Interim Results

Chemring Group PLC 27 June 2002 FOR IMMEDIATE RELEASE 27 June 2002 CHEMRING GROUP PLC Interim Results for the Six Months to 30 April 2002 â€¢ Operating profit increased by 18% to Â£6.13 million (2001: Â£5.19 million) â€¢ Group profit before tax (excluding profit on disposal) increased by 18% to Â£4.63 million (2001: Â£3.93 million) â€¢ Earnings per ordinary share increased by 6% to 12.01p (2001: 11.33p, excluding profit on disposal) â€¢ Interim dividend unchanged at 2.45p â€¢ Strong orders backlog of Â£83 million, including Â£45 million in our US defence subsidiaries, to support full year sales â€¢ First half performance held back by commissioning of rebuilt Kilgore decoy manufacturing plant which will be a strong contributor to the second half â€¢ Countermeasures - Leading market position worldwide, particularly with the US Department of Defense which is increasing its budgets - Increasing infra red decoy sales due to escalating customer budgets and introduction of innovative new products â€¢ Marine Safety - Increasing sales of electronic products assisted by new legislation and introduction of new products - Significant US Coast Guard order for electronic personal locating beacons won in face of strong US competition Ken Scobie, Chemring Group Chairman, commented: 'I remain very confident about the prospects for your Group. It is to be hoped that before I report to you again, we will have resolved our negotiations with Royal & Sun Alliance. Kilgore should return to profitability in the second half of the year, and all our other businesses are indicating a strong second half. I anticipate reporting a very satisfactory full year performance.' Notes: 1. All comparisons are for the half year to 30 April 2001. 2. The interim dividend of 2.45p per ordinary share will be paid on 29 August 2002 to holders on the register at 23 August 2002. The ex-dividend date will be 21 August 2002. For further information: Ken Scobie Chairman, Chemring Group PLC 0207 930 0777 David Evans Chief Executive, Chemring Group PLC 0207 930 0777 Paul Rayner Finance Director, Chemring Group PLC 0207 930 0777 Jonathan Rooper Cardew & Co. 0207 930 0777 STATEMENT BY THE CHAIRMAN I am pleased to report that profit before tax (excluding profit on disposal) improved in the first six months by 18% to Â£4.63 million. All companies in the Group, with the exception of Kilgore, met or exceeded our trading expectations. The plant at US-based Kilgore became operational in May. Kilgore operated at a loss in the first half of the year, which we believe is covered under our insurance arrangements. As announced recently, we have filed a claim against Kilgore's insurers, Royal & Sun Alliance (RSA), in the Chancery Court of Hardeman County, Tennessee for an additional US$16.9 million over and above the US$4.5 million received to date, plus damages. In parallel, discussions are continuing with RSA with a view to reaching a negotiated settlement. In preparing the half year results the Board has considered the current status of negotiations with RSA and has been conservative in recognising the level of compensation for insured business interruption. In view of the sensitive nature of our discussions with RSA, the Board does not believe that it would be in shareholders' interests to indicate the exact amount of revenue recognised in our half year results. Excellent growth was achieved at Alloy Surfaces, our proprietary infra red decoy business in the US. We anticipate continued substantial growth from this operation over the next three years. A disappointing but predicted lower level of sales at Chemring Countermeasures, compared to the first half of last year when the business benefited from significant naval orders, partially offset the encouraging profits at Alloy Surfaces. The Marine Safety business performed well in the first half, and our investment strategy in new electronics products is paying off, following receipt of a five year order for electronic personal locating beacons from the US Coast Guard. These electronic safety beacons will become standard equipment for every US Coast Guard boat crewmember. Increased focus on 'homeland' defence, particularly in the US, should increase opportunities for our Automatic Identification Systems (AIS) products. In May, the BBC Radio 4 Today programme broadcast false and highly damaging allegations regarding