HALF YEARLY REPORT

RNS Number : 9515I

Chemring Group PLC

23 June 2011

 



FOR IMMEDIATE RELEASE

23 JUNE 2011

CHEMRING GROUP PLC

INTERIM RESULTS FOR THE HALF YEAR TO 30 APRIL 2011

KEY HIGHLIGHTS

·           Revenue up 29% to £329.8 million (2010: £255.9 million)

·           Organic¹ revenue growth of 18%

·           25% of revenue to non-NATO customers (2010: 16%)

·           Current order book at record high of £988 million

·           Acquisition of General Dynamics Detection Systems business announced

·           Underlying earnings per share² up 18% to 20.8p (2010: 17.7p³)

·           Interim dividend per ordinary share up 18% at 4.0p (2010: 3.4p³)

FINANCIAL HIGHLIGHTS

Results for the half year to 30 April 2011

	2011 £m	2010 £m	Increase/ decrease
Revenue	329.8	255.9	29%
Underlying operating profit2	57.6	52.3	10%
Underlying profit before tax2	49.6	42.3	17%
Profit before tax	41.7	25.3	65%
Underlying earnings per share2	20.8p	17.7p3	18%
Basic earnings per share	17.5p	10.4p3	68%
Dividend per ordinary share	4.0p	3.4p3	18%
Underlying cash generated from operations	46.7	28.4	64%
Net debt	198.1	260.5	-24%

Divisional Highlights

Counter-IED

·           Excellent first half with revenue up 132% to £95.7 million - now the largest division

·           Over 150 Husky Mounted Detection Systems (HMDS) now in operation

·           Deliveries of upgraded radar on new 64 unit HMDS contract commence July 

Countermeasures

·           Strong growth in UK and Australian businesses

·           Good performance at Kilgore following  restart

·           Consolidation of Alloy Surfaces on two sites following reduced demand for helicopter flares

Munitions

·           Divisional revenue increased by 57% to £85.4 million despite minimal production at Mecar

·           Strong growth in naval and land force ammunition

·           Substantial growth in Middle East order book

          Pyrotechnics

·           Production of training grenades and battlefield simulation products resumes after upgrade

·           Reduced demand from British Army for 81mm illumination rounds compensated by growth in sales of smoke and signal grenades to European customers

·           US 40mm production weighted to second half

Dr David Price, Chemring Group Chief Executive, commented:

"The Group performed strongly in the first six months of this financial year, with revenue up 29% to £329.8 million and underlying profit before tax² up 17% to £49.6 million. Underlying earnings per share² increased 18% to 20.8p. This performance was achieved in spite of the growing difficulties facing the UK and US defence markets.

Delivery of 18% organic growth¹ in the first half of the year, with strong performances from the Counter-IED and Munitions businesses, an increase in non-NATO customers, and a current order book that is 52% higher than at April 2010, means the Group remains on course to meet the Board's full year expectations. As a short-cycle business with rapid development timescales, Chemring remains excellently placed to deliver continuing growth for the future." 

 

Notes:

1.    Organic growth excludes growth from the contracts and customers acquired with Roke and Mecar. 

2.    Excludes acquisition related costs, intangible amortisation arising from business combinations and gain/(loss) on fair value movements on derivatives totalling £7.9 million (2010: £17.0 million). Underlying earnings per share is reconciled to basic earnings per share in Note 5 of the interim report.

3.    Restated to reflect subdivision of 5p ordinary shares into 1p ordinary shares

4.    The interim dividend of 4.0p per ordinary share will be paid on 5 August 2011 to shareholders on the register at 15 July 2011. The ex-dividend date will be 13 July 2011.

5.    All comparisons are for the half year to 30 April 2010.

For further information:

David Price	Chief Executive, Chemring Group PLC	0207 930 0777
Paul Rayner	Finance Director, Chemring Group PLC	0207 930 0777
Rupert Pittman	Cardew Group	0207 930 0777

INTERIM MANAGEMENT REPORT

Results for the half year to 30 April 2011

	2011 £m	2010 £m
Revenue	329.8	255.9
Underlying operating profit*	57.6	52.3
Underlying profit before tax*	49.6	42.3
Profit before tax	41.7	25.3
Underlying earnings per share*	20.8p	17.7p#
Basic earnings per share	17.5p	10.4p#
Dividend per ordinary share	4.0p	3.4p#

*  Excludes acquisition related costs, intangible amortisation arising from business combinations and gain/(loss) on fair value movements on derivatives totalling £7.9 million (2010: £17.0 million)

^# Restated to reflect subdivision of 5p ordinary shares into 1p ordinary shares

^~ Organic growth excludes growth from contracts and customers acquired with Roke and Mecar

The Group performed strongly in the first six months of this financial year, with revenue up 29% to £329.8 million (2010: £255.9 million) and underlying profit before tax* up 17% to £49.6 million (2010: £42.3 million). Underlying earnings per share* increased 18% to 20.8p (2010:17.7p). This performance was achieved in spite of the growing difficulties facing the UK market as a result of severe defence budget constraints, as well as the widespread delays in US defence contract placement resulting from the extended timescales for approval of the US FY2011 defence budget. These delays, together with increased uncertainty in Middle East markets constrained the growth in the order book, which nonetheless grew by a further 17% over the period to £937 million (October 2010: £803 million). It is, however, 44% higher than at the end of April 2010 and remains a good leading indicator of future growth. Trading in the second half is, therefore, expected to be strong and the Group remains on course to meet the Board's full year expectations.

