## CONTINUING TO ## INNOVATE, PROTECT ## AND GROW CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022 ### CONTENTS STRATEGIC REPORT 01 2022 performance ### OUR PURPOSE 02 What we do Chemring helps make the world a safer place. Across physical and digital environments, our 04 Sustainability overview exceptional teams deliver innovative technologies and products that detect and defeat 06  ever-changing threats. 08 Investment case 10 Chairman’s statement Read more on pages 6 to 7 12 Market overview 14 Group Chief Executive’s review 18 Business model ### OUR STRATEGY 20 Section 172 statement To be a leading provider of critical and innovative technologies that detect and protect 21 Stakeholder engagement people, platforms, missions and information against constantly changing threats. 24 Strategy 26 Key performance indicators ### TARGET GROWING WINNING MARKET GROW OUR 30 Focus on Sensors & information ### NICHES SHARE  34 Focus on Countermeasures & energetics 37 Introduction to sustainability 40 Health and safety Read more on pages 24 to 25 42 Environment 45 Task Force on Climate-Related Financial Disclosures (“TCFD”) report ### 50  OUR ESG PILLARS 57 Ethics and business conduct The long-term success of the Chemring business can only be enhanced by a positive 59 Financial review interaction with all of our stakeholders, and therefore a positive and engaged approach 64 Risk management  66 Principal risks and uncertainties around the following key areas: 74 Viability statement and going concern 75 Non-financial information statement | | HEALTH AND | ENVIRONMENT PEOPLE ETHICS AND | | | --- | --- | --- | --- | | GOVERNANCE | SAFETY | |  | | 76 Chairman’s introduction to governance | | | CONDUCT | 78 Board of directors 80 Corporate governance report 90 Audit Committee report Read more on pages 37 to 58 94 Nomination Committee report 96 Directors’ remuneration report ### 120 Directors’ report OUR VALUES FINANCIAL STATEMENTS 123 Consolidated income statement 124 Consolidated statement of  ### SAFETY EXCELLENCE INNOVATION 125 Consolidated statement of changes in equity   We create world-class 126 Consolidated balance sheet | 127 Consolidated cash flow statement | of everything we do. | we consistently meet | solutions and develop | | --- | --- | --- | --- | | 128 Notes to the Group financial statements | |  | world-class thinking. | | 153 Parent company balance sheet | | we do. | | 154 Parent company statement of  Read more on page 19 154 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 DISCOVER MORE ABOUT CHEMRING AT 173 Corporate information and website CHEMRING.COM CONTINUING TO INNOVATE, PROTECT AND G ROW CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022 ### 2022 PERFORMANCE STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### FINANCIAL HIGHLIGHTS | REVENUE | CASH CONVERSION | UNDERLYING OPERATING | STATUTORY OPER ATING | | --- | --- | --- | --- | | | | PROFIT* | PROFIT | |  | 109% | | | | (+13%) (+7% at constant currency) | (2021: 105%) |  |  | | Increase in revenue at constant | Continued strong cash conversion, | (+11%) (+8% at constant currency) | (+6%) (+3% at constant currency) | | currency driven by strong | with an average of 108% on a | Reflects the growth of the | The difference to underlying | | performance at Roke and steady |  |  | operating profit reflects the | | growth in Countermeasures |  |  | amortisation of acquired intangible | |  | on working capital disciplines. |  | assets, acquisition expenses and loss | | | |  | on the movement in fair value of | | | |  | derivatives which are the only items |  ### UNDERLYING OPERATING PROFIT* | GROUP | | | SENSORS & INFORMATION | | COUNTERMEASURES & ENERGETICS | | | | --- | --- | --- | --- | --- | --- | --- | --- | |  | | |  | |  | | | | 2022 | | £64.0m | 2022 | £30.0m | 2022 | | £48.9m | | 2021 | £57.5m | | 2021 | £31.6m | 2021 | £40.0m | | | 2020 | £54.7m | | 2020 | £27.4m | 2020 | £39.9m | | | | | | Read more on pages 30 to 33 | | Read more on pages 34 to 36 | | | ### HIGHLIGHTS -  - Investment in the Group’s manufacturing infrastructure continues to   economic environment with the Countermeasures & Energetics margin improving from 16.2%  - Roke revenue exceeded £100m for the first time and with order intake of £168m, up 59%, is well positioned to continue its growth trajectory -   strong operating cash generation and cash conversion of 109%. Net debt to underlying EBITDA of 0.09 times - Post year-end acquisition of Geollect completed on 7 December 2022 -  -   driven by multi-year orders received across the sector -   ### 2023 OUTLOOK      refer to page 60 for further explanation. Chemring Group PLC Annual report and accounts 2022 01 ### WHAT WE DO ##  ##   ### At Chemring we create market-leading technology  ### solutions and develop world-class thinking to solve 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. UK EUROPE ### WHERE WE OPERATE  | substantial and enduring commitment to defence and national security. |  | 12% | | --- | --- | --- | | We also export our technology solutions to additional markets. The |  | In Europe, our Norwegian | | percentages represent the proportion of sales for that destination in the | benefit from the increased demand | business is experiencing ever | |  | for intelligence and cyber-security | greater demand for its niche | | | solutions signalled by the Integrated | speciality chemicals as customers | | | Review. We are also seeing | seek to strengthen their defence | | | accelerated demand for our | capabilities in response to Russia’s | | | Countermeasures & Energetics |  | capabilities resulting from the conflict in Eastern Europe. US ASIA PACIFIC ## 50%   Regional instabilities, capability upgrades and technology advancements   underpinned by a Special Security Agreement (“SSA”) that enables us to business positions us to contribute towards meeting the defence  requirements of Australia and other countries in the region.  relatively good visibility for future earnings as we respond to the customer’s modernisation priorities. Chemring Group PLC Annual report and accounts 202202 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### CHEMRING IS ORGANISED INTO TWO STRATEGIC SECTORS © Crown copyright ### SENSORS & INFORMATION COUNTERMEASURES & ENERGETICS Innovation is core to solving our clients’ difficult problems. Chemring is the world leader in the design, development and manufacture  With over 700 scientists, engineers and consultants, our Sensors & Information platforms against the growing threat of guided missiles. sector continues to invest in technologies that safeguard and protect in an uncertain world. We combine a deep understanding of platform signatures, missile seekers    domains, we enable our clients to deliver competitive advantage, defend their people, assets and information, and defeat their adversaries.  devices that perform critical functions for the space, aerospace, defence and  industrial markets. confidence, be they explosive, biological, chemical, radio or cyber. Every day, our products, services and experts assist customers, including  NASA and SpaceX, to achieve mission success. This ranges from cutting-edge communications, cyber and artificial intelligence to innovate and apply technology to enable our customers to launch rockets and satellites into orbit, these technologies in new ways. to the provision of aircraft safety systems including oxygen mask deployment We operate across the whole lifecycle providing advice, R&D, engineering, on commercial aircraft and ejector seats for aircrew egress. design and in-service support for our products and services. | REVENUE | REVENUE | | --- | --- | |  | £280.5m | |  |  | | UNDERLYING OPERATING PROFIT | UNDERLYING OPERATING PROFIT | |  |  | |  |  | | 2022 | | £30.0m | 2022 | | £48.9m | | --- | --- | --- | --- | --- | --- | | 2021 | | £31.6m | 2021 | £40.0m | | | 2020 | £27.4m | | 2020 | £39.9m | | Chemring Group PLC Annual report and accounts 2022 03 ###  ##  ##  At Chemring we acknowledge and embrace our collective responsibility Improving our sustainability performance plays a key role in the way in 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 goals are now directly linked to targets for remuneration and reward across  our leadership teams. protect our planet and our people, support our customers and their critical We also recognise that our ESG credentials are an increasingly important needs, and that we have a positive impact on the communities in which 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  HEALTH AND SAFETY ENVIRONMENT - Control of major accident hazards - Emission reduction - Injury prevention - Waste generation and hazardous materials management - HSE risk management - Energy usage -  - Water consumption Read more on pages 40 to 41 Read more on pages 42 to 49 ### MAKING THE ### WORLD A SAFER | PEOPLE | PLACE |  | | --- | --- | --- | | - Culture | | -  | | - Diversity and inclusion | | - Compliance oversight and risk management | | - Employee wellbeing and engagement | | - Whistleblowing | | - Employee learning and development | | - Anti-bribery and corruption | | Read more on pages 50 to 56 | | Read more on pages 57 to 58 |  it includes our planet and broader society and is underpinned by our values and behaviours. VALUES SAFETY EXCELLENCE INNOVATION We place safety at the heart We are focused on ensuring we consistently We create world-class solutions and of everything we do meet high standards in all that we do develop world-class thinking Chemring Group PLC Annual report and accounts 202204 As of 2022, Chemring Group PLC received an MSCI ESG Rating of AAA.* STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### PROGRESS IN 2022 Chemring’s purpose is to help make the world a safer place and Russia’s It has been another busy year in which we have built on the good progress   and security industry plays in preserving peace, democracy and freedom in  the western world. It has reinforced the argument that for sustainability to areas where our activities can have most impact. Plans are now in place to thrive, it requires global stability at its foundations. We are proud of the role continue this journey and to ensure that we meet the growing disclosure that Chemring plays in providing that stability and are equally focused on requirements of our stakeholders and demonstrate our ability to successfully ensuring that we manage and progress our own sustainability agenda, and address ESG-related issues.  ### ESG HIGHLIGHTS HEALTH AND SAFETY ENVIRONMENT Total recordable injury frequency rate 0.78 (2021: 0.67) 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  PEOPLE  100% of our senior leaders have participated in diversity, equity   Continued implementation of Chemring Compliance Portal   development programme which started in November 2021 * The use by Chemring Group PLC of any MSCI ESG research LLC or its affiliates DISCOVER MORE ABOUT SUSTAINABILITY: (“MSCI”) data, and the use of MSCI logos, trademarks, service marks or index CHEMRING.COM/SUSTAINABILITY/COMMITTED-TO-A-  SUSTAINABLE-FUTURE  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. Chemring Group PLC Annual report and accounts 2022 05 ### OUR PURPOSE IN ACTION ##  ##  ###  ###  ###  ###  ### national security and commercial operations in ###  Journey to Journey to Zero Harm Zero Harm Stop slips and trips Be prepared for emergencies Emergencies can occur in any location Slips and trips are the most and it’s important to know what to do in common cause of injury at case you experience an emergency. work, causing over a third What to do in an emergency: ### of all major injuries. Stop • Know your site’s plan SAFETY slips and trips by: • Know your evacuation route • Having routine and • Keep calm responsive cleaning • Follow evacuation procedures CONTINUING OUR JOURNEY TO ZERO HARM • Cleaning up spillages quickly • Use stairwells for evacuation, not the • Stop people walking elevators, and hold on to handrails   • Look out for trip actions to reduce the likelihood of anyone getting hurt by focusing hazards  strengthen our assets’ integrity. For process, we are investing in Young Artist: Viola, aged 7 Young artist: Charles, aged 10   SP T IT ST P IT SHARE IT SP T IT ST P IT SHARE IT   Journey to Journey to Zero Harm Zero Harm SPOT IT, STOP IT, SHARE IT Manual handling Common causes Last year, we launched a new internal campaign called Spot it, Stop it, Manual handling includes lifting, lowering, pushing, pulling and carrying. If any of of accidents Share it, encouraging our colleagues to step up their focus on these tasks are not carried out appropriately there is a risk of injury. Prevent injuries by: Look out for these common causes of accidents and injuries. Always think  reporting unsafe conditions, behaviours and near misses. Following up • Not twisting, stooping and overreaching • Slips, trips and falls • Falls from a height  those near miss reports with corrective actions is essential, and that is • Injured while handling, lifting or carrying • Personal health & wellbeing • Assess the weight to be carried • Struck by a moving object where leadership and the health and safety teams on site make a real Be careful when lifting 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 Young artist: Vaughn, aged 7 Young artist: Amber, aged 15  SP T IT ST P IT SHARE IT SP T IT ST P IT SHARE IT  Chemring Group PLC Annual report and accounts 202206 ### OUR PURPOSE IN ACTION ##  ##  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### EXCELLENCE INNOVATION COGSWELL AWARD FOR AN EXCEPTIONAL HELPING TO ADDRESS UK’S TECHNICAL SKILLS GAP   Chemring Sensors & Electronic Systems (“CSES”) was awarded a Earlier this year, the Roke Academy was launched as part of    candidates to their intensive six-month programme, the Ignite (“DCSA”) can bestow on a cleared defence contractor. It was 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 National Industrial Security Program (“NISP”), only the top 0.5% are  selected to receive a Cogswell Award. benefiting those already qualified for hire. This creates an alternate, fully inclusive pathway into employment for those that might With this award, CSES was recognised for establishing and otherwise have faced barriers to entry.  requirements, demonstrates a commitment to excellence and 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     Chemring Group PLC Annual report and accounts 2022 07 ### INVESTMENT CASE ##  ##  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, intellectual property, niche technology and high 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.  MAJOR INTERNATIONAL PROGRAMMES STRONG GROWTH IN ROKE’S NATIONAL Against the background of growing defence Chemring is exposed to a substantial pipeline of SECURITY AND DEFENCE MARKETS  major international programmes that have the Roke’s consulting, technology and R&D service Chemring is well positioned in niche segments potential to deliver strong long-term growth. activities are experiencing strong growth, driven   principally by information security for the national   security and defence markets. and having technologies and products to address These include the Group’s global market-leading The Group’s capabilities are well aligned to  positions on airborne and naval countermeasures,  hazard detection, chemical detection and biological advanced sensors, Electronic Warfare and  detection – increasingly relevant in a post- software engineering. We are also well placed to intelligence, data science, autonomy and Electronic pandemic world. benefit from growth in the space segment where Warfare (“EW”). This validates our Sensors & we are a key supplier of mission critical specialist As Cyber and Electromagnetic Activity (“CEMA”) Information sector strategy, and should increase devices to customers including NASA and SpaceX. becomes increasingly important in today’s threat the opportunity space for Roke to deploy its environment, and as a consequence of Russia’s market-leading technologies. The Group’s strong order book provides good  medium-term visibility. A significant proportion    Roke’s capabilities and offerings, both through products in the international market.  acquisitions and opportunities in adjacent markets partnering agreements. Market-leading positions, We are seeing growing customer enquiries for and territories. incumbent supplier status and high barriers to Roke’s suite of world-leading Electronic Warfare entry position Chemring well for the future. products and are supporting ongoing customer  orders from this potentially significant market. Chemring Group PLC Annual report and accounts 202208 m) £651m £501m £476m £449m £394m STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS FY22FY21FY20FY19FY18 |  |  | PROVEN MANAGEMENT | | --- | --- | --- | | Since 2019 the Group has communicated certain | Chemring has a robust balance sheet and strong |  | | medium-term financial objectives, which have been | ongoing operating cash generation, providing a | Chemring’s executive management team has | | rolled forward at each set of results. These included: | platform for future investment in the business, | significant sector experience, with a proven track | | | both organic and inorganic, and sustainable, | record of business restructuring, strategic | - Targeting mid-teen return on sales in the growing dividend payments. investment and the delivery of profitable growth. medium term. Margins have progressed from The team continues to manage delivering both  organic and inorganic growth, balancing near-term - 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    DISCOVER MORE ABOUT INVESTING: CHEMRING.COM/ Chemring is focused on building a financially INVESTORS sustainable and robust Group. These actions provide strong foundations for future growth. Chemring Group PLC Annual report and accounts 2022 09 ### CHAIRMAN’S STATEMENT ##  The Countermeasures & Energetics sector strategy is to strengthen and Carl-Peter Forster protect our niche, world-leading positions. We will seek to continuously improve our technological and operational base, and work closely with our Chairman 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 ## “ I   sectors. Both areas, which play to the Group’s high technology skillsets, offer significant opportunities for long-term growth. ###  stakeholders despite the numerous challenges 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 INTRODUCTION At Chemring our goal is zero harm. This goes beyond the management of The past year has seen a number of ongoing challenges, and opportunities 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, Europe. These have resulted in changing defence priorities, increasingly from employee wellbeing to climate change. competitive global markets and a business environment that is seeing supply chain interruption, increased energy costs and a shortage of labour availability. 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 Despite these challenges the Group has again delivered a robust performance 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 long-term sustainable value creation through safe, sound and ethical business therefore remains one of the core values within Chemring and is central to conduct at all times has ensured that we have met our customers’ critical our operating philosophy. A key part of our health, safety and environmental needs whilst performing to the highest standards. None of this would be (“HSE”) strategy is the collation and analysis of data at every level to focus on possible without the commitment and dedication of our people and on behalf the underlying causes of incidents and the impact of our operations. This of the Board I wish to acknowledge and thank them for their professionalism facilitates appropriate decision making at all levels of our organisation. and support. Through the use of enhanced risk assessment techniques, supported by the  roll-out of common asset integrity and electro-static discharge review industry plays in preserving peace and democracy in the western world, and programmes, we continue to focus on the control of residual risks within our that for sustainability to thrive, it requires global stability at its foundations. It high-hazard processes. 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 In addition, we have extended our current data platform to better assess the global defence market predicted to show strong growth over the next environmental impacts of our operations and performance against the targets decade I believe that Chemring is well placed to continue delivering both that were set in 2021 in support of our wider ESG commitment. Improving organic and inorganic growth, balancing near-term performance with our sustainability performance plays a key role in the way we both run our long-term value creation. businesses today, and how we plan for the future. Further details on this can be found in the sustainability section of this report. STRATEGY The Group’s strategy is to deliver sustainable, profitable growth by operating Whilst consolidating in a calculative culture we are also keen to ensure in markets where we have differentiators such as intellectual property, niche learning is transferred to the relevant parts of the organisation, accelerating technology, high barriers to entry and deep long-term customer relationships. our continuous improvement cycle. To date good progress has been maintained on our journey to become a proactive organisation. We will achieve this by continuing to focus our efforts and investment on Read more on pages 40 to 49 those areas of the defence and security market where we see increasing customer budgets. PEOPLE AND OUR COMMUNITY The Sensors & Information sector remains Chemring’s principal area of focus Chemring people are at the heart of our business and are our greatest asset. for long-term growth reflecting increasing customer demand and one where Engaged, motivated, empowered and appropriately skilled colleagues are we can capitalise on the opportunity presented by our customers’ pivot integral to our success as it is through them that we will progress our strategy towards the acquisition of high technology capabilities. We will expand the and deliver long-term growth. 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 Chemring Group PLC Annual report and accounts 202210 In 2022 we continued to develop Chemring’s culture with actions delivered STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 Further details on the Committee’s activities during the year can be found on each business unit by providing early leadership and skills development. page 57 of this report. Listening to our colleagues is a key pillar of our approach to developing the Good governance and ethical behaviour underpin our evolving sustainability Chemring culture. As the non-executive director with responsibility for agenda and ensure that we operate safely, responsibly and in compliance employee engagement on behalf of the Board and as Chair of the  Remuneration Committee, Laurie Bowen again met with groups of colleagues DIVIDENDS across Chemring to hear their experiences of working at Chemring. These sessions also provide the opportunity for Laurie to share with colleagues the The Board continues to recognise that dividends are an important work of the Board. This year these groups included colleagues at all levels component of total shareholder returns. The Board’s objective is for a from operators to the senior leadership teams at Chemring Countermeasures growing and sustainable dividend and continues to target a medium-term in Toone, Tennessee, and at Chemring Energetic Devices in Downers Grove, dividend cover of c.2.5 times underlying EPS, subject inter alia to maintaining Illinois. The groups Laurie met were very positive about their experiences   The Board is recommending a final dividend in respect of the year ended activities and events now possible since the easing of CV-19 restrictions.   dividend of 1.9p per share (2021: 1.6p), this results in a total dividend of 5.7p 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 CURRENT TRADING AND OUTLOOK governance and ethics across the Group, ensuring that we have the necessary Trading since the start of the current financial year has been in line with policies and procedures in place to enable the business to operate with    have a greater bias towards the second half of the financial year as a result of     of the Group, its subsidiary Chemring Technology Solutions Limited and   cover, which provides excellent visibility for the full year. followed a voluntary report by the Group. Chemring has co-operated fully  With market-leading innovative technologies and services that are critical to now closed, with no fines paid or payable. our customers, together with the flexibility provided by the Group’s strong balance sheet, the Board is confident that Chemring will continue to deliver Chemring remains committed to conducting its business in an ethical and both organic and inorganic growth, balancing near-term performance with responsible manner at all times, and in full compliance with all applicable laws long-term value creation. Chemring’s long-term prospects remain strong. and regulations. We will continue to strengthen our policies and procedures to ensure that the Group’s governance remain fit for purpose.  Carl-Peter Forster Framework, both of which bind our purpose, values, behaviour, policies and Chairman 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  Chemring Group PLC Annual report and accounts 2022 11 ### MARKET OVERVIEW ##   ### Chemring is an international technology company,  ###    competition in the region, with a consequent shift away from counter-insurgency doctrines and capabilities. ### geopolitical and technology trends are rapidly  ###   ###    priorities were already geared toward great power competition before  ### accelerated NATO expansion. OUR CHALLENGES AND OPPORTUNITIES   increasing its investment and action to strengthen its position towards an  assertive China with its own extensive defence and military modernisation capability enablers and R&D can create opportunities for us to deploy programmes. Alongside the high-intensity, kinematic, conflict between Russia Group-wide capabilities and technologies particularly in the customer  priorities of space, hypersonic technology, EW, sensors, biotechnology,  artificial intelligence (“AI”), cyber and quantum computing. continue to be prevalent. The Group’s diverse and niche capabilities make     countermeasures suite supports our leadership position in this capability area. LINK TO STRATEGY  1 2 3 ### UNITED STATES ### UNITED KINGDOM TOTAL SPEND 2021  TOTAL SPEND | 2020 | | |  | | | | | --- | --- | --- | --- | --- | --- | --- | | | | | | 2021 | |  | | 2019 | |  | | | | | | | | | | 2020 |  | | | 2018 |  | | | | | | | | | | | 2019 |  | | Source SIPRI 2018  OUR POSITION Source SIPRI  infra-red (“IR”) pyrotechnic decoys that protect airborne and naval assets from OUR POSITION   the design, development and manufacture of precision engineered devices for  distinct aerospace and defence applications including space and missiles. communications, cyber and AI, for national security and defence customers We are also the largest provider of advanced chemical and biological sensors     naval forces from the threat posed by guided missiles, through the design,  development and supply of radio frequency (“RF”) and IR pyrotechnic decoys, electronic warfare (“EW”) requirements with growing budgets.  MARKET TRENDS assembly, testing and through-life support of advanced energetic products for  defence, security and commercial markets.    activities at the Department of Energy, the Federal Bureau of Investigation and other agencies. Chemring Group PLC Annual report and accounts 202212 MARKET TRENDS MARKET TRENDS 2021’s “Integrated Review of Security, Defence, Development and Foreign  Policy”, and the accompanying “Defence Command Paper” and the “Defence geostrategic landscape, with Sweden and Finland formally set to end decades and Security Industrial Strategy”, outline how national advantage through   other European countries that are presently outside the alliance.  Significant growth in European defence budgets is also being signalled, with has been allocated to defence, with this allocation being part of a multi-year countries looking to make increased capital investments to deter and protect settlement to invest in pioneering technology in areas such as cyber, AI, 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 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 The Netherlands have indicated they will follow suit in the near term. and sustain a “Digital Backbone” that will be part of underpinning armed France has announced it will review its Loi de Programmation (“Programming forces modernisation. An investment of some £500m will be made in Cyber 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 capabilities in this environment, with £200m also provided over ten years 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 long-term defence investment as part of adapting to a more competitive and The medium-term outlook for the European market is positive, and several riskier world. opportunities for our niche capabilities can be anticipated. Against the new OUR CHALLENGES AND OPPORTUNITIES geostrategic backdrop, the Group will continue to support the requirements  of European allied nations.   LINK TO STRATEGY  1 1 2 significance as new capability priorities mature. The enhanced focus on S&T, AI, data science and autonomy as set out in the ### AUSTRALIA 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  1 1 2 OUR POSITION ### EUROPE 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 % of Chemring’s global sales (2018 – 2022) counter-hypersonic, EW, innovation, and information sharing capabilities,   security and stability.   OUR CHALLENGES AND OPPORTUNITIES Europe 12%  Group is well placed to respond to relevant opportunities resulting from the Asia Pacific 6%    LINK TO STRATEGY  1 1 2 ##  ###  ###  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.  US President 5 April 2022 Chemring Group PLC Annual report and accounts 2022 13 ### GROUP CHIEF EXECUTIVE’S REVIEW ##  ##  From an ESG perspective 2022 has seen us make further progress as we Michael Ord 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  ## negotiate numerous near-term challenges technology to remove our employees from exposure to energetic hazards. ## and the Group remains well placed to 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 INTRODUCTION as the rigour of process hazard analysis matured. As a result of this maturing The Group has delivered another year of good growth in 2022. 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  Government budget until the middle of March 2022. 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 The current geopolitical uncertainty, brought about by both Russia’s invasion leadership, clear expectations, accountability and establishing a safety culture   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 This year we consolidated our corporate reporting platform to capture again hugely grateful to all my colleagues across Chemring. The response of better understanding of root causes and increased levels of assurance. These our people and their families has been outstanding and this team effort has additional data points will help our continued focus on becoming a learning delivered results that exceeded our expectations at the start of the year. organisation. This data has established trends regarding musculoskeletal disorders due to the manual handling nature of some of our processes In response to the current threat environment, defence spending is expected together with cuts to fingers and hands. The relevant businesses have to rise and with it we can expect to see strengthening demand for the developed plans to reduce the risk of injuries and it is expected that this    drive greater co-operation and alignment between allies. In particular, the  increased importance that is being placed on Cyber and EW, information Safe delivery of our business continues through the management of risk and advantage, intelligent networks and multi-domain integration, is expected to  maintain and accelerate demand for Roke’s market-leading technologies.  HSE policy into practice by setting standards on eight core elements across The Group is well positioned with a robust strategy and a relentless focus 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 At Chemring our purpose is to help make the world a safer place, delivering  innovative technologies and products that detect and defeat ever-changing Statement process have helped the businesses focus on strengthening their  processes within the HSE framework requirement, which in turn provides embraces many different stakeholders including our people and our suppliers,  and it recognises the need for us to contribute towards a sustainable future.  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. Chemring Group PLC Annual report and accounts 202214 REVENUE +13% ![img-0.jpeg](img-0.jpeg) We measure our overall HBI performance to reflect both occupational safety and process safety. In doing this we have multiple data points, one of which is an external independent review of our safety culture. This year saw the third review since 2018 by a team of specialist consultants from global subject matter experts, SRH. The review, which was based on progress made since 2018 and 2019, has highlighted good progress as we journey towards becoming a high reliability organisation. In particular the review confirmed our businesses as approaching a Group-wide calculative status with robust 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 time from the top and underpinned by risk-informed, visible and proactive safety leadership. # ENVIRONMENT In 2022 we achieved a 7.3% carbon reduction in both scope 1 and 2 emissions as part of our ongoing commitment to becoming Carbon Neutral by 2030. A key challenge for the Group's Sustainability Committee is to manage our ESG-related risks – balancing both the near and longer-term targets that were set in FY25, with the need to continually kick for ways in which we can improve further. FY22 sees the Group report for the first time under the Task Force on Climate-related Financial Disclosures ("TDFD"). In addition, the Group has committed to further improve its non-mandatory disclosure and in July 2022 completed its first GDP submission. By translating the TDFD recommendations and pillars into actual disclosure questions and a standardised annual format, GDP provides investors and disclosers with a unique platform where the TDFD 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 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. Cheming 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 D&B 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 Cheming Committee has been established to encourage local women's networks in each business unit alongside delivering a global day for Women at Cheming in the second half of the year. # 2022 PERFORMANCE It is pleasing to report a strong set of results for the financial year despite a number of operational and market headwinds. This performance, which was ahead of the Board's expectations at the start of the year, demonstrated NUMBER OF ENERGETIC EVENTS CAUSING HARM OR INJURY Nil 2022 0 2021 continued progress against our strategic goal of balancing short-term performance with longer-term value creation. Revenue was up 13% to £442.8m (2021: £399.3m), underlying operating profit was up 11% to £64.0m (2021: £575m) and statutory profit before tax was up 6% to £51.8m (2021: £498m). Underlying earnings per share was up 30% to 20.2p (2021: 16.9p). The underlying operating profit from continuing operations of £64.0m (2021: £575m) resulted in an underlying operating margin of 14.5% (2021: 14.6%), achieving the mid-term 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 in Roke Academy, Roke Futures and Roke USA. In the UK, the markets for EW, Cyber and data science capabilities, in which 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 39% 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 Sergio Framework contract with the UK Government. It will develop the next generation of phased array radar technologies to address the challenges associated with hyper-sonic missile defence. In the last four years successful execution of its strategy has seen Roke double in size. Its headcount has increased from c.400 at the end of 2018 to over 800 today, driven in part by the success of its graduate and apprenticeship schemes, which saw 71 new papers in September 2022. Building on the 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 Cobra business units to create Roke Futures, which will sit alongside the National Security and Defence business units. In doing so, it has brought together its market-leading skill sets in Consulting, Intelligent Sensing, Situational Awareness and Autonomy. It will focus on building world-class capabilities and the development of new intellectual property and unique technologies in support of customers in UK Central Government & Law Enforcement, Aerospace, Digital Health and Energy markets. The acquisition of Geollect Limited in December 2022 creates further opportunities for Cheming to enhance and further accelerate growth in its Roke business. With demand for open source intelligence ("OSINT") and 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 The range of investment in research, research projects through advanced research and innovation in urban design and development # DIVIDENDS The growing value distribution is a key part of total shareholder growth. The CAPEX has a long-term improvement skyline, a range of 24.5 times underlying the market year, and a much better a strong financial position. # MERGERS AND ACQUISITIONS Financial Services & Information to particular Aided technology for large scale investments to accelerate growth and unlock the development # SHARE BUY BACK Financial Services and Information to investment sectors for several countries in the production, long-term business Cheming Group PLC Annual report and accounts 2022 15 Financial Services and Information to Investment Sectors for several countries in the production, long-term business ### GROUP CHIEF EXECUTIVE’S REVIEW continued 2022 PERFORMANCE continued Production continued as expected on the Husky Mounted Detection System The acquisition will enable Roke to build on its Intelligence as a Service (“Roke (“HMDS”) program with customer deliveries on schedule throughout the IaaS”) proposition by utilising the intelligence gathering and analysis capabilities year. Following a delay in the placement of the annual delivery order, expected of Geollect, and enhancing their already impressive processing capabilities     The strategic goal for Roke is to continue to focus on growth across all its realigning its budget priorities from a focus on counter-insurgency operations    re-alignment of DoD funding priorities and our expectations are that the   EW orders from this potentially significant market. We continue to invest in 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. clearance. This investment has allowed us to support ongoing customer  demonstrations and field trials. Customer feedback remains very positive expanding the Group’s product, service and capability offerings in the areas albeit anticipated follow-on orders have been delayed as a result of budget    March 2022. 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 and full rate production, and on exploiting a growing opportunity in further bolt-on acquisitions. bio-security and surveillance. In a post-pandemic and contested world,  governments are becoming increasingly concerned by the risks of both continue strengthening and protecting our niche, world-leading positions naturally occurring and engineered biological threats. Advances in synthetic  biology now give our national adversaries the capability to deliberately working closely with our customers in the development of new solutions engineer organisms to create hazards and cause harm.  