INTERIM RESULTS

NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS

 

1. ACCOUNTING POLICIES

 

Basis of preparation

The condensed consolidated financial information for each of the six month periods does 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 21 June 2018. The information for the year ended 31 October 2017 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. Full accounts for the year ended 31 October 2017, 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.

 

Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards ("IFRSs"), this announcement does not itself contain sufficient information to comply with IFRSs. 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.

 

As part of their regular assessment of Chemring's working capital and financing position, the Directors have prepared a detailed trading and cash flow forecast for a period which covers at least twelve months after the date of approval of the financial statements. In assessing the forecast, the Directors have considered:

 

·     trading risks presented by the current economic conditions in the defence market, particularly in relation to government budgets and spending;

·     the impact of macroeconomic factors, particularly interest rates and foreign exchange rates;

·     the status of the Group's financial arrangements and associated covenant requirements;

·     progress made in developing and implementing cost reduction programmes and operational improvements;

·     mitigating actions available should business activities fall behind current expectations, including the deferral of discretionary overheads and restricting cash outflows; and

·     the long-term nature of the Group's business which, taken together with the Group's order book, provides a satisfactory level of confidence to the Board in respect of trading.

 

The Directors have acknowledged the latest guidance on going concern. Management have considered the latest forecasts available to them and additional sensitivity analysis has been prepared on the covenant forecasts to consider the impact on covenants of any reduction in anticipated levels of EBITDA. This sensitised scenario shows headroom on all covenant test dates. After consideration of the above, 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.

 

Alternative Performance Measures ("APMs")

In the analysis of the Group's financial performance and position, operating results and cash flows, APMs are presented to provide readers with additional information. The principal APMs presented are underlying measures of earnings including underlying operating profit, underlying profit before tax, underlying profit after tax, underlying EBITDA, underlying earnings per share, and underlying operating cash flow. In addition, EBITDA, net debt, and constant currency revenues are presented which are also considered to be non-IFRS measures. These measures are consistent with information regularly reviewed by management to run the business, including planning, budgeting and reporting purposes and for its internal assessment of the operational performance of individual businesses.

 

The directors believe that the use of these APMs assist in providing additional information on the underlying trends, performance and position of the Group. APMs are used to improve the comparability of information between reporting periods by adjusting for items that are non-recurring or otherwise non-underlying. Management consider non-underlying items to be:

·     amortisation of acquired intangibles;

·     discontinued operations;

·     exceptional items, for example relating to acquisitions and disposals, restructuring of business and incident costs, and claim costs;

·     gains or losses on the movement in the fair value of derivative financial instruments; and

·     the tax impact of all of the above.

 

Our use of APMs is consistent with the prior year and we provide comparatives alongside all current period figures.

 

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 2017.

 

Recent accounting developments

The following standards, amendments and interpretations have been issued by the International Accounting Standards Board (IASB) or by the IFRS IC. The Group's approach to these is as follows:

 

i) The following International Financial Reporting Committee ("IFRIC") interpretations, amendments to existing standards and new standards were adopted in the period ending 30 April 2018 but have not materially impacted the reported results or the financial position:

·      Amendments to IAS 7 Statement of Cash Flows; and

·      Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses

ii) At the date of authorisation of this announcement, the following standards and interpretations that are potentially relevant to the Group and which have not yet been applied in these reported results were in issue but not yet effective (and in some cases had not yet been adopted by the European Union):

Effective for periods beginning on or after 1 January 2018

·      Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions;

·      IFRS 9 Financial Instruments Recognition and Measurement;

·      Annual Improvements to IFRSs 2014-2016 Cycle; and

·      IFRIC 22 Foreign Currency Transactions and Advance Consideration

Effective for periods beginning on or after 1 January 2019

·      IFRS 16 Leases

·      Annual Improvements to IFRSs 2015-2017 Cycle; and

·      IFRIC 23 Uncertainty over Income Tax Treatments

Effective for periods beginning on or after 1 January 2021

·      IFRS 17 Insurance Contracts

The Directors do not expect the adoption of these standards and interpretations to have a material impact on the results of the Group in future periods except as follows:

·      IFRS 16 Leases will impact the measurement, recognition, presentation and disclosure of leases, particularly operating leases where the term is longer than 12 months.

