Last checked at 24 Jun 2009 09:00
Castings plc
ANNUAL FINANCIAL REPORT
DTR 6.3.5 DISCLOSURE
YEAR ENDED 31 MARCH 2009
Chairman's Statement
It was indicated in the interim management statement in February 2009 that customer schedules had considerably reduced and we were operating at 40% of our previous production level. This situation has continued. However, at the time of writing, it has not worsened and schedules have stabilised at this low level.
It is with much regret that we have had to make approximately 350 employees redundant throughout all parts of the group. It is particularly sad that many long serving employees have had to leave the company; all our employees have worked hard over the past years and, through no fault of their own, some now find themselves out of work. It would surely have been cheaper for the government to fund temporary short time working rather than increasing unemployment. The unavoidable cost of the redundancies has been £2.2m; money that could have been spent more wisely on future investment.
Apart from the redundancy costs, we have provided £3.845m as possible losses on deposits with Icelandic banks. It has been indicated by the administrators of Heritable Bank and Kaupthing Singer and Friedlander that we will recover some money and this is why the provision has been reduced from the £5.7m we stated at the interim stage.
We have been confronted by high operational costs, mainly in respect of electricity, due to the unexpectedly rapid decline in demand. We contracted to buy electricity in July 2008 for an estimated year's requirements from October 2008 to September 2009. This was at a high price as at the time energy costs were rising rapidly due to high world oil and gas prices and forecasts were made of a shortage of energy and power cuts. Our customers were also forecasting high demands throughout the year. It was never predicted that the world recession would be so dramatic. We had to sell excess electricity back into the market at a loss of £2.2m. This cost has been taken as normal cost of production, but cannot be recovered from our customers and has therefore had a significant effect on our results.
Our management at all companies have taken timely action to reduce overheads and employment costs, and future capital expenditure is on hold.
The new foundry at William Lee which has cost some £16m is now ready for production; melting and moulding trials are nearly complete and in general very satisfactory with the quality of castings made during trials being excellent. We are well placed to bring this plant into production as soon as customer demand starts to improve.
We have purchased land next to the Brownhills site which will enable us to develop for future expansion of the business.
Our machine shop, CNC Speedwell, has seen schedules reduce even more than the foundry companies because of customer de-stocking and also controlling our own stocks. We have had to continue to invest in machinery because of long term commitments, hence we still have a large depreciation charge, with little revenue.
Dividends
An interim dividend of 2.71 pence per share was paid in January 2009. Your board have confidence in the underlying strength and future potential of the group and accordingly are pleased to recommend a maintained final dividend of 7.29 pence per share making a total dividend of 10 pence per share for the year.
Outlook
This has been a most difficult year going from unusually high demand up to October 2008 to a very low level by December. It has been difficult for all our employees to come to terms with the situation and I thank them for their understanding and co-operation in this difficult time. Although we have seen levels of demand stabilise, the timing and strength of any recovery still remains uncertain, and we remain cautious with regard to prospects for the 2009/10 financial year.
BRIAN J. COOKE
Chairman
24 June 2009
Castings plc Lichfield Road
BrownhillsWest Midlands
WS8 6JZ
Business and Financial Review
Since November 2008 customer demands have been at a very low level and we are now operating below 40% of our previous production levels. We believe with our careful cash management and limited capital expenditure, we will be able to sustain operations at these reduced levels.
Revenue decreased by 13% to £85 million, of which 62% was exported. The dispatch weight of castings to third party customers was 43,900 tonnes which was a decrease of 12,500 tonnes from the previous year. The group produced 45,100 tonnes of castings compared to 58,700 tonnes last year. CNC Speedwell's turnover decreased by 19.4%.
Significant cost increases, including unrecovered electricity costs, contributed to the profit from operations decreasing by £13.3 million (including exceptional costs of £6 million) and decreased the operating margin (excluding exceptional costs) to 9.4% from 15.6%.
Up to November 2008, our policy of continual improvement and investment once again reduced the number of hours it takes to produce one tonne of castings, but since then the large reduction in volumes has resulted in short-term inefficiencies decreasing the margin.
Unfortunately these reductions resulted in redundancies of some 350 employees across the group costing £2.2 million.
It was disappointing to report that our deposits in four Icelandic banks are under threat. The deposits were made earlier in 2008 when our advisers rated them satisfactorily. However, as a matter of prudence, we have made provision against these deposits of £3,845,000. Notwithstanding these at risk deposits, we have further substantial funds available. The board is therefore satisfied that any loss which may be incurred on these deposits will not have any impact on the ability of the group to continue to finance its trading operations.
Despite ending the year with less cash, the higher interest rates earlier in the year helped increase finance income by £270,000 to £1,684,000, an increase of 19%. Cash outflow included £19.9 million (2008: £9.4 million) on capital equipment. This included the construction of the new foundry at William Lee (£15.5 million) new machines at CNC Speedwell (£3.4 million) and land next to the Brownhills site (£1.04 million) which is to be used for future development of the business. However, due to the current economic downturn the new foundry is yet to come on stream.