Organic growth^~ in the first half period was 18%, which was an excellent performance. This strong growth was generated by the rapid expansion of the Counter-IED and Munitions businesses. The continued success of the Husky Mounted Detection System (HMDS) ground penetrating radar in the US market has made a major contribution. In addition, the strategic focus on developing the Group's position in non-NATO markets continues to play a key role, with sales from these regions now constituting around 25% of the Group revenue (2010: 16%).

Underlying cash generated from operating activities was up 64% to £46.7 million (2010: £28.4 million), reflecting a strong management focus on improving working capital during the period. This corresponds to an 81% conversion of underlying operating profit (2010: 54% conversion).

The integration of the Group's two recent acquisitions, Roke in the UK and Mecar in Belgium, progressed steadily over the period. Roke made an encouraging contribution with revenue of £24 million in the first half, and should deliver its expected profit levels over the full financial year. A number of important new product development programmes, linked to core parts of other Group businesses, have now been launched. Production at Mecar in the first half was badly affected by the explosion that took place within the large calibre assembly plant in September 2010. The rebuilding of this facility and the careful safety review that must be implemented before any production line is allowed to restart has delayed production by about four months. This will result in a stronger second-half weighting to the contribution from Mecar this year. 

Counter-IED

The Counter-IED business had an excellent first half, significantly increasing revenue by 132% to £95.7 million (2010: £41.3 million) and more than doubling operating profit to £20.0 million (2010: £9.9 million). The operating margin did, however, reduce to 21% (2010: 24%), principally due to the acquisition of Roke, which has lower margins.

NIITEK made another impressive start to the year, completing all of the HMDS ground penetrating radar (GPR) system deliveries on this year's 76 system contract, and increasing the deliveries of spares by 280% compared with last year. Over 150 of these GPR systems are now in operation with the US Army and have proved tremendously successful in saving the lives of hundreds of soldiers during operations in Afghanistan. The delivery of a high volume of spares, together with an extensive support network of NIITEK personnel to maintain the equipment at Forward Operating Bases, has ensured a high level of availability of the equipment. A contract for 64 systems was awarded in January 2011, including an upgrade to certain aspects of the technology. These modified systems will start to be delivered later this financial year. Funding for further development remains high, and good progress is being made on the next generation system. The competition in the US for the procurement of the next generation vehicle-mounted mine detection system is still expected in 2012.

The excellent performance achieved by the HMDS system and the deployment of "Eyes in the Skies" detection systems have reduced the effectiveness of insurgent attacks on vehicles, and more improvised explosive device (IED) attacks are now focussed towards dismounted operations. The Overseas Contingent Operations (OCO) part of the recently approved US FY2011 defence budget has allocated $75 million for procurement of hand-held detection systems, and a considerable amount of our research and development funding has been directed towards this growing part of the market. Both NIITEK and Roke have developed new hand-held products, which are undergoing evaluation trials at US and European test ranges respectively.

NIITEK won the recent competition to integrate a GPR system on to the Talon robot for use in off-road, dismounted operations. The product development will take place over the remainder of the financial year, and an in-theatre operational evaluation of the system is scheduled for 2012. Considerable interest has been shown in this product by export customers.

Chemring Ordnance has also won the recent competition for the manufacture of the Mk7 MOD 2 Anti-Personnel Obstacle Breaching System (APOBS) for the US Army and Marine Corps. APOBS is a self-contained, expendable linear demolition charge that is capable of safely clearing a footpath through anti-personnel mines and multi-strand wire obstacles. The contract, which has an initial value of $21 million, is estimated to be worth over $150 million over three years if all option quantities are exercised.  

Countermeasures

The Countermeasures business was rather subdued, with revenue down 3% to £89.6 million (2010: £91.9 million) and operating profit down 15% to £20.8 million (2010: £24.4 million). The organic component of the revenue decreased by 13% during the period but this was offset by the contribution from the acquired electronic countermeasures activities at Roke. The phasing of revenue in the US has been unusual, with a production gap at Kilgore, delays in annual contract placement, and the consolidation of the Alloy Surfaces business all combining to create a second half bias. The reduction in operating margin to 23% (2010: 27%) reflects the lower margin contribution from the Roke programmes.  

The non-US businesses made an excellent start to the year, with strong growth in both the UK and Australia. The UK countermeasures business delivered 13% growth in sales, with increased demand for advanced flares and chaff to support the Tornado and Typhoon aircraft currently involved in UK operations. The development programmes for several advanced naval rounds also made a good contribution, and these new rounds are expected to transition into initial production in the near future. The Australian countermeasures business also grew strongly, with a 38% increase in demand for chaff and flares in line with the requirements of the long term supply contract with the Commonwealth of Australia.

The US market was not as buoyant, with Alloy Surfaces seeing a substantial drop in demand for its transport and rotary decoys, exacerbated by the three or four month delay in placement of annual orders that was directly attributable to the extended US Government budget approval process. The reduction in demand for certain decoys appears to be in anticipation of the phased withdrawal from Afghanistan over the next three years. To maintain operational efficiency, Alloy Surfaces has consolidated production into two of its three sites and will be closing the third plant in the very near future.