The impact of IFRS 16 Leases is currently being assessed. Under IFRS 16 Leases, lessees will be required to apply a single model to recognise a lease liability and asset for all leases, including those classified as operating leases under current accounting standards, unless the underlying asset has a low value or the lease term is 12 months or less. The adoption of IFRS 16 will have a significant impact on the results as each lease will give rise to a right of use asset which will be depreciated on a straight line basis, and a lease liability with a related interest charge. The depreciation and interest will replace the operating lease payments currently recognised as an expense. The impact will depend on the transition approach and the contracts in effect at the time of the adoption. At 31 April 2018, operating lease commitments were £4.6m and operating lease payments in the period to 30 April 2018 were £0.5m.

 

Beyond this information, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been conducted during the second half of the year.

 

Critical accounting judgements and sources of estimation uncertainty

When applying the Group's accounting policies, management must make judgements, assumptions and estimates concerning the future that affect the carrying amounts of assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognised during the period. Such judgements, assumptions and estimates are based upon factors including historical experience, the observance of trends in the industries in which the Group operates, and information available from the Group's customers and other external sources.

 

Critical accounting judgements

Revenue recognition

IFRS 15 Revenue from Contracts with Customers recognises revenue on the basis of the satisfaction of performance obligations. The identification of these obligations requires management judgement, particularly with respect to milestone contracts that contain multiple obligations. Additionally, management has to consider whether performance obligations should be recognised at a single point in time, which is generally the case for the sale of products by the Group, or over a period of time, which is more common for certain service contracts.

 

Key sources of estimation uncertainty

Goodwill impairment

Determining whether goodwill is impaired requires an estimation of the value-in-use of the cash-generating units to which goodwill has been allocated. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit, and to determine a suitable discount rate in order to calculate present value. In reviewing the carrying value of goodwill of the Group's businesses, the Board considers the separate plans and cash flows of these businesses consistent with the requirements of IAS 36 Impairment of Assets. The plans and cash flows of these businesses reflect current and anticipated conditions in the defence industry.

 

Capitalised development costs

IAS 38 Intangible Assets requires that development costs, arising from the application of research findings or other technical knowledge to a plan or design of a new substantially improved product, are capitalised, subject to certain criteria being met. Determining the future cash flows generated by the products in development requires estimates which may differ from the actual outcome. In particular, this can depend on the estimation applied to future milestone events to secure long-term positions on production contracts.

 

Deferred tax assets on tax losses and US interest deductions

Applicable accounting standards permit the recognition of deferred tax assets only to the extent that it is probable that future taxable profits will be available to utilise the tax losses carried forward. The assessment of future taxable profits involves significant estimation uncertainty, principally relating to an assessment of management's projections of future taxable income based on business plans and ongoing tax planning strategies. These projections include assumptions about the future strategy of the Group, the economic and regulatory environment in which the Group operates, future tax legislation, and customer behaviour, amongst other variables.

 

2. SEGMENTAL ANALYSIS

Period to 30 April 2018 (unaudited)
	Countermeasures	Sensors		Energetics	Unallocated	Group
	£m	£m		£m	£m	£m
Revenue	55.9	44.5		128.9	-	229.3
Segment result before depreciation, amortisation and non-underlying items	12.6	8.8		11.3	(3.7)	29.0
Depreciation	(4.3)	(0.8)		(2.7)	(0.6)	(8.4)
Amortisation	(1.0)	(1.2)		(0.3)	-	(2.5)
Segmental underlying operating profit	7.3	6.8		8.3	(4.3)	18.1
Amortisation of acquired intangibles	(0.2)	(3.3)		(3.5)	-	(7.0)
Non-underlying items	(1.6)	(0.5)		0.2	(1.6)	(3.5)
Segmental operating profit	5.5	3.0		5.0	(5.9)	7.6