The pension valuation under IAS 19 showed a surplus of £1.01 million but this has not been shown as an asset due to the restriction of recognition of assets.
As a result of the continuing unknown drain on resources by the Staff and Shopfloor pension schemes, these schemes were closed to future accruals from 6th April 2009 with the contributing members joining the money purchase scheme.
The income statement shows a profit before tax of £3.6 million. However, this includes an income statement charge of £193,000 for defined benefit pension schemes in accordance with IAS 19. The directors view the cash contribution of £489,000 to be a relevant charge which would have given rise to a profit before taxation of £2.9 million.
The directors are recommending a final dividend that will be paid in August which, with the interim dividend paid in January, will result in the return of £4.4 million to shareholders.
Consolidated Income Statement
| Year to 31 March 2009 £'000 | Year to 31 March 2008 £'000 | ||
| Revenue | 84,812 | 97,372 | |
| Cost of sales | (66,921) | (71,653) | |
| Gross profit | 17,891 | 25,719 | |
| Distribution costs | (1,208) | (1,369) | |
| Administrative expenses | |||
| Excluding exceptional expenses | (8,708) | (9,100) | |
| Exceptional (Note 2) | (6,043) | - | |
| Total administrative expenses | (14,751) | (9,100) | |
| Profit from operations | 1,932 | 15,250 | |
| Finance income | 1,684 | 1,414 | |
| Profit before income tax | 3,616 | 16,664 | |
| Income tax expense | (2,994) | (4,668) | |
| Profit for the year attributable to equity holders of the parent company | 622 | 11,996 | |
| Earnings per share | |||
| Basic and diluted | 1.43p | 27.49p | |
| Dividend per share paid and proposed | 10.00p | 10.00p | |
| Dividend per share proposed | 7.29p | 7.29p |
Consolidated Balance Sheet
| Year to 31 March 2009 £'000 | Year to 31 March 2008 £'000 | ||
| Assets | |||
| Non-current assets | |||
| Property, plant and equipment | 53,408 | 38,772 | |
| Financial assets | 429 | 736 | |
| 53,837 | 39,508 | ||
| Current assets | |||
| Inventories | 7,401 | 7,054 | |
| Trade and other receivables | 13,854 | 22,588 | |
| Cash and cash equivalents | 15,804 | 31,494 | |
| 37,059 | 61,136 | ||
| Total assets | 90,896 | 100,644 | |
| Liabilities | |||
| Current liabilities | |||
| Trade and other payables | 12,608 | 18,589 | |
| Current tax liabilities | 310 | 1,816 | |
| 12,918 | 20,405 | ||
| Non-current liabilities | |||
| Deferred tax liabilities | 4,301 | 2,382 | |
| Total liabilities | 17,219 | 22,787 | |
| Net Assets | 73,677 | 77,857 | |
| Equity attributable to equity holders of the parent company | |||
| Share capital | 4,363 | 4,363 | |
| Share premium account | 874 | 874 | |
| Other reserves | 13 | 13 | |
| Retained earnings | 68,427 | 72,607 | |
| Total equity | 73,677 | 77,857 |
Consolidated Cash Flow
| Year to 31 March 2009 £'000 | Year to 31 March 2008 £'000 | ||
| Cash flows from operating activities | |||
| Cash generated from operations | 9,201 | 21,440 | |
| Interest received | 1,684 | 1,414 | |
| Tax paid | (2,525) | (3,462) | |
| Net cash generated from operating activities | 8,360 | 19,392 | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (19,888) | (9,354) | |
| Proceeds from disposal of property, plant and equipment | 93 | 214 | |
| Proceeds from disposal of financial assets | 108 | - | |
| Net cash used in investing activities | (19,687) | (9,140) | |
| Cash flow from financing activities | |||
| Dividends paid to shareholders | (4,363) | (4,210) | |
| Net cash used in financing activities | (4,363) | (4,210) | |
| Net (decrease) / increase in cash and cash equivalents | (15,690) | 6,042 | |
| Cash and cash equivalents at beginning of year (see below) | 31,494 | 25,452 | |
| Cash and cash equivalents at end of year (see below) | 15,804 | 31,494 | |
| £'000 | £'000 | ||
| Cash and cash equivalents: | |||
| Short-term deposits | 15,641 | 30,999 | |
| Cash available on demand | 163 | 495 | |
| 15,804 | 31,494 |
Consolidated Statement of Recognised Income and Expense
| Year to 31 March 2009 £'000 | Year to 31 March 2008 £'000 | ||
| Profit for the year | 622 | 11,996 | |
| Changes in fair value of available for sale financial assets | (199) | (87) | |
| Actuarial losses on defined benefit pension schemes | (296) | (510) | |
| Tax effect of gains and losses recognised directly in equity | 56 | 32 | |
| Total recognised income and expense for the year | 183 | 11,431 |
Supplementary Statement
Reconciliation of profit before income tax to net cash inflow from operating activities
| Year to 31 March 2009 £'000 | Year to 31 March 2008 £'000 | ||
| Profit before income tax | 3,616 | 16,664 | |
| Depreciation (net of profit on sale of property, plant and equipment) | 5,159 | 5,863 | |
| Interest received | (1,684) | (1,414) | |
| Excess of employer pension contributions over income statement charge | (296) | (510) | |
| Increase in inventories | (347) | (736) | |
| Decrease in receivables | 8,734 | (804) | |
| Decrease in payables | (5,981) | 2,377 | |
| Net cash inflow from operating activities | 9,201 | 21,440 |
Castings plc
Notes to the financial report
Basis of preparation and accounting policies
The financial information has been prepared under International Financial Reporting Standards (IFRS) as adopted by the EU using the same accounting policies that were used in the group financial statements for the year ended 31 March 2008.