Chemring’s experience and expertise in fielding biological agent detectors   Partnering Arrangement (“SPA”) with the Royal Air Force, Defence which to pursue opportunities in existing and adjacent markets, such as Equipment & Support (“DE&S”) and the Defence Science and Technology homeland security. Chemring continues to invest in its Mobius R&D project, Laboratory (“DSTL”), to ensure long-term provision of optimum air platform which aims to develop a deployable and cost-effective solution for the protection, including the exploitation of current capabilities and the identification of biological threats. development of new technology. This ten-year SPA will provide a framework     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 such decoy technology available to a wide range of allies and partner nations, and outdoor environments. Chemring’s technology dramatically shortens the increasing survivability of aircraft and aircrew. time taken to identify the bio-threat, which is critical to rapidly implementing The investment in the expansion and automation of our Tennessee facility to an effective response. Chemring’s product is also considerably less expensive meet the expected demand for airborne countermeasures continued during to procure and operate than current equipment, thus allowing the customer  to afford greater unit coverage while remaining within their budget. saw the commissioning process progress through characterisation and testing  as production gradually ramped up. We expect customer First Article testing 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     launched its passenger spacecraft, CST-100 Starliner, to the International  Space Station (“ISS”). Chemring provided various mission-critical components      Development (“EMD”) phase and we are now working with the customer  The future focus for the Countermeasures & Energetics sector remains on Production (“LRIP”) and Full Rate Production (“FRP”) thereafter. The next 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 The Aerosol and Vapor Chemical Agent Detector (“AVCAD”) program has manufacturing capabilities and developing new products and technologies. now completed its EMD phase. The next customer procurement decision  contractors currently selected for this competitive program. Chemring Group PLC Annual report and accounts 202216 DISCOVER MORE ABOUT   STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS         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 WOMEN’S 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, Inclusivity Network (WIN@Chemring) day. Celebrated across at the right time, with the right skills working in a safe, healthy and inclusive Chemring, the day was an opportunity to raise awareness of the environment. We continue to invest in our people at all levels across every issues surrounding gender diversity in the workplace. It was also a location and function creating strong foundations for our future success. day to celebrate some of the great things going on locally across the business in support of and organised by the women of Chemring.  Excellence and Innovation, continued throughout 2022 and is firmly embedded The network is all about building a community locally while sharing  great ideas and knowledge across the Group. The intention of this Local Accent supports year-on-year progress and we continue to focus 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 2022 saw the gradual easing of the pandemic restrictions in every geography. to leave a legacy that continues far beyond the September event. 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 These networks form part of the established strategy and framework around  DE&I at Chemring which started in 2021 with a programme of ensuring colleagues to reconnect face to face. Whilst I have been incredibly impressed corporate and personal awareness of the importance of a diverse population, at how the whole business has been able to embrace remote working an inclusive culture and systems that help support equality and drive equity. protocols and virtual interactions, there is no substitute for face-to-face The programme of workshops put in place for all our senior leaders and discussions to further both our approach to operational excellence and to managers in 2021 continued across 2022 and was extended to include 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 business goals and to ensure that we continue to invest in our people. understand how colleagues are feeling and where we need to focus. Participation with the tool and positivity towards the key cultural themes CONCLUSION continue to show improvements throughout 2022 despite the challenges Despite a challenging macro-economic environment, I am delighted with   of the business unit leadership teams in ensuring each business provides a Group as we build a stronger, higher quality and technology focused business. positive and engaging workplace. 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 Making sure that we have an appropriately diverse pool of talent within innovative protective technologies to help make the world a safer place.  across 2022. 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 This year has seen both formal and informal networking groups developing not have been possible without their collective efforts.  with shared characteristics or interests and complement the more formal With market-leading technologies and services that are critical to our customers, work we are doing around education and awareness of diversity and inclusion. our niche market positions and our strong balance sheet, I look to the future Notably in 2022 every business has established a Women’s Network to with excitement and confidence in our continued success. 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 Michael Ord future success of female colleagues.   Chemring Group PLC Annual report and accounts 2022 17 ###  ##  ###  ###  ### WHAT WE DO KEY STRENGTHS INVEST IN PEOPLE, PROCESSES EMPLOYEES   We have a highly skilled and knowledgeable We maintain close relationships and Chemring is a technology business workforce operating in specialist capability areas.   Their expertise is critical to us delivering  worldwide. We invest in our future by innovative solutions to our customers’ challenges. developing the capabilities of our people, maintaining safe and efficient operations CUSTOMER RELATIONSHIPS FACILITIES and developing next-generation solutions to meet our customers’ current and We enjoy long-term, high quality relationships We are investing in the resilience of our facilities, emerging needs. with defence and intelligence customers in the including increasing automation to deliver our member countries of the multilateral “Five Eyes” products safely, securely and efficiently.    We operate in niche segments of the relationships in selected other markets where international defence and security market.    advanced and dependable technology C T U D H solutions to meet our customers’ needs, N E O A C L T and we continually look for new growth S I N F O S & R M H S O R A E S T I A opportunities to deploy our capabilities. N O I N S E N N In Countermeasures & Energetics, we S D U B S  F E T A S A Y D F countermeasures, through our leading E N T A Y technology and manufacturing position. S  C I  H T N V E S T I performance and superiority of our E products. In Sensors & Information,  multiple technologies to develop INNOVATING differentiated solutions for meeting ever D  more demanding customer requirements. E I L N E N I I V C N E W N DELIVER SOLUTIONS O R E V L We focus on providing innovative and A L T E I C competitive solutions that meet our O X N E customer needs efficiently and on time.  T investments, we also invest in continuous N P C E E O improvement – a key element of O S M U C P N I N minimising the cycle time from order T T L E E O E R R G R M E I  E A E N V S U R E S & N E     Chemring Group PLC Annual report and accounts 202218 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### OUR VALUES OUTCOMES  ### STAKEHOLDER VALUE SAFETY INVESTMENT CUSTOMERS We place safety at the heart of   everything we do.  contractors and other commercial businesses.   - We ensure we operate safely and £69.7m was customer-funded. The capacity   expansion project at the Tennessee - We promote best safety practices across countermeasures site continues to progress on our operations and beyond. schedule and, excluding significant investments such INVESTORS - We are committed to ensuring we as this, we aim for investment to at least match We return money to our shareholders through minimise our impact on the environment. depreciation and amortisation each year. dividends and, through successfully executing our strategy, we grow the value of their investment INVESTMENT over time. ## £118.2m | | (2021: £88.9m) | EMPLOYEES | | --- | --- | --- | | EXCELLENCE | | The skills and experience of our employees | | We are focused on ensuring we | |  | | | CASH FLOW | commitments. We provide development | consistently meet high standards in all that we do. We aim to convert 100% of underlying EBITDA opportunities and a safe, stimulating and rewarding underlying operating cash flow over the medium working environment for all of our people. - A culture of continuous improvement term, accepting that timing differences will arise at  individual period ends. In 2022, the conversion | - We act to ensure that we maintain | ratio was 109%, reflecting strong operating cash | SUPPLIERS | | --- | --- | --- | |  | generation and the continued focus on managing | We form strong relationships with our suppliers | | - We always deliver on our promises. | working capital. | who partner with us to deliver innovative solutions | and are supported consequently through our UNDERLYING CASH CONVERSION procurement of their goods and services. ## 109% (2021: 105%) COMMUNITIES INNOVATION We make a positive contribution to the We create world-class solutions and communities where our people live and work develop world-class thinking. DIVIDENDS   economic prosperity through providing high - We inspire imaginative solutions. | |  |  | | --- | --- | --- | | - We work together to turn ideas into | 19% on the prior year, subject to the approval of | | | technologies and solutions. | the final dividend at the Annual General Meeting. | | | - We value collaboration and | | GOVERNMENTS | DIVIDENDS  Through paying taxes in the jurisdictions in which we operate, we support the development of public Read more about our sustainability ## 5.7p on pages 37 to 39 infrastructure and services such as healthcare, (+19%) transport systems, policing and education. Read more about our stakeholders on pages 21 to 23 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 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 In discharging our section 172 duties the directors have regard to the factors the way they consider, in good faith, would most likely promote the success set out above and any other factors which we consider relevant to the of the company for the benefit of its members as a whole. In doing so, 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 - likely consequences of any decision in the long term;  - interests of the company’s employees; Further details on how the Board operates and reflects stakeholder views in - need to foster the company’s business relationships with suppliers, its decision making are set out in the corporate governance report on pages customers and others; 80 to 89. Further information on how the Board has had regard to section - impact of the company’s operations on the community and environment; 172 matters during the year can also be found in the following sections of the - desirability of the company maintaining a reputation for high standards annual report:  - need to act fairly as between members of the company. SECTION 172 FACTOR KEY EXAMPLES PAGE CONSEQUENCES OF ANY DECISION IN THE -  6 LONG TERM | - Investment case | 8 | | --- | --- | | - Business model | 18 | | - Market overview | 12 | | - Strategy |  | | INTERESTS OF EMPLOYEES -  | | 6 | | --- | --- | --- | | | - Stakeholder engagement | 21 | | | - Health and safety |  | | | -  | 50 |  - Business model 18 SUPPLIERS, CUSTOMERS AND OTHERS | - Stakeholder engagement | 21 | | --- | --- | | - Market overview | 12 | | - Strategy |  | | - Ethics and business conduct | 57 | IMPACT OF OPERATIONS ON THE - Introduction to sustainability  COMMUNITY AND THE ENVIRONMENT | - Health and safety |  | | --- | --- | | - Environment |  | | -  | 50 | MAINTAINING HIGH STANDARDS OF - Ethics and business conduct 57  - Corporate governance report 80 |  - Investment case | | 8 | | --- | --- | --- | | | - Stakeholder engagement | 21 | | | - Corporate governance report | 80 | Chemring Group PLC Annual report and accounts 202220 ### STAKEHOLDER ENGAGEMENT The Board recognises that positive interaction and collaboration with all of We engage with a wide range of stakeholders at the Board level, at a Group STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS our stakeholders is essential to the delivery of sustainable long-term value. level and within our business units. In understanding what matters to our Effective engagement allows the Board to understand relevant stakeholder stakeholders we are able to take this into account when setting our strategy views on material issues which may impact the business and helps to inform and also in planning our day-to-day business operations. The table below sets the Board’s decision making. out how we engage with our key stakeholders. ### CUSTOMERS EMPLOYEES WHY WE ENGAGE WHY WE ENGAGE Ensuring that we provide innovative solutions that meet our customers’   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 meetings, teaming arrangements and engagement at all levels of our - Regular all-hands meetings and team briefings customers’ organisations - Works councils, trade unions, representative bodies and forums which - Partnering with customers on a broad range of technology and product support and connect people with shared characteristics or interests development programmes -  - Participating in industry forums and working groups, and hosting customer employees to provide immediate and anonymous feedback on visits to our sites developments within the business - Attending and exhibiting at selected trade shows, which enables high-level - Publication of a monthly video blog by the Group Chief Executive, interaction and the opportunity to brief customers on key product  developments and other initiatives - 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  -  our businesses through regular interactions with senior customer  representatives, and provide feedback to the Board - Monthly reporting to the Board on health and safety matters - External market updates and customer views are obtained to support the -  Board’s strategy review 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 - Site visits enable the Board to develop a deeper understanding of our and at different levels of the organisation products, technical capabilities and customer requirements - Board engagement with a wide range of employees during collective and individual site visits throughout the year HOW WE MONITOR - Nomination Committee reviews diversity initiatives, senior leadership succession plans and talent development programmes -  - R&D expenditure - Capital investment HOW WE MONITOR - Process safety events - Employee Voice participation and positivity scores - Safety performance indicators - Diversity statistics OUTCOMES -  - Customer-focused inputs into the Group strategy - External ESG ratings - Innovation and investment driven by customer requirements - Collaborative, strategic customer relationships - Improved customer satisfaction OUTCOMES - Development of people strategy and related investment - Safe, healthy and motivated workforce LINK TO STRATEGY 1 2 3 - Focus on diversity and inclusion - Improved employee retention - Attractive proposition for potential new employees LINK TO STRATEGY 1 1 3 Chemring Group PLC Annual report and accounts 2022 21 ### STAKEHOLDER ENGAGEMENT continued ### SUPPLIERS SHAREHOLDERS WHY WE ENGAGE WHY WE ENGAGE We rely on our suppliers to provide us with quality raw materials, products The continued support of our shareholders is something that we value and services. Constructive engagement ensures that our suppliers are able to greatly. We therefore recognise the importance of providing all of our meet our high expectations on safety, quality, value, delivery performance and shareholders with regular updates on the Group’s operational and financial ethical business conduct. We recognise that prompt payment terms and performance, strategy and future prospects, and ensuring that shareholder strong supplier relationships are important in building a long-term, sustainable views are taken into consideration in relation to major developments in and supportive supply chain.    - Day-to-day interaction with suppliers is conducted largely by supply chain - Engagement with shareholders predominantly led by the Group Chief management teams within our businesses  Affairs - Long-term agreements are entered into with our key suppliers, which  - Publication of our interim and full year results statements, along with  regular trading updates throughout the year -  - Sustainability Report published on our website the standards of ethical business conduct we expect of them - 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 - Business continuity and supply chain dependency reviews included within  the internal audit programme -  -   Compliance Committee receive notification of corporate updates -   HOW WE MONITOR - Board receives feedback collated by our brokers and other financial advisers - Payments made within payment terms from our institutional investors, in which their views can be expressed on a - Statistics on issue of the Supplier Code of Conduct and inclusion non-attributable basis  -   - The Chairman, the Senior Independent Director and Chair of the OUTCOMES Remuneration Committee meet with shareholders to discuss - Collaborative, long-term relationships  - Delivery of safe and reliable products and services to customers - Appropriate working capital management HOW WE MONITOR - Earnings per share LINK TO STRATEGY 1 1 3 - 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 1 2 3 Chemring Group PLC Annual report and accounts 202222 ### COMMUNITIES AND THE ENVIRONMENT  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS WHY WE ENGAGE 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 ensure that we maintain our licences to operate and continue to run our initiatives and charitable causes. Equally, our businesses take pride in the businesses in full compliance with all laws and regulations. We also need to 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 operations in future. the impact of our business on wider society and our responsibility to contribute to a sustainable future for all.  - Maintenance of a regular dialogue with contacts within governments and   -  -  selected charitable causes with a focus on the military and armed services, - Consultation with local governing bodies on planned business developments STEM-related initiatives and those linked to the local communities in which and investments our businesses operate -    - In addition to making cash donations, we also encourage and support -   the associated assurance processes ensures our businesses are meeting -  governmental and regulatory requirements initiatives and as a business we have relationships with several universities, -  whereby funding is provided for students’ research activities assurance to the Board that the business is operating in accordance with our - Sponsorship through the Horizons Bursary Scheme run by the Institution of Special Security Agreement Engineering and Technology, which provides financial support during degree study for students who have faced or continue to face adversity whilst they HOW WE MONITOR study; these students are all studying STEM degree courses which are relevant to the disciplines required within Chemring - Compliance statistics - Implementation of environmental and carbon reduction initiatives - Safety-related capital investment  OUTCOMES - Development of ESG strategy, objectives and targets subject to - Ethical and compliant business conduct  - Trusted supplier to government customers - Sustainability Committee, chaired by the Group Chief Executive, reports - Government support for proposed acquisitions regularly to the Board on ESG-related matters - Sustainable business operations - ESG-related targets included in the annual bonus plan and performance  LINK TO STRATEGY 1 1 3 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 Chemring Group PLC Annual report and accounts 2022 23 ### STRATEGY ##  At Chemring, our purpose strategy  vision, and guides the choices that we will make as a company. We will continue 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 1. Target growing segments  2. Win market share 3. Grow our US business ### 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   ### 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. Chemring Group PLC Annual report and accounts 202224 # STRATEGY IN ACTION In the UK we are building on our established Program of Record 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 our president-registered donors for use in space and mixed applications and are employing additional opportunities to complement organic growth. In the UK we have a strong pipeline of both organic and inorganic growth opportunities for Rose – focused in particular on developing the businesses in its core specialise areas of AI machine learning, data science and autonomy. # STRATEGY IN ACTION The investment in the US manufacturing operations for our Countermeasures & Energetics sector will improve quality through remote operations, improve quality through automation and deliver the exclusion capacity required for non-generation farm production. Elsewhere, we are seeing strong opportunities that support significant growth for Cherning Energetic Devices. The Chicago business' precision engineered invites being critical to achieving mission success for increasing customer activities, tracking space and mobile assets. # STRATEGY IN ACTION In Countermeasures & Energetics we continue to take a plan to our approach to our countermeasures activities. While the boundaries of security classifications, we share conventional, spectral and electronic farm capabilities and processes developed in this UK and Australia with our US operations and accommodating the benefits of these capabilities to the US customer. In Sensors & Information we have established a new sales and engineering office for KJ44 USA, third staff with the resource security awareness unit between a number of essential strategic trials of our land B/V products to a number of desired US customer stakeholders. ORDER BOOK £651m ![img-1.jpeg](img-1.jpeg) ORDER INTAKE £551m ![img-2.jpeg](img-2.jpeg) REVENUE £443m ![img-3.jpeg](img-3.jpeg) Cherning Group PLC Annual report and accounts 2022 15 2022/07/20 10:00 AM ### 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 | | | 2 | | | 3 | | | 4 | 5 | 6 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |  | | |  | | |  | | | ORDER INTAKE |  | REVENUE | | EVENTS CAUSING HARM | | |  | | |  | | |  |  |  | |  | | | HAZARD REPORTS | | | FREQUENCY RATE | | | | | | | | | | | | | | | | £551m | £651m |  | | | | | | | | | | |  | (2021: £501m) |  | | Nil | | |  | | | 17 | | | | | | | (2021: 2) | | |  | | |  | | | | | | | | | | | | | | | | SENSORS & INFORMATION | SENSORS & INFORMATION | SENSORS & INFORMATION | | 2022 | 0 | | 2022 | | 4,036 | 2022 | | 17 | | | | | 2021 | | 2 | 2021 | 3,518 | | 2021 | 14 | | | | | R ATE ## 0.78 COUNTERMEASURES COUNTERMEASURES COUNTERMEASURES & ENERGETICS & ENERGETICS & ENERGETICS (2021: 0.67) | | | | 2022 | | 0.78 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | 2021 | 0.67 | | | | | | DESCRIPTION | Number of energetic events causing | Number of near miss and potential | Number of recordable injuries per | | |  |  | Revenue is measured at sales value less any | | | harm or injury. | hazards reported. | 200,000 man hours worked. | | | and represents the last 12 months’ activity. | and indicates future potential. | applicable sales taxes. | | WHY IS IT A KPI? | A process safety event is one of the | This indicates employee awareness of | This is the rate for all injuries including | | | The trend of order intake gives an indication of | The level of order book, in particular for delivery | The trend of revenue gives an indication of both | | | key strategic safety risks of the | hazards and the greater the reporting | medical treatment, restricted workday | | | market conditions and our competitiveness within | in the next year, gives a degree of confidence in | the state of the end market and our business’s | | | business. This indicator measures | the more engaged our people are. | and lost time injuries. It is a more | | | our markets. | expected future financial performance. | ability to execute orders on time to satisfy | | | those events that have caused injury | | sensitive indicator of occupational | | | | | customer needs. | | | or harm. | | safety than lost time injury frequency | | | | | | rates, as more minor events  | 2022 PERFORMANCE |  | As we journey towards our goal of | We had 17 employee injuries this |  | Group revenue was in line with our expectations, | | --- | --- | --- | --- | --- | --- | | | injuries associated with energetic | zero harm we need a workforce that |  | seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services | with strong performance at Roke, steady growth | | | events compared to two last year. | is fully engaged and proactive in | resulted in a slight increase in our |  | in Countermeasures & Energetics and a foreign | | | Since 2010 the only other time this | reporting unsafe actions and | recordable injury rate, from 0.67 to | and strong order intake across the Countermeasures & Energetics sector where customers are increasingly |  | | | has happened was 2017. |  | 0.78, but remains below our limit of | placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the | | | | | reporting of near misses, providing us | 1. There were no fatalities or serious | previous year. | | | | | with the opportunity to learn and | injuries during the year. |  | | | | | prevent accidents from happening. It | |  | | is very encouraging therefore to see we have maintained a high level of near miss reporting this year. Chemring Group PLC Annual report and accounts 202226 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS STRATEGIC PRIORITY SAFETY ORDERS REVENUE KPI | 1 | 2 | 3 | 4 | | 5 | | | 6 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |  |  |  | ORDER INTAKE | |  | | | REVENUE | | | EVENTS CAUSING HARM |  |  |  | |  | | |  | | |  | HAZARD REPORTS | FREQUENCY RATE | | | | | | | | | | | | £551m | | £651m | | |  | | | | | |  | | (2021: £501m) | | |  | | | Nil |  | 17 | | | | | | | | | (2021: 2) |  |  | | | | | | | | | | | | SENSORS & INFORMATION | | SENSORS & INFORMATION | | | SENSORS & INFORMATION | | | | | | 2022 | £195m | | | £154m2022 | 2022 | £162m | | | | | 2021 | £176m | 2021 | £114m | | 2021 | £147m | R ATE ## 0.78 COUNTERMEASURES COUNTERMEASURES COUNTERMEASURES & ENERGETICS & ENERGETICS & ENERGETICS (2021: 0.67) 2022 £356m 2022 £497m 2022 £281m 2021 £255m 2021 £387m 2021 £246m | DESCRIPTION | Number of energetic events causing | Number of near miss and potential | Number of recordable injuries per |  |  | Revenue is measured at sales value less any | | --- | --- | --- | --- | --- | --- | --- | | | harm or injury. | hazards reported. | 200,000 man hours worked. | and represents the last 12 months’ activity. | and indicates future potential. | applicable sales taxes. | | WHY IS IT A KPI? | A process safety event is one of the | This indicates employee awareness of | This is the rate for all injuries including | The trend of order intake gives an indication of | The level of order book, in particular for delivery | The trend of revenue gives an indication of both | | | key strategic safety risks of the | hazards and the greater the reporting | medical treatment, restricted workday | market conditions and our competitiveness within | in the next year, gives a degree of confidence in | the state of the end market and our business’s | | | business. This indicator measures | the more engaged our people are. | and lost time injuries. It is a more | our markets. | expected future financial performance. | ability to execute orders on time to satisfy | | | those events that have caused injury | | sensitive indicator of occupational | | | customer needs. | | | or harm. | | safety than lost time injury frequency | | | | rates, as more minor events  | 2022 PERFORMANCE |  | As we journey towards our goal of | We had 17 employee injuries this |  | Group revenue was in line with our expectations, | | --- | --- | --- | --- | --- | --- | | | injuries associated with energetic | zero harm we need a workforce that |  | seeing order intake increase by 59% as customers increasingly place multi-year contracts for Roke’s services | with strong performance at Roke, steady growth | | | events compared to two last year. | is fully engaged and proactive in | resulted in a slight increase in our |  | in Countermeasures & Energetics and a foreign | | | Since 2010 the only other time this | reporting unsafe actions and | recordable injury rate, from 0.67 to | and strong order intake across the Countermeasures & Energetics sector where customers are increasingly |  | | | has happened was 2017. |  | 0.78, but remains below our limit of | placing multi-year orders. This was offset by orders on the HMDS PoR being significantly lower than in the | | | | | reporting of near misses, providing us | 1. There were no fatalities or serious | previous year. | | | | | with the opportunity to learn and | injuries during the year. |  | | | | | prevent accidents from happening. It | |  | | is very encouraging therefore to see we have maintained a high level of near miss reporting this year. 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 | | 8 | | | 9 | 10 | 11 | | | 12 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | UNDERLYING OPERATING | UNDERLYING OPERATING | UNDERLYING EARNINGS | | | WORKING CAPITAL | INVENTORY |  | | | UNDERLYING OPERATING | | | PROFIT | MARGIN |  | | |  |  |  | | | CASH FLOW | | |  |  | | | | | | | | | | | | | | 20.2p | | |  | £99.6m | 0.09x | | | £90.1m | | |  |  | | | | | | | | | | | | | | (2021: 16.9p) | | |  | (2021: £80.7m) |  | | | (2021: £80.0m) | | | (2021: £57.5m) |  | | | | | | | | | | | | | | 2022 | | 20.2p | | | 2022 | 0.09x | | 2022 | £90.1m | | | | 2021 | 16.9p | | | | 2021 | | 0.35x | 2021 | £80.0m | SENSORS & INFORMATION SENSORS & INFORMATION CHANGE FROM PREVIOUS YEAR SENSORS & INFORMATION SENSORS & INFORMATION CONVERSION OF  2022 £30.0m 2022 18.5% 2022 £30.6m 2022 £27.1m UNDERLYING OPERATING ## up 20% CASH 2021 £31.6m 2021 21.6% 2021 £38.3m 2021 £19.8m (2021: up 12%) | COUNTERMEASURES & | COUNTERMEASURES & | | | COUNTERMEASURES & | COUNTERMEASURES & | 109% | | --- | --- | --- | --- | --- | --- | --- | | | | 2022 | 20% | | | | | ENERGETICS | ENERGETICS | | | ENERGETICS | ENERGETICS | | (2021: 105%) | | | | | | 2021 | 12% | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 2022 | | £48.9m | 2022 | 17.4% | | | 2022 | | £63.3m | 2022 | | £72.5m | | | | | | | | | | | | | | | | | 2022 | 109% | | 2021 | £40.0m | | 2021 | 16.2% | | | 2021 | £46.1m | | 2021 | £60.9m | | | | | | | | | | | | | | | | | | 2021 | 105% | DESCRIPTION  Calculated as underlying earnings after Working capital is defined as Inventory is measured at cost. Measured as net debt divided by Cash flow from operating activities | need to be separately disclosed to properly understand the Group’s underlying quality | tax divided by the number of shares | inventories, trade and other receivables, | underlying EBITDA for the previous | before tax outflows, non-underlying | | --- | --- | --- | --- | --- | |  |  | less trade and other payables excluding | 12 months. | items and pension payments. | | divided by revenue. | | payroll related and other liabilities | | |  | WHY IS IT A KPI? |  | The measurement of underlying EPS | Efficiently turning profit into cash | The primary focus for improvement | This is a measure of leverage within | This is a key measure to ensure | | --- | --- | --- | --- | --- | --- | --- | | |  | reflects all aspects of the Group’s | demands a degree of control over |  | the business and is a banking covenant. | profit turns into cash in short order. | | | allows the impact of changes in revenue and cost base to be monitored, enabling | income statement including the | working capital. | | | | | | comparisons to be made of management performance and trading effectiveness. | management of interest and tax. | | | | | | 2022 PERFORMANCE | The underlying operating profit increased by 11% during the year. The changes |  | Working capital as a percentage | Inventory increased, as did advance | This has decreased in 2022, as |  | | |  | 2022, driven by increased underlying |  | payments from customers, reflecting | underlying EBITDA has increased | exceeded 100% as our focus on the | | | performance improvement actions, as set out in this strategic report. | operating profit and lower interest | year-on-year, demonstrating the | the timing of customer procurement | and net debt has decreased. | effective management of working | | | |  | continued effective management of |  | | capital was maintained. | working capital. Chemring Group PLC Annual report and accounts 202228 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS STRATEGIC PRIORITY UNDERLYING OPERATING PROFIT AND MARGIN  WORKING CAPITAL AND INVENTORY  KPI | 7 | | 8 | | | 9 | 10 | 11 | | | 12 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | UNDERLYING OPERATING | UNDERLYING OPERATING | UNDERLYING EARNINGS | | | WORKING CAPITAL | INVENTORY |  | | | UNDERLYING OPERATING | | | PROFIT | MARGIN |  | | |  |  |  | | | CASH FLOW | | |  |  | | | | | | | | | | | | | | 20.2p | | |  | £99.6m | 0.09x | | | £90.1m | | |  |  | | | | | | | | | | | | | | (2021: 16.9p) | | |  | (2021: £80.7m) |  | | | (2021: £80.0m) | | | (2021: £57.5m) |  | | | | | | | | | | | | | | 2022 | | 20.2p | | | 2022 | 0.09x | | 2022 | £90.1m | | | | 2021 | 16.9p | | | | 2021 | | 0.35x | 2021 | £80.0m | SENSORS & INFORMATION SENSORS & INFORMATION CHANGE FROM PREVIOUS YEAR SENSORS & INFORMATION SENSORS & INFORMATION CONVERSION OF  2022 £30.0m 2022 18.5% 2022 £30.6m 2022 £27.1m UNDERLYING OPERATING ## up 20% CASH 2021 £31.6m 2021 21.6% 2021 £38.3m 2021 £19.8m (2021: up 12%) | COUNTERMEASURES & | COUNTERMEASURES & | | | COUNTERMEASURES & | COUNTERMEASURES & | 109% | | --- | --- | --- | --- | --- | --- | --- | | | | 2022 | 20% | | | | | ENERGETICS | ENERGETICS | | | ENERGETICS | ENERGETICS | | (2021: 105%) | | | | | | 2021 | 12% | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 2022 | | £48.9m | 2022 | 17.4% | | | 2022 | | £63.3m | 2022 | | £72.5m | | | | | | | | | | | | | | | | | 2022 | 109% | | 2021 | £40.0m | | 2021 | 16.2% | | | 2021 | £46.1m | | 2021 | £60.9m | | | | | | | | | | | | | | | | | | 2021 | 105% | DESCRIPTION  Calculated as underlying earnings after Working capital is defined as Inventory is measured at cost. Measured as net debt divided by Cash flow from operating activities | need to be separately disclosed to properly understand the Group’s underlying quality | tax divided by the number of shares | inventories, trade and other receivables, | underlying EBITDA for the previous | before tax outflows, non-underlying | | --- | --- | --- | --- | --- | |  |  | less trade and other payables excluding | 12 months. | items and pension payments. | | divided by revenue. | | payroll related and other liabilities | | |  | WHY IS IT A KPI? |  | The measurement of underlying EPS | Efficiently turning profit into cash | The primary focus for improvement | This is a measure of leverage within | This is a key measure to ensure | | --- | --- | --- | --- | --- | --- | --- | | |  | reflects all aspects of the Group’s | demands a degree of control over |  | the business and is a banking covenant. | profit turns into cash in short order. | | | allows the impact of changes in revenue and cost base to be monitored, enabling | income statement including the | working capital. | | | | | | comparisons to be made of management performance and trading effectiveness. | management of interest and tax. | | | | | | 2022 PERFORMANCE | The underlying operating profit increased by 11% during the year. The changes |  | Working capital as a percentage | Inventory increased, as did advance | This has decreased in 2022, as |  | | |  | 2022, driven by increased underlying |  | payments from customers, reflecting | underlying EBITDA has increased | exceeded 100% as our focus on the | | | performance improvement actions, as set out in this strategic report. | operating profit and lower interest | year-on-year, demonstrating the | the timing of customer procurement | and net debt has decreased. | effective management of working | | | |  | continued effective management of |  | | capital was maintained. | working capital. Chemring Group PLC Annual report and accounts 2022 29 ### FOCUS ON ##  ###  ###  ###  ### 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 ### KEY FACTS capability offerings in the areas of tactical electronic warfare, artificial intelligence, machine learning and information security. We are also focused  REVENUE  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 UNDERLYING OPERATING PROFIT 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  UNDERLYING OPERATING MARGIN for increased defence expenditure, particularly amongst European members  and modernise their defence capabilities to meet the threat of peer on peer ## 18.5%  (2021: 21.6%) seen as becoming increasingly important, with greater co-operation and alignment between allies to the fore.  STATUTORY OPERATING PROFIT and remains opportunity-rich for the Sensors & Information sector. The  ##  ever and has a strong modernisation agenda including investment priorities  (2021: £25.9m) should give us the opportunity to address many of these requirements. The  DISCOVER MORE ABOUT SENSORS &  INFORMATION: CHEMRING.COM/WHAT-WE-DO/  SENSORS-AND-INFORMATION  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 In the UK, the fundamentals of our market position are underpinned by the 2021 Integrated Review of Defence, Security and Foreign Policy ("IR") and the subsequent role of policy papers that were published in support. The IR took a comprehensive view of the peer-level threats to British interests so its wholesale refresh is unlikely despite the Russia-Ukraine crisis. The increased importance that the UK is placing on cyber-security, active cyber effects, information advantage, intelligent networks, artificial intelligence, machine learning, and multi-domain integration, when matched with increasing budgets, is expected to accelerate the demand for Rolex's market-leading technologies. In both these home markets, the need to keep pace with rapidly evolving and complex threats align well with our Sensors & Information strategy. The clear emphasis placed on cyber, artificial intelligence, data science, EW and unmanned autonomous systems should increase the opportunity space for Chemming to deploy its market-leading technologies in these areas of growing requirement. # PERFORMANCE Order intake in the year was up 11% to £195m (2021: £176m). This was driven by a 59% increase in Rolex'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 impact of this), and the receipt of a US$16m delivery order for the second year of IPMD full rate production. This was offset by orders on the HMDIS Program of Record being significantly lower than in the previous year. | Rolex "pass-through" impact | 2022 £m | 2021 £m | Change | | --- | --- | --- | --- | | Order intake | | | | | Products and services | 132 | 100 | +32% | | Pass-through | 36 | 6 | +500% | | As reported | 168 | 106 | +59% | | Revenue | | | | | Products and services | 94 | 73 | +25% | | Pass-through | 16 | 7 | +129% | | As reported | 110 | 82 | +34% | Revenue for Sensors & Information increased by 11% to £162.3m (2021: £146.6m) and underlying operating profit fell by 5% to £30.0m (2021: £31.6m), as underlying operating profit margin declined to 18.5% (2021: 21.6%) driven by the operating expense investment in Rolex Academy, Rolex Futures and Rolex USA, and the reduction in HMDIS revenue in the year. On a constant 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 profit for the year was £26.3m (2021: £25.9m). In the UK, the markets for EW, cyber and data science capabilities, in which Rolex is a leading participant, have remained buoyant in the period. As shown above Rolex 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. ![img-4.jpeg](img-4.jpeg) # OUR PURPOSE IN ACTION # EUROPEAN ELECTRONIC WARFARE ("EW") REQUIREMENTS Rolex's production research team is in a group of 10 key stakeholders in high-level insurance, network and electronic surveillance capabilities, as well as the training of the UK, to develop a plan to provide good results. On 1 May 2024, it was proposed to include a multi-line system that supports all three components in the business base. The ownership system and operation between it that takes HMDIS (H) module elements to meet these elements. On 1 February 2024, software using providers pre-cluding and post-revision and synthesis and centralized command time science of the electromagnetic environment. This is directed towards from Defence customers, consists of a measure which demonstrates the functionality and ease of use of HMDIS. Rolex designed modern market. Rolex continues to undertake collaborative development of these platforms to address the building needs and emergent operational requirements. # LINK TO STRATEGY LINK TO OUR VALUES 2021: $ 16.6m Read more on page 19 2021: £176m 2021: £176m Chemring Group PLC Annual report and accounts 2022 31 ### FOCUS ON continued 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 ### OUR PURPOSE IN ACTION   800 today, driven in part by the success of its graduate and apprenticeship  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. 