Chemring Group PLC Annual report and accounts 2019 Overview 1 2019 performance 2 At a glance 4 Chairman’s statement Strategic report 7 Group Chief Executive’s review 9 Q&A with Michael Ord 10 Business model 12 Target markets 14 Our strategy 16 Key performance indicators 20 Focus on Sensors & Information 22 Focus on Countermeasures & Energetics 24 Financial review 28 Risk management 30 Principal risks and uncertainties 37 Introduction to sustainability A year of progress 38 Sustainability 38 Health & safety 40 Environment It has been an exceptionally busy year in which we continued 42 People to deliver our current mission of building a stronger business. 44 Ethics and business conduct Governance We have implemented significant changes to improve safety, 46 Board of directors strengthen leadership and corporate governance, and embed 48 Corporate governance report 60 Audit Committee report continuous improvement across the Group. We have also 64 Nomination Committee report changed the structure of the business and the way in which 66 Directors’ remuneration report 86 Directors’ report we operate. In doing so we are improving the quality of the Financial statements business and redefining our purpose. Collectively we are 90 Consolidated income statement 91 Consolidated statement of changing the culture of Chemring to one of close collaboration, comprehensive income responsible behaviour and belief in our core values of 92 Consolidated statement of changes in equity 93 Consolidated balance sheet Safety, Excellence and Innovation. 94 Consolidated cash flow statement 95 Notes to the Group financial statements With a number of significant operational and strategic 121 Parent company balance sheet 122 Parent company statement of milestones achieved this year we have made real progress; comprehensive income 122 Parent company statement of changes in equity moving away from commoditised product lines to focus on 123 Notes to the parent company higher quality, sustainable business areas where we have a financial statements 127 Accounting policies competitive advantage. 134 Independent auditor’s report to the members of Chemring Group PLC As we continue to develop, over time our focus will move Other information to strategic opportunities that further enhance the Group’s 141 Corporate information and website growth potential and the delivery of positive returns for all our stakeholders. Michael Ord Group Chief Executive Read more of our strategy Discover more at Page 14 chemring.co.uk 2019 performance Overview Revenue Order book Key points > Overall performance was slightly ahead of our initial expectations, reflecting £335m £449m strong Sensors & Information sector performance; Countermeasures & (+13%) (+14%) Energetics sector impacted by planned site recommissioning in the UK and The increase in revenue principally reflected Building in the Countermeasures & Energetics Australia. The UK countermeasures site the growth in Sensors & Information driven sector in line with strategy. Targeted 2020 has achieved steady state manufacturing. by the start of the HMDS IDIQ contract in revenue from continuing operations Results include £15m of insurance the year and a strong year at Roke. approximately 76% covered by orders in hand. recoveries, offsetting costs of remediation and site operating costs. > Safety remains our key priority and, Underlying operating profit* Statutory operating profit together with enhancing operational stability and efficiency, is driving investment in the Group’s manufacturing infrastructure. £44m £31m > Sale of Chemring Military Products and (+42%) (2018: £16m loss) Chemring Defence UK and closure of Chemring Prime Contracts completed Reflects revenue growth and improving margins The difference to underlying operating profit in the year. The sale of Chemring in both sectors as operational gearing and reflects the amortisation of acquired Ordnance was announced on performance both positively impacted margins. intangible assets which is the only item 21 November 2019. treated as non-underlying in 2019. > Australian subsidiary, which has been offline for the majority of the year to enable the changeover to F-35 Lightning II Underlying operating profit (£m)* countermeasure manufacturing, received two significant countermeasures contracts, as previously announced. Group 19 44.0 > Continued progress on various US Programs of Record. Further delivery 18 31.0 orders received for the next phase of £44.0m the HMDS IDIQ, valued at $30m. Successful critical design review on AVCAD led to a further 75 unit order. > Strong order intake in Countermeasures Sensors & Information Countermeasures & Energetics resulted in a Group order & Energetics book for the continuing business at year end of £449m (2018: £394m), £287m currently due as revenue in FY20, approximately 76% coverage of FY20 £26.3m £27.5m targeted revenue. 