Final Results

FOR IMMEDIATE RELEASE 3 FEBRUARY 2004 CHEMRING GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 OCTOBER 2003 Results Turnover of continuing operations Â£112.3m (2002: Â£85.0m), up 32% Operating profit of continuing operations Â£14.3m (2002: Â£7.0m) Profit before tax Â£12.1m (2002: Â£5.4m) Basic earnings per ordinary share 31.04p (2002: 14.16p) Basic earnings per ordinary share - continuing operations 30.06p (2002: 12.75p) Net debt Â£38.7m (2002: Â£47.3m), a reduction of 18% Dividend per ordinary share 7.40p (2002: 6.70p), up 10% Trading Highlights Operating profit of continuing operations more than doubled to Â£14.3m US Department of Defense sales up 33% to Â£31m Strong net cash flow Alloy Surfaces included in United Airlines team on Department of Homeland Security initiative on commercial aircraft protection Commenting on the results, Ken Scobie, Chemring Group Chairman, said: 'This has been a very successful year for the Group, principally due to significant growth in the sales and profitability of our three countermeasures businesses - Chemring Countermeasures, Alloy Surfaces and Kilgore. This excellent performance was achieved despite the fact that Kilgore's new production plant only resumed full production in the second half. The substantial increase in earnings of over 100% returns us to the growth pattern achieved prior to the incident at Kilgore in April 2001. Two non-core businesses, Chemical Coatings and Kembrey Wiring Systems, were sold in July 2003 and November 2003 respectively for a total consideration of Â£ 3.4 million after costs. The reduction in the Group's net debt to Â£39 million represents satisfactory progress. We are still awaiting a substantial sum from the resolution of the Kilgore insurance claim, which is being pursued against Royal and Sun Alliance (RSA), to further reduce our net debt. Last year I expressed my confidence in the growing demand for our countermeasures products. Our performance this year and current events in Iraq and Afghanistan have demonstrated clearly to the military the essential part we play in defeating ground-based missiles. This is having the anticipated impact on our order book and enquiries for the future, particularly in the US. Our military pyrotechnics business, our marine business and our Australian operation are expected to make further progress this year. This, together with the continuing expansion of our countermeasures business, should lead to another year of excellent growth for the Group.' Note: All comparisons are for the year ended 31 October 2002. For further information: Ken Scobie Chairman 0207 930 0777 David Evans Chief Executive 0207 930 0777 Paul Rayner Finance Director 0207 930 0777 Jonathan Rooper CardewChancery 0207 930 0777 Operating Results Turnover of the continuing operations was Â£112.3 million (2002: Â£85.0 million), an increase of 32%. Turnover of the discontinued operations was Â£8.2 million (2002: Â£11.3 million). Total Group turnover was Â£120.5 million (2002: Â£96.3 million), an increase of 25%. Overheads are unchanged on last year at Â£15.8 million. Overheads of the discontinued operations accounted for approximately Â£1.5 million of the total in both years. Net operating profits of the continuing operations were Â£14.3 million (2002: Â£ 7.0 million). Net operating margins of the continuing operations were 13% (2002: 8%). The discontinued operations produced an operating loss of Â£ 0.2 million in the year (2002: operating profit of Â£0.7 million). Dividends The Board recommends a final dividend of 4.85p per ordinary share, a 14% increase on the final dividend for last year and a 10% increase on the total dividend. It is recognised that the dividend is now over four times covered by retained profits and upon resolution of the insurance claim the Group's dividend policy will be reviewed. Turnover by Business Area 2003 2002 Â£m Â£m Countermeasures 66.4 45.7 Military pyrotechnics 19.5 17.9 Marine safety and security 26.4 21.4 Continuing operations 112.3 85.0 Discontinued operations 8.2 11.3 Total 120.5 96.3 Countermeasures Countermeasures turnover increased by 45% to Â£66.4 million The excellent growth in the countermeasures business reflects our position as the worldwide market leader in providing expendable decoys to protect valuable military platforms. We are the pre-eminent provider of aircraft IR expendable decoys to the US Department of Defense. There is particularly strong US demand for our