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 Such was the success of the 2021 intake that the business 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 overall business headcount. Roke’s employee value proposition and will deliver a welcome increase in  The final preparation for the 2022 intake focused on the  programme itself. Some core principles were applied: Roke continues to invest in high value, cutting-edge technology that is directly - streamlining the learning experience to meet the needs of the relevant to the rapidly emerging needs of its markets. Roke’s Technology early career intake through groupings based on their academic Roadmap focuses on the delivery of autonomous, intelligent and integrated background and future roles; capabilities. Historically, Roke has provided ground-breaking technologies in - maximising classroom time with Roke engineers to make the areas ranging from Electronic Warfare to Precision Navigation and Timing, most of unique Roke experience and knowledge by using a  partner to deliver introduction or industry standard learning; and Roke’s capabilities in an open architecture that enables autonomous tasking  - building in problem solving to provide challenge and collaboration.  triggered by an EW sensor results in the autonomous tasking of an unmanned the ability to work at a classified level. The Roke Futures business unit and     significantly to ensure our thought leadership proactively drives the market. We are seeing growing customer enquiries for Roke’s suite of world-leading In order to drive scalable growth and unlock future potential, Roke has Electronic Warfare products. The business received an £8m order in combined its Public Sector, Industry and Cubica business units to create November 2021 from the Swedish Ministry of Defence for the supply of   business units. In doing so, it has brought together its market-leading skill increasing importance of Cyber and Electromagnetic Activity (“CEMA”) in  today’s threat environment, heightened further as a consequence of Russia’s   intellectual property and unique technologies in support of customers in    EW orders from this potentially significant market. We continue to invest 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 Chemring Group PLC Annual report and accounts 202232 This investment has allowed us to support ongoing customer demonstrations OPPORTUNITIES AND OUTLOOK STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS and field trials. Customer feedback remains very positive albeit anticipated The focus for Sensors & Information continues to be on expanding the follow-on orders have been delayed as a result of budget restrictions caused Group’s product, service and capability offerings in the areas of national by the Continuing Resolution. security, AI and machine learning, tactical electronic warfare and information     and full rate production, and on exploiting a growing opportunity in  bio-security and surveillance. In a post-pandemic and contested world, analytics. With increasing customer budgets and growing market opportunities governments are becoming increasingly concerned by the risks of both  naturally occurring and engineered biological threats. Advances in synthetic five years is to maintain Roke’s recent record of growth, doubling annual biology now give our national adversaries the capability to deliberately revenue to greater than £200m organically, whilst maintaining strong margins. engineer organisms to create hazards and cause harm. Roke will continue to focus its efforts on growing across all its business areas, delivering research, design, engineering and advisory services using its high Chemring’s experience and expertise in fielding biological agent detectors quality people and capabilities.  which to pursue opportunities in existing and adjacent markets, such as We will continue to actively explore opportunities to expand and accelerate homeland security. Chemring continues to invest in its Mobius R&D project, the Sensors & Information sector capabilities and offerings, both by leveraging which aims to develop a deployable and cost-effective solution for the opportunities in adjacent markets and through further bolt-on acquisitions. identification of biological threats. However, any acquisition must meet a strict set of criteria, enhance shareholder value and fit in with our wider growth plans.    develop and deliver an aerosol bio-sensor that can detect, classify and provide its primary focus being on the delivery of explosive hazard detection systems presumptive identification in real time of pathogenic bio-threats in both indoor  and outdoor environments. Chemring’s technology dramatically shortens the priorities from counter-insurgency operations to equipping forces for 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. enhance medium-term visibility but first full rate production revenue is    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 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, re-alignment of DoD funding priorities and our expectations are that the offset by the expected reduction in HMDS-related revenue. Medium-term  growth opportunities are driven by the Group’s sole source positions on the for an additional four years as the HMDS program transitions to sustainment biological detection Programs of Record moving into full rate production. 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. Chemring Group PLC Annual report and accounts 2022 33 ### FOCUS ON continued ##  ### 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 ### KEY FACTS The Countermeasures & Energetics sector strategy continues to be  through continuously improving our technological and operational base, REVENUE whilst working closely with our customers in the development of new solutions to meet emerging needs. Investment in the sector will principally be ## £280.5m 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  UNDERLYING OPERATING PROFIT 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 UNDERLYING OPERATING MARGIN 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 (2021: 16.2%)   protect their international interests. Given the threat environment, several STATUTORY OPERATING PROFIT  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. DISCOVER MORE ABOUT COUNTERMEASURES & In the Countermeasures & Energetics sector the need for our niche ENERGETICS: CHEMRING.COM/WHAT-WE-DO/ capabilities will continue to remain relevant in the contested environment COUNTERMEASURES-AND-ENERGETICS  expected to remain robust. Chemring Group PLC Annual report and accounts 202234 Whilst there is a general trend in defence spending towards modernisation STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS  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 OUR PURPOSE IN ACTION protection, including the exploitation of current capabilities and the development  of new technology. This ten-year SPA will provide a framework for development, THE ROYAL AIR FORCE, DEFENCE EQUIPMENT & SUPPORT  AND THE DEFENCE SCIENCE AND TECHNOLOGY 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.   Science and Technology Laboratory (“DSTL”) earlier this year. must keep pace with the ever-evolving missile capabilities, anticipating  The SPA ensures the long-term provision of optimum air platform information sharing to facilitate a collaborative approach and encouraging protection, including exploiting current capabilities and developing co-operation such that the right level of capability is available to the front line new technology.   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 achieved and ensure countermeasures keep pace with ever- on the high value niche areas of the market where market conditions continue evolving missile capabilities. to strengthen as a consequence of increased global tension. Demand for our The ten-year SPA will underpin the development of the next 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 such decoy technology available to a wide range of allies and our investment into manufacturing capacity, efficiency and product R&D. partner nations, helping save the lives of more aircrew. 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 LINK TO STRATEGY 1  PERFORMANCE Read more on page 19 LINK TO OUR VALUES  INNOVATION multi-year orders received across the sector.      Toone, Tennessee. Chemring Group PLC Annual report and accounts 2022 35 ### FOCUS ON continued 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 ### OUR PURPOSE IN ACTION  CHEMRING SUPPORTS THE LAUNCH OF saw the commissioning process progress through characterisation and testing  as production gradually ramped up. We expect customer First Article Test   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     OPPORTUNITIES AND OUTLOOK  The focus for Countermeasures & Energetics remains on safeguarding 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 We will continue the process of modernisation and automation across system is ready to fly astronauts. After NASA and Boeing review  processes data from this test flight, teams will continue plans for manufacturing capabilities. We will also invest in new product development to Starliner and its next mission, the Crew Flight Test to the 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    Chemring Group PLC Annual report and accounts 202236 ### INTRODUCTION TO SUSTAINABILITY ## COMMITTED TO A ## SUSTAINABLE FUTURE Our approach to corporate responsibility and sustainability is embedded STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Michael Ord within the business units and all senior leaders have specific objectives around these areas identified which are linked to their incentive plans.  Chairman of the Group PROGRESS IN 2022 Sustainability Committee 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. ## “ Chemring acknowledges its ESG forms part of our everyday thinking, from how we run our businesses ## responsibilities to contribute to a 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 ## recognised obligation to ensure the item for every meeting of the Group’s Executive Committee and forms part of the monthly reporting cycle of each of our business units. ## responsible operation of our business Across the Group we continue to actively seek ways to reduce our impact on ## and are fully committed to long-term 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. ## at all times.”  improvements in this area. Our strategy is to reduce our global GHG emissions through improving energy efficiency to reduce consumption and by PURPOSE  Chemring helps make the world a safer place. Across physical and digital Many of our Chemring businesses have environmental management systems and environments, our exceptional teams deliver innovative technologies and have undertaken local initiatives and programmes to reduce environmental products that detect and defeat ever-changing threats. impacts. To improve energy efficiency for example, improvements have been VISION made to operations through the installation of new energy efficient buildings to replace old buildings, upgrading heating, ventilation and air conditioning To be a leading provider of critical and innovative technologies that detect (“HVAC”) systems and improving lighting. In 2022 we improved the steam and protect people, platforms, missions and information against constantly- heat distribution system at our Scotland facility by replacing valves, installing changing threats. new steam traps and improving insulation. This has contributed to significant  reductions in natural gas usage and greenhouse gas emissions. In addition, we run our businesses today and plan for the future, as we manage our replaced ageing HVAC systems at our Pennsylvania facility, reducing electricity ESG-related risks. We also recognise that our ESG credentials are an use and associated scope 2 emissions. We have also increased our use of  biodiesel fuels. people. Engaged, motivated, empowered and appropriately-skilled employees 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. Whilst our approach to sustainability continues to mature we are committed Against those longer-term targets we set the near-term target of reducing to implementing transparent policies and procedures, and to fostering an scope 1 and 2 GHG emissions year-on-year, with this being linked into inclusive culture across the Group where everyone does the right thing and remuneration and rewards across all our senior teams. In 2022 we have takes responsibility for their actions. Increasingly this focus will develop from  working as a trusted partner to our many customers and ensuring that our As our disclosure has increased, so has the need to ensure that the data that internal standards are fit for purpose, to working with our supply chain to we report to the market is accurate. We have now put in place an auditable ensure that they too work to the same standards. In doing so we will build a framework for our emissions reduction activities, with external subject sustainable company of which all our stakeholders can be proud, now and in matter experts appointed to verify the data and to report to the Group’s the future. Audit Committee. OUR APPROACH TO SUSTAINABILITY A key focus for both the Board and the Group’s Sustainability Committee has The long-term success of the Chemring business can only be enhanced by a been to ensure that we not only actively manage our sustainability agenda in positive interaction with all of our stakeholders and therefore a positive and order to meet the near and longer-term targets that were set in FY21, but 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 Group PLC Annual report and accounts 2022 37 ### INTRODUCTION TO SUSTAINABILITY continued 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 OUR PURPOSE IN ACTION activities around DE&I and employee wellbeing. STORAGE FACILITY UPGRADE AT CHEMRING NOBEL Chemring is committed to ensuring that we are able to attract and develop an Chemring Nobel (CHN) is further improving its sustainability appropriately diverse workforce. Our programme of education for all senior credentials by investing in a new storage tank facility. The new leaders continued in the first half of FY22 and was complemented by a suite facility will meet future government directives and environmental, of DE&I training modules which form part of all development programmes health and security compliance. The tank facility will increase the from Early Careers to Senior Leadership Team development. With a specific storage capacity of essential raw materials helping CHN guarantee focus on gender diversity, the global Women at Chemring Committee has supply to customers, and better protect the surrounding 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 environment from leaks or emissions. of the year. CHN produces and delivers specialist chemicals to customers for The Board has played an active role in supporting our DE&I activity with use in a range of performance and manufacturing applications. Board members taking part in various employee round-table discussions During the production of RDX and HMX, acetic acid is made and  recovered. This is an important part of the process, as the acetic responsibility for employee engagement on behalf of the Board and as Chair acid is sold to customers, as well as being used as an ingredient in of the Remuneration Committee, met with groups of colleagues from 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 as well as being able to share with them the work of the Board. These groups the process. The acid recovery area at the CHN facility originally included colleagues at all levels from operators to the senior leadership teams at Chemring Energetic Devices, as well as at Chemring Countermeasures had 19 storage tanks, in which the acid was kept ready for sale or USA’s facility in Tennessee. The groups Laurie met were overwhelmingly use. These storage tanks needed an upgrade and expansion. positive about their experiences of working at Chemring and pointed to many The old storage tank area was built in 1968 and expanded in 1985. examples of support from the Group. Laurie also gathered input as to how In January 2021, the CHN team started a two-year project to we can continue to develop, and colleagues provided clear and constructive establish a new storage tank capacity. input on areas such as enhancing cross-business collaboration which are being acted on. This £6m investment will increase the amount of acetic acid that can be stored and bring the tanks in line with new compliance 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 the life of the project and allow the team to consider and continue this journey and to ensure that we meet the growing disclosure implement new technology and further improvements to the requirements of our stakeholders and demonstrate our ability to successfully address ESG-related issues. recovery and storage area. We will also continue to work with our advisers and shareholders to identify CHN buys in the chemical compound acetic acid anhydride, which how we can constructively feed into and inform the debate on the future of is then converted into acetic acid in the production of RDX/HMX. ESG reporting and the creation of a common set of standards against which This project will double the storage capacity of both the incoming we can be measured. Chemring is now a business whose evolving purpose 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 may be used by our customers in the production of offensive capabilities. 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. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OUR SUSTAINABILITY GOALS UN SDG   Further information ENVIRONMENTAL - Reduce our impact on the environment and build - Chemring will be carbon neutral Environment on    Respecting and protecting waste and water, and by understanding the impact our planet by actively seeking - Chemring is working towards being of global climate change on our operations ways to reduce our  environmental impact. -   operational, resource and energy efficiency and to  minimise environmental impact - We will reduce our total direct - Invest in support of product development and  production techniques that meet our customers’  needs and support their environmental goals - 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 SOCIAL - Maintain the highest standards of safety and the - We will set a total recordable injury Health and safety on wellbeing of our workforce frequency rate limit of below 1  The safety, wellbeing and  Our people on development of our people is - Ensure that, in support of our wider commitment   at the heart of our business. to ethnic and gender diversity, our workforce represents the diversity of the local communities - We will continue to reduce the risk we operate in  - Implement effective policies and procedures and - We will increase the proportion continually invest in support of operational  excellence and the development of our people   -  -  GOVERNANCE - Operate with integrity and transparency and to the -  Ethics and business  representation on the Board  Conducting business in   - Ensure the highest standards of product safety and - We will seek to meet the guidelines of manner at all times. comply with all relevant standards the Parker Review on ethnic diversity as we refresh the composition of - Promote a culture where everyone does the right  thing and takes personal responsibility for their actions - All Chemring employees and third parties acting on our behalf must - Actively seek to increase representation of comply with the Chemring Code of ethnicity and gender on our Board, within our Conduct, wherever they are located leadership teams and across all our localities in the world -  - Maintain prudent and responsible financial and tax  Goal Aim Goal Aim Ensure healthy lives and promote wellbeing  for all at all ages Achieve gender equality and empower Ensure sustainable consumption and all women and girls production patterns READ MORE IN OUR Ensure access to affordable, reliable, Take urgent action to combat climate change SUSTAINABILITY REPORT: sustainable and modern energy for all and its impacts CHEMRING.COM/ SUSTAINABILITY Promote sustained, inclusive and sustainable Promote peaceful and inclusive societies for economic growth, full and productive sustainable development, provide access to employment and decent work for all  inclusive institutions at all levels CONTINUING TO INNOVATE, PROTECT A ND GROW Chemring Group PLC Annual report and accounts 2022  CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022 ### 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. ACHIEVEMENTS The Group HSE Director is a member of the Executive Committee and 2022 has continued to be a challenging year as we maintained a safe CV-19 reports on the performance of all businesses against agreed limits and environment despite the pandemic. As a result of the restrictions associated objectives. The Group Chief Executive reports monthly to the Board on all with CV-19, the Management of Change Process was used effectively to key HSE KPIs. ensure safe and continued operations aligned with in-country requirements. Whilst this created a need for continued focus, we have been able to progress The Board requires that all businesses systematically manage their health and our HSE strategy – Journey to Zero Harm, further consolidating the safety hazards, set objectives and monitor progress by regular measurement, processes implemented last year: audit and review. Each managing director is responsible for the implementation, management and ongoing compliance of health and safety within their - control of major accident hazards; business, and for providing adequate resources to satisfy the Board’s - injury reduction; and requirements. All managing directors have health, safety and environmental - HSE risk management. related objectives incorporated within their annual incentive plan. Actions taken in delivering the HSE plan included: Managers and supervisors in the Group’s businesses are required to ensure compliance with procedures, and to provide leadership and commitment - continued roll-out of the asset integrity management system;  - design and implementation of the electrostatic discharge protocols; and emphasises the importance of individual responsibility for health and safety at - deployment of the Spot it, Stop it, Share it campaign. 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. CONTROL OF MAJOR ACCIDENT HAZARDS Our Countermeasures & Energetics businesses are required to manage A key element in the continuous improvement of health and safety  management is collaboration at all levels resulting in the sharing of best their respective operating countries. Over the last three years, we have practice and lessons learnt from incidents across the Group’s businesses implemented a number of processes to enhance our focus in this area   with actions generated to prevent recurrence.  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? ## working day.” - 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. Chemring Group PLC Annual report and accounts 2022 Towards the end of last year, we established the Technical Safety Committee PROCESS SAFETY STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS with the purpose of sharing best practices and advice on the development of In addition to our reactive metrics we also measure process safety near miss new standards and guidance. This year the Committee has become more events, with a total of 880 recorded in 2022 compared to 625 in the previous established, providing the focal point for the delivery of the electrostatic year. Near miss reporting is crucial if we are to understand and prevent discharge protocols and oversight regarding the asset integrity management incidents which is why we encourage all our employees to stop, warn and system deployment. inform so we can manage any emerging risks. The increase in near miss reporting represents good progress as an organisation willing to learn and INJURY PREVENTION improve on a continuous basis. During 2021 we consolidated the reporting of Injury prevention focuses on the reduction of injuries through the adoption of our leading indicator for process safety events (“PSE”), which are categorised safety as an inherent part of everything we do. This is enacted through safety as level 1, 2 and 3, with 3 being the event with the most serious potential. leadership, clear expectations, accountability and establishing a safety culture   and this year we achieved 1.86. This year we consolidated our corporate reporting platform to capture HSE STRATEGY FORWARD OUTLOOK better understanding of root causes and increased levels of assurance. These In 2021 we reviewed the current three-year strategy focused on the control  of major accident hazards, injury prevention and HSE risk management. This organisation. This data has established trends regarding musculoskeletal review resulted in an additional element regarding the right capability being disorders due to the manual handling nature of some of our processes, added as well as a more balanced approach towards health, wellbeing and the together with cuts to fingers and hands. The relevant businesses have environment. The revised strategy is therefore a natural evolution and reflects developed plans to reduce the risk of injuries and it is hoped that this will be the maturity of the business. As such, during the next three years we will reflected in future reporting. continue to focus on: With regards to leadership on safety, this again has never been more critical - asset integrity and process safety – relating to the control of major accident than during the pandemic. Business unit leaders continue to manage an hazards and PSE events including a review of all electrostatic discharge risks; evolving situation through the Chemring CV-19 Playbook, ensuring the appropriate rigour and governance through our change management process. - occupational health and safety – focusing on injury and illness prevention, Our focus on injury prevention, in response to CV-19, continues to place including psychological health and wellbeing; more emphasis on people’s emotional wellbeing, which is supported by the - environment and sustainability – to co-ordinate our work on reducing our Healthy Workplace Sub-Committee. environmental impact; and HSE RISK MANAGEMENT - improved data – enabling data-driven discussions and decisions leading to a more proactive culture. Safe delivery of our business continues through the management of risk and  Our progress against this strategy will be reported in the next annual report and consistency. Our HSE Management System Framework Standard puts our and accounts. 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  Chemring Group PLC Annual report and accounts 2022  # ENVIRONMENT # REDUCING OUR ENVIRONMENTAL IMPACT Our goal of zero harm goes beyond the management of safety. We are committed to environmental sustainability, both globally and in our local communities, and reducing our environmental impact. ## 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, with a 7.3% reduction in scope 1 and market-based scope 2 emissions from 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 the Streamlined Energy and Carbon Reporting ("SECR") Guidance (March 2019), as specified under the Companies Act 2006 (Strategic Report and Director/Report) Regulations 2013. Data is presented for our financial year, from 1 November through to 31 October, and includes information on our most 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-based office spaces, where we do not have energy data and they are not under our operational control. 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 CO₂ with small contributions from CH4, N2 and HFCs. Our energy and carbon figures are now recorded on a monthly basis allowing cross checks for anomalies. To ensure a consistent approach we utilise DEBRA 2020 published conversion factors for all conversions (except non-UK electricity where US eGRID and IAE factors are used). Spot checks are conducted against utility bills to validated published figures. ## 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 the impact of global climate change on our operations. These three focus areas 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 with broader sustainability goals and reporting guidelines. Many of our Cherning businesses have environmental management systems and have undertaken local initiatives and programmes to reduce 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 2030. 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 of global climate change on our operations and supply chain. ## ENERGY USE AND ASSOCIATED GHG EMISSIONS Our Countermeasures & Energetics businesses in Norway and Scotland are responsible for 38.8% and 24.4%, respectively, of Group energy usage. This is followed by our business in Tennessee, which accounted for 18.9% of annual energy consumption. In 2022 we developed our updated carbon reduction plans in all of our businesses. Our UK operations account for 74.5% of our scope 1 emissions, 16.4% of our scope 2 emissions and 33.6% of our energy use. In 2022 we have achieved a 7.3% reduction in market-based scope 1 and scope 2 carbon emissions, from 20,684 tCO₂e in 2021 to 19,975 tCO₂e in 2022. Location-based emissions increased by 14% during the year. When normalised for gross revenue, market-based scope 1 and 2 emissions reduced 177%, from 52.6 to 43.3 tCO₂e per t/m of revenue. We make 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. 42 Cherning Group PLC Annual report and accounts 2022 ![img-5.jpeg](img-5.jpeg) ![img-6.jpeg](img-6.jpeg) | | 2022 | 2021 | | --- | --- | --- | | UK | US, Norway, Australia | Group total | UK | US, Norway, Australia | Group total | Scope 1 emissions | Emissions added to the revenue, treatment of equipment operated, owned or controlled by the Group | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | CO₂e (tonnes) | | | | | | | | Gas | 4,901 | 460 | 5,361 | 5,303 | 504 | 5,807 | | Heating oil | 1,000 | 388 | 1,388 | 1,475 | 96 | 1,571 | | Bio fuels | 1 | — | 1 | — | — | — | | LPG | 39 | 239 | 278 | 29 | 249 | 278 | | CO₂e consumed by Group (based on) based vehicle, including business, land and incineration, including | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | CO₂e (tonnes) | | | | | | | | Diesel | 95 | 78 | 173 | 93 | 97 | 190 | | Petroleum | — | 216 | 216 | — | 77 | 77 | | LPG | — | 25 | 25 | — | 19 | 19 | | CO₂e (tonnes) consumed of any manufacturing company by the Group | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | CO₂e (tonnes) | | | | | | | | On-site waste incineration | 26 | 160 | 186 | 21 | 147 | 168 | | Refrigerants discharged | 25 | 518 | 543 | 73 | 488 | 561 | | Total scope 1 emissions CO₂e (tonnes) | 6,087 | 2,084 | 8,171 | 6,994 | 1,677 | 8,671 | | Scope 2 emissions | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | Total emissions CO₂e (tonnes) | | | | | | | | Electricity – location-based | 2,426 | 12,372 | 14,798 | 3,086 | 10,889 | 13,975 | | Electricity – market-based | — | 11,004 | 11,004 | — | 12,013 | 12,013 | | Total scope 1 and 2 emissions | | | | | | | | Location-based CO₂e (tonnes) | 8,513 | 14,456 | 22,969 | 10,080 | 12,566 | 22,646 | | Market-based CO₂e (tonnes) | 6,087 | 13,088 | 19,175 | 6,994 | 13,690 | 20,684 | | Total energy consumption (MWh) | 44,361 | 87,478 | 131,839 | 48,373 | 81,689 | 130,062 | We engaged SRM 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. Then Independent Assurance Statement can be found on page 13 of our Sustainability Report 2022. The basis of reporting document can be found on the Group's website at www.chemiring.com/lassco/reporting. | | 2022 | 2021 | | --- | --- | --- | | Total scope 1 and scope 2 emissions CO₂e (tonnes) – location-based | 33,969 | 22,646 | | Total scope 1 and scope 2 emissions CO₂e (tonnes) – market-based | 19,175 | 20,684 | | Group revenue (£m) | 443.8 | 393.3 | | Total CO₂e (tonnes) per £m of revenue (location-based) | 51.8 | 37.6 | | Total CO₂e (tonnes) per £m of revenue (market-based) | 43.3 | 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. SCOPE 3 CARBON DATA COLLECTION SCOPE 3 CARBON DATA COLLECTION SCOPE 3 CARBON DATA COLLECTION Chemiring Group PLC Annual report and accounts 2022 43 ENVIRONMENT continued # WATER CONSUMPTION In 2022 we used a total of 943,769 m³ of freshwater. There was a considerable drop in usage from 2021 (1,220,000 m³) 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 use | | | | | | | | Freshwater use | 437,274 | 506,495 | 943,769 | 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 2,303 tonnes respectively. Of this, 71% of hazardous and 57% of non-hazardous waste was recycled. | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | UK | US, Norway, Australia | Group total | UK | US, Norway, Australia | Group total | | Waste (tonnes) | | | | | | | | Recycled, non-hazardous | 129 | 1,064 | 1,193 | 397 | 635 | 1,032 | | Recycled, hazardous | 59 | 1,302 | 1,361 | 32 | 1 | 33 | | Not recycled, non-hazardous | 172 | 739 | 911 | 164 | 977 | 1,141 | | Not recycled, hazardous | 36 | 517 | 553 | 88 | 242 | 330 | | Total waste (tonnes) | 396 | 3,622 | 4,018 | 681 | 1,855 | 2,536 | 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 of waste sent to landfill, and are evaluating and updating our waste reduction plans at our largest waste-generating businesses. # LAND QUALITY Our facility in Chicago, US, is located on a site which has "superfund" status under the US-contaminated land regime. The business continues to work with 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. The Group carries a £3.9m (2021) £3.0m provision in respect of environmental liabilities, which the Board considers to be adequate (see note 22). ![img-7.jpeg](img-7.jpeg) 44 Chemring Group PLC Annual report and accounts 2022 ### TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT The Board notes the recommendations in relation to the mandatory STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### The Task Force on Climate-related Financial 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. and consistent information about the risks and We consider our disclosure to be consistent with all the TCFD Recommendations and Recommended Disclosures including section C of the TCFD Annex ### opportunities presented by climate change. 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  GOVERNANCE BOARD OVERSIGHT OF The Board is responsible for overseeing climate-related risks and opportunities in delivering the Group’s strategy and CLIMATE-RELATED RISKS running the Group’s operations. The Group Chief Executive is the Board director responsible for sustainability across AND OPPORTUNITIES 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 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 MANAGING CLIMATE-  RELATED RISKS AND assessing and managing climate-related risks and opportunities. 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- The risks and opportunities associated with climate are reflected in our strategy and plans, and we strive for RELATED RISKS AND continuous improvement to reflect our purpose, our growth strategy, the external landscape and the expectations OPPORTUNITIES ON  CHEMRING’S BUSINESSES, were considered during the year. Associated time horizons associated were viewed as short-term (0 to 2 years), STRATEGY AND medium-term (2 to 5 years), or long-term (5 to 30 years). The basis for the time horizons was to align with our FINANCIAL PLANNING 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. Chemring Group PLC Annual report and accounts 2022  ### TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued STRATEGY CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED OVER THE SHORT, MEDIUM AND LONG TERM THE RESILIENCE OF In 2021/22 the Group began to develop its climate-related scenario analysis to improve understanding of the CHEMRING’S STRATEGY, behaviour of certain risks given different climate outcomes. We have utilised three public climate-related scenarios TAKING INTO which we deem to be reliable and related to our business operations to aid our understanding of the business CONSIDERATION resilience to climate change. We will revisit these scenario analyses to ensure these remain appropriate. The scenarios DIFFERENT CLIMATE- are as follows: RELATED SCENARIOS, 1 - Sustainable Development (SDS) outlining a global low carbon transition which limits the global temperatures rise INCLUDING A 2°C OR  LOWER SCENARIO 1 - Stated Policies (STEPS) outlining a combination of physical and transitions risk impacts as temperatures rise  2 - RCP 8.5  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. Chemring Group PLC Annual report and accounts 2022 RISK MANAGEMENT STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ALL BUSINESS UNITS ARE REQUIRED TO ASSESS RISK IN RELATION TO THE DELIVERY OF THEIR STRATEGY AND OBJECTIVES,  CHEMRING’S PROCESSES Current and emerging climate-related risks and opportunities are considered, whether they arise within the Group’s FOR IDENTIFYING AND operations or within the value chain, including existing and emerging regulations. In 2021/22, climate risks and ASSESSING CLIMATE- opportunities relevant to the Group were identified and reviewed with the aid of external consultants, and refined RELATED RISKS 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 Once each climate-related risk and opportunity was identified, the Group sought to quantify the financial impact, FOR MANAGING appropriate strategic response, and the cost of implementing the mitigations. This process includes considering the CLIMATE-RELATED RISKS 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 Climate is considered as a Group principal risk alongside the risks identified in the wider risk management process. IDENTIFYING, ASSESSING,  AND MANAGING The management of each business is responsible for the identification, management and reporting of local risks, CLIMATE-RELATED RISKS  INTEGRATED INTO CHEMRING’S OVERALL The Risk Management Committee meets quarterly and, utilising the input from the business risk registers and the US RISK MANAGEMENT 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   Chemring monitors scope 1 and 2 emissions with aspects of scope 3 disclosed on page 43. The Group also discloses APPROPRIATE, 3 GHG other environmental metrics such as freshwater use and waste generated, as reported on page 44. For the current EMISSIONS AND THE year disclosure of scope 3 emissions, please refer to page 10 of the Sustainability Report 2022. RELATED RISKS CHEMRING’S TARGETS A crucial first step in Chemring’s approach to addressing climate-related risks and opportunities in FY21, Chemring FOR MANAGING  CLIMATE-RELATED RISKS These included but were not limited to reducing our direct (scope 1) and indirect (scope 2) emissions year-on-year, AND OPPORTUNITIES  AND PERFORMANCE  AGAINST TARGETS Chemring Group PLC Annual report and accounts 2022  ### TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (“TCFD”) REPORT continued 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 Lost revenue Lost revenue Higher expenditure impact Time horizon Short-term Short-term Medium/Long-term Likelihood Likely Likely Unlikely Magnitude of impact Low Low-Medium Low 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 IMPACT ON THE  BUSINESS AND exposure to tropical storms. For example, in 2018, a severe weather event caused partial flooding at the Tennessee facility. STRATEGY  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 l Low impact SDS l l l l l Medium impact l High impact  l l l l Chemring Group PLC Annual report and accounts 2022 CLIMATE-RELATED OPPORTUNITIES STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 Reduced costs Reduced costs Reduced costs of input goods and impact  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 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 e) is projected to increase as follows: 2 Scenario 2030   IMPACT ON THE STEPS 65  90 BUSINESS AND STRATEGY 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. Chemring Group PLC Annual report and accounts 2022  ### OUR PEOPLE ## INVESTING IN OUR PEOPLE ### Chemring people are at the heart of our business. ###  ###  ### for our future success. CULTURE OUR OVERALL PEOPLE APPROACH IS FOCUSED ON UNDERSTANDING ENGAGING WITH DEVELOPING FIVE KEY AREAS: OUR POPULATION OUR PEOPLE  DIVERSITY AND CHEMRING IN THE INCLUSION AT COMMUNITY CHEMRING CHEMRING CULTURE In 2022 we continued to build on the progress made since 2019. Using a Our people approach is underpinned by our culture. Engaged, motivated, 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. growth. Our goal continues to be to ensure that we have the right people, in Since the initial culture review, every part of the business has developed the right place, at the right time, with the right skills, working in a safe, healthy  and inclusive environment. work done previously, as well as putting in place new activity to support The Chemring cultural framework has four pillars and these provide   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. CUSTOMER LEADERSHIP During 2022 the HSE teams have worked closely with the people teams CENTRICITY    THE DIVERSITY, EMPLOYEE EQUITY AND EXPERIENCE INCLUSION 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 