Revenue at Kilgore was 8% lower than in the first half of 2010, even though the business has a record order book and substantial prospects for growth. Production output was affected by the previously reported incident last September that destroyed the MJU-7 flare assembly facility. The replacement building will only become operational towards the end of this financial year, as a consequence of which £14 million of Kilgore's usual production is expected to be deferred into the 2012 financial year. Strong growth in the rate of production of B-52 flares, which more than doubled in the first half, together with a good start to M212 spectral flare production is expected to compensate for the MJU-7 shortfall. A careful review of the safety systems on all production lines was also instigated after the September incident, and a careful restart process implemented over the first three months of the year. Strong growth is expected from Kilgore during the second half. 

Munitions

The Munitions business had an excellent first half, increasing revenue by 57% to £85.4 million (2010: £54.4 million) and operating profit 24% to £13.5 million (2010: £10.9 million). The operating margin was 16% (2010: 20%), reflecting the losses made by Mecar in the four month period of lost production. Excluding Mecar from the analysis, the operating margin for this business segment would have been 19%, which more accurately reflects the mix between prime contracting and component revenues for the period.

In September 2010, after the Group had owned Mecar for only a few days, an incident occurred during the packaging of 81mm mortars that resulted in a fire which destroyed the large calibre assembly facility in Belgium. A major safety process review was instigated and a phased production restart introduced across all production lines, to ensure safe operations within all of Mecar's facilities. Minimal production occurred during the first four months of the financial year but the business is now starting to accelerate all of its production activities.

Components and sub-system revenues grew by 16%, with increased demand from both US and European prime contractors and an increase in delivery of fuzes to Indian customers. Demand for naval ammunition at Simmel also continues to grow, as a result of the recent pace of the frigate and destroyer ship building programmes. However, Simmel had lower sales of tank ammunition during the period, driven by the timing of follow-on orders from its NATO customers. Deliveries in 2011 are scheduled for the second half of the year. Strong growth was also achieved in the sales of a range of medium and large calibre products to non-NATO customers. 

Pyrotechnics

The Pyrotechnics business had a slow start to the year, with revenue down 14% to £59.1 million (2010: £68.3 million) and operating profit down 8% to £11.7 million (2010 £12.8 million). The operating margin increased slightly to 20% (2010: 19%) in spite of the decrease in revenue at Hi-Shear, which had technical difficulties that have delayed a number of space programmes into the second half of the year.

Production of both M228 training grenades and battlefield effect simulation launchers restarted in the period, and generated a 45% growth in training revenues. Production of the M228 has now reached a consistent 20 parts per minute, and strong growth in production is expected over the remainder of the year.

Demand for smoke and illumination products reduced by 10% over the period, mainly reflecting reduced requirements from the British Army and the timing of US contracts for 40mm pyrotechnic products. However, there was a 140% increase in deliveries of signal grenades and a 300% increase in deliveries of smoke grenades that offset a reduction in demand for 81mm illumination rounds. Deliveries of 40mm pyrotechnic rounds will restart in the US, and a full recovery is expected by the end of the financial year.

Dividend

The Board is today declaring an interim dividend of 4.0p per ordinary share (2010: 3.4p^#). This represents an increase of 18% over last year's interim dividend and builds on the increases delivered in recent years. The interim dividend will be paid on 5 August 2011 to shareholders on the register at 15 July 2011.

Financial position

The Group's financial position remains particularly strong, with net assets increasing by 58% in the past year to £449.2 million. The growth in net assets reflects the increase in retained profits and the equity issue that was completed in April 2011.

On 14 January 2011, the Group completed a refinancing of its bank facilities with a syndicate of five banks. The Group's unsecured working capital facilities now total £230 million, with a renewal date of April 2015.

Net debt at the period end was £198.1 million (2010: £260.5 million) and gearing was 44% (2010: 92%). The Group held a healthy cash balance of £180.2 million (2010: £72.1 million) at the period end, with in excess of £200 million headroom on its core working capital facilities.

Acquisition and share issue

On 20 April 2011, the Group announced the conditional acquisition of the Detection Systems operations and certain related assets ("Detection Systems") of General Dynamics Armament and Technical Products, a subsidiary of General Dynamics Corporation, for a cash consideration of $90 million (£55 million). Detection Systems, based in Charlotte, North Carolina, is a US leader in chemical and biological threat detection and has advanced capability in the stand-off detection of improvised explosive devices. The acquisition is expected to complete within the next few weeks.

Also on 20 April 2011, the Group placed 17,405,183 new ordinary shares at 645p per share, raising approximately £112 million before costs. The placing represented in the region of 9.8% of the Group's market capitalisation. Approximately £55 million of the placing proceeds will be used to fund the acquisition of Detection Systems, with the remainder of the proceeds being used to pay related acquisition costs and to fund future potential acquisition opportunities.

At the end of April, the net proceeds of the placing were held in cash and hence contributed to a significant reduction in the Group's net debt.

Share split

At the Annual General Meeting on 24 March 2011, the shareholders approved the subdivision of the Company's ordinary shares of 5p each into ordinary shares of 1p each.

Health and safety

The Group continues to invest substantial funds and effort to improve the safety record of its operations and to protect its employees who work, at times, with highly volatile and energetic materials. Significant amounts of capital have been expended on robotics and other automated processes to isolate operators from the most sensitive processes. This is a continuing process where, no matter how diligent one is in assessing risk, incidents can still happen. Risk assessments are carried out by internal health and safety teams supported, where advantageous, by outside experts. Complacency, however, is the enemy of safe operations, and the training of staff in safety procedures continues to be a focus throughout the Group.