products to protect military aircraft from missile attack, in particular IR Man-Portable Air Defence Systems. These systems have been prevalent in the Iraq campaign, where there continue to be numerous attacks on both helicopters and fixed wing transport aircraft. Recently there have been several initiatives on commercial aircraft protection. The most significant of these has originated from the Department of Homeland Security (DHS) in the US. Alloy Surfaces is included in the United Airlines team, which is one of the three consortia selected by the DHS to develop a system to protect commercial aircraft. The Group has invested a total of over Â£17.5 million in manufacturing facilities over the last three years at Kilgore and Alloy Surfaces in support of the US defence industrial base. Further investment will be made in production capacity at Alloy Surfaces in 2004 to meet the increasing demand for its products. During the year Kilgore was awarded initial decoy production contracts for both of the new US fighter aircraft and development contracts for decoys for emerging multi-role platforms. Alloy Surfaces and Kilgore have also been selected to provide an improved decoy for the B52 bomber. Decoy sales to the US military increased by 33% to Â£31 million during the year. These sales accounted for 47% of total countermeasures turnover. Our UK based business, Chemring Countermeasures, had an excellent year with increased exports contributing to a 32% increase in turnover. The UK business has a strong technical capability which is continually bringing new products to the market including the proprietary modular expendable blocks for enhanced helicopter protection and chaff and flare decoys for former Soviet Union platforms such as MiG29 fighters and Mi-24 helicopters. Military Pyrotechnics Military Pyrotechnics turnover in the year increased by 9% to Â£19.5 million Our military pyrotechnics business is at the forefront of providing specialist military pyrotechnic products used in illumination, screening, signalling and training. Overseas sales were 67% of total military pyrotechnics turnover. Despite the financial pressures on governments' defence expenditure, there is continuing strong international demand for our products against a background of political tensions which have increased awareness of the need for training. Kilgore is increasing its activity in illumination and screening products for targets and rescue applications. Kilgore is the main supplier to the US Navy of Mk58 pyrotechnic marine location markers. In addition to being used for anti-submarine warfare, the Mk58 marker is used for search and rescue operations, man-overboard markings, and for target practice at sea. Kilgore won an additional order from General Dynamics for smoke and screening products, and follow-on orders are expected. Kilgore is also a conduit into the US military market for the Group's UK based military vehicle decoy and screening products and technology, and is involved in supporting General Dynamics Land Systems on future military vehicle protection in the high profile US Army Future Combat Systems programme. In June 2003, PW Defence secured a partnering agreement with the UK MoD covering the procurement and through-life management of the majority of the MoD's military pyrotechnic requirements. The agreement is a vehicle for taking forward a number of initiatives, including improvements in the supply chain, smart procurement and manufacturing, and full-life support. Marine Safety Marine Safety and Security turnover in the year increased by 24% to Â£26.4 million The Group is a leading supplier of legislated marine electronic and safety equipment worldwide for commercial and leisure markets. The marine safety and security business is made up of three product groups and an emerging systems business. The product groups are electronics, marine safety lights and pyrotechnics. The growth in the business is primarily driven by electronics products, where the range of products has increased to meet increased shipping related legislation and growth in recreational markets both on land and at sea. Sales of electronics products have doubled over the last three years, and grew by 50% in 2003; these now represent 43% of total marine sales. Despite the good growth overall, however, the profitability of electronics products was disappointing. We have now instigated cost saving initiatives and are focusing on increasing sales volumes to