to include education, awareness and action planning around diversity and 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 resulting ways of working. Local employee forums have been revitalized with groups coming together to restart discussions around the experience of working at Cherning. Hybrid working principles have now been adopted as appropriate for each part of the business, providing further flexibility to complete work where it makes most sense to do so. Community and 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 Cherning 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 receive these regularly and share progress with colleagues at all levels through multiple channels. Wellbeing continued to be a key theme in 2022. In line with the approach of Global Voice, Local Accent, a global committee focusing on creating and maintaining a healthy workplace, which was established in 2021, continued to meet throughout 2022. Many business units have established Wellbeing 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 as helping individuals to develop healthy habits. Our strategy is to build this focus in the early stages of our talent pipelines to ensure these topics become "business as usual" as colleagues move through the organisation. TOTAL POPULATION ![img-8.jpeg](img-8.jpeg) 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 of Employee Assistance Programmes, which have been in place for a number of years, has been refreshed in 2022, with additional communication and provision of support to colleagues and managers. ### UNDERSTANDING OUR POPULATION Our Cherning business is highly diverse. Our success depends on understanding our global population. During 2021 a full review of all in-place HR technology revealed significant differences in level of provision and importantly in the ability to demonstrate to understand the population. In 2022 these insights were developed and an approach agreed which will 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. ![img-9.jpeg](img-9.jpeg) 2022 2023 2023 2023 2024 2024 31 ![img-10.jpeg](img-10.jpeg) ### OUR PEOPLE continued UNDERSTANDING OUR POPULATION CONTINUED This feedback was shared with our local leadership teams at those locations  to allow them to respond and take action. Employee feedback remains a 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 engagement priorities. both key static metrics, as well as to interrogate process metrics such as 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 progression, will provide the opportunity to leverage further our key asset in our organisation for colleagues working in every business area. These – our people. schemes, which are tailored to suit local business requirements and focus, Our investment in 2019 in the Employee Voice sentiment monitoring provide bonus awards quarterly, half yearly or annually tied to the   we did”. The launch of the Experienced Manager Development Programme in  2022 was in response to both a recognised gap in the development approach Development is at the heart of the people strategy at Chemring. It is essential as well as addressing comments raised through the Employee Voice tool. in ensuring we have the capabilities today and in the future to appropriately Similarly, the ongoing focus on Performance Conversations supports requests support the business. This development also underpins our retention and from colleagues for regular feedback from their managers. Continuing attraction capability with current colleagues and future candidates becoming improvements in internal communications – such as the programme to put TV increasingly demanding of the organisation and the investment in their future. screens across all locations to enable real-time communications to those who There were some significant additions to the development framework are not able to access email at work – are also in direct response to feedback  from the Employee Voice statements. framework taking colleagues from their Early Careers as graduates or ENGAGING WITH OUR PEOPLE apprentices and providing development at key career milestones in  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 Highlights of our development approach are: meetings, smaller team briefings, employee forums, direct email messaging - A UK-based Early Careers Development Programme which commenced 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 by technical development provided within each business unit specific to the face for a range of different activities and events – from development, lunch role colleagues have been brought in to learn. and learn sessions, fundraisers to community activity. - Continued development of the Leading our People programme for all line The recruitment challenge being felt globally has also focused attention in all managers globally in support of developing Chemring leadership bench businesses. A wide range of colleagues have been involved in supporting strength. The initial programme – Leading our People Foundation – is activity to both ensure retention – through communication of the benefits of undertaken by all new line managers as they progress or are hired to ensure working at Chemring, sharing more widely information and updates on that every colleague in this role has a strong foundational understanding of products and customer activities – and to generate new hires. Activities such what is expected of them. Launched in 2022, Leading our People Futures as in-person careers events held in local communities, through veterans’ provides quarterly learning and networking focused on local as well as associations and direct through the business units, have created the global business challenges. opportunity to remind colleagues of what a great place Chemring is to work, - The launch of Aspire@Chemring in 2022 supports the development of as well as providing much-needed colleague interaction after the past two managers who have moved beyond supervisor and first line management and years of limited contact. who are identified as future talent for our key senior roles. This creative, Despite the challenges of the pandemic, our colleagues remain positive about digitally-enabled programme encompasses group learning, networking  through the use of mixed learning “pods” and links to global executive feedback via the Employee Voice tool through reacting to statements or business schools including Columbia and MIT to leverage a mix of learning. providing written feedback. A regular review of the responses at business The focus on Leading Human Performance and Leading Organisational  Performance connects development into the personal, functional and different groups) ensures that concerns are identified quickly and addressed business goals.  - Leading our Organisation is run quarterly across the year to ensure our During the year, Laurie Bowen, as Chair of the Remuneration Committee and most senior colleagues are also benefiting from the opportunity to reflect non-executive director charged with employee engagement on behalf of the on the areas of culture which they can influence and work together to Board, met again with groups of colleagues to hear direct from them their develop action plans around their local priorities. 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. Chemring Group PLC Annual report and accounts 2022 DEVELOPING AT CHEMRING STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS LEADERSHIP ACCELERATE TALENT EARLY CAREERS LEADING OUR ORGANISATION SENIOR LEVEL LEADER ASPIRE@CHEMRING MID LEVEL LEADER EARLY CAREERS EMERGING LEADERS PARTICIPANTS/ PROGRAMME NETWORK LEADING OUR PEOPLE FIRST LEVEL LEADER PERFORMANCE EARLY CAREERS LEADING OURSELVES CONVERSATIONS PROGRAMME MANAGING YOURSELF Development is the cornerstone of the drive to continuously improve the We continue our commitment to sponsoring bursaries for undergraduates quality of our business. Our colleagues are involved in performing a huge through the Institute of Engineering and Technology which underlines our number of often complex processes and procedures which challenge their commitment to supporting future generations of scientists and engineers. technical expertise every day. Alongside the above programmes for leadership  development, work continues to ensure high levels of operator competence students as permanent colleagues as part of the Graduate Scheme. throughout the organisation. Individuals across the organisation are encouraged The market for talent remains challenging and nowhere more so than in to undertake continuing professional development as required to ensure that providing the type and number of colleagues required by our Roke business. expertise and knowledge remain up to date. Additionally through different In response, in 2022 we launched the Roke Academy in partnership with routes, further technical development, including workplace PhD programmes Hatch, a specialist in digital skills recruitment. The Roke Academy is a and MBA study, is actively undertaken by a number of colleagues.  In 2022 over 30 college undergraduates joined our business units in the UK non-traditional areas of recruitment to embrace undiscovered talent who throughout the summer to experience working for Chemring as part of our may not have previously had the opportunity to enter the tech field. summer internship programme. Summer placements are a key part of our In 2022 and 2023 the Roke Academy will look to attract those who may have outreach to support students pursuing STEM subjects and to encourage them faced barriers to work for a variety of reasons; individuals who have found to establish a career in this important area. the traditional recruitment process a challenge, are returning to work after The Chemring Early Careers cohort continues to grow with over   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 group of colleagues is fundamental to our future success. through this route and will continue to expand this programme in future years. The Roke Academy presents a wider opportunity to combine all Our commitment to apprentices means that we welcomed 25 apprentices development from Early Careers through technical training and to provide  support for the most senior leaders at Roke as a true centre for development to start their career at Chemring and so our attention is now on developing excellence. This will continue to evolve in 2023 and beyond. those colleagues already working with us who might benefit from formalised development beyond the Leading our People programme. Partnering with an In 2021 a global framework for assessing and supporting talent and succession outside organisation we will be using Apprentice Levy funding in 2023 to planning was introduced into every business unit. This framework provides a support colleagues in achieving ILM accredited level 3 and 5 apprenticeships consistent approach to understanding key roles in the business and creating as well as enabling them to benefit from creating an external network. 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. Chemring Group PLC Annual report and accounts 2022  OUR PEOPLE continued TOTAL GRADUATES AND APPRENTICES ![img-11.jpeg](img-11.jpeg) COLLEAGUES INVOLVED IN LEADERSHIP DEVELOPMENT PROGRAMMES IN 2022 ![img-12.jpeg](img-12.jpeg) KEY ROLE TALENT PIPELINE ![img-13.jpeg](img-13.jpeg) # DIVERSITY AND INCLUSION AT CHEMRING Chemring strives for diversity on a broad basis including gender, age, background, education, disability, neurodiversity and nationality (within the constraints of our regulatory requirements). This is an area where we continue to develop both globally and locally and which will be central to our success in the coming years. In 2021 we introduced DEBI 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 or interests. In 2022 we launched the Women's Industry Network, WIN@Chemring, with a focus on supporting female colleagues globally. ![img-14.jpeg](img-14.jpeg) # OUR PURPOSE IN ACTION # JOC PRESS GRADUATE JOURNEY Joc News is a Graduate Engineer at Raley's Norway, UK. Her medical doctor represents the Common University with support from The Institution of Engineering and Technology's (ILET's) Research Society. The Society publishes a report on the JOC PRESS. Through the January scheme, she was partnered with Chemistry at the same level, completing a summer interview with Chemring Communications, UK, UKOM, UK, and leading her to be current role at Raley. Also, get a first time in research beyond from the University. But any regard with quality research is such as this may expensive. It is a needed but not covered. It took from a new course. No one has, as the support also made that I didn't have to work. As long as it was in the UK for a lot more time. If just the chance to work with is great team with a great culture at KOBI UK and following conversation with the Managing Director, I expect to be an active scheme of Raley. This RAA I was offered a position at the end of my degree course and now here was one of its formal projects with Raley's position. The memories and support I've received from the team have been around to come, and the business is much. It's my hope to continue building my expertise in areas like development, research, and education. I think it is a good course with confidence. I'm like a second doctor, but I want opportunities that are not a good organization to become in the future. 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 of our population. We are keen to ensure that our Chemring community is 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 | 3.7 | 16.3 | 1.2 | 75.8 | 3.0 | * (Inc. Magazines, NHOPI, Native American) 54 Chemring Group PLC Annual report and accounts 2022 As an employer we make no distinction between disabled and able-bodied STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 OUR PURPOSE IN ACTION regardless of characteristics. MAKING MENTAL HEALTH A PRIORITY As a business, we are committed to meeting, at a minimum, the labour rights Chemring Energetics UK (“CEUK”) made mental health a priority  in 2022 and employed the services of a company called Headtorch. we often exceed these requirements. Headtorch, based in Glasgow, are a team of specialists in learning, CHEMRING IN THE COMMUNITY development and psychology. They work with organisations both We recognise that each of the Group’s businesses has an important role to nationally and internationally to build a positive mental health play in its local community. We have a recognised community investment policy, culture and support mental health in the workplace. which confirms our commitment to support selected charitable causes with Headtorch delivered a bespoke two-day event with 30 managers,  covering all areas of the site, to help them feel better equipped to communities in which the Group’s businesses operate. Each business has its encourage and facilitate mental health conversations with their  teams. In addition, a group of actors from Headtorch filmed considered by the Executive Committee. different mental health scenarios in full CEUK uniform and PPE to In addition to providing financial support, the Group also encourages and really bring the stories to life for those involved. supports employees who undertake voluntary work in the local community. The aim was to build a positive mental health culture on site so Looking to specific communities, our relationship with the Institution of that colleagues feel able to speak openly if they have issues. We  also want to remove the stigma of talking about mental health and directly to undergraduates studying for engineering and science-related rather than setting KPIs and targets around mental health, which degrees in the UK who have faced some level of hardship in achieving a place are extremely hard to measure, our priority is on supporting line to study their chosen programme. These high-calibre students are provided managers, helping staff feel able to talk openly at work and with financial support via a Chemring funded bursary and the opportunity providing access to the right professional resources to help people.  The CEUK team also established a Wellbeing Forum on site. We are aware that on occasion our manufacturing activities can impact    emotional, social and mental wellbeing of staff by providing a  mechanism for all our colleagues to contribute to the CEUK  wellbeing agenda. operations on the local environment, and is addressing this through its environmental strategy. ##  ##  ## commitment to support selected charitable ## causes with a focus on the military and ##  ## communities in which the Group’s ## businesses operate.” Chemring Group PLC Annual report and accounts 2022  ### OUR PEOPLE continued CHEMRING IN THE COMMUNITY CONTINUED BOARD OF DIRECTORS Across Chemring our colleagues support a wide range of charities, both local 2022 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. 2021  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. EXECUTIVE COMMITTEE There is much local activity supporting charities 2022 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 2021 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.  ##  ##   SENIOR MANAGERS 2022  2021   ##  ##   Male Female Chemring Group PLC Annual report and accounts 2022 ### ETHICS AND BUSINESS CONDUCT ## DOING THE RIGHT THING All of our Operational Framework policies, procedures and associated training STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ###  material are hosted on the Chemring Compliance Portal. This innovative online ###  system allows us to issue new and updated policies and training to employees and in full compliance with all applicable laws across the Group, targeted to their specific roles, and enables us to monitor  ###  Our governance framework also includes a requirement for all businesses OUR APPROACH  We are committed to promoting a culture within Chemring where everyone providing a detailed assessment of their compliance with the Operational does the right thing and takes personal responsibility for their actions. Our Framework. The output from the operational assurance process enables Operational Framework and Code of Conduct set out the standards of  business conduct and behaviours we expect of all of our businesses, our framework, including the identification of additional training requirements 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 internal audit programme.  ETHICS & COMPLIANCE COMMITTEE The Board has established an Ethics & Compliance Committee, chaired by Operational Carl-Peter Forster, with the other members being the Group Chief Executive, assurance process 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 Continuous risks and areas for processes. It monitors the implementation of the framework across the improvement improvements to Group and recommends areas for future improvement. the Operational Framework 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. Implementation During the year the Committee also reviewed: Internal audit of new procedures review and - reports from PwC on their internal audits of the business’s compliance with and training consideration programmes 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; CODE OF CONDUCT - training material on the Code of Conduct; and Our Code of Conduct, which sits alongside our Operational Framework, embraces our fundamental values of Safety, Excellence and Innovation. - 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 All employees and all third parties who act on the Group’s behalf are each meeting. required to comply with our standards of behaviour and business conduct, OPERATIONAL FRAMEWORK  Our Operational Framework incorporates a broad range of more than 35 countries in which we operate. All employees, current and new, are provided policies and procedures which have been adopted by all of our businesses. with a copy of the Code of Conduct and asked to confirm that they will The Operational Framework implements a robust governance and adhere to its standards. The Code is reproduced in Norwegian for our compliance framework to enable us to operate in a safe, consistent and employees in Norway. accountable way. Updated scenario-based training on the Code was provided to employees The leaders of each of our businesses are required to ensure that: during the year. - every employee, at every level of the organisation, has access to and READ OUR CODE OF CONDUCT POLICY: understands the requirements of the Operational Framework; CHEMRING.COM/SUSTAINABILITY/ETHICS- - appropriate training and monitoring processes are in place to ensure proper AND-BUSINESS-CONDUCT implementation of the Operational Framework; and - local procedures and processes are adopted to implement the requirements of the Operational Framework. CONTINUING TO INNOVATE, PROTECT A ND GROW Chemring Group PLC Annual report and accounts 2022  CHEMRING GROUP PLC SUSTAINABILITY REPORT 2022 ### ETHICS AND BUSINESS CONDUCT continued WHISTLEBLOWING All businesses are required to complete a BACM Compliance Certificate on Our Chemring culture embraces transparency and openness, and we an annual basis, confirming that all policies and procedures within BACM have encourage all employees to speak up if they have any concerns. We have a been complied with and providing supporting information to demonstrate whistleblowing policy and associated procedures in place which enable all compliance. BACM Compliance Certificates are reviewed by the Ethics & employees to raise concerns, in confidence, about possible improprieties or Compliance Committee following each submission. wrongdoing within the business, without fear of reprisal or retaliation. We recognise that the appointment of third party sales partners in our Employees are able to raise issues by contacting our 24-hour ethics reporting routes to market can present particular bribery and corruption risks, and service by phone or email or by accessing an external website. All issues   engagement of sales partners where there is a genuine business need   Our internal procedures on the handling of whistleblowing reports are - restrictions on the number of sales partners to be engaged in designed to ensure that all reports made, whether through the external  service or through other internal channels, are dealt with in a proper and - the preparation of a full business case to justify the appointment of all new consistent manner, with appropriate oversight from the UK and US legal third party sales partners, including a two-stage bribery risk assessment departments. Training is provided to members of our leadership teams on incorporating the requisite level of risk-based due diligence, which must how to identify whistleblowing reports which may emanate through  less-obvious channels and how to engage with employees who make  whistleblowing reports. - due diligence reports from external consultants for higher-risk appointments; ANTI-BRIBERY AND CORRUPTION - a full periodic reappointment process for all retained sales partners, The Group has well established anti-corruption policies, which are included including recommissioning of the appropriate risk-based due diligence and within our Operational Framework. Specifically, these cover bribery and resubmission of a full business case for approval by the Group Chief corruption, conflicts of interest, gifts and hospitality, and facilitation payments. Executive; and A number of other policies within the Operational Framework also address - increased reporting requirements for all payments made to third party sales bribery and corruption risks in areas such as finance, political donations and partners and higher risk service providers. lobbying, charitable donations and offset. The review and approval processes for our third party sales partners are The Group has also adopted a policy on sales to customers located in automated through the Chemring Compliance Portal, which enables us to higher-risk territories, which requires our businesses to prepare a risk adopt a consistent approach to the application of our due diligence and mitigation plan for any proposed transaction in a territory rated less than 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 which may be encountered in doing business in such territories. businesses have adopted a similar automated system for their service Our detailed anti-corruption procedures are incorporated within our Bribery providers and higher-risk suppliers. Act Compliance Manual (“BACM”), which is updated on a regular basis, and The Chemring Compliance Portal also incorporates a module for employees includes requirements for: to seek approval online prior to giving or receiving gifts and hospitality, or - each business to routinely conduct informed bribery risk assessments as making charitable donations on behalf of the business. part of normal operating procedures, to determine the nature and extent Selected third party sales partners are subject to an independent audit by of the Group’s exposure to potential internal and external risks of bribery  and corruption on its behalf by persons associated with it; suitability of our sales partners and help to further strengthen our - approval of the appointment of all sales partners and other third party anti-bribery and corruption processes. advisers, which in all circumstances requires the completion of risk-based due diligence, appropriate management approvals, use of standard form Compliance with BACM procedures continued to be a core aspect of PwC’s contracts, and ongoing monitoring and review; internal audit programme during the year. - risk-based anti-corruption due diligence processes for the engagement of HUMAN RIGHTS service providers and suppliers; The Group is committed to respecting human rights in the countries in which - regular mandatory training on BACM and its application to their respective we do business. Our Code of Conduct and other applicable policies under roles for management, supervisors and all employees working within the Operational Framework support our commitment to ensuring, as far 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 ethical standards and expectations, including in relation to human rights.  - proper identification, disclosure and management of potential or actual involved in slavery. conflicts of interest. A statement of the Group’s compliance with the Modern Slavery Act 2015 A BACM “Pocket Guide” is issued to all employees across the Group, which can be found on the Group’s website at www.chemring.com. provides an overview of our anti-corruption policies and the requirements  We fully adhere to all relevant government guidelines designed to ensure  equipment, used for the purposes of terrorism, international repression  Chemring Group PLC Annual report and accounts 2022 FINANCIAL REVIEW # DELIVERING GROWTH, STRONG CASH GENERATION AND FUNDING INVESTMENT ![img-15.jpeg](img-15.jpeg) We have successfully navigated the changing geopolitical landscape, supply chain challenges and inflationary pressures and delivered a 2022 result which exceeded initial expectations, maintaining the balance of short-term delivery with long-term investment. In the Sensors & Information sector, Rolex revenue exceeded £103m for the first time, and in what continues to be a buoyant market, order intake of £168m was up 59%. We invested in Rolex Academy and Rolex USA which in the medium term will enable Rolex to continue its track record of strong growth. In the US sensors business there has been a positive start to the full-rate production phase of the EPBO program. A customer procurement decision is expected in 2023 on the low rate initial production ("LRP") phase of the JBTDS and AVCAD programs. The shift in the US Government priorities from counter-insurgency operations to equipping forces for potential peer to peer-hear-peer competition in the Pacific, has resulted in a swift and unexpected re-prioritisation of US DoD budgets. This impacted our expected HPDPS 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. In Countermeasures & Energetics, order intake was £356m, up 40%, driven by multi-year orders received across the sector. Investment in the Group's manufacturing infrastructure continues to be a key enabler to deliver improved safety and operational excellence, resulting in Countermeasures & Energetics margin improving from 16.2% to 17.4%. The new Tennessee facility 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 and specialty materials was strong, with order intake up 37% to £137m for 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 cost of energy. These headwinds are likely to continue and the Group will 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 decreasing from $1.38 to $1.23. 46% of the Group's revenue was US dollar denominated (2021: 53%). On a constant currency basis the Group's revenue was up 7% to £421.3m, underlying operating profit was up 8% to £62.3m and underlying base earnings per share was up 17% to 19.7p. A summary of the impact of the exchange rate movements on the key metrics at a Group and sector level is shown in the table overleaf. GOLD STORIES INDUSTRY FINANCIAL REVIEW Cheering Group PLC Annual report and accounts 2022 39 FINANCIAL REVIEW continued # GROUP FINANCIAL PERFORMANCE CONTINUED | | As (notional currency) | | As reported | | 2021 £m | | --- | --- | --- | --- | --- | --- | | | 2022 £m | Change | 2022 £m | Change | | | Group | | | | | | | Order intake | 523.1 | +21% | 551.5 | +28% | 431.0 | | Order book | 604.1 | +21% | 650.9 | +30% | 500.8 | | Revenue | 421.2 | +7% | 442.8 | +13% | 393.3 | | Underlying EBITDA | 79.9 | +5% | 82.3 | +8% | 76.4 | | Underlying operating profit | 62.2 | +8% | 64.0 | +11% | 57.5 | | Underlying basic earnings per share | 19.7 | +17% | 20.2 | +20% | 16.9 | | Session & Information | | | | | | | Order intake | 192.3 | +9% | 195.2 | +11% | 175.9 | | Order book | 148.0 | +30% | 153.7 | +20% | 113.6 | | Revenue | 157.8 | +8% | 162.3 | +11% | 146.6 | | Underlying EBITDA | 32.8 | -5% | 33.0 | -4% | 34.4 | | Underlying operating profit | 29.9 | -5% | 30.0 | -5% | 31.6 | | Countermeasures & Energetics | | | | | | | Order intake | 330.8 | +30% | 356.3 | +40% | 255.1 | | Order book | 456.1 | +18% | 497.2 | +28% | 387.2 | | Revenue | 263.4 | +7% | 280.5 | +14% | 246.7 | | Underlying EBITDA | 61.7 | +10% | 64.2 | +14% | 56.1 | | Underlying operating profit | 46.6 | +17% | 48.9 | +22% | 40.0 | Order intake across the Group increased by 28% to £55.1m (2021: £43.1m), with a 59% increase in Role's order intake, driven by a growing number of multi-year contracts which include an increasing element of "pass-through" products and services which are included in revenue. Countermeasures & Energetics order intake was £356m, up 40%, driven by multi-year orders 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. Revenue for the year was up 10% to £442.8m (2021: £395.3m), driven by strong performance at Role as well as steady growth in Countermeasures & Energetics. The underlying operating profit of £64.0m (2021: £57.5m) resulted in an underlying operating margin of 14.5% (2021: 14.6%). As a result of the planned investment in Role operating margin was flat compared to 2021 with the improved operational execution in Countermeasures & Energetics, offset by the discretionary operating expense investment in Role Academy, Role Futures and Role USA. # UNDERLYING OPERATING PROFIT (£m) ![img-16.jpeg](img-16.jpeg) 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 on the underlying profit before tax was 91% (2021: 14.8%). The underlying 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 £51.8m (2021: £48.8m). The statutory tax charge totalled £4.4m (2021: £7.3m), giving statutory profit after tax of £47.4m (2021: £41.5m) and statutory basic earnings per share of 16.9p (2021: 14.7p). A reconciliation of underlying to statutory profit measures is provided in note 3. 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. # TAX The underlying tax charge totalled £5.7m (2021: £8.3m) on an underlying profit before tax of £62.5m (2021: £55.9m). The effective tax rate on underlying profit before tax for the year was a charge of 91% (2021: 14.8%). 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 as the change to the UK Corporation Tax rate, effective 1 April 2023, will 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 increase to approximately 20%. The statutory tax charge totalled £4.4m (2021: £7.3m) on a statutory profit before tax of £51.8m (2021: £48.8m). 60 Channing Group PLC Annual report and accounts 2022 EARNINGS PER SHARE GROUP FINANCIAL POSITION STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Underlying basic earnings per share was 20.2p (2021: 16.9p) and diluted NET DEBT AND CASH FLOW    representing a net debt to underlying EBITDA ratio of 0.09x (2021: 0.35x). was 16.4p (2021: 14.4p). The financial health of the Group has continued to improve in a number of aspects during the year. Disciplined working capital practices have been UNDERLYING DILUTED EPS (PENCE) maintained to reduce intra-period volatility. The Group is working to achieve 19.7p further improvements over the medium term. 16.5p UNDERLYING CASH CONVERSION (%) 14.8p 100% 11.0p 104% 110% 105% 109% 89% 6.7p FY22FY21FY20FY19FY18 WORKING CAPITAL Working capital was £93.9m (2021: £84.4m), an increase of £9.5m. At constant FY22FY21FY20FY19FY18 currency, working capital would have been £81.9m. As a percentage of Underlying operating activities generated cash of £90.1m (2021: £80.0m).     challenges the Group invested in certain inventory items to mitigate the risk Group has a revolving credit facility of £150m which runs to December 2025 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. WEEKLY NET DEBT (£m) 55 30 05 0 m c No e an eb ar p Ma u u ug ept FY20FY21FY22 Y Y Y 7 Chemring Group PLC Annual report and accounts 2022  £ A A S J J J 30 F F F 8 5 55 O D F M 1 1 1 Oct n l 19 18 1 r y v t c FINANCIAL REVIEW continued # DEBT FACILITIES The Group's principal debt facilities comprise a £150m revolving credit facility and a US$10m overdraft. These were established in July 2021 with a syndicate of six banks and run until December 2025 with two "one-year" options to extend. The Group had £156.7m (2021: £128.1m) of undrawn 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, ratio of exchange. The Group was in compliance with the covenants throughout the year. # RETIREMENT BENEFIT OBLIGATIONS The surplus on the Group's defined benefit pension schemes was £11.2m (2021: £13.3m), measured in accordance with IAS 19 (Revised) Employee Benefits. The surplus relates to the Cherning 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 15% to 19%, the increase being driven by the increase in the AA corporate 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 portfolio of equity investments in anticipation of the need for liquid cash resources to meet the margin calls on the liability driven investments, as gilt yields rose rapidly in September 2022. The Group also lent the Scheme £2m on a short-term basis to cover further margin calls in October 2022, which 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 104% of liabilities. The Group agreed with the trustees that no further deficit recovery payments are required. The next actuarial valuation is due as at 6 April 2024 after which the future funding requirements will be reassessed. # CONTINGENT LIABILITIES The Group is, from time to time, party to legal proceedings and claims, and is involved in correspondence relating to potential claims, which arise in the ordinary course of business. 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 year £11.5m (2021: £28.0m) was spent on property, plant and equipment. The most significant investment being the Tennessee capacity expansion programme to meet the expected demand for F-35 countermeasures, and a new proofing facility at our Scottish site which has continued during the period. We still expect to generate revenue from the new Tennessee facility during the first half of our 2023 financial year. # RESEARCH AND DEVELOPMENT R&D expenditure was £79.7m (2021: £62.0m). Continued investment in R&D 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 £m | 2021 £m | | --- | --- | --- | | Customer-funded R&D | 69.7 | 51.4 | | Internally-funded R&D | | | | – expensed to the income statement | 7.5 | 8.5 | | – capitalised | 2.5 | 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 by management to run the business, including for planning, budgeting and reporting purposes and for its internal assessment of the operational performance of individual businesses. | | 2022 £m | 2021 £m | Growth % | | --- | --- | --- | --- | | Revenue (as reported) | 442.8 | 393.3 | 13% | | Effect of using prior period foreign exchange rates | (21.6) | | | | Revenue at constant currency | 421.2 | 393.3 | 7% | | Underlying operating profit (as reported) | 64.0 | 57.5 | 11% | | Effect of using prior period foreign exchange rates | (1.8) | | | | Underlying operating profit at constant currency | 62.2 | 57.5 | 8% | 62 Cherning Group PLC Annual report and accounts 2022 A reconciliation of underlying measures to statutory measures is provided below: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Underlying | Non-underlying | Statutory | Underlying | Non-underlying | Statutory | | Group: | | | | | | | | EBITDA (£m) | 82.3 | (6.1) | 76.2 | 76.4 | (0.9) | 75.5 | | Operating profit (£m) | 64.0 | (10.7) | 53.3 | 57.5 | (7.1) | 50.4 | | Profit before tax (£m) | 62.5 | (10.7) | 51.8 | 55.9 | (7.1) | 48.8 | | Tax charge (£m) | (5.7) | 1.3 | (4.4) | (8.3) | 1.0 | (7.3) | | Profit after tax (£m) | 56.8 | (9.4) | 47.4 | 47.6 | (6.1) | 41.5 | | Basic earnings per share (pence) | 20.2 | (3.3) | 16.9 | 16.9 | (2.2) | 14.7 | | Diluted earnings per share (pence) | 19.7 | (3.3) | 16.4 | 16.5 | (2.1) | 14.4 | | Sectors: | | | | | | | | Sectors & Information EBITDA (£m) | 33.0 | (1.2) | 31.8 | 34.4 | (1.6) | 32.8 | | Sectors & Information operating profit (£m) | 30.0 | (3.7) | 26.3 | 31.6 | (5.7) | 25.9 | | Countermeasures & Energetics EBITDA (£m) | 64.2 | — | 64.2 | 56.1 | — | 56.1 | | Countermeasures & Energetics operating profit (£m) | 48.9 | (2.1) | 46.8 | 40.0 | (2.1) | 37.9 | 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. 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. The strategic report includes both statutory and adjusted measures, the latter 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 IFRS and may not be comparable with similarly titled measures used by other 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: £6.3m); - costs relating to acquisitions including deferred consideration treated as an expense under IFRS 2 of £2.0m (2021: £1.6m); - loss on the movement in the fair value of derivative financial instruments of £4.1m (2021: £0.7m gain); and - tax impact of adjustments of £1.3m credit (2021: £1.0m credit). Andrew Lewis Chief Financial Officer 13 December 2022 Financial Statements Chemring Group PLC Annual report and accounts 2022 63 ### RISK MANAGEMENT ## MANAGING RISK RISK MANAGEMENT POLICY AND FRAMEWORK ### We continue to manage key risks to ensure the 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 RISK MANAGEMENT ORGANISATION for the oversight and implementation of the Group’s risk management The Board is responsible for determining the nature and extent of risks it is systems and controls. 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 Group’s risk management framework draws fundamentally from  The Board reviews the Group risk register on a regular basis and considers day-to-day management of risk and maintenance of effective control whether the Risk Management Committee has appropriately identified the procedures at individual businesses. The “Second Line” comprises various principal risks to which the Group is exposed.  