At the end of last year, explosive incidents occurred at Kilgore in Tennessee and at Mecar in Belgium. In the Kilgore incident, three employees were seriously injured and it is very pleasing to report that they have all now been discharged from hospital. The Board wishes them a complete recovery. Lessons from both incidents have been extensively analysed, and improvements in processes and facilities have been rolled-out to all sites. All of the production lines at Kilgore and Mecar were reviewed and subjected to improvement programmes before any of them were allowed to restart.

Principal risks and uncertainties

The principal risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results have not changed significantly from those set out in the "Principal Risks and Uncertainties" section of the Group's 2010 Annual Report and Accounts. These can be summarised as:

·      Health and safety risks

·      Risks associated with possible cuts in worldwide defence budgets

·      Risks associated with the timing of receipt of orders

·      Risks related to the strength and breadth of management resource

·      Risks associated with the introduction of new manufacturing facilities

·      Risks associated with the introduction of new products

·      Political, economic and financial risks

·      Competitive risks

·      Compliance and corruption risks

Prospects

The global defence market has undergone a recent period of instability. The extended timescales for approval of last year's US defence budget, the current UK defence budget constraints, and the shifting approval of export licence applications for various parts of the Middle East have reduced the pace of growth over the last twelve months. However, with organic growth of 18% in the first half of the year, strong performances from the Counter-IED and Munitions businesses, an increase in non-NATO customers, and a current order book that is 52% higher than at April 2010, the Group remains on course to meet the Board's full year expectations. As a short-cycle business with rapid development timescales, Chemring remains excellently placed to deliver continuing growth for the future. 

D J Price

Chief Executive

23 June 2011

Cautionary statement This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any purpose. The IMR contains certain-forward looking statements. These statements are made by the directors in good faith based on information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for the maintenance and integrity of the Company website.

Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

a)	the Condensed Set of Financial Statements has been prepared in accordance with IAS 34 - Interim Financial Reporting;
b)	the Interim Management Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
c)	the Interim Management Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

D J Price	P A Rayner
Chief Executive	Finance Director
23 June 2011	23 June 2011

CONDENSED CONSOLIDATED INCOME STATEMENT

for the half year to 30 April 2011

	Note		Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Continuing operations
Revenue			329.8	255.9	597.1
Operating profit	2		49.7	35.3	107.9
Operating profit is analysed as:
Underlying operating profit*			57.6	52.3	135.6
Acquisition related costs			(1.6)	(2.3)	(6.7)
Intangible amortisation arising from business combinations			(11.5)	(7.9)	(17.0)
Gain/(loss) on fair value movements on derivatives			5.2	(6.8)	(4.0)
			49.7	35.3	107.9
Share of post-tax results of associate			-	-	0.1
Finance income			0.2	0.1	0.5
Finance expense			(8.2)	(10.1)	(19.4)
Profit before tax for the period/year:		41.7		25.3	89.1
Profit before tax for the period/year is analysed as:
Underlying profit before tax*		49.6		42.3	116.8
Acquisition related costs		(1.6)		(2.3)	(6.7)
Intangible amortisation arising from business combinations		(11.5)		(7.9)	(17.0)
Gain/(loss) on fair value movements on derivatives		5.2		(6.8)	(4.0)
		41.7		25.3	89.1
Tax	4	(10.8)		(6.9)	(22.4)
Profit after tax for the period/year:	2	30.9		18.4	66.7
Earnings per ordinary share**	5
From continuing operations:
Underlying*		20.8p		17.7p	49.2p
Basic		17.5p		10.4p	37.8p
Diluted		17.4p		10.3p	37.4p

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

**Restated figures for prior periods to reflect division of each 5p ordinary share into five 1p ordinary shares on 28 March 2011

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the half year to 30 April 2011

	Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Profit after tax for the period/year	30.9	18.4	66.7
Other comprehensive income:
(Losses)/gains on cash flow hedges	(0.4)	0.2	1.0
Movement on deferred tax relating to cash flow hedges	0.1	-	(0.3)
Exchange differences on translation of foreign operations	(0.6)	6.2	0.4
Actuarial gains/(losses) on defined benefit pension schemes	0.7	(1.8)	4.0
Movement on deferred tax relating to pension schemes	(0.2)	0.5	(1.4)
Current tax on items taken directly to equity	-	-	0.2
Deferred tax on items taken directly to equity	-	-	(0.5)
Total comprehensive income for the period/year attributable to equity holders of the parent	30.5	23.5	70.1

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the half year to 30 April 2011

	Share capital £m	Share premium account £m	Special capital reserve £m	Hedging reserve £m	Revaluation reserve £m	Translation reserve £m	Retained earnings £m	Total £m
At 1 November 2010	1.8	120.4	12.9	(2.7)	1.4	(12.4)	209.0	330.4
Profit after tax for the period	-	-	-	-	-	-	30.9	30.9
Other comprehensive income for the period	-	-	-	(0.3)	-	(0.6)	0.5	(0.4)
Total comprehensive income for the period	-	-	-	(0.3)	-	(0.6)	31.4	30.5
Ordinary shares issued	0.2	109.3	-	-	-	-	-	109.5
Dividends paid	-	-	-	-	-	-	(14.9)	(14.9)
Cost of share-based payments (net of settlement)	-	-	-	-	-	-	(1.3)	(1.3)
At 30 April 2011	2.0	229.7	12.9	(3.0)	1.4	(13.0)	224.2	454.2