improve the profitability. Lights and pyrotechnics markets are stable, although there was increased demand from military customers in the year. Demand for our 406MHz EPIRBs and personal locating beacons (PLBs) is increasing due to a combination of the phasing out of 121.5MHz beacons, and increasing use of 406MHz PLBs for marine, land, government, utilities and aviation use. In the US the Federal Communications Commission permitted the use of PLBs nationwide from 1 July 2003, enabling hikers and other outdoor adventurers to use this life-saving product. With a unique integral GPS capability built into our PLB, we will be the prime supplier of products into this market area. Sales of the newly developed commercial automatic identification system (AIS) transponder commenced in the fourth quarter. The AIS is an International Maritime Organisation legislated requirement for carriage of automatic identification systems capable of providing information automatically in the VHF maritime band about the ship to other ships and to coastal authorities. US federal law requires a wide range of vessels around the US coastline to carry this equipment by the end of 2004. The overall market will exceed Â£100 million over the next two years and we are targeting to achieve an appreciable market share. Shore monitoring will also require the introduction of AIS base stations and modification to existing maritime coast radio stations, which provides excellent opportunities for our emerging systems business, ICS Electronics. Kilgore Insurance Claim During the year a substantial amount of further work has been carried out to progress our claim against RSA. Our independent forensic accountant has arrived at his preliminary conclusions on the total quantum of the claim. His valuation is not materially different to the original total of our claim, to which I referred last year, and has received the full support of our insurance brokers, Willis. In addition, substantive discussions are at long last taking place between RSA and Willis to resolve the policy coverage issues which exist between them. It is hoped that this will soon lead to final negotiations in order to settle this matter. In light of these positive developments, we have reassessed our opinion on the sum recoverable under the policy. In the event that the matter is not settled within the next three months, the Board will concentrate on the litigation in Tennessee, which has been running in parallel to other events. Research and Development Research and development expenditure totalled Â£4.7 million (2002: Â£4.6 million), an analysis of which is set out below: 2003 2002 Â£m Â£m Customer funded research and development 1.9 1.4 Non-funded research and development 1.6 2.2 Capitalised development costs 1.2 1.0 Total research and development expenditure 4.7 4.6 The Group's prudent policy is to write-off capitalised development costs over a three year period. Amortisation of development costs was Â£1.2 million (2002: Â£ 0.7 million). Profits on Disposal The Chemical Coatings division of Alloy Surfaces was sold in the year for Â£1.5 million after costs, giving rise to a profit on disposal of Â£0.7 million. This profit has been accounted for within discontinued operations. The Group has reassessed the amounts recoverable in respect of the Kilgore insurance claim against RSA, and has increased the amount accrued in the Group's accounts by Â£1.1 million. Our total recoverable balance now stands at Â£7.5 million (2002: Â£9.6 million) Legal costs of Â£0.5 million have been incurred during the year in connection with the claim, and these have been offset against the additional Â£1.1 million accrual. The balance of Â£0.6 million is accounted for as a net profit on disposal of assets which were destroyed in the April 2001 incident. This is summarised in the table below: 2003 2002 Â£m Â£m Material damage proceeds in excess of net book value of assets 1.1 1.7 Legal expenses incurred (0.5) (0.6) Net profit on disposal 0.6 1.1 Interest The interest charge for the year was Â£3.4 million (2002: Â£3.5 million). Interest was covered 4.1 times (2002: 2.2 times) by operating profit. It is estimated that the Group incurred approximately Â£0.5 million (2002: Â£0.6 million) of interest during the year which would not have been incurred if the Kilgore insurance claim had been settled by RSA. Taxation The tax charge of Â£3.6 million (2002: Â£1.6 million) represents an effective rate of 30% (2002: 