Annual Report • Dec 14, 2022
Annual Report
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Across physical and digital environments, our exceptional teams deliver innovative technologies and products that detect and defeat ever-changing threats. Read more on pages 6 to 7 OUR STRATEGY To be a leading provider of critical and innovative technologies that detect and protect people, platforms, missions and information against constantly changing threats. TARGET GROWING NICHES WINNING MARKET SHARE GROW OUR Read more on pages 24 to 25 OUR ESG PILLARS The long-term success of the Chemring business can only be enhanced by a positive interaction with all of our stakeholders, and therefore a positive and engaged approach around the following key areas: HEALTH AND SAFETY ENVIRONMENT PEOPLE ETHICS AND CONDUCT Read more on pages 37 to 58 OUR VALUES SAFETY of everything we do. EXCELLENCE we consistently meet we do. INNOVATION We create world-class solutions and develop world-class thinking. Read more on page 19 STRATEGIC REPORT 01 2022 performance 02 What we do 04 Sustainability overview 06 08 Investment case 10 Chairman’s statement 12 Market overview 14 Group Chief Executive’s review 18 Business model 20 Section 172 statement 21 Stakeholder engagement 24 Strategy 26 Key performance indicators 30 Focus on Sensors & information 34 Focus on Countermeasures & energetics 37 Introduction to sustainability 40 Health and safety 42 Environment 45 Task Force on Climate-Related Financial Disclosures (“TCFD”) report 50 57 Ethics and business conduct 59 Financial review 64 Risk management 66 Principal risks and uncertainties 74 Viability statement and going concern 75 Non-financial information statement GOVERNANCE 76 Chairman’s introduction to governance 78 Board of directors 80 Corporate governance report 90 Audit Committee report 94 Nomination Committee report 96 Directors’ remuneration report 120 Directors’ report FINANCIAL STATEMENTS 123 Consolidated income statement 124 Consolidated statement of 125 Consolidated statement of changes in equity 126 Consolidated balance sheet 127 Consolidated cash flow statement 128 Notes to the Group financial statements 153 Parent company balance sheet 154 Parent company statement of 154 Parent company statement of changes 155 Notes to the parent company 159 Accounting policies 166 Independent auditor’s report to the members of Chemring Group PLC 172 Five-year record OTHER INFOMATION 173 Corporate information and website CONTENTS HIGHLIGHTS - economic environment - Roke revenue exceeded £100m for the first time and with order intake of £168m, up 59%, is well positioned to continue its growth trajectory - Post year-end acquisition of Geollect completed on 7 December 2022 - driven by multi-year orders received across the sector - Investment in the Group’s manufacturing infrastructure continues to with the Countermeasures & Energetics margin improving from 16.2% - strong operating cash generation and cash conversion of 109%. Net debt to underlying EBITDA of 0.09 times - - FINANCIAL HIGHLIGHTS UNDERLYING OPERATING PROFIT REVENUE (+13%) (+7% at constant currency) Increase in revenue at constant currency driven by strong performance at Roke and steady growth in Countermeasures CASH CONVERSION 109% (2021: 105%) Continued strong cash conversion, with an average of 108% on a on working capital disciplines. UNDERLYING OPERATING PROFIT (+11%) (+8% at constant currency) Reflects the growth of the STATUTORY OPER ATING PROFIT (+6%) (+3% at constant currency) The difference to underlying operating profit reflects the amortisation of acquired intangible assets, acquisition expenses and loss on the movement in fair value of derivatives which are the only items 2023 OUTLOOK GROUP £64.0m £57.5m 2022 2021 2020 £54.7m SENSORS & INFORMATION Read more on pages 30 to 33 2022 2021 2020 £30.0m £31.6m £27.4m 2022 2021 2020 £48.9m £40.0m £39.9m COUNTERMEASURES & ENERGETICS Read more on pages 34 to 36 refer to page 60 for further explanation. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 01 2022 PERFORMANCE WHAT WE DO safeguard in an uncertain world. We achieve this by innovating at every stage of the value chain, from research and development (“R&D”), through to design, manufacture and in-service support for our sensors and detection systems, countermeasures, precision engineering and energetic products. enforcement agencies, as well as commercial markets such as space, medical the globe. At Chemring we create market-leading technology solutions and develop world-class thinking to solve WHERE WE OPERATE substantial and enduring commitment to defence and national security. We also export our technology solutions to additional markets. The percentages represent the proportion of sales for that destination in the ASIA PACIFIC Regional instabilities, capability upgrades and technology advancements business positions us to contribute towards meeting the defence requirements of Australia and other countries in the region. US 50% underpinned by a Special Security Agreement (“SSA”) that enables us to relatively good visibility for future earnings as we respond to the customer’s modernisation priorities. EUROPE 12% In Europe, our Norwegian business is experiencing ever greater demand for its niche speciality chemicals as customers seek to strengthen their defence capabilities in response to Russia’s UK benefit from the increased demand for intelligence and cyber-security solutions signalled by the Integrated Review. We are also seeing accelerated demand for our Countermeasures & Energetics capabilities resulting from the conflict in Eastern Europe. Chemring Group PLC Annual report and accounts 202202 CHEMRING IS ORGANISED INTO TWO STRATEGIC SECTORS SENSORS & INFORMATION Innovation is core to solving our clients’ difficult problems. With over 700 scientists, engineers and consultants, our Sensors & Information sector continues to invest in technologies that safeguard and protect in an uncertain world. domains, we enable our clients to deliver competitive advantage, defend their people, assets and information, and defeat their adversaries. confidence, be they explosive, biological, chemical, radio or cyber. communications, cyber and artificial intelligence to innovate and apply these technologies in new ways. We operate across the whole lifecycle providing advice, R&D, engineering, design and in-service support for our products and services. COUNTERMEASURES & ENERGETICS Chemring is the world leader in the design, development and manufacture platforms against the growing threat of guided missiles. We combine a deep understanding of platform signatures, missile seekers devices that perform critical functions for the space, aerospace, defence and industrial markets. Every day, our products, services and experts assist customers, including NASA and SpaceX, to achieve mission success. This ranges from cutting-edge technology to enable our customers to launch rockets and satellites into orbit, to the provision of aircraft safety systems including oxygen mask deployment on commercial aircraft and ejector seats for aircrew egress. © Crown copyright REVENUE UNDERLYING OPERATING PROFIT £30.0m £31.6m 2022 2021 2020 £27.4m REVENUE £280.5m UNDERLYING OPERATING PROFIT £48.9m £40.0m 2022 2021 2020 £39.9m STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 03 At Chemring we acknowledge and embrace our collective responsibility to contribute to a sustainable future. We have a strong and recognised obligation to ensure the responsible operation of our business and are fully committed to long-term sustainable value creation through safe, sustainable protect our planet and our people, support our customers and their critical needs, and that we have a positive impact on the communities in which Improving our sustainability performance plays a key role in the way in goals are now directly linked to targets for remuneration and reward across our leadership teams. We also recognise that our ESG credentials are an increasingly important factor in our ability to attract and retain first-class people. Engaged, motivated, empowered and appropriately skilled employees are integral to PURPOSE Chemring helps make the world a safer place. Across physical and digital environments, our exceptional teams deliver innovative technologies STRATEGY To be a leading provider of critical and innovative technologies that detect and protect people, platforms, missions and information APPROACH The long-term success of Chemring can only be enhanced by a positive interaction with all of our stakeholders. An engaged and constructive approach is therefore important to us. Following the stakeholder materiality assessment that was undertaken in 2021, our approach is now it includes our planet and broader society and is underpinned by our values and behaviours. VALUES SAFETY We place safety at the heart of everything we do EXCELLENCE We are focused on ensuring we consistently meet high standards in all that we do INNOVATION We create world-class solutions and develop world-class thinking HEALTH AND SAFETY - Control of major accident hazards - Injury prevention - HSE risk management - Read more on pages 40 to 41 PEOPLE - Culture - Diversity and inclusion - Employee wellbeing and engagement - Employee learning and development Read more on pages 50 to 56 ENVIRONMENT - Emission reduction - Waste generation and hazardous materials management - Energy usage - Water consumption Read more on pages 42 to 49 - - Compliance oversight and risk management - Whistleblowing - Anti-bribery and corruption Read more on pages 57 to 58 MAKING THE WORLD A SAFER PLACE Chemring Group PLC Annual report and accounts 202204 PROGRESS IN 2022 Chemring’s purpose is to help make the world a safer place and Russia’s and security industry plays in preserving peace, democracy and freedom in the western world. It has reinforced the argument that for sustainability to thrive, it requires global stability at its foundations. We are proud of the role that Chemring plays in providing that stability and are equally focused on ensuring that we manage and progress our own sustainability agenda, and It has been another busy year in which we have built on the good progress areas where our activities can have most impact. Plans are now in place to continue this journey and to ensure that we meet the growing disclosure requirements of our stakeholders and demonstrate our ability to successfully address ESG-related issues. As of 2022, Chemring Group PLC received an MSCI ESG Rating of AAA. DISCOVER MORE ABOUT SUSTAINABILITY: CHEMRING.COM/SUSTAINABILITY/COMMITTED-TO-A- SUSTAINABLE-FUTURE ESG HIGHLIGHTS HEALTH AND SAFETY Total recordable injury frequency rate 0.78 (2021: 0.67) PEOPLE 100% of our senior leaders have participated in diversity, equity development programme which started in November 2021 ENVIRONMENT Green House Gas (“GHG”) and carbon emissions flat (<1% difference year-on-year) Carbon reduction plans being implemented in every business Sustainability Committee formed to shape, monitor and ensure Continued implementation of Chemring Compliance Portal * The use by Chemring Group PLC of any MSCI ESG research LLC or its affiliates (“MSCI”) data, and the use of MSCI logos, trademarks, service marks or index property of MSCI or its information providers, and are provided ‘as-is’ and without guarantee. MSCI names and logos are trademarks or services marks of MSCI. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 05 OUR PURPOSE IN ACTION national security and commercial operations in SAFETY CONTINUING OUR JOURNEY TO ZERO HARM actions to reduce the likelihood of anyone getting hurt by focusing strengthen our assets’ integrity. For process, we are investing in SPOT IT, STOP IT, SHARE IT Last year, we launched a new internal campaign called Spot it, Stop it, Share it, encouraging our colleagues to step up their focus on reporting unsafe conditions, behaviours and near misses. Following up those near miss reports with corrective actions is essential, and that is where leadership and the health and safety teams on site make a real difference. This year, the campaign continued with a safety poster design competition for our colleagues’ children to promote good behaviours and procedures. Building a strong, proactive safety culture is our number one priority at Chemring. We will continue to develop that health and safety SP T IT ST P IT SHARE IT Journey to Zero Harm Young artist: Vaughn, aged 7 Manual handling Manual handling includes lifting, lowering, pushing, pulling and carrying. If any of these tasks are not carried out appropriately there is a risk of injury. Prevent injuries by: • Not twisting, stooping and overreaching • Assess the weight to be carried Be careful when lifting SP T IT ST P IT SHARE IT Journey to Zero Harm Young artist: Amber, aged 15 Common causes of accidents Look out for these common causes of accidents and injuries. Always think • Slips, trips and falls • Injured while handling, lifting or carrying • Struck by a moving object • Falls from a height • Personal health & wellbeing SP T IT ST P IT SHARE IT Journey to Zero Harm Young Artist: Viola, aged 7 Stop slips and trips Slips and trips are the most common cause of injury at work, causing over a third of all major injuries. Stop slips and trips by: • Having routine and responsive cleaning • Cleaning up spillages quickly • Stop people walking • Look out for trip hazards SP T IT ST P IT SHARE IT Journey to Zero Harm Young artist: Charles, aged 10 Emergencies can occur in any location and it’s important to know what to do in case you experience an emergency. What to do in an emergency: • Know your site’s plan • Know your evacuation route • Keep calm • Follow evacuation procedures • Use stairwells for evacuation, not the elevators, and hold on to handrails Be prepared for emergencies Chemring Group PLC Annual report and accounts 202206 INNOVATION HELPING TO ADDRESS UK’S TECHNICAL SKILLS GAP Earlier this year, the Roke Academy was launched as part of candidates to their intensive six-month programme, the Ignite Development Pathway (“IDP”). The IDP focuses on life skills and enthusiasm for technology that candidates bring rather than a In the face of “the war for talent”, the Academy focuses on developing benefiting those already qualified for hire. This creates an alternate, fully inclusive pathway into employment for those that might otherwise have faced barriers to entry. Targeting the national technical skills gap, the Roke Academy provides high quality training in key technology areas and the supporting skills needed to deliver it effectively. The Academy is designed to be a centre of excellence for learning and development, focusing on non-traditional areas of recruitment to embrace undiscovered talent who may not have previously had the opportunity to enter the technology field. Individuals who have found the traditional recruitment process a challenge are returning to work after a break, transitioning from military and law enforcement service, or looking for a change of career. Candidate selection also seeks to challenge traditional technology demographics in areas of gender, ethnicity and neurodiversity. Paul MacGregor, Roke Managing Director, commented: “ The Roke Academy provides the opportunity to attract new EXCELLENCE COGSWELL AWARD FOR AN EXCEPTIONAL Chemring Sensors & Electronic Systems (“CSES”) was awarded a (“DCSA”) can bestow on a cleared defence contractor. It was National Industrial Security Program (“NISP”), only the top 0.5% are selected to receive a Cogswell Award. With this award, CSES was recognised for establishing and requirements, demonstrates a commitment to excellence and OUR PURPOSE IN ACTION STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 07 INVESTMENT CASE intellectual property, niche technology and high Against the background of growing defence Chemring is well positioned in niche segments These include the Group’s global market-leading positions on airborne and naval countermeasures, advanced sensors, Electronic Warfare and software engineering. We are also well placed to benefit from growth in the space segment where we are a key supplier of mission critical specialist devices to customers including NASA and SpaceX. The Group’s strong order book provides good medium-term visibility. A significant proportion partnering agreements. Market-leading positions, incumbent supplier status and high barriers to entry position Chemring well for the future. STRONG GROWTH IN ROKE’S NATIONAL SECURITY AND DEFENCE MARKETS Roke’s consulting, technology and R&D service activities are experiencing strong growth, driven principally by information security for the national security and defence markets. The Group’s capabilities are well aligned to intelligence, data science, autonomy and Electronic Warfare (“EW”). This validates our Sensors & Information sector strategy, and should increase the opportunity space for Roke to deploy its market-leading technologies. Roke’s capabilities and offerings, both through acquisitions and opportunities in adjacent markets and territories. MAJOR INTERNATIONAL PROGRAMMES Chemring is exposed to a substantial pipeline of major international programmes that have the potential to deliver strong long-term growth. and having technologies and products to address hazard detection, chemical detection and biological detection – increasingly relevant in a post- pandemic world. As Cyber and Electromagnetic Activity (“CEMA”) becomes increasingly important in today’s threat environment, and as a consequence of Russia’s products in the international market. We are seeing growing customer enquiries for Roke’s suite of world-leading Electronic Warfare products and are supporting ongoing customer orders from this potentially significant market. We continually review our portfolio to ensure that we maintain sustainable niche positions where technical and qualification barriers to entry enable high margins. These, along with strong and enduring customer relationships, provide us with a strong platform for future growth. We will achieve our growth by total commitment to our enduring purpose, which is to relentlessly innovate to protect our customers. Chemring Group PLC Annual report and accounts 202208 Since 2019 the Group has communicated certain medium-term financial objectives, which have been rolled forward at each set of results. These included: - Targeting mid-teen return on sales in the medium term. Margins have progressed from - Improving cash flow. Across the last three years, operating cash conversion has been 108% of EBITDA, demonstrating the improvement in business practices is permanent and sustainable - Reducing indebtedness. Net debt has Chemring is focused on building a financially sustainable and robust Group. These actions provide strong foundations for future growth. PROVEN MANAGEMENT Chemring’s executive management team has significant sector experience, with a proven track record of business restructuring, strategic investment and the delivery of profitable growth. The team continues to manage delivering both organic and inorganic growth, balancing near-term Chemring has a robust balance sheet and strong ongoing operating cash generation, providing a platform for future investment in the business, both organic and inorganic, and sustainable, growing dividend payments. DISCOVER MORE ABOUT INVESTING: CHEMRING.COM/ INVESTORS FY22FY21FY20FY19FY18 £651m £501m £476m £449m £394m m) STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 09 CHAIRMAN’S STATEMENT INTRODUCTION The past year has seen a number of ongoing challenges, and opportunities Europe. These have resulted in changing defence priorities, increasingly competitive global markets and a business environment that is seeing supply chain interruption, increased energy costs and a shortage of labour availability. Despite these challenges the Group has again delivered a robust performance long-term sustainable value creation through safe, sound and ethical business conduct at all times has ensured that we have met our customers’ critical needs whilst performing to the highest standards. None of this would be possible without the commitment and dedication of our people and on behalf of the Board I wish to acknowledge and thank them for their professionalism and support. industry plays in preserving peace and democracy in the western world, and that for sustainability to thrive, it requires global stability at its foundations. It has also highlighted the need for countries to re-equip and modernise their defence capabilities to meet the threat of peer on peer conflict. With the global defence market predicted to show strong growth over the next decade I believe that Chemring is well placed to continue delivering both organic and inorganic growth, balancing near-term performance with long-term value creation. STRATEGY The Group’s strategy is to deliver sustainable, profitable growth by operating in markets where we have differentiators such as intellectual property, niche technology, high barriers to entry and deep long-term customer relationships. We will achieve this by continuing to focus our efforts and investment on those areas of the defence and security market where we see increasing customer budgets. The Sensors & Information sector remains Chemring’s principal area of focus for long-term growth reflecting increasing customer demand and one where we can capitalise on the opportunity presented by our customers’ pivot towards the acquisition of high technology capabilities. We will expand the Group’s product, service and capability offerings, constantly innovating to enable our customers to deliver competitive advantage and to defend their people, assets and information. Read more on pages 30 to 33 “ I stakeholders despite the numerous challenges The Countermeasures & Energetics sector strategy is to strengthen and protect our niche, world-leading positions. We will seek to continuously improve our technological and operational base, and work closely with our customers in the development of new solutions to meet emerging needs. We will continue the process of modernisation and automation across our sites, improving our competitiveness through investment in lean manufacturing capabilities and operational alignment to share technology and manufacturing Read more on pages 34 and 36 As a Board we remain alert for opportunities to expand and accelerate our growth strategy through incremental acquisitions and by leveraging market adjacencies. However, any acquisition target must meet a strict set of criteria, enhance shareholder value and fit in with our wider growth plans. To date this activity has been principally focused around our Roke business and we sectors. Both areas, which play to the Group’s high technology skillsets, offer significant opportunities for long-term growth. Elsewhere we will continue to focus our efforts on building a safe, sustainable and resilient business that is able to deliver progression through continuous improvement in operational performance and execution. We shall continue to invest in both our people and our infrastructure in order to deliver further growth into the future. HEALTH, SAFETY AND THE ENVIRONMENT At Chemring our goal is zero harm. This goes beyond the management of safety and recognises that we have a duty to ensure that we take appropriate actions to minimise the impact of our operations on many different levels, from employee wellbeing to climate change. The Board recognises that the highest levels of safety are required in order to protect employees, product users and the general public. The Board believes that all incidents and injuries are preventable, and that all employees have the right to expect to return home safely at the end of every working day. Safety therefore remains one of the core values within Chemring and is central to our operating philosophy. A key part of our health, safety and environmental (“HSE”) strategy is the collation and analysis of data at every level to focus on the underlying causes of incidents and the impact of our operations. This facilitates appropriate decision making at all levels of our organisation. Through the use of enhanced risk assessment techniques, supported by the roll-out of common asset integrity and electro-static discharge review programmes, we continue to focus on the control of residual risks within our high-hazard processes. In addition, we have extended our current data platform to better assess the environmental impacts of our operations and performance against the targets that were set in 2021 in support of our wider ESG commitment. Improving our sustainability performance plays a key role in the way we both run our businesses today, and how we plan for the future. Further details on this can be found in the sustainability section of this report. Whilst consolidating in a calculative culture we are also keen to ensure learning is transferred to the relevant parts of the organisation, accelerating our continuous improvement cycle. To date good progress has been maintained on our journey to become a proactive organisation. Read more on pages 40 to 49 PEOPLE AND OUR COMMUNITY Chemring people are at the heart of our business and are our greatest asset. Engaged, motivated, empowered and appropriately skilled colleagues are integral to our success as it is through them that we will progress our strategy and deliver long-term growth. Carl-Peter Forster Chairman Chemring Group PLC Annual report and accounts 202210 In 2022 we continued to develop Chemring’s culture with actions delivered both within the individual business units and globally. In doing so we have continued to develop our people, ensuring that they are able to do their best work every day. Development programmes are now in place for all colleagues in management roles and for our Early Careers colleagues. Allied to the Talent and Succession framework launched in 2021, these programmes support the development of our future leaders as well as providing a platform for continuing the development of the Chemring culture. Chemring is committed to ensuring that we are able to attract and develop suite of diversity, equity and inclusion (“DE&I”) training modules which form part of all development programmes from Early Careers to Senior Leadership Team development. With a specific focus on gender diversity, the global Women at Chemring Committee was also established in the year to encourage local women’s networks in each business unit alongside delivering a global day for Women at Chemring which occurred in September. Early Careers colleagues form an increasing proportion of our population and in 2022 we welcomed over 80 graduates and apprentices into our businesses launched in year, complements the technical development provided through each business unit by providing early leadership and skills development. Listening to our colleagues is a key pillar of our approach to developing the Chemring culture. As the non-executive director with responsibility for employee engagement on behalf of the Board and as Chair of the Remuneration Committee, Laurie Bowen again met with groups of colleagues across Chemring to hear their experiences of working at Chemring. These sessions also provide the opportunity for Laurie to share with colleagues the work of the Board. This year these groups included colleagues at all levels from operators to the senior leadership teams at Chemring Countermeasures in Toone, Tennessee, and at Chemring Energetic Devices in Downers Grove, Illinois. The groups Laurie met were very positive about their experiences activities and events now possible since the easing of CV-19 restrictions. develop, and colleagues provided clear and constructive input on areas of additional focus which are being acted on. Read more on pages 50 to 56 GOVERNANCE AND ETHICS In recent years significant effort has been placed on strengthening the governance and ethics across the Group, ensuring that we have the necessary policies and procedures in place to enable the business to operate with of the Group, its subsidiary Chemring Technology Solutions Limited and followed a voluntary report by the Group. Chemring has co-operated fully now closed, with no fines paid or payable. Chemring remains committed to conducting its business in an ethical and responsible manner at all times, and in full compliance with all applicable laws and regulations. We will continue to strengthen our policies and procedures to ensure that the Group’s governance remain fit for purpose. Framework, both of which bind our purpose, values, behaviour, policies and procedures, and provide the necessary governance to enable us to operate in which meets regularly throughout the year and is chaired by me, is responsible for the oversight and monitoring of Chemring’s governance framework and Further details on the Committee’s activities during the year can be found on page 57 of this report. Good governance and ethical behaviour underpin our evolving sustainability agenda and ensure that we operate safely, responsibly and in compliance DIVIDENDS The Board continues to recognise that dividends are an important component of total shareholder returns. The Board’s objective is for a growing and sustainable dividend and continues to target a medium-term dividend cover of c.2.5 times underlying EPS, subject inter alia to maintaining The Board is recommending a final dividend in respect of the year ended dividend of 1.9p per share (2021: 1.6p), this results in a total dividend of 5.7p CURRENT TRADING AND OUTLOOK Trading since the start of the current financial year has been in line with have a greater bias towards the second half of the financial year as a result of cover, which provides excellent visibility for the full year. With market-leading innovative technologies and services that are critical to our customers, together with the flexibility provided by the Group’s strong balance sheet, the Board is confident that Chemring will continue to deliver both organic and inorganic growth, balancing near-term performance with long-term value creation. Chemring’s long-term prospects remain strong. Carl-Peter Forster Chairman STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 11 MARKET OVERVIEW TOTAL SPEND 2021 2020 2019 2018 Source SIPRI Chemring is an international technology company, geopolitical and technology trends are rapidly accelerated NATO expansion. increasing its investment and action to strengthen its position towards an assertive China with its own extensive defence and military modernisation programmes. Alongside the high-intensity, kinematic, conflict between Russia continue to be prevalent. The Group’s diverse and niche capabilities make UNITED STATES OUR POSITION infra-red (“IR”) pyrotechnic decoys that protect airborne and naval assets from the design, development and manufacture of precision engineered devices for distinct aerospace and defence applications including space and missiles. We are also the largest provider of advanced chemical and biological sensors electronic warfare (“EW”) requirements with growing budgets. MARKET TRENDS activities at the Department of Energy, the Federal Bureau of Investigation and other agencies. competition in the region, with a consequent shift away from counter-insurgency doctrines and capabilities. priorities were already geared toward great power competition before OUR CHALLENGES AND OPPORTUNITIES capability enablers and R&D can create opportunities for us to deploy Group-wide capabilities and technologies particularly in the customer priorities of space, hypersonic technology, EW, sensors, biotechnology, artificial intelligence (“AI”), cyber and quantum computing. countermeasures suite supports our leadership position in this capability area. LINK TO STRATEGY UNITED KINGDOM OUR POSITION communications, cyber and AI, for national security and defence customers naval forces from the threat posed by guided missiles, through the design, development and supply of radio frequency (“RF”) and IR pyrotechnic decoys, assembly, testing and through-life support of advanced energetic products for defence, security and commercial markets. TOTAL SPEND 2021 2020 2019 2018 Source SIPRI 1 2 3 Chemring Group PLC Annual report and accounts 202212 MARKET TRENDS 2021’s “Integrated Review of Security, Defence, Development and Foreign Policy”, and the accompanying “Defence Command Paper” and the “Defence and Security Industrial Strategy”, outline how national advantage through has been allocated to defence, with this allocation being part of a multi-year settlement to invest in pioneering technology in areas such as cyber, AI, By means of an example, digital integration across all defence domains will be key and a £1.5bn investment will be provided over the next decade to build and sustain a “Digital Backbone” that will be part of underpinning armed forces modernisation. An investment of some £500m will be made in Cyber capabilities in this environment, with £200m also provided over ten years long-term defence investment as part of adapting to a more competitive and riskier world. OUR CHALLENGES AND OPPORTUNITIES significance as new capability priorities mature. The enhanced focus on S&T, AI, data science and autonomy as set out in the Integrated Review, with the creation of new military and security constructs that are data and intelligence driven, will enlarge the opportunity space for Roke to deploy its unrivalled capabilities to address these next-generation technology requirements. Lastly, as the sole-source supplier of countermeasures to the LINK TO STRATEGY EUROPE OUR POSITION Although the Group continues to vie with highly capable competitors countermeasures, EW systems and improvised explosive device (“IED”) detectors to several European customers including Germany, France, Italy and Spain. Additionally, our Norwegian based business provides energetic materials to many leading prime contractors across the region. % of Chemring’s global sales (2018 – 2022) Europe 12% Asia Pacific 6% 1 1 2 MARKET TRENDS geostrategic landscape, with Sweden and Finland formally set to end decades other European countries that are presently outside the alliance. Significant growth in European defence budgets is also being signalled, with countries looking to make increased capital investments to deter and protect their national interests. Seven European countries – Belgium, Germany, Italy, Norway, Poland, Romania and Sweden – have already announced their plans to increase defence budgets given the invasion, targeting at least the 2% GDP The Netherlands have indicated they will follow suit in the near term. France has announced it will review its Loi de Programmation (“Programming Law”) owing to the changed geopolitical situation, and a new era of German foreign and security policy has been heralded with the creation of a special fund of €100bn to be spent on defence procurement and a commitment to allocate more than 2% of German GDP to defence. OUR CHALLENGES AND OPPORTUNITIES The medium-term outlook for the European market is positive, and several opportunities for our niche capabilities can be anticipated. Against the new geostrategic backdrop, the Group will continue to support the requirements of European allied nations. LINK TO STRATEGY AUSTRALIA OUR POSITION Chemring’s in-country capabilities are founded on our integral place in the Australia is the country’s pre-eminent manufacturer and supplier of airborne countermeasures, and the modern Lara plant is the world’s most advanced manufacturing facility for such products. MARKET TRENDS An enduring emphasis on future great power competition in the Indo-Pacific region is driving increased Australian defence spending with a focus on force in advanced cyber, AI, autonomy, quantum, undersea, hypersonic and counter-hypersonic, EW, innovation, and information sharing capabilities, security and stability. OUR CHALLENGES AND OPPORTUNITIES Group is well placed to respond to relevant opportunities resulting from the LINK TO STRATEGY US President 5 April 2022 1 1 2 1 1 2 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 13 GROUP CHIEF EXECUTIVE’S REVIEW INTRODUCTION The Group has delivered another year of good growth in 2022. Government budget until the middle of March 2022. The current geopolitical uncertainty, brought about by both Russia’s invasion role that the defence industry plays in society. Delivering in support of our customers and their critical needs has never been more important, and I am again hugely grateful to all my colleagues across Chemring. The response of our people and their families has been outstanding and this team effort has delivered results that exceeded our expectations at the start of the year. In response to the current threat environment, defence spending is expected to rise and with it we can expect to see strengthening demand for the drive greater co-operation and alignment between allies. In particular, the increased importance that is being placed on Cyber and EW, information advantage, intelligent networks and multi-domain integration, is expected to maintain and accelerate demand for Roke’s market-leading technologies. The Group is well positioned with a robust strategy and a relentless focus At Chemring our purpose is to help make the world a safer place, delivering innovative technologies and products that detect and defeat ever-changing embraces many different stakeholders including our people and our suppliers, and it recognises the need for us to contribute towards a sustainable future. negotiate numerous near-term challenges and the Group remains well placed to From an ESG perspective 2022 has seen us make further progress as we proactively manage our sustainability agenda. Focus areas included health wellbeing. As a business we are committed to building a sustainable company of which all our stakeholders can be proud, both now and in the future. HEALTH AND SAFETY Safety is our core value, with the health, safety and wellbeing of our colleagues, their families, our customers and the communities in which (“TRIF”) is currently at 0.78 which shows a slight increase when compared to last year’s 0.67 but still below our annual limit of 1. The nature of most injuries were either slips, trips and falls, or muscular skeletal type of events. We are proud to report that during 2022 there were no injuries in connection with or arising from energetic events. CONTROL OF MAJOR ACCIDENT HAZARDS enhance our focus in this area by ensuring we design, maintain and operate technology to remove our employees from exposure to energetic hazards. During the design of these processes we have placed more scrutiny on the application of process hazard analysis. In 2019 we mandated that all Countermeasures & Energetics businesses would need to conduct regular reviews to identify the potential for major process safety events. This year saw the fourth iteration of that review process, with an increase in the number of hazard scenarios being identified as the rigour of process hazard analysis matured. As a result of this maturing process, we continue to deepen our understanding of our residual risks and throughout the year have taken steps to reduce these to a level as low as is reasonably practicable. INJURY REDUCTION Injury prevention focuses on the reduction of injuries through the adoption of safety as an inherent part of everything we do. This is enacted through safety leadership, clear expectations, accountability and establishing a safety culture This year we consolidated our corporate reporting platform to capture better understanding of root causes and increased levels of assurance. These additional data points will help our continued focus on becoming a learning organisation. This data has established trends regarding musculoskeletal disorders due to the manual handling nature of some of our processes together with cuts to fingers and hands. The relevant businesses have developed plans to reduce the risk of injuries and it is expected that this Safe delivery of our business continues through the management of risk and HSE policy into practice by setting standards on eight core elements across the Group to drive a robust and common approach to the management of HSE. Each business is audited every two years to ensure compliance, with high-priority non-compliances being reported and monitored at Executive Statement process have helped the businesses focus on strengthening their processes within the HSE framework requirement, which in turn provides measures for people working from home and their mental and emotional wellbeing, and is now supported by the newly formed Group-wide Healthy Workplace Sub-Committee. Michael Ord Chemring Group PLC Annual report and accounts 202214 CAUSING HARM OR INJURY Nil 0 2 2022 2021 REVENUE £443m £393m 2022 2021 We measure our overall HSE performance to reflect both occupational safety and process safety. In doing this we have multiple data points, one of which third review since 2018 by a team of specialist consultants from global subject matter experts, ERM. The review, which was based on progress made becoming a high reliability organisation. In particular the review confirmed processes and systems generating data and signals around our high-hazard operations. The level of collaboration has also increased with many businesses sharing best practice on a regular basis to help accelerate our performance, all of which is supported by a positive tone from the top and underpinned ENVIRONMENT emissions as part of our ongoing commitment to becoming Carbon Neutral manage our ESG-related risks – balancing both the near and longer-term Climate-related Financial Disclosures (“TCFD”). In addition, the Group has completed its first CDP submission. By translating the TCFD recommendations and pillars into actual disclosure questions and a standardised annual format, CDP provides investors and disclosers with a unique platform where the TCFD Framework can be brought into real-world practice in a comparable and consistent way. As our disclosure increases, so has the need to ensure that the data auditable framework for our emissions reduction activities, with external subject matter experts appointed to verify the data and to report to the Group’s Audit Committee. Chemring is committed to ensuring that we are able to attract and develop programmes from Early Careers to Senior Leadership Team development. With a specific focus on gender diversity, the global Women at Chemring Committee has been established to encourage local women’s networks in each business unit alongside delivering a global day for Women at Chemring in the second half of the year. 2022 PERFORMANCE It is pleasing to report a strong set of results for the financial year despite was ahead of the Board’s expectations at the start of the year, demonstrated continued progress against our strategic goal of balancing short-term performance with longer-term value creation. 