	Share capital £m	Share premium account £m	Special capital reserve £m	Hedging reserve £m	Revaluation reserve £m	Translation reserve £m	Retained earnings £m	Total £m
At 1 November 2009	1.8	120.3	12.9	(3.4)	1.4	(11.7)	157.5	278.8
Profit after tax for the period	-	-	-	-	-	-	18.4	18.4
Other comprehensive income for the period	-	-	-	0.2	-	6.2	(1.3)	5.1
Total comprehensive income for the period	-	-	-	0.2	-	6.2	17.1	23.5
Dividends paid	-	-	-	-	-	-	(12.7)	(12.7)
Cost of share-based payments (net of settlement)	-	-	-	-	-	-	(0.5)	(0.5)
Transfers between reserves	-	-	-	0.1	-	-	(0.1)	-
At 30 April 2010	1.8	120.3	12.9	(3.1)	1.4	(5.5)	161.3	289.1

	Share capital £m	Share premium account £m	Special capital reserve £m	Hedging reserve £m	Revaluation reserve £m	Translation reserve £m	Retained earnings £m	Total £m
At 1 November 2009	1.8	120.3	12.9	(3.4)	1.4	(11.7)	157.5	278.8
Profit after tax for the year	-	-	-	-	-	-	66.7	66.7
Other comprehensive income for the year	-	-	-	0.7	-	0.4	2.3	3.4
Total comprehensive income for the year	-	-	-	0.7	-	0.4	69.0	70.1
Ordinary shares issued	-	0.1	-	-	-	-	-	0.1
Dividends paid	-	-	-	-	-	-	(18.7)	(18.7)
Cost of share-based payments (net of settlement)	-	-	-	-	-	-	0.1	0.1
Transfers between reserves	-	-	-	-	-	(1.1)	1.1	-
At 31 October 2010	1.8	120.4	12.9	(2.7)	1.4	(12.4)	209.0	330.4

CONDENSED CONSOLIDATED BALANCE SHEET

as at 30 April 2011

	Note	Unaudited As at 30 April 2011	Unaudited As at 30 April 2010	Audited As at 31 Oct 2010 As restated#
		£m	£m	£m
Non-current assets
Goodwill		227.1	207.9	229.9
Development costs		16.4	10.1	13.3
Other intangible assets		167.2	131.5	181.5
Property, plant and equipment		208.2	154.0	197.5
Interest in associate		1.1	1.1	1.1
Deferred tax		15.5	17.9	16.8
	2	635.5	522.5	640.1
Current assets
Inventories		153.5	121.8	141.3
Trade and other receivables		170.1	117.2	165.6
Cash and cash equivalents	8	180.2	72.1	58.4
Derivative financial instruments		5.8	-	1.9
		509.6	311.1	367.2
Total assets		1,145.1	833.6	1,007.3
Current liabilities
Borrowings		(9.4)	(13.3)	(65.6)
Obligations under finance leases		(2.1)	(0.5)	(2.6)
Trade and other payables		(216.1)	(123.1)	(220.2)
Short term provisions		(2.2)	(1.7)	(1.9)
Current tax liabilities		(15.9)	(9.4)	(7.7)
Derivative financial instruments		(1.3)	(2.6)	(1.6)
		(247.0)	(150.6)	(299.6)
Non-current liabilities
Borrowings		(364.0)	(317.9)	(294.6)
Obligations under finance leases		(2.7)	(0.8)	(3.0)
Trade and other payables		(1.2)	(1.3)	(1.0)
Long term provisions		(2.9)	(6.2)	(3.1)
Deferred tax		(49.3)	(34.1)	(52.4)
Preference shares		(0.1)	(0.1)	(0.1)
Retirement benefit obligations		(22.4)	(30.1)	(23.0)
Derivative financial instruments		(6.3)	(8.7)	(7.3)
		(448.9)	(399.2)	(384.5)
Total liabilities		(695.9)	(549.8)	(684.1)
Net assets		449.2	283.8	323.2
Equity
Share capital		2.0	1.8	1.8
Share premium account		229.7	120.3	120.4
Special capital reserve		12.9	12.9	12.9
Hedging reserve		(3.0)	(3.1)	(2.7)
Revaluation reserve		1.4	1.4	1.4
Translation reserve		(13.0)	(5.5)	(12.4)
Retained earnings		224.2	161.3	209.0
		454.2	289.1	330.4
Own shares		(5.0)	(5.3)	(7.2)
Equity attributable to equity holders of the parent		449.2	283.8	323.2
Total equity		449.2	283.8	323.2

^#The restatement above relates to the reassessment of fair value of assets on prior year acquisitions - see Note 10

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the half year to 30 April 2011

	Note	Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Cash flows from operating activities
Underlying cash generated from operations	A	46.7	28.4	126.1
Acquisition related costs	10	(2.5)	(2.3)	(6.7)
Cash generated from operations	A	44.2	26.1	119.4
Tax paid		(4.5)	(12.2)	(30.0)
Net cash inflow from operating activities		39.7	13.9	89.4
Cash flows from investing activities
Dividends received from associate		0.1	0.1	0.1
Purchases of intangible assets		(4.7)	(2.8)	(7.8)
Purchases of property, plant and equipment		(19.7)	(19.5)	(40.9)
Acquisition of subsidiaries (net of cash acquired)		-	(92.0)	(176.8)
Net cash outflow from investing activities		(24.3)	(114.2)	(225.4)
Cash flows from financing activities
Dividends paid		(14.9)	(12.7)	(18.7)
Interest paid		(9.1)	(5.8)	(14.0)
Proceeds on issue of shares		109.5	-	0.1
New borrowings		101.2	171.7	208.8
Repayments of borrowings		(78.7)	(41.2)	(41.7)
Proceeds from sale and finance leaseback		-	-	4.5
Repayments of finance leases		(0.7)	(0.5)	(0.7)
Purchase of own shares		-	(2.0)	(3.9)
Net cash inflow from financing activities		107.3	109.5	134.4
Increase/(decrease) in cash and cash equivalents during the year		122.7	9.2	(1.6)
Cash and cash equivalents at start of the period/year		58.4	61.3	61.3
Effect of foreign exchange rate changes		(0.9)	1.6	(1.3)
Cash and cash equivalents at end of the period/year		180.2	72.1	58.4