the Group's subsidiary, PW Defence, in spite of receiving a categorical denial from the Company prior to the first broadcast. The broadcast made serious allegations that PW Defence operated a 'thriving business in illegal anti-personnel landmines', and that 'these landmines were marketed and sold across the World's war zones from an official British Government arms fair sponsored by the Ministry of Defence'. Since the Landmines Act 1998 came into force, PW Defence has not at any time manufactured, sold or exhibited products for use as anti-personnel landmines. All of the Group's businesses, including PW Defence, are cognisant of the strict legal requirements under which they operate, and comply fully with all relevant laws and UK Government rules and regulations, particularly in relation to export licensing approvals for defence products. The Group's lawyers have written to the BBC demanding a full retraction of the allegations and a response is awaited. RESULTS FOR THE HALF YEAR TO 30 APRIL 2002 2002 2001 Â£000 Â£000 Turnover 43,468 45,370 Operating profit 6,134 5,185 Profit before tax (excluding profit on disposal) 4,631 3,931 Profit after tax 3,237 3,134 Earnings per share (excluding profit on disposal) 12.01p 11.33p No profit on disposal was made in the half year (2001: Â£369,000). Interest costs increased to Â£1,503,000 (2001: Â£1,254,000). Interest was covered by operating profit 4 times (2001: 4 times). The tax rate is estimated at 30% (2001: 27%). BALANCE SHEET AND CASH FLOW The Group's net debt at the end of April 2002 stood at Â£52 million, an increase of Â£11 million since the year end due principally to the funding of the Kilgore rebuild at a cost of Â£7 million. Over this period, ongoing trials relating to naval countermeasures contracts delayed further cash receipts. However, I am pleased to report that we have now received Â£2 million in relation to these contracts and expect to receive the balance of Â£3.6 million by the year end. The Board is conscious that the Group's debt is too high but anticipates reductions in the second half as Kilgore returns to profitability and positive cash flow. Resolution of the outstanding insurance claim will also improve the Group's net debt. DIVIDEND The directors have declared an interim dividend of 2.45p per ordinary share (2001: 2.45p), payable on 29 August 2002 to holders on the register at 23 August 2002. BUSINESS PERFORMANCE Defence Businesses Turnover at our defence businesses of Â£27.8 million was constrained by the Kilgore restart. If Kilgore had been operating normally from the start of the year, an additional Â£10 million of sales would have been achieved from existing orders. â€¢ Countermeasures Turnover at Â£21.5 million was impacted by the Kilgore restart and lower naval decoy sales. Kilgore should provide a significant contribution to Group turnover growth in the second half, supported by its current order book. Countermeasures make up more than 50% of the Group's activities. With two operations in the US and one in the UK, the Group is the largest supplier of IR and chaff decoys worldwide. The combined US operations are the leading suppliers of IR decoys to the US DoD, where budget allocation for aircraft IR decoys has increased. The Countermeasures businesses are well positioned to provide the variety of decoys required to defeat both legacy and emerging threats. Tactical airborne trials held this year, both in NATO and the US, have demonstrated that the Group's range of decoys is well proven in terms of effectiveness against all types of IR missile threats. Kilgore has been awarded a US Army study contract for expendable decoy countermeasures for light armoured vehicles, which Alloy Surfaces is supporting. Kilgore is the leading provider of magnesium based flares to the US DoD, and currently has an order book of Â£35 million. A chaff capability is being established to compete with the current single source supplier, and naval decoy technology has been transferred from the UK in support of US Navy interest. Demand for Alloy Surfaces' proprietary special material IR decoys continues to increase, especially for area IR coverage in pre-emptive operational mode. Alloy Surfaces' special material decoys feature in every US advanced decoy program. Chemring Countermeasures (CCM), our UK operation, provides decoys worldwide for most aircraft and helicopter