 

 

Period to 30 April 2017 (unaudited)
	Countermeasures	Sensors		Energetics	Unallocated	Group
	£m	£m		£m	£m	£m
Revenue	53.4	40.3		155.9	-	249.6
Segment result before depreciation, amortisation and non-underlying items	7.0	7.5		19.9	(4.4)	30.0
Depreciation	(4.9)	(1.0)		(2.7)	(0.7)	(9.3)
Amortisation	(1.1)	(2.0)		(0.4)	-	(3.5)
Segmental underlying operating profit	1.0	4.5		16.8	(5.1)	17.2
Amortisation of acquired intangibles	(0.2)	(3.6)		(3.9)	-	(7.7)
Non-underlying items	(1.8)	(5.1)		(3.0)	(0.5)	(10.4)
Segmental operating loss	(1.0)	(4.2)		9.9	(5.6)	(0.9)

 

 

Year ended 31 October 2017 (audited)
	Countermeasures	Sensors		Energetics	Unallocated	Group
	£m	£m		£m	£m	£m
Revenue	134.8	94.5		318.2	-	547.5
Segment result before depreciation, amortisation and non-underlying items	29.8	20.2		41.2	(10.2)	81.0
Depreciation	(10.8)	(1.8)		(5.8)	(0.1)	(18.5)
Amortisation	(2.3)	(4.1)		(0.6)	(0.1)	(7.1)
Segmental underlying operating profit	16.7	14.3		34.8	(10.4)	55.4
Amortisation of acquired intangibles	(0.4)	(7.0)		(7.6)	-	(15.0)
Non-underlying items	(3.6)	(5.4)		(16.2)	0.1	(25.1)
Segmental operating profit	12.7	1.9		11.0	(10.3)	15.3

 

 

3. ALTERNATIVE PERFORMANCE MEASURES AND DISCONTINUED OPERATIONS

 

The principal Alternative Performance Measures ("APMs") presented are the underlying measures of earnings which exclude discontinued operations, exceptional items, gain or loss on the movement on the fair value of derivative financial instruments, and the amortisation of acquired intangibles. The Directors believe that these APMs improve the comparability of information between reporting periods. The term underlying is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

 

	Unaudited period to 30 April 2018	Unaudited period to 30 April 2017	Audited year ended 31 October 2017
	£m	£m	£m
Acquisition and disposal related costs	0.5	-	2.3
Business restructuring costs	1.6	11.1	14.3
Claim related costs	1.5	0.2	0.4
Impairment of business	-	-	9.8
Gain on the movement in the fair value of derivative financial instruments	(0.1)	(0.9)	(1.7)
Non-underlying items	3.5	10.4	25.1
Less non-underlying depreciation in business restructuring costs	(0.7)	(1.0)	(1.0)
Impact of non-underlying items on EBITDA	2.8	9.4	24.1
Non-underlying depreciation in business restructuring costs	0.7	1.0	1.0
Intangible amortisation arising from business combinations	7.0	7.7	15.0
Impact of non-underlying items on operating profit and profit before tax	10.5	18.1	40.1
Tax impact of non-underlying items	(1.6)	(5.8)	(7.2)
Non-underlying deferred tax write-off	17.4	-	-
Impact of non-underlying items on continuing profit after tax	26.3	12.3	32.9
Discontinued operations	-	(1.2)	(3.5)
Impact of non-underlying items on profit after tax	26.3	11.1	29.4

 

Acquisition and disposal related costs

In the period to 30 April 2018, the Group disposed of its Norwegian subsidiary 3d-Radar resulting in a loss on disposal of £0.5m.