NOTES TO THE CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the half year ended 30 April 2011

A. Cash generated from operations	Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Operating profit from continuing operations	49.7	35.3	107.9
Adjustment for:
Amortisation of development costs	1.2	1.2	2.1
Amortisation of intangible assets arising from business combinations	11.5	7.9	17.0
Amortisation of other intangibles	0.2	0.2	0.3
Depreciation of property, plant and equipment	8.2	7.7	11.6
Loss on disposal of tangible assets	-	-	0.2
(Gain)/loss on fair value movements on derivatives	(5.2)	6.8	4.0
Share-based payment expense	1.0	1.4	2.3
Difference between pension contributions paid and amount recognised in Income Statement	0.3	0.3	0.7
Increase/(decrease) in provisions	0.1	1.2	(1.4)
Operating cash flows before movements in working capital	67.0	62.0	144.7
Increase in inventories	(12.1)	(18.7)	(19.2)
Increase in trade and other receivables	(4.6)	(16.3)	(44.0)
(Decrease)/increase in trade and other payables	(6.1)	(0.9)	37.9
Cash generated from operations	44.2	26.1	119.4
Acquisition related costs	2.5	2.3	6.7
Underlying cash generated from operations	46.7	28.4	126.1
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash and cash equivalents during the period/year	122.7	9.2	(1.6)
Increase in debt and lease financing due to cash flows	(21.0)	(130.6)	(171.1)
Change in net debt resulting from cash flows	101.7	(121.4)	(172.7)
Acquired debt	-	-	(5.4)
New finance leases	-	0.3	-
Foreign exchange gains/(losses)	8.3	(15.9)	(5.4)
Amortisation of debt finance costs	(0.6)	(0.7)	(1.2)
Movement in net debt in the year	109.4	(137.7)	(184.7)
Net debt at start of the period/year	(307.5)	(122.8)	(122.8)
Net debt at end of the period/year	(198.1)	(260.5)	(307.5)

Analysis of net debt
	As at 1 Nov 2010 £m	Cash flow £m	Non-cash changes £m	Exchange movement £m	As at 30 April 2011 £m
Cash at bank and in hand	58.4	122.7	-	(0.9)	180.2
Debt due within one year	(65.6)	54.4	(0.1)	1.9	(9.4)
Debt due after one year	(294.6)	(76.1)	(0.5)	7.2	(364.0)
Finance leases	(5.6)	0.7	-	0.1	(4.8)
Preference shares	(0.1)	-	-	-	(0.1)
Net debt	(307.5)	101.7	(0.6)	8.3	(198.1)

INDEPENDENT REVIEW REPORT TO CHEMRING GROUP PLC

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 April 2011 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and related Notes 1 to 13. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland): 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410: Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom. A review of half-yearly financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 April 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditors

London, United Kingdom

23 June 2011

NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

Basis of preparation

The Condensed Consolidated Income Statement for each of the six month periods and the Condensed Consolidated Balance Sheet as at 30 April 2011 do not constitute statutory accounts as defined by section 435 of the Companies Act 2006 and have not been delivered to the Registrar of Companies. The half-yearly financial report was approved by the Board of Directors on 23 June 2011. The information for the year ended 31 October 2010 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. Full accounts for the year ended 31 October 2010, which include an unqualified audit report, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006, have been delivered to the Registrar of Companies.

These half-yearly financial statements have been prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in the half-yearly financial report has been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting as adopted by the European Union.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

Going concern

The directors believe the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current committed facilities.

The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the half-yearly condensed financial statements.

Accounting policies

The accounting policies applied by the Group in this half-yearly financial report are the same as those applied by the Group in its consolidated financial statements for the year ended 31 October 2010.

2. SEGMENTAL ANALYSIS

A segmental analysis of revenue and results is set out below:                 

Continuing operations:	Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Revenue
Counter-IED	95.7	41.3	114.9
Countermeasures	89.6	91.9	196.3
Munitions	85.4	54.4	115.9
Pyrotechnics	59.1	68.3	170.0
Total	329.8	255.9	597.1
Underlying operating profit
Counter-IED	20.0	9.9	28.1
Countermeasures	20.8	24.4	58.8
Munitions	13.5	10.9	20.9
Pyrotechnics	11.7	12.8	40.1
Charge for share based payments	(1.0)	(1.4)	(2.3)
Non-recurring restructuring and restart costs	(2.9)	-	(1.5)
Incident costs	-	-	(2.8)
Provision release	-	-	2.4
Unallocated head office costs	(4.5)	(4.3)	(8.1)
Underlying operating profit	57.6	52.3	135.6
Acquisition related costs	(1.6)	(2.3)	(6.7)
Intangible amortisation arising from business combinations	(11.5)	(7.9)	(17.0)
Gain/(loss) on fair value movements on derivatives	5.2	(6.8)	(4.0)
Operating profit	49.7	35.3	107.9
Share of post-tax results of associate	-	-	0.1
Finance income	0.2	0.1	0.5
Finance expense	(8.2)	(10.1)	(19.4)
Profit before tax for the period/year	41.7	25.3	89.1
Tax	(10.8)	(6.9)	(22.4)
Profit after tax for the period/year	30.9	18.4	66.7

In 2011 the non-recurring restructuring and restart costs relate to the closure of Plant 3 at Alloy Surfaces Company, Inc. (£1.1 million) and the start up of production at Mecar S.A. following the incident that occurred in September 2010 (£1.8 million).