The annual report and accounts will be posted to shareholders on 2 July 2009 and will be available on the company's website, www.castings.plc.uk from 6 July 2009.
2. Exceptional expenses
| 2009 £'000 | 2008 £'000 | ||
| Redundancy costs (see (a) below) | 2,198 | - | |
| Provision for losses on deposits with Icelandic banks (see (b) below) | 3,845 | - | |
| 6,043 | - |
a) Redundancy costs relate to termination of employment payments due to reduction in production volumes.
b) The company reported in October 2008 that it had £5.7 million on deposits with Icelandic banks Kaupthing Singer and Friedlander, Heritable Bank, Landsbanki and Glitner Bank. All of these amounts were due for repayment by 31st December 2008. No repayment has been received and therefore these deposits are at risk. Statements have been issued by the administrators of Heritable Bank and Kaupthing Singer and Friedlander giving a range of possible outcomes. The lower end of these ranges has been used to calculate the recoverable amount.
3. Income tax expense
The Finance Act 2008 incorporated the phasing out of industrial building allowances and as a result the deferred tax implication (i.e. difference between accounting and tax treatment) has resulted in a deferred tax charge of £2,066,000. The effective rate of tax, excluding this adjustment, would have been 25.66%.
4. Dividends
The Board are proposing a final dividend amounting to 7.29 pence per share (2008:7.29p). An interim dividend of 2.71p per share (2008:2.71p) has already been paid, making the total dividend for the year 10.00p per share (2008:10.00p). The Annual General Meeting will be held on Tuesday 18 August 2009 and if the proposed final dividend is approved by the members the dividend will be paid on 21 August 2009 to shareholders registered on 24 July 2009.
5. The basic and diluted earnings per share is calculated on the profit on ordinary activities after taxation of £622,000 (2008: £11,996,000) and on the weighted average number of shares in issue of 43,632,068 in 2009 and in 2008.
6. The company operates two defined benefit pension schemes. The funded status of these schemes at 31 March 2009 was a surplus of £1,007,000 (2008: £2,786,000). In accordance with IAS 19 paragraph 58b the asset has not been disclosed in this financial information. These schemes were closed to future accruals at 6th April 2009.
7. The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2009 or 2008, but is derived from those accounts. Statutory accounts for 2008 have been delivered to the Registrar of Companies and those for 2009 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under the Companies Act 1985, s 237(2) or (3).
Appendix A
Review of Principal Risks and Uncertainties
Risk
In common with all trading business, the group is exposed to a variety of risks in the conduct of its normal business operations.
The group maintains a range of insurance policies against major identified insurable risks, including (but not limited to) those related to business interruption, damage to property and equipment, products and employment.
Whilst it is not possible to either completely record or to quantify every material risk that the group faces, below is a summary of those risks that the directors believe are most significant to the group's business and could have a material impact on future performance, causing it to differ materially from expected or historic achieved results.
Foreign exchange risk
Foreign exchange rate risk is sometimes partially hedged using forward foreign exchange contracts. Translational risk arises as a consequence of applying different exchange rates to net assets denominated in currencies other than sterling and, not being an exposure that results in an actual cash flow, is not hedged.
Operational and commercial risks
The group's revenues are principally derived from commercial vehicle and automotive markets. Both markets, and therefore group revenues, can be subject to variations in patterns of demand. Commercial vehicle sales are linked to technological factors (e.g. emission legislations) and economic growth. Passenger vehicle sales are influenced, inter alia, by consumer preferences, incentives and the availability of consumer credit.
