Final Results - Year Ended 31 October 1999

Chemring Group PLC 11 January 2000 CHEMRING GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 OCTOBER 1999 * Group profit before tax increased to £4.3 million from £1.25 million * Turnover on continuing operations increased to £62.1 million from £57.6 million * Basic earnings per ordinary share increased to 14.49p from 3.52p * Diluted earnings per ordinary share on continuing operations increased to 19.02p from 11.64p * Recommended final dividend per ordinary share 3.50p, making a total dividend of 5.50p for the year, up 10% (previous period : 5.00p) * Order book at a record level of £59 million Ken Scobie, Chemring Group Chairman, commented: 'I am pleased to report that the Group has made a strong recovery following completion of the restructuring in 1998. We have had considerable success in strategically positioning our continuing operations in their market places. Since the year end, significant new orders of £29 million have increased the order book to a record level of £59 million. Against this background, I believe the Group can look forward to a strong period of growth and a substantial improvement in shareholder value.' Note All comparisons are for the thirteen month period ended 31 October 1998. For further information: Ken Scobie Chairman 0171 930 0777 David Evans Chief Executive 0171 930 0777 Paul Rayner Finance Director 0171 930 0777 Peter Gaze Cardew & Co. 0171 930 0777 STATEMENT BY THE CHAIRMAN Introduction I am pleased to report that the Group has made a strong recovery following completion of the restructuring in 1998. Against a background of a successful year for Countermeasures and Marine Safety, a strong order book and exciting new opportunities for each of the businesses, the Group is set for a period of sustained growth. Results Group profit before taxation was £4,306,000 compared with £1,251,000 in the thirteen month period to 31 October 1998, and earnings per ordinary share increased to 14.49p compared with 3.52p in 1998. For continuing operations, operating profit, after absorbing £295,000 of aborted bid costs, increased by 14% to £7,766,000 (previous period : £6,814,000) on turnover of £62,082,000, up 8%. Diluted earnings per ordinary share on continuing operations increased by 63% to 19.02p compared with 11.64p in 1998. Net debt reduced by £1,891,000 to £20,681,000 and Group interest and finance costs reduced by 23% to £1,979,000. We continue to invest significant resources in research and development and we are confident that this level of expenditure will support growth across the Group particularly in Countermeasures and Marine Safety. Business Activities Countermeasures is one of the world leaders in air and naval decoys, with the exciting growth in both the UK and the US continuing. The US operation increased its turnover by 77% in the year, as development programmes transitioned into production. Military Pyrotechnics and Explosives disappointed in 1999 as orders were delayed by other UK priorities in support of the Kosovo conflict. These belated orders are now flowing through and, supported by export business, the current order book is strong. We are continually reviewing the business cost base and, consequently in November 1999, we decided to relocate the Military business to our Derby site. The savings arising from this will be seen in 2000 and more than outweigh the one-off costs of the relocation. Marine Safety successfully launched several new products in 1999, including an award winning Emergency Positioning Indicating Radio Beacon (EPIRB) and an innovative Hydrostatic Release Unit (HRU), and this contributed to a doubling in its electronics business. Future growth in electronic products is expected as a result of increased commercial and leisure legislation. Kembrey Wiring Systems secured an important five year contract with BAE Systems in support of its military aircraft production that will provide significant growth in 2000 and subsequent years. The infrastructure and organisation has been strengthened in support of this anticipated growth, although this necessary investment has increased overheads and constrained profits in 1999. As referred to in my Interim Report, I felt that Chemring Plating Systems would benefit from being part of a specialist group supplying the printed circuit board industry and consequently this business was sold on 26 October 1999; its results are included under discontinued operations. Dividends An interim dividend for the year ended 31 October 1999 of 2.00p per ordinary share was paid on 27 August 1999. The directors recommend a final dividend of 3.50p per ordinary share, to be paid on 10 April 2000, making a total for the year of 5.50p per ordinary share, up 10% (previous period : 5.00p). Board Paul Rayner was appointed Finance Director on 20 August 1999, following the departure of Ray Gibbs. Paul's operational background is providing strong financial management to the Group in the next phase of its development. Employees The year has seen the Group make a strong recovery and I would like to thank all our employees for their support and hard work. Current trading and prospects We have had considerable