Within the figures for the year ended 31 October 2010 restructuring costs of £1.5 million relate to the Group's UK Counter-IED business, and the incident costs of £2.8 million relate to incidents at the Kilgore Flares and Mecar S.A. sites. The provision release of £2.4 million relates to the environmental liabilities associated with the Chemring Energetic Devices site. Further details are disclosed in the Group's audited financial statements for the year ended 31 October 2010.

	Unaudited Half year to 30 April 2011 £m	Unaudited Half year to 30 April 2010 £m	Audited Year to 31 Oct 2010 £m
Continuing operations:
Revenue by destination
UK	64.6	42.6	111.6
USA	156.5	141.8	293.1
Europe	25.8	30.1	72.9
Australia and Far East	26.3	23.2	44.1
Middle East	46.8	15.4	51.6
Rest of the world	9.8	2.8	23.8
Total	329.8	255.9	597.1

There were no inter-segment sales in any of the periods.

The directors consider the only countries that are significant in accordance with IFRS 8 are the UK and USA, as disclosed above.

The Group does not disclose assets by segment in the monthly management accounts provided to the Executive Committee or the Board of Directors, as the chief operational decision makers do not use this as a key decision tool. However, a disclosure of non-current assets by location is shown below:

	Unaudited Half year to 30 April 2011	Unaudited Half year to 30 April 2010	Audited Year to 31 Oct 2010 As restated#
	£m	£m	£m
Continuing operations:
Non-current assets by location
UK	206.8	133.1	199.6
USA	256.5	283.4	275.9
Europe	151.6	96.2	149.4
Australia and Far East	20.6	9.8	15.2
Total	635.5	522.5	640.1

^#The restatement above relates to the reassessment of fair value of assets on prior year acquisitions - see Note 10

3. SEASONALITY OF REVENUE

Revenue for all four of the business segments is more weighted towards the second half of the financial year in line with defence spending. Margins in the second half of the financial year are anticipated to improve as increased revenue should lead to higher gross profit, whilst fixed costs should remain at similar levels to the first half of the financial year.

4. TAX

The estimated tax rate for the Group for the year ending 31 October 2011 is 26% (2010: 25%) and the underlying estimated effective tax rate is 26% (2010: 26%). This represents the best estimate of the average effective income tax rate expected for the full year, applied to the pre-tax income for the six month period.

5. EARNINGS PER SHARE

On 28 March 2011 the 5p ordinary shares in the Company were divided into five 1p ordinary shares. All figures relating to share numbers (including shares in issue, dividends per share and earnings per share) prior to 28 March 2011 have been restated as though the share split had already occurred, in order to provide comparable information for the current period. See Note 7 for further detail on the share split. 

Earnings per share are based on the average number of shares in issue of 176,919,779 (2010: 176,671,165) and profit on ordinary activities after tax and minority interests of £30.9 million (2010: £18.4 million). Diluted earnings per share has been calculated using a diluted average number of shares in issue of 178,176,690 (2010: 178,330,180) and profit on ordinary activities after tax and minority interests of £30.9 million (2010: £18.4 million).

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

			2011			2010
From continuing operations	Earnings £m	Ordinary shares Number 000s	EPS Pence	Earnings £m	Ordinary shares Number 000s	EPS Pence
Basic**	30.9	176,920	17.5	18.4	176,671	10.4
Additional shares issuable other than at fair value in respect of options outstanding**	-	1,257	(0.1)	-	1,659	(0.1)
Diluted**	30.9	178,177	17.4	18.4	178,330	10.3

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

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

			2011			2010
From continuing operations	Earnings £m	Ordinary shares Number 000s	EPS Pence	Earnings £m	Ordinary shares Number 000s	EPS Pence
Basic**	30.9	176,920	17.5	18.4	176,671	10.4
Acquisition related costs, intangible amortisation arising from business combinations and gain/(loss) on fair value movements on derivatives (after tax)**	5.8	-	3.3	12.9	-	7.3
Underlying**	36.7	176,920	20.8	31.3	176,671	17.7

For the year ended 31 October 2010, underlying earnings per share from continuing operations was 49.2p, which was calculated on £86.9 million of earnings and 176,602,225 average shares, based on restated historic share numbers following the share split on 28 March 2011. Basic earnings per share was 37.8p from continuing operations, calculated on £66.7 million of earnings and 176,602,225 average shares.

The number of shares in issue differs from the number held by third parties due to the fact that the Group holds Chemring Group PLC shares in treasury. The total number of ordinary shares held in treasury at 30 April 2011 was 1,043,145 (2010: 1,175,000) with an average cost of £4.83 (2010: £4.49) per share. This represents 0.5% of the total issued and fully paid ordinary share capital.