 

Acquisition and disposal related costs of £2.3m in the year ended 31 October 2017 related to transactions costs and an earnout payment on the acquisition of Wallop Defence Systems' assets for which no provision was made at the time of acquisition.

 

Business restructuring costs

In the period to 30 April 2018, restructuring costs were £1.6m relating to the initial stages of the transformation programme at our Tennessee facility. These costs comprised a non-cash write-off of demolished assets of £1.1m and the costs of demolition and site remediation of £0.5m.

 

In the year to 31 October 2017, business restructuring costs of £14.3m (H1 2017: £11.1m) principally comprise of restructuring costs in relation to the site closures/consolidations at facilities in California, Philadelphia and Virginia.

 

Claim related costs

In the period to 30 April 2018, claim related costs of £1.5m relate to the legal costs of the ongoing Serious Fraud Office investigation.

 

In the year ended 31 October 2017, claim related costs of £0.4m (H1 2017: £0.2m) related to the legal costs of the ongoing Serious Fraud Office investigation, offset by the final settlement of claims regarding the manufacture of certain components for the Next Generation Light Anti-Tank Weapon ("NLAW") by Chemring Energetics UK.

 

Impairment of business

In 2017 the Group recognised a total impairment loss of £10.6m which included £0.8m relating to taxation, in respect of the Chemring Defence UK business. This was based on the prevailing market conditions in the military and law enforcement pyrotechnics market.

 

4. SEASONALITY OF REVENUE

 

Revenue for all three of the business segments is more weighted towards the second half of the financial year. This second half weighting arises due to customer behaviours in the defence marketplace, the timing of expected contract activity and planned facility maintenance work programmes, and the acceptance testing of product by customers.

 

5. TAX

 

	Unaudited period to 30 April 2018	Unaudited period to 30 April 2017	Audited year ended 31 October 2017
	£m	£m	£m
Underlying tax charge	3.3	2.4	8.1
Tax credit on non-underlying items	(1.6)	(5.8)	(7.2)
Non-underlying deferred tax write-off	17.4	-	-
Total statutory tax charge/(credit)	19.1	(3.4)	0.9

 

 

The continuing statutory tax charge totalled £19.1m (H1 2017: £3.4m credit, 2017: £0.9m) on a continuing statutory profit before tax of £4.3m (H1 2017: £6.8m loss, 2017: £4.0m). The increase in the continuing effective rate of tax on the results of the Group is primarily due to recently enacted US tax legislation which reduces the US corporate tax rate and changes the rules regarding US interest tax deduction limitations. In addition, the rate is impacted by the geographic mix of profits, changes to the amounts of deferred tax assets considered recoverable in respect of both tax losses and prior year adjustments.

 

The effective tax rate on underlying profit before tax for the period is a charge of 22.3% (H1 2017: 21.2%, 2017: 18.4%) and is based on the estimated effective tax rate on underlying profit before tax for the full year.

 

The US Tax Cuts and Jobs Act ("TCJA") was substantively enacted on 22 December 2017. The TCJA provides for a reduction in the main rate of US federal corporate income tax from 35% to 21% for accounting periods beginning on or after 1 January 2018, thus first impacting Chemring for its 2019 financial year, however the impact on the deferred tax asset has been recognised in 2018.

 

The impact on Chemring has been two-fold; the reduction in the main rate of US federal corporate income tax has resulted in a write-off of deferred tax of £8.6m associated with tax losses and interest restrictions, offset by a £3.9m credit on the revaluation of the deferred tax liabilities associated with US related acquired intangibles. This has resulted in a net write-off of £4.7m in respect of the rate change. In addition, and the introduction of restrictions on the availability of interest deductions has resulted in a write-off of deferred tax of £12.7m.