platforms. CCM is the design authority to the UK MoD for in-service magnesium IR and chaff aircraft decoys, and is also the developer of these decoys for the European Fighter Aircraft 2000 (Typhoon) where production orders are expected in 2003. A new spectral flare has completed testing and qualification, and has been adopted by a number of overseas customers to combat advanced seeker heads. CCM received substantial orders for the RF Modular Expendable Block (MEB) from the UK MoD, Belgium and Denmark. Its IR MEB was adopted by a NATO customer in support of the Afghan conflict, giving acceptance to the IR MEB as the advanced helicopter solution. Naval decoy sales in the first half were down compared to last year. Technical issues arising last year have been successfully resolved; the rounds are now are in production and deliveries to the customer have commenced. Demand for CCM's range of MK36 decoys is expected to pick up again in 2003 against known requirements for MK216 chaff rounds and US Foreign Military Sales (FMS) via Kilgore. â€¢ Military Pyrotechnics PW Defence is an international market leader for its range of specialist military pyrotechnic and explosive products used in illumination, signaling, screening and training, and in the case of explosives, for linear cutting and demolition. All exports are subject to UK Government export licensing approval. Turnover increased by 7% over the first half of last year to Â£6.4 million, and a healthy order book has been maintained, equivalent to one full year's turnover. PW Defence continues to maintain its international market share, and collaborations with major international primes on providing pyrotechnic products as part of a larger order are a factor in turnover growth. Non-defence Businesses Turnover of our non-defence businesses increased by 17% to Â£15.6 million. â€¢ Marine Safety The Group is a global market leader in providing marine safety products to aid location and rescue, including electronic location beacons, portable VHF radios, AIS products, fixed VHF radios incorporating Digital Selective Calling (DSC), location lights and distress signals. The first half produced an excellent result, with turnover increasing by 19% to Â£10.1 million. Electronic sales again provided the growth, supporting our strategy to expand the electronics product range to meet known legislative requirements. New product sales for fixed VHF radios with DSC, EPIRBs with integral GPS and personal locating beacons are going well, particularly in the US and Canada despite domestic competition. A significant event for McMurdo, our Marine Safety subsidiary, was the award of a five year contract, in competition, from the US Coast Guard to supply all personnel with hand held satellite location personal EPIRB devices. This product will become standard equipment for every US Coast Guard boat crewmember. This award demonstrates that McMurdo is leading the market in producing and developing satellite rescue devices. AIS product development is progressing well with a view to satisfying initial peak demand anticipated in 2003 from new legislation. AIS provides the identity of a ship and its position, together with other information such as its course, speed and destination. It is used to automate reporting systems along coastlines and will support the US Coastguard in its key role in ensuring maritime homeland security. â€¢ Wiring Harnesses Kembrey Wiring Systems is the largest UK manufacturer of electrical interconnection systems for the aerospace and defence industries, and has an excellent reputation for supplying quality wiring harnesses to manufacturers of airframe and aircraft engines. Turnover increased by 4% to Â£4.4 million, supported by an increase in military aircraft work, offsetting the downturn in civil engine business. Kembrey has now completed the first three wiring harness sets for BAE Systems' Nimrod MR4A program. A further four sets are required this year and the requisite engineering work to meet this is under way. Delivery of Tornado RB199 engine refit harnesses to Rolls-Royce began earlier this year, and work for GKN Aerospace is increasing. OUTLOOK I remain very confident about the prospects for your Group. It is to be hoped that before I report to you again, we will have resolved our negotiations with Royal & Sun Alliance. Kilgore should return to profitability in the second