During the period the Group issued 456,855 of treasury shares (on a restated basis) following the vesting of conditional awards made on 23 January 2008 under the Chemring Group Performance Share Plan.

Full details of earnings per share for the year ended 31 October 2010 are disclosed in the Group's audited financial statements for the year ended 31 October 2010.

**Restated figures for prior periods to reflect division of each 5p ordinary share into five 1p ordinary shares on 28 March 2011

6. DIVIDENDS

	2011 £m	2010 £m
Dividends on ordinary shares of 1p each**
Interim dividend for the year ended 31 October 2010 3.4p**	-	6.0
Final dividend for the year ended 31 October 2010 8.4p (2009: 7.2p)**	14.9	12.7
Total dividends	14.9	18.7

The proposed interim dividend in respect of the half year ended 30 April 2011 of 4.0p per share will, if approved, absorb approximately £7.8 million of shareholders' funds. No liability for the proposed interim dividend has been included in these half-yearly financial statements.

**Restated figures for prior periods to reflect division of each 5p ordinary share into five 1p ordinary shares on 28 March 2011

7. SHARE SPLIT AND PLACING

At the Company's Annual General Meeting on 24 March 2011 a resolution was passed to split the Company's ordinary shares of 5p each (the "Existing Ordinary Shares") in issue or held in treasury into ordinary shares of 1p each (the "Ordinary Shares"), resulting in shareholders holding five Ordinary Shares for each Existing Ordinary Share they held prior to the share split.

On 20 April 2011 the Companyplaced 17,405,183 new ordinary shares to raise a total of £112.3 million before expenses. The proceeds will be used to fund the total cash consideration for the acquisition of the Detection Systems operations and certain related assets of General Dynamics Armament and Technical Products, a subsidiary of General Dynamics Corporation (see Note 10). The remaining proceeds of approximately £57.1 million have been raised to take advantage of future opportunities and to pay transaction costs.

8. CASH AND CASH EQUIVALENTS

Included within cash is £15.6 million of restricted cash (2010: £10.4 million), of which £15.2 million (2010: £10.1 million) is held in escrow in relation to the Chemring Group Staff Pension Scheme.

9. REFINANCING

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

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

10. ACQUISITIONS

Prior period balance sheet restatement

There were no acquisitions made by the Group in the period, but acquisitions were made in the year ended 31 October 2010. Their initial measurement period was incomplete as at 31 October 2010 and in accordance with IFRS 3 (revised 2008) the fair values of their net assets and goodwill were still provisional at that date.

In the current period there were measurement adjustments to the acquired balance sheets of Roke Manor Research Limited, Mecar and Chemring Fuze Technology S.r.l..

	Roke Manor  Research  Limited £m	Mecar £m	Chemring Fuze Technology  S.r.l. £m	Total £m
Intangible non-current assets	(0.1)	(0.5)	-	(0.6)
Property, plant and equipment	-	8.8	-	8.8
Working capital	(0.7)	(0.9)	(0.1)	(1.7)
(Decrease)/increase to net assets	(0.8)	7.4	(0.1)	6.5

Goodwill as at 31 October 2010	27.5	7.4	2.8	37.7
Increase/(decrease) to goodwill	0.8	(7.4)	0.1	(6.5)
Goodwill as at 30 April 2011	28.3	-	2.9	31.2

There was a decrease in the fair value of acquired working capital at Roke Manor Research Limited of £0.7 million and a decrease in intangible assets of £0.1 million, resulting in a revised goodwill figure of £28.3 million. 

At Mecar the fair value of working capital decreased by £0.9 million but there was a revaluation of property, plant and equipment that increased the fair value by £8.8 million. Also there was a reassessment of acquired intangible assets at Mecar and the fair value decreased by £0.5 million. The net effect left no goodwill remaining in relation to Mecar.

An additional £0.1 million of acquisition related costs were identified in relation to Chemring Fuze Technology S.r.l, resulting in revised goodwill of £2.9 million.

The balance sheet as at 31 October 2010 has been restated to reflect the above changes.

Acquisition related costs

Acquisition related costs of £1.6 million (2010: £2.3 million) have been recognised through the Income Statement in accordance with IFRS 3 (revised 2008). The cash flow movement of £2.5 million (2010: £2.3 million) recognises an additional £0.9 million of deferred consideration which has been paid in the period in respect of previous acquisitions.

Conditional acquisition

On 20 April 2011 the Group announced the conditional acquisition of the Detection Systems operations and certain related assets of General Dynamics Armament and Technical Products, a subsidiary of General Dynamics Corporation, for a cash consideration of $90 million. The consideration for this acquisition will be funded from the share placement completed during the period (see Note 7). The acquisition is expected to complete within the next few weeks.

11. PENSIONS

The defined benefit obligations are calculated using an actuarial valuation as at 30 April 2011. The deficit on the Chemring Group Staff Pension Scheme has decreased to £20.3 million (2010: £27.3 million) as a result of changes to the scheme's asset values from rising equity markets and from the adjustment in assumptions to reflect current market conditions. The difference between the expected return on assets and the actual return on assets has been recognised as an actuarial gain in the Condensed Consolidated Statement of Comprehensive Income in accordance with the Group's accounting policy.

12. RELATED PARTY TRANSACTIONS

The Group had no related party transactions during the period requiring disclosure.

13. CORPORATE WEBSITE

Further information on the Group and its activities can be found on the corporate website at www.chemring.co.uk

 

END

 

 

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