The Audit Committee is responsible for reviewing in detail the effectiveness management level, which are designed to enhance and monitor the First Line. of the Group’s systems of internal control, including financial, operational and The “Third Line” comprises the Group’s internal audit function, utilising an compliance controls, and its risk management systems. The Audit Committee  also reviews the effectiveness of the Group’s internal audit arrangements. APPROACH TO RISK MANAGEMENT The Risk Management Committee is responsible for overseeing the The management of each business is responsible for the identification, implementation of the Group’s risk management framework and is also management and reporting of local risks, in accordance with the Group’s risk responsible for identifying the principal risks to which the Group is exposed, management framework. The management of each business is also monitoring key mitigation plans and maintaining the Group risk register. The responsible for the maintenance of business risk registers and the Risk Management Committee also reviews the business unit risk registers on a implementation of mitigation plans. regular basis and considers input from the US Risk Management Committee, Each business is required to maintain a risk register identifying their key risks. which has been constituted to oversee risk within the US operations. The risk registers include an analysis of the likelihood and impact of each risk, The current members of the Risk Management Committee are: 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 - Michael Ord (Group Chief Executive);  - Bill Currer (President, US); The business risk registers are updated locally on a quarterly basis and are - Sarah Ellard (Group Legal Director & Company Secretary); reviewed in detail by the Group Chief Executive, the Chief Financial Officer - Andrew Lewis (Chief Financial Officer); and and other members of the Executive Committee at quarterly business review - Steven Messam (Group HSE Director). meetings with each of the businesses. The US Risk Management Committee  level risks and maintains a consolidated US risk register. KEY ROLES AND RESPONSIBILITIES FOR THE GROUP’S RISK MANAGEMENT STRATEGY BUSINESS MANAGEMENT RISK MANAGEMENT AUDIT COMMITTEE THE BOARD - Responsible for the COMMITTEE - Reviews the effectiveness of - Overall responsibility for implementation of the - Oversees the the Group’s risk risk management Group’s risk management implementation management framework - Defines the Group’s framework at the  and systems of  operational level   - Maintains business unit risk - Monitors compliance - Oversees the effectiveness registers and provides input  of the Group’s internal to the Risk Management  audit arrangements Committee - Maintains the Group - Responsible for compliance  with internal controls Chemring Group PLC Annual report and accounts 2022 The Risk Management Committee meets quarterly and, utilising the input  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS from the business risk registers and the US risk register, identifies those The management of risks associated with CV-19 continued to be monitored principal risks which are material to the Group as a whole. The Risk during the year. Whilst the Group’s operations have not been significantly Management Committee also considers corporate-level risks and emerging impacted by CV-19, we have continued to take all appropriate actions to risks, as referenced below. These risks are collated on the Group risk register, protect and safeguard our employees, and ensure continuity of our businesses. together with details of the applicable mitigation plans and risk owners. EMERGING RISKS The Group has implemented an Operational Framework, incorporating a The current UK Corporate Governance Code requires the Board to broad range of policies and procedures which are required to be adopted by undertake a robust assessment of the emerging risks that may impact the all businesses. A half-yearly operational assurance process is a fundamental Group in the future. This requirement has been reflected in the Group’s part of the Operational Framework and provides an assessment of compliance  with the Operational Framework policies across the Group. The output of Management Committee when compiling the Group risk register. the operational assurance process provides additional visibility on risks across the Group and is utilised by the Risk Management Committee as a further Emerging risks are identified through discussions with both external input to the Group risk register. The operational assurance process also  provides assurance to the Board that the Group’s internal systems and customers and regulators, and through horizon scanning of future controls are operating effectively. developments in areas relevant to the Group’s business operations. The full Group risk register is reviewed by the Board on a half-yearly basis Certain emerging risks relating to future technological, regulatory and and key individual risks are reviewed at every Board meeting. macro-economic changes are reflected on the Group risk register and mitigation plans implemented accordingly. However, other emerging risks 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: RISK REVIEW - Our HSE Management Framework has been updated and we 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: - We have further enhanced our HSE data collection and reporting through - the operational and financial reports received from the executive our EcoOnline system. management throughout the year; - Additional IT and cyber-security standards have been implemented, and - the Group risk register and the mitigation actions being taken to manage members of the senior leadership team participated in a cyber incident key risks; scenario planning workshop. - output from the operational assurance process; and - We have improved our succession and talent management programmes  - internal audit reports and reports from the other assurance processes  - We have established a new project focused on improving business continuity management across the Group. The Board confirms that there is an ongoing process for identifying, evaluating - Climate change risks have been considered as key risks to the future and managing the principal risks faced by the business, and that robust operation of the Group. 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 - Our internal audit programme has continued to incorporate thematic of these financial statements. reviews in key risk areas. The Board acknowledges that the internal control systems can only provide Our risk management systems were reviewed by PwC in 2021 as part of   Group’s assets. The Board therefore continues to take steps to embed structures and processes were fit for purpose and a number of good practice internal control and risk management further into the operations of the areas were identified. Their recommendations for further enhancements Group, and to address any areas for potential improvement which come   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. The Board carried out an assessment of the principal and emerging risks to We have also introduced a target risk rating for each risk, and now separately which the Group is exposed as part of its half-yearly review of the Group consider key mitigation controls and ongoing risk reduction actions. These  changes provide greater distinction between relative risks and have enabled adequately captured in the Group risk register and whether the requisite us to better facilitate the prioritisation of key mitigation actions. progress had been made on the mitigation actions to address significant risks. 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  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 RISK PROFILE AND HEAT MAP impact on the Group’s business model, strategy, future performance or The overall risk profile for the Group continued to improve during the year reputation are set out below. The principal risks are identified by the Risk and the Group risk register reflects the following changes to principal risks: Management Committee based on the likelihood of occurrence and the - Our understanding of the risks associated with occupational and potential impact on the Group as a whole.  In addition to the risks disclosed below, the Risk Management Committee also implementation of the Group’s three-year HSE strategy and an increased monitors and manages a wide range of other risks to which the Group may focus on asset integrity, and shared learning and reporting of near misses be exposed. within our operations. OVERVIEW OF PRINCIPAL RISKS - Risks associated with environmental issues have increased with the increased focus on the environmental impact of our businesses. The table below summarises the Group’s principal risks and uncertainties, and identifies how each links to values and our strategic objectives, and whether - Climate change risks and the potential impact of changed weather the trend in the risk profile from the Group’s perspective increased,  decreased or remained stable during the year. Group risk register. Change in - Market-related risk has reduced, reflecting the increased focus on defence Strategic risk profile spending as a result of the recent geopolitical and technology trends. Principal risk/uncertainty Our values objectives in the year - People-related risk in relation to resourcing has continued to increase as  Occupational and A continuing to make it difficult to recruit and retain employees, and process safety  Environmental laws - Financial risks have continued to reduce, reflecting the Group’s strong B    C Climate change - 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 D Market employed are an increasing risk for all businesses. The heat map below illustrates the relative inherent and residual positioning E Political  F Contracts G Technology A H Financial K I Operational L C J People G D B Impact Medium High Compliance K H J  I E L Cyber-security F Target growing segments Safety Win market share Excellence Low Low Medium High Grow our US business Innovation Likelihood Chemring Group PLC Annual report and accounts 2022 INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS  A. OCCUPATIONAL AND PROCESS SAFETY Risk and potential impacts Mitigation actions/factors The Group’s operations involve energetic - Safety reinforced as a core value. materials that by their nature have inherent Risk appetite: Low - Continued emphasis on the “Journey to Zero  Harm” and promotion of a culture which puts Change during the year and outlook safety first and encourages employees to take - Incidents may occur which could result in personal responsibility for their actions. Through the implementation of our major accident  - HSE Strategy and HSE Management System Framework hazard review process, together with increased  Standard fully implemented within the businesses. reporting and investigation of process upset  conditions, we continue to take further actions to - The Group may be exposed to financial loss, - Robust major accident hazard analysis process reduce the likelihood of a major energetic event. In regulatory action and potential liabilities for adopted across the Group. addition, we have strengthened our asset integrity workplace injuries and fatalities. - Asset integrity review completed using external programmes and introduced an enhanced process consultants at higher-hazard sites and new asset for sharing of learnings from significant incidents. We integrity standard adopted. continue to invest in new automated production - New Group-wide standard on management systems and improving process controls for our  legacy operations. - Incident investigation and crisis management Our total recordable injury frequency rate has standards adopted.  - Process established for Group-wide review but remains below our limit of 1.0. There were no  injuries sustained from energetic ignitions during  - Occupational Health, Safety and Wellbeing prior year.  - “Spot it, Stop it, Share it” campaign instigated to increase We hope to see further improvements in process focus on near miss identification and reporting. safety in FY23 as we continue with our capital investment programme. - Continued programme of capital investment in  Example key risk indicators  Link to strategy - Total recordable injury frequency rate - Target growing segments - Number of process safety events - Win market share - Number of near miss reports  B. ENVIRONMENTAL LAWS AND REGULATIONS Risk and potential impacts Mitigation actions/factors The Group’s operations and ownership or use - Monitoring programmes established at certain sites of real property are subject to a number of and appropriate financial provisions held. Risk appetite: Low federal, state and local environmental laws and - Environmental liability insurance procured for Change during the year and outlook regulations. At certain sites currently or certain risks. formerly owned or operated by the Group, - Environmental consultants retained to The sale or closure of several sites during the there is known or potential contamination for   which there is, or may be, a requirement to remediations. exposure to environmental risks. However, we retain remediate or provide resource restoration. a financial liability for environmental remediation of - Sustainability and Environmental certain sites formerly owned by the Group, most - The Group could incur substantial costs,  notably those occupied by the divested munitions including remediation costs, resource businesses in Belgium and Italy. restoration costs, fines and penalties, or be exposed to third party property damage or Environmental risks continue to increase with personal injury claims, as a result of liabilities  associated with past practices or violations of environmental impact of all businesses. We have environmental laws or non-compliance with 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 - Target growing segments - Energy and water utilisation  - Volume of waste produced - Number of environmental incidents Chemring Group PLC Annual report and accounts 2022  ### PRINCIPAL RISKS AND UNCERTAINTIES continued continued C. CLIMATE CHANGE Risk and potential impacts Mitigation actions/factors The Group’s operations and delivery of our - Additional measures have been implemented, strategy could be impacted by climate change such as cutting back grassland close to Risk appetite: Low related risks, including those associated with manufacturing operations, to mitigate the risk of wildfires. Change during the year and outlook wildfires, severe weather events and new climate-related requirements in relation to the - Drainage has been improved on certain sites to Sustainability Committee established which is Group’s manufacturing processes and products. mitigate the impact of potential flooding events. overseeing the identification and management - Carbon reduction plans and other environmental  - Wildfires and severe weather events could result in harm to employees, the temporary shutdown performance targets have been established to Carbon reduction plans established across of facilities or other disruption to manufacturing reduce the Group’s environmental impact.  processes. - Close relationships are maintained with - The Group may be exposed to financial loss for customers, which should provide early insight business interruption and/or increased expenditure into new environmental requirements which for adapting its production facilities and processes  to address climate change-related risks. Example key risk indicators  Link to strategy - Wildfires - Target growing segments - Severe weather events  - Technology  STRATEGIC RISKS D. MARKET Risk and potential impacts Mitigation actions/factors Defence spending depends on a complex mix of - Continual assessment of alignment of planned political considerations, budgetary constraints and organic growth strategies and technology Risk appetite: Low to moderate the requirements of the armed forces to address roadmaps against government priorities for future funding. Change during the year and outlook specific threats and perform certain missions. Overall defence spending may therefore be - Increased focus on the development of Ongoing conflict in Eastern Europe is shaping the subject to significant yearly fluctuations and there commercial products and services. threat environment, with a resurgence in demand may also be downward pressure on defence - Focus on organisational development to ensure for classical kinematic capabilities, alongside the budgets in certain key programme areas. the business is appropriately structured to meet growing information advantage and intelligence current and future needs, and to provide requirements. However, economic pressures may The Group’s profits and cash flows are resilience in difficult market conditions. place defence spend under pressure. dependent, to a significant extent, on the timing  - Continued focus on order intake as a key majority of the Group’s contracts are of a performance indicator. relatively short duration and, with the exception - Pursuit of long-term, multi-year contracts of framework contracts with key customers, do  not cover multi-year requirements. - Global business development initiatives - The Group’s financial performance may be established in the Countermeasures & Energetics adversely impacted by lower defence spending and Sensors & Information segments. by its major customers, either generally or in - Increased collaboration between businesses relation to certain programmes. across the Group on establishing shared routes - Short-term trading and cash constraints may to market. 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. Example key risk indicators  Link to strategy - Defence budget cuts/changes - Target growing segments - Reductions in order intake - Win market share - Deterioration in profitability - Grow our US business  Chemring Group PLC Annual report and accounts 2022 INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS STRATEGIC RISKS E. POLITICAL Risk and potential impacts Mitigation actions/factors The Group is active in several countries that - Relationships maintained at political level   Risk appetite: Low to moderate instability. In addition, there is a significant risk  Change during the year and outlook  - Financing arrangements implemented, including structure in certain non-NATO countries to which letters of credit and advance payments, for Political tensions across the world are increasing the the Group currently sells. contracts with high-risk customers. risk of disruption in our non-NATO markets. - The Group’s business in certain countries may - Political risks insurance procured in We have continued to focus our business be adversely affected in a way that is material to  development and sales and marketing activities the Group’s financial position and the results of - Continued focus on the development of  its operations. commercial business across the Group, - Political changes could impact future defence particularly in key home territories. expenditure strategy and the Group’s ability  Example key risk indicators  Link to strategy - Political changes - Target growing segments - Suspension/withdrawal of export licences - Win market share - Trade embargoes - Grow our US business - Reductions in order intake  F. CONTRACTS Risk and potential impacts Mitigation actions/factors The Group’s government contracts may be - The Commercial Policy within the Operational terminated at any time and may contain other Framework requires central approval for certain Risk appetite: Moderate unfavourable provisions. contractual risk exposures. Change during the year and outlook - Commercial and contract risk management The Group may need to commit resources in training programme implemented. The implementation of the Operational advance of contracts becoming fully effective, to - Stage payments negotiated with customers  ensure prompt fulfilment of orders or to enable wherever possible, in order to improve working on commercial and contracting practices across the conditions precedent to be met. capital management. Group, and is enabling us to manage contractual - 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. Example key risk indicators  Link to strategy - Number of contract claims/terminations - Target growing segments - Increase in working capital - Win market share - Delays in customer payments - Grow our US business - Number of bonds or guarantees called 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  - Close relationships maintained with programmes due to issues with capability development, customers on all key future Risk appetite: Moderate  programmes. Change during the year and outlook - New Product Development Policy The Group needs to continually add new products to its and procedures adopted, to align Innovation is one of our core values. current range, through innovation and continuing emphasis on  research and development. New product development may be Progressing our technology-led key development investment across the Group. subject to delays, or may fail to achieve the requisite standards programmes will continue to be a significant area of to satisfy volume manufacturing requirements and the - Technology investments aligned focus for the year ahead. production of products against high reliability and safety criteria  to meet customer specifications.  - Working groups established to service activities. In 2022 we launched the Futures  - Failure to obtain production contracts on major business unit to focus on capturing the growing growth in certain key areas within development programmes may significantly impact the opportunities for Roke’s capabilities in the Countermeasures & Energetics and future performance and value of individual businesses.  Sensors & Information. - Failure to complete planned product development and upgrades Chemring Sensors & Electronics Systems in the successfully may have financial and reputational impacts, and may  result in obsolescence or loss of future business. technologies into prototype products which can  cheaper than existing systems. Example key risk indicators  Link to strategy - Reduction in R&D expenditure - Target growing segments - Delays in R&D programmes - Win market share - Delays in qualification of products - Grow our US business - Loss of production contracts -  H. FINANCIAL Risk and potential impacts Mitigation actions/factors The Group is exposed to a range of financial risks, both - Committed banking facilities in place externally driven, such as an unexpected movement in foreign to December 2025. Risk appetite: Moderate exchange rates or increased inflation, and specific to the Group. - Regular monitoring of actual and Change during the year and outlook Specific financial risks could arise out of a disruption to forecast financing covenants. operations; failure to deliver strategic objectives, including - Capital approval processes in place, The Group’s revolving credit facilities were extended planned investment; or customer-related events, including requiring Board approval for during the year to December 2025. defaults on the payment of debts. significant projects. The year-end bank covenant of net debt: EBITDA was As a result of a number of past events, the Group is exposed - Hedging policy applied for significant 0.14x, well within the covenant limit of 3.0x. to a number of contingent liabilities which may or may not foreign transactions. result in future cash outflows. (Further details are contained in The Group’s businesses faced inflationary cost - Energy bought forward in the note 33 of the Group financial statements.) increases during the year and higher energy prices.  These were largely mitigated but could have a further The Group may also face an increased funding requirement escalating prices. impact in 2023. for its legacy UK defined benefit pension scheme. - Advance payments and letters At the year end, the legacy UK defined benefit pension  - The Group may fail to comply with financing covenants and scheme was £11.2m in surplus (on an IAS 19 basis). with a heightened payment risk. be unable to meet debt repayments, leading to withdrawal  of funding or additional costs of maintaining funding. - Close dialogue maintained with the carried out as at April 2021 and confirmed that the trustees of the pension scheme on - Operational results may be impacted by unexpected financial scheme was £3.8m in surplus at that date. No further investment and funding matters. losses or increased costs. contributions will therefore be required before the next valuation as at April 2024. 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. Example key risk indicators  Link to strategy - Deterioration in bank covenants - Target growing segments - Increase in net debt - Win market share - Interest rate increases - Grow our US business - Foreign exchange rate movements - Increase in bad debts  - Increase in inflation Chemring Group PLC Annual report and accounts 202270 INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS STRATEGIC RISKS I. OPERATIONAL Risk and potential impacts Mitigation actions/factors The Group’s manufacturing activities may be - Major accident hazard analysis process and upset exposed to business continuity risks, arising from condition management standard implemented Risk appetite: Low to moderate plant failures, supplier interruptions, quality issues across the Group. Change during the year and outlook or large scale employee absences. - Key performance indicators adopted, to provide better visibility on operational performance and A multi-year capital investment programme was Planned new facility developments may be delayed to facilitate early identification of potential initiated in 2019. This is designed to mitigate a as a result of operational issues. production and quality issues. number of operational risks through a plant - Interruptions to production and sales could result automation and modernisation programme - Advance purchases made of raw materials where in financial loss, reputational damage and loss of  potential supply chain constraints are identified. future business.  - Business continuity plans established across - A delay in completing new manufacturing facilities   could constrain capacity and limit future - Continued capital investment in legacy facilities to Commissioning of the new automated manufacturing  | improve safety and reliability. | facilities in Tennessee has progressed in line with plan. | | --- | --- | | - Asset integrity programme implemented. | Capital investment projects progressed at our | | - Detailed plans developed for all significant capital | facilities in Scotland and Norway, and further | | investment projects and additional dedicated | projects are planned for 2023. | 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  Example key risk indicators  Link to strategy - Number of process safety events - Target growing segments - Reduction in right first time and on-time - Win market share  - Grow our US business - Increase in supplier-related delays - Increase in quality issues and  See also: Group Chief Executive’s review - Reduction in capital expenditure  - Delays in commissioning of facilities 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 - Chemring values of Safety, Excellence and areas of expertise becomes more challenging. Innovation established. Allied to this there is a risk of loss of key personnel. - Development framework implemented Risk appetite: Moderate  As the shape of the Group’s business changes and management and leadership skills and behaviours Change during the year and outlook with an increased focus in high technology areas, particularly amongst our line manager and the Group may fail to build and retain an Resourcing challenges continued to increase during supervisor population. appropriate skill base to facilitate successful the year, particularly in parts of the US where competition in new markets and product areas. - Ongoing review of capability requirements  against the business strategy. Employees may not be fully engaged with the  - Increased focus on DE&I. Chemring journey, purpose, products, customers Salary inflation impacted a number of our and values. - Culture review completed, facilitating the businesses and one-off cost-of-living payments were development of a framework to support the - Failure to recruit sufficient suitably qualified made to a number of employees across the Group. evolution of the Chemring culture. personnel in key areas of the business may We continued to make good progress on the - Employment Voice real-time engagement tool  implementation of our development framework deployed across the Group. growth aspirations. during the year, with over 340 line managers and - Talent framework and succession planning - Failure to build and retain key skills will lead to supervisors having participated in a structured process implemented.  development programme. and deliver new contracts. - Incentive arrangements enhanced to encourage We also continue to focus on communications using collaboration and create a Group focus at - If key personnel are not fully engaged with the a wide range of formal and informal challenges, both  business purpose, values and products, and are  not appropriately incentivised, the ability of the Group to retain them will be compromised. This The deployment across the Group of Employee could result in loss of management expertise and Voice enables us to monitor employee sentiment on knowledge, and the Group’s operations may a continuous basis and gives employees the ability to suffer as a consequence. provide feedback on changes as they occur. Example key risk indicators  Link to strategy - Diversity statistics - Target growing segments - Increase in employee turnover - Win market share - Number of unfilled vacancies - Grow our US business - Employee sentiment scores  Chemring Group PLC Annual report and accounts 202272 INHERENT RISK: High LowMedium TREND: Increasing DecreasingStable STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS LEGAL AND COMPLIANCE RISKS K. COMPLIANCE AND CORRUPTION Risk and potential impacts Mitigation actions/factors The Group operates in over 50 countries - Ethics & Compliance Committee established to worldwide, in a highly regulated environment, and oversee compliance across the Group. is subject to the applicable laws and regulations - Operational Framework in place, mandating Risk appetite: Low  compliance with a range of policies and ensure that all of its businesses, its employees procedures covering a wide range of legal Change during the year and outlook   comply with all relevant legal and regulatory The Operational Framework and the associated - Half-yearly operational assurance process obligations. The nature of the Group’s operations operational assurance process has fundamentally established as part of the Operational Framework. could also expose it to government and regulatory changed the management of legal and compliance investigations relating to safety and the environment, - Central legal and compliance function assists and risks across the Group. import-export controls, money laundering, false monitors all Group businesses, supported by Further progress was made during the year on fully accounting, and corruption or bribery. dedicated internal legal resource in the US. embedding our Group-wide online compliance - Code of Conduct stipulates the standards of The Group requires a significant number of permits, system – the Chemring Compliance Portal. The acceptable business conduct required from all licences and approvals to operate its business, which system hosts our Operational Framework policies employees and third parties acting on the may be subject to non-renewal or revocation. and associated training material, and automates our Group’s behalf. anti-bribery processes. - Non-compliance could result in administrative, - Updated Bribery Act Compliance Manual civil or criminal liabilities, and could expose the implemented, incorporating enhanced Group to fines, penalties, suspension or anti-bribery policies and procedures. debarment, and reputational damage. - Policy adopted to manage risks associated with - Loss of key operating permits and approvals sales to customers in higher-risk territories. could result in temporary or permanent site closures, and loss of business. Example key risk indicators  Link to strategy - Regulatory intervention and penalties - Target growing segments - Non-renewal/revocation of licences and permits - Win market share - Breaches of policies - Non-completion of compliance training See also: Ethics and business conduct - Increase in whistleblowing reports  REPUTATIONAL RISKS L. CYBER-SECURITY Risk and potential impacts Mitigation actions/factors Cyber-security and related risks are key emergent - Threat assessment completed and an action areas of critical importance for all businesses,  particularly for those involved in the defence and threats implemented. Risk appetite: Low security sector. Threats can emanate from a wide - Security Committee established. variety of sources and could target various - Group-wide cyber-security standard adopted Change during the year and outlook systems for a wide range of purposes, making based on the US DFARS “CMMC Level 2” response particularly difficult. We have an ongoing programme to address IT and standard and a number of cyber-security cyber-security but the threats in this area continue The data and systems which need to be protected defence measures adopted, encompassing, as to evolve and we therefore need to ensure that our include customer-classified or sensitive appropriate to the nature of the threat and security arrangements evolve appropriately information, commercially sensitive information, sensitivity of data or systems being protected,  employee-related data and safety-critical hardware, software, system, process or manufacturing systems. people-based solutions. Good progress was made towards achieving CMMC Level 2 compliance at a number of businesses during - Where appropriate, government or commercial - The Group may suffer from critical systems the year. accreditation of networks and systems obtained in failures, or its intellectual property, or that of its support of the overall cyber-security programme. customers, may fall into the hands of third parties. - IT and security systems review included within - In addition to business interruption and financial the internal audit programme. loss, the Group may suffer reputational damage, and its business of providing cyber-security services - Cyber incident scenario planning workshop held. to customers may be irreparably damaged. Example key risk indicators  Link to strategy - Number of “phish” emails reported - Target growing segments - Number of system attacks and failures - Win market share Chemring Group PLC Annual report and accounts 2022 73 ### VIABILITY STATEMENT AND GOING CONCERN In accordance with the UK Corporate Governance Code, the Board 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 GOING CONCERN of the current situation on the Group’s supply chain. The CV-19 outbreak is The Group’s business activities, key performance indicators, and principal not currently having any material impact in relation to these risks or any other risks and uncertainties are set out within the strategic report on pages 1 potential impacts; however, the directors are monitoring the situation closely.  CONFIRMATION OF GOING CONCERN The directors believe that the Group is well placed to manage its business After consideration of the above, the directors have a reasonable expectation risks successfully, despite the current uncertain economic outlook. The that the Group and the Company will have sufficient funds to continue to Group’s forecasts and projections, taking account of reasonably possible meet its liabilities as they fall due for at least 12 months from the date of changes in trading performance, show that the Group should be able to approval of the financial statements and therefore have prepared the financial operate within the level of its current committed facilities. statements on a going concern basis. KEY FINANCIAL METRICS LONG-TERM VIABILITY 2022 Covenant ASSESSMENT OF LONG-TERM PROSPECTS Revolving credit facility and overdraft  The directors have assessed the Group’s viability over a three-year period to Undrawn committed borrowing facilities  October 2025 based on the above assessment, combined with the Group’s Leverage ratio  Less than 3x strategic planning process, which gives greater certainty over the forecasting Interest cover ratio  Greater than 4x 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 The revolving credit facility and overdraft run to December 2025 with two its liabilities as they fall due up to October 2025. “one-year” options to extend at the lenders’ discretion. The Group was in The directors have chosen a three-year period to assess viability to reflect compliance with the covenants throughout the year.  