 

Deferred tax balances are analysed on the balance sheet as follows:

 

	Unaudited Half year to 30 April 2018	Unaudited Half year to 30 April 2017	Audited Year to 31 Oct 2017
	£m	£m	£m
Non-current assets	45.6	59.5	63.2
Non-current liabilities	(50.2)	(51.4)	(53.5)
	(4.6)	8.1	9.7

 

 

The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon:

 

	Accelerated
	tax		US Interest	Tax	Acquired
	depreciation	Pensions	deductions	losses	intangibles	Other	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 November 2017	(12.3)	0.1	22.6	1.5	(10.3)	8.1	9.7
(Charge)/credit to income	(0.1)	-	(21.3)	-	5.6	-	(15.8)
Credit/(charge) to equity	0.4	(0.1)	-	-	1.5	(0.3)	1.5
At 30 April 2018	(12.0)	-	1.3	1.5	(3.2)	7.8	(4.6)

 

6. EARNINGS PER SHARE

 

Earnings per share are based on the average number of shares in issue, excluding own shares held, of 279,642,267 (H1 2017: 279,229,427, 2017: 279,244,616). Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 285,755,048 (H1 2017: 285,517,552, 2017: 285,023,906).

 

No dilution has been recognised for the purposes of basic earnings per share from continuing operations in April 2018 and April 2017 due to there being a loss per share for the period to 30 April 2018 and 30 April 2017.

 

The earnings used in the calculations of the various measures of earnings per share are as follows:

 

			Unaudited Half year to 30 April 2018			Unaudited Half year to 30 April 2017
	£m	Basic eps (pence)	Diluted eps (pence)	£m	Basic eps (pence)	Diluted eps (pence)
Underlying profit after tax	11.5	4.1	4.0	8.9	3.2	3.1
Non-underlying items	(26.3)	(9.4)	(9.3)	(12.3)	(4.4)	(4.3)
Loss from continuing operations	(14.8)	(5.3)	(5.3)	(3.4)	(1.2)	(1.2)
Profit from discontinued operations	-	-	-	1.2	0.4	0.4
Total loss after tax	(14.8)	(5.3)	(5.3)	(2.2)	(0.8)	(0.8)

 

 

 

			Audited year to 31 October 2017
	£m	Basic eps (pence)	Diluted eps (pence)
Underlying profit after tax	36.0	12.9	12.6
Non-underlying items	(32.9)	(11.8)	(11.5)
Profit from continuing operations	3.1	1.1	1.1
Profit from discontinued operations	3.5	1.3	1.2
Total profit after tax	6.6	2.4	2.3

 

7. DIVIDENDS

 

On 18 May 2017 a dividend of 1.3p per ordinary share was paid to shareholders on the register on 28 April 2017 and an interim dividend of 1.0p per ordinary share was paid on 15 September 2017 to shareholders on the register on 1 September 2017.

 

At the Annual General Meeting on 20 March 2018 the shareholders approved a final dividend in respect of the year ended 31 October 2017 of 2.0p per ordinary share. This was paid on 20 April 2018 to shareholders on the register on 6 April 2018.

 

The Board also declared an interim dividend in respect of 2018 of 1.1p per ordinary share which will be paid on 14 September 2018 to shareholders on the register on 31 August 2018. In accordance with accounting standards this dividend has not been recorded as a liability as at 30 April 2018.

 

8. FINANCIAL INSTRUMENTS

 

As at 30 April 2018, there were no significant differences between the book value and fair value (as determined by market value) of the Group's derivative financial instruments.

 

The fair value of derivative financial instruments is estimated by discounting the future contracted cash flow using readily available market data and represents a Level 2 measurement in the fair value hierarchy under IFRS 7 Financial Instruments: Disclosures. As at 30 April 2018, the total fair value of forward foreign exchange contracts recognised in the condensed consolidated balance sheet were an asset of £0.4m (H1 2017: £0.6m, 2017: £0.4m) and a liability of £0.3m (H1 2017: £0.4m, 2017: £0.4m).