half of the year, and all our other businesses are indicating a strong second half. I anticipate reporting a very satisfactory full year performance. K C SCOBIE - Chairman 27 June 2002 UNAUDITED CONSOLIDATED PROFIT & LOSS ACCOUNT for the half year to 30 April 2002 Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Turnover - continuing operations 43,468 45,370 95,245 Operating profit - continuing operations 6,134 5,185 11,971 Profit on disposal - 369 369 Associated undertaking - - 43 Profit on ordinary activities before interest 6,134 5,554 12,383 Interest payable (1,503) (1,254) (2,984) Profit on ordinary activities before taxation 4,631 4,300 9,399 Tax on profit on ordinary activities (1,394) (1,166) (2,342) Profit on ordinary activities after taxation 3,237 3,134 7,057 Equity minority interest (3) - (25) Dividends (660) (629) (1,831) Retained profit 2,574 2,505 5,201 Basic earnings per ordinary share 12.01p 12.77p 27.96p Earnings per ordinary share before profit on disposal 12.01p 11.33p 26.49p Diluted earnings per ordinary share 11.87p 12.57p 27.85p Dividend per ordinary share 2.45p 2.45p 6.70p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Profit on ordinary activities after taxation 3,237 3,134 7,057 Currency translation differences on foreign currency net investments 53 311 (469) 3,290 3,445 6,588 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Profit on ordinary activities after taxation 3,237 3,134 7,057 Equity minority interest (3) - (25) Dividends (660) (629) (1,831) 2,574 2,505 5,201 Ordinary shares issued 1 88 151 Share premium arising 41 4,225 8,216 Other recognised profits/(losses) 53 311 (469) Net addition to shareholders' funds 2,669 7,129 13,099 Opening shareholders' funds 46,403 33,304 33,304 Closing shareholders' funds 49,072 40,433 46,403 UNAUDITED CONSOLIDATED BALANCE SHEET as at 30 April 2002 Unaudited Unaudited Audited As at As at As at 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Fixed assets Intangible assets 27,854 25,384 27,479 Tangible assets 40,716 29,107 33,901 Investments 924 893 924 69,494 55,384 62,304 Current assets Stock 19,759 17,826 18,231 Debtors 37,231 25,954 30,494 Cash at bank and in hand 2,790 1,768 2,418 59,780 45,548 51,143 Creditors due within one year Bank loans and overdraft 24,295 7,014 9,138 Loan stock 40 40 40 Other 24,666 19,805 24,732 49,001 26,859 33,910 Net current assets 10,779 18,689 17,233 Total assets less current liabilities 80,273 74,073 79,537 Creditors due after more than one year (30,161) (33,372) (32,097) Provisions for liabilities and charges (706) (268) (706) Equity minority interest (334) - (331) 49,072 40,433 46,403 Capital and reserves Called up share capital 1,410 1,346 1,409 Reserves 47,662 39,087 44,994 Shareholders' funds 49,072 40,433 46,403 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT for the half year to 30 April 2002 Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Net cash (outflow)/inflow from operating activities (74) (784) 4,134 Returns on investments and servicing of finance (1,240) (1,054) (3,077) Taxation 200 (343) (1,522) Net capital expenditure (8,272) (1,679) (8,058) Acquisitions - (14,063) (15,401) Equity dividends paid (1,145) (1,007) (1,640) Cash outflow before use of liquid resources and financing (10,531) (18,930) (25,564) Financing - issue of shares 42 775 4,833 - (decrease)/increase in debt (1,047) 19,157 16,896 (Decrease)/increase in cash (11,536) 1,002 (3,835) Reconciliation of operating profit to net cash flow from operating activities Operating profit 6,134 5,185 11,971 Amortisation charge 289 198 550 Depreciation charge 1,256 1,044 2,286 (Increase)/decrease in stocks (1,528) 909 929 Increase in debtors (6,737) (2,872) (6,906) Increase/(decrease) in creditors 512 (5,248) (4,696) Net cash (outflow)/inflow from operating activities (74) (784) 4,134 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT - continued for the half year to 30 April 2002 Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash (11,536) 1,002 (3,835) Cash and lease financing outflow/(inflow) from the 1,047 (19,157) (16,896) (decrease)/increase in debt Change in net debt resulting from cash flows (10,489) (18,155) (20,731) New finance leases (560) - (115) Translation difference 3 (385) 22 (11,046) (18,540) (20,824) Analysis of net debt As at Cash Non cash Exchange As at 1 Nov 2001 flow changes movement 30 April 