ASSESSMENT OF NEAR-TERM PROSPECTS arrangements. These range from multi-year contracts such as the US Programs  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 PRINCIPAL RISKS budget and cash flow forecast for the period through to October 2024. This In considering our viability statement we have considered the principal risks has allowed the directors to assess going concern for a period of at least 12 and uncertainties discussed in the strategic report and assessed the impact. months after the date of approval of the financial statements. This is in The impact of CV-19 on viability is clearly a consideration for all companies addition to the Group’s longer-term strategic planning process. In assessing   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. - the impact of macro-economic factors, particularly inflationary pressures, SENSITIVITY ANALYSIS supply chain challenges, interest rates and foreign exchange rates; Sensitivity analyses were run to model the financial and operational impact - the status of the Group’s existing financial arrangements and associated  covenant requirements;   - progress made in developing and implementing cost reduction programmes economy and future government policy and spending, underperformance in and operational improvements; executing the Group’s strategy, failure to deliver operational improvements, - the availability of mitigating actions should business activities fall behind the impact of a potential climate-related risk causing business interruption and current expectations, including the deferral of discretionary overheads and material movements in foreign exchange rates. restricting cash flows; and Consideration was also given to the plausibility of the occurrence of other - the long-term nature of the Group’s business which, taken together with individual events that in their own right could have a material impact on the the Group’s order book, provides a satisfactory level of confidence to the Group’s viability. Board in respect of trading. CONFIRMATION OF VIABILITY SENSITIVITY ANALYSIS Based on the consolidated financial impact of the sensitivity analyses and Additional detailed sensitivity analysis has been performed on the forecasts to associated mitigating internal controls and risk management actions that are consider the impact of severe, but plausible, reasonable worst case scenarios either now in place or could be implemented, the Board has been able to on the covenant requirements. These scenarios, which sensitised the conclude that the Group will be able to maintain sufficient bank facilities to forecasts for specific identified risks, modelled the reduction in anticipated meet its funding needs over the three-year period and the Group’s forecasts 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. Chemring Group PLC Annual report and accounts 2022 ### NON-FINANCIAL INFORMATION STATEMENT Our Code of Conduct provides direction to our STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ### This section of the strategic report constitutes employees on the standards of behaviour and business ### the Group’s non-financial information statement conduct which we expect from them. It sits alongside our ### and addresses the requirements of sections Operational Framework, which incorporates a wide range of policies and procedures to enable our businesses to ### 414CA and 414CB of the Companies Act 2006. comply with their legal obligations and to operate in a ### The non-financial information is included within safe, consistent and accountable way. ###  READ OUR CODE OF CONDUCT ### and is cross-referenced below. POLICY: CHEMRING.COM/ SUSTAINABILITY/ETHICS-AND- BUSINESS-CONDUCT RELEVANT POLICIES WHICH GOVERN | REPORTING REQUIREMENT |  WHERE TO READ MORE PAGE | | | | --- | --- | --- | --- | | ENVIRONMENTAL MATTERS - Group health, safety and environmental policy - Introduction to sustainability | | |  | | | | - Environment | 42 | - TCFD report 45 | EMPLOYEES - People policy | | - Stakeholder engagement | 21 | | --- | --- | --- | --- | | | - Group health, safety and environmental policy | - Our people | 50 | | | - Directors’ remuneration policy | - Health and safety | | 40 - Whistleblowing policy - Ethics and business conduct  - Code of Conduct - Directors’ remuneration report 96 SOCIAL AND COMMUNITY - Community investment policy - Our people 50 MATTE RS | | - Code of Conduct | - Ethics and business conduct |  | | --- | --- | --- | --- | | RESPECT FOR HUMAN RIGHTS - Modern Slavery Act Statement | | - Our people | 50 | | | - People policy | - Ethics and business conduct |  | - Supplier Code of Conduct - Code of Conduct ANTI-BRIBERY AND - Anti-corruption policy - Ethics and business conduct  CORRUPTION - Bribery Act Compliance Manual - Policy on sales to customers located in  - Offset policy - Code of Conduct BUSINESS MODEL - What we do 2 - Investment case 8 - Business model 18 - Market overview 12 - Strategy 24 | STAKEHOLDERS - Stakeholder engagement | | 21 | | --- | --- | --- | | | - Corporate governance report | 80 | | RISK MANAGEMENT - Risk management | | 64 | | | - Principal risks and uncertainties | 66 | | NON-FINANCIAL KEY | - Key performance indicators | 26 | PERFORMANCE INDICATORS - Health and safety 40 - Environment 42 - Our people 50 Chemring Group PLC Annual report and accounts 2022  ### CHAIRMAN’S INTRODUCTION TO GOVERNANCE ## SUSTAINING A ROBUST ##  PURPOSE, VALUES AND CULTURE The Board recognises its role in establishing the purpose and values Carl-Peter Forster      innovative technologies and products that detect and defeat ever-changing        ## “ Our Operational Framework and  ##    ##    ##  GOVERNANCE AND OPERATIONAL FRAMEWORK ##     ###    ###   ###   ###   ###           STRATEGY - Board of directors   - Corporate governance report  -   -   -    -  businesses and ensuring that the requisite resources are allocated to the UK CORPORATE GOVERNANCE CODE   ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) 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           BOARD LEADERSHIP AND COMPANY PURPOSE     Culture            Conflicts of interest    DIVISION OF RESPONSIBILITIES    BOARD EFFECTIVENESS Division of responsibilities       COMPOSITION, SUCCESSION AND EVALUATION        Length of service   Evaluation       AUDIT, RISK AND INTERNAL CONTROL                     REMUNERATION  Policies and practices    112    BOARD EVALUATION      Carl-Peter Forster   Chemring Group PLC Annual report and accounts 2022 77 ### BOARD OF DIRECTORS ## EXPERIENCED LEADERSHIP CHAIRMAN EXECUTIVE DIRECTORS 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: EXPERIENCE: EXPERIENCE: EXPERIENCE: -  -  -  -    in the defence sector  -  -  -  -   in both service and Director level engineering sectors  - Chartered Accountant -                       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                            Chemring Group PLC Annual report and accounts 202278 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS NON-EXECUTIVE DIRECTORS A N R A N R A N R A N R LAURIE BOWEN ANDREW DAVIES STEPHEN KING FIONA MACAULAY  Senior Independent    BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE BOARD LENGTH OF SERVICE         EXPERIENCE: EXPERIENCE: EXPERIENCE: EXPERIENCE: -  -  -  -        -  -    - Chartered Accountant - International and operational             She is also Chair of IOG plc* and a                              served in senior operational and                 Senior Independent Director at TT            also held senior financial positions at    Length of service COMMITTEE MEMBERSHIP  A   N   R   Denotes Chair   ##  Chemring Group PLC Annual report and accounts 2022 79 ### CORPORATE GOVERNANCE REPORT ###  GOVERNANCE FRAMEWORK The Board is responsible for ensuring leadership of the Group through effective       THE BOARD    | | AUDIT COMMITTEE | | | NOMINATION COMMITTEE | | | REMUNERATION COMMITTEE | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | |  | | |  | | |  | | | |  | | | |  | | |  | | |  | | | | |  |  | | | | | | See page 90 | | | See page 94 | | | See page 96 | | | (Audit Committee report) | | | (Nomination Committee report) | | | (Directors’ remuneration report) | | THE CHIEF EXECUTIVE  EXECUTIVE COMMITTEE        RISK MANAGEMENT COMMITTEE ETHICS & COMPLIANCE COMMITTEE SUSTAINABILITY COMMITTEE               See page 37 See page 64 See page 57 (Introduction to sustainability) (Risk management) (Ethics and business conduct) Chemring Group PLC Annual report and accounts 202280 PURPOSE CULTURE AND VALUES STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS                       HOW THE BOARD ESTABLISHES AND MONITORS CULTURE   SAFETY                         EMPLOYEES  Code of Conduct                       Board site visits GOVERNANCE  Code of Conduct   AND BUSINESS    CONDUCT                      INTERNAL     CONTROL       MANAGEMENT     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  -   -    -   -   -   -          BOARD SITE VISITS  Site visits enable the Board to obtain a deeper understanding of the business       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  -    -    EXPERIENCE OF THE BOARD  TIME COMMITMENT OF DIRECTORS             APPROVAL OF DIRECTORS’ EXTERNAL APPOINTMENTS                               Governance 5  ##    Chemring Group PLC Annual report and accounts 2022 85 ### CORPORATE GOVERNANCE REPORT continued ###  continued 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                       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Audit      | | | Board | | | |  | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | |  | | | | |  |  | | | |  | |  | | | (2 scheduled | |  | | | |  | | (5 scheduled | |  |  | | |  |  | | |  |  | | |  |   —     5(5)     5(5)     — — —   5(5)     — — —   5(5)     — — —    Chemring Group PLC Annual report and accounts 2022 87 ### CORPORATE GOVERNANCE REPORT continued ###  BOARD APPOINTMENTS AND RE-ELECTION OF DIRECTORS PERFORMANCE EVALUATION            -   -    -  -  DIVERSITY  -   -   -   -    -         INDUCTION, TRAINING AND DEVELOPMENT      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   INDEPENDENT ADVICE -     -   -      Chemring Group PLC Annual report and accounts 202288 ###  FINANCIAL AND BUSINESS REPORTING STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS          RISK MANAGEMENT AND INTERNAL CONTROL           OPERATIONAL FRAMEWORK   provides an enhanced governance structure to enable us to operate in a      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      non-audit services AUDIT COMMITTEE MEMBERS              INTRODUCTION OPERATION OF THE COMMITTEE     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             understandable SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE  Appropriateness and disclosure of                              the Group              Effectiveness and independence of the       auditor                    Effectiveness of the internal auditors and           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  -    -   -   -  -  -  Chemring Group PLC Annual report and accounts 2022 91 ### AUDIT COMMITTEE REPORT continued SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE EXTERNAL AUDIT  continued                  -     -      -    -    - the effectiveness of co-ordination of the individual business unit audits     -     -              PROPOSED AUDIT AND CORPORATE GOVERNANCE REFORMS                     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INDEPENDENCE  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS                   -  -   -  -  -   -  -  -    - the level of fees proposed for the non-audit services relative to the -     -           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 Carl-Peter  Forster             BOARD COMPOSITION NOMINATION COMMITTEE MEMBERS                 INTRODUCTION    APPOINTMENTS TO THE BOARD           their valuable contribution to the Board and their roles as chair of the Audit   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Percentage of  the Board SID and Chair)    5        0 1   — — — — — ETHNIC BACKGROUND OF THE BOARD AND EXECUTIVE MANAGEMENT  senior positions on the Board  Percentage of   Percentage of   the Board SID and Chair)     100   100  — — — — —  — — — — —  — — — — —  — — — — — DIVERSITY, EQUITY AND INCLUSION SUCCESSION PLANNING     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      Carl-Peter Forster      Chemring Group PLC Annual report and accounts 2022 95 ### DIRECTORS’ REMUNERATION REPORT ###  THE REMUNERATION COMMITTEE’S  Laurie Bowen      SUMMARY OF MAJOR ACTIVITIES AND DECISIONS OF THE COMMITTEE IN 2022       Consideration of the 2021 annual bonus   Approval of the 2022 annual bonus plan  REMUNERATION COMMITTEE MEMBERS                  MEMBERSHIP AND OPERATION OF THE                    PERFORMANCE FOR 2022 AND REMUNERATION OUTCOMES                INTRODUCTION      -     -     -   -  - Annual bonus   -                   - PSP awards made on 22 March 2019 (subject, in part, to TSR performance over the three-year period ended 21 March 2022): Chemring Group PLC Annual report and accounts 202296   STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS             - PSP awards made on 17 December 2019 (subject to performance over the three  years ended 31 October 2022):        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       IMPLEMENTATION OF THE POLICY FOR 2023       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   CONCLUSION              Laurie Bowen      Chemring Group PLC Annual report and accounts 2022 97 ### DIRECTORS’ REMUNERATION REPORT continued ###  2022 REMUNERATION YEAR IN SUMMARY                                EXECUTIVE DIRECTORS’ TOTAL PAY  Total pay | Michael Ord | £2,336k | | --- | --- | | Andrew Lewis | £1,728k | | Sarah Ellard | £1,171k | £0.0m £0.50m £1.0m £1.5m £2.0m £2.5m Salary Annual bonus PSPPension and benefits ANNUAL BONUS PLAN OUTCOME   | Michael Ord | | | | | 147%90% | £764k150% | | --- | --- | --- | --- | --- | --- | --- | | Andrew Lewis | | | 122.5%75% | 125% | | £466k | | Sarah Ellard | 122.5%75% | 125% | | | | £327k | £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) Total bonus Chemring Group PLC Annual report and accounts 202298 PERFORMANCE SHARE PLAN OUTCOME STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS           Sarah Ellard  Value of shares vesting Accrued dividends            Chemring Group PLC Annual report and accounts 2022 99 ### DIRECTORS’ REMUNERATION REPORT continued ###     DIRECTORS’ EMOLUMENTS (AUDITED)  Bonus (cash and | |  | |  | | Pension | | | Total | deferred | | | | | Total | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | fees | benefits | 1 | benefits | 2 |  | | shares) |  | PSP |  |  | | 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                  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  Chemring Group PLC Annual report and accounts 2022100 BASE SALARY AND BENEFITS PAID DURING THE YEAR (AUDITED) STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS   | |  | 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 | | | |  | |  | | | 50% Threshold | | |  |  |   | | | (continuing operations) | | | | Target | |  |  | | | | | | | | Stretch | |  |  | | | |  | | | 50% Threshold | | |  |  |   | | | (continuing operations) | | | | 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 2022 101 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR continued  continued 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 | | | | Bonus paid in | respect of | | | | --- | --- | --- | --- | --- | --- | --- | | | | | respect of | strategic | | | | |  | | financial targets | objectives | Total bonus | | |  | |  |  |  |  | 1 | Michael Ord     Andrew Lewis     Sarah Ellard          Chemring Group PLC Annual report and accounts 2022102  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS    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    —  Value of accrued   vested 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    —  Value of accrued   to vest dividends to vest Michael Ord    Andrew Lewis    Sarah Ellard       Chemring Group PLC Annual report and accounts 2022 103 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued DETAILS OF VARIABLE PAY OPPORTUNITY IN THE YEAR continued  continued PSP awards granted in the year  Closing  share price conditional  on date shares  vests at Vesting  Date of grant  of grant  value threshold  Michael Ord        Andrew Lewis         Sarah Ellard                                 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benefit accrued at | | | Transfer value | | | | Increase in | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | |  | | | of accrued | | | 31 October 2022 | | | of accrued | | transfer value | | | Value of | | | Cash in lieu of | | | | | benefit at | | | | | | benefit at | | | during year | | benefit | | | | pension | | |  | | | | | | | 31 October | | (less members’ | | | for single | | | contributions | | Pension | Cash | | | 2021 | | Pension | Cash | | | 2022 | contributions) | | | figure | |  | |  |  |  | | |  | £’000 p.a. | | £’000 | | | £’000 | | | £’000 | £’000 | Michael Ord 51 — — — — — — — 51 Andrew Lewis  — — — — — — — 76 Sarah Ellard     24 72 461 — 53    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      Value of conditions under the PSP | |  | |  | | | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | |  | |  | | | | | | | | | | | Total at | Deferred bonus | | | | |  |  | | | Guideline | |  | | Dec 2020 | | Dec 2021 | |  | | | share | Sharesave | |  | of shares) | |  | 1 | |  | |  | |  | |  | | 2022 | |  | options | Michael Ord          Andrew Lewis          Sarah Ellard           Carl-Peter Forster  — — — — — — — — Laurie Bowen  — — — — — — — — Andrew Davies — — — — — — — — — Stephen King  — — — — — — — — Fiona MacAulay — — — — — — — — —      OUTSTANDING PSP AWARDS (AUDITED)  | | | At |  | Lapsed | Vested | | At | | | Closing | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | |  | | during | during | during |  | | Date of | share price on | | |  | | 2021 |  |  |  | | 2022 | vesting | date of grant (p) | |  — —  —   1  — — —    Michael Ord  — — —    —  — —    949,085 255,555 — (421,568) 783,072  — —  —   1  — — —    Andrew Lewis  — — —    —  — —    757,324 195,386 — (336,391) 616,319  — —  —   1  — — —    Sarah Ellard  — — —    —  — —    499,666 136,973 — (216,361) 420,278    Chemring Group PLC Annual report and accounts 2022106  STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS  Threshold   Director  vesting vesting             Upper quartile  Sarah Ellard                    Upper quartile  Sarah Ellard                Upper quartile             Sarah Ellard         OUTSTANDING DEFERRED BONUS SHARE AWARDS (AUDITED)  | | | At |  | Lapsed | Vested | | At | | | Closing | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | |  | | during | during | during |  | | Date of | share price on | | |  | | 2021 |  |  |  | | 2022 | vesting | date of grant (p) | |  — — —     — — —    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 2022 107 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued OUTSTANDING SHARESAVE OPTIONS (AUDITED)  | | | At |  | Lapsed | Vested | | At | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | |  | | during | during | during |  | |  |  | | |  | | 2021 |  |  |  | | 2022 | price | | date |  — — —    Michael Ord  16,853 — — — 16,853  — — —  202p  Andrew Lewis  8,910 — — — 8,910  — — —  202p  Sarah Ellard  8,910 — — — 8,910 TOTAL SHAREHOLDER RETURN PERFORMANCE GRAPH      £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 CHIEF EXECUTIVE’S REMUNERATION TABLE 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        2,336 Annual bonus £350           98% £300             100% £250 £200 £150 £100 £50 Chemring Group PLC Annual report and accounts 2022108 F F Chemring TSE 250 TSE SmallCap Source: Datastream (Thomson Reuters) PERCENTAGE CHANGE IN THE DIRECTORS’ REMUNERATION STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS    2020 vs 2021 2021 vs 2022  Benefits Annual bonus  Benefits Annual bonus  Benefits Annual bonus                     Group Legal Director & 1                     2                                                            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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)     Chemring Group PLC Annual report and accounts 2022110 ### DIRECTORS’ REMUNERATION REPORT ###  KEY OBJECTIVES STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS  -   -  >  >  >   -    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  CONSIDERATION OF CODE PROVISIONS IN DETERMINING POLICY              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accounts 2022 111 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued POLICY SUMMARY        Operation   Salary -  -  -  -         -  the role   -  - Provides an appropriate level of        -        Bonus -  -  -  -     -    -     - Vesting of deferred shares is subject   -   “good leaver” scenarios) at the end    receive dividend equivalents the bonus -     -       -  - Non-pensionable  -  an underpin based on the on vesting of deferred share     including inter alia levels of have been paid on the deferred  shares during the deferral period  -          -    Chemring Group PLC Annual report and accounts 2022112   Operation   STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Long-term -  -  -  -  incentive plan     strategic objectives of delivering    (performance     share plan    – “PSP”) -   -        -   -        -    -  in the plan rules during the      -        -    All-employee -  -  -  -  share scheme       Sharesave Plan Pension -  - Ongoing pension provision is in the -  -      paid in lieu of occupational pension   -  -     paid in lieu of occupational pension closed to future accrual for the   -         -     Other benefits -  -  -  -     and retention  -      -    -       Chemring Group PLC Annual report and accounts 2022 113 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued POLICY SUMMARY continued  continued   Operation   Minimum -  -  shareholding    requirements      -   to hold shares to the value of the      be assessed at the point of stepping                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   -  -  -  -  -   -  -         HOW THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY RELATES TO THE WIDER GROUP     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 Chemring Group PLC Annual report and accounts 2022 115 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued POLICY IN RESPECT OF THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS    Operation   The Chairman’s  -  -  -  and non- practice and set at a level that is  executive sufficient to attract and retain  directors’ fees    -     -  -  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    Chemring Group PLC Annual report and accounts 2022116 APPLICATION OF THE REMUNERATION POLICY IN 2023 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS     Salary -  >  >  >  -     Benefits -  Pension -   Bonus -   -   >   >   >   -  >    >   >  >  >   >  >  >  >  >  -       -  inter alia Chemring Group PLC Annual report and accounts 2022 117 ### DIRECTORS’ REMUNERATION REPORT continued ###  continued APPLICATION OF THE REMUNERATION POLICY IN 2023 continued  continued   Performance -  Share Plan -  (“PSP”)   -    1          -           Upper quartile or above  -             -           Chemring Group PLC Annual report and accounts 2022118 APPLICATION OF THE REMUNERATION POLICY IN 2023 continued STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS       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 2022 119 ### DIRECTORS’ REPORT  CONTRACTUAL ARRANGEMENTS          -   -   -   -  RESEARCH AND DEVELOPMENT -    BUSINESS REVIEW  CHANGE OF CONTROL            provisions granting the counterparties certain rights in the event of a change  RESULTS AND DIVIDENDS       SHARE CAPITAL AND SHAREHOLDER RIGHTS           DIRECTORS AND THEIR INTERESTS   Details of the rights attaching to shares are set out in the Articles of  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    Prudential Plc                   EMPLOYEE SHARE SCHEMES AND PLANS                 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           SUBSTANTIAL SHAREHOLDINGS             GOING CONCERN    Chemring Group PLC Annual report and accounts 2022 121 ### DIRECTORS’ REPORT continued 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 RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT      -  STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF    The directors are responsible for preparing the annual report and the Group   -               Reduced  Disclosure Framework.       Michael Ord Sarah Ellard      Chemring Group PLC Annual report and accounts 2022122 # CONSOLIDATED INCOME STATEMENT For the year ended 31 October 2022 | | Note | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | Underlying performance £m | Non-underlying items* £m | Total £m | Underlying performance £m | Non-underlying items* £m | Total £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 5. SECTION 2 SECTION 3 SECTION 4 Chemring Group PLC Annual report and accounts 2022 123 ## CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 October 2022 | | 2016 | 2022 £m | 2021 £m | | --- | --- | --- | --- | | **Profit after tax attributable to equity holders of the parent as reported** | | **47.4** | **41.3** | | **Items that will not be reclassified subsequently to profit and loss** | | | | | Remeasurement of the defined benefit pension schemes | 29 | (3.3) | 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** | 124 Channing Group PLC Annual report and accounts 2022 # CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 October 2022 | | Share capital £m | Share premium account £m | Special capital reserve £m | Translation reserve £m | Retained earnings* £m | Total £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 capital £m | Share premium account £m | Special capital reserve £m | Translation reserve £m | Translation reserve £m | Retained earnings £m | Own shares £m | Total £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 60.9m 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. SECTION 2 (continued) SECTION 2 (continued) SECTION 2 (continued) Chemring Group PLC Annual report and accounts 2022 125 # CONSOLIDATED BALANCE SHEET As at 31 October 2022 | | Total | 2022 | | 2021 | | | --- | --- | --- | --- | --- | --- | | | | £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 | 231.2 | | 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** | | | 630.1 | | 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) | | | | | | (80.3) | | (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 Cherning Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on 13 December 2022. Signed on behalf of the Board **Michael Ord** **Andrew Lewis** Director Director 126 Cherning Group PLC Annual report and accounts 2022 # CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 October 2022 | | Years | 2022 £m | 2021 £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 | | (3.2) | (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** | 2022 2021 2021 2020 2021 2020 Chemring Group PLC Annual report and accounts 2022 127 NOTES TO THE GROUP FINANCIAL STATEMENTS # **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 by destination: | | Sensors & Information £m | Countermeasures & Energetics £m | 2022 £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 & Information £m | Countermeasures & Energetics £m | 2021 £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 | 13.8 | | 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. The following table discloses the split of the Group's revenue between goods and services: | | Sensors & Information £m | Countermeasures & Energetics £m | 2022 £m | | --- | --- | --- | --- | | Goods | 53.1 | 274.3 | 327.4 | | Services | 109.2 | 6.2 | 115.4 | | | **162.3** | **280.5** | **442.8** | | | Sensors & Information £m | Countermeasures & Energetics £m | 2021 £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. As at 31 October 2022 £651m (2021: £501m) of revenue was not yet recognised in respect of obligations that were unfulfilled or only partially fulfilled as at the year end: £403m (2021: £358m) of the revenue is expected to be recognised in the next financial year and £248m (2021: £143m) in future periods. # **2. BUSINESS SEGMENTS** IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Group Chief Executive and the Board to allocate resources to the segments and to assess their performance. For management purposes, the Group's operating and reporting structure clusters similar businesses together, based on the products and services they offer. These segments are the basis on which the Group reports its segmental information. The principal activities of each segment are as follows: | **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 ('EMD') equipment. | | --- | --- | | **Countermeasures & Energetics** | 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. | 128 Channing Group PLC Annual report and accounts 2022 ## 2. BUSINESS SEGMENTS continued A segmental analysis of revenue and operating profit is set out below: | Year ended 31 October 2022 | Sensors & Information £m | Countermeasures & Energetics £m | Unallocated* £m | Total £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 | | Tax | | | (4.4) | (4.4) | | **Profit for the year** | | | **(25.7)** | **47.4** | | Year ended 31 October 2021 | Sensors & Information £m | Countermeasures & Energetics £m | Unallocated* £m | Total £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 | (3.7) | (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 | | Tax | | | (7.3) | (7.3) | | **Profit for the year** | | | **(22.3)** | **41.5** | * Unallocated items are specific corporate level costs that cannot be allocated to 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 and are not disclosed here. A disclosure of non-current assets by location, excluding retirement benefit surplus and deferred tax, is shown below: | Non-current assets by location | 2022 £m | 2021 £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 Revenues of £166.2m (2021: £166.9m) arose from sales to the Group's largest customer, the US DoD. The largest customer had sales reported in both of the Group's business segments. This was the only individual customer where direct sales accounted for more than 10% of Group revenue for the year. Financial Services 2022 Financial Services 2022 Chemring Group PLC Annual report and accounts 2022 129 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 their IFRS equivalent measures as follows: | Non-underlying items and non-underlying measures | 2022 £m | 2021 £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 basis 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. # **APPORTISATION OF ACQUIRED INTANGIBLES** Included in non-underlying items is the amortisation charge arising from business combinations of £46m (2021: £6.3m). 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 Cherning's ownership. As such, these costs are not reflective of the underlying costs of the Group and therefore, in order to provide an explanation of results that is not distorted by the history of business units being acquired rather than organically developed, have been excluded from the underlying measures. # **DERIVATIVE FINANCIAL INSTRUMENTS** Included in non-underlying items is a £4.1m loss (2021: £0.7m gain) on the movement in fair value of derivative financial instruments. This is excluded from underlying earnings to ensure the recognition of the gain or loss on the derivative matches the timing of the underlying transaction. # **ACQUISITION EXPENSES** Included in non-underlying items is £2.0m (2021: £1.6m) of acquisition expenses. This includes £10m (2021: £0.4m) relating to deferred consideration contingent on continued employment of the former owners of Cabsis, 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 remaining expense of £10m (2021: £1.2m) primarily includes professional fees incurred in relation to the Group's mergers and acquisitions activity during 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 distorted by the costs of acquiring a business rather than organically developed, these costs have been excluded from the underlying measures. # **TAX** The tax impact of non-underlying items comprises a £1.3m tax credit (2021: £1.0m credit) on the above non-underlying items. # **NET DEBT** A reconciliation and analysis of net debt is presented in notes 31 and 32. # **EBITDA** In our financial review we present measures of EBITDA, which is calculated as follows: | | 2022 £m | 2021 £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 licenses (note 11) | 0.1 | 0.1 | | Depreciation of property, plant and equipment (note 12) | 18.1 | 18.3 | | **EBITDA** | **76.2** | **75.5** | | Non-underlying items | 6.1 | 0.9 | | **Underlying EBITDA** | **82.3** | **76.4** | 130 Cherning Group PLC Annual report and accounts 2022 ### 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 Operating profit is stated after charging (crediting): | | 2022 £m | 2021 £m | | --- | --- | --- | | Research and development costs | 7.5 | 8.5 | | Amortisation | 4.6 | 6.2 | | | 0.1 | 0.6 | | | 0.1 | 0.1 | | Depreciation of property, plant and equipment | 16.5 | 16.8 | | | 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 | 138.0 | The remaining items within operating profit predominantly relate to general and administrative expenses and production overheads, and includes £4.8m of other income. A detailed analysis of the auditor's remuneration on a worldwide basis is set out below: | Auditor's remuneration | 2022 £m | 2021 £m | | --- | --- | --- | | Fees payable to the Company's auditor and its associates for: | | | | – 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 | Included in the fees for the audit of the Company's annual accounts is £0.1m (2021: £0.1m) in respect of the parent company. A description of the work of the 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 The average monthly number of employees, including executive directors, was: | | 2022 Number | 2021 Number | | --- | --- | --- | | Direct | 1,435 | 1,381 | | Indirect | 899 | 905 | | | 3,334 | 2,286 | The costs incurred in respect of employees, including share-based payments, were: | | 2022 £m | 2021 £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** | The share-based payment charge of £6.4m (2021: £5.7m) excludes £1.0m (2021: £0.4m) of deferred consideration in relation to acquisitions accounted for as equity-wettled 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 2022 131 SALES PROFITS INVESTMENT INVESTMENT INCOME NOTES TO THE GROUP FINANCIAL STATEMENTS continued # 6. FINANCE EXPENSE | | 2022 £m | 2021 £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 general borrowings during the year, in this case 1.3% (2021: 1.3%). During the year £0.6m (2021: £0.5m) of interest was capitalised in relation to the Tennessean modernisation and automation programme. # 7. TAXATION | | 2022 £m | 2021 £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** | Income tax in the UK is calculated at 19.0% (2021: 19.0%) of the taxable profit for the year. Tax for other jurisdictions is calculated at the rates prevailing in those jurisdictions. The tax charge can be reconciled to the income statement as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | **Profit before tax** | **51.8** | **48.8** | | Tax at the UK corporation tax rate of 19.0% (2021: 19.0%) | 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 | 3.1 | 1.8 | | **Tax charge** | **4.4** | **7.3** | In addition to the tax charge in the income statement, a tax credit of £0.4m (2021: £2.1m charge) has been recognised in other comprehensive income in the year. The effective rate of tax on the profit before tax of the Group is 8.5% (2021: 15.0%), and the effective rate of tax on the underlying profit before tax of the Group is 9.1% (2021: 14.8%). The effective rate of tax on the underlying profit before tax is lower than the 2021 effective tax rate due to the recognition of a deferred tax asset in respect of future US interest deductions, which is included in tax losses not previously recognised above. Included within the tax charge is a current year non-underlying deferred tax credit of £1.3m (2021: £1.0m), predominantly relating to tax on amortisation of acquired intangibles. 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 The Group's future tax charge and effective tax rate could be affected by several factors including tax reform in countries around the world, including any arising 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. 132 Channing Group PLC Annual report and accounts 2022 # 8. DIVIDENDS | | 2022 £m | 2021 £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 the close of business on 24 March 2023. The estimated cash value of this dividend is £10.7m. The total dividend for the year will therefore be 5.7p (2021: 4.8p) 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. The cumulative preference shares carry an entitlement to a dividend at the rate of 7p per share per annum which was paid in equal instalments on 30 April 2022 and 31 October 2022. # 9. EARNINGS PER ORDINARY SHARE Earnings per share is based on the average number of shares in issue, excluding own shares held, of 280,506,245 (2021: 281,555,716). Diluted earnings per share has been calculated using a diluted average number of shares in issue, excluding own shares held, of 288,218,004 (2021: 287,985,431). The number of shares used in the calculations is as follows: | | 2022 Ordinary shares Number millions | 2021 Ordinary shares Number millions | | --- | --- | --- | | Weighted average number of shares used to calculate basic earnings per share | 280.5 | 281.6 | | Additional shares issuable other than or for 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 | The earnings used in the calculations of the various measures of earnings per share are as follows: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | £m | Base SPL (Pence) | Diluted SPL (Pence) | £m | Base SPL (Pence) | Diluted SPL (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 2B) | 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 2022 133 SECTION 3: OFFICE SECTION 3: OFFICE SECTION 3: OFFICE 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. 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 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 CGUs. Pre-tax discount rates, derived from the Group's post-tax weighted average cost of capital of 7.2% (2021: 7.1%) which 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 CGUs, have been used to discount projected cash flows. These premiums range from 1% to 2% (2021: 1% to 3%). 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. At the end of five years, the calculations assume the performance of the CGUs will grow at a nominal annual rate of 2.25% (2021: 1.75%) in perpetuity. Growth 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. The weighted average cost of capital is derived using beta values of a comparator group of defence companies adjusted for funding structures as appropriate. The pre-tax discount rates used for value-in-use calculations and the carrying value of goodwill by CGUs are: | | 2022 % | 2021 % | 2022 6m | 2021 6m | | --- | --- | --- | --- | --- | | Roke Manor Research Limited | 11.3 | 11.7 | 31.5 | 31.5 | | Cheming Energetics UK Limited | 10.2 | 9.7 | 14.6 | 14.6 | | Cheming Sensors & Electronic Systems, Inc. | 10.5 | 10.6 | 40.8 | 34.3 | | Cheming Energetic Devices, Inc. | 10.5 | 10.6 | 18.0 | 15.2 | | Other | | | 13.3 | 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). The pre-tax discount rates used for other CGUs ranged from 10.2% to 12.3% (2021: 8.6% to 11.3%). 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. 134 Cheming Group PLC Annual report and accounts 2022 11. DEVELOPMENT COSTS AND OTHER INTANGIBLE ASSETS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 2022 135 NOTES TO THE GROUP FINANCIAL STATEMENTS continued # 12. PROPERTY, PLANT AND EQUIPMENT | | Land and buildings £m | Plant and equipment £m | Right-of-use land and buildings £m | Right-of-use plant and equipment £m | Total £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 | (0.3) | — | — | 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 | During the year, £0.6m (2021: £0.5m) of interest was capitalised, as set out in note 6. £0.8m (2021: £1.1m) of capitalised interest was charged as depreciation and £1m (2021: £4m) was disposed of. This results in a net book value for capitalised interest of £8.8m (2021: £9.0m). Included within land and buildings and plant and equipment are assets under construction of £13.6m and £11.5m respectively (2021: £20.8m and £24.2m). These assets are not depreciated. Land and buildings were revalued at 30 September 1997 by Chestertons Chartered Surveyors, independent valuers not connected with the Group, on the basis 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 £m | 2021 £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** | If stated under historical cost principles, the comparable amounts for the total of land and buildings would be: | | 2022 £m | 2021 £m | | --- | --- | --- | | Cost | 144.5 | 130.4 | | Accumulated depreciation | (35.2) | (31.9) | | **Historical cost value** | **119.3** | **108.5** | All other tangible fixed assets are stated at historical cost. At 31 October 2022, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £6.9m (2021: £10.4m). Cash flows from purchases of property, plant and equipment are £31.5m (2021: £28.0m). The difference to the additions total presented above includes £3.8m (2021: £0.1m) non-cash movements related to right-of-use assets as well as the movement in accrued capital expenditure. 136 Channing Group PLC Annual report and accounts 2022 13. SUBSIDIARY UNDERTAKINGS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 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 2022 137 NOTES TO THE GROUP FINANCIAL STATEMENTS continued # **14. INVENTORIES** | | 2022 £m | 2021 £m | | --- | --- | --- | | Raw materials | 48.1 | 36.6 | | Work in progress | 38.8 | 27.2 | | Finished goods | 12.7 | 16.9 | | | **99.6** | **80.7** | There are no significant differences between the replacement cost of inventory and the carrying amount shown above. The Group recognised £0.7m (2021: £2.3m) 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 £m | 2021 £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. The average credit period taken by customers on sales of goods, calculated using a countback basis, is 17 days (2021: 25 days). No interest is charged on receivables from the date of invoice to payment. 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, £0.1m of gross trade receivables were aged greater than 30 days past due (2021: £0.8m). The directors consider that the carrying amount of trade and other receivables approximates to their fair values. Of the £10.0m of accrued income at 31 October 2021, £10.0m had been billed and paid in the year. Of the £11.4m of accrued income at 31 October 2022, over 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. Of the £8.5m (2021: £3.7m) of other receivables at 31 October 2022, £2.0m (2021: £4.6) related to a short-term loan due from the Cherning Group Staff Pension Scheme to fund margin calls on liability driven investments, which was repaid in November 2022, and £4.8m (2021: £2.9m) related to research and 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 of these assets approximates to their fair value. For the purposes of the statement of cash flows, cash and cash equivalents comprises cash at bank of £198m (2021: £5.8m) less the bank overdraft included in short-term borrowings of £4.4m (2021: £0.4m), as the overdraft is held for the purpose of meeting short-term cash commitments. # **17. BORROWINGS** | | 2022 £m | 2021 £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** | 138 Cherning Group PLC Annual report and accounts 2022 # **17. BORROWINGS** continued Analysis of borrowings by currency: | | 2022 £m | 2021 £m | | --- | --- | --- | | Sterling | 0.1 | 0.1 | | US dollar | 20.9 | 28.5 | | | **21.0** | **28.6** | The weighted average interest rates paid were as follows: | | 2022 % | 2021 % | | --- | --- | --- | | Bank overdrafts | 2.3 | 1.0 | | UK bank loans | 2.3 | — | | - Sterling denominated | 1.4 | 1.9 | | - US dollar denominated | | | An analysis of borrowings by maturity is as follows: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Bank loans and overdrafts £m | Preference shares £m | Total £m | Bank loans and overdrafts £m | Preference shares £m | Total £m | | Borrowings falling due: | | | | | | | | - within one year | — | — | — | 0.4 | — | 0.4 | | Borrowings falling due: | | | | | | | | - 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$70m overdraft. These were established in July 2021 with a syndicate of six banks and run until December 2025 with two "one-year" options to extend at the lenders' discretion. None of the borrowings in the current or the prior 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 £m | 2021 £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 limit 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. The expense relating to short-term and low-value leases in the year was £0.9m (2021: £0.8m). In total, payments of £2.2m (2021: £1.6m) were made under leasing contracts. Included in the financing activities section of the cash flow is £2.1m (2021: £1.5m) to repay the principal portion of the lease and £0.1m (2021: £0.1m) to repay lease interest. Included in the operating activities section of the cash flow is £0.9m (2021: £0.8m) relating to short-term and low-value leases. SECTION 2 SECTION 3 SECTION 4 Chemring Group PLC Annual report and accounts 2022 139 NOTES TO THE GROUP FINANCIAL STATEMENTS continued # **18. LEASES continued** A maturity analysis of the future undiscounted lease payments in respect of the Group's lease liabilities is presented in the table below: | | 2022 £m | 2021 £m | | --- | --- | --- | | Lease liabilities falling due: | | | | – within one year | 1.8 | 1.4 | | Lease liabilities falling due: | | | | – 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 £m | 2021 £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 | Other payables of £28.5m (2021: £29.0m) includes payroll-related creditors of £18.0m (2021: £21.7m). 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 £17.1m included in advance receipts from customers recognised at 31 October 2021 has been recognised as revenue in 2022 (2021: £22.8m). Of the £26.6m 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. The average credit period taken on purchases of goods is 18 days (2021: 18 days) using year-end trade payables divided by cost of sales. No interest is payable on trade payables from the date of invoice to payment. # **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** Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers. The impairment provisions for financial assets disclosed in note 15 "Trade and other receivables" are based on assumptions about risk of default and expected 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 and existing market conditions, as well as forward-looking estimates at the end of each reporting period. Customers are mainly multinational organisations or 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 balance which might be affected by credit risk are trade receivables and cash and cash equivalents. 