group is active in several countries that are suffering from political, social and economic instability. In addition, there is a significant risk of political unrest and changes in the political structure in certain non-NATO countries to which the Group currently sells.

The Group's business in certain countries may be adversely affected in a way that is material to the Group's financial position and the results of its operations.

Political changes could impact future defence expenditure strategy and the Group's ability to export products to certain countries. During periods of unrest, delays in obtaining export licences can result in delayed revenue.

The Group's businesses strive to maintain relationships at all levels within the political structure of certain key countries, in order to ensure that they are aware of and can react to proposed changes, if and when they occur.

Wherever possible, the businesses implement financing arrangements, such as letters of credit and advance payments, for contracts with high risk customers, which are intended to mitigate the impact of a deterioration in the customer's financial position, and in certain circumstances they may also procure political risks insurance.

The Group continues to explore opportunities for collaboration on the establishment of local manufacturing operations in certain countries, which may remove some of the uncertainty regarding export of products.

· Management resource - The Group requires competent management to lead it through the next stage of its development. In challenging markets and difficult times, there is an increased risk of loss of key personnel. As the shape of the Group's business also changes, with an increased focus on electronics, there is a need to ensure that the businesses build an appropriate skill base to enable them to compete successfully in new markets and product areas.

If key personnel are not incentivised appropriately to remain within the Group, its operations may suffer from loss of management expertise and knowledge.

Incentivisation arrangements have been streamlined and improved in certain areas of the business, to ensure that employees are suitably incentivised to deliver key strategic objectives.

Succession plans are being developed further throughout the business.

· Manufacturing risks - The Group's manufacturing activities may be exposed to business continuity risks, arising from plant failures, supplier interruptions or quality issues.

Site consolidation plans may not be effectively implemented.

Interruptions to production and sales could result in financial loss, reputational damage and loss of future business.

Failure to complete planned site consolidation activities may result in long-term inefficiencies, and increasing misalignment of organisational skills and market requirements.

All of the Group's businesses are required to prepare business continuity plans.

The Group continues to refine its requirements for reporting of key performance indicators, in order to provide better visibility on operational performance, and to facilitate the identification of potential production and quality issues at an early stage.

The Group insures certain business interruption risks where appropriate.

Detailed plans are developed for all restructuring and consolidation projects, and progress is monitored by the Group Executive Committee.

· Technological risks - The Group may fail to maintain its position on key future programmes due to issues with capability development, technology transfer or cost-effective manufacture.

The Group needs to continually add new products to its current range, through innovation and continuing emphasis on research and development. New product development may be subject to delays, or may fail to achieve the requisite standards to satisfy volume manufacturing requirements and the production of products against high reliability and safety criteria to meet customer specifications.

The Group also needs to ensure that it continues to upgrade its existing product range to compete with emerging technologies.

Failure to obtain production contracts on major development programmes may significantly impact the future performance and value of individual businesses. Failure to complete planned product development and upgrades successfully may have financial and reputational impacts, and may result in obsolescence or loss of future business.

Close relationships are maintained with customers on all key future programmes, to ensure product and capability development aligns with customer requirements.

The Group has introduced a more focused product development and technology investment approach, in order to ensure that resources are applied appropriately across the Group in support of the five year plan. A Technology Review Board has been established to review all proposed research and development projects, to ensure that key initiatives are being prioritised and to eliminate possible duplication of effort in different parts of the Group. Working groups have been established to drive and co-ordinate the Group's technology growth in certain key areas, such as cyber-security.

· Product liability and other customer claims - The Group may be subject to product liability and other claims from customers or third parties, in connection with (i) the non-compliance of products or services with the customer's requirements, due to faults in design or production; (ii) the delay or failed supply of the products or the services indicated in the contract; or (iii) possible malfunction or misuse of products.

As many of the Group's products are single-use devices, it is often impossible to conduct functional testing without destroying the product, and this increases the risk of possible product failure, either in use or during customers' own sample-based functional tests.

Substantial claims could harm the Group's business and its financial position. In addition, any accident, failure, incident or liability, even if fully insured, could negatively affect the Group's reputation among customers and the public, thereby making it more difficult for the Group to compete effectively.

Material breaches in the performance of contractual obligations may also lead to contract termination and the calling of performance bonds.

The businesses maintain rigorous control of their production processes, monitoring critical parameters on a batch or unit basis. State-of-the-art techniques, including statistical process control or Six Sigma, are applied and, where appropriate, processes are automated to reduce the scope for human error. Detailed assessments of incoming components and materials are conducted to ensure compliance with specifications.

Product liability claims from third parties for damage to property or persons are generally covered by the Group's insurance policies, subject to applicable insurance conditions.

· Compliance and corruption risks - The Group operates in over fifty countries worldwide, in a highly regulated environment, and is subject to applicable laws and regulations in each of these jurisdictions. The Group must ensure that all of its businesses, its employees and third parties providing services on its behalf comply with all relevant legal obligations.

The nature of the Group's operations could also expose it to government investigations relating to import-export controls, money laundering, false accounting, and corruption or bribery.

The Group requires a significant number of permits, licences and approvals to operate its business, which may be subject to non-renewal or revocation.

Non-compliance could result in administrative, civil or criminal liabilities, and could expose the Group to fines, penalties, suspension or debarment, and reputational damage.

Loss of key operating permits and approvals could result in temporary or permanent site closures, and loss of business.

The Group has a central legal and compliance function which assists and monitors all Group businesses, supported by dedicated internal legal resource in the US. The Group's internal audit activities also incorporate a review of legal risks.

The Group operates under a Global Code of Business Principles, which stipulates the standard of acceptable business conduct required from all employees and third parties acting on the Group's behalf. The Group has also adopted a Bribery Act Compliance Manual, incorporating all of its anti-bribery policies and procedures.

A significant proportion of the Group's management have received training in relation to ethics and anti-corruption.

· Cyber related risks - Cyber security and related risks are key emergent areas of critical importance for all businesses, particularly for those involved in the defence and security sector. Threats emanate from a wide variety of sources and could target a range of systems for a wide range of purposes, making response particularly difficult. The data and systems which need to be protected include customer classified or sensitive information, commercially sensitive information, employee-related data and safety-critical manufacturing systems.

The Group may suffer from critical systems failures, or its intellectual property, or that of its customers, may fall into the hands of third parties.

In addition to business interruption and financial loss, the Group may suffer reputational damage and its business of providing cyber-security services to customers may be irreparably damaged.

A detailed threat assessment has been completed, and an action plan to counter the Group's identified major threats has been implemented.

The Group adopts a number of cyber security defence measures, encompassing, as appropriate to the nature of the threat and the sensitivity of data or systems being protected, hardware, software, system, process or people-based solutions. Where appropriate, government or commercial accreditation of networks and systems is obtained in support of the overall cyber security programme.

A review of the Group's IT and security systems is included within the internal audit programme.

· Financial risks - Details of the financial risks to which the Group is potentially exposed and details of mitigating factors are set out in the financial review and note 24 of the group financial statements within the 2015 Annual Report and Accounts.

This information is provided by RNS

The company news service from the London Stock Exchange

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