 

9. DISCONTINUED OPERATIONS

 

In the period to 30 April 2018 there was a non-underlying credit of £nil (H1 2017: £1.3m, 2017: £3.5m) resulting from the retranslation of provisions established on the disposal of businesses in prior years and the expiry of certain tax liabilities, with an associated non-underlying tax charge of £nil (H1 2017: £0.1m, 2017: £nil).

 

10. RETIREMENT BENEFIT SURPLUS/(OBLIGATIONS)

 

The defined benefit surplus/(obligations) are calculated using an actuarial valuation as at 30 April 2018. In the period to 30 April 2018, retirement benefit surplus/(obligations) improved to a £3.5m surplus (H1 2017: £11.3m obligation, 2017: £0.6m obligation), principally as a result of employer contributions paid in accordance with the funding plan agreed with the trustees of the Chemring Group Staff Pension Scheme in 2015 and actuarial gains in the period, primarily arising from higher than expected returns on assets.

 

11. RELATED PARTY TRANSACTIONS

 

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

 

12. CASH FLOWS FROM UNDERLYING OPERATIONS

 

	Unaudited Half year to 30 April 2018 £m	Unaudited Half year to 30 April 2017 £m	Audited Year to 31 Oct 2017 £m
Operating profit/(loss) from continuing operations	7.6	(0.9)	15.3
Amortisation of development costs	2.4	3.4	6.9
Amortisation of intangible assets arising from business combinations	7.0	7.7	15.0
Amortisation of patents and licenses	0.1	0.1	0.2
Loss on disposal of non-current assets	-	-	0.3
Depreciation of property, plant and equipment	8.4	9.3	18.5
Non-cash movement of non-underlying items	1.9	8.5	20.5
Gain on the fair value of derivative financial instruments	(0.1)	(0.9)	(1.7)
Share-based payment expense	1.3	0.6	1.9
Operating cash flows before movements in working capital	28.6	27.8	76.9
Increase in inventories	(0.9)	(16.0)	(6.0)
Decrease/(increase) in trade and other receivables	17.8	(19.0)	(32.3)
(Decrease)/increase in trade and other payables	(25.7)	(3.4)	2.3
Decrease in provisions	(0.1)	(0.1)	(0.1)
Operating cash flow from continuing operations	19.7	(10.7)	40.8
Analysed as:-
Operating cash flow before the impact of non-underlying items	21.4	(7.9)	47.1
Cash impact of non-underlying items	(1.7)	(2.8)	(6.3)
Operating cash flow from continuing operations	19.7	(10.7)	40.8
Discontinued operations
Profit for the period	-	1.2	3.5
Decrease in payables / provisions	-	(1.2)	(3.5)
Cash flow from discontinued operations	-	-	-

 

13. ANALYSIS OF NET DEBT

 

	As at 1 Nov 2017	Cash flows	Non-cash changes	Exchange rate effects	As at 30 April 2018
	£m	£m	£m	£m	£m
Cash and cash equivalents	33.6	(32.5)	-	(0.6)	0.5
Debt due within one year	(51.6)	26.7	21.3	3.6	-
Debt due after one year	(61.9)	-	(21.8)	(1.3)	(85.0)
Preference shares	(0.1)	-	-	-	(0.1)
	(80.0)	(5.8)	(0.5)	1.7	(84.6)

 

 

The Group has a £100m revolving credit facility with a syndicate of three banks expiring in July 2019. The Group had £67.6m (H1 2017: £105.0m, 2017: £106.0m) of undrawn borrowing facilities at the half year.

 

The Group is subject to two key financial covenants, which are tested quarterly. These covenants relate to the leverage ratio between "underlying EBITDA" and debt; and the interest cover ratio between underlying EBITDA and finance costs. The calculation of these ratios involves the translation of non-Sterling denominated debt using average, rather than closing, rates of exchange. The revolving credit facility and the loan notes have differing covenant compliance calculations. The Group was in compliance with the covenants throughout the period.