20% to 20.2p (2021: 16.9p). achieving the mid-teen Group margin objective that we set out in early 2019. The flat margin primarily reflects the improvement in operational execution in Countermeasures & Energetics offset by the operating expense investment Roke is a leading participant, have remained extremely buoyant in the period. Roke delivered double digit growth in orders, revenue and underlying operating profit and has maintained strong margins despite increased investment in people, infrastructure and product development. Roke’s order intake during the year was up 59% to £168m (2021: £106m) with revenue for the year exceeding £100m for the first time. A significant order, Hyperion, valued at £26m was awarded under the Serapis framework phased array radar technologies to address the challenges associated with hypersonic missile defence. In the last four years successful execution of its strategy has seen Roke double 800 today, driven in part by the success of its graduate and apprenticeship schemes, which saw 71 new joiners in September 2022. Building on this success, Roke has invested in the launch of the Roke Academy. This unique offering will be a centre of excellence for learning and development and is designed to target the recruitment and development of undiscovered talent, and the enhancement of skillsets within the business. In order to drive scalable growth and unlock future potential, Roke has combined its Public Sector, Industry and Cubica business units to create business units. In doing so, it has brought together its market-leading skill intellectual property and unique technologies in support of customers in The acquisition of Geollect Limited in December 2022 creates further opportunities for Chemring to enhance and further accelerate growth in commercially curated intelligence growing at 28% CAGR, Roke’s customers require an exponential increase in capability to achieve digital advantage against complex threats. CAPITAL ALLOCATION POLICY INVESTMENT CAPEX Continued investment to support organic growth through enhanced capacity and automation to drive margin improvement DIVIDENDS Recognising that dividends are a key part of total shareholder return. The Group targets a medium-term dividend cover of c.2.5 times underlying EPS, subject inter alia MERGERS AND ACQUISITIONS Focus on Sensors & Information, bolt-on acquisition targets to accelerate growth and Low risk, high return on investment option for excess long-term holders STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 15 GROUP CHIEF EXECUTIVE’S REVIEW continued 2022 PERFORMANCE continued The acquisition will enable Roke to build on its Intelligence as a Service (“Roke IaaS”) proposition by utilising the intelligence gathering and analysis capabilities of Geollect, and enhancing their already impressive processing capabilities The strategic goal for Roke is to continue to focus on growth across all its EW orders from this potentially significant market. We continue to invest in clearance. This investment has allowed us to support ongoing customer demonstrations and field trials. Customer feedback remains very positive albeit anticipated follow-on orders have been delayed as a result of budget March 2022. and full rate production, and on exploiting a growing opportunity in bio-security and surveillance. In a post-pandemic and contested world, governments are becoming increasingly concerned by the risks of both naturally occurring and engineered biological threats. Advances in synthetic biology now give our national adversaries the capability to deliberately engineer organisms to create hazards and cause harm. Chemring’s experience and expertise in fielding biological agent detectors which to pursue opportunities in existing and adjacent markets, such as homeland security. Chemring continues to invest in its Mobius R&D project, which aims to develop a deployable and cost-effective solution for the identification of biological threats. develop and deliver an aerosol bio-sensor that can detect, classify, and provide presumptive identification in real time of pathogenic bio-threats in both indoor and outdoor environments. Chemring’s technology dramatically shortens the time taken to identify the bio-threat, which is critical to rapidly implementing an effective response. Chemring’s product is also considerably less expensive to procure and operate than current equipment, thus allowing the customer to afford greater unit coverage while remaining within their budget. summarised below. The Enhanced Maritime Biological Detector (“EMBD”), an automated sensor to rapidly detect, collect, identify and sample airborne biological warfare agents, has seen a positive start to its full rate production phase. The value Development (“EMD”) phase and we are now working with the customer Production (“LRIP”) and Full Rate Production (“FRP”) thereafter. The next The Aerosol and Vapor Chemical Agent Detector (“AVCAD”) program has now completed its EMD phase. The next customer procurement decision contractors currently selected for this competitive program. Production continued as expected on the Husky Mounted Detection System (“HMDS”) program with customer deliveries on schedule throughout the year. Following a delay in the placement of the annual delivery order, expected realigning its budget priorities from a focus on counter-insurgency operations re-alignment of DoD funding priorities and our expectations are that the additional five years as the HMDS program transitions to sustainment mode. We continue to work with the customer to determine funding levels and timings moving forward. expanding the Group’s product, service and capability offerings in the areas Programs of Record. We will continue to actively explore opportunities to expand and accelerate the Sensors & Information sector capabilities and offerings, both by leveraging opportunities in adjacent markets and through further bolt-on acquisitions. continue strengthening and protecting our niche, world-leading positions working closely with our customers in the development of new solutions Partnering Arrangement (“SPA”) with the Royal Air Force, Defence Equipment & Support (“DE&S”) and the Defence Science and Technology Laboratory (“DSTL”), to ensure long-term provision of optimum air platform protection, including the exploitation of current capabilities and the development of new technology. This ten-year SPA will provide a framework such decoy technology available to a wide range of allies and partner nations, increasing survivability of aircraft and aircrew. The investment in the expansion and automation of our Tennessee facility to meet the expected demand for airborne countermeasures continued during saw the commissioning process progress through characterisation and testing as production gradually ramped up. We expect customer First Article testing launched its passenger spacecraft, CST-100 Starliner, to the International Space Station (“ISS”). Chemring provided various mission-critical components The future focus for the Countermeasures & Energetics sector remains on safeguarding and growing the Group’s market-leading positions in niche markets through the modernisation and automation of our manufacturing facilities, and in improving our competitiveness through investment in lean manufacturing capabilities and developing new products and technologies. Chemring Group PLC Annual report and accounts 202216 Net debt at the year end was £7.2m (2021: £26.6m), the decrease since offset by the investment in capital projects in the year. Strong operating cash showing that the ongoing focus on working capital improvements is delivering long-term, sustainable positive results. CULTURE Chemring people are at the heart of our business. Engaged, motivated, empowered and appropriately skilled colleagues are integral to our success which is founded in the quality of our people. It is imperative that we are able to sustain an environment where we have the right people, in the right place, at the right time, with the right skills working in a safe, healthy and inclusive environment. We continue to invest in our people at all levels across every location and function creating strong foundations for our future success. Excellence and Innovation, continued throughout 2022 and is firmly embedded Local Accent supports year-on-year progress and we continue to focus 2022 saw the gradual easing of the pandemic restrictions in every geography. This enabled renewed focus on bringing colleagues together both socially and for professional networking and sharing of ideas. Alongside this we have been able to meet with customers and third parties at all our locations for the colleagues to reconnect face to face. Whilst I have been incredibly impressed at how the whole business has been able to embrace remote working protocols and virtual interactions, there is no substitute for face-to-face discussions to further both our approach to operational excellence and to continue the development of our culture. time, continues to underpin our approach to measuring how far we have come in achieving our cultural aspirations. Dashboards help business units understand how colleagues are feeling and where we need to focus. Participation with the tool and positivity towards the key cultural themes continue to show improvements throughout 2022 despite the challenges of the business unit leadership teams in ensuring each business provides a positive and engaging workplace. Making sure that we have an appropriately diverse pool of talent within across 2022. This year has seen both formal and informal networking groups developing with shared characteristics or interests and complement the more formal work we are doing around education and awareness of diversity and inclusion. Notably in 2022 every business has established a Women’s Network to support our female colleagues at all levels and in all roles. Women make up ongoing focus on this key population and support both engagement and future success of female colleagues. These networks form part of the established strategy and framework around DE&I at Chemring which started in 2021 with a programme of ensuring corporate and personal awareness of the importance of a diverse population, an inclusive culture and systems that help support equality and drive equity. The programme of workshops put in place for all our senior leaders and managers in 2021 continued across 2022 and was extended to include business goals and to ensure that we continue to invest in our people. CONCLUSION Despite a challenging macro-economic environment, I am delighted with Group as we build a stronger, higher quality and technology focused business. We maintain our relentless focus on living our shared values of Safety, Excellence and Innovation, and in doing so we are driving our collective purpose: delivering innovative protective technologies to help make the world a safer place. I would like to thank all my colleagues across Chemring for their determination, hard work and support. The progress made over the past few years would not have been possible without their collective efforts. With market-leading technologies and services that are critical to our customers, our niche market positions and our strong balance sheet, I look to the future with excitement and confidence in our continued success. Michael Ord CHEMRING WOMEN’S Inclusivity Network (WIN@Chemring) day. Celebrated across Chemring, the day was an opportunity to raise awareness of the issues surrounding gender diversity in the workplace. It was also a day to celebrate some of the great things going on locally across the business in support of and organised by the women of Chemring. The network is all about building a community locally while sharing great ideas and knowledge across the Group. The intention of this event is that it provides a focus for the women’s network groups in each part of the business – both new and existing networks – and to leave a legacy that continues far beyond the September event. DISCOVER MORE ABOUT STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 17 KEY STRENGTHS EMPLOYEES We have a highly skilled and knowledgeable workforce operating in specialist capability areas. Their expertise is critical to us delivering innovative solutions to our customers’ challenges. CUSTOMER RELATIONSHIPS We enjoy long-term, high quality relationships with defence and intelligence customers in the member countries of the multilateral “Five Eyes” relationships in selected other markets where We maintain close relationships and FACILITIES We are investing in the resilience of our facilities, including increasing automation to deliver our products safely, securely and efficiently. WHAT WE DO INVEST IN PEOPLE, PROCESSES Chemring is a technology business worldwide. We invest in our future by developing the capabilities of our people, maintaining safe and efficient operations and developing next-generation solutions to meet our customers’ current and emerging needs. We operate in niche segments of the international defence and security market. advanced and dependable technology solutions to meet our customers’ needs, and we continually look for new growth opportunities to deploy our capabilities. In Countermeasures & Energetics, we countermeasures, through our leading technology and manufacturing position. performance and superiority of our products. In Sensors & Information, multiple technologies to develop differentiated solutions for meeting ever more demanding customer requirements. DELIVER SOLUTIONS We focus on providing innovative and competitive solutions that meet our customer needs efficiently and on time. investments, we also invest in continuous improvement – a key element of minimising the cycle time from order INNOVATING E X C E L L E N C E W I N S A F E T Y I N V E S T I N N O V A T I O N D E L I V E R S E N S O R S & I N F O R M A T I O N C O U N T E R M E A S U R E S & E N E R G E T I C S H E A L T H A N D S A F E T Y E N V I R O N M E N T E T H I C S A N D B U S I N E S S C O N D U C T P E O P L E Chemring Group PLC Annual report and accounts 202218 OUR VALUES SAFETY We place safety at the heart of everything we do. - We ensure we operate safely and - We promote best safety practices across our operations and beyond. - We are committed to ensuring we minimise our impact on the environment. EXCELLENCE We are focused on ensuring we consistently meet high standards in all that we do. - A culture of continuous improvement - We act to ensure that we maintain - We always deliver on our promises. INNOVATION We create world-class solutions and develop world-class thinking. - We inspire imaginative solutions. - We work together to turn ideas into technologies and solutions. - We value collaboration and Read more about our sustainability on pages 37 to 39 STAKEHOLDER VALUE CUSTOMERS contractors and other commercial businesses. INVESTORS We return money to our shareholders through dividends and, through successfully executing our strategy, we grow the value of their investment over time. EMPLOYEES The skills and experience of our employees commitments. We provide development opportunities and a safe, stimulating and rewarding working environment for all of our people. SUPPLIERS We form strong relationships with our suppliers who partner with us to deliver innovative solutions and are supported consequently through our procurement of their goods and services. COMMUNITIES We make a positive contribution to the communities where our people live and work economic prosperity through providing high GOVERNMENTS Through paying taxes in the jurisdictions in which we operate, we support the development of public infrastructure and services such as healthcare, transport systems, policing and education. Read more about our stakeholders on pages 21 to 23 OUTCOMES INVESTMENT £69.7m was customer-funded. The capacity expansion project at the Tennessee countermeasures site continues to progress on schedule and, excluding significant investments such as this, we aim for investment to at least match depreciation and amortisation each year. INVESTMENT £118.2m (2021: £88.9m) CASH FLOW We aim to convert 100% of underlying EBITDA underlying operating cash flow over the medium term, accepting that timing differences will arise at individual period ends. In 2022, the conversion ratio was 109%, reflecting strong operating cash generation and the continued focus on managing working capital. UNDERLYING CASH CONVERSION 109% (2021: 105%) DIVIDENDS 19% on the prior year, subject to the approval of the final dividend at the Annual General Meeting. DIVIDENDS 5.7p (+19%) CLIMATE CHANGE We recognise the profound impact of climate change. We are actively seeking ways to reduce our effects on the environment and build resilience to climate change by focusing on energy, waste and Read more on pages 42 to 49 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 19 SECTION 172 STATEMENT Section 172 (1) of the Companies Act 2006 requires the directors to act in the way they consider, in good faith, would most likely promote the success of the company for the benefit of its members as a whole. In doing so, - likely consequences of any decision in the long term; - interests of the company’s employees; - need to foster the company’s business relationships with suppliers, customers and others; - impact of the company’s operations on the community and environment; - desirability of the company maintaining a reputation for high standards - need to act fairly as between members of the company. In discharging our section 172 duties the directors have regard to the factors set out above and any other factors which we consider relevant to the decision being made. We acknowledge that every decision we make will not always result in a positive outcome for all of our stakeholders. However, by considering the Company’s purpose, vision and values, together with our strategic objectives and having a process in place for decision making, we Further details on how the Board operates and reflects stakeholder views in its decision making are set out in the corporate governance report on pages 80 to 89. Further information on how the Board has had regard to section 172 matters during the year can also be found in the following sections of the annual report: SECTION 172 FACTOR KEY EXAMPLES PAGE CONSEQUENCES OF ANY DECISION IN THE LONG TERM - - Investment case - Business model - Market overview - Strategy 6 8 18 12 INTERESTS OF EMPLOYEES - - Stakeholder engagement - Health and safety - 6 21 50 SUPPLIERS, CUSTOMERS AND OTHERS - Business model - Stakeholder engagement - Market overview - Strategy - Ethics and business conduct 18 21 12 57 IMPACT OF OPERATIONS ON THE COMMUNITY AND THE ENVIRONMENT - Introduction to sustainability - Health and safety - Environment - 50 MAINTAINING HIGH STANDARDS OF - Ethics and business conduct - Corporate governance report 57 80 - Investment case - Stakeholder engagement - Corporate governance report 8 21 80 Chemring Group PLC Annual report and accounts 202220 STAKEHOLDER ENGAGEMENT EMPLOYEES WHY WE ENGAGE of our strategy and the future growth of the business. We recognise the importance of attracting, developing and retaining the best talent, and the need to provide a safe and inclusive environment where individuals can thrive. - Regular all-hands meetings and team briefings - Works councils, trade unions, representative bodies and forums which support and connect people with shared characteristics or interests - employees to provide immediate and anonymous feedback on developments within the business - Publication of a monthly video blog by the Group Chief Executive, - Publication of regular company notices and the in-house magazine, Chemring-I, which features news and events from across the Group - Development programmes and succession planning - Monthly reporting to the Board on health and safety matters - supplemented by periodic culture “check-ins” facilitated by an external consultant - Direct engagement with the Board’s nominated non-executive director, Laurie Bowen, through meetings with colleagues from across the business and at different levels of the organisation - Board engagement with a wide range of employees during collective and individual site visits throughout the year - Nomination Committee reviews diversity initiatives, senior leadership succession plans and talent development programmes HOW WE MONITOR - Employee Voice participation and positivity scores - Safety performance indicators - Diversity statistics - - External ESG ratings OUTCOMES - Development of people strategy and related investment - Safe, healthy and motivated workforce - Focus on diversity and inclusion - Improved employee retention - Attractive proposition for potential new employees LINK TO STRATEGY CUSTOMERS WHY WE ENGAGE Ensuring that we provide innovative solutions that meet our customers’ - Regular meetings, teaming arrangements and engagement at all levels of our customers’ organisations - Partnering with customers on a broad range of technology and product development programmes - Participating in industry forums and working groups, and hosting customer visits to our sites - Attending and exhibiting at selected trade shows, which enables high-level interaction and the opportunity to brief customers on key product developments and other initiatives - our businesses through regular interactions with senior customer representatives, and provide feedback to the Board - External market updates and customer views are obtained to support the Board’s strategy review - - Site visits enable the Board to develop a deeper understanding of our products, technical capabilities and customer requirements HOW WE MONITOR - - R&D expenditure - Capital investment - Process safety events OUTCOMES - Customer-focused inputs into the Group strategy - Innovation and investment driven by customer requirements - Collaborative, strategic customer relationships - Improved customer satisfaction LINK TO STRATEGY The Board recognises that positive interaction and collaboration with all of our stakeholders is essential to the delivery of sustainable long-term value. Effective engagement allows the Board to understand relevant stakeholder views on material issues which may impact the business and helps to inform the Board’s decision making. We engage with a wide range of stakeholders at the Board level, at a Group level and within our business units. In understanding what matters to our stakeholders we are able to take this into account when setting our strategy and also in planning our day-to-day business operations. The table below sets out how we engage with our key stakeholders. 1 2 3 1 1 3 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 21 SHAREHOLDERS WHY WE ENGAGE The continued support of our shareholders is something that we value greatly. We therefore recognise the importance of providing all of our shareholders with regular updates on the Group’s operational and financial performance, strategy and future prospects, and ensuring that shareholder views are taken into consideration in relation to major developments in - Engagement with shareholders predominantly led by the Group Chief Affairs - Publication of our interim and full year results statements, along with regular trading updates throughout the year - Sustainability Report published on our website - Face-to-face meetings or video calls following the publication of any significant news update or at the request of the shareholder - Formal presentations and structured roadshows for our institutional investors following the publication of the Group’s interim and full - receive notification of corporate updates - Board receives feedback collated by our brokers and other financial advisers from our institutional investors, in which their views can be expressed on a non-attributable basis - - The Chairman, the Senior Independent Director and Chair of the Remuneration Committee meet with shareholders to discuss HOW WE MONITOR - Earnings per share - Dividends paid - Total shareholder return - ESG metrics - External ESG ratings OUTCOMES - Development of capital allocation and dividend policy - Development of ESG strategy - Supportive, long-term shareholder base - Access to funding LINK TO STRATEGY SUPPLIERS WHY WE ENGAGE We rely on our suppliers to provide us with quality raw materials, products and services. Constructive engagement ensures that our suppliers are able to meet our high expectations on safety, quality, value, delivery performance and ethical business conduct. We recognise that prompt payment terms and strong supplier relationships are important in building a long-term, sustainable and supportive supply chain. - Day-to-day interaction with suppliers is conducted largely by supply chain management teams within our businesses - Long-term agreements are entered into with our key suppliers, which - the standards of ethical business conduct we expect of them - Business continuity and supply chain dependency reviews included within the internal audit programme - Compliance Committee - HOW WE MONITOR - Payments made within payment terms - Statistics on issue of the Supplier Code of Conduct and inclusion OUTCOMES - Collaborative, long-term relationships - Delivery of safe and reliable products and services to customers - Appropriate working capital management LINK TO STRATEGY STAKEHOLDER ENGAGEMENT continued 1 1 3 1 2 3 Chemring Group PLC Annual report and accounts 202222 WHY WE ENGAGE ensure that we maintain our licences to operate and continue to run our businesses in full compliance with all laws and regulations. We also need to operations in future. - Maintenance of a regular dialogue with contacts within governments and - - Consultation with local governing bodies on planned business developments and investments - the associated assurance processes ensures our businesses are meeting governmental and regulatory requirements - assurance to the Board that the business is operating in accordance with our Special Security Agreement HOW WE MONITOR - Compliance statistics - Safety-related capital investment OUTCOMES - Ethical and compliant business conduct - Trusted supplier to government customers - Government support for proposed acquisitions - Sustainable business operations LINK TO STRATEGY COMMUNITIES AND THE ENVIRONMENT WHY WE ENGAGE We recognise the important role that each of our businesses play in their local communities and we actively encourage our businesses to support local initiatives and charitable causes. Equally, our businesses take pride in the contribution that they make to their local communities, both as a local employer and in the work they do to support good causes. We also recognise the impact of our business on wider society and our responsibility to contribute to a sustainable future for all. - selected charitable causes with a focus on the military and armed services, STEM-related initiatives and those linked to the local communities in which our businesses operate - - In addition to making cash donations, we also encourage and support - initiatives and as a business we have relationships with several universities, whereby funding is provided for students’ research activities - Sponsorship through the Horizons Bursary Scheme run by the Institution of Engineering and Technology, which provides financial support during degree study for students who have faced or continue to face adversity whilst they study; these students are all studying STEM degree courses which are relevant to the disciplines required within Chemring - Implementation of environmental and carbon reduction initiatives - Development of ESG strategy, objectives and targets subject to - Sustainability Committee, chaired by the Group Chief Executive, reports regularly to the Board on ESG-related matters - ESG-related targets included in the annual bonus plan and performance HOW WE MONITOR - Charitable donations - Environmental performance indicators - External ESG ratings OUTCOMES - Development of ESG strategy - Informed communities - Contribution to local businesses and employment - Contribution to wider society - Sustainable business operations LINK TO STRATEGY 1 1 3 1 1 3 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 23 STRATEGY 2 WIN MARKET SHARE In addition to targeting threat-focused growth segments, we also aim to win market share by focusing on meeting established customer needs in an effective and competitive continuing demand for airborne countermeasures driven by air platform sales including 3 Countermeasures & Energetics and Sensors & Information are well placed on a number Programs of Record. This positioning, underpinned by our operational performance and our business in the world’s largest defence market. 1 TARGET GROWING SEGMENTS can be expected to grow. Simultaneously, our customers’ strategic context will continue capabilities including those in CEMA, artificial intelligence, autonomous systems and space. With a greater threat of peer-level competition, demand for energetic capabilities can be anticipated to strengthen as the traditional battlefield continues to feature, alongside the market based on our in-depth understanding of our customers’ mission requirements and At Chemring, our purpose technologies and products that detect and defeat ever-changing threats. Connected to our purpose, our vision provides a clear definition of the future state Chemring wishes to attain. It is to be a leading provider of critical and innovative technologies that detect and protect people, platforms, missions strategy vision, and guides the choices that we will make as a company. We will continue 1. Target growing segments 2. Win market share 3. Grow our US business Chemring Group PLC Annual report and accounts 202224 STRATEGY IN ACTION Countermeasures & Energetics sector will improve safety and deliver the extrusion capacity required for next-generation Elsewhere, we are seeing strong opportunities that support significant growth for Chemring Energetic Devices. The Chicago business’ precision-engineered devices being critical to achieving mission success for increasing customer activities involving space and missile assets. £551m +28% £551m £431m 2022 2021 2020 £437m STRATEGY IN ACTION In Countermeasures & Energetics we continue to take a pan- Group approach to our countermeasures activities. Within the boundaries of security classifications, we share conventional, spectral and kinematic flare capabilities and processes developed In Sensors & Information we have established a new sales and security clearances and delivered a number of proof-of-concept customer stakeholders. REVENUE £443m £393m 2022 2021 2020 £402m STRATEGY IN ACTION position in sensors to develop and implement a technology-led strategy for the capture of future opportunities. We are also responding to the strong demand signals that we are seeing for applications, and are exploring additional opportunities to complement organic growth. growth opportunities for Roke – focused in particular on developing the businesses in its core specialist areas of AI, machine learning, data science and autonomy. £651m £651m £501m 2022 2021 2020 £476m STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 25 KEY PERFORMANCE INDICATORS These KPIs enable progress to be monitored on the implementation of the Group’s strategy, levels of investment, operational performance and business development. They also give an early insight into how well the principal risks and uncertainties are being managed. Similar indicators are used to review performance by each of the Group’s businesses, albeit that the exact nature of these varies between business units to reflect the differing nature of their operations. The KPIs that the Board and senior management utilise to assess Group performance are set out below. All financial KPIs refer to continuing operations and therefore exclude businesses classified as discontinued STRATEGIC PRIORITY SAFETY ORDERS REVENUE KPI 1 EVENTS CAUSING HARM Nil (2021: 2) 2 HAZARD REPORTS 3 FREQUENCY RATE 17 4 ORDER INTAKE £551m SENSORS & INFORMATION 5 £651m (2021: £501m) SENSORS & INFORMATION 6 REVENUE SENSORS & INFORMATION R ATE 0.78 (2021: 0.67) COUNTERMEASURES & ENERGETICS COUNTERMEASURES & ENERGETICS COUNTERMEASURES & ENERGETICS DESCRIPTION Number of energetic events causing harm or injury. Number of near miss and potential hazards reported. Number of recordable injuries per 200,000 man hours worked. and represents the last 12 months’ activity. and indicates future potential. Revenue is measured at sales value less any applicable sales taxes. WHY IS IT A KPI? A process safety event is one of the key strategic safety risks of the business. This indicator measures those events that have caused injury or harm. This indicates employee awareness of hazards and the greater the reporting the more engaged our people are. This is the rate for all injuries including medical treatment, restricted workday and lost time injuries. It is a more sensitive indicator of occupational safety than lost time injury frequency rates, as more minor events The trend of order intake gives an indication of market conditions and our competitiveness within our markets. The level of order book, in particular for delivery in the next year, gives a degree of confidence in expected future financial performance. The trend of revenue gives an indication of both the state of the end market and our business’s ability to execute orders on time to satisfy customer needs. 2022 PERFORMANCE injuries associated with energetic events compared to two last year. Since 2010 the only other time this has happened was 2017. As we journey towards our goal of zero harm we need a workforce that is fully engaged and proactive in reporting unsafe actions and reporting of near misses, providing us with the opportunity to learn and prevent accidents from happening. It is very encouraging therefore to see we have maintained a high level of near miss reporting this year. We had 17 employee injuries this resulted in a slight increase in our recordable injury rate, from 0.67 to 0.78, but remains below our limit of 1. There were no fatalities or serious injuries during the year. seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services and strong order intake across the Countermeasures & Energetics sector where customers are increasingly placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the previous year. Group revenue was in line with our expectations, with strong performance at Roke, steady growth in Countermeasures & Energetics and a foreign 0 2 2022 2021 4,036 3,518 2022 2021 17 14 2022 2021 0.78 0.67 2022 2021 Chemring Group PLC Annual report and accounts 202226 £195m £176m 2022 2021 £114m £154m2022 2021 £162m £147m 2022 2021 £356m £255m 2022 2021 £497m £387m 2022 2021 £281m £246m 2022 2021 STRATEGIC PRIORITY SAFETY ORDERS REVENUE KPI 1 EVENTS CAUSING HARM Nil (2021: 2) 2 HAZARD REPORTS 3 FREQUENCY RATE 17 4 ORDER INTAKE £551m SENSORS & INFORMATION 5 £651m (2021: £501m) SENSORS & INFORMATION 6 REVENUE SENSORS & INFORMATION R ATE 0.78 (2021: 0.67) COUNTERMEASURES & ENERGETICS COUNTERMEASURES & ENERGETICS COUNTERMEASURES & ENERGETICS DESCRIPTION Number of energetic events causing harm or injury. Number of near miss and potential hazards reported. Number of recordable injuries per 200,000 man hours worked. and represents the last 12 months’ activity. and indicates future potential. Revenue is measured at sales value less any applicable sales taxes. WHY IS IT A KPI? A process safety event is one of the key strategic safety risks of the business. This indicator measures those events that have caused injury or harm. This indicates employee awareness of hazards and the greater the reporting the more engaged our people are. This is the rate for all injuries including medical treatment, restricted workday and lost time injuries. It is a more sensitive indicator of occupational safety than lost time injury frequency rates, as more minor events The trend of order intake gives an indication of market conditions and our competitiveness within our markets. The level of order book, in particular for delivery in the next year, gives a degree of confidence in expected future financial performance. The trend of revenue gives an indication of both the state of the end market and our business’s ability to execute orders on time to satisfy customer needs. 2022 PERFORMANCE injuries associated with energetic events compared to two last year. Since 2010 the only other time this has happened was 2017. As we journey towards our goal of zero harm we need a workforce that is fully engaged and proactive in reporting unsafe actions and reporting of near misses, providing us with the opportunity to learn and prevent accidents from happening. It is very encouraging therefore to see we have maintained a high level of near miss reporting this year. We had 17 employee injuries this resulted in a slight increase in our recordable injury rate, from 0.67 to 0.78, but remains below our limit of 1. There were no fatalities or serious injuries during the year. seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services and strong order intake across the Countermeasures & Energetics sector where customers are increasingly placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the previous year. Group revenue was in line with our expectations, with strong performance at Roke, steady growth in Countermeasures & Energetics and a foreign STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 27 KEY PERFORMANCE INDICATORS continued STRATEGIC PRIORITY UNDERLYING OPERATING PROFIT AND MARGIN WORKING CAPITAL AND INVENTORY KPI 7 UNDERLYING OPERATING PROFIT (2021: £57.5m) UNDERLYING OPERATING MARGIN 8 UNDERLYING EARNINGS 20.2p (2021: 16.9p) 20.2p 16.9p 2022 2021 9 WORKING CAPITAL 10 INVENTORY £99.6m (2021: £80.7m) 11 0.09x 0.09x 0.35x 2022 2021 12 UNDERLYING OPERATING CASH FLOW £90.1m (2021: £80.0m) £90.1m £80.0m 2022 2021 SENSORS & INFORMATION £30.0m £31.6m 2022 2021 COUNTERMEASURES & ENERGETICS £48.9m £40.0m 2022 2021 SENSORS & INFORMATION 18.5% 21.6% 2022 2021 COUNTERMEASURES & ENERGETICS 17.4% 16.2% 2022 2021 CHANGE FROM PREVIOUS YEAR up 20% (2021: up 12%) 20% 12% 2022 2021 SENSORS & INFORMATION £30.6m £38.3m 2022 2021 COUNTERMEASURES & ENERGETICS £63.3m £46.1m 2022 2021 SENSORS & INFORMATION £27.1m £19.8m 2022 2021 COUNTERMEASURES & ENERGETICS £72.5m £60.9m 2022 2021 CONVERSION OF UNDERLYING OPERATING CASH 109% (2021: 105%) 109% 105% 2022 2021 DESCRIPTION need to be separately disclosed to properly understand the Group’s underlying quality divided by revenue. Calculated as underlying earnings after tax divided by the number of shares Working capital is defined as inventories, trade and other receivables, less trade and other payables excluding payroll related and other liabilities Inventory is measured at cost. Measured as net debt divided by underlying EBITDA for the previous 12 months. Cash flow from operating activities before tax outflows, non-underlying items and pension payments. WHY IS IT A KPI? allows the impact of changes in revenue and cost base to be monitored, enabling comparisons to be made of management performance and trading effectiveness. The measurement of underlying EPS reflects all aspects of the Group’s income statement including the management of interest and tax. Efficiently turning profit into cash demands a degree of control over working capital. The primary focus for improvement This is a measure of leverage within the business and is a banking covenant. This is a key measure to ensure profit turns into cash in short order. 2022 PERFORMANCE The underlying operating profit increased by 11% during the year. The changes performance improvement actions, as set out in this strategic report. 2022, driven by increased underlying operating profit and lower interest Working capital as a percentage year-on-year, demonstrating the continued effective management of working capital. Inventory increased, as did advance payments from customers, reflecting the timing of customer procurement This has decreased in 2022, as underlying EBITDA has increased and net debt has decreased. exceeded 100% as our focus on the effective management of working capital was maintained. Chemring Group PLC Annual report and accounts 202228 STRATEGIC PRIORITY UNDERLYING OPERATING PROFIT AND MARGIN WORKING CAPITAL AND INVENTORY KPI 7 UNDERLYING OPERATING PROFIT (2021: £57.5m) UNDERLYING OPERATING MARGIN 8 UNDERLYING EARNINGS 20.2p (2021: 16.9p) 20.2p 16.9p 2022 2021 9 WORKING CAPITAL 10 INVENTORY £99.6m (2021: £80.7m) 11 0.09x 0.09x 0.35x 2022 2021 12 UNDERLYING OPERATING CASH FLOW £90.1m (2021: £80.0m) £90.1m £80.0m 2022 2021 SENSORS & INFORMATION £30.0m £31.6m 2022 2021 COUNTERMEASURES & ENERGETICS £48.9m £40.0m 2022 2021 SENSORS & INFORMATION 18.5% 21.6% 2022 2021 COUNTERMEASURES & ENERGETICS 17.4% 16.2% 2022 2021 CHANGE FROM PREVIOUS YEAR up 20% (2021: up 12%) 20% 12% 2022 2021 SENSORS & INFORMATION £30.6m £38.3m 2022 2021 COUNTERMEASURES & ENERGETICS £63.3m £46.1m 2022 2021 SENSORS & INFORMATION £27.1m £19.8m 2022 2021 COUNTERMEASURES & ENERGETICS £72.5m £60.9m 2022 2021 CONVERSION OF UNDERLYING OPERATING CASH 109% (2021: 105%) 109% 105% 2022 2021 DESCRIPTION need to be separately disclosed to properly understand the Group’s underlying quality divided by revenue. Calculated as underlying earnings after tax divided by the number of shares Working capital is defined as inventories, trade and other receivables, less trade and other payables excluding payroll related and other liabilities Inventory is measured at cost. Measured as net debt divided by underlying EBITDA for the previous 12 months. Cash flow from operating activities before tax outflows, non-underlying items and pension payments. WHY IS IT A KPI? allows the impact of changes in revenue and cost base to be monitored, enabling comparisons to be made of management performance and trading effectiveness. The measurement of underlying EPS reflects all aspects of the Group’s income statement including the management of interest and tax. Efficiently turning profit into cash demands a degree of control over working capital. The primary focus for improvement This is a measure of leverage within the business and is a banking covenant. This is a key measure to ensure profit turns into cash in short order. 2022 PERFORMANCE The underlying operating profit increased by 11% during the year. The changes performance improvement actions, as set out in this strategic report. 2022, driven by increased underlying operating profit and lower interest Working capital as a percentage year-on-year, demonstrating the continued effective management of working capital. Inventory increased, as did advance payments from customers, reflecting the timing of customer procurement This has decreased in 2022, as underlying EBITDA has increased and net debt has decreased. exceeded 100% as our focus on the effective management of working capital was maintained. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 29 DISCOVER MORE ABOUT SENSORS & INFORMATION: CHEMRING.COM/WHAT-WE-DO/ SENSORS-AND-INFORMATION FOCUS ON KEY FACTS REVENUE UNDERLYING OPERATING PROFIT UNDERLYING OPERATING MARGIN 18.5% (2021: 21.6%) STATUTORY OPERATING PROFIT (2021: £25.9m) partners worldwide to solve the most technically jamming electronic communications, and world-leading systems for detecting domains the Sensors & Information sector is constantly innovating to enable customers to deliver competitive advantage and to defend their people, assets and information. STRATEGY for long-term growth, reflecting customer demand and opportunities in this area. We continue to focus on expanding the Group’s product, service and capability offerings in the areas of tactical electronic warfare, artificial intelligence, machine learning and information security. We are also focused explosive hazard detection and chemical and biological threat detection. The Group’s specialist consulting and technology services business, Roke, operates in the growing Cyber market. Investing in retaining, developing and recruiting people, together with expanding our geographical and customer coverage, is key to long-term profitable growth in this area. We continue to actively explore opportunities to expand and accelerate Roke’s capabilities and offerings to drive medium and long-term growth including leveraging opportunities in adjacent markets and territories. In the short term this will require continued operating expense investment in Roke Academy, Roke The integration of Cubica Group, acquired in 2021, has progressed extremely well and has brought significant additional research and development expertise as we invest in next-generation technologies and expand our product, service and capability offerings. We continue to actively explore opportunities and have MARKETS The current geopolitical uncertainty, brought about by both Russia’s invasion for increased defence expenditure, particularly amongst European members and modernise their defence capabilities to meet the threat of peer on peer seen as becoming increasingly important, with greater co-operation and alignment between allies to the fore. and remains opportunity-rich for the Sensors & Information sector. The ever and has a strong modernisation agenda including investment priorities should give us the opportunity to address many of these requirements. The not funded, and we are currently working with the customer to appropriately plan for their expected future requirements which we anticipate will be at lower volumes. Chemring Group PLC Annual report and accounts 202230 OUR PURPOSE IN ACTION Roke continues to support key European partners with respect to high performance, networked electronic surveillance capabilities capable of delivering “find & fix” capabilities against a peer-to- supports different deployment stances, and Roke has seen initial orders and significant interest in the latest PERCEIVE mobile electronic surveillance system. mission analysis tools and centralised command and control of the electromagnetic environment. This is drawing interest from Defence customer’s agnostic of hardware which demonstrates the functionality and ease of use of this Roke-designed mission toolset. Roke continues to undertake collaborative development of operational requirements. LINK TO STRATEGY LINK TO OUR VALUES INNOVATION 2021 Integrated Review of Defence, Security and Foreign Policy (“IR”) and the subsequent raft of policy papers that were published in support. The IR took a comprehensive view of the peer-level threats to British interests so its information advantage, intelligent networks, artificial intelligence, machine learning, and multi-domain integration, when matched with increasing budgets, is expected to accelerate the demand for Roke’s market-leading technologies. In both these home markets, the need to keep pace with rapidly evolving for Chemring to deploy its market-leading technologies in these areas of growing requirement. PERFORMANCE by a 59% increase in Roke’s order intake, with a growing number of multi-year contracts which include an increasing element of “pass-through” products and services which are included in revenue (see table below for an analysis of the year of EMBD full rate production. This was offset by orders on the HMDS Program of Record being significantly lower than in the previous year. 2022 2021 £m Change Order intake Products and services 132 100 Pass-through 36 6 +500% As reported 168 106 +59% Revenue Products and services 94 75 +25% Pass-through 16 7 +129% As reported 110 82 as underlying operating profit margin declined to 18.5% (2021: 21.6%) driven by the operating expense investment in Roke Academy, Roke Futures and currency basis revenue would have risen 8% to £157.8m and underlying operating profit would have fallen by 5% to £29.9m. The statutory operating Roke is a leading participant, have remained buoyant in the period. As shown above Roke has delivered strong growth in orders and revenue with double digit growth in underlying operating profit and has maintained strong margins despite increased investment in people, infrastructure and product development. Read more on page 19 1 3 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 31 PERFORMANCE continued The acquisition of Geollect Limited was completed in December 2022 having now received NSIA approval, creates further opportunities for Chemring to enhance and further accelerate growth in its Roke business. Geollect, based in assess human activity and physical geography anywhere in the world and has the potential to transform some of the most traditional and complex commercially curated intelligence growing at 25% CAGR, Roke’s customers require an exponential increase in capability to achieve digital advantage against complex threats. The acquisition will enable Roke to build on its Intelligence as a Service (“Roke IaaS”) proposition by utilising the intelligence gathering and analysis capabilities of Geollect, and enhancing their already impressive processing capabilities with Roke’s innovative approach to AI, machine learning and data science. Roke’s unique customer relationships in National Security and Defence will provide a growth accelerator while providing new markets for Roke’s Futures business. In the last four years successful execution of its strategy has seen Roke 800 today, driven in part by the success of its graduate and apprenticeship Building on this success, Roke invested £2.5m of annualised operating expenses in the launch of the Roke Academy, to address the challenge of recruiting appropriately skilled engineers in this competitive market. This unique offering target the recruitment and development of undiscovered talent, and the enhancement of skill sets within the business. This is a significant step in Roke’s employee value proposition and will deliver a welcome increase in Roke continues to invest in high value, cutting-edge technology that is directly relevant to the rapidly emerging needs of its markets. Roke’s Technology Roadmap focuses on the delivery of autonomous, intelligent and integrated capabilities. Historically, Roke has provided ground-breaking technologies in areas ranging from Electronic Warfare to Precision Navigation and Timing, Roke’s capabilities in an open architecture that enables autonomous tasking triggered by an EW sensor results in the autonomous tasking of an unmanned significantly to ensure our thought leadership proactively drives the market. In order to drive scalable growth and unlock future potential, Roke has combined its Public Sector, Industry and Cubica business units to create business units. In doing so, it has brought together its market-leading skill intellectual property and unique technologies in support of customers in As part of its strategy to broaden its geographic spread and access to different talent pools, Roke has expanded its footprint in Woking and in doing so has increased its office capacity from 25 to over 150 staff. This will provide a first class working experience with an improved environmental impact and OUR PURPOSE IN ACTION In the ever increasing war for talent and alongside ambitious growth plans, Roke recognises the importance of bringing in individuals early in their careers to develop alongside the existing experienced population of Roke experts. Such was the success of the 2021 intake that the business overall business headcount. The final preparation for the 2022 intake focused on the programme itself. Some core principles were applied: - streamlining the learning experience to meet the needs of the early career intake through groupings based on their academic background and future roles; - maximising classroom time with Roke engineers to make the most of unique Roke experience and knowledge by using a partner to deliver introduction or industry standard learning; and - building in problem solving to provide challenge and collaboration. FOCUS ON continued the ability to work at a classified level. The Roke Futures business unit and We are seeing growing customer enquiries for Roke’s suite of world-leading Electronic Warfare products. The business received an £8m order in November 2021 from the Swedish Ministry of Defence for the supply of increasing importance of Cyber and Electromagnetic Activity (“CEMA”) in today’s threat environment, heightened further as a consequence of Russia’s EW orders from this potentially significant market. We continue to invest in Chemring Group PLC Annual report and accounts 202232 This investment has allowed us to support ongoing customer demonstrations and field trials. Customer feedback remains very positive albeit anticipated follow-on orders have been delayed as a result of budget restrictions caused by the Continuing Resolution. and full rate production, and on exploiting a growing opportunity in bio-security and surveillance. In a post-pandemic and contested world, governments are becoming increasingly concerned by the risks of both naturally occurring and engineered biological threats. Advances in synthetic biology now give our national adversaries the capability to deliberately engineer organisms to create hazards and cause harm. Chemring’s experience and expertise in fielding biological agent detectors which to pursue opportunities in existing and adjacent markets, such as homeland security. Chemring continues to invest in its Mobius R&D project, which aims to develop a deployable and cost-effective solution for the identification of biological threats. develop and deliver an aerosol bio-sensor that can detect, classify and provide presumptive identification in real time of pathogenic bio-threats in both indoor and outdoor environments. Chemring’s technology dramatically shortens the time taken to identify the bio-threat, which is critical to rapidly implementing an effective response. Chemring’s product is also considerably less expensive to procure and operate than current equipment, thus allowing the customer to afford greater unit coverage while remaining within their budget. summarised below. Following a delay in the placement of the annual delivery order, expected its budget priorities from a focus on counter-insurgency operations to the re-alignment of DoD funding priorities and our expectations are that the for an additional four years as the HMDS program transitions to sustainment mode. We continue to work with the customer to determine funding levels and timings moving forward. The EMBD system, an automated sensor to rapidly detect, collect, identify and sample airborne biological warfare agents, has seen a positive start to its full rate production phase. The value of this sole source framework contract The AVCAD program is also progressing through its EMD phase. The next customer procurement decision point is still expected to be at the conclusion of two contractors currently selected for this competitive program. OPPORTUNITIES AND OUTLOOK The focus for Sensors & Information continues to be on expanding the Group’s product, service and capability offerings in the areas of national security, AI and machine learning, tactical electronic warfare and information analytics. With increasing customer budgets and growing market opportunities five years is to maintain Roke’s recent record of growth, doubling annual revenue to greater than £200m organically, whilst maintaining strong margins. Roke will continue to focus its efforts on growing across all its business areas, delivering research, design, engineering and advisory services using its high quality people and capabilities. We will continue to actively explore opportunities to expand and accelerate the Sensors & Information sector capabilities and offerings, both by leveraging opportunities in adjacent markets and through further bolt-on acquisitions. However, any acquisition must meet a strict set of criteria, enhance shareholder value and fit in with our wider growth plans. its primary focus being on the delivery of explosive hazard detection systems priorities from counter-insurgency operations to equipping forces for enhance medium-term visibility but first full rate production revenue is Information is expected to show a continuation of the levels of business seen in 2022, with continued growing demand for Roke’s products and services, offset by the expected reduction in HMDS-related revenue. Medium-term growth opportunities are driven by the Group’s sole source positions on the biological detection Programs of Record moving into full rate production. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 33 DISCOVER MORE ABOUT COUNTERMEASURES & ENERGETICS: CHEMRING.COM/WHAT-WE-DO/ COUNTERMEASURES-AND-ENERGETICS FOCUS ON continued KEY FACTS REVENUE £280.5m UNDERLYING OPERATING PROFIT UNDERLYING OPERATING MARGIN (2021: 16.2%) STATUTORY OPERATING PROFIT In our Countermeasures & Energetics sector, Chemring is the world leader in the design, development and manufacture devices that perform critical functions for the space, aerospace, defence and industrial markets including satellite deployment, aircrew egress and aircraft safety systems. During the course of 2022 the Countermeasures & Energetics sector STRATEGY The Countermeasures & Energetics sector strategy continues to be through continuously improving our technological and operational base, whilst working closely with our customers in the development of new solutions to meet emerging needs. Investment in the sector will principally be directed towards safety, automation and the enhancement of current facilities including capacity and capabilities. We also see great opportunity through Protection solutions against conventional threats in the traditional domains maintain technology leadership. their activities, sharing intelligence, products and processes, and promoting the benefits of these capabilities to our international customers. This includes the development of multi-shot countermeasures that combine multiple Chicago facility is well placed to benefit from growth in the space segment. Countermeasures & Energetics sector will improve safety through remote operations, improve quality though automation and deliver extrusion capacity required for next-generation flare production. Elsewhere, we continue with our programme of significant investment in safety and automation as part of creating a robust group of high-performing manufacturing facilities. MARKETS protect their international interests. Given the threat environment, several committed to increasing their defence spend with a large proportion of funds allocated towards capital investment. In the medium to long term Chemring has the opportunity to benefit as demand for the Group’s capabilities is expected to increase. In the Countermeasures & Energetics sector the need for our niche capabilities will continue to remain relevant in the contested environment expected to remain robust. Chemring Group PLC Annual report and accounts 202234 OUR PURPOSE IN ACTION THE ROYAL AIR FORCE, DEFENCE EQUIPMENT & SUPPORT AND THE DEFENCE SCIENCE AND TECHNOLOGY Science and Technology Laboratory (“DSTL”) earlier this year. The SPA ensures the long-term provision of optimum air platform protection, including exploiting current capabilities and developing new technology. achieved and ensure countermeasures keep pace with ever- evolving missile capabilities. The ten-year SPA will underpin the development of the next such decoy technology available to a wide range of allies and partner nations, helping save the lives of more aircrew. LINK TO STRATEGY LINK TO OUR VALUES INNOVATION Whilst there is a general trend in defence spending towards modernisation position in the addressable air countermeasures market. Demand in the countermeasures sector over the next five years is primarily being driven Sole source positions on several products and platforms in conjunction Three additional countries, Canada, Finland and Germany, have announced programmes will contribute to us maintaining our market-leading position in the addressable air countermeasures market. Strategic Partnering Arrangement (“SPA”) with the Royal Air Force, Defence Equipment & Support (“DE&S”) and the Defence Science and Technology Laboratory (“DSTL”), to ensure long-term provision of optimum air platform protection, including the exploitation of current capabilities and the development of new technology. This ten-year SPA will provide a framework for development, jet, transport and helicopter platforms fitted with self-defence systems. the highest level of air platform protection to counter threats, this SPA will underpin the development of the next generation of countermeasures. must keep pace with the ever-evolving missile capabilities, anticipating information sharing to facilitate a collaborative approach and encouraging co-operation such that the right level of capability is available to the front line decoy technology available to a wide range of allies and partner nations, increasing survivability of aircraft and aircrew. In the specialist energetic devices and materials businesses our focus remains on the high value niche areas of the market where market conditions continue to strengthen as a consequence of increased global tension. Demand for our range of energetic devices, propellants and explosive products continues to grow year-on-year. Increasingly, customers are signing long-term contracts in order to secure supply and this improved visibility is enabling greater focus on our investment into manufacturing capacity, efficiency and product R&D. Whilst the outlook for the global defence market is increasingly positive, between announcement and budget increases translating into new orders can be expected as governments take time to reposition and reallocate funding PERFORMANCE multi-year orders received across the sector. Toone, Tennessee. Read more on page 19 1 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 35 PERFORMANCE continued countermeasures to international customers. precision engineered devices and specialist materials, have also seen strong demonstrating the value our customers place on the high-reliability products provided by Chemring in the critical areas of space, aerospace, defence and industrial markets. mid-March 2022, slowed the process of doing business with government departments. As a result some Countermeasures & Energetics orders that We expect this to result in an increase to the weighting of revenue in the The investment in the expansion and automation of our Tennessee facility to meet the expected demand for airborne countermeasures continued during saw the commissioning process progress through characterisation and testing as production gradually ramped up. We expect customer First Article Test OPPORTUNITIES AND OUTLOOK The focus for Countermeasures & Energetics remains on safeguarding We will continue the process of modernisation and automation across manufacturing capabilities. We will also invest in new product development to ensure that our product portfolio remains highly relevant to our customers and will continue the process of operational alignment to share technology and manufacturing excellence across the Group. The Group’s niche propellant and devices businesses in Scotland and Chicago are increasingly securing long-term contracts with customers, supporting greater short and medium-term visibility and providing a framework for placed to benefit from growth in the space segment. Similarly, demand for high quality energetic materials has enabled Chemring Nobel in Norway to work proactively with its customer base on long-term contracting models, providing much improved visibility. where customers are increasingly placing multi-year orders. Foreign exchange has been a tailwind in the year and on a constant currency basis using the FOCUS ON continued OUR PURPOSE IN ACTION CHEMRING SUPPORTS THE LAUNCH OF CST-100 Starliner, to the International Space Station (“ISS”). Starliner is part of NASA’s Commercial Crew Program, an initiative tasked with developing spacecraft capable of taking NASA Canaveral Air Force Station in Florida and docked with the ISS on that supported this test flight. Chemring provided various mission-critical components on the Atlas V, as well as components for the landing sequence for Starliner’s return home. The safe return of the Starliner spacecraft helps to prove the system is ready to fly astronauts. After NASA and Boeing review processes data from this test flight, teams will continue plans for Starliner and its next mission, the Crew Flight Test to the Chemring Group PLC Annual report and accounts 202236 INTRODUCTION TO SUSTAINABILITY COMMITTED TO A SUSTAINABLE FUTURE PURPOSE Chemring helps make the world a safer place. Across physical and digital environments, our exceptional teams deliver innovative technologies and products that detect and defeat ever-changing threats. VISION To be a leading provider of critical and innovative technologies that detect and protect people, platforms, missions and information against constantly- changing threats. run our businesses today and plan for the future, as we manage our ESG-related risks. We also recognise that our ESG credentials are an people. Engaged, motivated, empowered and appropriately-skilled employees Whilst our approach to sustainability continues to mature we are committed to implementing transparent policies and procedures, and to fostering an inclusive culture across the Group where everyone does the right thing and takes responsibility for their actions. Increasingly this focus will develop from working as a trusted partner to our many customers and ensuring that our internal standards are fit for purpose, to working with our supply chain to ensure that they too work to the same standards. In doing so we will build a sustainable company of which all our stakeholders can be proud, now and in the future. OUR APPROACH TO SUSTAINABILITY The long-term success of the Chemring business can only be enhanced by a positive interaction with all of our stakeholders and therefore a positive and engaged approach to corporate responsibility and sustainability is important to us. Our approach is focused around the following key areas: - health and safety; - environment; - people; and - ethics and business conduct. “ Chemring acknowledges its responsibilities to contribute to a recognised obligation to ensure the responsible operation of our business and are fully committed to long-term at all times.” Our approach to corporate responsibility and sustainability is embedded within the business units and all senior leaders have specific objectives around these areas identified which are linked to their incentive plans. PROGRESS IN 2022 Chemring’s purpose is to help make the world a safer place and Russia’s invasion of Ukraine has tragically highlighted the critical role that the defence and security industry plays in preserving peace, democracy and freedom in the western world. It has reinforced the argument that for sustainability to thrive, it requires global stability at its foundations. We are proud of the role that Chemring plays in providing that stability and are equally focused on ensuring that we manage and progress our own sustainability agenda, and It has been another busy year in which we have built on the good progress made during FY21. ESG forms part of our everyday thinking, from how we run our businesses from day to day, to long-term strategic planning. Climate-related issues, such as emissions, are now part of every monthly Board report and ESG is a scheduled Board agenda item every six months. It is also a standing agenda item for every meeting of the Group’s Executive Committee and forms part of the monthly reporting cycle of each of our business units. Across the Group we continue to actively seek ways to reduce our impact on the environment and build resilience to climate change by focusing on energy, waste and water, and understanding the impact of global climate change on our operations. These four focus areas have been identified based on an overall evaluation of environmental impacts and risks, with a focus on impacts that we can influence and have consequently influenced financial planning. improvements in this area. Our strategy is to reduce our global GHG emissions through improving energy efficiency to reduce consumption and by Many of our Chemring businesses have environmental management systems and have undertaken local initiatives and programmes to reduce environmental impacts. To improve energy efficiency for example, improvements have been made to operations through the installation of new energy efficient buildings to replace old buildings, upgrading heating, ventilation and air conditioning (“HVAC”) systems and improving lighting. In 2022 we improved the steam heat distribution system at our Scotland facility by replacing valves, installing new steam traps and improving insulation. This has contributed to significant reductions in natural gas usage and greenhouse gas emissions. In addition, we replaced ageing HVAC systems at our Pennsylvania facility, reducing electricity use and associated scope 2 emissions. We have also increased our use of biodiesel fuels. In 2021 we committed to becoming carbon neutral for market-based scope 1 and 2 emissions by 2030 and working to be a net zero organisation by 2050. Against those longer-term targets we set the near-term target of reducing scope 1 and 2 GHG emissions year-on-year, with this being linked into remuneration and rewards across all our senior teams. In 2022 we have As our disclosure has increased, so has the need to ensure that the data that we report to the market is accurate. We have now put in place an auditable framework for our emissions reduction activities, with external subject matter experts appointed to verify the data and to report to the Group’s Audit Committee. A key focus for both the Board and the Group’s Sustainability Committee has been to ensure that we not only actively manage our sustainability agenda in order to meet the near and longer-term targets that were set in FY21, but Michael Ord Chairman of the Group Sustainability Committee STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 37 PROGRESS IN 2022 CONTINUED FY22 sees the Group report for the first time under the Task Force on Climate-related Financial Disclosures (“TCFD”), the details of which can be found on pages 45 to 49 of this report. In addition, the Group progressed its commitment to further improve its non-mandatory disclosure by completing its first CDP submission (formerly the Carbon Disclosure Project) at the end of July 2022. By translating the TCFD recommendations and pillars into actual disclosure questions and a standardised annual format, CDP provides investors and disclosers with a unique platform where the TCFD Framework can be brought into real-world practice in a comparable and consistent way. In addition to our environmental activity, this year has seen us progress our activities around DE&I and employee wellbeing. Chemring is committed to ensuring that we are able to attract and develop an appropriately diverse workforce. Our programme of education for all senior leaders continued in the first half of FY22 and was complemented by a suite of DE&I training modules which form part of all development programmes from Early Careers to Senior Leadership Team development. With a specific focus on gender diversity, the global Women at Chemring Committee has been established to encourage local women’s networks in each business unit, alongside delivering a global day for Women at Chemring in the second half of the year. The Board has played an active role in supporting our DE&I activity with Board members taking part in various employee round-table discussions responsibility for employee engagement on behalf of the Board and as Chair of the Remuneration Committee, met with groups of colleagues from as well as being able to share with them the work of the Board. These groups included colleagues at all levels from operators to the senior leadership teams at Chemring Energetic Devices, as well as at Chemring Countermeasures USA’s facility in Tennessee. The groups Laurie met were overwhelmingly positive about their experiences of working at Chemring and pointed to many examples of support from the Group. Laurie also gathered input as to how we can continue to develop, and colleagues provided clear and constructive input on areas such as enhancing cross-business collaboration which are being acted on. Our ESG strategy over the current and future years will seek to identify those areas where our activities can have most impact. Plans are now in place to continue this journey and to ensure that we meet the growing disclosure requirements of our stakeholders and demonstrate our ability to successfully address ESG-related issues. We will also continue to work with our advisers and shareholders to identify how we can constructively feed into and inform the debate on the future of ESG reporting and the creation of a common set of standards against which we can be measured. Chemring is now a business whose evolving purpose may be used by our customers in the production of offensive capabilities. INTRODUCTION TO SUSTAINABILITY continued OUR PURPOSE IN ACTION STORAGE FACILITY UPGRADE AT CHEMRING NOBEL Chemring Nobel (CHN) is further improving its sustainability credentials by investing in a new storage tank facility. The new facility will meet future government directives and environmental, health and security compliance. The tank facility will increase the storage capacity of essential raw materials helping CHN guarantee supply to customers, and better protect the surrounding environment from leaks or emissions. CHN produces and delivers specialist chemicals to customers for use in a range of performance and manufacturing applications. During the production of RDX and HMX, acetic acid is made and recovered. This is an important part of the process, as the acetic acid is sold to customers, as well as being used as an ingredient in the production of other chemicals. The team recovers the acetic acid through several steps of evaporation and distillation, resulting in pure acetic acid at the end of the process. The acid recovery area at the CHN facility originally had 19 storage tanks, in which the acid was kept ready for sale or use. These storage tanks needed an upgrade and expansion. The old storage tank area was built in 1968 and expanded in 1985. In January 2021, the CHN team started a two-year project to establish a new storage tank capacity. This £6m investment will increase the amount of acetic acid that can be stored and bring the tanks in line with new compliance the life of the project and allow the team to consider and implement new technology and further improvements to the recovery and storage area. CHN buys in the chemical compound acetic acid anhydride, which is then converted into acetic acid in the production of RDX/HMX. This project will double the storage capacity of both the incoming acetic acid anhydride and the outgoing acetic acid. This will secure production, especially during the winter when shipment to and from Europe can be challenging. The project, which is due for completion in 2023, also has the following benefits: - More automated operations (health and safety benefits). - A new system for fire detection and firefighting via a foam system (health and safety and risk prevention/management benefits). - A system to purify emissions to air (environmental benefits). - Safe operations for loading and unloading trucks (health and safety benefits). - New retaining walls or “bunding” around the storage facility to better protect the surrounding environment (environmental and health and safety benefits). Chemring Group PLC Annual report and accounts 202238 As a business we remain fully committed to building a sustainable company of which all our stakeholders can be proud, both now and in the future. OUR SUSTAINABILITY GOALS UN SDG Further information ENVIRONMENTAL - Reduce our impact on the environment and build waste and water, and by understanding the impact of global climate change on our operations - operational, resource and energy efficiency and to minimise environmental impact - Invest in support of product development and production techniques that meet our customers’ needs and support their environmental goals - Chemring will be carbon neutral - Chemring is working towards being - We will reduce our total direct - We will continue to focus our efforts on reducing energy consumption and on embracing green technology - We will target zero waste to landfill by 2030 Environment on Respecting and protecting our planet by actively seeking ways to reduce our environmental impact. SOCIAL - Maintain the highest standards of safety and the wellbeing of our workforce - Ensure that, in support of our wider commitment to ethnic and gender diversity, our workforce represents the diversity of the local communities we operate in - Implement effective policies and procedures and continually invest in support of operational excellence and the development of our people - - - We will set a total recordable injury frequency rate limit of below 1 - We will continue to reduce the risk - We will increase the proportion Health and safety on Our people on The safety, wellbeing and development of our people is at the heart of our business. GOVERNANCE - Operate with integrity and transparency and to the - Ensure the highest standards of product safety and comply with all relevant standards - Promote a culture where everyone does the right thing and takes personal responsibility for their actions - Actively seek to increase representation of ethnicity and gender on our Board, within our leadership teams and across all our localities - - Maintain prudent and responsible financial and tax - representation on the Board - We will seek to meet the guidelines of the Parker Review on ethnic diversity as we refresh the composition of - All Chemring employees and third parties acting on our behalf must comply with the Chemring Code of Conduct, wherever they are located in the world Ethics and business Conducting business in manner at all times. CONTINUING TO INNOVATE, PROTECT A ND GROW CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022 Goal Aim Goal Aim Ensure healthy lives and promote wellbeing for all at all ages Achieve gender equality and empower all women and girls Ensure sustainable consumption and production patterns Ensure access to affordable, reliable, sustainable and modern energy for all Take urgent action to combat climate change and its impacts Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Promote peaceful and inclusive societies for sustainable development, provide access to inclusive institutions at all levels READ MORE IN OUR SUSTAINABILITY REPORT: CHEMRING.COM/ SUSTAINABILITY STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 ACHIEVEMENTS 2022 has continued to be a challenging year as we maintained a safe CV-19 environment despite the pandemic. As a result of the restrictions associated with CV-19, the Management of Change Process was used effectively to ensure safe and continued operations aligned with in-country requirements. Whilst this created a need for continued focus, we have been able to progress our HSE strategy – Journey to Zero Harm, further consolidating the processes implemented last year: - control of major accident hazards; - injury reduction; and - HSE risk management. Actions taken in delivering the HSE plan included: - continued roll-out of the asset integrity management system; - design and implementation of the electrostatic discharge protocols; and - deployment of the Spot it, Stop it, Share it campaign. CONTROL OF MAJOR ACCIDENT HAZARDS Our Countermeasures & Energetics businesses are required to manage their respective operating countries. Over the last three years, we have implemented a number of processes to enhance our focus in this area from exposure to energetic hazards. During the design of these processes In 2019 we mandated that all Countermeasures & Energetics businesses would need to conduct regular reviews to identify the potential for major process safety events. The reviews are based on a “stress test” that addresses the following questions: - Have potential major accident hazards been identified? - Are there effective controls in place to prevent and contain a major event? - Are these controls being actively monitored? This year saw the fourth iteration of that review process, with an increase hazard analysis matured. As a result of this maturing process, we continue have taken further steps to reduce these to a level as low as is reasonably practicable. To help reduce our residual risks the implementation of a common computerised maintenance management system has begun across selected businesses, improving management and accountability for safety critical assets. HEALTH AND SAFETY ESTABLISHING A STRONG HEALTH AND SAFETY CULTURE POLICIES AND PRACTICES The Board recognises that the highest levels of safety are required in order to protect employees, product users and the general public. The Board believes that all incidents and injuries are preventable, and that all employees have the right to expect to return home safely at the end of every working day. The Group Chief Executive has overall responsibility for health, safety and environmental (“HSE”) matters across the Group. The Group HSE Director reports directly to the Group Chief Executive and is responsible for the ongoing development and assurance of the Group’s health, safety and environment strategy, known as our Journey to Zero Harm. The Group HSE Director is a member of the Executive Committee and reports on the performance of all businesses against agreed limits and objectives. The Group Chief Executive reports monthly to the Board on all key HSE KPIs. The Board requires that all businesses systematically manage their health and safety hazards, set objectives and monitor progress by regular measurement, audit and review. Each managing director is responsible for the implementation, management and ongoing compliance of health and safety within their business, and for providing adequate resources to satisfy the Board’s requirements. All managing directors have health, safety and environmental related objectives incorporated within their annual incentive plan. Managers and supervisors in the Group’s businesses are required to ensure compliance with procedures, and to provide leadership and commitment emphasises the importance of individual responsibility for health and safety at all levels of the organisation, and expects employees to report all hazards, to be involved in implementing solutions and to adhere to rules and procedures. A key element in the continuous improvement of health and safety management is collaboration at all levels resulting in the sharing of best practice and lessons learnt from incidents across the Group’s businesses with actions generated to prevent recurrence. working day.” Chemring Group PLC Annual report and accounts 2022 Towards the end of last year, we established the Technical Safety Committee with the purpose of sharing best practices and advice on the development of new standards and guidance. This year the Committee has become more established, providing the focal point for the delivery of the electrostatic discharge protocols and oversight regarding the asset integrity management system deployment. INJURY PREVENTION Injury prevention focuses on the reduction of injuries through the adoption of safety as an inherent part of everything we do. This is enacted through safety leadership, clear expectations, accountability and establishing a safety culture This year we consolidated our corporate reporting platform to capture better understanding of root causes and increased levels of assurance. These organisation. This data has established trends regarding musculoskeletal disorders due to the manual handling nature of some of our processes, together with cuts to fingers and hands. The relevant businesses have developed plans to reduce the risk of injuries and it is hoped that this will be reflected in future reporting. With regards to leadership on safety, this again has never been more critical than during the pandemic. Business unit leaders continue to manage an evolving situation through the Chemring CV-19 Playbook, ensuring the appropriate rigour and governance through our change management process. Our focus on injury prevention, in response to CV-19, continues to place more emphasis on people’s emotional wellbeing, which is supported by the Healthy Workplace Sub-Committee. HSE RISK MANAGEMENT Safe delivery of our business continues through the management of risk and and consistency. Our HSE Management System Framework Standard puts our HSE policy into practice by setting standards on eight core elements across the Group to drive a robust and common approach to the management of HSE. Each business is audited every two years to ensure compliance, with high-priority non-compliances being reported and monitored at Executive Committee level. The changes made last year to our Operational Assurance Statement process has helped the businesses focus on compliance with the HSE Framework which in turn provides useful insights when planning the OUR HSE PERFORMANCE We measure our HSE performance to reflect both occupational and process safety. In doing so we have several data points, one of which is an external review of our prevailing safety culture. This year we invited back a team of experts to review our progress since their previous reviews back in 2018 becoming a high reliability organisation. In particular the review confirmed processes and systems generating data and signals around our high-hazard operations. The level of collaboration has also increased, with many businesses sharing best practice on a regular basis to help accelerate our performance, all of which is supported by a positive tone from the top and underpinned by risk-informed, visible and proactive safety leadership. OCCUPATIONAL SAFETY We focus not only on actual injuries but also hazards and near miss events. We therefore place an emphasis on near miss and hazard reporting as a leading indicator of our maturing safety culture. This year we had 2,828 We are embedding this learning into the organisation through quarterly Learning from Incidents reviews with all business leaders and increased use PROCESS SAFETY In addition to our reactive metrics we also measure process safety near miss events, with a total of 880 recorded in 2022 compared to 625 in the previous year. Near miss reporting is crucial if we are to understand and prevent incidents which is why we encourage all our employees to stop, warn and inform so we can manage any emerging risks. The increase in near miss reporting represents good progress as an organisation willing to learn and improve on a continuous basis. During 2021 we consolidated the reporting of our leading indicator for process safety events (“PSE”), which are categorised as level 1, 2 and 3, with 3 being the event with the most serious potential. and this year we achieved 1.86. HSE STRATEGY FORWARD OUTLOOK In 2021 we reviewed the current three-year strategy focused on the control of major accident hazards, injury prevention and HSE risk management. This review resulted in an additional element regarding the right capability being added as well as a more balanced approach towards health, wellbeing and the environment. The revised strategy is therefore a natural evolution and reflects the maturity of the business. As such, during the next three years we will continue to focus on: - asset integrity and process safety – relating to the control of major accident hazards and PSE events including a review of all electrostatic discharge risks; - occupational health and safety – focusing on injury and illness prevention, including psychological health and wellbeing; - environment and sustainability – to co-ordinate our work on reducing our environmental impact; and - improved data – enabling data-driven discussions and decisions leading to a more proactive culture. Our progress against this strategy will be reported in the next annual report and accounts. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 Our goal of zero harm goes beyond the management of safety. We are committed to OUR COMMITMENT In 2021 we committed to reduce our total direct and indirect greenhouse gas (“GHG”) emissions year-on-year and to be carbon neutral by 2030. In this report we include information on our climate-related risks and opportunities in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). We have made good progress on our goals, our 2021 baseline. We also have identified a path to become carbon neutral by 2030. In 2022 we published our first CDP report and we have begun to collect and report selected scope 3 carbon emission data. This work is overseen by our Sustainability Committee with regular progress reports to the Board. INTRODUCTION Our environmental performance information is presented in accordance with as specified under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Data is presented for our financial year, from significant environmental aspects: energy consumption and associated GHG emissions; freshwater use; and waste generation. The scope of the reporting includes all continuing global businesses under our operational control and does not include several small leased office spaces, where we do not have energy Our GHG emissions calculations are undertaken in accordance with the GHG Protocol Corporate Accounting and Reporting Standard. We are reporting 2021 and 2022 data and include scope 1 GHG emissions, as well as location and market-based approaches for scope 2 emissions of purchased electricity. Our key scope 1 emissions sources are natural gas and fuel oil used for building and process heating, with small contributions from fuels used in on-site vehicles and refrigerant releases. Primary scope 1 emissions are CO 2 Our energy and carbon figures are now recorded on a monthly basis (except non-UK electricity where US eGRID and IAE factors are used). OUR APPROACH We are actively seeking ways to reduce our impact on the environment and build resilience to climate change by focusing on energy, waste and understanding were updated in 2021 based on a materiality review of our environmental impacts and risks, with a focus on impacts that we can influence. These focus areas are periodically reviewed by our Environmental Committee, consistent Many of our Chemring businesses have environmental management environmental impacts. In addition, in 2022 we began using a new data collection and dashboard reporting system. OUR STRATEGY Our strategy is to reduce our global GHG emissions through improving energy efficiency to reduce consumption and by purchasing electricity from renewable sources. In 2021 we committed to becoming carbon neutral for scope 1 and 2 emissions by 2030 and working to be a net zero organisation by 2050. To improve our energy efficiency, we continue to make improvements to our operations, including installing new energy-efficient buildings to replace old buildings, upgrading HVAC systems and improving lighting. In 2022 we installed new HVAC systems at our Pennsylvania facility and reduced natural gas usage at our Scotland site. CLIMATE CHANGE RESILIENCE We recognise that climate change has the potential to have an impact on our operations, having experienced flooding from a severe weather event at our Tennessee facility in 2018 and wildfires in areas surrounding our Australia operations in 2019. We have begun to review the physical and transition risks ENERGY USE AND ASSOCIATED GHG EMISSIONS Our Countermeasures & Energetics businesses in Norway and Scotland are energy consumption. In 2022 we developed our updated carbon reduction energy use. 2 carbon emissions, from 20,684 tCO 2 2 e in 2022. 52.6 to 43.3 tCO 2 e per £m of revenue. We made significant improvements in our market-based carbon emissions. Reductions have been achieved across the businesses through initiatives such as the use of biofuels at our Roke and Salisbury sites; improved efficiency and maintenance of our steam systems in Scotland; and the use of renewable energy in Australia. We also acquired and retired Renewable Energy Certificates (“RECs”) for some of our US electricity consumption. ENVIRONMENT REDUCING OUR ENVIRONMENTAL IMPACT Chemring Group PLC Annual report and accounts 2022 2022 2021 UK US, Norway, Australia Group total UK US, Norway, Australia Group total Combustion of fuel in any premises, machinery or equipment operated, owned or controlled by the Group CO 2 e (tonnes) Gas 5,303 504 Heating oil 388 96 Bio fuels — — — — LPG 278 29 249 Fuels consumed by Group-owned and leased vehicles, excluding business travel and employee commuting CO 2 e (tonnes) Diesel 78 93 190 Petroleum — — LPG — — 19 19 The operation or control of any manufacturing process by the Group CO 2 e (tonnes) On-site waste incineration 21 168 Refrigerants discharged 488 561 2 e (tonnes) 6,994 Scope 2 emissions Total emissions CO 2 e (tonnes) Electricity – location-based 3,086 10,889 Electricity – market-based — — 12,013 12,013 Location-based CO 2 e (tonnes) 10,080 12,566 22,646 Market-based CO 2 e (tonnes) 6,994 13,690 20,684 Total energy consumption (Mwh) 81,689 130,062 We engaged ERM CVS to provide independent assurance of our 2021 and 2022 total scope 1 and total scope 2 location-based emissions figures as well as total scope 2 market-based emissions figures. Their Independent Assurance Statement can be found on page 12 of our Sustainability Report 2022. The basis of reporting document can be found on the Group’s website at www.chemring.com/basisofreporting. 2022 2021 Total scope 1 and scope 2 emissions CO 2 e (tonnes) – location-based 22,646 Total scope 1 and scope 2 emissions CO 2 e (tonnes) – market-based 20,684 Group revenue (£m) 393.3 Total CO 2 e (tonnes) per £m of revenue (location-based) Total CO 2 e (tonnes) per £m of revenue (market-based) 52.6 SCOPE 3 CARBON DATA COLLECTION In 2022 we initiated the collection of a limited set of scope 3 carbon data. Details of this can be found on page 10 of our Sustainability Report 2022. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 WATER CONSUMPTION 3 of freshwater. There was a considerable drop in usage from 2021 (1,220,000 m 3 ) due to reduced water usage in Scotland. None of our operations are in water-stressed regions as defined by the United Nations. Our Australian facility continues to collect and use rainwater that falls on the site for facility needs. 2022 2021 UK US, Norway, Australia Group total UK US, Norway, Australia Group total Freshwater (m) Freshwater use 668,000 552,000 1,220,000 WASTE GENERATION In 2022 we introduced a new reporting system for waste which allow tracking of waste destinations. Our hazardous waste reporting increased from 2021 due to inclusion of a recycled waste that was not included in previous reports. This accounts for the significant rise in recycled hazardous waste reported (1,361 tonnes from 33 tonnes). In 2022 our total hazardous and non-hazardous waste was 1,914 and 2,103 2022 2021 UK US, Norway, Australia Group total UK US, Norway, Australia Group total Waste (tonnes) Recycled, non-hazardous 635 1,032 Recycled, hazardous 32 1 33 Not recycled, non-hazardous 164 1,141 Not recycled, hazardous 88 242 330 Total waste (tonnes) 681 1,855 2,536 ENVIRONMENT continued At our Countermeasures & Energetics businesses we generate unique waste which is often best managed by destroying it at on-site treatment facilities. In 2022, we continued work on upgrading the testing and treatment facilities at our Scotland facility. With respect to waste management there are two priority areas: the reduction of waste generation and the reduction of waste sent to landfill. To help track progress in these areas we have begun recording the amount plans at our largest waste-generating businesses. LAND QUALITY Our facility in Chicago, US, is located on a site which has “superfund” status consultants and the regulatory authorities to ensure that its legal obligations in relation to this matter are fully satisfied. In 2022 we also incurred costs in connection with environmental remediation on the sites of the munitions businesses formerly owned by the Group in Belgium and Italy in accordance with the terms of sale of those businesses. Chemring Group PLC Annual report and accounts 2022 TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT GOVERNANCE BOARD OVERSIGHT OF CLIMATE-RELATED RISKS AND OPPORTUNITIES The Board is responsible for overseeing climate-related risks and opportunities in delivering the Group’s strategy and running the Group’s operations. The Group Chief Executive is the Board director responsible for sustainability across the Group which includes climate-related risks and opportunities. The Board reviews the Group Risk Register as a scheduled agenda item every six months in which both physical and transitional climate-related-risks alongside opportunities are considered. The Board is informed of progress against the Group’s carbon reduction targets implemented in 2021. Associated MANAGEMENT’S ROLE MANAGING CLIMATE- RELATED RISKS AND OPPORTUNITIES To facilitate and ensure a centralised approach to sustainability across all our businesses, the Group Sustainability Committee (consisting of members of the Group’s Executive Committee) was formed during 2021. The Committee assessing and managing climate-related risks and opportunities. The Group Chief Executive, informed by the Sustainability Committee, is responsible for ensuring that the Board is updated quarterly on all key matters including the impact of climate-related issues. Members of the Committee are informed through their respective departments on matters relevant to climate-related issues. Group’s carbon reduction targets through their annual bonus and long-term incentive plan (Performance Share Plan (“PSP”)) as detailed on pages 96 to 119. STRATEGY CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED OVER THE SHORT, MEDIUM AND LONG TERM THE IMPACT OF CLIMATE- RELATED RISKS AND OPPORTUNITIES ON CHEMRING’S BUSINESSES, STRATEGY AND FINANCIAL PLANNING The risks and opportunities associated with climate are reflected in our strategy and plans, and we strive for continuous improvement to reflect our purpose, our growth strategy, the external landscape and the expectations were considered during the year. Associated time horizons associated were viewed as short-term (0 to 2 years), medium-term (2 to 5 years), or long-term (5 to 30 years). The basis for the time horizons was to align with our internal strategic and financial planning processes. Short-term being the immediate budget period, medium-term covering the remaining detailed financial planning period and long-term being outside of these periods. From this, the key risks and opportunities that could have a material financial impact on the organisation have been identified. Where material, the Group is committed to managing regulatory, reputational and market risk related to climate change. Details of the principal risks and uncertainties which could have a material impact on the Group’s business model, strategy, future performance or reputation, of which climate change has been identified as a risk, are covered in the pages 46 to 49. 1. IEA (2021), World Energy Model, IEA, Paris https://www.iea.org/reports/world-energy-model. The Task Force on Climate-related Financial and consistent information about the risks and opportunities presented by climate change. The Board notes the recommendations in relation to the mandatory disclosures of climate-related financial risk arising from Listing Rule 9.8.6(8) and has concluded that the business strategy remains resilient given the mitigations already implemented and planned. We consider our disclosure to be consistent with all the TCFD Recommendations and Recommended Disclosures including section C of the TCFD Annex entitled “Guidance for all Sectors” excluding full completeness of scope 3 emissions for which we continue to embed the relevant capabilities across developing our reporting to enable future disclosure. Our statement to meet these requirements, providing information on the governance of climate-related issues, integration with overall risk management, strategy in managing climate-related issues and opportunities, and the metrics STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 STRATEGY CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED OVER THE SHORT, MEDIUM AND LONG TERM THE RESILIENCE OF CHEMRING’S STRATEGY, TAKING INTO CONSIDERATION DIFFERENT CLIMATE- RELATED SCENARIOS, INCLUDING A 2°C OR LOWER SCENARIO In 2021/22 the Group began to develop its climate-related scenario analysis to improve understanding of the behaviour of certain risks given different climate outcomes. We have utilised three public climate-related scenarios which we deem to be reliable and related to our business operations to aid our understanding of the business resilience to climate change. We will revisit these scenario analyses to ensure these remain appropriate. The scenarios are as follows: - Sustainable Development (SDS) 1 outlining a global low carbon transition which limits the global temperatures rise - Stated Policies (STEPS) 1 outlining a combination of physical and transitions risk impacts as temperatures rise - RCP 8.5 2 Scenarios have been supplemented with additional sources that are specific to each risk to inform assumptions included in projections. The Group continues to refine its approach to quantitative aspects of this modelling and Assumptions have been made as part of this scenario analysis: - Chemring will have the same business activities that are in place today. That means impacts should be considered - Impacts are assumed to occur without the company responding with any mitigation actions, which would reduce the impact of risks. - The analysis considered each risk and scenario in isolation, when in practice they may occur in parallel as part - Carbon pricing was informed by the Global Energy Outlook 2021 report from the International Energy Agency (“IEA”). 