success in strategically positioning our continuing operations in their market places. Since the year end, significant new orders of £29 million have increased the order book to a record level of £59 million. Against this background, I believe the Group can look forward to a strong period of growth and a substantial improvement in shareholder value. K C Scobie Chairman 11 January 2000 REVIEW BY THE CHIEF EXECUTIVE The Group's activities are covered under the following headings: Defence Countermeasures: Chemring Countermeasures, Alloy Surfaces, Pains Wessex Australia Military Pyrotechnics and Explosives: Pains Wessex, Pains Wessex Australia, Haley & Weller Non-Defence Marine Safety: Pains Wessex Safety Systems, McMurdo Marine, Nova Marine Wiring Harnesses: Kembrey Wiring Systems Chemical Coatings: Alloy Surfaces Defence Businesses The dynamic growth in Countermeasures continues, with overall turnover in defence activities of £35.8 million, up £4.3 million (14%) on the previous period's performance. The year ended with a healthy order book of £26 million, up £6 million on 1998; this has further increased to £48 million since the year end. Military Pyrotechnics and Explosives turnover was down by £1.9 million (16%) on the previous period due to known requirements from the UK MoD being delayed due to other MoD priorities in support of the Kosovo conflict; these orders have now been received. Countermeasures The Group is recognised as an international market leader in the development and manufacture of expendable countermeasures to protect valuable military platforms, and continues to develop new products and new markets to maintain its leading position. The Countermeasures business continues to strengthen its global position in this expanding market, with innovative new concepts moving from development into production, where we are providing world leading solutions. A buoyant order book has supported the turnover increase of 33% to £25.2 million for the year. The order book increased by 16% over the year to £15.4 million and in the first two months of the new financial year this has further increased to £33 million. For aircraft countermeasures, the Group is prime contractor to the UK MoD for its current range of infra red flares, and in the US, sole source supplier of two out of the family of four flares in the Advanced Strategic and Tactical Expendables (ASTE) programme. ASTE is a joint Air Force (USAF)/Navy (USN) effort to develop advanced infra red (IR) expendable solutions for use against evolving infra red threats for a variety of USAF/USN platforms. Development of a new proprietary lower cost 55mm flare for Tornado aircraft is now complete and first production deliveries will be made in 2000. Tornado aircraft users include the UK, Germany, Italy and Saudi Arabia. The Group is also the developer of the chaff and flare decoys for the European Fighter Aircraft 2000 (Typhoon). In the US, the investment made in 1998 in Alloy Surfaces' new facility in New Chester, Pennsylvania supported a 77% increase in turnover. Alloy Surfaces' unique infra red material features in all of the advanced infra red expendable countermeasure programmes in the US, which will ensure continued growth. Several new products have completed their development phase and transitioned into production this year, in particular the proprietary BOL IR decoy, for which a contract was received from the UK MoD during the year, and for which we expect USN orders in 2000. Alloy Surfaces currently provides a special materials decoy for USN helicopters and has also developed a product for US Army helicopters, which will commence series production in 2001, when the Advanced Threat IR Countermeasures (ATIRCM), which combine missile warning with directable infra red countermeasures in a single package, enter service. Development has been completed on the MEBs (Modular Expendable Blocks), which incorporate both flare and chaff materials to increase operational effectiveness on both fixed wing aircraft and helicopters. As well as significantly improving operational capabilities, the MEB also confers significant savings in logistic costs to the user. In naval countermeasures, we have made significant strides and there are exciting growth prospects. Development of the UK MoD MK36 130mm naval IR round is almost complete and production deliveries will commence in 2000. We have recently received a significant order from Denmark for our innovative combined MK36 compatible 130mm RF/IR round, with deliveries commencing in 2000. This will be the first of its kind and underlines the confidence which government organisations place on our innovative design, development and production capabilities. The MK36 decoy launcher is standard in most NATO navies and these two new products add to our portfolio of MK 36 compatible products. This has been a good year for our Countermeasures business with both orders and sales reaching record highs, with significant opportunities for further increases. Investment will continue in both facilities and R&D to ensure the Group maintains its market position and capitalises on the increasing need to protect valuable military platforms. Military