140 Channing Group PLC Annual report and accounts 2022 ## 20. FINANCIAL RISK MANAGEMENT (continued) 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. The capital structure of the Group consists of equity (as disclosed in the consolidated statement of changes in equity), retained earnings, cash and cash 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. 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 six banks and run until December 2025 with two 'one-year' options to extend. As at 31 October 2022, the RCF was drawn by £21.7m (2021: £29.2m). ### (C) FINANCIAL RISK MANAGEMENT The primary risks that the Group is exposed to are liquidity risk, foreign currency risk, interest rate risk and credit risk. It is the Group's policy to manage these risks under the following policies: #### 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. The Group minimises the balance sheet translation exposures, where it is practical to do so, by funding subsidiaries with long-term loans, on which exchange 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 and US dollars, and at the shorter and are subject to floating rates of interest. ### 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 £m | Fair value £m | Carrying value £m | Fair value £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 | (38.5) | (38.5) | (29.0) | (29.0) | | Interest payable | (0.1) | (0.1) | — | — | | Borrowings | (21.0) | (21.0) | (28.6) | (28.6) | The following items are not financial instruments as defined by IFRS 9: - (a) prepayments made/acknowledged 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). CASH FLOW CASH FLOW CASH FLOW Chemring Group PLC Annual report and accounts 2022 141 NOTES TO THE GROUP FINANCIAL STATEMENTS continued # **21. FINANCIAL INSTRUMENTS** The following table details the fair value of derivative financial instruments assets/(liabilities) recognised in the balance sheet: | | 2022 £m | 2021 £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** | There was a £4.1m loss (2021: £0.7m gain) on the movement in the fair value of derivative financial instruments recognised in the income statement. 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 instruments £m | Loans and overdrafts £m | Total £m | Derivative instruments £m | Loans and overdrafts £m | Total £m | | Rating due: | | | | | | | | – 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 these financial instruments fall under the fair value hierarchy. The fair value measurement hierarchy is as follows: - 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 (i.e. derived from prices); and - Level 3 – inputs for the asset or liability that are not based on observable market data (i.e. as unobservable inputs). The following tables present the Group's assets and liabilities that are measured at fair value: | | Fair value hierarchy | 2022 | | 2021 | | | --- | --- | --- | --- | --- | --- | | | | Carrying amount £m | Fair value £m | Carrying amount £m | Fair value £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 the closing exchange rate for the US dollar was 1.15 (2021: 1.37) and the average exchange rate was 1.23 (2021: 1.38). 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 £19m (2021: £2.6m). 142 Channing Group PLC Annual report and accounts 2022 ## 21. FINANCIAL INSTRUMENTS continued ### SENSITIVITY ANALYSIS continued The following table details the Group's sensitivity to a 10 cent movement in the US dollar rate against sterling with regards to its income statement. The Group 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 of a reasonably possible change to their exchange rates. | Continuing operations | +10 cents US dollar impact | | -10 cents US dollar impact | | | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £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. As the Group mainly has fixed interest rate debt, a change in interest rates would not have an immediate significant impact on the income statement. A change in interest rates of 1% throughout the year would cause the Group's finance expense to change by £0.2m. ## 22. PROVISIONS | | Legal provision £m | Environmental provision £m | Disposal provision £m | Total £m | | --- | --- | --- | --- | --- | | At 31 October 2021 | 3.6 | 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 | These provisions are classified on the balance sheet as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | Included in current liabilities | 1.6 | 2.6 | | Included in non-current liabilities | 16.8 | 14.9 | | | 18.4 | 17.5 | The legal provision represents the estimated legal liabilities faced by the Group at the balance sheet date. There are uncertainties regarding the range of possible 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 energetic 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 £14 and £23.7m, and the risk of economic outflow relating to these reduces with the passage of time. These are expected to be utilised over the next five years. 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. SENSITIVITY ANALYSIS continued SENSITIVITY ANALYSIS continued Chemring Group PLC Annual report and accounts 2022 143 NOTES TO THE GROUP FINANCIAL STATEMENTS continued # **23. DEFERRED TAX** The following are the principal deferred tax assets/(liabilities) recognised by the Group and movements thereon: | | Accelerated tax depreciation £m | Proceeds £m | US interest deductions £m | Tax losses £m | Acquired intangibles £m | Other £m | Total £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 | 0.6 | 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) | (45.3) | | **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. Deferred tax balances of £10.4m (2021: £8.2m) within the "Other" category above include temporary differences arising on provisions and accruals. 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. At the balance sheet date, the Group had unrecognised deferred tax of £3.7m (2021: £4.5m) on gross tax losses of £21.3m (2021: £45.3m) and unrecognised deferred tax of £18.2m (2021: £16.5m) on gross interest deductions of £72.2m (2021: £77.3m) as a result of US interest limitation regulations, potentially available for offset against future profits in certain circumstances. The Group also had unrecognised deferred tax of £1.5m (2021: £1.2m) on gross capital losses of £6.9m (2021: £5.9m). No deferred tax asset has been recognised in respect of these amounts because of the unpredictability of future taxable qualifying profit 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 because the Group is in a position to control the timing of the reversal of the temporary differences and none are expected to reverse in the foreseeable future. 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 transfer's line. # **24. SHARE CAPITAL** | | 2022 £m | 2021 £m | | --- | --- | --- | | **Issued and fully paid** | | | | 283,541,742 (2021: 283,149,511) ordinary shares of 1p each | **2.8** | **2.8** | During the year, 392,231 ordinary shares (2021: 299,581) were issued for cash to employees under the Group's approved savings-related share schemes. 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 for accounting purposes within non-current liabilities. 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. 144 Channing Group PLC Annual report and accounts 2022 ## 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 by the Court in 1986, in accordance with the requirements of the Companies Act 1985. The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations and the accumulation of gains or losses from the effective portion of hedges of net investments in foreign operations. Included within retained earnings is £7.3m (2021: £7.6m) of the Company's own shares held by the Group's Employee Share Ownership Plan Trust ("ESOP") which is treated as a branch of the parent company. The ESOP purchased 2,467,329 shares during the year (2021: 2,242,342) and 2,607,529 shares (2021: 846,369) 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 31 October 2022 was 2,443,709 (2021: 2,583,509). 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 £m | 2021 £m | | --- | --- | --- | | At 1 November 2021 | — | 2.9 | | Transactions | — | (2.9) | | As 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 share-based incentive schemes, details of which are set out in note 27.7M ordinary shares (2021: nil) were acquired during the year and nil ordinary shares (2021: 675,392) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at 31 October 2022 was nil (2021: nil). ## 27. SHARE-BASED PAYMENTS The Group operates share-based compensation arrangements to provide incentives to the Group's senior management and eligible employees. The Group recognised a net charge of £7.4m (2021: £5.7m) in respect of share-based payments during the year, of which £1.0m (2021: £0.4m) is included in non-underlying costs. 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 | 4,218,961 | 4,185,176 | | Awarded | 2,386,342 | 1,791,635 | | Vested | (2,374,221) | (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 | — | — | The following awards were outstanding at 31 October 2022: | Date of award | Number of ordinary shares under award | Vesting price per share items | Date when awards due 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 2022 145 7. 2016 6. 2016 5. 2016 ### 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  Chemring Group PLC Annual report and accounts 2022146 ## 27. SHARE-BASED PAYMENTS continued ### DEFERRED BONUS SHARE AWARDS Under the deferred bonus share awards, deferred awards of ordinary shares are made at nil cost to employees. Awards ordinarily vest on the second or third anniversary of the award date. | | Number of deferred shares | | | --- | --- | --- | | | 2022 | 2021 | | Outstanding at the beginning of the year | 766,171 | 613,365 | | Awarded | 456,232 | 351,832 | | Vested | (233,621) | (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** | **—** | **—** | The following awards were outstanding at 31 October 2022: | Date of award | Number of ordinary shares under award | Share price at valuation (Rms) | Visiting price per share (Rms) | Costs when awards are due 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 | 170,536 | 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 during the year was 284p (2021: 300p). The Group has applied a discount to the share-based payments, to reflect the expected number of leavers over the life 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. The deferred consideration is comprised of two tranches of 326,792 Cherning ordinary shares each, valued at £2.0m based on the share price on 2 June 2021 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 Cherning Group PLC. No further awards were granted during the year ended 31 October 2022 (2021: 653,584) in respect of the Cubica Group acquisition. Nil vested or lapsed in the year (2021: nil) and 653,584 are outstanding at the end of the period. Nil went subject to vesting at the end of the year (2021: 653,584). The fair value of the deferred share awards is based on the share price on the grant date of the award. The weighted average fair value of awards made during 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, Cherning 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 £70m, funded from Cherning's existing bank facilities. Further deferred consideration of up to £2.0m is payable in Cherning 1p ordinary shares in two tranches (subject to the former owners remaining employed in the Cherning Group) on the second and third anniversary of completion. The operating results and assets and liabilities of the acquired company have been consolidated from 3 June 2021. The deferred consideration of £2.0m is contingent on continued employment of the former owners. In accordance with IFRS 3 these costs have been treated as post-acquisition expenses and accounted for as equity-settled share-based payments under IFRS 2. See note 3 for further details. Acquisition-related costs of £1.6m have been classified as non-underlying costs in the statement of profit or loss in the reporting period ended 31 October 2021. 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 £14m, 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. Cherning Group PLC Annual report and accounts 2022 147 CUBICA GROUP CUBICA GROUP CUBICA GROUP PLC 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** | The fair values of the assets and liabilities of the Cubica Group as at the date of acquisition were as follows: | | Per value £m | | --- | --- | | Cash and cash equivalents | 1.9 | | Trade and other receivables | 0.4 | | Trade and other payables | (1.4) | | Current tax | (0.5) | | Intangible assets: customer relationships | 2.1 | | Intangible assets: technology | 2.5 | | Deferred tax liability | (1.1) | | **Net identifiable assets** | **3.9** | | Less: non-controlling interests | — | | Add: Goodwill | 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 adjustments to the above amounts, or any additional provisions that existed at the date of acquisition, then the accounting for the acquisition would be revised. The Group has not identified any such information that therefore no changes were required to the accounting for the acquisition. Goodwill is attributable to the skills and technical talent of the assembled workforce and synergies expected to arise after the Group's acquisition of the new 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 Vigl. Al Limited ("Vigl.Al"), 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 arrangements are all defined contribution schemes, with a combined cost of £7.3m (2021: £6.0m) for continuing operations. Chemring Nisbet operated a defined benefit pension scheme that was closed in October 2022 and the liability transferred to an insurance company. The net deficit of the Chemring Nisbet Scheme as at 31 October 2021 was £14 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 £11.2m at 31 October 2022 (2021: £13.7m). 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. 148 Chemring Group PLC Annual report and accounts 2022 ## 29. RETIREMENT BENEFIT OBLIGATIONS continued The movement in the net defined benefit asset is as follows: | | Defined benefit obligations | | Defined benefit asset | | Net defined benefit asset | | | --- | --- | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | 2022 £m | 2021 £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** | | | | | | | | Reneasurement (loss)/gain | | | | | | | | Actuarial (loss)/gain arising from: | | | | | | | | – 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 (benefit) paid out | 3.3 | 3.4 | (3.3) | (3.4) | — | — | | At 31 October | (60.3) | (90.9) | 71.4 | 104.6 | 11.2 | 13.7 | The Cherning Group Staff Pension Scheme had 828 members at the end of the year (2021: 884). Of these members 58.9% (2021: 578%) were pensioners 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 for at least the next 45 years. The pension scheme's assets are analysed as follows: | | 2022 £m | 2021 £m | 2022 % | 2021 % | | --- | --- | --- | --- | --- | | 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 ("LDF") 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 Cherning 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. The principal assumptions used in the actuarial valuation of the Cherning Group Staff Pension Scheme were as follows: | | 2022 % | 2021 % | | --- | --- | --- | | Discount rate | 4.9 | 1.8 | | Inflation – RPI | 3.1 | 3.4 | | – CPI | 2.7 | 2.7 | Cherning Group PLC Annual report and accounts 2022 149 SECTION 2 (continued) SECTION 2 (continued) SECTION 2 (continued) 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 Cherning Group Staff Pension Scheme, the actuarial table currently used is EIPM tables (series 3 of the SAPS tables) with future improvements in line with CMI 2021 and a 1.25% long-term trend rate. This results in the following life expectancies at age 65: | | | 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 and the mortality rates. If the discount rate used in determining retirement benefit obligations were to change by 0.1% then it is predicted that the deficit in the 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. The Group anticipates contributions to the defined benefit scheme for the year ending 31 October 2023 will be £nil (2022, £nil). ### 30. CASH GENERATED FROM OPERATING ACTIVITIES | | Notes | 2022 £m | 2021 £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 £m | 2021 £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 | 37.4 | 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) | 198 Cherning Group PLC Annual report and accounts 2022 ### 32. ANALYSIS OF NET DEBT | | At 31 November 2021 £m | Cash flows £m | Non-cash charges £m | Exchange rate effects £m | At 31 October 2022 £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) | (10.9) | | 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) | Accrued interest is included in the carrying amount of interest payable (note 19) measured at amortised cost and therefore is not presented as a separate line item in the above table. ### 33. CONTINGENT LIABILITIES The Group is, from time to time, party to legal proceedings and claims, and is involved in correspondence relating to potential claims, which arise in the ordinary course of business. #### 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 Cherning 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 been classified in other receivables on the consolidated balance sheet. #### 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. The remuneration of the executive directors is determined by the Remuneration Committee, having regard to the performance of the individuals and market 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. Total emoluments for key management personnel charged to the consolidated income statement were: | | 2022 £m | 2021 £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** | SECTION 2 OF 2 SECTION 3 SECTION 4 OF 4 Cherning Group PLC Annual report and accounts 2022 151 ### 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. Chemring Group PLC Annual report and accounts 2022152 # PARENT COMPANY BALANCE SHEET As at 31 October 2022 | | Note | 2022 | | 2021 | | | --- | --- | --- | --- | --- | --- | | | | £m | £m | £m | £m | | **Non-current assets** | | | | | | | Property, plant and equipment | 1 | 0.2 | | 0.2 | | | Investments in subsidiaries | 2 | 786.6 | | 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 | — | | (8.9) | | | Preference shares | 8 | (0.1) | | (0.1) | | | | | | (31.2) | | (30.6) | | **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 basis. The Company reported a loss for the year ended 31 October 2022 of £45.1m (2021: £24.6m profit). These financial statements of Chemring Group PLC (registered number 86662) were approved and authorised for issue by the Board of directors on 13 December 2022. Signed on behalf of the Board Michael Ord Andrew Lewis Director Director SALES SERVICE SERVICES FINANCIAL SERVICES Chemring Group PLC Annual report and accounts 2022 153 ## PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 October 2022 | | 2022 £m | 2021 £m | | --- | --- | --- | | (Loss)/profit after tax attributable to equity holders of the parent as reported items that will not be reclassified subsequently to profit and loss | (45.1) | 24.6 | | 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 capital £m | Share premium account £m | Special capital reserve £m | Retained earnings £m | Total £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 capital £m | Share premium account £m | Special capital reserve £m | Retained earnings £m | Own shares £m | | At 1 November 2020 | 2.8 | 306.7 | 12.9 | 474.3 | (2.9) | | Profit after tax | — | — | — | 24.6 | — | | Other comprehensive income | — | — | — | 2.1 | — | | Total comprehensive income | — | — | — | 26.7 | — | | Ordinary shares issued | — | 0.4 | — | — | 0.4 | | Share-based payments (net of settlement) | — | — | — | 4.7 | — | | Dividends paid | — | — | — | (11.9) | — | | Purchase of shares by employee share ownership plan trust | — | — | — | (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. As at 31 October 2022 the Company had distributable reserves of £422.0m (2021: £483.8m). When required, the Company can receive dividends from its subsidiaries to further increase distributable reserves. 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. 154 **Channing Group PLC** Annual report and accounts 2022 # NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS ## 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 | 31.7 | | **At 31 October 2022** | **902.8** | | **Impairment** | | | At 31 October 2021 | (84.5) | | 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 £31.7m represent a capital contribution to CHG Overseas Limited. During the year ended 31 October 2021, Cheming Group PLC acquired the Cubica Group for a cost of investment of £7.0m. See note 28 of the Group financial statements for further details. In addition, the Company increased its investments in Cheming Countermeasures Limited and CHG Overseas Limited by £30.0m 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 CGUs, have been used to discount projected cash flows. These premiums range from 1% to 2% (2021: 1% to 3%). The calculations assume the performance of the CGUs will grow at a nominal annual rate of 2.25% (2021: 1.75%) in perpetuity. 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. SALES & TRENDS SALES & TRENDS SALES & TRENDS Cheming Group PLC Annual report and accounts 2022 155 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued # **3. TRADE AND OTHER RECEIVABLES** | | 2022 £m | 2021 £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 | — | | | **33.2** | **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 of invoice to payment. As at 31 October 2022, Cherning Group PLC loaned £2.8m to the Cherning 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 £m | 2021 £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** | Other payables of £6.8m (2021: £8.2m) includes payroll-related creditors of £4.4m (2021: £5.7m). 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 £m | 2021 £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** | An analysis of borrowings by maturity is as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | Borrowings falling due: | | | | – 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%. 156 Cherning Group PLC Annual report and accounts 2022 # 6. LEASES The interest expense on lease liabilities is £ml (2021: £ml). In total, payments of £ml (2021: £0.1m) were made under leasing contracts, of which £ml (2021: £0.1m) was made to repay the principal portion of the lease. The total lease liability at 31 October 2022 was £ml (2021: £ml). # 7. PROVISIONS | | Year £m | | --- | --- | | At 31 October 2021 | 7.1 | | Provided | 1.6 | | Paid | (0.5) | | At 31 October 2022 | 8.3 | 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 £m | 2021 £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 £m | 2021 £m | | --- | --- | --- | | Issued, allotted and fully paid | | | | 283,541,742 (2021: 283,149,511) ordinary shares of 1p each | 2.8 | 2.8 | During the year, 392,231 ordinary shares (2021: 299,581) were issued for cash to employees under the Group's approved savings-related share schemes. 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 £m | 2021 £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 share-based incentive schemes (see note 27 to the Group financial statements). All ordinary shares (2021: nil) were acquired during the year and nil ordinary shares (2021: 675,592) were distributed following the vesting of awards under the PSP. The total number of ordinary shares held in treasury at 31 October 2022 was nil (2021: nil). # 11. DEFERRED TAX | | 2022 £m | 2021 £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) | At the balance sheet date, the Company had unrecognised tax losses of £ml (2021: £ml) potentially available for offset against future profits in certain circumstances. Chemring Group PLC Annual report and accounts 2022 157 SALES SHEETS SALES SHEETS SALES SHEETS NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued # **12. PENSIONS** The Company has assumed its share of the assets and liabilities of the Group's defined benefit pension scheme. An analysis of the surplus balance is shown below: | | 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 Number | 2021 Number | | --- | --- | --- | | Average monthly number of total employees (including executive directors) | 34 | 31 | The costs incurred in respect of these employees (including share-based payments) were: | | 2022 £m | 2021 £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 | 4.3 | 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. 158 **Channing Group PLC** Annual report and accounts 2022 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 Rolex 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 by the International Accounting Standards Board ("IASB") or by the IFRS Interpretations Committee. The Group's approach to these is as follows: 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 and new standards were adopted in the year ended 31 October 2022 but have not materially impacted the reported results or the financial position: > 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 by the UK Endorsement Board): # 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 IAS 37); and > Annual Improvements to IFRS Standards 2018–2020. # EFFECTIVE FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2022 > IFRS 17 Insurance Contracts > Classification of Liabilities as Current or Non-Current (Amendments to IAS 1); > Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2); > Definition of Accounting Estimates (Amendments to IAS 8); and > Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). 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 The Group financial statements consolidate those of the Company and all of 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 included in the consolidated financial statements from the date on which control commences until the date on which control ceases. 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 to the same date. All intra-group transactions, balances, income and expenses are eliminated on consolidation. # Non-controlling interest The Group recognizes non-controlling interest in an acquired entity either at fair value or at the non-controlling interest's proportionate share of the acquired 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 to recognise the non-controlling interests at its proportionate share of the acquired net identifiable assets. Q6 Holdings Limited, a wholly owned subsidiary of Chemring Group PLC, owns 80% of the issued shares of Vigi Al Limited. Disclosure of the minority interest on the face of the primary statements has not been included as this is considered immaterial to the Group. As at 31 October 2022, profit, total comprehensive income and equity attributable to minority interests were less than £0.1m. Financial Statements Financial Statements Financial Statements Chemring Group PLC Annual report and accounts 2022 159 ### ACCOUNTING POLICIES continued 3. GROUP ACCOUNTING POLICIES continued  REVENUE RECOGNITION customer has bought the goods but has not yet taken physical possession. This Chemring is organised into two sectors, Sensors & Information and usually arises when the customer has limited storage space or there have been Countermeasures & Energetics. 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 whole lifecycle of its products and services, these are generally awarded by its shipment at the customer’s request. These categories of sales are common customers as individual contracts for the different stages rather than being large, across all segments. complex, long-term framework agreements requiring extensive consideration of price allocation and performance obligations. As a result we are less 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 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 - the Group has identified a sales contract with a customer; services are unique to a customer and may not have an alternative use at the - the performance obligations within this contract have been identified; point of production. In such cases, where an enforceable right to payment exists, revenue will be recognised over time. - the transaction price has been determined; - this transaction price has been allocated to the performance obligations in From time to time we enter into contracts for “customer-funded R&D” where the contract; and Chemring provides a service towards the development of a technology for a customer resulting in revenue. In certain instances, Chemring partly funds the -   Performance obligations are satisfied when the customer gains control of Contracts promised goods or services from the contract. Customers do not typically The majority of the Group’s revenue arises from the manufacture and gain a right of return of goods. shipment of goods. Rendering of services Sales contracts are reviewed for performance obligations but the Revenue from a contract to provide services, including customer-funded  research and development, is recognised by reference to the stage of typically based on Incoterms. Certain contracts may also require customer completion of the contract. Stage of completion is typically estimated by acceptance testing. Once the relevant delivery obligation has been met and, as   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 The timing of payment from customers is generally aligned to revenue differ from using the proportion of contract costs incurred basis. 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 Information segment, arises from time and materials contracts, where revenue issue of a report where there is no enforceable right to payment for work in is typically accrued and billed in the following month based on work progress.  In a smaller number of cases, revenue also arises from milestone contracts that Principal versus agent assessment contain multiple performance obligations. Often these contracts are already The Group enters into certain arrangements which involve a consortium of divided into milestones for payment purposes, but judgement is required when service providers. The Group acts as a “Prime” contractor in certain contracts assessing the way the contract is divided up to ensure that each element is a with customers and utilises sub-contractors to undertake the work. Under separate and valid performance obligation. If they are not, the relevant revenue these contracts the Group is considered to be primarily responsible for amount is allocated across the other obligations as appropriate. In some cases fulfilling the service to the customer. The Group performs a technical milestones are achieved in one period but not billed until the next period, assessment of the work before it is delivered to the customer and is leading to a timing difference with the recognition of revenue in advance of responsible for quality and performance of the sub-contractor. As such the customer billing. In this instance accrued income is recognised as described in Group is considered to be the principal to the arrangement with the customer note 15. There are no contracts with a significant financing component. 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 At the start of the contract, the total transaction price is estimated as in respect of sub-contractor costs.  exchange for transferring the promised goods and services to the customer, All consortium arrangements are assessed by the Group to determine if it is excluding sales taxes. This is based on the agreed contract price, with no the principal or agent considering who is responsible for fulfilling the performance material claims and incentive payment terms, and therefore significant obligation, who bears inventory risk and who has price discretion. 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. Chemring Group PLC Annual report and accounts 2022160 3. GROUP ACCOUNTING POLICIES continued ACQUIRED INTANGIBLES STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ACQUISITIONS AND DISPOSALS 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 contingent liabilities of subsidiary undertakings that meet the IFRS 3 (Revised) to write down their cost or valuation to their estimated residual values by Business Combinations recognition criteria are measured at the fair value at the   - technology – average of ten years - deferred tax assets or liabilities, and liabilities or assets relating to employee - customer relationships – average of ten years benefit arrangements, are recognised and measured in accordance with IAS DEVELOPMENT COSTS 12 Income Taxes and IAS 19 (Revised) Employee Benefits respectively; 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 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 annually or when a trigger is identified. measured in accordance with that standard. PATENTS AND LICENCES Where cost exceeds fair value of the net assets acquired, the difference 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 Where the fair value of the net assets exceeds the cost, the difference   PROPERTY, PLANT AND EQUIPMENT subsidiary undertakings are changed where necessary to be consistent with Other than historically revalued land and buildings, property, plant and those of the Group. equipment is held at cost less accumulated depreciation and any recognised If the initial accounting for a business combination is incomplete by the end of impairment loss. Borrowing costs on significant capital expenditure projects the reporting period in which the combination occurs, the Group reports are capitalised and allocated to the cost of the project. provisional amounts for the items for which the accounting is incomplete. No depreciation is provided on freehold land. On other assets, depreciation Those provisional amounts are adjusted during the measurement period (see  below), or additional assets or liabilities recognised, to reflect new information estimated residual values by equal instalments over their estimated useful 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. - freehold buildings – up to fifty years The measurement period runs from the date of acquisition to the date the Group obtains complete information about facts and circumstances that - leasehold buildings – the period of the lease existed as at the acquisition date, subject to a maximum period of one year. - plant and equipment – up to ten years In accordance with IFRS 3 (Revised) Business Combinations, acquisition and IMPAIRMENT OF NON-CURRENT ASSETS disposal-related items are recognised through the income statement. Assets that have indefinite lives are allocated to the Group’s cash-generating Acquisition and disposal-related items refer to credits and costs associated units and tested for impairment at least annually. Assets that are subject with the acquisition and disposal of businesses, together with the costs of  aborted bids and the establishment of joint ventures. changes in circumstances indicate that the carrying value may not be recoverable. To the extent that the carrying value exceeds the recoverable DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE amount, an impairment loss is recorded for the difference as an expense in 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 For the purpose of impairment testing, assets are grouped at the lowest levels provisions of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. for which there are separately identifiable cash flows. These discontinued operations may represent components of the Group that INVENTORIES have already been disposed of or are classified as held for sale. Inventories are recorded at the lower of cost and net realisable value. Cost Non-current assets and disposal groups classified as held for sale are measured represents materials, direct labour, other direct costs and related overheads, at the lower of carrying amount and fair value less costs to sell. 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 Non-current assets and disposal groups are classified as held for sale if their completion and disposal. 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 Provision is made for slow-moving, obsolete and defective items 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 BORROWING COSTS be expected to qualify as a completed sale within one year from the date of Borrowing costs directly attributable to the acquisition, construction classification.  INTANGIBLE ASSETS – GOODWILL  The purchased goodwill of the Group is regarded as having an indefinite  Impairment of Assets,     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 2022 161 ### ACCOUNTING POLICIES continued 3. GROUP ACCOUNTING POLICIES continued FOREIGN CURRENCIES GOVERNMENT GRANTS The individual financial statements of each Group company are presented in its Government grants are not recognised until there is reasonable assurance that functional currency, being the currency of the primary economic environment the Group will comply with the conditions attaching to them and that the in which it operates. For the purpose of these Group financial statements, the grants will be received. results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the Government grants for staff retraining costs are recognised as income over presentation currency for these financial statements. the periods necessary to match them with the related costs and are deducted in reporting the related expense. 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 deferred income and released to the income statement over the expected transactions. At each balance sheet date, monetary assets and liabilities that useful economic lives of the assets concerned. are denominated in foreign currencies are retranslated at the rates prevailing TA X on the balance sheet date. Non-monetary items carried at fair value that are The tax expense represents the sum of current tax and deferred tax. denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. 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 Non-monetary items that are measured in terms of historical cost in a foreign income or expense that are taxable or deductible in other years, and it currency are not retranslated. excludes items of income or expense that are never taxable or deductible. Exchange differences arising on the settlement of monetary items and on 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 In order to hedge its exposure to certain foreign exchange risks, the Group differences between the carrying amounts of assets and liabilities enters into forward foreign exchange contracts which are accounted for as  derivative financial instruments (see below for details of the Group’s computation of taxable profit, and is accounted for using the balance sheet accounting policies in respect of such derivative financial instruments). liability method. Deferred tax liabilities are generally recognised for all taxable For the purpose of presenting these financial statements, the assets and temporary differences, and deferred tax assets are recognised to the extent liabilities of the Group’s foreign operations are translated at exchange rates that it is probable taxable profits will be available in the future against which prevailing on the balance sheet date. Income and expense items are translated deductible temporary differences can be utilised. Such assets and liabilities are at the average exchange rates for the period. not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and 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 accounting profit. the closing rate. Deferred tax liabilities are recognised for taxable temporary differences arising FINANCIAL INSTRUMENTS on investments in subsidiaries and associates, and interests in joint ventures, Financial assets and liabilities are recognised in the Group’s balance sheet when except where the Group is able to control the reversal of the temporary the Group becomes a party to the contractual provisions of the instrument.  FINANCIAL ASSETS the foreseeable future. Trade receivables The carrying amount of deferred tax assets is reviewed at each balance sheet Trade receivables do not carry any interest and are stated at their fair value date and reduced to the extent that it is no longer probable that sufficient and amortised cost as reduced by appropriate allowances for expected 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 Cash and cash equivalents apply in the period when the liability is settled or the asset is realised. Cash and cash equivalents comprise cash on hand and demand deposits, 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 FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS right to set off current tax assets against current tax liabilities, when they relate Financial liabilities to income taxed by the same tax authority, and when the Group intends to Financial liabilities and equity instruments are classified according to the settle its current tax assets and liabilities on a net basis. substance of the contractual arrangements entered into. SPECIAL CAPITAL RESERVE Bank borrowings The special capital reserve was created as part of a capital reduction scheme Interest bearing bank loans and overdrafts are recorded at the proceeds involving the cancellation of the share premium account which was approved received, net of direct issue costs. Finance charges, including premiums payable by the Court in 1986, in accordance with the requirements of the Companies on settlement or redemption, and direct issue costs are accounted for on an Act 1985. 