2. I PCC, 2014: Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued Chemring Group PLC Annual report and accounts 2022 RISK MANAGEMENT ALL BUSINESS UNITS ARE REQUIRED TO ASSESS RISK IN RELATION TO THE DELIVERY OF THEIR STRATEGY AND OBJECTIVES, CHEMRING’S PROCESSES FOR IDENTIFYING AND ASSESSING CLIMATE- RELATED RISKS Current and emerging climate-related risks and opportunities are considered, whether they arise within the Group’s operations or within the value chain, including existing and emerging regulations. In 2021/22, climate risks and opportunities relevant to the Group were identified and reviewed with the aid of external consultants, and refined through consultation with key Chemring personnel, including members of the Sustainability Committee, Risk Management Committee and the Board. Risks and opportunities were assessed in line with the Group’s methodology to assess principal risks. A probability and impact matrix defines the likelihood of the risk, assessed based on historical evidence or experience that such consequences have materialised (Very Unlikely, Unlikely, Neutral, Likely, Very Likely). The magnitude of impact is also classified (Low, Low-Medium, Medium, Medium-High, High) and, where possible, a single figure estimate for the financial impact was calculated. CHEMRING’S PROCESSES FOR MANAGING CLIMATE-RELATED RISKS Once each climate-related risk and opportunity was identified, the Group sought to quantify the financial impact, appropriate strategic response, and the cost of implementing the mitigations. This process includes considering the long-term impacts arising from the risks identified on our products and services. This in turn helped to determine the materiality, allowing the Group to prioritise resources to manage its most significant climate-related impacts, change risks and opportunities are covered by existing or planned mitigation and adaptation strategies. PROCESSES FOR IDENTIFYING, ASSESSING, AND MANAGING CLIMATE-RELATED RISKS INTEGRATED INTO CHEMRING’S OVERALL RISK MANAGEMENT Climate is considered as a Group principal risk alongside the risks identified in the wider risk management process. The management of each business is responsible for the identification, management and reporting of local risks, The Risk Management Committee meets quarterly and, utilising the input from the business risk registers and the US risk register, identifies those principal risks which are material to the Group as a whole. The completed climate-related risk and opportunity register was reviewed by the Board during the financial year. METRICS AND TARGETS METRICS USED TO ASSESS CLIMATE-RELATED RISKS AND OPPORTUNITIES IN-LINE WITH CHEMRING’S STRATEGY APPROPRIATE, 3 GHG EMISSIONS AND THE RELATED RISKS Chemring monitors scope 1 and 2 emissions with aspects of scope 3 disclosed on page 43. The Group also discloses other environmental metrics such as freshwater use and waste generated, as reported on page 44. For the current year disclosure of scope 3 emissions, please refer to page 10 of the Sustainability Report 2022. CHEMRING’S TARGETS FOR MANAGING CLIMATE-RELATED RISKS AND OPPORTUNITIES AND PERFORMANCE AGAINST TARGETS A crucial first step in Chemring’s approach to addressing climate-related risks and opportunities in FY21, Chemring These included but were not limited to reducing our direct (scope 1) and indirect (scope 2) emissions year-on-year, STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 CLIMATE-REL ATED RISKS Risk Wildfires Severe weather events Technology Type Physical Physical Transition Area Own operations Own operations Own operations/downstream Primary potential financial impact Lost revenue Lost revenue Higher expenditure Time horizon Short-term Short-term Medium/Long-term Likelihood Likely Likely Unlikely Magnitude of impact Low Low-Medium Low IMPACT ON THE BUSINESS AND STRATEGY WILDFIRES Climate change poses an increased risk to the likelihood and severity of grass fires, which have the potential to disrupt production and product delivery due to physical damage to surrounding infrastructure and Chemring facilities, as well as creating additional costs of remediation. Wild grass fires that occurred in 2019 on one of the business sites in Victoria, Australia, which, although did not impact operations, highlighted this threat. Current mitigations have already been deployed in the form of cutting back grassland close to operations and ensuring local mitigations in place for activities such as planned burns. Using analysis conducted for the risk assessment of wildfires in Australia (the area in which the likelihood for the risk impacts from this risk are highlighted within the Australia region in the physical risks table (Table 1). SEVERE WEATHER EVENTS Extreme weather events resulting from cyclones and storms are exacerbated by climate change, having the potential to impact the Group’s operations. Physical damage to Chemring facilities and surrounding infrastructure could result in disruption to exposure to tropical storms. For example, in 2018, a severe weather event caused partial flooding at the Tennessee facility. flooding events in the future. In looking at future scenarios, the physical risk of severe weather events remained localised to sites within the US, particularly Tennessee. Even in the RCP 8.5 scenario, the risk of expected damage from river flooding projected out to 2050 remains similar to scenario SDS. This is also summarised within Table 1. TECHNOLOGY Climate-related requirements are changing in key customer procurement contracts, which presents a risk that the Group’s costs could increase in order to comply. This would influence expenditure along with other potential impacts including loss In response to this risk, Chemring maintains continual assessment of government priorities in terms of technology roadmaps and procurement requirements as necessary. Additionally, close relationships with customers are maintained to facilitate effective risk management and long-term planning. Under the scenario (SDS), the Ministry of Defence has outlined its approach to climate change and sustainability strategy. Future procurement decisions may focus on the sustainability of a supplier’s business operations, for which Chemring has a roadmap towards becoming a net zero organisation by 2050. Site location Scenario Australia Europe UK North America SDS l l l l l l l l l Low impact l Medium impact l High impact TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued Chemring Group PLC Annual report and accounts 2022 CLIMATE-RELATED OPPORTUNITIES Opportunity More efficient production Sourcing low-emission energy Supply chain resilience Type Resource efficiency Energy source Resilience Area Own operations Own operations Own operations/upstream Primary potential financial impact Reduced costs Reduced costs Reduced costs of input goods and Time horizon Short-term Short to Medium-term Short to Medium-term Likelihood Likely Very likely Very likely Magnitude of impact Low Low Low-Medium IMPACT ON THE BUSINESS AND STRATEGY MORE EFFICIENT PRODUCTION Improving energy efficiency through initiatives such as upgrading building facilities, and LED lighting retrofits has the benefit of saving on direct energy costs. Plans for future initiatives are in place with planned financial savings. This opportunity is largely unaffected by external changing policy scenarios, as future initiatives are already in place with planned financial savings. SOURCING LOW-EMISSION ENERGY Increased renewable energy availability and improvements to technology are leading to renewable energy becoming increasingly inexpensive. Chemring will benefit from de-linking energy costs to fossil fuel prices through the procurement of renewable energy for its sites. In addition, this will reduce the Group’s exposure to GHG emissions and therefore lower sensitivity to changes in the cost of carbon. The carbon price (US$/tCO 2 e) is projected to increase as follows: Scenario 2030 STEPS 65 90 SDS 120 200 Difference There is an opportunity to benefit from the avoided emissions of sourcing energy from fossil fuel based providers. transitions such as those under the European Green Deal (STEPS) provide further impetus for procuring energy from more renewable sources. SUPPLY CHAIN RESILIENCE Chemring has identified opportunities to improve resilience in the supply chain, including from the physical impact of climate change by understanding supplier risks and developing redundancy. Some suppliers within the supply chain are sole suppliers, which requires an understanding of their potential risks and the implementation of mitigations to minimise any supply disruptions. geographic location and current risk to extreme weather events. As a further supply chain investigations are developed, location-based data for sole suppliers will be available and can inform the climate-related risk scenario analysis. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 CHEMRING CULTURE Our people approach is underpinned by our culture. Engaged, motivated, growth. Our goal continues to be to ensure that we have the right people, in the right place, at the right time, with the right skills, working in a safe, healthy and inclusive environment. The Chemring cultural framework has four pillars and these provide In 2022 we continued to build on the progress made since 2019. Using a well-practised blend of global direction and structure, delivered locally through individual business units, we continue to support our Chemring colleagues in their mission to do their best work every day. Since the initial culture review, every part of the business has developed work done previously, as well as putting in place new activity to support The ESG agenda is now well embedded across the business and leadership support has ensured that the work around the environment, diversity, good governance and continuous improvement has become a key part of the culture at Chemring. During 2022 the HSE teams have worked closely with the people teams OUR OVERALL PEOPLE APPROACH IS FOCUSED ON FIVE KEY AREAS: CULTURE UNDERSTANDING OUR POPULATION DEVELOPING CHEMRING IN THE COMMUNITY ENGAGING WITH OUR PEOPLE DIVERSITY AND INCLUSION AT CHEMRING CUSTOMER CENTRICITY THE EMPLOYEE EXPERIENCE LEADERSHIP DIVERSITY, EQUITY AND INCLUSION OUR PEOPLE INVESTING IN OUR PEOPLE Chemring people are at the heart of our business. for our future success. Chemring Group PLC Annual report and accounts 2022 We have further embedded our approach to providing development opportunities at all key career levels – Early Careers, First Line Managers, Experienced Managers and Senior Leadership Teams – and extended this inclusion appropriate for each level. With the restrictions of the pandemic easing throughout the year in all geographies, the focus has been on bringing colleagues back together and resetting ways of working. Local employee forums have been revitalised as appropriate for each part of the business, providing further flexibility recognition events, such as charity fundraising, working with veterans’ organisations and the return of social events for colleagues, have provided further opportunities for in-person interaction and this supports the development and reinforcement of the Chemring culture. Measuring progress is key to understanding how far we have come in achieving our cultural aspirations. Our Employee Voice initiative ensures that we are regularly checking in with colleagues to track and share our progress towards the aspirational culture goals. The real-time bespoke sentiment tracking tool creates dashboards of participation and positivity based on the four cultural pillars. Business unit leaders review these regularly and share Wellbeing continued to be a key theme in 2022. In line with the approach maintaining a healthy workplace, which was established in 2021, continued Teams locally to focus on areas of local interest and importance, and to deliver activities and support to promote wellbeing on site. As part of line manager development and through the early careers network events, areas such as maintaining mental health have been addressed, as well focus in the early stages of our talent pipelines to ensure these topics become “business as usual” as colleagues move through the organisation. Mental health first aid training has continued across all business units in 2022, with some business units also providing specific mental health training on site throughout the year. Support through the provision of occupational health services on demand in each location has been used extensively in 2022. Additionally, the provision UNDERSTANDING OUR POPULATION Our Chemring business is highly diverse. Our success depends on understanding our global population. During 2021 a full review of all and importantly in the ability to derive data to understand the population. move towards a more consistent systematic approach to managing employee information. In the US, the people team have commenced work to implement a single vendor solution for end to end employee lifecycle support using an existing supplier as the start point. A similar programme will commence for the UK businesses in 2023. >90 graduates and apprentices 120 graduates and apprentices took part in UK wide Early Careers Development Programme >340 line managers and supervisors involved in global Leading our People programme 80 experienced managers enrolled on Aspire@Chemring, our first fully virtual management development programme 80 senior leaders took part in quarterly development sessions as individual senior leadership teams as part of the Leading our Organisation initiative, including DE&I training and safety development >2,300 colleagues with regular access pulse survey regular response rate of participants in Employee Voice positivity score >5,000 individual comments STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 Male Female TOTAL POPULATION 2022 2021 UNDERSTANDING OUR POPULATION CONTINUED recruit, on-board and then manage and develop colleagues, as well as reducing the risk around key activities such as payroll processing. The ability to report both key static metrics, as well as to interrogate process metrics such as progression, will provide the opportunity to leverage further our key asset – our people. Our investment in 2019 in the Employee Voice sentiment monitoring we did”. The launch of the Experienced Manager Development Programme in 2022 was in response to both a recognised gap in the development approach as well as addressing comments raised through the Employee Voice tool. Similarly, the ongoing focus on Performance Conversations supports requests from colleagues for regular feedback from their managers. Continuing improvements in internal communications – such as the programme to put TV screens across all locations to enable real-time communications to those who are not able to access email at work – are also in direct response to feedback from the Employee Voice statements. ENGAGING WITH OUR PEOPLE Communication both within and across the Group is key to engagement. Each business unit uses a range of formal and informal channels including all-hands meetings, smaller team briefings, employee forums, direct email messaging and the CEO’s vlog, with an active Q&A session encouraging anyone from across the business to ask a question, as well as regular distribution of the Chemring magazine, Chemring-i. As pandemic restrictions eased, every business unit has taken the opportunity to bring colleagues together face to face for a range of different activities and events – from development, lunch and learn sessions, fundraisers to community activity. The recruitment challenge being felt globally has also focused attention in all businesses. A wide range of colleagues have been involved in supporting activity to both ensure retention – through communication of the benefits of working at Chemring, sharing more widely information and updates on products and customer activities – and to generate new hires. Activities such as in-person careers events held in local communities, through veterans’ associations and direct through the business units, have created the opportunity to remind colleagues of what a great place Chemring is to work, as well as providing much-needed colleague interaction after the past two years of limited contact. Despite the challenges of the pandemic, our colleagues remain positive about feedback via the Employee Voice tool through reacting to statements or providing written feedback. A regular review of the responses at business different groups) ensures that concerns are identified quickly and addressed During the year, Laurie Bowen, as Chair of the Remuneration Committee and non-executive director charged with employee engagement on behalf of the Board, met again with groups of colleagues to hear direct from them their views on working at Chemring as well as sharing the work of the Board. Laurie visited multiple locations across the UK and US and hosted eight feedback groups across three different business areas and at different levels of the organisation from our front line colleagues through to senior leaders. Feedback from these sessions covered a variety of topics on the minds of our employees, such as how inflation is impacting the cost of living through to how our values of Safety, Excellence and Innovation are lived and breathed in our businesses. Leadership and Communication were specifically raised as areas where improvements have been made and employee ideas were shared on how we could further improve. This feedback was shared with our local leadership teams at those locations to allow them to respond and take action. Employee feedback remains a engagement priorities. In 2022 we continued to ensure that all colleagues were able to share in our corporate success. Discretionary bonus schemes are now in place at all levels in our organisation for colleagues working in every business area. These schemes, which are tailored to suit local business requirements and focus, provide bonus awards quarterly, half yearly or annually tied to the Development is at the heart of the people strategy at Chemring. It is essential in ensuring we have the capabilities today and in the future to appropriately support the business. This development also underpins our retention and attraction capability with current colleagues and future candidates becoming increasingly demanding of the organisation and the investment in their future. There were some significant additions to the development framework framework taking colleagues from their Early Careers as graduates or apprentices and providing development at key career milestones in Highlights of our development approach are: - A UK-based Early Careers Development Programme which commenced by technical development provided within each business unit specific to the role colleagues have been brought in to learn. - Continued development of the Leading our People programme for all line managers globally in support of developing Chemring leadership bench strength. The initial programme – Leading our People Foundation – is undertaken by all new line managers as they progress or are hired to ensure that every colleague in this role has a strong foundational understanding of what is expected of them. Launched in 2022, Leading our People Futures provides quarterly learning and networking focused on local as well as global business challenges. - The launch of Aspire@Chemring in 2022 supports the development of managers who have moved beyond supervisor and first line management and who are identified as future talent for our key senior roles. This creative, digitally-enabled programme encompasses group learning, networking through the use of mixed learning “pods” and links to global executive business schools including Columbia and MIT to leverage a mix of learning. The focus on Leading Human Performance and Leading Organisational Performance connects development into the personal, functional and business goals. - Leading our Organisation is run quarterly across the year to ensure our most senior colleagues are also benefiting from the opportunity to reflect on the areas of culture which they can influence and work together to develop action plans around their local priorities. OUR PEOPLE continued Chemring Group PLC Annual report and accounts 2022 Development is the cornerstone of the drive to continuously improve the quality of our business. Our colleagues are involved in performing a huge number of often complex processes and procedures which challenge their technical expertise every day. Alongside the above programmes for leadership development, work continues to ensure high levels of operator competence throughout the organisation. Individuals across the organisation are encouraged to undertake continuing professional development as required to ensure that expertise and knowledge remain up to date. Additionally through different routes, further technical development, including workplace PhD programmes and MBA study, is actively undertaken by a number of colleagues. In 2022 over 30 college undergraduates joined our business units in the UK throughout the summer to experience working for Chemring as part of our summer internship programme. Summer placements are a key part of our outreach to support students pursuing STEM subjects and to encourage them to establish a career in this important area. The Chemring Early Careers cohort continues to grow with over group of colleagues is fundamental to our future success. Our commitment to apprentices means that we welcomed 25 apprentices to start their career at Chemring and so our attention is now on developing those colleagues already working with us who might benefit from formalised development beyond the Leading our People programme. Partnering with an outside organisation we will be using Apprentice Levy funding in 2023 to support colleagues in achieving ILM accredited level 3 and 5 apprenticeships as well as enabling them to benefit from creating an external network. SENIOR LEVEL LEADER MID LEVEL LEADER FIRST LEVEL LEADER DEVELOPING AT CHEMRING LEADERSHIP ACCELERATE TALENT EARLY CAREERS LEADING OUR ORGANISATION ASPIRE@CHEMRING LEADING OUR PEOPLE LEADING OURSELVES PERFORMANCE CONVERSATIONS EMERGING LEADERS PROGRAMME EARLY CAREERS PROGRAMME EARLY CAREERS PARTICIPANTS/ NETWORK We continue our commitment to sponsoring bursaries for undergraduates through the Institute of Engineering and Technology which underlines our commitment to supporting future generations of scientists and engineers. students as permanent colleagues as part of the Graduate Scheme. The market for talent remains challenging and nowhere more so than in providing the type and number of colleagues required by our Roke business. In response, in 2022 we launched the Roke Academy in partnership with Hatch, a specialist in digital skills recruitment. The Roke Academy is a non-traditional areas of recruitment to embrace undiscovered talent who may not have previously had the opportunity to enter the tech field. In 2022 and 2023 the Roke Academy will look to attract those who may have faced barriers to work for a variety of reasons; individuals who have found the traditional recruitment process a challenge, are returning to work after The Academy supports these diverse individuals who can bring unique strengths to our business in terms of creativity, data analysis and innovation to then progress in their chosen field. In 2022 we welcomed 24 new colleagues through this route and will continue to expand this programme in future years. The Roke Academy presents a wider opportunity to combine all development from Early Careers through technical training and to provide support for the most senior leaders at Roke as a true centre for development excellence. This will continue to evolve in 2023 and beyond. In 2021 a global framework for assessing and supporting talent and succession planning was introduced into every business unit. This framework provides a consistent approach to understanding key roles in the business and creating an understanding of the talent pipeline for each role. This process has continued into 2022 with development plans in place at an organisational Aspire@Chemring programme content was designed around the outputs commonly identified in the organisational talent reviews. MANAGING YOURSELF STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 DIVERSITY AND INCLUSION AT CHEMRING Chemring strives for diversity on a broad basis including gender, age, background, education, disability, neurodiversity and nationality (within continue to develop both globally and locally and which will be central to our success in the coming years. In 2021 we introduced DE&I goals for all of our senior leaders which form part of our incentive plans. We have an increasing number of formal and informal groups around the business which support and connect people with shared characteristics WIN@Chemring, with a focus on supporting female colleagues globally. OUR PURPOSE IN ACTION JOE SPIRES’ GRADUATE JOURNEY Joe Spires is a Graduate Engineer at Roke in Romsey, UK. He studied nuclear engineering at Lancaster University with support from The Institution of Engineering and Technology’s (“IET”) Horizons Bursary. The Bursary provides financial support of up to £4,000. Through the bursary scheme, Joe was partnered with Chemring in his second year, completing a summer internship with Chemring Countermeasures UK (“CCM UK”) and leading him to his current role at Roke. Says Joe, “The financial support I gained from the Horizons Bursary helped with quality resources such as the many expensive books needed for my course. I come from a low-income household, so this support also meant that I didn’t have to work during my degree and could focus on my studies. “I got the chance to work with a great team with a great culture at CCM UK, and, following a conversation with the Managing was offered a position at the end of my degree course and have been working on special projects with Roke since then. The mentoring and support I’ve received from the team have been second to none, and I’m learning so much. “It’s my hope to continue building my expertise in areas like robotics and sensors to enable me to architect solutions myself with confidence. I’m also excited about the travel opportunities that a role in a global organisation could offer in the future.” Male Female KEY ROLE TALENT PIPELINE 2022 2021 These groups made up of female colleagues from every function and level have put in place actions to support both male and female colleagues and provided the opportunity for colleagues to discuss local challenges and issues affecting this key population. Across 2022 we have worked to ensure we understand the ethnic diversity reflective of the communities we operate in and are developing approaches to more formally monitor this. We are pleased to be able to provide additional reporting on ethnic diversity at Chemring in this year’s annual report. Asian Black Mixed race White Other * Senior managers 3.8 5.0 0.0 91.2 0.0 Mid-level managers 1.8 4.2 1.5 91.3 1.2 All other employees 16.3 1.2 3.0 * (Inc Hispanic, NHOPI, Native American). OUR PEOPLE continued Male Female Male Female Chemring Group PLC Annual report and accounts 2022 TOTAL GRADUATES AND APPRENTICES 2022 2021 COLLEAGUES INVOLVED IN LEADERSHIP DEVELOPMENT PROGRAMMES IN 2022 2022 As an employer we make no distinction between disabled and able-bodied persons in recruitment, employment and training, career development and promotion, provided that any disability does not make the particular employment impractical or impossible under the stringent regulatory requirements under which Chemring operates. Today we ensure that any external bodies we work with to support our hiring efforts have diverse candidate pools and attraction approaches that are open to all suitably qualified individuals and we ask questions at appointment around these important areas. The Executive Committee has a formal requirement to review the process for appointing all senior team members, including ensuring processes are without bias and open to all candidates regardless of characteristics. As a business, we are committed to meeting, at a minimum, the labour rights we often exceed these requirements. CHEMRING IN THE COMMUNITY We recognise that each of the Group’s businesses has an important role to play in its local community. We have a recognised community investment policy, which confirms our commitment to support selected charitable causes with communities in which the Group’s businesses operate. Each business has its considered by the Executive Committee. In addition to providing financial support, the Group also encourages and supports employees who undertake voluntary work in the local community. Looking to specific communities, our relationship with the Institution of directly to undergraduates studying for engineering and science-related degrees in the UK who have faced some level of hardship in achieving a place to study their chosen programme. These high-calibre students are provided with financial support via a Chemring funded bursary and the opportunity We are aware that on occasion our manufacturing activities can impact operations on the local environment, and is addressing this through its environmental strategy. OUR PURPOSE IN ACTION MAKING MENTAL HEALTH A PRIORITY Chemring Energetics UK (“CEUK”) made mental health a priority in 2022 and employed the services of a company called Headtorch. Headtorch, based in Glasgow, are a team of specialists in learning, development and psychology. They work with organisations both nationally and internationally to build a positive mental health culture and support mental health in the workplace. Headtorch delivered a bespoke two-day event with 30 managers, covering all areas of the site, to help them feel better equipped to encourage and facilitate mental health conversations with their teams. In addition, a group of actors from Headtorch filmed different mental health scenarios in full CEUK uniform and PPE to really bring the stories to life for those involved. The aim was to build a positive mental health culture on site so that colleagues feel able to speak openly if they have issues. We also want to remove the stigma of talking about mental health and rather than setting KPIs and targets around mental health, which are extremely hard to measure, our priority is on supporting line managers, helping staff feel able to talk openly at work and providing access to the right professional resources to help people. The CEUK team also established a Wellbeing Forum on site. emotional, social and mental wellbeing of staff by providing a mechanism for all our colleagues to contribute to the CEUK wellbeing agenda. commitment to support selected charitable causes with a focus on the military and communities in which the Group’s businesses operate.” STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 Male Female EXECUTIVE COMMITTEE 2022 2021 BOARD OF DIRECTORS 2022 2021 SENIOR MANAGERS 2022 2021 OUR PEOPLE continued CHEMRING IN THE COMMUNITY CONTINUED Across Chemring our colleagues support a wide range of charities, both local and national. Highlights this year include: Since March 2022, Chemring colleagues have pulled together across the organisation to fundraise and donate to support the humanitarian crisis in Ukraine, with Chemring matching all money raised. A number of charities directly related to Activities range from fundraising to donations and providing time and resources to initiatives. In the US, Chemring Energetic Devices (“CED”) is supporting Habitat for Humanity, an international charity fighting global poverty and homelessness, by spending a day helping build homes as well as fundraising in support of the charity. There is much local activity supporting charities close to our sites. Chemring Australia are supporting a women’s refuge through the WIN@Chemring team, and at CED colleagues support local families over the holiday season through the Adopt-a-Family scheme. Colleagues across Chemring regularly take on individual challenges for causes special to them with donations often matched by the company. Climbing mountains, moving large objects and running marathons have all been tackled in the year. Chemring Group PLC Annual report and accounts 2022 ETHICS AND BUSINESS CONDUCT DOING THE RIGHT THING and in full compliance with all applicable laws OUR APPROACH We are committed to promoting a culture within Chemring where everyone does the right thing and takes personal responsibility for their actions. Our Operational Framework and Code of Conduct set out the standards of business conduct and behaviours we expect of all of our businesses, our employees and all third parties who act on our behalf. We require all employees and third parties who act on our behalf to conduct business honestly and with integrity, and to take personal responsibility for ensuring ETHICS & COMPLIANCE COMMITTEE The Board has established an Ethics & Compliance Committee, chaired by Carl-Peter Forster, with the other members being the Group Chief Executive, the President of our US operations and the Group Legal Director & Company Secretary. The Committee has oversight of the Group’s ethical business conduct and compliance framework, including our anti-bribery processes. It monitors the implementation of the framework across the Group and recommends areas for future improvement. The Committee met three times during the year. At every meeting the Committee reviews and monitors compliance with our anti-bribery processes and reviews whistleblowing reports received and associated investigations. During the year the Committee also reviewed: - reports from PwC on their internal audits of the business’s compliance with our anti-bribery processes and their review of the implementation of the Chemring Compliance Portal; - metrics on the due diligence of third party sales partners, service providers and suppliers conducted through the Chemring Compliance Portal; - reports on the independent audit of selected third party sales partners; - training material on the Code of Conduct; and - approvals granted under our policy on sales to customers located in higher risk territories. The Chairman reports to the Board on the Committee’s activities following each meeting. OPERATIONAL FRAMEWORK Our Operational Framework incorporates a broad range of more than 35 policies and procedures which have been adopted by all of our businesses. The Operational Framework implements a robust governance and compliance framework to enable us to operate in a safe, consistent and accountable way. The leaders of each of our businesses are required to ensure that: - every employee, at every level of the organisation, has access to and understands the requirements of the Operational Framework; - appropriate training and monitoring processes are in place to ensure proper implementation of the Operational Framework; and - local procedures and processes are adopted to implement the requirements of the Operational Framework. All of our Operational Framework policies, procedures and associated training material are hosted on the Chemring Compliance Portal. This innovative online system allows us to issue new and updated policies and training to employees across the Group, targeted to their specific roles, and enables us to monitor Our governance framework also includes a requirement for all businesses providing a detailed assessment of their compliance with the Operational Framework. The output from the operational assurance process enables framework, including the identification of additional training requirements internal audit programme. CODE OF CONDUCT Our Code of Conduct, which sits alongside our Operational Framework, embraces our fundamental values of Safety, Excellence and Innovation. All employees and all third parties who act on the Group’s behalf are required to comply with our standards of behaviour and business conduct, countries in which we operate. All employees, current and new, are provided with a copy of the Code of Conduct and asked to confirm that they will adhere to its standards. The Code is reproduced in Norwegian for our employees in Norway. Updated scenario-based training on the Code was provided to employees during the year. Operational assurance process risks and areas for improvement Continuous improvements to the Operational Framework Implementation of new procedures and training programmes Internal audit review and consideration READ OUR CODE OF CONDUCT POLICY: CHEMRING.COM/SUSTAINABILITY/ETHICS- AND-BUSINESS-CONDUCT CONTINUING TO INNOVATE, PROTECT A ND GROW CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 WHISTLEBLOWING Our Chemring culture embraces transparency and openness, and we encourage all employees to speak up if they have any concerns. We have a whistleblowing policy and associated procedures in place which enable all employees to raise concerns, in confidence, about possible improprieties or wrongdoing within the business, without fear of reprisal or retaliation. Employees are able to raise issues by contacting our 24-hour ethics reporting service by phone or email or by accessing an external website. All issues Our internal procedures on the handling of whistleblowing reports are designed to ensure that all reports made, whether through the external service or through other internal channels, are dealt with in a proper and consistent manner, with appropriate oversight from the UK and US legal departments. Training is provided to members of our leadership teams on how to identify whistleblowing reports which may emanate through less-obvious channels and how to engage with employees who make whistleblowing reports. ANTI-BRIBERY AND CORRUPTION The Group has well established anti-corruption policies, which are included within our Operational Framework. Specifically, these cover bribery and corruption, conflicts of interest, gifts and hospitality, and facilitation payments. A number of other policies within the Operational Framework also address bribery and corruption risks in areas such as finance, political donations and lobbying, charitable donations and offset. The Group has also adopted a policy on sales to customers located in higher-risk territories, which requires our businesses to prepare a risk mitigation plan for any proposed transaction in a territory rated less than which may be encountered in doing business in such territories. Our detailed anti-corruption procedures are incorporated within our Bribery Act Compliance Manual (“BACM”), which is updated on a regular basis, and includes requirements for: - each business to routinely conduct informed bribery risk assessments as part of normal operating procedures, to determine the nature and extent of the Group’s exposure to potential internal and external risks of bribery and corruption on its behalf by persons associated with it; - approval of the appointment of all sales partners and other third party advisers, which in all circumstances requires the completion of risk-based due diligence, appropriate management approvals, use of standard form contracts, and ongoing monitoring and review; - risk-based anti-corruption due diligence processes for the engagement of service providers and suppliers; - regular mandatory training on BACM and its application to their respective roles for management, supervisors and all employees working within commercial, sales and marketing, finance and human resource functions or in customer-facing roles; - approval of the giving and receiving of reasonable, proportionate and appropriate gifts and hospitality in the normal course of business; and - proper identification, disclosure and management of potential or actual conflicts of interest. A BACM “Pocket Guide” is issued to all employees across the Group, which provides an overview of our anti-corruption policies and the requirements All businesses are required to complete a BACM Compliance Certificate on an annual basis, confirming that all policies and procedures within BACM have been complied with and providing supporting information to demonstrate compliance. BACM Compliance Certificates are reviewed by the Ethics & Compliance Committee following each submission. We recognise that the appointment of third party sales partners in our routes to market can present particular bribery and corruption risks, and engagement of sales partners where there is a genuine business need - restrictions on the number of sales partners to be engaged in - the preparation of a full business case to justify the appointment of all new third party sales partners, including a two-stage bribery risk assessment incorporating the requisite level of risk-based due diligence, which must - due diligence reports from external consultants for higher-risk appointments; - a full periodic reappointment process for all retained sales partners, including recommissioning of the appropriate risk-based due diligence and resubmission of a full business case for approval by the Group Chief Executive; and - increased reporting requirements for all payments made to third party sales partners and higher risk service providers. The review and approval processes for our third party sales partners are automated through the Chemring Compliance Portal, which enables us to adopt a consistent approach to the application of our due diligence and approval processes across the Group. Due diligence processes for the third party service providers and higher risk suppliers engaged by our non-US businesses are also managed in the Chemring Compliance Portal. The US businesses have adopted a similar automated system for their service providers and higher-risk suppliers. The Chemring Compliance Portal also incorporates a module for employees to seek approval online prior to giving or receiving gifts and hospitality, or making charitable donations on behalf of the business. Selected third party sales partners are subject to an independent audit by suitability of our sales partners and help to further strengthen our anti-bribery and corruption processes. Compliance with BACM procedures continued to be a core aspect of PwC’s internal audit programme during the year. HUMAN RIGHTS The Group is committed to respecting human rights in the countries in which we do business. Our Code of Conduct and other applicable policies under the Operational Framework support our commitment to ensuring, as far ethical standards and expectations, including in relation to human rights. involved in slavery. A statement of the Group’s compliance with the Modern Slavery Act 2015 can be found on the Group’s website at www.chemring.com. We fully adhere to all relevant government guidelines designed to ensure equipment, used for the purposes of terrorism, international repression ETHICS AND BUSINESS CONDUCT continued Chemring Group PLC Annual report and accounts 2022 FINANCIAL REVIEW DELIVERING GROWTH, STRONG CASH GENERATION AND FUNDING INVESTMENT “ Our focus in 2022 has been on adapting to our customers’ needs in what has inflationary cost pressures.” NET DEBT (2021: £26.6m) ORDER BOOK £651m (2021: £501m) Andrew Lewis Chief Financial Officer In the Sensors & Information sector, Roke revenue exceeded £100m for the first time, and in what continues to be a buoyant market, order intake of £168m In the US sensors business there has been a positive start to the full rate production phase of the EMBD program. A customer procurement decision is expected in 2023 on the low rate initial production (“LRIP”) phase of the JBTDS and AVCAD programs. The shift in the US Government priorities from counter-insurgency operations to equipping forces for potential peer unexpected re-prioritisation of US DoD budgets. This impacted our expected HMDS FY22 delivery order, which was not funded, and we are currently working with the customer to appropriately plan for their expected future requirements as we expect the program to move from production to sustainment earlier than anticipated. Group’s manufacturing infrastructure continues to be a key enabler to deliver improved safety and operational excellence, resulting in Countermeasures & commissioned in the second half of the year is expected to deliver its first revenue in the first half of 2023. The market for precision engineered devices these niche areas of our Countermeasures & Energetics sector. GROUP FINANCIAL PERFORMANCE In 2022 the Group successfully navigated a number of operational and financial challenges: delays in the US DoD procurement process; labour availability; various supply chain and inflationary pressures, in particular the continue to work to mitigate their impact. Foreign exchange translation has provided a tailwind to operating profit compared to last year. While exchange rates have been volatile in the year, the US dollar has strengthened with the average exchange rate to sterling impact of the exchange rate movements on the key metrics at a Group and sector level is shown in the table overleaf. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 FINANCIAL REVIEW continued GROUP FINANCIAL PERFORMANCE CONTINUED At constant currency As reported 2022 2022 2021 £m Change £m Change £m Group Order intake 431.0 Order book 500.8 Revenue 393.3 Underlying EBITDA Underlying operating profit Underlying basic earnings per share 16.9 Sensors & Information Order intake Order book 113.6 Revenue 146.6 Underlying EBITDA 34.4 Underlying operating profit 31.6 Countermeasures & Energetics Order intake 255.1 Order book Revenue Underlying EBITDA 56.1 Underlying operating profit 40.0 multi-year contracts which include an increasing element of “pass-through” products and services which are included in revenue. Countermeasures & received across the sector. The impact of the Continuing Resolution in the US, and the continuation of CV-19 related working restrictions slowed the process of doing business with government departments, and as a result some orders were received later than expected which will adversely impact phasing of FY23. performance at Roke as well as steady growth in Countermeasures & Energetics. planned investment in Roke operating margin was flat compared to 2021 with the improved operational execution in Countermeasures & Energetics offset by the discretionary operating expense investment in Roke Academy, Roke Futures and Roke USA. FY22FY21FY20FY19FY18 £64.0m £57.5m £54.7m £44.0m £31.0m UNDERLYING OPERATING PROFIT (£m) Total finance expense fell to £1.5m (2021: £1.6m) which resulted in an underlying profit before tax of £62.5m (2021: £55.9m). The effective tax rate basic earnings per share was 20.2p (2021: 16.9p). Statutory operating profit was £53.3m (2021: £50.4m) and after statutory finance expenses of £1.5m (2021: £1.6m), statutory profit before tax was The non-underlying costs relate to the amortisation of acquired intangibles, costs relating to acquisitions, loss on the movement in the fair value of derivative financial instruments and the tax credit associated with these. TA X profit before tax of £62.5m (2021: £55.9m). The effective tax rate on The reduction in rate is due to the recognition of a deferred tax asset in respect of future US interest deductions of £4.3m. Looking forward into 2023 we expect the Group effective tax rate to return to the mid-teens impact the annual current tax charge for seven months. From FY24 we will see a full year effect and as such the Group effective tax rate is expected to Chemring Group PLC Annual report and accounts 2022 EARNINGS PER SHARE Underlying basic earnings per share was 20.2p (2021: 16.9p) and diluted was 16.4p (2021: 14.4p). FY22FY21FY20FY19FY18 19.7p 16.5p 14.8p 11.0p 6.7p UNDERLYING DILUTED EPS (PENCE) WORKING CAPITAL Working capital was £93.9m (2021: £84.4m), an increase of £9.5m. At constant currency, working capital would have been £81.9m. As a percentage of challenges the Group invested in certain inventory items to mitigate the risk of shortages on production and delivery to customers. We continued with our focus on commercial contracting, inventory levels and cash management. (2021: 18) demonstrate that working capital has been managed in a balanced and sustainable manner. GROUP FINANCIAL POSITION NET DEBT AND CASH FLOW representing a net debt to underlying EBITDA ratio of 0.09x (2021: 0.35x). The financial health of the Group has continued to improve in a number of aspects during the year. Disciplined working capital practices have been maintained to reduce intra-period volatility. The Group is working to achieve further improvements over the medium term. FY22FY21FY20FY19FY18 109% 105% 110% 104% 89% UNDERLYING CASH CONVERSION (%) 100% Underlying operating activities generated cash of £90.1m (2021: £80.0m). Group has a revolving credit facility of £150m which runs to December 2025 5 30 O c t FY20FY21FY22 F Y 19 F Y 18 F Y 1 7 No v D e c J an F eb M ar A p r 8 0 55 1 30 1 05 £ m 1 55 Ma y J u n J u l A ug S ept Oct WEEKLY NET DEBT (£m) STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 FINANCIAL REVIEW continued DEBT FACILITIES The Group’s principal debt facilities comprise a £150m revolving credit borrowing facilities at the year end. The Group is subject to two key financial covenants, which are tested quarterly. These covenants relate to the leverage ratio between underlying EBITDA and net 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 Group was in compliance with RETIREMENT BENEFIT OBLIGATIONS The surplus on the Group’s defined benefit pension schemes was £11.2m Employee Benefits. The surplus relates to the Chemring Group Staff Pension Scheme (the “Scheme”), a UK defined benefit scheme whose assets are held in a separately administered fund. The Scheme was closed to future accrual in April 2012. The surplus as a percentage of scheme liabilities increased from bond yield used as the discount rate for IAS 19. The resilience of the Scheme’s investment strategy , which includes a liability driven investment hedge, was demonstrated by the limited impact of increased interest rate and inflation expectations. During the final quarter of the year the Scheme exited its yields rose rapidly in September 2022. The Group also lent the Scheme £2m was repaid in November 2022. An updated triennial valuation was completed as at 6 April 2021 and showed a technical provisions surplus of £3.8m, which represented a funding level of recovery payments are required. The next actuarial valuation is due as at CONTINGENT LIABILITIES The Group is, from time to time, party to legal proceedings and claims, and ordinary course of business. In addition, one matter remained open at year end, being the incident that occurred at the Group’s countermeasures site in Salisbury on 10 August 2018. Full details are included in note 33. CAPITAL EXPENDITURE The Group continues to invest in the infrastructure of its facilities, with particular focus on enhancing safety and operational performance. In the The most significant investment being the Tennessee capacity expansion programme to meet the expected demand for F-35 countermeasures, and period. We still expect to generate revenue from the new Tennessee RESEARCH AND DEVELOPMENT is a key aspect of the Group’s strategy, and levels of internally funded R&D are expected to be maintained as investment in product development continues, particularly within Sensors & Information. An analysis of R&D expenditure is set out below: 2022 2021 £m £m Customer-funded R&D 51.4 Internally-funded R&D: – expensed to the income statement 8.5 – capitalised 2.1 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, underlying operating cash flow and underlying cash conversion. In addition, EBITDA, net debt, underlying operating profit and revenue on a constant currency basis are presented which are also considered to be non-IFRS measures. These measures are consistent with information regularly reviewed 2022 £m 2021 £m Growth Revenue (as reported) 393.3 Effect of using prior period Revenue at constant currency 393.3 Underlying operating profit (as reported) Effect of using prior period Underlying operating profit at constant currency Chemring Group PLC Annual report and accounts 2022 2022 2021 Underlying Non- underlying Statutory Underlying Non- underlying Statutory Group: EBITDA (£m) (0.9) Operating profit (£m) 50.4 Profit before tax (£m) 55.9 48.8 Tax charge (£m) (8.3) 1.0 Profit after tax (£m) (6.1) 41.5 Basic earnings per share (pence) 16.9 (2.2) Diluted earnings per share (pence) 16.5 (2.1) 14.4 Sectors: Sensors & Information EBITDA (£m) 34.4 (1.6) 32.8 Sensors & Information operating profit (£m) 31.6 25.9 Countermeasures & Energetics EBITDA (£m) — 56.1 — 56.1 Countermeasures & Energetics operating profit (£m) 40.0 (2.1) We present a measure of constant currency revenue and operating The Group manages its finance costs and tax on a central or regional basis and therefore the Board believes the use of underlying operating profit or EBITDA is the best way of monitoring the performance of operating businesses. of which, in management’s view, reflects how the business is managed and measured on a day-to-day basis. Our APMs and KPIs are aligned to our strategy and together are used to measure the performance of our business and form the basis of the performance measures for remuneration. Adjusted results exclude certain items because, if included, these items could distort the understanding of our performance