Pyrotechnics and Explosives The Group is a leading supplier to the UK MoD and an international market leader for its range of specialist pyrotechnic and explosive products used in training and other non-offensive activities. Turnover in the year was down by £1.9 million (16%). At the year end the order book had increased by 70% to £10.6 million, and has further increased to £15.3 million in the first two months of the new financial year. There is good visibility of UK MoD requirements over the next three years and the Group is well placed to maintain its market position. The relocation of the business to Derby and consolidation on one site will result in significant cost savings and will allow expansion in UK Countermeasures to take place at our Salisbury site. Pains Wessex Australia's military turnover was at a similar level to last year's high, in support of the Australian government strategy to encourage in-country industrial capability. We are increasing our international collaboration initiatives and in Europe, exploring closer working relationships with our competitors, to position us for possible European-led defence procurement programmes. Non-Defence Businesses Marine Safety The Group is a market leader in providing legislated marine safety products to aid location and rescue, including pyrotechnics, electronic location beacons, location lights and VHF radio. Electronics sales more than doubled in the year to assist in increasing Marine Safety turnover to £16.8 million. The business is primarily driven by global legislation set by the International Maritime Organisation (IMO) under its Safety of Life at Sea (SOLAS) convention. This mandates the carrying of pyrotechnic products and marine safety lights - all manufactured by the Group. Electronic products in support of the legislated Global Maritime Distress and Safety System (GMDSS) include 406 EPIRBs, SARTs and portable VHF radios. New products, which have contributed to the growth this year, are 'all round' lights, VHF radios, a pyrotechnic HRU for electronic beacons and life rafts, and an award winning lower cost EPIRB, all of which provide a more competitive range of products. The emphasis has been on innovative low cost products, which have helped to generate sales and improve margins for the business and resulted in increased market share in 1999. Forthcoming legislation, both internationally from the IMO and within the European Union, will further expand our market opportunities. This includes new fishing vessel safety requirements within the EU and additional safety measures, such as voyage data recorders and automatic identification systems. Development in 406 EPIRB technology and the integration of Global Positioning Systems (GPS) presents new market areas for our technology, including Personal Locating Beacons (PLB) for land use and Emergency Location Transmitters (ELT) for aviation use, as legislation is introduced in these areas. Wiring Harnesses Kembrey Wiring Systems is one of the largest UK manufacturers of high specification cable harnesses for the aerospace industry. It has an excellent reputation for supplying quality wiring systems to manufacturers of aircraft and aircraft engines. Major customers include Rolls-Royce, BMW and BAE Systems. Of significance was the contract award received from BAE Systems to supply wiring harnesses for all its military aircraft. The contract is for an initial five year period. Significant investment in equipment, people and training was necessary in the year in support of gaining this important strategic partnership. This included the latest laser marking technology, computer aided design and improvements to the facilities. This investment is now complete and deliveries to BAE Systems have commenced. Chemical Coatings Turnover for the year was £2.3 million compared with £2.7 million in 1998. Alloy Surfaces has a niche market in supplying special chemicals in the aerospace sector for use in diffusion coating of engine components and demand is expected to continue at current levels. D R Evans Chief Executive 11 January 2000 REVIEW BY THE FINANCE DIRECTOR Operating results A summary of the operating results for the year ended 31 October 1999 appears in the Chairman's Statement. Continuing operations' gross profit grew by 11% to £17,097,000 on a turnover increase of 8%. This is the result of greater efficiencies and the introduction of new products. Gross margins increased to 27% (previous period : 26%). Overheads in the continuing operations have been well controlled in the year with distribution costs being 4.3% of turnover (previous period : 5.1%) and administration expenses being 10.8% of turnover (previous period : 9.7%). Administration expenses in the year are stated after charging £295,000 relating to the aborted bid costs; discounting these costs, administration expenses would have been 10.3%. £2,801,000 was expended on research and development activities during the year. Operating margins of the continuing operations improved to 12.5% from 11.8%. The operating loss on discontinued operations relates primarily to Chemring Plating Systems, which was sold in October 1999. There were no exceptional items during