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. Chemring Group PLC Annual report and accounts 2022162 3. GROUP ACCOUNTING POLICIES continued The finance cost is charged to the income statement over the lease term to STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS FINANCIAL LIABILITIES AND DERIVATIVE FINANCIAL INSTRUMENTS produce a constant periodic rate of interest on the lease liability. The lease continued payment is allocated between repayment of the lease liability and finance cost. Trade payables The Group has elected to account for short-term leases and leases of Trade payables are not interest bearing and are stated at their fair value and low-value assets using the practical expedients. Instead of recognising a amortised cost. right-of-use asset and lease liability, the payments in relation to these are Derivative financial instruments recognised as an expense in the income statement on a straight-line basis over The Group’s activities expose it to the financial risks of foreign currency the lease term. transactions, and it uses forward foreign exchange contracts to hedge its SHARE-BASED COMPENSATION exposure to these transactional risks. The Group does not use derivative The Group operates equity-settled share-based compensation schemes. financial instruments for speculative purposes. For grants made under the Group’s share-based compensation schemes, the Derivative financial instruments are recognised at fair value on the date the fair value of an award is measured at the date of grant and reflects any derivative contract is entered into and are revalued to fair value at each market-based vesting conditions. Non-market-based vesting conditions are balance sheet date. The fair values of derivative financial instruments are excluded from the fair value of the award. At the date of grant, the Company calculated by external valuers. estimates the number of awards expected to vest as a result of non-market- The Group does not apply hedge accounting for derivative financial based vesting conditions, and the fair value of this estimated number of awards instruments, with changes in the fair value of derivatives being recognised in is recognised as an expense in the income statement on a straight-line basis the income statement immediately. 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 Hedges of net investments in foreign operations period. Proceeds received, net of any directly attributable transaction costs, 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 PROVISIONS ineffective portion is recognised immediately in the income statement. Provisions are recognised when the Group has a present obligation,  RETIREMENT BENEFIT COSTS Group will be required to settle that obligation, and a reliable estimate can be Payments to defined contribution retirement benefit schemes are charged as  an administrative expense in the period to which they relate. For defined the best estimate of the consideration required to settle the present obligation benefit schemes, the cost of providing benefits is determined using the at the balance sheet date, taking into account the risks and uncertainties projected unit credit method, with actuarial valuations being carried out at surrounding the obligation. Where a provision is measured using the estimated each balance sheet date. Remeasurement of the defined benefit pension cash flows to settle the present obligation, its carrying amount is the present scheme, which comprise actuarial gains and losses, the return on plan assets value of those cash flows. The Group uses the “expected value” or “most likely (excluding interest) and the effect of the asset ceiling (if any, excluding interest), outcome” method on a case-by-case bases to estimate the value of provisions. are recognised in the statement of comprehensive income in full in the period in which they occur. 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 The Group determines the net interest income on the net defined benefit asset if it is virtually certain that reimbursement will be received and the asset for the period by applying the discount rate used to measure the defined amount of the receivable can be measured reliably. 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 Environmental provisions during the year as a result of contributions and benefit payments. Net interest Where the Group is liable for decontamination work or the restoration of income and other expenses related to defined benefit plans are recognised in sites to their original condition, an estimate is made of the costs needed to profit or loss. complete these works, discounted back to present values, relying upon independent third party valuers where appropriate. 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 Restructuring provisions curtailment is recognised immediately in profit or loss. A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in The retirement benefit obligation recognised in the balance sheet represents those affected that it will carry out the restructuring by starting to implement 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 measurement of a restructuring provision includes only the direct service cost, plus the present value of available refunds and reductions in expenditures arising from the restructuring and not those associated with the future contributions to the scheme. ongoing activities of the entity. LEASED ASSETS Warranty provisions 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 goods legislation are recognised at the date of sale of the relevant products, balance sheet.  The lease liability is initially measured at the present value of future lease Group’s obligations. payments, discounted using the Group’s incremental borrowing rate. The Disposal provisions 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, of discontinued operations and other disposed entities under the terms of any initial direct costs and any restoration costs. The asset is recorded as their respective sale agreements. 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. Chemring Group PLC Annual report and accounts 2022 163 ### ACCOUNTING POLICIES continued 3. GROUP ACCOUNTING POLICIES continued The following exemptions from the requirements of IFRS have been applied in CONTINGENT LIABILITIES  The Group exercises judgement in recognising exposures to contingent - share-based payments; liabilities related to pending litigation or other outstanding claims subject to - financial instruments; negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement may be necessary in assessing the - fair value measurements; likelihood that a pending claim will succeed, or a liability will arise, and/or to - IFRS 16 Leases (paragraphs 52 and 58); quantify the possible range of the financial settlement. - presentation of comparative information in respect of certain assets; ALTERNATIVE PERFORMANCE MEASURES - IFRSs issued but not yet effective; In the analysis of the Group’s financial performance and position, operating - related party transactions; results and cash flows, APMs are presented to provide readers with additional - assumptions and sensitivities for impairment review; and information. The principal APMs presented are underlying measures of earnings including underlying operating profit, underlying profit before tax, - cash flow. underlying profit after tax, underlying EBITDA, underlying earnings per share Investment in Group undertakings and underlying operating cash flow. In addition, EBITDA, net debt and Investments are stated at cost less any provision for impairment in value. constant currency metrics are presented which are also considered non-IFRS measures. These measures are consistent with information regularly reviewed Critical accounting judgements and sources of estimation uncertainty by management to run the business, including planning, budgeting and There are no critical accounting judgements for the Company. The other reporting purposes and for its internal assessment of the operational   Investments in subsidiaries impairment The directors believe that the use of these APMs assists in providing additional Determining whether investments in subsidiaries are impaired requires an information on the underlying trends, performance and position of the Group. estimation of the value-in-use of the legal entities to which the investments APMs are used to improve the comparability of information between relate. Where the investment value relates to an intermediate holding reporting periods by adjusting for items that are non-recurring or otherwise 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 - amortisation of acquired intangibles; suitable discount rate in order to calculate present value (see note 10). In - material exceptional items, for example relating to acquisitions and disposals, reviewing the carrying value of investments in subsidiaries, the Board has business restructuring costs and legal costs; considered the separate plans and cash flows of these businesses consistent - gains or losses on the movement in the fair value of derivative financial with the requirements of IAS 36 Impairment of Assets. The plans and cash instruments; and 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 tax impact of all of the above. the parent company financial statements, which shows a carrying value of The Group’s use of APMs is consistent and we provide comparatives alongside £766.6m at 31 October 2022. all current period figures. 5. ACCOUNTING JUDGEMENTS AND SOURCES OF Further detail on the APMs presented within these financial statements,  including a reconciliation to the IFRS equivalent, is presented in note 3. When applying the Group’s accounting policies, management must make judgements, assumptions and estimates concerning the future that affect the EXCEPTIONAL ITEMS carrying amounts of assets and liabilities at the balance sheet date and the Exceptional items are excluded from management’s assessment of profit amounts of revenue and expenses recognised during the period. Such because by their size or nature they need to be separately disclosed to judgements, assumptions and estimates are based upon factors including properly understand the Group’s underlying quality of earnings. They are historical experience, the observance of trends in the industries in which the typically gains or losses arising from events that are not considered part of the Group operates, and information available from the Group’s customers and core operations of the business. These items are excluded to reflect other external sources. performance in a consistent manner and are in line with how the business is managed and measured on a day-to-day basis. ACCOUNTING JUDGEMENTS Revenue recognition POST-BALANCE SHEET EVENTS Following IFRS 15 Revenue from Contracts with Customers, the Group recognises In accordance with IAS 10 Events after the Reporting Period, the Group 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 4. CHEMRING GROUP PLC – PARENT COMPANY products by the Group, or over a period of time, which is more common for  certain service contracts. FRS 101 REDUCED DISCLOSURE FRAMEWORK The financial statements have been prepared in accordance with UK In making its judgement about obligations that are satisfied at a point in time, accounting standards and applicable law, including FRS 101 Reduced Disclosure management has to consider at what point control has passed to the Framework. customer, allowing revenue to be recognised. This is typically determined through a consideration of customer acceptance testing, stage of completion, The Company operates a defined benefit scheme including employees of other contract terms and delivery arrangements. Group companies (a Group plan). Following FRS 101, the scheme assets and liabilities have been allocated across the Group companies using a method that KEY SOURCES OF ESTIMATION UNCERTAINTY management considers to be the most appropriate, based on scheme There are no key sources of estimation uncertainty at the balance sheet date membership, in accordance with the Group’s internal policy. that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Chemring Group PLC Annual report and accounts 2022164 ## 5. ACCOUNTING JUDGEMENTS AND SOURCES OF ESTIMATION UNCERTAINTY (continued) ### OTHER NON-SIGNIFICANT AREAS THAT INCLUDE A DEGREE OF ESTIMATION UNCERTAINTY OR JUDGEMENTS While these areas do not present a significant risk resulting in a material adjustment, they are areas of focus for management and include: #### Provisions The Group holds provisions where appropriate in respect of future economic outflows which arise due to past events. These are subject to uncertainty in 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 changes 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 (in payment of Accts). 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 Accts) 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 OxID. 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 (JBTs), Nevo Generation Chemical Detector (JEGs) and Peroxine (PESm). #### 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 agreeing tax liabilities with local tax authorities can take several years. This 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 higher profits (or lower costs) to activities being undertaken in their jurisdiction, potentially leading to higher total tax payable by the Group. 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 reasonably possible range of outcomes is between £14 and £3.5m. #### 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 only to the extent that it is probable that future taxable profits will be 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 impact on the use of the deficit. Note 29 provides information on the key assumptions and analysis of their sensitivities. #### CLIMATE CHANGE In preparing the financial statements, we have considered the impact of climate change. As our climate risks (discussed earlier in the annual reports) identified predominantly manifest in business interruption, the main areas affected 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. FINANCIAL STATEMENTS AND SOURCES (FUNDED BY IAS) FINANCIAL STATEMENTS Chemring Group PLC Annual report and accounts 2022 165 ### INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC 1 OUR OPINION IS UNMODIFIED - the parent Company financial statements have been properly prepared in We have audited the financial statements of Chemring Group PLC accordance with UK accounting standards, including FRS 101 Reduced  Disclosure Framework; and consolidated income statement, consolidated statement of comprehensive - the financial statements have been prepared in accordance with the income, consolidated statement of changes in equity, consolidated balance requirements of the Companies Act 2006. sheet, consolidated cash flow statement, parent company balance sheet, BASIS FOR OPINION parent company statement of comprehensive income, parent company We conducted our audit in accordance with International Standards on Auditing statement of changes in equity, and the related notes, including the (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. - 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 We were first appointed as auditor by the directors on 23 March 2018. The Group’s profit for the year then ended; period of total uninterrupted engagement is for the five financial years ended - the Group financial statements have been properly prepared in accordance  with UK-adopted international accounting standards; 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 Our response MISSTATEMENT We performed the tests below rather than seeking to rely on any of the Key audit matters are those matters that, in our professional judgement, were Group’s controls because the nature of the balance is such that we would of most significance in the audit of the financial statements and include the expect to obtain audit evidence primarily through the detailed procedures most significant assessed risks of material misstatement (whether or not due   -  overall audit strategy; the allocation of resources in the audit; and directing the accuracy of the cash flows, forecasting and building comparable variations 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, the valuation; 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 available analysts’ reports and peer comparison using input from our own provide a separate opinion on these matters. valuation experts; -  RECOVERABILITY OF GOODWILL of reasonable downward changes to the assumptions noted above;  -  Refer to page 91 (Audit Committee report), page 161 (accounting policy) and to the aggregate of the Group’s market capitalisation and the fair value of the pages 133 and 134 (financial disclosures). net debt to assess the reasonableness of those cash flows; and THE RISK -  Forecast based assessment the estimation uncertainty related to the impairment assessment reflect the A history of business combinations results in significant Group goodwill. We risks inherent in the valuation of goodwill. determined that the forecast future cash flows used in calculating the value in Our findings use of each CGU involves a degree of estimation uncertainty, with a potential We found the Group’s conclusion that there is no impairment of Group range of reasonable outcomes greater than our materiality for the financial goodwill to be balanced. 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. Chemring Group PLC Annual report and accounts 2022166 2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL 3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS MISSTATEMENT continued  RECOVERABILITY OF PARENT COMPANY’S INVESTMENTS IN Materiality for the Group financial statements as a whole was set at £3.0m SUBSIDIARIES   Group profit before tax, normalised to exclude non-underlying items as disclosed in note 3 to the group financial statements, of which it represents Refer to page 91 (Audit Committee report), page 164 (accounting policy) and  page 155 (financial disclosures). Materiality for the parent Company financial statements as a whole was set 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 In line with our audit methodology, our procedures on individual account forecast cash flows. The estimated recoverable amount of these balances is balances and disclosures were performed to a lower threshold of performance subjective due to the inherent uncertainty involved in forecasting and materiality, so as to reduce to an acceptable level the risk that individually discounting future cash flows. immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. 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 this percentage in our determination of performance materiality because we parent Company financial statements disclose the sensitivity estimated by the did not identify any factors indicating an elevated level of risk. parent Company. We agreed to report to the Audit Committee any corrected or uncorrected Our response  We performed the tests below rather than seeking to rely on any of the identified misstatements that warranted reporting on qualitative grounds. 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 related to reclassification.  Of the Group’s fourteen reporting components, we subjected seven -   accuracy of the cash flows, forecasting and building comparable variations   financially significant enough to require a full scope audit for Group purposes, the valuation; 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. 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. Chemring Group PLC Annual report and accounts 2022 167 ### INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued 3 OUR APPLICATION OF MATERIALITY AND AN OVERVIEW OF THE NORMALISED PROFIT BEFORE TAX GROUP MATERIALITY SCOPE OF OUR AUDIT continued £62.5m (2021: £55.9m) £3.0m (2021: £2.75m) The components within the scope of our work accounted for the percentages ##  £3.0m illustrated opposite. Whole financial statements      £2.25m of any of total Group revenue, total profits and losses that made up Group Whole financial statements profit before tax or total Group assets. For these residual components, performance materiality   assessment that there were no significant risks of material misstatement £1.9m  Range of materiality at 10 The Group team instructed component auditors as to the significant areas to components (£0.9m–£1.8m) be covered, including the relevant risks detailed above and the information to  be reported back. The Group team approved the component materialities,     Group materiality  £150k Company, was performed by the Group team. The Group team performed Misstatements reported to procedures on the items excluded from normalised Group profit before tax. the Audit Committee    conference meetings were also held with these component auditors and all TOTAL PROFITS AND LOSSES others that were not physically visited. At these visits and meetings, the THAT MADE UP GROUP PROFIT findings reported to the Group team were discussed in more detail, and any GROUP REVENUE BEFORE TA X 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 14 3 reporting in several areas of our audit, where our controls testing supported 7 this approach, which enabled us to reduce the scope of our substantive 6 ## 87% 85%     | | | | 85 | | | | 79 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT | | | | 73 | | | | | | | |  | | | |  | | | | In planning our audit, we considered the potential impacts of climate | | | | | | | | 82 | |  |  | | | |  | | | |   GROUP TOTAL ASSETS Full scope for Group audit THE CONTEXT OF CLIMATE CHANGE FOR THE GROUP purposes 2022 Climate change impacts the Group in a variety of ways including the impact 10   procedures 2022  11  Residual components 2022 ## 89%   Full scope for Group audit  purposes 2021 The Group’s exposure to climate change is primarily through the acquisition 78 79  ##    end products. As part of our audit we have made enquiries of management procedures 2021 ##   Residual components 2021 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. Chemring Group PLC Annual report and accounts 2022168 4 THE IMPACT OF CLIMATE CHANGE ON OUR AUDIT continued We considered whether these risks could plausibly affect the liquidity or STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS THE GROUP’S ASSESSMENT OF ACCOUNTING CONSEQUENCES covenant compliance in the going concern period by assessing the directors’ IFRS requires the Group’s financial reporting to be based, amongst other sensitivities over the level of available financial resources and covenant things, on the Group’s best estimate of assumptions that are reasonable and thresholds indicated by the Group’s financial forecasts taking account of supportable as at the date of reporting. Those assumptions may not align with severe, but plausible adverse effects that could arise from these risks the ways in which the global economy, society and government policies will individually and collectively. need to change to meet the relevant targets. We also assessed completeness of the going concern disclosure. The Group has set carbon emission targets and estimated the incremental  capital and operational expenditure required to deliver those targets.  - we consider that the directors’ use of the going concern basis of accounting economic lives of its existing property, plant and equipment, and this does 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 The Group has provided more detail on how they have considered 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; OUR AUDIT RESPONSE - we have nothing material to add or draw attention to in relation to the Risk assessment procedures directors’ statement in note 1 to the accounting policies note on the use of As part of our risk assessment procedures, we made enquiries, with the the going concern basis of accounting with no material uncertainties that may assistance of our sustainability specialists, of key members of management. cast significant doubt over the Group and parent Company’s use of that Our enquiries focused on understanding the Group’s climate related strategy basis for the going concern period, and we found the going concern and identifying those areas where climate change could have a potential  material impact on the financial statements. We did not identify the impact - the related statement under the Listing Rules set out on page 74 is materially  consistent with the financial statements and our audit knowledge. the Group’s operations and knowledge gained of its impact on significant accounting estimates and judgements during our risk assessment procedures However, as we cannot predict all future events or conditions and as and testing. subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above Audit procedures in relation to Key Audit Matters conclusions are not a guarantee that the Group or the parent Company will We did not consider the impact of climate change to be significant to our audit continue in operation. response for the Key Audit Matters relating to recoverability of goodwill and the parent Company’s investments in subsidiaries. 6 FRAUD AND BREACHES OF LAWS AND REGULATIONS –  Other audit procedures IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL During the course of our audit, we carried out the following additional MISSTATEMENT DUE TO FRAUD  To identify risks of material misstatement due to fraud (“fraud risks”) we - we considered the Group’s processes around climate change related assessed events or conditions that could indicate an incentive or pressure to disclosures in the Annual Report and read the disclosures in the Strategic commit fraud or provide an opportunity to commit fraud. Our risk assessment Report and Directors’ Report and considered its consistency with the  financial statements and our audit knowledge; and - Enquiring of directors and internal audit and inspection of policy - we assessed the appropriateness of climate-related financial disclosures, documentation as to the Group’s high-level policies and procedures to including TCFD recommended disclosures. prevent and detect fraud, including the internal audit function, and the The audit procedures were performed principally by the Group engagement Group’s channel for “whistleblowing”, as well as whether they have team with the support of our sustainability specialists. knowledge of any actual, suspected or alleged fraud; - Reading Board, Audit Committee, Executive Committee, Remuneration 5 GOING CONCERN Committee and Risk Committee meeting minutes; 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 - Considering remuneration incentive schemes and performance 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 - Using analytical procedures to identify any unusual or unexpected significant doubt over their ability to continue as a going concern for at least relationships; and  - Using our own forensic specialists to assist us in identifying fraud risks based concern period”). on discussions of the circumstances of the Group and parent Company. We used our knowledge of the Group, its industry, and the general economic We communicated identified fraud risks throughout the audit team and environment to identify the inherent risks to its business model and analysed remained alert to any indications of fraud throughout the audit. This included how those risks might affect the Group’s and parent Company’s financial communication from the Group audit team to full scope component audit resources or ability to continue operations over the going concern period. The teams of relevant fraud risks identified at the Group level and request to 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. Chemring Group PLC Annual report and accounts 2022 169 ### INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHEMRING GROUP PLC continued 6 FRAUD AND BREACHES OF LAWS AND REGULATIONS – For the Health and Safety Executive matter discussed in note 33, we assessed  continued disclosures against our understanding from legal correspondence, including IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL discussions held with the lawyers as well as inspection of relevant documentation. MISSTATEMENT DUE TO FRAUD continued CONTEXT OF THE ABILITY OF THE AUDIT TO DETECT FRAUD As required by auditing standards and taking into account possible pressures to  meet profit targets, we perform procedures to address the risk of management Owing to the inherent limitations of an audit, there is an unavoidable risk override of control, in particular the risk that Group and component  management may be in a position to make inappropriate accounting entries, statements, even though we have properly planned and performed our audit and the risk of bias in accounting estimates and judgements such as provisions in accordance with auditing standards. For example, the further removed and pension assumptions. On this audit, we do not believe there is a fraud risk non-compliance with laws and regulations is from the events and transactions related to revenue recognition because there are no complexities or significant reflected in the financial statements, the less likely the inherently limited areas of estimation within the revenue recognition. procedures required by auditing standards would identify it. We did not identify any additional fraud risks. In addition, as with any audit, there remained a higher risk of non-detection   misrepresentations, or the override of internal controls. Our audit procedures - Identifying journal entries and other adjustments to test for all full scope are designed to detect material misstatement. We are not responsible for components based on risk criteria and comparing the identified entries preventing non-compliance or fraud and cannot be expected to detect  non-compliance with all laws and regulations. accounts; and 7 WE HAVE NOTHING TO REPORT ON THE OTHER INFORMATION - Assessing whether the judgements made in making significant accounting IN THE ANNUAL REPORT estimates are indicative of a potential bias. The directors are responsible for the other information presented in the IDENTIFYING AND RESPONDING TO RISKS OF MATERIAL Annual Report together with the financial statements. Our opinion on the MISSTATEMENT DUE TO NON-COMPLIANCE WITH LAWS financial statements does not cover the other information and, accordingly,   We identified areas of laws and regulations that could reasonably be expected form of assurance conclusion thereon. to have a material effect on the financial statements from our general Our responsibility is to read the other information and, in doing so, consider commercial and sector experience, through discussion with the directors whether, based on our financial statements audit work, the information therein  is materially misstated or inconsistent with the financial statements or our and legal correspondence and discussed with the directors the policies and audit knowledge. Based solely on that work we have not identified material procedures regarding compliance with laws and regulations. misstatements in the other information. As the Group is regulated, our assessment of risks involved gaining an STRATEGIC REPORT AND DIRECTORS’ REPORT understanding of the control environment including the entity’s procedures for  complying with regulatory requirements. - we have not identified material misstatements in the strategic report and the We communicated identified laws and regulations throughout our team and directors’ report; remained alert to any indications of non-compliance throughout the audit. - in our opinion the information given in those reports for the financial year is This included communication from the Group audit team to component audit consistent with the financial statements; and teams of relevant laws and regulations identified at the Group level, and a - in our opinion those reports have been prepared in accordance with the request for component auditors to report to the Group team any instances Companies Act 2006.  misstatement at Group level. DIRECTORS’ REMUNERATION REPORT In our opinion the part of the Directors’ Remuneration Report to be audited The potential effect of these laws and regulations on the financial statements has been properly prepared in accordance with the Companies Act 2006. varies considerably. DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER- Firstly, the Group is subject to laws and regulations that directly affect the TERM VIABILITY financial statements including financial reporting legislation (including related We are required to perform procedures to identify whether there is a companies legislation), distributable profits legislation, taxation legislation material inconsistency between the directors’ disclosures in respect of  emerging and principal risks and the viability statement, and the financial laws and regulations as part of our procedures on the related financial statements and our audit knowledge. statement items. Based on those procedures, we have nothing material to add or draw 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 - the directors’ confirmation, on page 65, that they have carried out a robust fines or litigation. We identified the following areas as those most likely to have assessment of the emerging and principal risks facing the Group, including  those that would threaten its business model, future performance, solvency anti-bribery and corruption, recognising the regulated nature of the Group’s and liquidity; activities and its legal form. Auditing standards limit the required audit - the principal risks disclosures describing these risks and how emerging risks procedures to identify non-compliance with these laws and regulations to are identified, and explaining how they are being managed and mitigated; and 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. Chemring Group PLC Annual report and accounts 2022170 7 WE HAVE NOTHING TO REPORT ON THE OTHER INFORMATION 9 RESPECTIVE RESPONSIBILITIES STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS IN THE ANNUAL REPORT continued DIRECTORS’ RESPONSIBILITIES DISCLOSURES OF EMERGING AND PRINCIPAL RISKS AND LONGER- As explained more fully in their statement set out on page 122, the directors TERM VIABILITY continued  - the directors’ explanation in the viability statement of how they have satisfied that they give a true and fair view; such internal control as they assessed the prospects of the Group, over what period they have done so determine is necessary to enable the preparation of financial statements that and why they considered that period to be appropriate, and their statement are free from material misstatement, whether due to fraud or error; assessing as to whether they have a reasonable expectation that the Group will be the Group and parent Company’s ability to continue as a going concern, able to continue in operation and meet its liabilities as they fall due over the disclosing, as applicable, matters related to going concern; and using the going period of their assessment, including any related disclosures drawing concern basis of accounting unless they either intend to liquidate the Group or attention to any necessary qualifications or assumptions. the parent Company or to cease operations, or have no realistic alternative but to do so. 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 AUDITOR’S RESPONSIBILITIES that the above disclosures are materially consistent with the financial Our objectives are to obtain reasonable assurance about whether the financial statements and our audit knowledge. 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 Our work is limited to assessing these matters in the context of only the assurance is a high level of assurance, but does not guarantee that an audit knowledge acquired during our financial statements audit. As we cannot conducted in accordance with ISAs (UK) will always detect a material predict all future events or conditions and as subsequent events may result 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 statements is not a guarantee as to the Group’s and parent Company’s the financial statements. longer-term viability. A fuller description of our responsibilities is provided on the FRC’s website at CORPORATE GOVERNANCE DISCLOSURES www.frc.org.uk/auditorsresponsibilities. We are required to perform procedures to identify whether there is a material inconsistency between the directors’ corporate governance The Company is required to include these financial statements in an annual disclosures and the financial statements and our audit knowledge. financial report prepared using the single electronic reporting format specified in the TD ESEF Regulation. This auditor’s report provides no assurance over Based on those procedures, we have concluded that each of the following is whether the annual financial report has been prepared in accordance with   - the directors’ statement that they consider that the annual report and 10 THE PURPOSE OF OUR AUDIT WORK AND TO WHOM WE financial statements taken as a whole is fair, balanced and understandable,  and provides the information necessary for shareholders to assess the This report is made solely to the Company’s members, as a body, in Group’s position and performance, business model and strategy; accordance with Chapter 3 of Part 16 of the Companies Act 2006 and the - the section of the annual report describing the work of the Audit terms of our engagement by the Company. Our audit work has been Committee, including the significant issues that the Audit Committee undertaken so that we might state to the Company’s members those matters considered in relation to the financial statements, and how these issues 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 - the section of the annual report that describes the review of the with the Company, and for no other purpose. To the fullest extent permitted effectiveness of the Group’s risk management and internal control systems. 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 We are required to review the part of the Corporate Governance Report report, or for the opinions we have formed. 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. Andrew Campbell-Orde (Senior Statutory Auditor) 8 WE HAVE NOTHING TO REPORT ON THE OTHER MATTERS for and on behalf of KPMG LLP, Statutory Auditor  Chartered Accountants Under the Companies Act 2006, we are required to report to you if, in Gateway House  Tollgate - adequate accounting records have not been kept by the parent Company, Chandlers Ford  Southampton  SO53 3TG - the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the 13 December 2022 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. Chemring Group PLC Annual report and accounts 2022 171 FIVE-YEAR RECORD For the year ended 31 October 2022 | | 2022 £m | 2021 £m | 2020 £m | 2019 £m | 2018 £m | | --- | --- | --- | --- | --- | --- | | Revenue | 443.8 | 393.3 | 402.5 | 333.2 | 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) | 52.3 | 50.4 | 46.3 | 31.3 | (13.9) | | 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) | (60.0) | | 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 | | Financed by: | | | | | | | 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 | 14.3p | 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 | 172 Chemring Group PLC Annual report and accounts 2022 ### CORPORATE INFORMATION AND WEBSITE | HEADQUARTERS AND REGISTERED OFFICE | SUBSIDIARY UNDERTAKINGS’ REGISTERED OFFICES | STRATEGIC REPORT GOVERNANCE OTHER INFORMATION | | --- | --- | --- | | Roke Manor | SUBSIDIARY UNDERTAKINGS IN ENGLAND: | | | Old Salisbury Lane | Roke Manor | | | Romsey | Old Salisbury Lane | | | Hampshire | Romsey | | | SO51 0ZN | Hampshire | | SO51 0ZN T: +44 (0)1794 463401 SUBSIDIARY UNDERTAKING IN SCOTLAND: F: +44 (0)1794 463374 Troon House E: info@chemring.com Ardeer Site Stevenston Website: www.chemring.com Ayrshire REGISTERED NUMBER KA20 3LN 86662 SUBSIDIARY UNDERTAKINGS IN THE US: | REGISTRARS | 23031 Ladbrook Drive | | --- | --- | | Computershare Investor Services plc | Dulles | | The Pavilions | Virginia | | Bridgwater Road | 20166 | Bristol SUBSIDIARY UNDERTAKING IN AUSTRALIA: BS13 8AE 230 Staceys Road Lara Victoria Australia 3212 SUBSIDIARY UNDERTAKING IN NORWAY: Engeneveien 7 N-3475 Sætre Norway FIND OUT MORE ONLINE  - Current share price - Shareholder services and notices - Analysts’ forecasts - Key financial information - Corporate governance - Regulatory news - Financial calendar - Results and presentations 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’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. Chemring Group PLC Annual report and accounts 2022 173 CBP016288 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 CHEMRING GROUP PLC ANNUAL REPORT AND ACCOUNTS 2022