30%). Tax losses at Kilgore were used to offset taxable profits at Alloy Surfaces and thereby reduce tax payments in the US. Pensions Actuarial valuations as at 6 April 2003 for both of the Group's defined benefit pension schemes are in progress and will be finalised by the half year. Although the Chemring Group Staff Pension Scheme, which is by far the larger of the two, was in surplus at the last valuation, it is anticipated that both schemes will show deficits on the 2003 valuations. The Board has therefore taken action to increase its pension contributions with effect from 1 January 2004. The impact of these increased contributions over the current and future financial years is in the region of Â£0.5 million per annum. Shareholder Returns Earnings per ordinary share were 31.04p (2002: 14.16p). Earnings per ordinary share of the continuing operations were 30.06p (2002: 12.75p). The dividend per ordinary share of 7.40p (2002: 6.70p) is covered 4.2 times (2002: 2.1 times). The total shareholder return for the Group over the five years to 31 October 2003 has outperformed the FTSE Small Cap Index for the same period by 209%. Shareholders' funds at the year end were Â£53.5 million (2002: Â£48.7 million). Cash Flow and Gearing Operating cash flow was Â£18.1 million (2002: Â£10.1 million), representing a conversion rate from operating profit of 129% (2002: 131%). Operating cash flow was particularly strong in the second half of the year, with the predicted return to profitability of Kilgore being converted into cash flow. Working capital balances have broadly remained the same as last year, despite the substantial growth in the Group turnover. Tangible fixed asset expenditure in the year was Â£5.4 million (2002: Â£13.1 million). Net debt fell to Â£38.7 million (2002: Â£47.3 million). Gearing was 72% (2002: 97%). Foreign Exchange The Group's principal foreign exchange exposure is to the US dollar. During the year sterling appreciated by 8% against the dollar, leading to reduced profits from the US on translation of the results into sterling. The impact on the Group's sales and profit before tax was approximately 3%. Contracts have been entered into until the end of the current financial year to reduce the Group's exposure to further depreciation of the dollar against sterling. Post Balance Sheet Event On 8 November 2003, the entire issued share capital of Kembrey Wiring Systems Limited was sold for net asset value of Â£1.9 million. Cash consideration of Â£ 1.2 million was paid on completion and a further Â£0.2 million was paid in January 2004. The balance of the consideration of Â£0.5 million is payable in two instalments on the anniversary of completion in November 2004 and November 2005. The net assets are subject to a post completion working capital adjustment with any surpluses or deficits to net assets being adjusted via the deferred consideration. As a consequence of the disposal process, the Group agreed to pay Â£0.5 million to the Chemring Group Staff Pension Scheme. This cost will be accounted for in future results. Prospects The Board hopes that next year they will be able to report to shareholders the strengthening of the Group's balance sheet through the receipt of monies from RSA. Last year the Board expressed confidence in the growing demand for the Group's countermeasures products. The performance this year and current events in Iraq and Afghanistan have demonstrated clearly to the military the essential part the Group's products play in defeating ground-based missiles. This is having the anticipated impact on the Group's order book and enquiries for the future, particularly in the US. The military pyrotechnics business, the marine business and the Australian operation are expected to make further progress this year. This, together with the continuing expansion of the countermeasures business, should lead to another year of excellent growth for the Group. SUMMARY FINANCIAL INFORMATION 2003 2002 Â£000 Â£000 Turnover Countermeasures 66,411 45,725 Military pyrotechnics 19,540 17,942 Marine safety and security 26,366 21,345 Continuing operations 112,317 85,012 Discontinued operations 8,240 11,315 120,557 96,327 Operating profit/(loss) -Continuing 14,256 7,006 -Discontinued (216) 684 14,040 7,690 Profit before taxation -Continuing 11,693 4,874 -Discontinued 381 542 12,074 5,416 Dividend per ordinary share 7.40p 6.70p Basic earnings per ordinary share 31.04p 14.16p Basic earnings per ordinary share - continuing 30.06p 12.75p Diluted earnings per ordinary share 30.60p 14.11p Net debt 38,681 47,277 Shareholders' funds 53,520 48,671 CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 October 2003 2003 2002 Continuing Discontinued Total Continuing Discontinued Total operations operations operations operations operations operations Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Turnover 112,317 8,240 120,557 85,012 11,315 96,327 Analysis of operating profit/(loss) Kilgore - normal 2,180 - 2,180 (4,851) - (4,851) operations - - 5,559 - 5,559 insurance - - claim 2,180 - 2,180 708 - 708 Rest of Group 12,076 (216) 11,860 6,298 684 6,982 Operating profit/ 14,256 (216) 14,040 7,006 684 7,690 (loss) Operating profit/ 14,256 (216) 14,040 7,006 684 7,690 (loss) Associated undertaking 178 - 178 89 - 89 Profit on - 565 - 565 1,123 - 1,123 disposal insurance claim - sale of 724 724 - - division - - Profit on ordinary 14,999 508 15,507 8,218 684 8,902 activities before interest Interest payable (3,306) (127) (3,433) (3,344) (142) (3,486) Profit on ordinary 11,693 381 12,074 4,874 542 5,416 activities before taxation Tax on profit on (3,465) (113) (3,578) (1,444) (161) (1,605) ordinary activities Profit on ordinary 8,228 268 8,496 3,430 381 3,811 activities after taxation Equity minority 23 29 interest Profit for the 8,519 3,840 financial year Dividends (2,034) (1,843) Retained profit 6,485 1,997 Basic earnings per 31.04p 14.16p ordinary share Basic earnings per ordinary share - continuing 30.06p 12.75p Diluted earnings per 30.60p 14.11p ordinary share ADDITIONAL FINANCIAL PERFORMANCE STATEMENTS For the year ended 31 October 2003 2003 2002 Â£000 Â£000 Statement of total recognised gains and losses Profit on ordinary activities after taxation 8,496 3,811 Currency translation differences on foreign currency net investments (1,636) (756) Total recognised gains and losses relating to the year 6,860 3,055 Reconciliation of movements in shareholders' funds Profit on ordinary activities after taxation 8,496 3,811 Equity minority interest 23 29 Dividends (2,034) (1,843) Retained profit 6,485 1,997 Other recognised losses (1,636) (756) Ordinary shares issued - 25 Share premium arising - 1,391 Net addition to shareholders' funds 4,849 2,657 Opening shareholders' funds 48,671 46,014 Closing shareholders' funds 53,520 48,671 CONSOLIDATED BALANCE SHEET As at 31 October 2003 2003 2002 Â£000 Â£000 Â£000 Â£000 Fixed assets Intangible assets Development costs 2,996 3,002 Goodwill 28,442 28,343 31,438 31,345 Tangible assets 42,879 42,746 Investments 1,063 972 75,380 75,063 Current assets Stock 20,248 17,807 Debtors 36,346 32,636 Cash at bank and in hand 5,821 3,774 62,415 54,217 Creditors due within one year (57,675) (49,288) Net current assets 4,740 4,929 Total assets less current liabilities 80,120 79,992 Creditors due after more than one year (21,489) (29,375) Provisions for liabilities and charges (4,832) (1,644) Equity minority interest (279) (302) 53,520 48,671 Capital and reserves Called-up share capital 1,434 1,434 Reserves Share premium account 20,726 20,726 Special capital reserve 12,939 12,939 Revaluation reserve 2,446 2,482 Revenue reserves 15,975 11,090 52,086 47,237 Shareholders' funds 53,520 48,671 Attributable to equity shareholders 53,458 48,609 Attributable to non-equity shareholders 62 62 53,520 48,671 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 October 2003 2003 2002 Â£000 Â£000 Â£000 Â£000 Net cash inflow from operating 18,084 10,056 activities Returns on investments and servicing (3,420) (2,899) of finance Taxation (686) 671 Capital expenditure (5,497) (10,622) Acquisitions and disposals 1,475 (145) Equity dividends paid (1,866) (1,818) Cash inflow/(outflow) before use of 8,090 (4,757) liquid resources and financing Financing - issue of shares - 54 - decrease in debt (5,645) (2,111) (5,645) (2,057) Increase/(decrease) in cash 2,445 (6,814) Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash 2,445 (6,814) Cash outflow from the decrease in debt and lease financing 5,645 2,111 Change in net debt resulting from 8,090 (4,703) cash flows New finance leases (1,153) (3,479) Translation difference 1,964 1,212 New finance costs applied to loans - 737 Amortisation of debt finance costs (305) (102) Movement in net debt 8,596 (6,335) Opening net debt (47,277) (40,942) Closing net debt (38,681) (47,277) RECONCILIATION OF OPERATING PROFIT/(LOSS) TO NET CASH FLOW FROM OPERATING ACTIVITIES For the year ended 31 