the year (previous period : £2,261,000). Interest The interest charge for the year was £1,979,000 (previous period : £2,582,000). Interest cover on profit generated by continuing operations is 3.9 times (previous period : 2.6 times). Taxation The tax charge of £871,000 is an effective rate of 20%, which represents tax arising on overseas operations and a reduced charge on the UK operations, due the utilisation of brought forward tax losses in the UK. In future, it is anticipated that the tax rate will increase as losses are used up. Shareholder returns Basic earnings per ordinary share increased to 14.49p (previous period : 3.52p). Diluted earnings per ordinary share on continuing operations increased to 19.02p (previous period : 11.64p) up 63%. Dividend per ordinary share of 5.50p (previous period : 5.00p) is covered 2.63 times (previous period : 0.7 times). Post tax return on capital employed was 11.9%, a significant improvement on 3.1% for the previous period. Goodwill Goodwill of £18.3 million arose as acquisitions were made in the Countermeasures, Marine Safety and Military businesses. The Board has carried out an annual impairment test that has demonstrated no amortisation is necessary on the constituent parts of the goodwill balance. Cash flow and gearing Operating cash flow before capital expenditure was £5,834,000 (previous period : £7,297,000). Cash flow in relation to discontinued operations was poor and this impacted on the full year cash flows. Capital expenditure on tangible assets of £2,700,000 in support of continued growth was financed through cash flow and leasing during the year. Growth in the Countermeasures and Marine Safety businesses increased the level of debtors at the year end. Post year end cash flow has exceeded expectations and further reductions in net debt are anticipated. Proceeds from disposals have been used to reduce net debt which stood at £20,681,000 (previous period : £22,572,000) a reduction of 8%. Gearing is now 72% (previous period : 84%). Funding and going concern Total facilities of £22.8 million have been agreed with National Westminster Plc for all UK companies. In addition credit lines of £2 million have been agreed with various lenders to cater for plant and machinery purchases for the UK companies. Facilities of US$8.2 million are in place with Wilmington Trust and the Pennsylvania Industrial Development Authority, to provide funding for Alloy Surfaces. Facilities of A$1.4 million exist to provide funding for Pains Wessex Australia. The Board has reviewed the latest guidance on going concern and considers the above facilities enable the Group to compile the financial statements on the going concern basis and enable it to continue in operational existence for the foreseeable future. New accounting developments The following accounting standards have been adopted in the year and the financial information amended as appropriate: FRS12 Provisions, contingent liabilities and contingent assets. FRS13 Derivatives and other financial instruments - disclosure. FRS14 Earnings per share. Year 2000 The Group has not experienced any Year 2000 related issues and compliance costs have not added significantly to overheads. The Euro The Group has traded in the new currency, particularly benefiting the Marine Safety business from the price transparencies that now exist within Europe. P A Rayner Finance Director 11 January 2000 SUMMARY FINANCIAL INFORMATION For the year ended 31 October 1999 Audited Unaudited Audited Year 6 month 13 month ended period ended period ended 31 Oct 1999 1 May 1999 31 Oct 1998 £000 £000 £000 Turnover : Continuing operations Defence Countermeasures 25,180 11,248 18,929 Military pyrotechnics and explosives 10,616 5,341 12,600 35,796 16,589 31,529 Non-defence Marine safety 16,765 8,264 15,622 Wiring harnesses 7,197 3,153 7,772 Chemical coatings 2,324 1,291 2,741 26,286 12,708 26,135 62,082 29,297 57,664 Turnover: Discontinued operations 3,316 2,762 17,082 65,398 32,059 74,746 Operating profit/(loss) Continuing operations 7,766 2,858 6,814 Discontinued operations (1,551) (769) (790) Profit before taxation 4,306 1,095 1,251 Dividend per ordinary share 5.50p 2.00p 5.00p Basic earnings per ordinary share 14.49p 3.74p 3.52p Diluted earnings per ordinary share on continuing operations 19.02p 6.40p 11.64p CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 October 1999 Year ended 31 Oct 1999 Continuing Discontinued Total operations operations operations £000 £000 £000 Turnover 62,082 3,316 65,398 Cost of sales (44,985) (2,064) (47,049) Gross profit 17,097 1,252 18,349 Distribution costs (2,648) (149) (2,797) Administrative expenses (6,683) (2,654) (9,337) Operating profit/(loss) 7,766 (1,551) 6,215 Associated undertaking 70 Exceptional items Loss on disposal of discontinued operations - Profit on ordinary activities before interest 6,285 Interest payable (1,979) Profit on ordinary activities before taxation 4,306 Tax on profit on ordinary activities (871) Profit on ordinary activities after taxation 3,435 Dividends (1,308) Retained profit/(loss) for the year/period 2,127 Basic earnings per ordinary share 14.49p Diluted earnings per ordinary share 13.98p Diluted earnings