for the year and the comparability between the periods. Management considers non-underlying items to be: - amortisation of acquired intangibles; - discontinued operations; - exceptional items, for example relating to acquisitions and disposals, restructuring costs, impairment charges and legal 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 year figures. The directors believe that these APMs improve the comparability of information between reporting periods as well as reflect the key performance indicators used within the business to measure performance. The term underlying is not defined under companies. All profit and earnings per share figures in this strategic report relate to underlying business performance (as defined above) unless otherwise stated. Further details are provided in note 3. The adjustments comprise: - amortisation of acquired intangibles of £4.6m (2021: £6.2m); - costs relating to acquisitions including deferred consideration treated as - loss on the movement in the fair value of derivative financial instruments - tax impact of adjustments of £1.3m credit (2021: £1.0m credit). Andrew Lewis Chief Financial Officer 13 December 2022 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 KEY ROLES AND RESPONSIBILITIES FOR THE GROUP’S RISK MANAGEMENT STRATEGY RISK MANAGEMENT MANAGING RISK We continue to manage key risks to ensure the RISK MANAGEMENT ORGANISATION The Board is responsible for determining the nature and extent of risks it is willing to accept in delivering the Group’s strategy and running the Group’s operations, and ensuring that risks are effectively managed across the Group. The Board reviews the Group risk register on a regular basis and considers whether the Risk Management Committee has appropriately identified the principal risks to which the Group is exposed. The Audit Committee is responsible for reviewing in detail the effectiveness of the Group’s systems of internal control, including financial, operational and compliance controls, and its risk management systems. The Audit Committee also reviews the effectiveness of the Group’s internal audit arrangements. The Risk Management Committee is responsible for overseeing the implementation of the Group’s risk management framework and is also responsible for identifying the principal risks to which the Group is exposed, monitoring key mitigation plans and maintaining the Group risk register. The Risk Management Committee also reviews the business unit risk registers on a regular basis and considers input from the US Risk Management Committee, which has been constituted to oversee risk within the US operations. The current members of the Risk Management Committee are: - Michael Ord (Group Chief Executive); - Bill Currer (President, US); - Sarah Ellard (Group Legal Director & Company Secretary); - Andrew Lewis (Chief Financial Officer); and - Steven Messam (Group HSE Director). RISK MANAGEMENT POLICY AND FRAMEWORK The Group’s risk management policy sets out the Group’s approach to risk management, including its risk appetite; the framework for assessing, managing and monitoring risk within the business; and the key roles and responsibilities for the oversight and implementation of the Group’s risk management systems and controls. The Group’s risk management framework draws fundamentally from day-to-day management of risk and maintenance of effective control procedures at individual businesses. The “Second Line” comprises various management level, which are designed to enhance and monitor the First Line. The “Third Line” comprises the Group’s internal audit function, utilising an APPROACH TO RISK MANAGEMENT The management of each business is responsible for the identification, management and reporting of local risks, in accordance with the Group’s risk management framework. The management of each business is also responsible for the maintenance of business risk registers and the implementation of mitigation plans. Each business is required to maintain a risk register identifying their key risks. The risk registers include an analysis of the likelihood and impact of each risk, before and after mitigation actions are taken to manage the risk, together with details of the mitigation plans and progress against them. Each risk is The business risk registers are updated locally on a quarterly basis and are reviewed in detail by the Group Chief Executive, the Chief Financial Officer and other members of the Executive Committee at quarterly business review meetings with each of the businesses. The US Risk Management Committee level risks and maintains a consolidated US risk register. THE BOARD - Overall responsibility for risk management - Defines the Group’s AUDIT COMMITTEE - Reviews the effectiveness of the Group’s risk management framework and systems of - Oversees the effectiveness of the Group’s internal audit arrangements RISK MANAGEMENT COMMITTEE - Oversees the implementation - Monitors compliance - Maintains the Group BUSINESS MANAGEMENT - Responsible for the implementation of the Group’s risk management framework at the operational level - Maintains business unit risk registers and provides input to the Risk Management Committee - Responsible for compliance with internal controls Chemring Group PLC Annual report and accounts 2022 The Risk Management Committee meets quarterly and, utilising the input from the business risk registers and the US risk register, identifies those principal risks which are material to the Group as a whole. The Risk Management Committee also considers corporate-level risks and emerging risks, as referenced below. These risks are collated on the Group risk register, together with details of the applicable mitigation plans and risk owners. The Group has implemented an Operational Framework, incorporating a broad range of policies and procedures which are required to be adopted by all businesses. A half-yearly operational assurance process is a fundamental part of the Operational Framework and provides an assessment of compliance with the Operational Framework policies across the Group. The output of the operational assurance process provides additional visibility on risks across the Group and is utilised by the Risk Management Committee as a further input to the Group risk register. The operational assurance process also provides assurance to the Board that the Group’s internal systems and controls are operating effectively. The full Group risk register is reviewed by the Board on a half-yearly basis and key individual risks are reviewed at every Board meeting. KEY AREAS OF FOCUS DURING THE YEAR During the past year, we have continued to enhance our risk management systems, with specific focus in the following areas: - Our HSE Management Framework has been updated and we - We have further enhanced our HSE data collection and reporting through our EcoOnline system. - Additional IT and cyber-security standards have been implemented, and members of the senior leadership team participated in a cyber incident scenario planning workshop. - We have improved our succession and talent management programmes - We have established a new project focused on improving business continuity management across the Group. - Climate change risks have been considered as key risks to the future operation of the Group. - Our internal audit programme has continued to incorporate thematic reviews in key risk areas. Our risk management systems were reviewed by PwC in 2021 as part of structures and processes were fit for purpose and a number of good practice areas were identified. Their recommendations for further enhancements introduction of an expanded five-by-five matrix for the assessment of the potential impact and likelihood of individual risks on the Group risk register. We have also introduced a target risk rating for each risk, and now separately consider key mitigation controls and ongoing risk reduction actions. These changes provide greater distinction between relative risks and have enabled us to better facilitate the prioritisation of key mitigation actions. PRINCIPAL RISKS The current Group risk register comprises risks in seven key risk areas, covering health, safety and environment risks, strategic risks, financial risks, operational risks, people risks, legal and compliance risks, and reputational The management of risks associated with CV-19 continued to be monitored during the year. Whilst the Group’s operations have not been significantly impacted by CV-19, we have continued to take all appropriate actions to protect and safeguard our employees, and ensure continuity of our businesses. EMERGING RISKS The current UK Corporate Governance Code requires the Board to undertake a robust assessment of the emerging risks that may impact the Group in the future. This requirement has been reflected in the Group’s Management Committee when compiling the Group risk register. Emerging risks are identified through discussions with both external customers and regulators, and through horizon scanning of future developments in areas relevant to the Group’s business operations. Certain emerging risks relating to future technological, regulatory and macro-economic changes are reflected on the Group risk register and mitigation plans implemented accordingly. However, other emerging risks RISK REVIEW The Board carries out an annual review of the effectiveness of the Group’s systems of internal control and risk management systems. In understanding this review, the Board considers: - the operational and financial reports received from the executive management throughout the year; - the Group risk register and the mitigation actions being taken to manage key risks; - output from the operational assurance process; and - internal audit reports and reports from the other assurance processes The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the business, and that robust systems of internal control and risk management were in place throughout the year under review and have remained in place up to the date of approval of these financial statements. The Board acknowledges that the internal control systems can only provide Group’s assets. The Board therefore continues to take steps to embed internal control and risk management further into the operations of the Group, and to address any areas for potential improvement which come The Board carried out an assessment of the principal and emerging risks to which the Group is exposed as part of its half-yearly review of the Group adequately captured in the Group risk register and whether the requisite progress had been made on the mitigation actions to address significant risks. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 PRINCIPAL RISKS AND UNCERTAINTIES RISK MANAGEMENT IN ACTION Details of the principal risks and uncertainties which could have a material impact on the Group’s business model, strategy, future performance or reputation are set out below. The principal risks are identified by the Risk Management Committee based on the likelihood of occurrence and the potential impact on the Group as a whole. In addition to the risks disclosed below, the Risk Management Committee also monitors and manages a wide range of other risks to which the Group may be exposed. OVERVIEW OF PRINCIPAL RISKS The table below summarises the Group’s principal risks and uncertainties, and identifies how each links to values and our strategic objectives, and whether the trend in the risk profile from the Group’s perspective increased, decreased or remained stable during the year. Principal risk/uncertainty Our values Strategic objectives Change in risk profile in the year A Occupational and process safety B Environmental laws C Climate change D Market E Political F Contracts G Technology H Financial I Operational J People K Compliance L Cyber-security RISK PROFILE AND HEAT MAP The overall risk profile for the Group continued to improve during the year and the Group risk register reflects the following changes to principal risks: - Our understanding of the risks associated with occupational and implementation of the Group’s three-year HSE strategy and an increased focus on asset integrity, and shared learning and reporting of near misses within our operations. - Risks associated with environmental issues have increased with the increased focus on the environmental impact of our businesses. - Climate change risks and the potential impact of changed weather Group risk register. - Market-related risk has reduced, reflecting the increased focus on defence spending as a result of the recent geopolitical and technology trends. - People-related risk in relation to resourcing has continued to increase as continuing to make it difficult to recruit and retain employees, and - Financial risks have continued to reduce, reflecting the Group’s strong - The inherent risk associated with cyber threats and system failures continues to increase, acknowledging that the continuing changes in the nature of cyber attacks and the increased sophistication of the methods employed are an increasing risk for all businesses. The heat map below illustrates the relative inherent and residual positioning A K L H F G D C B J I E Low Impact Medium High Low Medium Likelihood High Target growing segments Win market share Grow our US business Safety Excellence Innovation Chemring Group PLC Annual report and accounts 2022 A. OCCUPATIONAL AND PROCESS SAFETY Risk and potential impacts Mitigation actions/factors The Group’s operations involve energetic materials that by their nature have inherent - Incidents may occur which could result in - The Group may be exposed to financial loss, regulatory action and potential liabilities for workplace injuries and fatalities. - Safety reinforced as a core value. - Continued emphasis on the “Journey to Zero Harm” and promotion of a culture which puts safety first and encourages employees to take personal responsibility for their actions. - HSE Strategy and HSE Management System Framework Standard fully implemented within the businesses. - Robust major accident hazard analysis process adopted across the Group. - Asset integrity review completed using external consultants at higher-hazard sites and new asset integrity standard adopted. - New Group-wide standard on management - Incident investigation and crisis management standards adopted. - Process established for Group-wide review - Occupational Health, Safety and Wellbeing - “Spot it, Stop it, Share it” campaign instigated to increase focus on near miss identification and reporting. - Continued programme of capital investment in Risk appetite: Low Change during the year and outlook Through the implementation of our major accident hazard review process, together with increased reporting and investigation of process upset conditions, we continue to take further actions to reduce the likelihood of a major energetic event. In addition, we have strengthened our asset integrity programmes and introduced an enhanced process for sharing of learnings from significant incidents. We continue to invest in new automated production systems and improving process controls for our legacy operations. Our total recordable injury frequency rate has but remains below our limit of 1.0. There were no injuries sustained from energetic ignitions during prior year. We hope to see further improvements in process safety in FY23 as we continue with our capital investment programme. Example key risk indicators Link to strategy - Total recordable injury frequency rate - Number of process safety events - Number of near miss reports - Target growing segments - Win market share B. ENVIRONMENTAL LAWS AND REGULATIONS Risk and potential impacts Mitigation actions/factors The Group’s operations and ownership or use of real property are subject to a number of federal, state and local environmental laws and regulations. At certain sites currently or formerly owned or operated by the Group, there is known or potential contamination for which there is, or may be, a requirement to remediate or provide resource restoration. - The Group could incur substantial costs, including remediation costs, resource restoration costs, fines and penalties, or be exposed to third party property damage or personal injury claims, as a result of liabilities associated with past practices or violations of environmental laws or non-compliance with - Monitoring programmes established at certain sites and appropriate financial provisions held. - Environmental liability insurance procured for certain risks. - Environmental consultants retained to remediations. - Sustainability and Environmental Risk appetite: Low Change during the year and outlook The sale or closure of several sites during the exposure to environmental risks. However, we retain a financial liability for environmental remediation of certain sites formerly owned by the Group, most notably those occupied by the divested munitions businesses in Belgium and Italy. Environmental risks continue to increase with environmental impact of all businesses. We have implemented a more centralised approach to the management of our environmental performance as part of our ESG strategy, recognising that minimising our environmental impact and addressing climate change-related risks is becoming increasingly important. Example key risk indicators Link to strategy - Carbon emissions - Energy and water utilisation - Volume of waste produced - Number of environmental incidents - Target growing segments INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 continued C. CLIMATE CHANGE Risk and potential impacts Mitigation actions/factors The Group’s operations and delivery of our strategy could be impacted by climate change related risks, including those associated with wildfires, severe weather events and new climate-related requirements in relation to the Group’s manufacturing processes and products. - Wildfires and severe weather events could result in harm to employees, the temporary shutdown of facilities or other disruption to manufacturing processes. - The Group may be exposed to financial loss for business interruption and/or increased expenditure for adapting its production facilities and processes to address climate change-related risks. - Additional measures have been implemented, such as cutting back grassland close to manufacturing operations, to mitigate the risk of wildfires. - Drainage has been improved on certain sites to mitigate the impact of potential flooding events. - Carbon reduction plans and other environmental performance targets have been established to reduce the Group’s environmental impact. - Close relationships are maintained with customers, which should provide early insight into new environmental requirements which Risk appetite: Low Change during the year and outlook Sustainability Committee established which is overseeing the identification and management Carbon reduction plans established across Example key risk indicators Link to strategy - Wildfires - Severe weather events - Technology - Target growing segments STRATEGIC RISKS D. MARKET Risk and potential impacts Mitigation actions/factors Defence spending depends on a complex mix of political considerations, budgetary constraints and the requirements of the armed forces to address specific threats and perform certain missions. Overall defence spending may therefore be subject to significant yearly fluctuations and there may also be downward pressure on defence budgets in certain key programme areas. The Group’s profits and cash flows are dependent, to a significant extent, on the timing majority of the Group’s contracts are of a relatively short duration and, with the exception of framework contracts with key customers, do not cover multi-year requirements. - The Group’s financial performance may be adversely impacted by lower defence spending by its major customers, either generally or in relation to certain programmes. - Short-term trading and cash constraints may impact on the Group’s ability to invest in longer-term technologies and capabilities. - Unmitigated delays in the receipt of orders or cancellation of existing contracts could affect the Group’s financial performance. If the Group’s businesses are unable to continue trading profitably during periods of lower order intake, financial performance will deteriorate and assets may be impaired. - Continual assessment of alignment of planned organic growth strategies and technology roadmaps against government priorities for future funding. - Increased focus on the development of commercial products and services. - Focus on organisational development to ensure the business is appropriately structured to meet current and future needs, and to provide resilience in difficult market conditions. - Continued focus on order intake as a key performance indicator. - Pursuit of long-term, multi-year contracts - Global business development initiatives established in the Countermeasures & Energetics and Sensors & Information segments. - Increased collaboration between businesses across the Group on establishing shared routes to market. Risk appetite: Low to moderate Change during the year and outlook Ongoing conflict in Eastern Europe is shaping the threat environment, with a resurgence in demand for classical kinematic capabilities, alongside the growing information advantage and intelligence requirements. However, economic pressures may place defence spend under pressure. Example key risk indicators Link to strategy - Defence budget cuts/changes - Reductions in order intake - Deterioration in profitability - Target growing segments - Win market share - Grow our US business PRINCIPAL RISKS AND UNCERTAINTIES continued Chemring Group PLC Annual report and accounts 2022 STRATEGIC RISKS E. POLITICAL Risk and potential impacts Mitigation actions/factors The Group is active in several countries that instability. In addition, there is a significant risk structure in certain non-NATO countries to which the Group currently sells. - The Group’s business in certain countries may be adversely affected in a way that is material to the Group’s financial position and the results of its operations. - Political changes could impact future defence expenditure strategy and the Group’s ability - Relationships maintained at political level - Financing arrangements implemented, including letters of credit and advance payments, for contracts with high-risk customers. - Political risks insurance procured in - Continued focus on the development of commercial business across the Group, particularly in key home territories. Risk appetite: Low to moderate Change during the year and outlook Political tensions across the world are increasing the risk of disruption in our non-NATO markets. We have continued to focus our business development and sales and marketing activities Example key risk indicators Link to strategy - Political changes - Suspension/withdrawal of export licences - Trade embargoes - Reductions in order intake - Target growing segments - Win market share - Grow our US business F. CONTRACTS Risk and potential impacts Mitigation actions/factors The Group’s government contracts may be terminated at any time and may contain other unfavourable provisions. The Group may need to commit resources in advance of contracts becoming fully effective, to ensure prompt fulfilment of orders or to enable conditions precedent to be met. - The Group may suffer financial loss if its contracts are terminated by customers, or a termination arising out of the Group’s default may have an adverse effect on its ability to re-compete for future contracts and orders. - Unfavourable commercial contract terms may adversely impact the Group’s working capital position, particularly if the receipt of payments by the Group is delayed. - The Commercial Policy within the Operational Framework requires central approval for certain contractual risk exposures. - Commercial and contract risk management training programme implemented. - Stage payments negotiated with customers wherever possible, in order to improve working capital management. Risk appetite: Moderate Change during the year and outlook The implementation of the Operational on commercial and contracting practices across the Group, and is enabling us to manage contractual Example key risk indicators Link to strategy - Number of contract claims/terminations - Increase in working capital - Delays in customer payments - Number of bonds or guarantees called - Target growing segments - Win market share - Grow our US business INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 PRINCIPAL RISKS AND UNCERTAINTIES continued STRATEGIC RISKS continued G. TECHNOLOGY Risk and potential impacts Mitigation actions/factors programmes due to issues with capability development, The Group needs to continually add new products to its current range, through innovation and continuing emphasis on research and development. New product development may be subject to delays, or may fail to achieve the requisite standards to satisfy volume manufacturing requirements and the production of products against high reliability and safety criteria to meet customer specifications. - Failure to obtain production contracts on major development programmes may significantly impact the future performance and value of individual businesses. - Failure to complete planned product development and upgrades successfully may have financial and reputational impacts, and may result in obsolescence or loss of future business. - Close relationships maintained with customers on all key future programmes. - New Product Development Policy and procedures adopted, to align investment across the Group. - Technology investments aligned - Working groups established to growth in certain key areas within Countermeasures & Energetics and Sensors & Information. Risk appetite: Moderate Change during the year and outlook Innovation is one of our core values. Progressing our technology-led key development programmes will continue to be a significant area of focus for the year ahead. service activities. In 2022 we launched the Futures business unit to focus on capturing the growing opportunities for Roke’s capabilities in the Chemring Sensors & Electronics Systems in the technologies into prototype products which can cheaper than existing systems. Example key risk indicators Link to strategy - Reduction in R&D expenditure - Delays in R&D programmes - Delays in qualification of products - Loss of production contracts - - Target growing segments - Win market share - Grow our US business H. FINANCIAL Risk and potential impacts Mitigation actions/factors The Group is exposed to a range of financial risks, both externally driven, such as an unexpected movement in foreign exchange rates or increased inflation, and specific to the Group. Specific financial risks could arise out of a disruption to operations; failure to deliver strategic objectives, including planned investment; or customer-related events, including defaults on the payment of debts. As a result of a number of past events, the Group is exposed to a number of contingent liabilities which may or may not result in future cash outflows. (Further details are contained in note 33 of the Group financial statements.) The Group may also face an increased funding requirement for its legacy UK defined benefit pension scheme. - The Group may fail to comply with financing covenants and be unable to meet debt repayments, leading to withdrawal of funding or additional costs of maintaining funding. - Operational results may be impacted by unexpected financial losses or increased costs. Further details of the financial risks to which the Group is potentially exposed and the mitigating factors are set out in the financial review and note 20 of the Group financial statements. - Committed banking facilities in place to December 2025. - Regular monitoring of actual and forecast financing covenants. - Capital approval processes in place, requiring Board approval for significant projects. - Hedging policy applied for significant foreign transactions. - Energy bought forward in the escalating prices. - Advance payments and letters with a heightened payment risk. - Close dialogue maintained with the trustees of the pension scheme on investment and funding matters. Risk appetite: Moderate Change during the year and outlook The Group’s revolving credit facilities were extended during the year to December 2025. The year-end bank covenant of net debt: EBITDA was 0.14x, well within the covenant limit of 3.0x. The Group’s businesses faced inflationary cost increases during the year and higher energy prices. These were largely mitigated but could have a further impact in 2023. At the year end, the legacy UK defined benefit pension scheme was £11.2m in surplus (on an IAS 19 basis). carried out as at April 2021 and confirmed that the scheme was £3.8m in surplus at that date. No further contributions will therefore be required before the next valuation as at April 2024. Example key risk indicators Link to strategy - Deterioration in bank covenants - Increase in net debt - Interest rate increases - Foreign exchange rate movements - Increase in bad debts - Increase in inflation - Target growing segments - Win market share - Grow our US business Chemring Group PLC Annual report and accounts 202270 STRATEGIC RISKS I. OPERATIONAL Risk and potential impacts Mitigation actions/factors The Group’s manufacturing activities may be exposed to business continuity risks, arising from plant failures, supplier interruptions, quality issues or large scale employee absences. Planned new facility developments may be delayed as a result of operational issues. - Interruptions to production and sales could result in financial loss, reputational damage and loss of future business. - A delay in completing new manufacturing facilities could constrain capacity and limit future - Major accident hazard analysis process and upset condition management standard implemented across the Group. - Key performance indicators adopted, to provide better visibility on operational performance and to facilitate early identification of potential production and quality issues. - Advance purchases made of raw materials where potential supply chain constraints are identified. - Business continuity plans established across - Continued capital investment in legacy facilities to improve safety and reliability. - Asset integrity programme implemented. - Detailed plans developed for all significant capital investment projects and additional dedicated resource employed to oversee key projects. - CV-19 Playbook implemented and supply chains being actively managed to minimise the impact of CV-19-related disruption. - Business interruption risks insured Risk appetite: Low to moderate Change during the year and outlook A multi-year capital investment programme was initiated in 2019. This is designed to mitigate a number of operational risks through a plant automation and modernisation programme Commissioning of the new automated manufacturing facilities in Tennessee has progressed in line with plan. Capital investment projects progressed at our facilities in Scotland and Norway, and further projects are planned for 2023. Example key risk indicators Link to strategy - Number of process safety events - Reduction in right first time and on-time - Increase in supplier-related delays - Increase in quality issues and - Reduction in capital expenditure - Delays in commissioning of facilities - Target growing segments - Win market share - Grow our US business See also: Group Chief Executive’s review INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 PRINCIPAL RISKS AND UNCERTAINTIES continued STRATEGIC RISKS continued J. PEOPLE Risk and potential impacts Mitigation actions/factors There is a risk that the market for talent in key areas of expertise becomes more challenging. Allied to this there is a risk of loss of key personnel. As the shape of the Group’s business changes and with an increased focus in high technology areas, the Group may fail to build and retain an appropriate skill base to facilitate successful competition in new markets and product areas. Employees may not be fully engaged with the Chemring journey, purpose, products, customers and values. - Failure to recruit sufficient suitably qualified personnel in key areas of the business may growth aspirations. - Failure to build and retain key skills will lead to and deliver new contracts. - If key personnel are not fully engaged with the business purpose, values and products, and are not appropriately incentivised, the ability of the Group to retain them will be compromised. This could result in loss of management expertise and knowledge, and the Group’s operations may suffer as a consequence. - Chemring values of Safety, Excellence and Innovation established. - Development framework implemented management and leadership skills and behaviours particularly amongst our line manager and supervisor population. - Ongoing review of capability requirements against the business strategy. - Increased focus on DE&I. - Culture review completed, facilitating the development of a framework to support the evolution of the Chemring culture. - Employment Voice real-time engagement tool deployed across the Group. - Talent framework and succession planning process implemented. - Incentive arrangements enhanced to encourage collaboration and create a Group focus at Risk appetite: Moderate Change during the year and outlook Resourcing challenges continued to increase during the year, particularly in parts of the US where Salary inflation impacted a number of our businesses and one-off cost-of-living payments were made to a number of employees across the Group. We continued to make good progress on the implementation of our development framework during the year, with over 340 line managers and supervisors having participated in a structured development programme. We also continue to focus on communications using a wide range of formal and informal challenges, both The deployment across the Group of Employee Voice enables us to monitor employee sentiment on a continuous basis and gives employees the ability to provide feedback on changes as they occur. Example key risk indicators Link to strategy - Diversity statistics - Increase in employee turnover - Number of unfilled vacancies - Employee sentiment scores - Target growing segments - Win market share - Grow our US business Chemring Group PLC Annual report and accounts 202272 LEGAL AND COMPLIANCE RISKS K. COMPLIANCE AND CORRUPTION Risk and potential impacts Mitigation actions/factors The Group operates in over 50 countries worldwide, in a highly regulated environment, and is subject to the applicable laws and regulations ensure that all of its businesses, its employees comply with all relevant legal and regulatory obligations. The nature of the Group’s operations could also expose it to government and regulatory investigations relating to safety and the environment, import-export controls, money laundering, false accounting, and corruption or bribery. The Group requires a significant number of permits, licences and approvals to operate its business, which may be subject to non-renewal or revocation. - Non-compliance could result in administrative, civil or criminal liabilities, and could expose the Group to fines, penalties, suspension or debarment, and reputational damage. - Loss of key operating permits and approvals could result in temporary or permanent site closures, and loss of business. - Ethics & Compliance Committee established to oversee compliance across the Group. - Operational Framework in place, mandating compliance with a range of policies and procedures covering a wide range of legal - Half-yearly operational assurance process established as part of the Operational Framework. - Central legal and compliance function assists and monitors all Group businesses, supported by dedicated internal legal resource in the US. - Code of Conduct stipulates the standards of acceptable business conduct required from all employees and third parties acting on the Group’s behalf. - Updated Bribery Act Compliance Manual implemented, incorporating enhanced anti-bribery policies and procedures. - Policy adopted to manage risks associated with sales to customers in higher-risk territories. Risk appetite: Low Change during the year and outlook The Operational Framework and the associated operational assurance process has fundamentally changed the management of legal and compliance risks across the Group. Further progress was made during the year on fully embedding our Group-wide online compliance system – the Chemring Compliance Portal. The system hosts our Operational Framework policies and associated training material, and automates our anti-bribery processes. Example key risk indicators Link to strategy - Regulatory intervention and penalties - Non-renewal/revocation of licences and permits - Breaches of policies - Non-completion of compliance training - Increase in whistleblowing reports - Target growing segments - Win market share See also: Ethics and business conduct REPUTATIONAL RISKS L. CYBER-SECURITY Risk and potential impacts Mitigation actions/factors Cyber-security and related risks are key emergent areas of critical importance for all businesses, particularly for those involved in the defence and security sector. Threats can emanate from a wide variety of sources and could target various systems for a wide range of purposes, making response particularly difficult. The data and systems which need to be protected include customer-classified or sensitive information, commercially sensitive information, employee-related data and safety-critical manufacturing systems. - The Group may suffer from critical systems failures, or its intellectual property, or that of its customers, may fall into the hands of third parties. - In addition to business interruption and financial loss, the Group may suffer reputational damage, and its business of providing cyber-security services to customers may be irreparably damaged. - Threat assessment completed and an action threats implemented. - Security Committee established. - Group-wide cyber-security standard adopted based on the US DFARS “CMMC Level 2” standard and a number of cyber-security defence measures adopted, encompassing, as appropriate to the nature of the threat and sensitivity of data or systems being protected, hardware, software, system, process or people-based solutions. - Where appropriate, government or commercial accreditation of networks and systems obtained in support of the overall cyber-security programme. - IT and security systems review included within the internal audit programme. - Cyber incident scenario planning workshop held. Risk appetite: Low Change during the year and outlook We have an ongoing programme to address IT and cyber-security but the threats in this area continue to evolve and we therefore need to ensure that our security arrangements evolve appropriately Good progress was made towards achieving CMMC Level 2 compliance at a number of businesses during the year. Example key risk indicators Link to strategy - Number of “phish” emails reported - Number of system attacks and failures - Target growing segments - Win market share INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 73 VIABILITY STATEMENT AND GOING CONCERN In accordance with the UK Corporate Governance Code, the Board GOING CONCERN The Group’s business activities, key performance indicators, and principal risks and uncertainties are set out within the strategic report on pages 1 The directors believe that 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. KEY FINANCIAL METRICS 2022 Covenant Revolving credit facility and overdraft Undrawn committed borrowing facilities Leverage ratio Less than 3x Interest cover ratio Greater than 4x The revolving credit facility and overdraft run to December 2025 with two “one-year” options to extend at the lenders’ discretion. The Group was in compliance with the covenants throughout the year. ASSESSMENT OF NEAR-TERM PROSPECTS As part of a regular assessment of the Group’s working capital and financing position, the directors have prepared a detailed bottom-up two-year trading budget and cash flow forecast for the period through to October 2024. This has allowed the directors to assess going concern for a period of at least 12 months after the date of approval of the financial statements. This is in addition to the Group’s longer-term strategic planning process. In assessing - - the impact of macro-economic factors, particularly inflationary pressures, supply chain challenges, interest rates and foreign exchange rates; - the status of the Group’s existing financial arrangements and associated covenant requirements; - progress made in developing and implementing cost reduction programmes and operational improvements; - the availability of mitigating actions should business activities fall behind current expectations, including the deferral of discretionary overheads and restricting cash flows; 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. SENSITIVITY ANALYSIS Additional detailed sensitivity analysis has been performed on the forecasts to consider the impact of severe, but plausible, reasonable worst case scenarios on the covenant requirements. These scenarios, which sensitised the forecasts for specific identified risks, modelled the reduction in anticipated levels of underlying EBITDA and the associated increase in net debt. These scenarios included significant delays to major contracts and considered the principal risks and uncertainties discussed in the strategic report. These sensitised scenarios show headroom on all covenant test dates for the foreseeable future. In addition to the above, the directors continue to monitor developments with, and the potential impact of CV-19 in the short and medium term, and are, in particular, focused on the key risks of delays by customers in testing and acceptance of products, disruption to production capacity and the impact of the current situation on the Group’s supply chain. The CV-19 outbreak is not currently having any material impact in relation to these risks or any other potential impacts; however, the directors are monitoring the situation closely. CONFIRMATION OF GOING CONCERN After consideration of the above, the directors have a reasonable expectation that the Group and the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a going concern basis. LONG-TERM VIABILITY ASSESSMENT OF LONG-TERM PROSPECTS The directors have assessed the Group’s viability over a three-year period to October 2025 based on the above assessment, combined with the Group’s strategic planning process, which gives greater certainty over the forecasting assumptions used. Based on this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation and meet all its liabilities as they fall due up to October 2025. The directors have chosen a three-year period to assess viability to reflect arrangements. These range from multi-year contracts such as the US Programs PRINCIPAL RISKS In considering our viability statement we have considered the principal risks and uncertainties discussed in the strategic report and assessed the impact. The impact of CV-19 on viability is clearly a consideration for all companies defence and national security industrial base in all territories in which we operate. All our businesses remain open with business continuity plans mobilised at every location. SENSITIVITY ANALYSIS Sensitivity analyses were run to model the financial and operational impact economy and future government policy and spending, underperformance in executing the Group’s strategy, failure to deliver operational improvements, the impact of a potential climate-related risk causing business interruption and material movements in foreign exchange rates. Consideration was also given to the plausibility of the occurrence of other individual events that in their own right could have a material impact on the Group’s viability. CONFIRMATION OF VIABILITY Based on the consolidated financial impact of the sensitivity analyses and associated mitigating internal controls and risk management actions that are either now in place or could be implemented, the Board has been able to conclude that the Group will be able to maintain sufficient bank facilities to meet its funding needs over the three-year period and the Group’s forecasts Chemring Group PLC Annual report and accounts 2022 NON-FINANCIAL INFORMATION STATEMENT This section of the strategic report constitutes the Group’s non-financial information statement and addresses the requirements of sections 414CA and 414CB of the Companies Act 2006. The non-financial information is included within and is cross-referenced below. Our Code of Conduct provides direction to our employees on the standards of behaviour and business conduct which we expect from them. It sits alongside our Operational Framework, which incorporates a wide range of policies and procedures to enable our businesses to comply with their legal obligations and to operate in a safe, consistent and accountable way. REPORTING REQUIREMENT RELEVANT POLICIES WHICH GOVERN WHERE TO READ MORE PAGE ENVIRONMENTAL MATTERS - Group health, safety and environmental policy - Introduction to sustainability - Environment - TCFD report 42 45 EMPLOYEES - People policy - Group health, safety and environmental policy - Directors’ remuneration policy - Whistleblowing policy - Code of Conduct - Stakeholder engagement - Our people - Health and safety - Ethics and business conduct - Directors’ remuneration report 21 50 40 96 SOCIAL AND COMMUNITY MATTE RS - Community investment policy - Code of Conduct - Our people - Ethics and business conduct 50 RESPECT FOR HUMAN RIGHTS - Modern Slavery Act Statement - People policy - Supplier Code of Conduct - Code of Conduct - Our people - Ethics and business conduct 50 ANTI-BRIBERY AND CORRUPTION - Anti-corruption policy - Bribery Act Compliance Manual - Policy on sales to customers located in - Offset policy - Code of Conduct - Ethics and business conduct BUSINESS MODEL - What we do - Investment case - Business model - Market overview - Strategy 2 8 18 12 24 STAKEHOLDERS - Stakeholder engagement - Corporate governance report 21 80 RISK MANAGEMENT - Risk management - Principal risks and uncertainties 64 66 NON-FINANCIAL KEY PERFORMANCE INDICATORS - Key performance indicators - Health and safety - Environment - Our people 26 40 42 50 READ OUR CODE OF CONDUCT POLICY: CHEMRING.COM/ SUSTAINABILITY/ETHICS-AND- BUSINESS-CONDUCT STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 Chemring Group PLC Annual report and accounts 202276 CHAIRMAN’S INTRODUCTION TO GOVERNANCE SUSTAINING A ROBUST PURPOSE, VALUES AND CULTURE The Board recognises its role in establishing the purpose and values innovative technologies and products that detect and defeat ever-changing GOVERNANCE AND OPERATIONAL FRAMEWORK STRATEGY businesses and ensuring that the requisite resources are allocated to the ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) “ Our Operational Framework and - Board of directors - Corporate governance report - - - - UK CORPORATE GOVERNANCE CODE Carl-Peter Forster STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 77 DIVERSITY STAKEHOLDER ENGAGEMENT BOARD EFFECTIVENESS BOARD EVALUATION Carl-Peter Forster BOARD LEADERSHIP AND COMPANY PURPOSE Culture Conflicts of interest DIVISION OF RESPONSIBILITIES Division of responsibilities COMPOSITION, SUCCESSION AND EVALUATION Length of service Evaluation AUDIT, RISK AND INTERNAL CONTROL REMUNERATION Policies and practices 112 Chemring Group PLC Annual report and accounts 202278 BOARD OF DIRECTORS EXPERIENCED LEADERSHIP International Group PLC and the CARL-PETER FORSTER N R MICHAEL ORD ANDREW LEWIS SARAH ELLARD Group Legal Director BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE EXPERIENCE: - - engineering sectors - EXPERIENCE: - - in both service and EXPERIENCE: - in the defence sector - Director level - Chartered Accountant EXPERIENCE: - - CHAIRMAN EXECUTIVE DIRECTORS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 79 served in senior operational and Senior Independent Director at TT also held senior financial positions at She is also Chair of IOG plc and a LAURIE BOWEN A N R ANDREW DAVIES A N R Senior Independent STEPHEN KING A N R FIONA MACAULAY A N R BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE EXPERIENCE: - - EXPERIENCE: - - EXPERIENCE: - - Chartered Accountant EXPERIENCE: - - International and operational Length of service COMMITTEE MEMBERSHIP A N R Denotes Chair NON-EXECUTIVE DIRECTORS Chemring Group PLC Annual report and accounts 202280 CORPORATE GOVERNANCE REPORT GOVERNANCE FRAMEWORK The Board is responsible for ensuring leadership of the Group through effective THE BOARD THE CHIEF EXECUTIVE EXECUTIVE COMMITTEE RISK MANAGEMENT COMMITTEE See page 64 (Risk management) ETHICS & COMPLIANCE COMMITTEE See page 57 (Ethics and business conduct) SUSTAINABILITY COMMITTEE See page 37 (Introduction to sustainability) AUDIT COMMITTEE See page 90 (Audit Committee report) NOMINATION COMMITTEE See page 94 (Nomination Committee report) REMUNERATION COMMITTEE See page 96 (Directors’ remuneration report) STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 81 HOW THE BOARD ESTABLISHES AND MONITORS CULTURE SAFETY EMPLOYEES Code of Conduct Board site visits GOVERNANCE AND BUSINESS CONDUCT Code of Conduct INTERNAL CONTROL MANAGEMENT PURPOSE CULTURE AND VALUES Chemring Group PLC Annual report and accounts 202282 CORPORATE GOVERNANCE REPORT continued continued BOARD ACTIVITIES IN 2022 the