October 2003 2003 2002 Continuing Discontinued Total Continuing Discontinued Total operations operations operations operations operations operations Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Operating 14,256 (216) 14,040 7,006 684 7,690 profit/ (loss) Amortisation 1,210 - 1,210 702 - 702 charge Depreciation 3,229 66 3,295 2,873 56 2,929 charge Loss on - - - 27 - 27 disposal of fixed assets (Increase)/ (3,215) 375 (2,840) 338 176 514 decrease in stock (Increase)/ (4,078) 325 (3,753) (1,301) 463 (838) decrease in debtors Increase/ 6,107 25 6,132 314 (1,282) (968) (decrease) in creditors 17,509 575 18,084 9,959 97 10,056 Notes Accounts and Auditors Report The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 October 2003 or 31 October 2002 but is derived from those accounts. Statutory accounts for 2002 have been delivered to the Registrar of Companies, and those for 2003 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s237(2) or s237(3) of the Companies Act 1985. The financial information has been prepared in accordance with the accounting policies adopted for the 2002 accounts. Insurance Claim Following the manufacturing incident at Kilgore Flares Company LLC on 18 April 2001, resulting in material damage and suspension of operations, the Group lodged a claim with its insurers for property damage and business interruption. Legal proceedings in respect of this claim were filed in a Tennessee Court in March 2002 for an additional Â£11,000,000 over and above the Â£3,200,000 which had been received from insurers at that time. Alongside the legal process, negotiations with the Group's insurers have continued throughout the year ended 31 October 2003. At 31 October 2003, the Board has made a further estimate of the additional proceeds which it believes that Kilgore is entitled to receive under the insurance policy, after taking advice from its professional advisers, of which Â£1,077,000 (2002: Â£7,300,000) has been recognised in these financial statements. Of this, Â£nil (2002: Â£5,559,000) has been credited to cost of sales with the balance, net of legal and professional costs of Â£512,000 (2002: Â£618,000), being allocated as material damage proceeds. As the material damage related to fixed assets, the surplus of Â£565,000 (2002: Â£1,123,000) has been accounted for as a profit on disposal, in accordance with FRS15, and included separately in the profit and loss account. At 31 October 2003, payments totalling Â£5,700,000 (2002: Â£3,200,000) had been received from the Group's insurers. The balance of the claim that had not been recovered from the insurers at the year end was Â£7,486,000 (2002: Â£9,633,000) which has been included within other debtors. Foreign exchange movements of Â£724,000 have been recognised through the statement of total recognised gains and losses in the Group's financial statements, due to the claim being denominated in US dollars. Earnings per Ordinary Share The earnings and shares used in the calculations are as follows: 2003 2002 Ordinary Ordinary shares shares Earnings Number EPS Earnings Number EPS Â£000 000s Pence Â£000 000s Pence Basic 8,515 27,436 31.04 3,836 27,098 14.16 Additional shares issuable other than at fair value in respect of options outstanding - 391 (0.44) - 88 (0.05) Diluted 8,515 27,827 30.60 3,836 27,186 14.11 Earnings comprise profit for the financial year after deducting preference dividends of Â£4,000 (2002: Â£4,000). Ordinary shares are calculated by reference to the average number of shares in issue in the year. Reconciliation from basic earnings per share to basic earnings per share - continuing: 2003 2002 Ordinary Ordinary shares shares Earnings Number EPS Earnings Number EPS Â£000 000s Pence Â£000 000s Pence Basic 8,515 27,436 31.04 3,836 27,098 14.16 Profit on ordinary activities after taxation - discontinued operations (268) - (0.98) (381) - (1.41) Basic - continuing 8,247 27,436 30.06 3,455 27,098 12.75 Dividend Subject to shareholder approval, the final dividend of 4.85p per ordinary share will be paid on 9 June 2004 to all shareholders registered at the close of business on 14 May 2004. The ex-dividend date will be 12 May 2004. 2003 Financial Statements The financial statements for the year ended 31 October 2003 will be posted to shareholders on 20 February 2004 and will also be available from that date at the registered office, 1650 Parkway, Whiteley, Fareham, Hampshire PO15 7AH.

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