2002 Â£000 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 2,418 371 - 1 2,790 Overdrafts (9,138) (11,907) - - (21,045) (6,720) (11,536) - 1 (18,255) Debt due within one year (2,040) 1,000 (2,250) (3,290) Debt due after one year (31,782) (164) 2,250 2 (29,694) Finance leases (400) 211 (560) - (749) (40,942) (10,489) (560) 3 (51,988) INDEPENDENT REVIEW REPORT BY THE AUDITORS To Chemring Group PLC Introduction We have been instructed by the Company to review the financial information for the 6 months ended 30 April 2002 which comprises the consolidated profit and loss account, statement of total recognised gains and losses, reconciliation of movements in shareholders' funds, consolidated balance sheet, consolidated cash flow statement and associated notes, and the related notes 1 to 7. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Uncertainty relating to litigation In arriving at our review conclusion, we have considered the disclosures made in the financial information concerning the possible outcome of litigation in respect of amounts recoverable under an insurance claim relating to an incident at Kilgore Flares, a subsidiary undertaking of the Company, in April 2001. The future settlement of this litigation could result in a shortfall, or a surplus, when compared with the recorded debtor at 30 April 2002. It is not possible to quantify the effect, if any, of this uncertainty. Details of the circumstances relating to this uncertainty and the reasons why the amount of the related debtor recorded at 30 April 2002 has not been disclosed are described in note 3. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the 6 months ended 30 April 2002. DELOITTE & TOUCHE, Chartered Accountants, 27 June 2002 Mountbatten House, 1 Grosvenor Square, Southampton, Hampshire SO15 2BZ NOTES TO THE INTERIM STATEMENT 1. BASIS OF PREPARATION The interim accounts to 30 April 2002 have been prepared on the basis of the accounting policies set out in the full year accounts to 31 October 2001. The Group has adopted FRS19: Deferred tax, the impact of which is not significant in either the current or comparative period. 2. SEGMENTAL ANALYSIS OF TURNOVER Unaudited Unaudited Audited Half year to Half year to Year to 30 April 2002 30 April 2001 31 Oct 2001 Â£000 Â£000 Â£000 Defence Countermeasures 21,459 26,067 51,352 Military pyrotechnics 6,387 5,971 12,991 27,846 32,038 64,343 Non-defence Marine safety 10,113 8,478 19,356 Wiring harnesses 4,405 4,249 9,594 Chemical coatings 1,104 605 1,952 15,622 13,332 30,902 Total 43,468 45,370 95,245 3. INSURANCE CLAIM As reported in the financial statements for the year ended 31 October 2001 the Group has lodged a claim with its insurers in respect of property damage and business interruption arising out of the incident at Kilgore in April 2001. To date US$4.5 million has been received from the insurers. On 26 March 2002 legal proceedings were initiated to recover the balance of the claim, amounting to US$16.9 million, from the Group's insurers. The Group has accrued an amount in its financial statements which it believes to be a conservative level of recovery, although not the total amount. Readers of the accounts will appreciate that due to the sensitive nature of the settlement that the exact amount of the accrual is not disclosed. 4. 2001 RESULTS The figures for the year to 31 October 2001 are abridged from the Group's full Financial Statements for that period which carry an unqualified Auditors' Report and have been filed with the Registrar of Companies. 5. TAXATION The estimated tax rate for the Group for the year ending 31 October 2002 is 30% (2001: 27%). 6. EARNINGS PER SHARE Earnings per share are based on the average number of shares in issue of 26,939,579 (2001: 24,541,240) and profit on ordinary activities after taxation and minority interests of Â£3,234,000 (2001: Â£3,134,000). Diluted earnings per share has been calculated using a diluted average number of shares in issue of 27,245,486 (2001: 24,932,064) and profit on ordinary activities after taxation and minority interests of Â£3,233,000 (2001: Â£3,133,000). 7. CORPORATE WEBSITE Further information on the Group and its activities can be found on the corporate website at www.chemring.co.uk. This information is provided by RNS The company news service from the London Stock Exchange

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