per ordinary share on continuing operations 19.02p CONSOLIDATED PROFIT AND LOSS ACCOUNT 13 month period ended 31 Oct 1998 Continuing Discontinued Total operations operations operations £000 £000 £000 Turnover 57,664 17,082 74,746 Cost of sales (42,313) (11,635) (53,948) Gross profit 15,351 5,447 20,798 Distribution costs (2,953) (2,417) (5,370) Administrative expenses (5,584) (3,820) (9,404) Operating profit/(loss) 6,814 (790) 6,024 Associated undertaking 70 Exceptional items Loss on disposal of discontinued operations (2,261) Profit on ordinary activities before interest 3,833 Interest payable (2,582) Profit on ordinary activities before taxation 1,251 Tax on profit on ordinary activities (413) Profit on ordinary activities after taxation 838 Dividends (1,189) Retained profit/(loss) for the year/period (351) Basic earnings per ordinary share 3.52p Diluted earnings per ordinary share 3.37p Diluted earnings per ordinary share on continuing operations 11.64p ADDITIONAL FINANCIAL PERFORMANCE STATEMENTS For the year ended 31 October 1999 Year ended 13 month 31 Oct 1999 period ended £000 31 Oct 1998 £000 Statement of total recognised gains and losses Profit on ordinary activities after taxation 3,435 838 Currency translation differences on foreign currency net investments (118) (1,009) Decrease in revaluation reserve - (209) Total recognised gains and losses for the year/period 3,317 (380) Reconciliation of movements in shareholders' funds Profit on ordinary activities after taxation 3,435 838 Dividends (1,308) (1,189) Retained profit/(loss) for the year/period 2,127 (351) Other recognised losses (118) (1,218) Ordinary shares issued 1 - Share premium arising 24 18 Net addition/(reduction) to shareholders' funds 2,034 (1,551) Shareholders' funds at 1 November 1998 26,815 28,366 Shareholders' funds at 31 October 1999 28,849 26,815 CONSOLIDATED BALANCE SHEET As at 31 October 1999 As at 31 Oct 1999 £000 £000 Fixed assets Intangible assets Development costs 549 Good-will 18,246 18,795 Tangible assets 17,219 Investments 880 36,894 Current assets Stock 9,597 Debtors 17,928 Cash at bank and in hand 2,408 29,933 Creditors due within one year (20,449) Net current assets 9,484 Total assets less current liabilities 46,378 Creditors due after more than one year (17,089) Provisions for liabilities and charges (440) 28,849 Capital and reserves Called-up share capital 1,247 Reserves Share premium account 10,813 Special capital reserve 12,939 Revaluation reserve 2,590 Revenue reserves 1,260 27,602 Shareholders' funds 28,849 Attributable to equity shareholders 28,787 Attributable to non-equity shareholders 62 28,849 CONSOLIDATED BALANCE SHEET As at 31 Oct 1998 £000 £000 Fixed assets Intangible assets Development costs 608 Good-will 18,246 18,854 Tangible assets 18,549 Investments 863 38,266 Current assets Stock 10,920 Debtors 14,487 Cash at bank and in hand 2,162 27,569 Creditors due within one year (21,556) Net current assets 6,013 Total assets less current liabilities 44,279 Creditors due after more than one year (16,964) Provisions for liabilities and charges (500) 26,815 Capital and reserves Called-up share capital 1,246 Reserves Share premium account 10,789 Special capital reserve 12,939 Revaluation reserve 2,626 Revenue reserves (785) 25,569 Shareholders' funds 26,815 Attributable to equity shareholders 26,753 Attributable to non-equity shareholders 62 26,815 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 October 1999 Year 13 month ended period ended 31 Oct 1999 31 Oct 1998 £000 £000 £000 £000 Net cash inflow from operating activities 5,834 7,297 Fundamental reorganisation of operations (494) (1,788) 5,340 5,509 Returns on investments and servicing of finance (2,006) (2,312) Taxation (495) (165) Capital expenditure (2,842) (4,251) Acquisitions and disposals 2,813 401 Equity dividends paid (1,186) (712) Cash inflow/(outflow) before use of liquid resources and financing 1,624 (1,530) Financing - issue of shares 25 18 - increase in debt 318 2,846 343 2,864 Increase in cash in the year/period 1,967 1,334 Reconciliation of net cash flow to movement in net debt Increase in cash in the year/period 1,967 1,334 Cash inflow from the increase in debt and lease financing (318) (2,846) Change in net debt resulting from cash flows 1,649 (1,512) Translation difference 49 (69) Disposals 193 8 Finance leases - (378) 1,891 (1,951) Notes 1. The financial information set out above does not constitute the company's statutory accounts for the year ended 31 October 1999 or the thirteen month period ended 31 October 1998 but is derived from those accounts. Statutory accounts for 1998 have been delivered to the Registrar of Companies, and those for 1999 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 section 237(2) or (3) of the Companies Act 1985. The financial information has been prepared in accordance with the accounting policies adopted for the 1998 accounts. 2. The financial statements for the year ended 31 October 1999 will be posted to shareholders on 26 January 2000 and will also be available from that date at the registered office, 1645 Parkway, Whiteley, Fareham, Hampshire PO15 7AH.

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