19 26.3 19 27.5 > Net debt has decreased year on year, reflecting the strong operating cash 18 15.3 18 23.9 generation offset by the start of the investment in the Tennessee facility. Net debt: EBITDA of 1.24x (2018: 1.64x) Read more on Read more on and pension fund in IAS 19 surplus. Page 20 Page 22 > Board recommending a final dividend of 2.4p per ordinary share, giving a total Progress Safety 2020 outlook dividend of 3.6p per ordinary share Building a stronger business As part of our commitment to Countermeasures & Energetics (2018: 3.3p). approach to ensure solid continuous improvement, we order book, opportunities foundations are in place have established three core under the US Programs of > Board’s expectations for FY20 trading to deliver medium-term values: Safety, as paramount, Record and the strong performance remain unchanged, growth opportunities. Excellence and Innovation. market for Roke’s services again with the usual seasonal all support improving H2 weighting. medium-term expectations. * References to underlying operating profit and earnings per share throughout this strategic report are to underlying measures from continuing operations; see note 3 for a reconciliation to the statutory profit after tax from both continuing and discontinued operations of £21.9m (2018: £105.8m loss). Chemring Group PLC | Annual report and accounts 2019 1 At a glance Relentlessly innovating to protect Chemring designs and delivers high-tech solutions to solve difficult problems, relentlessly innovating to protect people, platforms, missions and information against constantly changing threats. We challenge convention and use our extensive science and engineering expertise to turn ideas into reality, delivering practical results that protect and safeguard in an uncertain world. Chemring is organised under two sectors: Sensors & Information Countermeasures Innovation is core to solving our clients’ & Energetics difficult problems. Operating across Chemring is the world leader commercial, national security and in the design, development and defence domains, we enable our manufacture of advanced clients to deliver competitive advantage, expendable countermeasures and defend their people, assets and countermeasure suites for protecting secrets and defeat their adversaries. air, sea and land platforms against the With over 350 scientists, engineers growing threat of guided missiles. and consultants, our Sensors & We combine a deep understanding Information sector continues to invest in technologies that safeguard and of platform signatures, missile seekers and chemical formulations to protect in an uncertain world. develop new decoys against new threats. Our sensor technologies detect threats with a very high degree of Our world-class energetics capabilities include cutting-edge raw materials confidence, be they explosive, biological, chemical, radio or cyber. to meet unique client product requirements, actuators, air crew safety Our Roke business draws on a 60-year heritage of innovation in sensors, systems, and missile and rocket components. communications, cyber and artificial intelligence to secure, combine and Every day, our products, services and experts assist customers including apply these technologies in new ways. NASA to take rockets into orbit, provide demolition stores for militaries We operate across the whole life cycle providing advice, engineering, and security forces, and enable navies to ensure their missiles self-destruct. design, research and solutions created from our products and services. Revenue Underlying operating profit Revenue Underlying operating profit £131.9m £26.3m £203.3m £27.5m (2018: £87.3m) (2018: £15.3m) (2018: £210.1m) (2018: £23.9m) Where we operate Our customers are national defence and security agencies, defence prime contractors, and increasingly those in the commercial sector. Our home markets in the UK, the US, Australia and Norway represent some of the most demanding users in the world, with well-funded militaries and international credibility, which helps achieve export sales. The percentages below represent the proportion of the Group’s total 2019 revenue (see note 1 on page 95). US UK Europe Asia Pacific and ROW 55% 27% 9% 9% The US maintains the largest In the UK we are seeing growing In Europe, our Norwegian Steady year-on-year growth in defence budget in the world, customer demand for our cyber business has achieved record key regional markets as defence and remains our core market. and information security solutions order intake delivered through spending increases in response Our exposure to key long-term in national security, defence long-term supply agreements and to increased