Group acquisition of Geollect dividend on the businesses succession plans Group STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 83 HOW THE BOARD CONSIDERS STAKEHOLDERS IN ITS DECISION MAKING - - - - - - Chemring Group PLC Annual report and accounts 202284 EMPLOYEE ENGAGEMENT - - - - - - - Further details on employee engagement more broadly SHAREHOLDER ENGAGEMENT AND THE ANNUAL BOARD SITE VISITS Site visits enable the Board to obtain a deeper understanding of the business LEADERSHIP OF THE US BUSINESSES AND THE US BOARD CORPORATE GOVERNANCE REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 85 COMPOSITION OF THE BOARD AND INDEPENDENCE TIME COMMITMENT OF DIRECTORS APPROVAL OF DIRECTORS’ EXTERNAL APPOINTMENTS CONFLICTS OF INTEREST - - - - EXPERIENCE OF THE BOARD Governance 5 Chemring Group PLC Annual report and accounts 202286 BOARD ROLES AND RESPONSIBILITIES Responsible for the leadership of the Board and ensuring its overall effectiveness in directing the Group Oversees the finance functions across the Group Ensures effective financial controls and financial reporting processes are in place agreed objectives CORPORATE GOVERNANCE REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 87 BOARD MEETINGS AND ATTENDANCE Board (5 scheduled (2 scheduled — 5(5) 5(5) — — — 5(5) — — — 5(5) — — — Board Audit April 1 2 0 Chemring Group PLC Annual report and accounts 202288 BOARD APPOINTMENTS AND RE-ELECTION OF DIRECTORS DIVERSITY INDUCTION, TRAINING AND DEVELOPMENT INDEPENDENT ADVICE PERFORMANCE EVALUATION - - - - - - - - - - - - - - CORPORATE GOVERNANCE REPORT continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 89 FINANCIAL AND BUSINESS REPORTING RISK MANAGEMENT AND INTERNAL CONTROL OPERATIONAL FRAMEWORK provides an enhanced governance structure to enable us to operate in a AUDIT LONG-TERM VIABILITY STATEMENT Chemring Group PLC Annual report and accounts 202290 INTRODUCTION MEMBERSHIP OF THE AUDIT COMMITTEE AUDIT COMMITTEE REPORT AUDIT COMMITTEE MEMBERS Stephen King non-audit services OPERATION OF THE COMMITTEE STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 91 SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE THE COMMITTEE’S ACTIVITIES DURING THE YEAR understandable Appropriateness and disclosure of the Group Effectiveness and independence of the auditor Effectiveness of the internal auditors and FINANCIAL REPORTING - - - - - - - Chemring Group PLC Annual report and accounts 202292 SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE continued PROPOSED AUDIT AND CORPORATE GOVERNANCE REFORMS EXTERNAL AUDIT - - - - - the effectiveness of co-ordination of the individual business unit audits - - AUDIT COMMITTEE REPORT continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 93 AUDITOR INDEPENDENCE - - - - the level of fees proposed for the non-audit services relative to the INTERNAL AUDIT - - - - - - - Stephen King Chemring Group PLC Annual report and accounts 202294 NOMINATION COMMITTEE REPORT INTRODUCTION MEMBERSHIP OF THE COMMITTEE OPERATION OF THE COMMITTEE BOARD COMPOSITION APPOINTMENTS TO THE BOARD their valuable contribution to the Board and their roles as chair of the Audit NOMINATION COMMITTEE MEMBERS Carl-Peter Forster STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 95 GENDER IDENTITY OR SEX OF THE BOARD AND EXECUTIVE MANAGEMENT Percentage of the Board senior positions on the Board SID and Chair) Percentage of 5 0 1 — — — — — ETHNIC BACKGROUND OF THE BOARD AND EXECUTIVE MANAGEMENT Percentage of the Board senior positions on the Board SID and Chair) Percentage of 100 100 — — — — — — — — — — — — — — — — — — — — DIVERSITY, EQUITY AND INCLUSION SUCCESSION PLANNING Carl-Peter Forster Chemring Group PLC Annual report and accounts 202296 DIRECTORS’ REMUNERATION REPORT INTRODUCTION - - - - - REMUNERATION COMMITTEE MEMBERS MEMBERSHIP AND OPERATION OF THE Laurie Bowen THE REMUNERATION COMMITTEE’S SUMMARY OF MAJOR ACTIVITIES AND DECISIONS OF THE COMMITTEE IN 2022 Consideration of the 2021 annual bonus Approval of the 2022 annual bonus plan PERFORMANCE FOR 2022 AND REMUNERATION OUTCOMES - Annual bonus - PSP awards made on 22 March 2019 (subject, in part, to TSR performance over the three-year period ended 21 March 2022): STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 97 - PSP awards made on 17 December 2019 (subject to performance over the three years ended 31 October 2022): IMPLEMENTATION OF THE POLICY FOR 2023 EMPLOYEE PAY AND STAKEHOLDER ENGAGEMENT CONCLUSION Laurie Bowen Chemring Group PLC Annual report and accounts 202298 DIRECTORS’ REMUNERATION REPORT continued 2022 REMUNERATION YEAR IN SUMMARY EXECUTIVE DIRECTORS’ TOTAL PAY ANNUAL BONUS PLAN OUTCOME Total pay £2,336k £1,728k £1,171k Michael Ord Andrew Lewis Sarah Ellard £0.0m £0.50m £1.0m £1.5m £2.0m £2.5m Salary Annual bonus PSPPension and benefits Total bonus £764k150% 125% 125% £466k £327k Michael Ord Andrew Lewis Sarah Ellard £0.0m £0.1m £0.2m £0.3m £0.4m £0.5m £0.8m£0.7m£0.6m Target (% of salary) Maximum (% of salary)Actual (% of salary) 147%90% 122.5%75% 122.5%75% STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 99 PERFORMANCE SHARE PLAN OUTCOME Sarah Ellard Value of shares vesting Accrued dividends Chemring Group PLC Annual report and accounts 2022100 DIRECTORS’ REMUNERATION REPORT continued DIRECTORS’ EMOLUMENTS (AUDITED) fees benefits 1 Pension benefits 2 Total Bonus (cash and deferred shares) PSP Total Total Executives 2022 514 21 51 586 764 986 1,750 2,336 2021 21 2022 379 20 76 475 466 787 1,252 1,728 2021 20 Sarah Ellard 2022 265 20 53 338 327 506 833 1,171 2021 20 51 Non-executives 2022 205 — — 205 — — — 205 2021 200 — — 200 — — — 200 5 2022 71 — — 71 — — — 71 2021 — — — — — 2022 66 — — 66 — — — 66 2021 — — — — — 2022 66 — — 66 — — — 66 2021 — — — — — 2022 56 — — 56 — — — 56 2021 55 — — 55 — — — 55 Total remuneration 2022 1,622 61 180 1,863 1,557 2,279 3,836 5,699 2021 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 101 BASE SALARY AND BENEFITS PAID DURING THE YEAR (AUDITED) Annual salary from 1 January 2022 to 31 October 2022 Michael Ord £520,000 Andrew Lewis £380,358 Sarah Ellard £266,646 DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR including inter alia Weighting (80% of overall bonus) Target Actual (continuing operations) 50% Threshold Target Stretch (continuing operations) 50% Threshold Target Stretch Strategic objective target Performance against targets - - - - - Achieved in full. - - - - - - - - - - - - - Energetics businesses to capture the opportunities resulting in - - Achieved at 75% of maximum in light of the Roke USA sales target not being achieved and delays in the AVCAD Program of Record. Chemring Group PLC Annual report and accounts 2022102 Strategic objective target Performance against targets - - - - - - - Achieved at 75% of maximum in light of the Employee Voice participation target not being met. - - - - - - - - - - - Achieved in full. - - - - - Achieved in full. Bonus paid in respect of financial targets Bonus paid in respect of strategic objectives Total bonus 1 Michael Ord Andrew Lewis Sarah Ellard DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR continued continued DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 103 Date of grant 1 Michael Ord Andrew Lewis Sarah Ellard Vesting of March 2019 PSP awards Vesting date at grant vested lapsed Michael Ord — Andrew Lewis — Sarah Ellard — vested Value of accrued dividends vested 1 Michael Ord Andrew Lewis Sarah Ellard Vesting of December 2019 PSP awards Threshold vesting Vesting date at grant to vest to lapse Michael Ord — Andrew Lewis — Sarah Ellard — to vest Value of accrued dividends to vest Michael Ord Andrew Lewis Sarah Ellard Chemring Group PLC Annual report and accounts 2022104 DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR continued continued PSP awards granted in the year Date of grant Closing share price on date of grant conditional shares value vests at threshold Vesting Michael Ord Andrew Lewis Sarah Ellard Upper quartile or above DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 105 PENSION (AUDITED) Cash in lieu of pension contributions Total benefit accrued at Transfer value of accrued benefit at 2021 Total benefit accrued at 31 October 2022 Transfer value of accrued benefit at 31 October 2022 £’000 Increase in transfer value during year (less members’ contributions) £’000 Value of benefit for single figure £’000 Pension Cash Pension £’000 p.a. Cash £’000 Michael Ord 51 — — — — — — — 51 Andrew Lewis — — — — — — — 76 Sarah Ellard 24 72 461 — 53 PAYMENTS TO PAST DIRECTORS AND PAYMENTS FOR LOSS OF OFFICE REMUNERATION IN THE WIDER WORKFORCE Chemring Group PLC Annual report and accounts 2022106 DIRECTORS’ SHAREHOLDINGS (AUDITED) of shares) Value of 1 Guideline conditions under the PSP Deferred bonus share Sharesave options Dec 2020 Dec 2021 Total at 2022 Michael Ord Andrew Lewis Sarah Ellard Carl-Peter Forster — — — — — — — — Laurie Bowen — — — — — — — — Andrew Davies — — — — — — — — — Stephen King — — — — — — — — Fiona MacAulay — — — — — — — — — OUTSTANDING PSP AWARDS (AUDITED) At 2021 Date of vesting Closing share price on date of grant (p) during Lapsed during Vested during At 2022 Michael Ord — — — — — — 1 — — — — — — 949,085 255,555 — (421,568) 783,072 Andrew Lewis — — — — — — 1 — — — — — — 757,324 195,386 — (336,391) 616,319 Sarah Ellard — — — — — — 1 — — — — — — 499,666 136,973 — (216,361) 420,278 DIRECTORS’ REMUNERATION REPORT continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 107 Director Threshold vesting vesting Sarah Ellard Upper quartile Sarah Ellard Upper quartile Sarah Ellard Upper quartile OUTSTANDING DEFERRED BONUS SHARE AWARDS (AUDITED) At 2021 Date of vesting Closing share price on date of grant (p) during Lapsed during Vested during At 2022 Michael Ord — — — — — — — — — 172,322 83,481 — — 255,803 Andrew Lewis — — — — — — — — — 110,002 51,060 — — 161,062 Sarah Ellard — — — — — — — — — 70,752 35,795 — — 106,547 Chemring Group PLC Annual report and accounts 2022108 OUTSTANDING SHARESAVE OPTIONS (AUDITED) At 2021 price date during Lapsed during Vested during At 2022 Michael Ord — — — 16,853 — — — 16,853 Andrew Lewis — — — 202p 8,910 — — — 8,910 Sarah Ellard — — — 202p 8,910 — — — 8,910 TOTAL SHAREHOLDER RETURN PERFORMANCE GRAPH Chemring F TSE 250 F TSE SmallCap £350 £300 £250 £200 £150 £100 £50 £0 31 Oct 12 31 Oct 13 31 Oct 14 31 Oct 15 31 Oct 16 31 Oct 17 31 Oct 18 31 Oct 19 31 Oct 20 31 Oct 21 31 Oct 22 Source: Datastream (Thomson Reuters) CHIEF EXECUTIVE’S REMUNERATION TABLE 2015 2020 2021 2022 2,336 Annual bonus 98% 100% DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 109 PERCENTAGE CHANGE IN THE DIRECTORS’ REMUNERATION 2020 vs 2021 2021 vs 2022 Benefits Annual bonus Benefits Annual bonus Benefits Annual bonus Group Legal Director & 1 2 CHIEF EXECUTIVE’S PAY RATIO - - 50th percentile 2022 2021 2020 25th percentile 50th percentile 25th percentile 50th percentile 2022 Chemring Group PLC Annual report and accounts 2022110 RELATIVE IMPORTANCE OF SPEND ON PAY 2022 £m 2021 Staff costs 169.7 Dividends 14.4 Retained profits 87.2 ADVISERS TO THE REMUNERATION COMMITTEE SHAREHOLDER VOTING ON THE DIRECTORS’ REMUNERATION POLICY AT THE 2022 ANNUAL GENERAL MEETING Against Total votes cast (for and against excluding withheld votes) 1 Total votes cast (including withheld votes) SHAREHOLDER VOTING ON THE DIRECTORS’ REMUNERATION REPORT AT THE 2022 ANNUAL GENERAL MEETING Against Total votes cast (for and against excluding withheld votes) 1 Total votes cast (including withheld votes) DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 111 DIRECTORS’ REMUNERATION REPORT KEY OBJECTIVES - - > > > - DECISION MAKING PROCESS CONSIDERATION OF CODE PROVISIONS IN DETERMINING POLICY Chemring Group PLC Annual report and accounts 2022112 POLICY SUMMARY Operation Salary - the role - Provides an appropriate level of - - - - - - Bonus - - - receive dividend equivalents - - Vesting of deferred shares is subject “good leaver” scenarios) at the end the bonus - - Non-pensionable - on vesting of deferred share have been paid on the deferred shares during the deferral period - - - - - an underpin based on the including inter alia levels of - - DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 113 Operation Long-term incentive plan (performance share plan – “PSP”) - strategic objectives of delivering - - - - - in the plan rules during the - - - - - - All-employee share scheme - Sharesave Plan - - - Pension - - Ongoing pension provision is in the - closed to future accrual for the - paid in lieu of occupational pension - paid in lieu of occupational pension - - - Other benefits - and retention - - - - - - Chemring Group PLC Annual report and accounts 2022114 Operation Minimum shareholding requirements - - - to hold shares to the value of the be assessed at the point of stepping DIRECTORS’ REMUNERATION REPORT continued continued POLICY SUMMARY continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 115 COMMITTEE DISCRETIONS - - - - - - - HOW THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY RELATES TO THE WIDER GROUP Provision Contract dates Notice period Termination payments Chemring Group PLC Annual report and accounts 2022116 POLICY IN RESPECT OF THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS Operation The Chairman’s and non- executive directors’ fees practice and set at a level that is sufficient to attract and retain - - - - incentive plans - thereon - - - CHAIRMAN’S AND NON-EXECUTIVE DIRECTORS’ LETTERS OF APPOINTMENT Carl-Peter Forster Laurie Bowen 1 August 2022 Andrew Davies Stephen King Fiona MacAulay DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 117 APPLICATION OF THE REMUNERATION POLICY IN 2023 Salary - > > > - Benefits - Pension - Bonus - - > > > - > > > > > > > > > > - - inter alia Chemring Group PLC Annual report and accounts 2022118 APPLICATION OF THE REMUNERATION POLICY IN 2023 continued continued Performance Share Plan (“PSP”) - - - 1 - Upper quartile or above - - DIRECTORS’ REMUNERATION REPORT continued continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 119 APPLICATION OF THE REMUNERATION POLICY IN 2023 continued Percentage increase — — Senior Independent Director fee — — APPROVAL OF THE DIRECTORS’ REMUNERATION REPORT Signed on behalf of the Board Laurie Bowen Chemring Group PLC Annual report and accounts 2022120 DIRECTORS’ REPORT - - - - - BUSINESS REVIEW RESULTS AND DIVIDENDS DIRECTORS AND THEIR INTERESTS EMPLOYEES AND EMPLOYEE CONSULTATION POLITICAL DONATIONS CONTRACTUAL ARRANGEMENTS RESEARCH AND DEVELOPMENT CHANGE OF CONTROL provisions granting the counterparties certain rights in the event of a change SHARE CAPITAL AND SHAREHOLDER RIGHTS Details of the rights attaching to shares are set out in the Articles of STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 121 SUBSTANTIAL SHAREHOLDINGS Aviva PLC and its subsidiaries Schroders Plc Prudential Plc EMPLOYEE SHARE SCHEMES AND PLANS GOING CONCERN Chemring Group PLC Annual report and accounts 2022122 ADDITIONAL INFORMATION, AS REQUIRED BY LISTING RULES REQUIREMENT 9.8.4 - - - - - - - - None of the shareholders is considered to be a Controlling Shareholder (as PROVISION OF INFORMATION TO THE AUDITOR AUDITOR ANNUAL GENERAL MEETING STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF The directors are responsible for preparing the annual report and the Group Reduced Disclosure Framework. - - - - - - RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT - - Michael Ord Sarah Ellard DIRECTORS’ REPORT continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 123 CONSOLIDATED INCOME STATEMENT For the year ended 31 October 2022 2022 2021 Non- Non- Underlying underlying Underlying underlying performance items 1 To t a l performance items 1 Total Note £m £m £m £m £m £m Continuing operations Revenue 1,2 442.8 — 442.8 393.3 — 393.3 Operating profit 2,4 64.0 (10.7) 53.3 57.5 (7.1) 50.4 Finance expense 6 (1.5) — (1.5) (1.6) — (1.6) Profit before tax 62.5 (10.7) 51.8 55.9 (7.1) 48.8 Taxation 7 (5.7) 1.3 (4.4) (8.3) 1.0 (7.3) Profit after tax 56.8 (9.4) 47.4 47.6 (6.1) 41.5 Earnings per ordinary share Basic 9 20.2p 16.9p 16.9p 14.7p Diluted 9 19.7p 16.4p 16.5p 14.4p 1. Further information about non-underlying items is set out in note 3. Chemring Group PLC Annual report and accounts 2022124 For the year ended 31 October 2022 2022 2021 Note £m £m Profit after tax attributable to equity holders of the parent as reported 47.4 41.5 Items that will not be reclassified subsequently to profit and loss Remeasurement of the defined benefit pension schemes 29 (2.3) 6.2 Movement on deferred tax relating to pension schemes 23 0.8 (2.2) (1.5) 4.0 Items that may be reclassified subsequently to profit and loss Exchange differences on translation of foreign operations 35.0 (8.3) Tax on exchange differences on translation of foreign operations (0.4) 0.1 34.6 (8.2) Total comprehensive income attributable to equity holders of the parent 80.5 37.3 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 125 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 October 2022 Share Special Share premium capital Translation Retained capital account reserve reserve earnings * Total £m £m £m £m £m £m At 1 November 2021 2.8 307.1 12.9 (27.1) 57.1 352.8 Profit after tax — — — — 47.4 47.4 Other comprehensive income/(loss) — — — 35.0 (2.3) 32.7 Tax relating to components of other comprehensive income/(loss) — — — (0.4) 0.8 0.4 Total comprehensive income — — — 34.6 45.9 80.5 Ordinary shares issued — 0.6 — — — 0.6 Share-based payments (net of settlement) — — — — 5.6 5.6 Dividends paid — — — — (14.4) (14.4) Purchase of shares by employee share ownership plan trust — — — — (7.0) (7.0) At 31 October 2022 2.8 307.7 12.9 7.5 87.2 418.1 Share Special Share premium capital Revaluation Translation Retained Own capital account reserve reserve reserve earnings shares Total £m £m £m £m £m £m £m £m At 1 November 2020 2.8 306.7 12.9 1.0 (18.9) 28.0 (2.9) 329.6 Profit after tax — — — — — 41.5 — 41.5 Other comprehensive (loss)/income — — — — (8.3) 6.2 — (2.1) Tax relating to components of other comprehensive (loss)/income — — — — 0.1 (2.2) — (2.1) Total comprehensive income — — — — (8.2) 45.5 — 37.3 Ordinary shares issued — 0.4 — — — — — 0.4 Share-based payments (net of settlement) — — — — — 4.5 — 4.5 Dividends paid — — — — — (11.9) — (11.9) Purchase of shares by employee share ownership plan trust — — — — — (7.1) — (7.1) Transactions in own shares — — — — — (2.9) 2.9 — Transfer between reserves — — — (0.1) — 0.1 — — At 31 October 2021 2.8 307.1 12.9 0.9 (27.1) 56.2 — 352.8 * Retained earnings as at 1 November 2021 includes £0 .9m that was previously classified as a revaluation reserve. This balance has been amalgamated into the retained earnings balance from 1 November 2021 on the basis that it is immaterial. Chemring Group PLC Annual report and accounts 2022126 2022 2021 Note £m £m £m £m Non-current assets Goodwill 10 118.1 108.7 Development costs 11 34.6 30.0 Other intangible assets 11 11.4 14.1 Property, plant and equipment 12 231.3 198.7 Retirement benefit surplus 29 11.2 13.7 Deferred tax 23 32.3 18.2 438.9 383.4 Current assets Inventories 14 99.6 80.7 Trade and other receivables 15 61.1 60.6 Cash and cash equivalents 16 19.8 5.8 Derivative financial instruments 21 0.7 1.0 181.2 148.1 Total assets 620.1 531.5 Current liabilities Borrowings 17 — (0.4) Lease liabilities 18 (1.8) (1.4) Trade and other payables 19 (98.2) (85.7) Provisions 22 (1.6) (2.6) Current tax (7.9) (12.0) Derivative financial instruments 21 (4.2) (0.4) (113.7) (102.5) Non-current liabilities Borrowings 17,32 (20.9) (28.1) Lease liabilities 18 (4.2) (2.4) Provisions 22 (16.8) (14.9) Deferred tax 23 (45.2) (30.7) Derivative financial instruments 21 (1.1) — Preference shares 17,24 (0.1) (0.1) (88.3) (76.2) Total liabilities (202.0) (178.7) Net assets 418.1 352.8 Equity Share capital 24 2.8 2.8 Share premium account 25 307.7 307.1 Special capital reserve 25 12.9 12.9 Revaluation reserve 25 — 0.9 Translation reserve 25 7.5 (27.1) Retained earnings 87.2 56.2 Total equity 418.1 352.8 These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on Signed on behalf of the Board Michael Ord Andrew Lewis Director Director CONSOLIDATED BALANCE SHEET As at 31 October 2022 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 127 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 October 2022 2022 2021 Note £m £m Cash flows from operating activities Cash generated from continuing underlying operations 30 90.1 80.0 Cash impact of continuing non-underlying items (1.1) (1.3) Cash impact of discontinued non-underlying items — (0.4) Cash flows from operating activities 89.0 78.3 Tax paid (8.5) (2.6) Net cash inflow from operating activities 80.5 75.7 Cash flows from investing activities Purchases of intangible assets (3.0) (2.2) Purchases of property, plant and equipment (31.5) (28.0) Acquisition of subsidiary net of cash acquired 28 — (5.1) Proceeds on disposal of subsidiary — 0.4 Short-term funding to defined benefit pension scheme 34 (2.0) — Proceeds on disposal of property, plant and equipment 6.0 — Net cash outflow from investing activities (30.5) (34.9) Cash flows from financing activities Dividends paid 8 (14.4) (11.9) Purchase of own shares (7.0) (7.1) Net proceeds for transactions in own shares 0.1 0.4 Finance expense paid (1.3) (2.6) Capitalised facility fees paid — (1.1) Drawdown of borrowings 30.0 29.2 Repayments of borrowings (41.0) (55.7) Payment of lease liabilities (2.2) (1.6) Net cash outflow from financing activities (35.8) (50.4) Increase/(decrease) in cash and cash equivalents 31 14.2 (9.6) Cash and cash equivalents at beginning of year (including bank overdraft) 5.4 14.7 Effect of foreign exchange rate changes 0.2 0.3 Cash and cash equivalents at end of year (including bank overdraft) 16,32 19.8 5.4 Chemring Group PLC Annual report and accounts 2022128 1. REVENUE All of the Group’s revenue is derived from the sale of goods and the provision of services. The following table provides an analysis of the Group’s revenue Sensors Countermeasures & Information & Energetics 2022 £m £m £m UK 100.3 51.5 151.8 US 54.9 166.8 221.7 Europe 5.7 48.8 54.5 Asia Pacific 1.2 10.4 11.6 Rest of the world 0.2 3.0 3.2 162.3 280.5 442.8 Sensors Countermeasures & Information & Energetics 2021 £m £m £m UK 75.7 44.4 120.1 US 62.9 137.3 200.2 Europe 5.1 48.6 53.7 Asia Pacific 2.1 13.7 15.8 Rest of the world 0.8 2.7 3.5 146.6 246.7 393.3 The directors consider that the only countries that are significant in accordance with IFRS 8 Operating Segments are the US and the UK. Sensors Countermeasures & Information & Energetics 2022 £m £m £m Goods 53.1 274.3 327.4 Services 109.2 6.2 115.4 162.3 280.5 442.8 Sensors Countermeasures & Information & Energetics 2021 £m £m £m Goods 56.4 242.8 299.2 Services 90.2 3.9 94.1 146.6 246.7 393.3 All revenues recognised arose from contracts with customers. 2. BUSINESS SEGMENTS IFRS 8 Operating Segments reviewed by the Group Chief Executive and the Board to allocate resources to the segments and to assess their performance. For management purposes, Sensors & Information Provision of consulting and technology services to solve security-critical issues. Development and manufacture of electronic countermeasures, chemical and biological threat detection equipment and explosive hazard detection (“EHD”) equipment. Countermeasures Development and manufacture of expendable countermeasures for air and sea platforms, cartridge/propellant actuated devices, pyrotechnic devices for satellite launch and deployment, missile components, propellants, separation sub-systems, actuators and energetic materials. NOTES TO THE GROUP FINANCIAL STATEMENTS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 129 2. BUSINESS SEGMENTS continued Sensors Countermeasures & Information & Energetics Unallocated To t a l Year ended 31 October 2022 £m £m £m £m Revenue 162.3 280.5 — 442.8 Segment result before depreciation, amortisation and non-underlying items 33.0 64.2 (14.9) 82.3 Depreciation (3.0) (15.1) — (18.1) Amortisation — (0.2) — (0.2) Segmental underlying operating profit 30.0 48.9 (14.9) 64.0 Amortisation of acquired intangibles (note 3) (2.5) (2.1) — (4.6) Non-underlying items (note 3) (1.2) — (4.9) (6.1) Impact of non-underlying items on profit before tax (note 3) (3.7) (2.1) (4.9) (10.7) Segmental operating profit 26.3 46.8 (19.8) 53.3 Finance expense (1.5) (1.5) Profit before tax (21.3) 51.8 Ta x (4.4) (4.4) Profit for the year (25.7) 47.4 Sensors Countermeasures & Information & Energetics Unallocated Total Year ended 31 October 2021 £m £m £m £m Revenue 146.6 246.7 — 393.3 Segment result before depreciation, amortisation and non-underlying items 34.4 56.1 (14.1) 76.4 Depreciation (2.7) (15.5) — (18.2) Amortisation (0.1) (0.6) — (0.7) Segmental underlying operating profit 31.6 40.0 (14.1) 57.5 Amortisation of acquired intangibles (note 3) (4.1) (2.1) — (6.2) Non-underlying items (note 3) (1.6) — 0.7 (0.9) Impact of non-underlying items on profit before tax (note 3) (5.7) (2.1) 0.7 (7.1) Segmental operating profit 25.9 37.9 (13.4) 50.4 Finance expense (1.6) (1.6) Profit before tax (15.0) 48.8 Ta x (7.3) (7.3) Profit for the year (22.3) 41.5 * Unallocated items are specific corporate level costs that cannot be allocated to a business segment. Assets and liabilities by segment are not reported to the Group Chief Executive on a monthly basis; therefore they are not used as a key decision making tool 2022 2021 Non-current assets by location £m £m UK 149.4 143.4 US 211.5 178.1 Norway 18.0 12.4 Australia 16.5 17.6 395.4 351.5 INFORMATION ON MAJOR CUSTOMERS Group’s business segments. This was the only individual customer where direct sales accounted for more than 10% of Group revenue for the year. Chemring Group PLC Annual report and accounts 2022130 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 3. ALTERNATIVE PERFORMANCE MEASURES In accordance with our accounting policy we have presented the following reconciliation of Alternative Performance Measures used throughout this report to 2022 2021 Non-underlying items and non-underlying measures £m £m (Loss)/gain on the movement in the fair value of derivative financial instruments (note 21) (4.1) 0.7 Acquisition expenses (note 28) (2.0) (1.6) Impact of non-underlying items on EBITDA (6.1) (0.9) Amortisation of acquired intangibles arising from business combinations (note 11) (4.6) (6.2) Impact of non-underlying items on profit before tax (10.7) (7.1) Tax impact of non-underlying items 1.3 1.0 Impact of non-underlying items on profit after tax (9.4) (6.1) Underlying profit after tax 56.8 47.6 Statutory profit after tax 47.4 41.5 The Alternative Performance Measures (“APMs”) used may not be comparable across companies. The impact of non-underlying items on statutory basic and diluted EPS, as well as a reconciliation to the IFRS equivalent, is presented in note 9. The impact of non-underlying items on cash generated from operating activities, as well as a reconciliation to the IFRS equivalent, is presented in note 30. The cash impact of non-underlying items includes the impact of exceptional items from prior years where the income statement and cash flow timings differ. AMORTISATION OF ACQUIRED INTANGIBLES arising from business combinations is associated with acquisition accounting under IFRS 3 Business Combinations. IFRS requires intangibles to be recognised on acquisition that would not have been capitalised had the business grown organically under Chemring’s ownership. As such, these costs are not reflective of the rather than organically developed, have been excluded from the underlying measures. DERIVATIVE FINANCIAL INSTRUMENTS underlying earnings to ensure the recognition of the gain or loss on the derivative matches the timing of the underlying transaction. ACQUISITION EXPENSES on continued employment of the former owners of Cubica, which has been accounted for as equity-settled share-based payments under IFRS 2 Share-based Payments. We have classified this cost as a non-underlying item as it is a non-recurring cost relating to an acquisition. See note 28 for further details. The year. The acquisition expenses are not reflective of the underlying costs of the Group and therefore, in order to provide an explanation of results that is not TA X NET DEBT A reconciliation and analysis of net debt is presented in notes 31 and 32. EBITDA 2022 2021 £m £m Operating profit 53.3 50.4 Amortisation arising from business combinations (note 11) 4.6 6.2 Amortisation of development costs (note 11) 0.1 0.6 Amortisation of patents and licences (note 11) 0.1 0.1 Depreciation of property, plant and equipment (note 12) 18.1 18.2 EBITDA 76.2 75.5 Non-underlying items 6.1 0.9 Underlying EBITDA 82.3 76.4 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 131 3. ALTERNATIVE PERFORMANCE MEASURES continued CONSTANT CURRENCY REVENUE AND OPERATING PROFIT In our financial review we present a measure of constant currency revenue and operating profit. This is calculated by translating our results for the year ended 31 October 2022 at the average exchange rates for the comparative year ended 31 October 2021. 4. OPERATING PROFIT 2022 2021 £m £m Research and development costs – internally-funded 7.5 8.5 Amortisation – arising from business combinations 4.6 6.2 – development costs 0.1 0.6 – patents and licences 0.1 0.1 Depreciation of property, plant and equipment – owned assets 16.5 16.8 – leased assets 1.6 1.4 Impairment of development costs 2.2 — (Profit)/loss on disposal of non-current assets (1.9) 0.1 Government grant amortisation — (0.5) Foreign exchange losses/(gains) 2.0 (0.8) Staff costs (note 5) 169.7 146.0 Cost of inventories recognised as an expense 144.3 128.0 The remaining items within operating profit predominantly relate to general and administrative expenses and production overheads, and includes £4.8m of other income. 2022 2021 Auditor’s remuneration £m £m – the audit of the Company’s annual accounts 0.4 0.3 – the audit of the Company’s subsidiaries, pursuant to legislation 0.7 0.7 1.1 1.0 Other services Audit-related assurance services 0.1 0.1 1.2 1.1 Audit Committee is set out in the Audit Committee report on pages 90 to 93, and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor. No services were provided by the auditor pursuant to contingent fee arrangements. 5. STAFF COSTS 2022 2021 Number Number Direct 1,435 1,381 Indirect 899 905 2,334 2,286 2022 2021 £m £m Wages and salaries 141.8 121.4 Social security costs 14.2 12.9 Other pension costs 7.3 6.0 Share-based payment charge 6.4 5.7 Staff costs 169.7 146.0 equity-settled share-based payments. These amounts are included in non-underlying costs, see notes 3 and 27 for details. Chemring Group PLC Annual report and accounts 2022132 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 6. FINANCE EXPENSE 2022 2021 £m £m Bank overdraft and loan interest 1.6 1.3 Amortisation of debt finance costs 0.3 0.6 Interest cost on retirement benefit obligations (note 29) 0.1 0.1 Lease liability interest 0.1 0.1 2.1 2.1 Amount capitalised (0.6) (0.5) Finance expense 1.5 1.6 The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity’s 7. TAXATION 2022 2021 £m £m Current tax charge – current year 5.0 7.2 Current tax credit – prior year (1.7) (1.9) Deferred tax charge – current year (note 23) 0.7 1.2 Deferred tax charge – prior year (note 23) 0.4 0.8 Tax charge 4.4 7.3 2022 2021 £m £m Profit before tax 51.8 48.8 9.8 9.3 Expenses not deductible for tax purposes 0.1 — Changes in tax rates — 1.7 Tax losses/future interest deductions not previously recognised (4.6) (4.4) Release of tax risk provision (1.7) — Prior period adjustments (1.3) (1.1) Overseas profits taxed at rates different to the UK standard rate 2.1 1.8 Tax charge 4.4 7.3 The UK Finance Bill 2021 was published on 11 March 2021 and substantively enacted on 24 May 2021. The bill provides for an increase in the rate of corporation tax from 19% to 25% with effect from 1 April 2023. UK deferred tax balances were recalculated in accordance with these rate changes during the year ended 31 October 2021. FACTORS AFFECTING THE TAX CHARGE IN FUTURE YEARS from the implementation of the OECD’s BEPS actions and European Commission initiatives such as the proposed tax and financial reporting directive or as a consequence of state aid investigations, future corporate acquisitions and disposals and any restructuring of our business. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 133 8. DIVIDENDS 2022 2021 £m £m Dividends paid on ordinary shares of 1p each Final dividend of 3.2p per share for the year ended 31 October 2021 (2.6p per share for the year ended 31 October 2020) 9.1 7.4 Interim dividend of 1.9p per share for the year ended 31 October 2022 (1.6p per share for the year ended 31 October 2021) 5.3 4.5 Total dividends 14.4 11.9 Subject to approval at the Annual General Meeting, the final dividend of 3.8p per ordinary share will be paid on 14 April 2023 to all shareholders registered at per ordinary share. As the final dividend is subject to approval by the shareholders at the Annual General Meeting, it has not been included as a liability in the financial statements for the year ended 31 October 2022. and 31 October 2022. 9. EARNINGS PER ORDINARY SHARE 2022 2021 Ordinary shares Ordinary shares Number Number millions millions Weighted average number of shares used to calculate basic earnings per share 280.5 281.6 Additional shares issuable other than at fair value in respect of options outstanding 7.7 6.4 Weighted average number of shares used to calculate diluted earnings per share 288.2 288.0 2022 2021 Basic EPS Diluted EPS Basic EPS Diluted EPS £m (Pence) (Pence) £m (Pence) (Pence) Underlying profit after tax 56.8 20.2 19.7 47.6 16.9 16.5 Non-underlying items (note 3) (9.4) (6.1) Total profit after tax 47.4 16.9 16.4 41.5 14.7 14.4 10. GOODWILL £m Cost At 1 November 2020 187.8 Acquisitions through business combinations (note 28) 3.1 Foreign exchange adjustments (6.4) At 31 October 2021 184.5 Foreign exchange adjustments 20.4 At 31 October 2022 204.9 Accumulated impairment losses At 1 November 2020 (79.3) Foreign exchange adjustments 3.5 At 31 October 2021 (75.8) Foreign exchange adjustments (11.0) At 31 October 2022 (86.8) Carrying amount At 31 October 2022 118.1 At 31 October 2021 108.7 Chemring Group PLC Annual report and accounts 2022134 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 10. GOODWILL continued Goodwill acquired in a business combination is allocated at acquisition to the cash-generating units (“CGUs”) that are expected to benefit from that business combination, being the individual operating companies within the operating segment descriptions on page 128. The Group tests goodwill at least annually for impairment. Tests are conducted more frequently if there are indications that goodwill might be impaired. individually estimated for each CGU and include the discount rates and expected changes to cash flows during the period for which management has detailed plans, which are underpinned by the winning and execution of key contracts. Based on our assessment, there is no reasonable possible change in a key assumption which would result in the impairment of goodwill. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to each of the specific to each of the CGUs to account for differences in currency risk, country risk and other factors affecting specific CGUs, have been used to discount Expected changes to cash flows during the period for which management has detailed plans relate to revenue forecasts, expected contract outcomes and forecast operating margins in each of the operating companies based on our Board-approved five-year plan which considered past experience and our understanding of customer budgets and priorities. The relative value ascribed to each varies between CGUs as the budgets are built up from the underlying operating companies within each CGU. rates are based on management’s view of industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes. 2022 2021 2022 2021 % % £m £m Roke Manor Research Limited 11.2 11.7 31.5 31.5 Chemring Energetics UK Limited 10.2 9.7 14.6 14.6 Chemring Sensors & Electronic Systems, Inc. 10.5 10.6 40.8 34.3 Chemring Energetic Devices, Inc. 10.5 10.6 18.0 15.2 Other 13.2 13.1 118.1 108.7 The goodwill arising from the acquisition of the Cubica Group of £3.1m during the year ended 31 October 2021 was allocated to the Roke Manor Research Limited CGU as it will form part of this operating company going forward (see note 29 for further details). Following a detailed review, no impairment losses were recognised in the years ended 31 October 2022 and 31 October 2021 for continuing operations. Stress testing was performed on the forecasts to consider the impact of reasonably possible worst case scenarios over the forecast period, including a 1% increase in discount rate, a 1% reduction in long-term growth rate, a 10% fall in the forecast cash flows or a $0.10 weakening in the sterling to US dollar exchange rate. Even under any of these circumstances, no CGUs would require an impairment against goodwill. There are no reasonably possible changes in assumptions that would require an impairment against goodwill. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 135 11. DEVELOPMENT COSTS AND OTHER INTANGIBLE ASSETS Acquired Development Acquired customer Patents and costs technology relationships licences To t a l £m £m £m £m £m Cost At 1 November 2020 55.9 93.8 48.6 0.6 143.0 Acquisitions through business combinations (note 28) — 2.5 2.1 — 4.6 Additions 2.1 — — 0.1 0.1 Disposals (0.5) — — (0.1) (0.1) Foreign exchange adjustments (1.9) (4.8) (1.9) (0.1) (6.8) At 31 October 2021 55.6 91.5 48.8 0.5 140.8 Additions 2.5 0.4 — — 0.4 Disposals (0.4) — — (0.3) (0.3) Foreign exchange adjustments 6.2 15.2 6.2 0.3 21.7 At 31 October 2022 63.9 107.1 55.0 0.5 162.6 Amortisation At 1 November 2020 (26.1) (86.8) (39.3) (0.3) (126.4) Charge (0.6) (3.8) (2.4) (0.1) (6.3) Disposals 0.5 — — 0.1 0.1 Foreign exchange adjustments 0.6 4.4 1.4 0.1 5.9 At 31 October 2021 (25.6) (86.2) (40.3) (0.2) (126.7) Charge (0.1) (2.0) (2.6) (0.1) (4.7) Impairment (2.2) — — — — Disposals 0.3 — — 0.3 0.3 Foreign exchange adjustments (1.7) (14.8) (5.1) (0.2) (20.1) At 31 October 2022 (29.3) (103.0) (48.0) (0.2) (151.2) Carrying amount At 31 October 2022 34.6 4.1 7.0 0.3 11.4 At 31 October 2021 30.0 5.3 8.5 0.3 14.1 lives, estimated to be between three and ten years, with the remaining amortisation periods for these assets ranging up to ten years. by reference to future estimated cash flows, discounted at an appropriate rate to present value, or by reference to the amount that would have been paid in an arm’s length transaction between two knowledgeable and willing parties. Other intangible assets are recognised at cost and are amortised over their estimated useful economic lives, which are set out in the accounting policies section. are one year, two years and nine years respectively. Chemring Group PLC Annual report and accounts 2022136 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 12. PROPERTY, PLANT AND EQUIPMENT Right-of-use Right-of-use Land and Plant and land and plant and buildings equipment buildings equipment Total £m £m £m £m £m Cost or valuation At 31 October 2020 126.6 142.4 5.7 0.6 275.3 Reclassification 0.6 (0.6) — — — Additions 7.4 19.2 0.3 — 26.9 Disposals (0.3) (10.1) (0.2) — (10.6) Foreign exchange adjustments (3.1) (3.1) (0.3) 0.1 (6.4) At 31 October 2021 131.2 147.8 5.5 0.7 285.2 Reclassification 0.2 (0.3) — — (0.1) Additions 9.2 25.6 3.7 — 38.5 Disposals (5.7) (3.7) (0.2) — (9.6) Foreign exchange adjustments 10.4 13.4 1.1 — 24.9 At 31 October 2022 145.3 182.8 10.1 0.7 338.9 Depreciation At 31 October 2020 (19.3) (60.5) (1.4) (0.1) (81.3) Charge (3.4) (13.4) (1.3) (0.1) (18.2) Disposals 0.3 10.0 0.2 — 10.5 Foreign exchange adjustments 0.6 1.8 0.1 — 2.5 At 31 October 2021 (21.8) (62.1) (2.4) (0.2) (86.5) Reclassification 0.3 (0.2) — — 0.1 Charge (3.5) (13.0) (1.4) (0.2) (18.1) Disposals 2.5 3.1 — — 5.6 Foreign exchange adjustments (2.4) (5.7) (0.6) — (8.7) At 31 October 2022 (24.9) (77.9) (4.4) (0.4) (107.6) Carrying amount At 31 October 2022 120.4 104.9 5.7 0.3 231.3 At 31 October 2021 109.4 85.7 3.1 0.5 198.7 of depreciated replacement cost for two pyrotechnic sites and on open market for the remainder, which represent Level 2 measurements in the fair value hierarchy. 2022 2021 £m £m 30 September 1997 depreciated replacement cost 4.0 4.0 Freehold at cost 141.3 127.2 Cost of land and buildings as at 31 October 145.3 131.2 2022 2021 £m £m Cost 144.5 130.4 Accumulated depreciation (25.2) (21.9) Historical cost value 119.3 108.5 All other tangible fixed assets are stated at historical cost. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 137 13. SUBSIDIARY UNDERTAKINGS All subsidiary undertakings have been reflected in these financial statements. The subsidiary undertakings held at 31 October 2022, which have a single class otherwise stated. Country of incorporation (or registration) and operation Operating segment Subsidiary undertaking Chemring Australia Pty Limited Australia Countermeasures & Energetics B.D.L. Systems Limited England Dormant Chemring Countermeasures Limited England Countermeasures & Energetics Chemring Energetics Limited England Dormant Chemring Europe Limited England Dormant Chemring Finance Europe Limited England Dormant Chemring Investments Limited England Dormant Chemring North America Unlimited England Dormant Chemring Prime Contracts Limited England Dormant Chemring Technology Solutions Limited England Countermeasures & Energetics CHG Overseas Investments Limited England Dormant CHG Overseas Limited England Holding company Cubica Technology Limited England Sensors & Information Greys Exports Limited England Dormant Parkway No 10 Limited England Dormant Q6 Holdings Limited England Dormant Richmond EEI Limited England Dormant Richmond Electronics & Engineering Limited England Dormant Roke Manor Research Limited England Sensors & Information Vigil AI Limited* England Sensors & Information Chemring Nobel AS Norway Countermeasures & Energetics Chemring Energetics UK Limited Scotland Countermeasures & Energetics Alloy Surfaces Company, Inc. US Countermeasures & Energetics ASC Realty LLC US Property holding company Chemring Energetic Devices, Inc. US Countermeasures & Energetics Chemring North America Group, Inc. US Holding company CHG Flares, Inc. US Holding company CHG Group, Inc. US Holding company Kilgore Flares Company LLC US Countermeasures & Energetics Chemring Sensors & Electronic Systems, Inc. US Sensors & Information Roke USA, Inc. US Sensors & Information Tactical Systems and Ordnance, Inc. US Non-trading * Shares directly held by Chemring Group PLC. ** 80% indirectly owned by Chemring Group PLC (see note 29). CHG Overseas Limited, Cubica Technology Limited and Chemring Technology Solutions Limited are exempt from the requirement to file audited accounts for Chemring Group PLC Annual report and accounts 2022138 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 14. INVENTORIES 2022 2021 £m £m Raw materials 48.1 36.6 Work in progress 38.8 27.2 Finished goods 12.7 16.9 99.6 80.7 as a write down of inventories to net realisable value. See note 4 for details of cost of inventories recognised as an expense. 15. TRADE AND OTHER RECEIVABLES 2022 2021 £m £m Trade receivables 33.8 41.2 Allowance for doubtful debts (0.5) (0.3) 33.3 40.9 Advance payments to suppliers 1.7 0.5 Other receivables 8.5 3.7 Prepayments 6.2 5.5 Accrued income 11.4 10.0 61.1 60.6 All amounts shown above are due within one year. Given the Group’s customer base, expected credit losses are typically not material; however, the Group’s policy is to provide in full for trade receivables outstanding for more than 120 days beyond agreed terms, unless there are facts and circumstances that support recoverability. As at 31 October 2022, The directors consider that the carrying amount of trade and other receivables approximates to their fair values. half was billed in the month after the reporting date. The remainder relates to the completion of performance obligations which will be billed at the next contractual milestone, which is expected within the next year. development expenditure credits receivable. 16. CASH AND CASH EQUIVALENTS Bank balances and cash comprise cash held by the Group and short-term deposits with an original maturity of three months or less. The carrying amount cash commitments. 17. BORROWINGS 2022 2021 £m £m Within current liabilities Bank overdrafts — 0.4 Borrowings due within one year — 0.4 Within non-current liabilities Bank borrowings 20.9 28.1 Preference shares 0.1 0.1 Borrowings due after more than one year 21.0 28.2 Total borrowings 21.0 28.6 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 139 17. BORROWINGS continued 2022 2021 £m £m Sterling 0.1 0.1 US dollar 20.9 28.5 21.0 28.6 2022 2021 % % Bank overdrafts 2.3 1.0 UK bank loans – Sterling denominated 2.3 — – US dollar denominated 1.4 1.9 2022 2021 Bank Bank loans and Preference loans and Preference overdrafts shares To t a l overdrafts shares Total £m £m £m £m £m £m – within one year — — — 0.4 — 0.4 – within one to two years — — — — — — – within two to five years 20.9 — 20.9 28.1 — 28.1 – after five years — 0.1 0.1 — 0.1 0.1 20.9 0.1 21.0 28.1 0.1 28.2 Total borrowings 20.9 0.1 21.0 28.5 0.1 28.6 The Group’s principal debt facilities comprised a £150m revolving credit facility and a US$10m overdraft. These were established in July 2021 with a syndicate of year were secured. There have been no breaches of the terms of the loan agreements during the current or prior year. The Group has the following undrawn borrowing facilities available, in respect of which all conditions precedent have been met. Interest costs under these facilities are charged at floating rates. 2022 2021 £m £m Undrawn borrowing facilities 136.7 128.1 The Group is subject to two key financial covenants, which are tested quarterly. These covenants relate to the leverage ratio between “underlying EBITDA” and net 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 and includes liabilities on foreign exchange forward contracts within its definition of net debt. Therefore the leverage ratio of 0.14 times differs to the ratio of 0.09 times that is disclosed elsewhere in the annual report and accounts, which is calculated using the closing rates of exchange and does not include liabilities on foreign exchange forward contracts within its definition of net debt. The Group was in compliance with the covenants throughout the year. The year-end leverage ratio was 0.14 times (covenant limit of 3 times) and the year-end interest cover ratio was 57 times (covenant floor of 4 times). 18. LEASES The carrying amount, additions and depreciation charge for right-of-use assets by class of underlying asset is included in note 12. low-value leases. Chemring Group PLC Annual report and accounts 2022140 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 18. LEASES continued 2022 2021 £m £m – within one year 1.8 1.4 – within one to two years 0.8 1.6 – within two to five years 1.4 1.0 – more than five years 2.1 — 4.3 2.6 Impact of discounting (0.1) (0.2) Lease liabilities included in balance sheet as at 31 October 6.0 3.8 19. TRADE AND OTHER PAYABLES 2022 2021 £m £m Within current liabilities Trade payables 14.7 13.1 Other payables 28.5 29.0 Interest payable 0.1 — Other tax and social security 6.8 4.7 Advance receipts from customers 26.6 17.1 Accruals 17.6 17.3 Deferred income 3.9 4.5 98.2 85.7 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. Advance receipts from customers represent the obligation to transfer goods or services to a customer for which consideration has been received. The amount of advanced receipts from customers at 31 October 2022, £26.6m is relevant to goods and services that will be delivered and provided within a year. No revenue was recognised in 2022 from performance obligations satisfied in previous years. 20. FINANCIAL RISK MANAGEMENT The Group uses financial instruments to manage financial risk wherever it is appropriate to do so. The main risks addressed by financial instruments are liquidity risk, foreign currency risk, interest rate risk and credit risk. The Group’s policies in respect of the management of these risks, which remained unchanged throughout the year, are set out below. (A) CREDIT RISK principally from the Group’s receivables from customers. loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Group’s past history government agencies with which the Group has long-term business relationships. The Group’s principal customers are government defence departments, such as the US DoD and the UK Ministry of Defence (“UK MOD”), US and UK defence prime contractors, such as BAE Systems and General Dynamics, and distributors of products for their onward sale to end users. The majority of revenue in 2022 related to the US DoD, the UK MOD and the US and UK defence prime contractors, which consistently pay within terms and are deemed low credit risk as a result. For all other customers the Group’s policy is to trade under a letter of credit. If there is any doubt over recoverability, the Group’s policy is to provide in full for trade receivables outstanding for more than 120 days beyond agreed terms. The balances which might be affected by credit risk are trade receivables and cash and cash equivalents. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 141 20. FINANCIAL RISK MANAGEMENT continued (B) CAPITAL MANAGEMENT The Group manages its capital to ensure that all entities in the Group will be able to continue as a going concern while meeting the returns to stakeholders. equivalents (note 16) and a revolving credit facility (“RCF”) (note 17). The Group seeks to manage its capital through an appropriate mix of these items. (C) FINANCIAL RISK MANAGEMENT i. Liquidity risk management Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due. The Group manages liquidity risk by maintaining adequate reserves and by continually monitoring forecast and actual cash flows. The Group’s policy is to maintain continuity of funding through available cash and cash equivalents and the RCF. ii. Foreign currency risk management The Group’s presentational currency is sterling. The Group is subject to exposure on the translation of the assets of foreign subsidiaries, whose functional currencies differ from the Group. The Group’s primary balance sheet translation exposures are to the US dollar, Australian dollar and Norwegian krone. differences are taken to reserves. US dollar borrowings held by the Group are treated as a net investment hedge against the US dollar assets of the Group. The Group faces currency exposures arising from the translation of profits earned in foreign currency. These exposures are not hedged. Exposures also arise from foreign currency denominated trading transactions undertaken by subsidiaries deemed transactional exposures. The Group’s policy is to hedge transactional exposures above £250,000 in the banking market on a one-to-one basis using forward contracts. Below £250,000, the exposures are netted across subsidiaries and any surplus or deficit hedged in the banking market using spot or forward contracts. The Group’s policy is that there is no speculative trading in financial instruments. During the year ended 31 October 2022, there were no options or structured derivatives utilised. iii. Interest rate risk management The Group finances its operations through a combination of retained profits and bank borrowings. The UK borrowings are denominated in sterling IFRS 9 FINANCIAL INSTRUMENTS Chemring Group PLC is not a financial institution and does not have any complex financial instruments. The Group does not apply hedge accounting to derivatives and the Group’s customers are generally governments that are considered creditworthy and pay consistently within agreed payment terms. 2022 2021 Carrying value Fair value Carrying value Fair value £m £m £m £m Assets carried at amortised cost Trade receivables 33.3 33.3 40.9 40.9 Cash and cash equivalents 19.8 19.8 5.8 5.8 Assets carried at fair value Derivative financial instruments 0.7 0.7 1.0 1.0 Liabilities carried at fair value Derivative financial instruments (5.3) (5.3) (0.4) (0.4) Liabilities carried at amortised cost Trade payables (14.7) (14.7) (13.1) (13.1) Other payables (28.5) (28.5) (29.0) (29.0) Interest payable (0.1) (0.1) — — Borrowings (21.0) (21.0) (28.6) (28.6) (a) prepayments made/advances received (right to receive future goods or services, not cash or a financial asset); (b) tax receivables and payables and similar items (statutory rights and obligations, not contractual); or (c) deferred revenue and warranty obligations (obligations to deliver goods and services, not cash or financial assets). Chemring Group PLC Annual report and accounts 2022142 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 21. FINANCIAL INSTRUMENTS 2022 2021 £m £m Included in current assets 0.7 1.0 Included in current liabilities (4.2) (0.4) (3.5) 0.6 Included in non-current liabilities (1.1) — Forward foreign exchange contracts (4.6) 0.6 The table below details the remaining contractual maturities of the Group’s derivative financial instruments and loans at the reporting date. The amounts are gross and undiscounted and include interest payments estimated based on the conditions existing at the reporting date. 2022 2021 Derivative Loans and Derivative Loans and instruments overdrafts Tot a l instruments overdrafts Total £m £m £m £m £m £m – within one year (3.5) (0.3) (3.8) 0.6 (0.7) (0.1) – within one to two years (1.1) (0.3) (1.4) — (0.3) (0.3) – within two to five years — (21.3) (21.3) — (28.4) (28.4) (4.6) (21.9) (26.5) 0.6 (29.4) (28.8) A maturity analysis of the contracted cash outflows on lease liabilities is provided in note 18. FAIR VALUE HIERARCHY IFRS 7 Financial Instruments: Disclosures requires companies that carry financial instruments at fair value in the balance sheet to disclose their level of hierarchy, determining into which category those financial instruments fall under the fair value hierarchy. - Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly - Level 3 – inputs for the asset or liability that are not based on observable market data (i.e. as unobservable inputs). 2022 2021 Carrying Carrying Fair value amount Fair value amount Fair value hierarchy £m £m £m £m Held at fair value Derivative financial instruments – assets Level 2 0.7 0.7 1.0 1.0 Derivative financial instruments – liabilities Level 2 (5.3) (5.3) (0.4) (0.4) (4.6) (4.6) 0.6 0.6 The fair value of derivative financial instruments is estimated by discounting the future contracted cash flow, using readily available market data. SENSITIVITY ANALYSIS For the year ended 31 October 2022 a 10 cent strengthening in the US dollar exchange rate would have increased reported net debt by approximately £1.9m STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 143 21. FINANCIAL INSTRUMENTS continued SENSITIVITY ANALYSIS continued considers a 10 cent strengthening or weakening of US dollars against sterling as a reasonably possible change in foreign exchange rates. The other functional currencies used in the Group (Norwegian krone and Australian dollars) are not significant enough to have a material impact on the Group results in the event +10 cents –10 cents US dollar impact US dollar impact 2022 2021 2022 2021 Continuing operations £m £m £m £m Revenue (14.2) (14.2) 20.6 15.8 Underlying operating profit (0.8) (2.4) 1.0 2.8 Interest — — — — Underlying profit before tax (0.8) (2.4) 1.0 2.8 As at 31 October 2022, 78% of the Group’s gross debt was at a fixed rate of 1.37% and the remainder was at floating rates. The Group monitors its exposure to movements in interest rates, having regard to prevailing market conditions, and considers the use of interest rate swaps on an ongoing basis to manage this exposure. The Group has not entered into any interest rate swaps as of 31 October 2022. 22. PROVISIONS Legal Environmental Disposal provision provision provision Total £m £m £m £m At 31 October 2021 5.6 3.0 8.9 17.5 Transfer from trade and other payables — 0.3 — 0.3 Transfer (1.8) — 1.8 — Foreign exchange adjustments — 0.7 0.4 1.1 Paid (0.3) (0.1) (0.1) (0.5) At 31 October 2022 3.5 3.9 11.0 18.4 2022 2021 £m £m Included in current liabilities 1.6 2.6 Included in non-current liabilities 16.8 14.9 18.4 17.5 outcomes and timing of cash outflows, dependent on the outcome of court proceedings. Further details of the Group’s contingent liabilities are set out in note 33. The environmental provision is held in respect of potential liabilities, associated with the Group’s facility in Chicago, US. The range of possible outcomes is between £1.4m and £9.1m. There are uncertainties regarding the timing of cash outflows, dependent on the outcome of regulatory proceedings. The disposal provision relates to estimated liabilities faced by the Group in respect of the disposal of its European Munitions businesses in 2014 and its commoditised energetics businesses in Derby and Florida in 2019 and 2020 respectively, under the terms of their respective sale agreements. The range of possible outcomes is between £nil and £25.7m, and the risk of economic outflow relating to these reduces with the passage of time. These are expected to Provisions are subject to uncertainty in respect of the outcome of future events. Legal provisions will be utilised based on the outcome of cases and the level of costs incurred defending the Group’s position. Environmental provisions will be utilised based on the outcome of further environmental studies and remediation work. Disposal provisions will be utilised based on the outcome of certain events which are specified in sale and purchase agreements. It is not possible to estimate more accurately the expected timing of any resulting outflows of economic benefits. Chemring Group PLC Annual report and accounts 2022144 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 23. DEFERRED TAX Accelerated tax US interest Tax Acquired depreciation Pensions deductions losses intangibles Other Total £m £m £m £m £m £m £m At 1 November 2020 (8.6) (1.5) — 9.2 (7.9) 1.6 (7.2) (Charge)/credit to income (3.2) — 4.0 (3.3) 1.8 (1.3) (2.0) Credit/(charge) to other comprehensive income 0.2 (2.2) (0.2) (0.2) 0.2 — (2.2) Recognised on acquisition — — — — (1.1) — (1.1) Transfers (7.8) — — (0.1) — 7.9 — At 31 October 2021 (19.4) (3.7) 3.8 5.6 (7.0) 8.2 (12.5) (Charge)/credit to income (11.5) — 3.5 6.3 (0.6) 1.2 (1.1) (Charge)/credit to other comprehensive income (2.2) 0.8 0.8 1.0 (0.7) 1.0 0.7 Transfers 0.1 — — — (0.1) — — At 31 October 2022 (33.0) (2.9) 8.1 12.9 (8.4) 10.4 (12.9) Analysed as: Deferred tax assets 0.3 — 8.1 12.9 — 11.0 32.3 Deferred tax liabilities (33.3) (2.9) — — (8.4) (0.6) (45.2) At 31 October 2022 (33.0) (2.9) 8.1 12.9 (8.4) 10.4 (12.9) Deferred tax assets 0.4 — 3.8 5.6 — 8.4 18.2 Deferred tax liabilities (19.8) (3.7) — — (7.0) (0.2) (30.7) At 31 October 2021 (19.4) (3.7) 3.8 5.6 (7.0) 8.2 (12.5) Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. Deferred tax balances after offset are analysed on the balance sheet as per the table above. The UK Finance Bill 2021 was published on 11 March 2021 and substantively enacted on 24 May 2021. The bill provides for an increase in the rate of corporation tax from 19% to 25% with effect from 1 April 2023. UK deferred tax balances have been calculated in accordance with these rate changes. streams. The aforementioned gross interest deductions are available indefinitely with no fixed expiry date, while the gross tax losses and gross capital losses expire in 2031 and 2026 respectively. The Group has not recognised any deferred tax liability on temporary differences relating to potentially taxable unremitted earnings of overseas subsidiaries During the year ended 31 October 2021 £7.9m of deferred tax liabilities relating to development costs were reclassified to accelerated tax depreciation via the transfers line. 24. SHARE CAPITAL 2022 2021 £m £m Issued and fully paid 2.8 2.8 The Company’s share capital also includes 62,500 7% cumulative preference shares of £1 each, which are all issued and fully paid up, and are classified other classes of shares, the sum of £1 per share together with any arrears of dividends. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 145 25. RESERVES The share premium account, the special capital reserve and the revaluation reserve are not distributable. The special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premium account which was approved The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations and were distributed following the vesting of awards under the deferred bonus and PSP schemes. The total number of ordinary shares held by the ESOP at Group dividends (note 8) are payable out of the parent company retained earnings as disclosed in the parent company financial statements. This provides cover over the declared final dividend of 3.8p per ordinary share for the year ended 31 October 2022. 26. OWN SHARES 2022 2021 £m £m At 1 November 2021 — 2.9 Transactions — (2.9) At 31 October 2022 — — The own shares reserve represents the cost of shares in the Company purchased in the market and held by the Group to satisfy awards under the Group’s 27. SHARE-BASED PAYMENTS The Group operates share-based compensation arrangements to provide incentives to the Group’s senior management and eligible employees. Details of the four schemes which operated during the year are set out below. THE CHEMRING GROUP PERFORMANCE SHARE PLAN 2016 (THE “2016 PSP”) Under the 2016 PSP, conditional awards of ordinary shares are made at nil cost to employees. Awards ordinarily vest on the third anniversary of the award date. 2016 PSP Number of conditional shares 2022 2021 Outstanding at the beginning of the year 6,218,961 6,185,176 Awarded 2,386,342 1,791,635 Vested (2,374,231) (1,358,817) Lapsed (243,743) (399,033) Outstanding at the end of the year 5,987,329 6,218,961 Subject to vesting at the end of the year — — Number of ordinary Vesting price Date when shares per share awards due Date of award under award Pence to vest 17 December 2019 2,027,806 nil 17 December 2022 16 December 2020 1,658,830 nil 16 December 2023 15 December 2021 2,300,693 nil 15 December 2024 The Group has applied a discount to the share-based payments, to reflect the anticipated achievement of the stipulated targets for each 2016 PSP award based on the predicted figures within the Group’s financial projections and the expected number of leavers over the life of the awards. Chemring Group PLC Annual report and accounts 2022146 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 27. SHARE-BASED PAYMENTS continued THE CHEMRING GROUP PERFORMANCE SHARE PLAN 2016 (THE “2016 PSP”) continued Date awarded 15 December 16 December 17 December 2021 2020 2019 Share price at valuation 284p 300p 210p Exercise price nil nil nil Risk-free rate 0.5% 0.5% 0.5% Expected volatility 29.1% 29.1% 29.1% Fair value 232.9p 246.4p 172.5p grant date. THE CHEMRING GROUP 2008 AND 2018 UK SHARESAVE PLAN (THE “UK SHARESAVE PLAN”) Options were granted during the year on 1 September 2022. 2022 2021 Weighted Weighted average average Number exercise Number exercise of share price of share price options Pence options Pence Outstanding at the beginning of the year 1,770,380 197.4 1,773,742 177.7 Granted 664,054 264.0 481,085 240.0 Exercised (362,049) 153.4 (299,581) 158.1 Lapsed (194,040) 198.3 (184,866) 183.0 Outstanding at the end of the year 1,878,345 229.3 1,770,380 197.4 Subject to exercise at the end of the year 5,056 178.0 22,243 178.0 Number of ordinary Exercise price shares under per share Dates between which Date of award award Pence options may be exercised 27 July 2017 2,432 148.0 1 October 2022–31 March 2023 30 July 2018 46,847 178.0 1 October 2023–31 March 2024 29 July 2019 76,196 154.0 1 October 2022–31 March 2023 29 July 2019 26,881 154.0 1 October 2024–31 March 2025 30 July 2020 541,211 202.0 1 October 2023–31 March 2024 30 July 2020 83,162 202.0 1 October 2025–31 March 2026 26 July 2021 361,185 240.0 1 October 2024–31 March 2025 26 July 2021 73,025 240.0 1 October 2026–31 March 2027 1 September 2022 553,821 264.0 1 October 2025–31 March 2026 1 September 2022 108,529 264.0 1 October 2027–31 March 2028 The fair values of the share options in the UK Sharesave Plan are based on the difference between the exercise price and the share price on the grant date of STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 147 27. SHARE-BASED PAYMENTS continued DEFERRED BONUS SHARE AWARDS anniversary of the award date. Number of deferred shares 2022 2021 Outstanding at the beginning of the year 766,171 615,365 Awarded 456,232 351,832 Vested (225,621) (132,919) Lapsed (59,727) (68,107) Outstanding at the end of the year 937,055 766,171 Subject to vesting at the end of the year — — Number of ordinary Share price Vesting price Date when shares at valuation per share awards are due Date of award under award Pence Pence to vest 16 December 2019 205,576 210p nil 16 December 2022 15 December 2020 156,431 300p nil 15 December 2022 15 December 2020 147,500 300p nil 15 December 2023 14 December 2021 231,491 284p nil 14 December 2023 14 December 2021 170,336 284p nil 15 December 2024 The fair value of the deferred bonus share awards is based on the share price on the grant date of the award. The weighted average fair value of awards made of the awards. DEFERRED SHARES RELATED TO ACQUISITION Deferred consideration in relation to the acquisition of the “Cubica Group” of up to £2.0m has been accounted for as equity-settled share-based payments under IFRS 2. See note 28 for further detailed disclosure. of 307p. The first tranche will vest on the second anniversary of completion, 2 June 2023, and the second tranche will vest on the third anniversary of completion, 2 June 2024, subject to continued employment with Chemring Group PLC. the prior year was 307p. 28. ACQUISITION OF SUBSIDIARY ACQUISITIONS IN THE PRIOR YEAR ENDED 31 OCTOBER 2021 Acquisition of the Cubica Group On 2 June 2021, Chemring Group PLC acquired 100% of the issued shares in Cubica Technology Limited (“Cubica”) and Q6 Holdings Limited (“Q6”), collectively the “Cubica Group”. The Cubica Group specialises in machine learning, data fusion and autonomous systems. The acquisition has strong synergies to Roke and will expand the Group’s existing capabilities and product offerings. The acquisition has been completed for an initial cash consideration of £7.0m, funded from Chemring’s existing bank facilities. Further deferred consideration post-acquisition expenses and accounted for as equity-settled share-based payments under IFRS 2. See note 3 for further details. Since acquisition to 31 October 2021, the Cubica Group contributed revenue of £0.6m and an operating profit of £0.3m to the Group’s results. If the acquisition had occurred on 1 November 2020, we estimate that its revenue would have been £1.4m, and operating profit for the year would have been £0.8m. In determining these amounts, we have assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 November 2020. Chemring Group PLC Annual report and accounts 2022148 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 28. ACQUISITION OF SUBSIDIARY continued ACQUISITIONS IN THE PRIOR YEAR ENDED 31 OCTOBER 2021 continued £m Cash paid 7.0 Total purchase consideration 7.0 Less cash acquired (1.9) Net cash outflow 5.1 Fair value £m Cash and cash equivalents 1.9 Trade and other receivables 0.4 Trade and other payables (1.4) Current tax (0.5) 2.1 2.5 Deferred tax liability (1.1) Net identifiable assets 3.9 — 3.1 Net assets acquired 7.0 The net assets recognised in the 31 October 2021 annual report were based on a provisional assessment of their fair value. The Group stated that if new information were obtained within one year of the date of acquisition about facts and circumstances that existed at the date of acquisition and identifies The Group has not identified any such information that therefore no changes were required to the accounting for the acquisition. subsidiary. None of the goodwill is expected to be deductible for tax purposes. The fair value of the trade receivables amounted to £0.3m. The gross amount of trade receivables were £0.3m and the full contractual amounts were collected. Q6 owns 80% of the issued shares of Vigil AI Limited (“Vigil AI”), which has technology providing state-of-the-art solutions to enable online platforms to detect imagery relating to child sexual exploitation globally. The Group has chosen to measure the non-controlling interests at the proportionate share of the value of net identifiable assets acquired. See page 159 for further detail. 29. RETIREMENT BENEFIT OBLIGATIONS In the UK, the Group operates a defined benefit scheme (the “Chemring Group Staff Pension Scheme”). The Group’s other UK and overseas pension benefit pension scheme that was closed in October 2022 and the liability transferred to an insurance company. The net deficit of the Chemring Nobel Scheme as at 31 October 2021 was £nil and as such was immaterial for disclosure in the prior year comparisons. The Chemring Group Staff Pension Scheme is a funded scheme and the assets of the scheme are held in a separate trustee administered fund. The scheme was closed to future accrual on 6 April 2012. A full actuarial valuation for the Scheme as at 6 April 2021 has been prepared and updated to 31 October 2022, using the projected unit credit method. The main assumptions for the scheme are detailed below. The surplus of the Chemring Group Staff Pension Scheme was Under the funding plan agreed with the trustees following the 2021 actuarial valuation, no further deficit recovery payments are required. The Company and the trustees monitor funding levels annually, and a new funding plan is agreed with the trustees every three years, based on actuarial valuations. The next actuarial valuation is due as at 6 April 2024 at which point funding requirements will be reassessed. The trust deed provides for an unconditional right to a return of surplus assets in the event of a plan wind-up. The trustees are given no rights to unilaterally wind up or augment the benefits due to members of the scheme. Based on these rights, any net surplus in the UK scheme is recognised in full. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 149 29. RETIREMENT BENEFIT OBLIGATIONS continued Defined benefit obligations Defined benefit asset Net defined benefit asset 2022 2021 2022 2021 2022 2021 £m £m £m £m £m £m At 1 November (90.9) (91.3) 104.6 98.9 13.7 7.6 Included in profit or loss Administrative expenses — — (0.3) (0.3) (0.3) (0.3) Net interest (cost)/credit (1.6) (1.5) 1.8 1.7 0.2 0.2 (1.6) (1.5) 1.5 1.4 (0.1) (0.1) Included in other comprehensive income – demographic and financial assumptions 29.9 (2.4) — — 29.9 (2.4) – experience adjustment (1.8) 0.9 — — (1.8) 0.9 – return on plan assets excluding interest income — — (30.4) 7.7 (30.4) 7.7 28.1 (1.5) (30.4) 7.7 (2.3) 6.2 Other Settlements 0.9 — (1.0) — (0.1) — Net benefits paid out 3.3 3.4 (3.3) (3.4) — — At 31 October (60.2) (90.9) 71.4 104.6 11.2 13.7 drawing benefits from the scheme and the balance were deferred members. The duration of the liability is long, with pension payments expected to be made 2022 2021 2022 2021 £m £m % % Equities — 18.4 — 17.6 Liability driven investment 25.3 24.7 35.4 23.6 Diversified alternatives 26.9 27.3 37.6 26.1 Multi-asset credit 7.8 23.3 10.9 22.3 Assets held by insurance company 1.1 1.5 1.5 1.4 Cash 10.3 9.4 14.6 9.0 71.4 104.6 100.0 100.0 Liability driven investments, diversified alternatives and multi-asset credit assets are either pooled or unpooled investment vehicles. Unpooled investment vehicles which are not quoted on active markets, have been valued at the latest available bid price or single price provided by the pooled investment manager. Where funds are valued weekly the value is taken as at the week ending immediately before or after the year end date. Shares in other pooled arrangements have been valued at the latest available net assets value, determined in accordance with fair value principles, provided by the pooled investment manager. The scheme’s assets are invested in accordance with the statement of investment principles after taking professional advice from the scheme’s investment advisers. The investment strategy is to split the assets into a growth portfolio of diversified assets and a matching portfolio of leveraged liability driven pooled funds. The scheme’s liability matching portfolio is invested in leveraged pooled liability driven investment (“LDI”) funds and a liquidity fund. The trustees target an interest rate and inflation hedge ratio of around 100% (based on the scheme’s technical provisions funding basis). As at 31 October 2022, the Group loaned £2.0m to the Chemring Group Staff Pension Scheme representing a short-term loan to fund margin calls on liability driven investments. This is included in the cash amount above and was repaid in November 2022. 2022 2021 % % Discount rate 4.9 1.8 Inflation – RPI 3.1 3.4 – CPI 2.7 2.7 Chemring Group PLC Annual report and accounts 2022150 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 29. RETIREMENT BENEFIT OBLIGATIONS continued In determining defined benefit obligations, the Group uses mortality assumptions which are based on published mortality tables. For the Chemring Group Staff Pension 2022 2021 Future pensioners – male 88.2 88.6 – female 90.4 90.6 Current pensioners – male 87.4 87.7 – female 89.0 89.2 While the vaccination programme has significantly reduced the number of deaths directly attributable to CV-19, the impact of the pandemic on future mortality rates remains uncertain. At this stage the Group has assumed CV-19 will have no lasting impact on mortality rates and that life expectancies will return to pre-pandemic expectations. We will continue to monitor and assess this at future reporting dates. The most significant assumptions in the pension valuation are the discount rate applied to the liabilities, the inflation rate to be applied to pension payments scheme would change by approximately £0.8m. A change in the rate of inflation by 0.1% is predicted to change the deficit by approximately £0.4m and a 10% change to the mortality assumption would change the deficit by approximately £1.7m. The principal risks to the scheme are that the investments do not perform as well as expected, the discount rate continues to rise driven by higher market interest rates, short-term movements in inflation, and the rate of improvement in mortality assumed is insufficient and life expectancies continue to rise. 30. CASH GENERATED FROM OPERATING ACTIVITIES 2022 2021 Notes £m £m Operating profit from continuing operations 53.3 50.4 Amortisation of development costs 11 0.1 0.6 Amortisation of intangible assets arising from business combinations 11 4.6 6.2 Amortisation of patents and licences 11 0.1 0.1 Impairment of development costs 2.2 — (Profit)/loss on disposal of non-current assets (1.9) 0.1 Depreciation of property, plant and equipment 12 18.1 18.2 Non-cash movement of non-underlying items 6.1 0.9 Share-based payment expense 27 6.4 5.3 Operating cash flows before movements in working capital 89.0 81.8 (Increase)/decrease in inventories (6.4) 7.9 Decrease in trade and other receivables 4.5 0.9 Increase/(decrease) in trade and other payables 2.9 (10.3) Increase/(decrease) in provisions 0.1 (0.3) Operating cash flow from continuing underlying operations 90.1 80.0 Discontinued operations Cash impact of non-underlying items from discontinued operations — (0.4) Net cash outflow from discontinued operating activities — (0.4) Net cash inflow from discontinued investing activities — 0.4 Net cash inflow from discontinued operations — — 31. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2022 2021 £m £m Increase/(decrease) in cash and cash equivalents 14.2 (9.6) Decrease in debt and lease financing due to cash flows 13.2 29.2 Decrease in net debt resulting from cash flows 27.4 19.6 Effect of foreign exchange rate changes (4.2) 2.7 New leases entered into, lease interest and other non-cash movements (3.5) (0.1) Amortisation of debt finance costs (0.3) (0.6) Movement in net debt 19.4 21.6 Net debt at the beginning of the year (26.6) (48.2) Net debt at the end of the year (7.2) (26.6) STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 151 32. ANALYSIS OF NET DEBT At At 1 November Non-cash Exchange 31 October 2021 Cash flows changes rate effects 2022 £m £m £m £m £m Cash and cash equivalents (including bank overdraft) 5.4 14.2 — 0.2 19.8 Debt due after one year (28.1) 11.0 (0.3) (3.5) (20.9) Preference shares (0.1) — — — (0.1) (22.8) 25.2 (0.3) (3.3) (1.2) Lease liabilities (3.8) 2.2 (3.5) (0.9) (6.0) (26.6) 27.4 (3.8) (4.2) (7.2) item in the above table. 33. CONTINGENT LIABILITIES course of business. COUNTERMEASURES UK INCIDENT On 10 August 2018 an incident occurred at our countermeasures facility in Salisbury. The Group responded immediately to support those who were injured, and maintains appropriate employers’ liability insurance that we expect will provide full compensation in due course. We continue to fully support the Health and Safety Executive (“HSE”) as it undertakes its investigation. Whilst provisions have been recorded for costs that have been identified (included within “legal provisions”), it is possible that additional uninsured costs and, depending on the outcome of the HSE investigation, financial penalties may be incurred. At this stage these costs are not anticipated to be material in the context of the Group’s financial statements. 34. RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions with the Group’s pension schemes are disclosed in note 29. As at 31 October 2022, £2.0m was due from the Chemring Group Staff Pension Scheme representing a short-term loan to fund margin calls on liability driven investments which was repaid in November 2022. The amount receivable has REMUNERATION OF KEY MANAGEMENT PERSONNEL The directors of the Company had no material transactions with the Company during the year, other than in connection with their service agreements. trends. The remuneration of the non-executive directors is determined by the Board, having regard to the practice of other companies and the particular demands of the Group. For the purposes of remuneration disclosure, key management personnel includes only the directors and excludes the other senior business managers and members of the Executive Committee. Further information on the remuneration of individual directors is provided in the audited part of the directors’ remuneration report on pages 96 to 119. 2022 2021 £m £m Short-term employee benefits 3.2 2.8 Post-employment benefits 0.2 0.2 Share-based payment benefits 2.4 1.7 Total remuneration of key management personnel 5.8 4.7 Chemring Group PLC Annual report and accounts 2022152 NOTES TO THE GROUP FINANCIAL STATEMENTS continued 35. EVENTS SINCE THE END OF THE YEAR (A) ACQUISITION OF GEOLLECT On 7 December 2022, Chemring Group PLC acquired 100% of the issued shares in Geollect Limited (“Geollect”). Geollect is an international provider of geospatial intelligence consultancy and subscription services. The acquisition has strong synergies to Roke and will expand the Group’s existing capabilities and product offerings. The acquisition has been completed for an initial cash consideration of £7.3m, funded from Chemring’s existing bank facilities. Further deferred consideration second and third anniversary of completion. Given the close proximity of the completion date of the transaction and the date of issuing the financial statements, the Group had not yet completed the accounting for the acquisition. The financial effects of this transaction have not been recognised at 31 October 2022. The operating results and assets and liabilities of the acquired company will be consolidated from 7 December 2022. Costs in relation to this acquisition for the year ended 31 October 2022 have been classified as non-underlying costs in the statement of profit or loss and are included within the acquisition costs of £2.0m, see note 3. A full provisional fair value exercise, completed in accordance with IFRS 3, is expected to be available for the Group’s interim financial statements to 30 April 2023. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 153 PARENT COMPANY BALANCE SHEET As at 31 October 2022 2022 2021 Note £m £m £m £m Non-current assets Property, plant and equipment 1 0.2 0.2 Investments in subsidiaries 2 766.6 786.6 Amounts owed by subsidiary undertakings 3 10.7 69.2 Retirement benefit surplus 12 5.8 7.2 Deferred tax 11 0.8 — 784.1 863.2 Current assets Trade and other receivables 3 23.2 5.1 Cash and cash equivalents — — 23.2 5.1 Total assets 807.3 868.3 Current liabilities Trade and other payables 4 (30.7) (11.1) (30.7) (11.1) Non-current liabilities Borrowings 5 (21.8) (42.5) Trade and other payables 4 (1.1) — Provisions 7 (8.2) (7.1) Deferred tax 11 — (0.9) Preference shares 8 (0.1) (0.1) (31.2) (50.6) Total liabilities (61.9) (61.7) Net assets 745.4 806.6 Equity Share capital 9 2.8 2.8 Share premium account 307.7 307.1 Special capital reserve 12.9 12.9 Retained earnings 422.0 483.8 Total equity 745.4 806.6 PROFIT ATTRIBUTABLE TO SHAREHOLDERS In accordance with the concession granted under section 408 of the Companies Act 2006, the profit and loss account of Chemring Group PLC has not been presented separately in these financial statements. There is no material difference between the results disclosed and the results on an unmodified historical cost These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on Signed on behalf of the Board Michael Ord Andrew Lewis Director Director Chemring Group PLC Annual report and accounts 2022154 For the year ended 31 October 2022 2022 2021 £m £m (Loss)/profit after tax attributable to equity holders of the parent as reported (45.1) 24.6 Items that will not be reclassified subsequently to profit and loss Remeasurement of the defined benefit pension scheme, net of deferred tax (0.9) 2.1 Total comprehensive (loss)/income attributable to the equity holders of the parent (46.0) 26.7 PARENT COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 October 2022 Share Special premium capital Retained Share capital account reserve earnings Total £m £m £m £m £m At 1 November 2021 2.8 307.1 12.9 483.8 806.6 Loss after tax — — — (45.1) (45.1) Other comprehensive loss — — — (0.9) (0.9) Total comprehensive loss — — — (46.0) (46.0) Ordinary shares issued — 0.6 — — 0.6 Share-based payments (net of settlement) — — — 5.6 5.6 Dividends paid — — — (14.4) (14.4) Purchase of shares by employee share ownership plan trust — — — (7.0) (7.0) At 31 October 2022 2.8 307.7 12.9 422.0 745.4 Share Special premium capital Retained Share capital account reserve earnings Own shares Total £m £m £m £m £m £m At 1 November 2020 2.8 306.7 12.9 474.3 (2.9) 793.8 Profit after tax — — — 24.6 — 24.6 Other comprehensive income — — — 2.1 — 2.1 Total comprehensive income — — — 26.7 — 26.7 Ordinary shares issued — 0.4 — — — 0.4 Share-based payments (net of settlement) — — — 4.7 — 4.7 Dividends paid — — — (11.9) — (11.9) Purchase of shares by employee share ownership plan trust — — — (7.1) — (7.1) Transactions in own shares — — — (2.9) 2.9 — At 31 October 2021 2.8 307.1 12.9 483.8 — 806.6 The auditor’s remuneration for audit and other services is disclosed in note 4 to the Group financial statements. A final dividend of 3.8p per ordinary share has been proposed. See note 8 to the Group financial statements. Included within retained earnings is the Company’s own shares held by the Group’s Employee Share Ownership Plan Trust (“ESOP”); see note 25 of the Group financial statements for details. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 155 1. PROPERTY, PLANT AND EQUIPMENT Detailed disclosure of property, plant and equipment was not considered necessary due to its immaterial value. The Company had no capital commitments as at 31 October 2022 or 31 October 2021. 2. INVESTMENTS IN SUBSIDIARIES Shares in subsidiary undertakings £m Cost At 31 October 2021 851.1 Additions 51.7 At 31 October 2022 902.8 Impairment At 31 October 2021 (64.5) Impairment (71.7) At 31 October 2022 (136.2) Carrying amount At 31 October 2022 766.6 At 31 October 2021 786.6 Investment values are allocated to their respective legal entities. Where the investment value relates to an intermediate holding company, the subsidiaries of that holding company are used to support the carrying value. During the year ended 31 October 2022, the additions of £51.7m represent a capital contribution to CHG Overseas Limited. During the year ended 31 October 2021, Chemring Group PLC acquired the Cubica Group for a cost of investment of £7.0m. See note 28 of the Group financial and £115.0m respectively. The Company tests investments at least annually for impairment. Tests are conducted more frequently if there are indications that investments might be impaired. The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the value-in-use calculations have been individually estimated for each CGU and are detailed in note 10 of the Group financial statements. During the year ended 31 October 2022, the Company concluded that the carrying value relating to CHG Overseas Limited was higher than its recoverable amount and therefore an impairment charge of £71.7m was recorded. The recoverable amount for CHG Overseas Limited was calculated using discount rates that have been adjusted for a premium specific to each of the CGUs to account for differences in currency risk, country risk and other factors affecting specific Stress testing was performed on the forecasts to consider the impact of reasonably possible worst case scenarios over the forecast period, including a 1% reduction in long-term growth rate, a 10% fall in the forecast cash flows or a $0.10 weakening in the GBP to US dollar exchange rate. A 1% increase in discount rate is the most sensitive assumption and would result in an additional impairment of £94.8m in CHG Overseas Limited being required. A $0.10 weakening in the GBP to US dollar exchange rate is the least sensitive assumption and would result in an additional impairment of £37.1m in CHG Overseas Limited being required. In determining the value in use, we have allocated central costs necessary to generate the underlying cash flows however there is judgement in this allocation. Had we increased the allocation by 10%, this would have resulted in an additional impairment of £10.4m in CHG Overseas Limited being required. Details of the Group undertakings at 31 October 2022 are set out in note 13 to the Group financial statements. The Company has given a parental guarantee under section 479A of the Companies Act 2006 to certain subsidiary undertakings, details of which are also set out in note 13 to the Group financial statements. The directors consider that the carrying value of the investments does not exceed their fair value. Chemring Group PLC Annual report and accounts 2022156 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued 3. TRADE AND OTHER RECEIVABLES 2022 2021 £m £m Within current assets Amounts owed by subsidiary undertakings 19.7 3.4 Derivative financial instruments (note 21 to the Group financial statements) 0.7 1.0 Prepayments and accrued income 0.8 0.7 Other debtor 2.0 — 23.2 5.1 Within non-current assets Amounts owed by subsidiary undertakings 10.7 69.2 10.7 69.2 The directors consider that the carrying value of the trade and other receivables approximates to their fair value. Interest on amounts owed by subsidiary undertakings is charged between 0% and 8.5%. No interest is charged on trade and other receivables from the date As at 31 October 2022, Chemring Group PLC loaned £2.0m to the Chemring Group Staff Pension Scheme to fund margin calls on liability driven investments, this is a related party transaction for further details refer to note 34. This short-term loan is included in Other debtors above and was repaid in November 2022. 4. TRADE AND OTHER PAYABLES 2022 2021 £m £m Within current liabilities Derivative financial instruments (note 21 to the Group financial statements) 4.1 0.4 Trade payables 0.5 0.2 Amounts owed to subsidiary undertakings 19.2 2.0 Other payables 6.8 8.2 Other tax and social security — 0.3 Accruals and deferred income 0.1 — 30.7 11.1 Within non-current liabilities Derivative financial instruments (note 21) 1.1 — 31.8 11.1 Interest on amounts owed to subsidiary undertakings attracts interest rates between 0% and 2%. No interest is payable on trade payables from the date of invoice to payment. 5. BORROWINGS 2022 2021 £m £m Borrowings due after more than one year Bank borrowings – US dollar denominated 20.9 28.0 Bank borrowings – sterling denominated 0.9 14.5 Total borrowings 21.8 42.5 2022 2021 £m £m – less than one year — — – within one to two years — — – within two to five years 21.8 42.5 21.8 42.5 The interest incurred on the above borrowings is detailed within notes 6 and 17 to the Group financial statements. Sterling denominated borrowings relate to stand-alone Company bank overdraft which carries interest at 1.2%. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 157 6. LEASES 7. PROVISIONS Total £m At 31 October 2021 7.1 Provided 1.6 Paid (0.5) At 31 October 2022 8.2 It is not possible to estimate more accurately the expected timing of any resulting outflows of economic benefits. Total provisions include legal provisions, which represent the estimated legal costs relating to ongoing investigations, and disposal provisions, which relate to estimated liabilities faced by the Company in respect of the disposal of its commoditised energetics businesses under the terms of their respective sale agreements. See note 22 to the Group financial statements for further details. 8. PREFERENCE SHARES 2022 2021 £m £m Cumulative preference shares (62,500 shares of £1 each) 0.1 0.1 The cumulative preference shares carry an entitlement to a dividend at the rate of 7p per share per annum, payable in equal instalments on 30 April and 31 October each year. Holders of the preference shares have the right on a winding-up to receive, in priority to any other classes of shares, the sum of £1 per share together with any arrears of dividends. 9. SHARE CAPITAL 2022 2021 £m £m Issued, allotted and fully paid 2.8 2.8 The preference shares are presented as a liability and accordingly are excluded from called-up share capital in the balance sheet. SHARE-BASED INCENTIVE SCHEMES Full details of the schemes are set out in note 27 to the Group financial statements. 10. OWN SHARES 2022 2021 £m £m At the beginning of the year — 2.9 Transactions — (2.9) At the end of the year — — The own shares reserve represents the cost of shares in the Company purchased in the market and held by the Group to satisfy awards under the Group’s 11. DEFERRED TAX 2022 2021 £m £m At the beginning of the year (0.9) (0.8) Credit to income statement 1.2 1.0 Credit/(charge) to other comprehensive income 0.5 (1.1) Deferred tax asset/(liability) at the end of the year 0.8 (0.9) The amount provided represents: Pension (2.0) (2.5) Other temporary differences 2.8 1.6 0.8 (0.9) Chemring Group PLC Annual report and accounts 2022158 12. PENSIONS Total £m At 31 October 2020, retirement benefit surplus 4.1 Contributions — Other finance costs (0.1) Actuarial movements 3.2 At 31 October 2021, retirement benefit surplus 7.2 Contributions — Other finance costs (0.1) Actuarial movements (1.3) At 31 October 2022, retirement benefit surplus 5.8 Further details are set out in note 29 to the Group financial statements. 13. STAFF COSTS 2022 2021 Number Number Average monthly number of total employees (including executive directors) 34 31 2022 2021 £m £m Wages and salaries 5.0 6.5 Social security costs 1.0 0.9 Other pension costs 0.6 0.6 Share-based payment 4.2 2.9 10.8 10.9 Disclosures in respect of directors’ emoluments can be found in the directors’ remuneration report on pages 96 to 119. NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 159 ACCOUNTING POLICIES 1. GENERAL INFORMATION Chemring Group PLC is a company incorporated in England and Wales under registration number 86662. The address of the registered office is Roke Manor, Old Salisbury Lane, Romsey, Hampshire, SO51 0ZN. The nature of the Group’s operations and its principal activities are set out in note 2 of the Group financial statements and in the directors’ report on pages 120 to 122. These financial statements are the consolidated financial statements of Chemring Group PLC and its subsidiaries (the “Group”). Chemring Group PLC and the companies in which it directly and indirectly owns investments are separate and distinct entities. In this publication of the annual report and accounts, the collective expressions “Chemring” and “the Group” may be used for convenience where reference is made in general to those companies. Likewise, the words “we”, “us”, “our” and “ourselves” are used in some places to refer to the subsidiaries of the Group in general. These expressions are also used where no useful purpose is served by identifying any particular company or companies. The financial statements are presented in pounds sterling, being the currency of the primary economic environment in which the Group operates, and rounded to the nearest £0.1m. Foreign operations are included in accordance with the foreign currencies accounting policy. GOING CONCERN The directors have, at the time of approving the financial statements, a reasonable expectation that the Group and the Company have adequate resources to continue to adopt the going concern basis of accounting in preparing these financial statements. Further detail is contained in the statement on going concern on page 74 which forms part of these financial statements. 2. ADOPTION OF NEW AND REVISED STANDARDS The following standards, amendments and interpretations have been issued i) There were no IFRS Interpretations Committee (“IFRIC”) interpretations, amendments to existing standards and new standards adopted in the year ended 31 October 2022 that have materially impacted the reported results or the financial position. ii) The following IFRIC interpretations, amendments to existing standards > Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16 Leases); and > Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16). iii) 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 EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2022 > Reference to the Conceptual Framework (Amendments to IFRS 3); > Property, Plant and Equipment – Proceeds before Intended Use (Amendments to IAS 16); > Onerous Contracts – Cost of Fulfilling a Contract (Amendments to > Annual Improvements to IFRS Standards 2018–2020. EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2023 > IFRS 17 Insurance Contracts; > Classification of Liabilities as Current or Non-Current (Amendments > Disclosure of Accounting Policies (Amendments to IAS 1 and > Definition of Accounting Estimates (Amendments to IAS 8); and > Deferred Tax related to Assets and Liabilities arising from a The directors do not expect the adoption of these standards and interpretations will have a material impact on the results of the Group in future periods. 