 

14. EXCHANGE RATES

 

The following exchange rates applied during the year:

 

	Average rate H1 2018	Closing rate H1 2018	Average rate H1 2017	Closing rate H1 2017	Average rate 2017	Closing rate 2017
AU Dollar	1.78	1.82	1.66	1.73	1.68	1.73
US Dollar	1.39	1.38	1.26	1.29	1.30	1.33

 

The translation of foreign currency items in the financial statements are dependent on the prevailing foreign exchange rates. For the period ended 30 April 2018, a 10 cent increase in the US dollar exchange rate would have decreased reported underlying operating profit for the first half of 2018 by approximately £1.0m and decreased reported net debt at 30 April 2018 by approximately £3.2m.

 

15. CONTINGENT LIABILITIES

 

The Group is, from time to time, party to legal proceedings and claims, and is involved in correspondence relating to potential claims, which arise in the ordinary course of business.

 

A dispute between Alloy Surfaces Company, Inc. and the US Army, in relation to disputed pricing of a certain historic contract fulfilled by Alloy Surfaces Company, Inc., proceeded to a hearing in front of the US Armed Services Board of Contract Appeals ("ASBCA") in April 2017. ASBCA is expected to take approximately two years to issue its decision in relation to this matter. The range of possible outcomes is between £nil to £12.0m. A provision of £1.0m (H1 2017: £1.3m, 2017: £1.1m) exists to cover estimated legal costs for the Group with regards to this issue.

The Group has benefited from the UK's Controlled Foreign Company (CFC) Finance Company exemption in recent years. The European Commission has launched an investigation into whether the UK's CFC Finance Company exemption breaches state aid rules. No timescale has been set for the review and this could take several years to conclude. If, at the end of the investigation, the regime is considered to be in contravention of the State Aid provisions, the UK government will be required to seek repayment of the lost tax from the relevant tax payers. Given the early stage of the investigation it is too early to determine whether a tax liability is probable.

The Serious Fraud Office (the "SFO") is currently undertaking a formal investigation into concerns about bribery, corruption and money laundering involving intermediaries who previously represented one of the Group's UK-based subsidiaries, Chemring Technology Solutions Limited ("CTSL") and its predecessor companies.

 

The investigation commenced following a voluntary report made by CTSL relating to two specific historic contracts, the first of which was awarded prior to the Group's ownership of the business concerned and the second in 2011, neither of which are considered to be material in the context of the Group. It is too early to predict the outcome of the SFO's investigation and therefore the timings and amounts of the outcome cannot be estimated reliably. The Group continues to co-operate fully with the SFO in its investigation, and will provide a further update as and when appropriate.

 

16. EVENTS AFTER THE BALANCE SHEET DATE

 

There are no material post balance sheet events.

 

17. PRINCIPAL RISKS AND UNCERTAINTIES

 

The principal risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results have not changed significantly from those set out in the Group's 2017 Annual Report and Accounts. A detailed description of the Group's principal risks and uncertainties and the ways they are mitigated can be found on pages 26 to 33 of the 2017 Annual Report and Accounts. These risks can be summarised as:

 

·      health and safety risks;

·      environmental laws and regulations;

·      possible defence budget cuts;

·      timing and value of orders;

·      contract-related risks;

·      political risks;

·      management resource;

·      manufacturing risks;

·      technology risks;

·      product liability and other customer claims;

·      compliance and corruption risks;

·      cyber-related risks; and

·      financial risks.

 

Management have detailed mitigation plans and assurance processes to manage and monitor these risks.

 

18. CORPORATE WEBSITE

 

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

 

 

 

INDEPENDENT REVIEW REPORT TO CHEMRING GROUP PLC

 

Conclusion

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 2018 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 the related explanatory notes.

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 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

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 UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) 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.

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 DTR of the UK FCA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

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.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this 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 reached.

 

 

 

Andrew Campbell-Orde

for and on behalf of KPMG LLP

Chartered Accountants

Gateway House

Tollgate

Chandlers Ford

Southampton

SO53 3TG

 

21 June 2018