3. GROUP ACCOUNTING POLICIES BASIS OF PREPARATION These financial statements have been prepared in accordance with UK-adopted international accounting standards (“UK-adopted IFRS”) in conformity with the requirements of the Companies Act 2006. The financial statements are prepared under the historical cost convention, except as described below under the heading of “Derivative financial instruments”. The accounting policies adopted have been applied consistently throughout the current and previous year. BASIS OF CONSOLIDATION its subsidiaries. Subsidiaries are entities controlled by the Group. The Group “controls” an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are The Company considers that it has the power to govern the financial and operating policies of the US entities falling within the Special Security Agreement and these entities have therefore been consolidated in these financial statements. The Company and all of its subsidiaries make up their financial statements are eliminated on consolidation. Non-controlling interest entity’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. For non-controlling interests that the Group holds, the Group elected acquired net identifiable assets. owns 80% of the issued shares of Vigil AI Limited. Disclosure of the minority interest on the face of the primary statements has not been included as this comprehensive income and equity attributable to minority interests were Chemring Group PLC Annual report and accounts 2022160 3. GROUP ACCOUNTING POLICIES continued REVENUE RECOGNITION Chemring is organised into two sectors, Sensors & Information and Countermeasures & Energetics. whole lifecycle of its products and services, these are generally awarded by its customers as individual contracts for the different stages rather than being large, complex, long-term framework agreements requiring extensive consideration of price allocation and performance obligations. As a result we are less Whilst as a Group we aim to develop products which can be sold on to multiple end users and markets, in some instances the nature of products and services are unique to a customer and may not have an alternative use at the point of production. In such cases, where an enforceable right to payment exists, revenue will be recognised over time. From time to time we enter into contracts for “customer-funded R&D” where Chemring provides a service towards the development of a technology for a customer resulting in revenue. In certain instances, Chemring partly funds the Contracts The majority of the Group’s revenue arises from the manufacture and shipment of goods. Sales contracts are reviewed for performance obligations but the typically based on Incoterms. Certain contracts may also require customer acceptance testing. Once the relevant delivery obligation has been met and, as The timing of payment from customers is generally aligned to revenue recognition, though on certain contracts advance receipts are received as disclosed in note 19. This also applies to sales where there are no goods shipped but a deliverable is completed at a certain point in time, such as the issue of a report where there is no enforceable right to payment for work in progress. In a smaller number of cases, revenue also arises from milestone contracts that contain multiple performance obligations. Often these contracts are already divided into milestones for payment purposes, but judgement is required when assessing the way the contract is divided up to ensure that each element is a separate and valid performance obligation. If they are not, the relevant revenue amount is allocated across the other obligations as appropriate. In some cases milestones are achieved in one period but not billed until the next period, leading to a timing difference with the recognition of revenue in advance of customer billing. In this instance accrued income is recognised as described in note 15. There are no contracts with a significant financing component. At the start of the contract, the total transaction price is estimated as exchange for transferring the promised goods and services to the customer, excluding sales taxes. This is based on the agreed contract price, with no material claims and incentive payment terms, and therefore significant judgement to determine the transaction price is not required. Typically our contracts do not have any material variable consideration and no significant judgement has been required around the extent to which this ought to be recognised. The total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative stand-alone selling prices, where stand-alone selling prices are typically estimated based on expected costs plus contract margin. The Group provides warranties to its customers to give them assurance that its products and services will function in line with agreed-upon specifications. separate performance obligations. customer has bought the goods but has not yet taken physical possession. This usually arises when the customer has limited storage space or there have been delays in their own production schedule. For such revenue to be recognised the bill and hold arrangement must be substantive and the relevant goods must be clearly identified as belonging to the customer and ready for immediate shipment at the customer’s request. These categories of sales are common across all segments. Qualifying costs to obtain a contract are not material across the Group. Sale of goods Revenue from the sale of goods is recognised when all of the following - the Group has identified a sales contract with a customer; - the performance obligations within this contract have been identified; - the transaction price has been determined; - this transaction price has been allocated to the performance obligations in the contract; and - Performance obligations are satisfied when the customer gains control of promised goods or services from the contract. Customers do not typically gain a right of return of goods. Rendering of services Revenue from a contract to provide services, including customer-funded research and development, is recognised by reference to the stage of completion of the contract. Stage of completion is typically estimated by or completion of relevant milestones where this faithfully depicts the transfer of control of the goods and services to the customer and does not significantly differ from using the proportion of contract costs incurred basis. Information segment, arises from time and materials contracts, where revenue is typically accrued and billed in the following month based on work Principal versus agent assessment The Group enters into certain arrangements which involve a consortium of service providers. The Group acts as a “Prime” contractor in certain contracts with customers and utilises sub-contractors to undertake the work. Under these contracts the Group is considered to be primarily responsible for fulfilling the service to the customer. The Group performs a technical assessment of the work before it is delivered to the customer and is responsible for quality and performance of the sub-contractor. As such the Group is considered to be the principal to the arrangement with the customer and includes sub-contractor costs within revenue. However, where the Group is merely acting as an agent of a sub-contractor then no revenue is recognised in respect of sub-contractor costs. All consortium arrangements are assessed by the Group to determine if it is the principal or agent considering who is responsible for fulfilling the performance obligation, who bears inventory risk and who has price discretion. ACCOUNTING POLICIES continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 161 3. GROUP ACCOUNTING POLICIES continued ACQUISITIONS AND DISPOSALS contingent liabilities of subsidiary undertakings that meet the IFRS 3 (Revised) Business Combinations recognition criteria are measured at the fair value at the - deferred tax assets or liabilities, and liabilities or assets relating to employee benefit arrangements, are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 (Revised) Employee Benefits respectively; - IFRS 2 Share-based Payments; and - assets (or disposal groups) that are classified as held for sale, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, are measured in accordance with that standard. Where cost exceeds fair value of the net assets acquired, the difference Where the fair value of the net assets exceeds the cost, the difference subsidiary undertakings are changed where necessary to be consistent with those of the Group. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as at the acquisition date that, if known, would have affected the amounts recognised as at that date. The measurement period runs from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as at the acquisition date, subject to a maximum period of one year. In accordance with IFRS 3 (Revised) Business Combinations, acquisition and disposal-related items are recognised through the income statement. Acquisition and disposal-related items refer to credits and costs associated with the acquisition and disposal of businesses, together with the costs of aborted bids and the establishment of joint ventures. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE When the Group makes a decision to exit a significant business unit or separate major line of business, the associated operations and cash flows are classified as discontinued operations in the financial statements, in accordance with the provisions of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. These discontinued operations may represent components of the Group that have already been disposed of or are classified as held for sale. Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sales transaction rather than continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify as a completed sale within one year from the date of classification. INTANGIBLE ASSETS – GOODWILL The purchased goodwill of the Group is regarded as having an indefinite Impairment of Assets, ACQUIRED INTANGIBLES The Group recognises, separately from goodwill, intangible assets that are separable or arise from contractual or other legal rights and whose fair value can be measured reliably. These intangible assets are amortised at rates calculated to write down their cost or valuation to their estimated residual values by - technology – average of ten years - customer relationships – average of ten years DEVELOPMENT COSTS Development costs that qualify as intangible assets are capitalised as incurred and, once the relevant intangible asset is ready for use, are amortised on a straight-line basis over their estimated useful lives, averaging ten years annually or when a trigger is identified. PATENTS AND LICENCES Patents and licences are measured initially at purchase cost and are amortised on a straight-line basis over their estimated useful lives, averaging seven years PROPERTY, PLANT AND EQUIPMENT Other than historically revalued land and buildings, property, plant and equipment is held at cost less accumulated depreciation and any recognised impairment loss. Borrowing costs on significant capital expenditure projects are capitalised and allocated to the cost of the project. No depreciation is provided on freehold land. On other assets, depreciation estimated residual values by equal instalments over their estimated useful - freehold buildings – up to fifty years - leasehold buildings – the period of the lease - plant and equipment – up to ten years IMPAIRMENT OF NON-CURRENT ASSETS Assets that have indefinite lives are allocated to the Group’s cash-generating units and tested for impairment at least annually. Assets that are subject changes in circumstances indicate that the carrying value may not be recoverable. To the extent that the carrying value exceeds the recoverable amount, an impairment loss is recorded for the difference as an expense in For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows. INVENTORIES Inventories are recorded at the lower of cost and net realisable value. Cost represents materials, direct labour, other direct costs and related overheads, and is determined using a weighted average cost basis. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and disposal. Provision is made for slow-moving, obsolete and defective items BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction All other borrowing costs are recognised in the income statement in the period in which they are incurred. Chemring Group PLC Annual report and accounts 2022162 3. GROUP ACCOUNTING POLICIES continued GOVERNMENT GRANTS Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants for staff retraining costs are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense. deferred income and released to the income statement over the expected useful economic lives of the assets concerned. TA X The tax expense represents the sum of current tax and deferred tax. Current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it excludes items of income or expense that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax represents amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable taxable profits will be available in the future against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except where it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they relate to income taxed by the same tax authority, and when the Group intends to settle its current tax assets and liabilities on a net basis. SPECIAL CAPITAL RESERVE The special capital reserve was created as part of a capital reduction scheme involving the cancellation of the share premium account which was approved by the Court in 1986, in accordance with the requirements of the Companies Act 1985. FOREIGN CURRENCIES The individual financial statements of each Group company are presented in its functional currency, being the currency of the primary economic environment in which it operates. For the purpose of these Group financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for these financial statements. In preparing the financial statements of each Group company, transactions in foreign currencies, being currencies other than the entity’s functional currency, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items and on In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward foreign exchange contracts which are accounted for as derivative financial instruments (see below for details of the Group’s accounting policies in respect of such derivative financial instruments). For the purpose of presenting these financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. FINANCIAL INSTRUMENTS Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. FINANCIAL ASSETS Trade receivables Trade receivables do not carry any interest and are stated at their fair value and amortised cost as reduced by appropriate allowances for expected Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS Financial liabilities Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. Bank borrowings Interest bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, and direct issue costs are accounted for on an accruals basis in the income statement using the effective interest method, and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. ACCOUNTING POLICIES continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 163 3. GROUP ACCOUNTING POLICIES continued FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS continued Trade payables Trade payables are not interest bearing and are stated at their fair value and amortised cost. Derivative financial instruments The Group’s activities expose it to the financial risks of foreign currency transactions, and it uses forward foreign exchange contracts to hedge its exposure to these transactional risks. The Group does not use derivative financial instruments for speculative purposes. Derivative financial instruments are recognised at fair value on the date the derivative contract is entered into and are revalued to fair value at each balance sheet date. The fair values of derivative financial instruments are calculated by external valuers. The Group does not apply hedge accounting for derivative financial instruments, with changes in the fair value of derivatives being recognised in the income statement immediately. Hedges of net investments in foreign operations Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the statement of comprehensive income and accumulated in the translation reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. RETIREMENT BENEFIT COSTS Payments to defined contribution retirement benefit schemes are charged as an administrative expense in the period to which they relate. For defined benefit schemes, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. Remeasurement of the defined benefit pension scheme, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised in the statement of comprehensive income in full in the period in which they occur. The Group determines the net interest income on the net defined benefit asset for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit asset, taking into account any changes in the net defined benefit asset during the year as a result of contributions and benefit payments. Net interest income and other expenses related to defined benefit plans are recognised in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme. LEASED ASSETS At the lease commencement date (i.e. the date the underlying asset is available for use), the Group recognises a right-of-use asset and a lease liability on the balance sheet. The lease liability is initially measured at the present value of future lease payments, discounted using the Group’s incremental borrowing rate. The right-of-use asset is initially measured at cost, comprising the initial value of the lease liability, any lease payments made before commencement of the lease, any initial direct costs and any restoration costs. The asset is recorded as property, plant and equipment, and is depreciated over the shorter of its estimated useful economic life and the lease term on a straight-line basis. The finance cost is charged to the income statement over the lease term to produce a constant periodic rate of interest on the lease liability. The lease payment is allocated between repayment of the lease liability and finance cost. The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in the income statement on a straight-line basis over the lease term. SHARE-BASED COMPENSATION The Group operates equity-settled share-based compensation schemes. For grants made under the Group’s share-based compensation schemes, the fair value of an award is measured at the date of grant and reflects any market-based vesting conditions. Non-market-based vesting conditions are excluded from the fair value of the award. At the date of grant, the Company estimates the number of awards expected to vest as a result of non-market- based vesting conditions, and the fair value of this estimated number of awards is recognised as an expense in the income statement on a straight-line basis over the vesting period. At each balance sheet date, the impact of any revision to vesting estimates is recognised in the income statement over the vesting period. Proceeds received, net of any directly attributable transaction costs, PROVISIONS Provisions are recognised when the Group has a present obligation, Group will be required to settle that obligation, and a reliable estimate can be the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the estimated cash flows to settle the present obligation, its carrying amount is the present value of those cash flows. The Group uses the “expected value” or “most likely outcome” method on a case-by-case bases to estimate the value of provisions. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Environmental provisions Where the Group is liable for decontamination work or the restoration of sites to their original condition, an estimate is made of the costs needed to complete these works, discounted back to present values, relying upon independent third party valuers where appropriate. Restructuring provisions A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement measurement of a restructuring provision includes only the direct expenditures arising from the restructuring and not those associated with the ongoing activities of the entity. Warranty provisions goods legislation are recognised at the date of sale of the relevant products, Group’s obligations. Disposal provisions of discontinued operations and other disposed entities under the terms of their respective sale agreements. Chemring Group PLC Annual report and accounts 2022164 3. GROUP ACCOUNTING POLICIES continued CONTINGENT LIABILITIES The Group exercises judgement in recognising exposures to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement may be necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and/or to quantify the possible range of the financial settlement. ALTERNATIVE PERFORMANCE MEASURES 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 metrics are presented which are also considered 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 The directors believe that the use of these APMs assists 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 - amortisation of acquired intangibles; - material exceptional items, for example relating to acquisitions and disposals, business restructuring costs and legal costs; - gains or losses on the movement in the fair value of derivative financial instruments; and - the tax impact of all of the above. The Group’s use of APMs is consistent and we provide comparatives alongside all current period figures. Further detail on the APMs presented within these financial statements, including a reconciliation to the IFRS equivalent, is presented in note 3. EXCEPTIONAL ITEMS Exceptional items are excluded from management’s assessment of profit because by their size or nature they need to be separately disclosed to properly understand the Group’s underlying quality of earnings. They are typically gains or losses arising from events that are not considered part of the core operations of the business. These items are excluded to reflect performance in a consistent manner and are in line with how the business is managed and measured on a day-to-day basis. POST-BALANCE SHEET EVENTS In accordance with IAS 10 Events after the Reporting Period, the Group 4. CHEMRING GROUP PLC – PARENT COMPANY FRS 101 REDUCED DISCLOSURE FRAMEWORK The financial statements have been prepared in accordance with UK accounting standards and applicable law, including FRS 101 Reduced Disclosure Framework. The Company operates a defined benefit scheme including employees of other Group companies (a Group plan). Following FRS 101, the scheme assets and liabilities have been allocated across the Group companies using a method that management considers to be the most appropriate, based on scheme membership, in accordance with the Group’s internal policy. The following exemptions from the requirements of IFRS have been applied in - share-based payments; - financial instruments; - fair value measurements; - IFRS 16 Leases (paragraphs 52 and 58); - presentation of comparative information in respect of certain assets; - IFRSs issued but not yet effective; - related party transactions; - assumptions and sensitivities for impairment review; and - cash flow. Investment in Group undertakings Investments are stated at cost less any provision for impairment in value. Critical accounting judgements and sources of estimation uncertainty There are no critical accounting judgements for the Company. The other Investments in subsidiaries impairment Determining whether investments in subsidiaries are impaired requires an estimation of the value-in-use of the legal entities to which the investments relate. Where the investment value relates to an intermediate holding company, the subsidiaries of that holding company are used to support the carrying value. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the legal entity, and to determine a suitable discount rate in order to calculate present value (see note 10). In reviewing the carrying value of investments in subsidiaries, the Board has considered 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. The total investments in subsidiaries is set out in note 2 of the parent company financial statements, which shows a carrying value of £766.6m at 31 October 2022. 5. ACCOUNTING JUDGEMENTS AND SOURCES OF 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. ACCOUNTING JUDGEMENTS Revenue recognition Following IFRS 15 Revenue from Contracts with Customers, the Group recognises revenue on the basis of the satisfaction of performance obligations. 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. In making its judgement about obligations that are satisfied at a point in time, management has to consider at what point control has passed to the customer, allowing revenue to be recognised. This is typically determined through a consideration of customer acceptance testing, stage of completion, contract terms and delivery arrangements. KEY SOURCES OF ESTIMATION UNCERTAINTY There are no key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. ACCOUNTING POLICIES continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 165 5. ACCOUNTING JUDGEMENTS AND SOURCES OF continued OTHER NON-SIGNIFICANT AREAS THAT INCLUDE A DEGREE While these areas do not present a significant risk resulting in a material Provisions The Group holds provisions where appropriate in respect of future economic respect of the outcome of future events. Estimates, judgements and assumptions are based on 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. Actual outflows of economic benefit may not occur as anticipated, and estimates may prove to be incorrect, leading to further charges or releases of provisions as circumstances change. The provisions held by the Group as at 31 October 2022 are set out in note 22. 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 (see note 10). In reviewing the carrying value of goodwill of the Group’s businesses, the Board has considered 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. The total goodwill intangible asset is set out in note 10, which shows a carrying value of £118.1m at 31 October 2022. Capitalised development costs impairment 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, for example Programs of Record for the US DoD. The total capitalised development intangible asset is set out in note 11, which shows a carrying value of £34.6m at 31 October 2022. Included in this balance are individually material balances relating to Joint Biological Tactical Detection System (£9.7m), Next Generation Chemical Detector (£16.5m) and Perceive (£5.6m). Taxation The Group operates in a number of countries around the world. Uncertainties exist in relation to the interpretation of complex tax legislation, changes in tax laws and the amount and timing of future taxable income. In some jurisdictions could necessitate future adjustments to taxable income and expense already recorded. At the year-end date, tax liabilities and assets are based on management’s best judgements around the application of the tax regulations and management’s estimate of the future amounts that will be settled. The Group’s operating model involves the cross-border supply of goods into end markets. There is a risk that different tax authorities could seek to assess At 31 October 2022 there was a provision of £3.5m in respect of uncertain tax positions. Due to the uncertainties noted above, there is a risk that the Group’s judgements are challenged, resulting in a different tax payable or recoverable from the amounts provided. Management estimates that the Deferred tax assets on tax losses and US interest deductions The category of deferred tax asset which contains significant estimation uncertainty and which requires management judgement in assessing its recoverability relates to US interest limitations and tax losses carried forward (see note 23). Applicable accounting standards permit the recognition of deferred tax assets available, or to the extent that the existing taxable temporary differences, of an appropriate type, reverse in an appropriate period 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. Defined benefit pension scheme Estimation is required in the determination of the discount rate and inflation assumptions underpinning the valuation of the liabilities of the Group’s defined benefit pension scheme. There is a range of possible values for each of the actuarial assumptions and small changes in assumptions may have a significant CLIMATE CHANGE In preparing the financial statements, we have considered the impact of climate change. As our climate risks (discussed earlier in the annual report) identified predominantly manifest in business interruption, the main areas effected from a financial perspective have been our impairment and going concern and viability assessments where we have ensured that these potential risks have been appropriately considered in forecast cash flows used. Chemring Group PLC Annual report and accounts 2022166 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC 1 OUR OPINION IS UNMODIFIED We have audited the financial statements of Chemring Group PLC consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated balance sheet, consolidated cash flow statement, parent company balance sheet, parent company statement of comprehensive income, parent company statement of changes in equity, and the related notes, including the - the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 October 2022 and of the Group’s profit for the year then ended; - the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards; - the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and - the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were first appointed as auditor by the directors on 23 March 2018. The period of total uninterrupted engagement is for the five financial years ended remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. Overview Materiality: Group financial statements as a whole non-underlying items Coverage continuing operations only Key audit matters vs 2021 Recurring risks Recoverability of parent company’s investments in subsidiaries New Recoverability of goodwill 2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and our findings from those procedures in order that the parent Company’s members, as a body, may better understand the process by which we arrived at our audit opinion. These matters were addressed, and our findings are based on procedures undertaken, in the context of, and solely for the purpose of, thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. RECOVERABILITY OF GOODWILL Refer to page 91 (Audit Committee report), page 161 (accounting policy) and pages 133 and 134 (financial disclosures). THE RISK Forecast based assessment A history of business combinations results in significant Group goodwill. We determined that the forecast future cash flows used in calculating the value in use of each CGU involves a degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The estimated recoverable amount of the Group is subjective due to inherent uncertainty involved in forecasting and discounting future cash flows for CGUs. Our response We performed the tests below rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures - accuracy of the cash flows, forecasting and building comparable variations the valuation; - - available analysts’ reports and peer comparison using input from our own valuation experts; - of reasonable downward changes to the assumptions noted above; - to the aggregate of the Group’s market capitalisation and the fair value of the net debt to assess the reasonableness of those cash flows; and - the estimation uncertainty related to the impairment assessment reflect the risks inherent in the valuation of goodwill. Our findings We found the Group’s conclusion that there is no impairment of Group goodwill to be balanced. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 167 2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT continued RECOVERABILITY OF PARENT COMPANY’S INVESTMENTS IN SUBSIDIARIES Refer to page 91 (Audit Committee report), page 164 (accounting policy) and page 155 (financial disclosures). THE RISK Forecast based assessment The carrying amount of the parent Company’s investments in subsidiaries are significant and at risk of irrecoverability due to changes in product demand and forecast cash flows. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. The effect of these matters is that, as part of our risk assessment, we determined that the recoverable amount of the cost of investment in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. Note 2 to the parent Company financial statements disclose the sensitivity estimated by the parent Company. Our response We performed the tests below rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures as - accuracy of the cash flows, forecasting and building comparable variations the valuation; - business understanding; - available analysts’ reports and peer comparison using input from our own valuation specialists; - - investments with the expected value of the business based on the Group’s market capitalisation and the fair value of the net debt; and - disclosures about the estimation uncertainty related to the impairment assessment reflect the risks inherent in the recoverability of the parent Company’s investments in subsidiaries. Our findings We found the balance of the parent Company’s investments in subsidiaries and conclusion that there is no impairment of its investments in subsidiaries to be balanced). We continue to perform procedures over revenue recognition from provision of services over time. However, following our risk assessment procedures in the current year, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately identified in our report this year. 3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW Materiality for the Group financial statements as a whole was set at £3.0m Group profit before tax, normalised to exclude non-underlying items as disclosed in note 3 to the group financial statements, of which it represents Materiality for the parent Company financial statements as a whole was set In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold of performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. this percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements that warranted reporting on qualitative grounds. related to reclassification. Of the Group’s fourteen reporting components, we subjected seven financially significant enough to require a full scope audit for Group purposes, but did present specific individual risks that needed to be addressed. We conducted reviews of financial information (including enquiry) at a further coverage over the Group’s results. Chemring Group PLC Annual report and accounts 2022168 87% 89% Group materiality NORMALISED PROFIT BEFORE TAX £62.5m (2021: £55.9m) GROUP MATERIALITY £3.0m (2021: £2.75m) £3.0m Whole financial statements £150k Misstatements reported to the Audit Committee £2.25m Whole financial statements performance materiality £1.9m Range of materiality at 10 components (£0.9m–£1.8m) Full scope for Group audit purposes 2022 procedures 2022 Residual components 2022 Full scope for Group audit purposes 2021 procedures 2021 Residual components 2021 GROUP REVENUE TOTAL PROFITS AND LOSSES THAT MADE UP GROUP PROFIT BEFORE TA X GROUP TOTAL ASSETS 85 78 73 79 7 11 14 10 82 3 79 6 85% 3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW OF THE SCOPE OF OUR AUDIT continued The components within the scope of our work accounted for the percentages illustrated opposite. of any of total Group revenue, total profits and losses that made up Group profit before tax or total Group assets. For these residual components, assessment that there were no significant risks of material misstatement The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, Company, was performed by the Group team. The Group team performed procedures on the items excluded from normalised Group profit before tax. conference meetings were also held with these component auditors and all others that were not physically visited. At these visits and meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. We were able to rely upon the Group’s internal control over financial reporting in several areas of our audit, where our controls testing supported this approach, which enabled us to reduce the scope of our substantive 4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT In planning our audit, we considered the potential impacts of climate THE CONTEXT OF CLIMATE CHANGE FOR THE GROUP Climate change impacts the Group in a variety of ways including the impact The Group’s exposure to climate change is primarily through the acquisition end products. As part of our audit we have made enquiries of management Group’s financial statements and the Group’s preparedness for this. The Group emits greenhouse gases directly from energy used in its production operations. As explained on page 42 of the Group’s annual report, the Group announced updated targets to reduce scope 1 and 2 carbon emissions to become carbon neutral by 2030 and then working towards being a net zero organisation by 2050. INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 169 4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT continued THE GROUP’S ASSESSMENT OF ACCOUNTING CONSEQUENCES IFRS requires the Group’s financial reporting to be based, amongst other things, on the Group’s best estimate of assumptions that are reasonable and supportable as at the date of reporting. Those assumptions may not align with the ways in which the global economy, society and government policies will need to change to meet the relevant targets. The Group has set carbon emission targets and estimated the incremental capital and operational expenditure required to deliver those targets. economic lives of its existing property, plant and equipment, and this does The Group has provided more detail on how they have considered OUR AUDIT RESPONSE Risk assessment procedures As part of our risk assessment procedures, we made enquiries, with the assistance of our sustainability specialists, of key members of management. Our enquiries focused on understanding the Group’s climate related strategy and identifying those areas where climate change could have a potential material impact on the financial statements. We did not identify the impact the Group’s operations and knowledge gained of its impact on significant accounting estimates and judgements during our risk assessment procedures and testing. Audit procedures in relation to Key Audit Matters We did not consider the impact of climate change to be significant to our audit response for the Key Audit Matters relating to recoverability of goodwill and the parent Company’s investments in subsidiaries. Other audit procedures During the course of our audit, we carried out the following additional - we considered the Group’s processes around climate change related disclosures in the Annual Report and read the disclosures in the Strategic Report and Directors’ Report and considered its consistency with the financial statements and our audit knowledge; and - we assessed the appropriateness of climate-related financial disclosures, including TCFD recommended disclosures. The audit procedures were performed principally by the Group engagement team with the support of our sustainability specialists. 5 GOING CONCERN The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the parent Company or to cease their operations, and as they have concluded that the Group’s and the parent Company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least concern period”). We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business model and analysed how those risks might affect the Group’s and parent Company’s financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group’s and parent Company’s available financial resources, EBITDA and net debt, and therefore - delays to significant revenue contracts; - manufacturing facilities safety incidents; and - the potential outcome of the provisions and contingent liabilities related to regulatory investigations. We considered whether these risks could plausibly affect the liquidity or covenant compliance in the going concern period by assessing the directors’ sensitivities over the level of available financial resources and covenant thresholds indicated by the Group’s financial forecasts taking account of severe, but plausible adverse effects that could arise from these risks individually and collectively. We also assessed completeness of the going concern disclosure. - we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; - we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group’s or parent Company’s ability to continue as a going concern for the going concern period; - we have nothing material to add or draw attention to in relation to the directors’ statement in note 1 to the accounting policies note on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and parent Company’s use of that basis for the going concern period, and we found the going concern - the related statement under the Listing Rules set out on page 74 is materially consistent with the financial statements and our audit knowledge. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group or the parent Company will continue in operation. 6 FRAUD AND BREACHES OF LAWS AND REGULATIONS – IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL MISSTATEMENT DUE TO FRAUD To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment - Enquiring of directors and internal audit and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Group’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud; - Reading Board, Audit Committee, Executive Committee, Remuneration Committee and Risk Committee meeting minutes; - Considering remuneration incentive schemes and performance - Using analytical procedures to identify any unusual or unexpected relationships; and - Using our own forensic specialists to assist us in identifying fraud risks based on discussions of the circumstances of the Group and parent Company. We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. This included communication from the Group audit team to full scope component audit teams of relevant fraud risks identified at the Group level and request to Chemring Group PLC Annual report and accounts 2022170 6 FRAUD AND BREACHES OF LAWS AND REGULATIONS – continued IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL MISSTATEMENT DUE TO FRAUD continued As required by auditing standards and taking into account possible pressures to meet profit targets, we perform procedures to address the risk of management override of control, in particular the risk that Group and component management may be in a position to make inappropriate accounting entries, and the risk of bias in accounting estimates and judgements such as provisions and pension assumptions. On this audit, we do not believe there is a fraud risk related to revenue recognition because there are no complexities or significant areas of estimation within the revenue recognition. We did not identify any additional fraud risks. - Identifying journal entries and other adjustments to test for all full scope components based on risk criteria and comparing the identified entries accounts; and - Assessing whether the judgements made in making significant accounting estimates are indicative of a potential bias. IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL MISSTATEMENT DUE TO NON-COMPLIANCE WITH LAWS We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, through discussion with the directors and legal correspondence and discussed with the directors the policies and procedures regarding compliance with laws and regulations. As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s procedures for complying with regulatory requirements. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group audit team to component audit teams of relevant laws and regulations identified at the Group level, and a request for component auditors to report to the Group team any instances misstatement at Group level. The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, taxation legislation laws and regulations as part of our procedures on the related financial statement items. Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have anti-bribery and corruption, recognising the regulated nature of the Group’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. For the Health and Safety Executive matter discussed in note 33, we assessed disclosures against our understanding from legal correspondence, including discussions held with the lawyers as well as inspection of relevant documentation. CONTEXT OF THE ABILITY OF THE AUDIT TO DETECT FRAUD Owing to the inherent limitations of an audit, there is an unavoidable risk statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations. 7 WE HAVE NOTHING TO REPORT ON THE OTHER INFORMATION IN THE ANNUAL REPORT The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. STRATEGIC REPORT AND DIRECTORS’ REPORT - we have not identified material misstatements in the strategic report and the directors’ report; - in our opinion the information given in those reports for the financial year is consistent with the financial statements; and - in our opinion those reports have been prepared in accordance with the Companies Act 2006. DIRECTORS’ REMUNERATION REPORT In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER- TERM VIABILITY We are required to perform procedures to identify whether there is a material inconsistency between the directors’ disclosures in respect of emerging and principal risks and the viability statement, and the financial statements and our audit knowledge. Based on those procedures, we have nothing material to add or draw - the directors’ confirmation, on page 65, that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; - the principal risks disclosures describing these risks and how emerging risks are identified, and explaining how they are being managed and mitigated; and INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 171 7 WE HAVE NOTHING TO REPORT ON THE OTHER INFORMATION IN THE ANNUAL REPORT continued DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER- TERM VIABILITY continued - the directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We are also required to review the viability statement, set out on page 74 under the Listing Rules. Based on the above procedures, we have concluded that the above disclosures are materially consistent with the financial statements and our audit knowledge. Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result statements is not a guarantee as to the Group’s and parent Company’s longer-term viability. CORPORATE GOVERNANCE DISCLOSURES We are required to perform procedures to identify whether there is a material inconsistency between the directors’ corporate governance disclosures and the financial statements and our audit knowledge. Based on those procedures, we have concluded that each of the following is - the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; - the section of the annual report describing the work of the Audit Committee, including the significant issues that the Audit Committee considered in relation to the financial statements, and how these issues - the section of the annual report that describes the review of the effectiveness of the Group’s risk management and internal control systems. We are required to review the part of the Corporate Governance Report relating to the Group’s compliance with the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in this respect. 8 WE HAVE NOTHING TO REPORT ON THE OTHER MATTERS Under the Companies Act 2006, we are required to report to you if, in - adequate accounting records have not been kept by the parent Company, - the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or - certain disclosures of directors’ remuneration specified by law are not - we have not received all the information and explanations we require for We have nothing to report in these respects. 9 RESPECTIVE RESPONSIBILITIES DIRECTORS’ RESPONSIBILITIES As explained more fully in their statement set out on page 122, the directors satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. The Company is required to include these financial statements in an annual financial report prepared using the single electronic reporting format specified in the TD ESEF Regulation. This auditor’s report provides no assurance over whether the annual financial report has been prepared in accordance with 10 THE PURPOSE OF OUR AUDIT WORK AND TO WHOM WE This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and the terms of our engagement by the Company. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report, and the further matters we are required to state to them in accordance with the terms agreed with the Company, 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 and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Andrew Campbell-Orde (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Gateway House Tollgate Chandlers Ford Southampton SO53 3TG 13 December 2022 Chemring Group PLC Annual report and accounts 2022172 FIVE-YEAR RECORD For the year ended 31 October 2022 2022 2021 2020 2019 2018 £m £m £m £m £m Revenue 442.8 393.3 402.5 335.2 297.4 Underlying operating profit 64.0 57.5 54.7 44.0 31.0 Non-underlying items (10.7) (7.1) (8.4) (12.7) (46.9) Operating profit/(loss) 53.3 50.4 46.3 31.3 (15.9) Finance expense (1.5) (1.6) (3.0) (4.6) (6.1) Profit/(loss) before taxation 51.8 48.8 43.3 26.7 (22.0) Taxation (4.4) (7.3) (8.6) (3.6) (18.8) Profit/(loss) for the year from continuing operations 47.4 41.5 34.7 23.1 (40.8) (Loss)/profit after tax from discontinued operations — — — (1.2) (65.0) Profit/(loss) attributable to equity shareholders 47.4 41.5 34.7 21.9 (105.8) Intangible assets and property, plant and equipment 395.4 351.5 348.9 329.9 318.9 Working capital 93.9 84.4 85.1 90.5 83.7 Provisions (18.4) (17.5) (19.0) (17.2) (20.7) Retirement benefit surplus 11.2 13.7 7.6 9.6 7.5 Net current and deferred tax liabilities (20.8) (24.5) (16.3) (8.5) (11.1) Net debt (7.2) (26.6) (48.2) (75.7) (81.8) Other (36.0) (28.2) (28.5) (22.8) (2.3) Net assets employed 418.1 352.8 329.6 305.8 294.2 Ordinary share capital 2.8 2.8 2.8 2.8 2.8 Reserves attributable to equity shareholders 307.7 350.0 326.8 303.0 291.4 Total equity 310.5 352.8 329.6 305.8 294.2 Basic underlying earnings per ordinary share (continuing operations) 20.2p 16.9p 15.1p 11.2p 6.9p Diluted underlying earnings per ordinary share (continuing operations) 19.7p 16.5p 14.8p 11.0p 6.7p Basic earnings/(loss) per ordinary share (continuing operations) 16.9p 14.7p 12.3p 8.2p (14.6)p Diluted earnings/(loss) per ordinary share (continuing operations) 16.4p 14.4p 12.0p 8.1p (14.6)p Dividend per share 5.7p 4.8p 3.9p 3.6p 3.3p STRATEGIC REPORT GOVERNANCE OTHER INFORMATION Chemring Group PLC Annual report and accounts 2022 173 CBP016288 Chemring’s commitment to environmental issues is reflected in this Annual Report, which has been printed on Galerie Satin, an FSC ® certified material. This document was printed by Park Communications using its environmental print technology, which minimises the impact of printing on the environment, with 99% of dry waste diverted from landfill. Both the printer and the paper mill are registered to ISO 14001. HEADQUARTERS AND REGISTERED OFFICE Roke Manor Old Salisbury Lane Romsey Hampshire SO51 0ZN T: +44 (0)1794 463401 F: +44 (0)1794 463374 E: [email protected] Website: www.chemring.com REGISTERED NUMBER 86662 REGISTRARS Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS13 8AE SUBSIDIARY UNDERTAKINGS’ REGISTERED OFFICES SUBSIDIARY UNDERTAKINGS IN ENGLAND: Roke Manor Old Salisbury Lane Romsey Hampshire SO51 0ZN SUBSIDIARY UNDERTAKING IN SCOTLAND: Troon House Ardeer Site Stevenston Ayrshire KA20 3LN SUBSIDIARY UNDERTAKINGS IN THE US: 23031 Ladbrook Drive Dulles Virginia 20166 SUBSIDIARY UNDERTAKING IN AUSTRALIA: 230 Staceys Road Lara Victoria Australia 3212 SUBSIDIARY UNDERTAKING IN NORWAY: Engeneveien 7 N-3475 Sætre Norway CORPORATE INFORMATION AND WEBSITE FIND OUT MORE ONLINE - Current share price - Key financial information - Financial calendar - Shareholder services and notices - Corporate governance - Results and presentations - Analysts’ forecasts - Regulatory news Chemring Group PLC’s 2022 annual report and accounts and the notice for the Annual General Meeting can also be viewed and downloaded at www.chemring.com/investors. © CHEMRING GROUP PLC 2022 The information in this document is the property of Chemring Group PLC and may not be copied or communicated to a third party or used for any purpose, other than that for which it is supplied, without the express written consent of Chemring Group PLC. This information is given in good faith based upon the latest information available to Chemring Group PLC; no warranty or representation is given concerning such information, which must not be taken as establishing any contractual or other commitment binding upon Chemring Group PLC or any of its subsidiary or associated companies. CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022 CHEMRING GROUP PLC Roke Manor Old Salisbury Lane Romsey Hampshire SO51 0ZN United Kingdom www.chemring.com CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022
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