Market competition
Automotive and commercial vehicle markets are, by their nature, highly competitive, which has historically led to deflationary pressure on selling prices. This pressure is most pronounced in cycles of lower demand. A number of the group's customers are also adopting global sourcing models with the aim to reduce bought out costs. Whilst there can be no guarantee that business will not be lost on price, we are confident that we can remain competitive.
Customer concentration, programme dependencies and relationships
The loss of, or deterioration in any single customer relationship could have a material impact on the group's results.
Equipment
The group operates a number of specialist pieces of equipment, including foundry furnaces, moulding lines and CNC milling machines which, due to manufacturing lead times, would be difficult to replace sufficiently quickly to prevent major interruption and possible loss of business in the event of unforeseen failure. Whilst this risk cannot be entirely mitigated without uneconomic duplication of all key equipment, all key equipment is maintained to the highest possible standards and inventories of strategic equipment spares maintained. The facilities at Brownhills and Dronfield have similar equipment and work can be transferred from one location to another very quickly.
Suppliers
Although the group takes care to ensure alternative sources of supply remain available for materials or services on which the group's businesses are critically dependant, this is not always possible to guarantee without risk of short-term business disruption, additional costs and potential, damage to relationships with key customers.
Commodity and energy pricing
The principal metal raw materials used by the group's businesses are steel scrap and various alloys. The most important alloy raw material inputs are premium graphite, magnesium ferrosilicon, nickel and molybdenum. Wherever possible, prices and quantities (except steel) are secured through long-term agreements with suppliers. In general, the risk of price inflation of these materials resides with the group's customers through price adjustment clauses. The group is exposed to price level changes in copper and molybdenum, which have seen dramatic increases in recent years. Where possible, the group seeks to mitigate the financial impact through the application of surcharges, although the success of this approach varies by customer.
Energy contracts are locked in for at least twelve months, although renegotiation risks remain at contract maturity dates but again this is mitigated through the application of surcharges. However, energy contracts relate to specified usage and if not obtained can result in penalties.
Information technology and systems reliability
The group is dependent on its information technology ("IT") systems to operate its business efficiently, without failure or interruption. Whilst data within key systems is regularly backed up and systems subject to virus protection, any failure of back-up systems or other major IT interruption could have a disruptive effect on the group's business.
Short-term deposits
Advice is taken as to where to deposit funds, usually banks and building societies. Only highly rated institutions are used. However, institutions can be downgraded before maturity therefore possibly placing these deposits at risk.
Product quality and liability
The group's businesses expose it to certain product liability risks which, in the event of failure, could give rise to material financial liabilities. Whilst it is a policy of the group to limit its financial liability by contract in all long-term agreements ("LTAs"), it is not always possible to secure such limitations in the absence of LTAs. The group's customers do require the maintenance of demanding quality systems to safeguard against quality-related risks and the group maintains appropriate external quality accreditations. The group maintains insurance for public liability-related claims but does not insure against the risk of product warranty or recall.
Environmental risk
The group's businesses are subject to compliance with many different laws and requirements in the UK, Europe, North America and elsewhere. Great care is made to act responsibly towards the environment to achieve compliance with all relevant laws and to establish a standard above the minimum level required. Whilst the group's manufacturing processes are not generally considered to provide a high risk of harm to the environment, a major control failure leading to environmental harm could give rise to a material financial liability as well as significant harm to the reputation of our business.
Pension scheme funding
The fair value of the assets and liabilities of the group's defined benefit pension schemes is substantial. As at 31st March 2009 the schemes were in surplus on an
IAS 19 basis. The potential risks and uncertainties are mitigated by careful management and continual monitoring of the schemes and by appropriate and timely action to ensure as far as possible that the defined benefit pension liabilities do not increase disproportionately. The company works closely with the scheme trustees and specialist advisers in managing the inherent risks of such schemes.
The schemes were closed to future accruals from 6th April 2009 which will only leave past service liabilities to be funded.
Appendix B
Statement of Directors' Responsibilities
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the group, for safeguarding the assets of the company, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors' Report and Directors' Remuneration Report which comply with the requirements of the Companies Act 1985.
The directors are responsible for preparing the annual report and the financial statements in accordance with the Companies Act 1985. The directors are also required to prepare financial statements for the group in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs) and Article 4 of the IAS Regulation. The directors have chosen to prepare financial statements for the company in accordance with UK Generally Accepted Accounting Practice.
Group financial statements
International Accounting Standard 1requires that financial statements present fairly for each financial year the group's financial position, financial performance and cash flows. This requires the faithful presentation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the directors to:
consistently select and apply appropriate policies;
present information, including accounting policies, in a manner that provide relevant, reliable, comparable and understandable information; and
provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.
Parent company financial statements
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business;
make judgments and estimates that are reasonable and prudent; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements.
Financial statements are published on the group's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the group's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.
Each of the persons who is a director at the date of approval of this report confirms that to the best of his knowledge:
(a) each of the Group and Parent financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU and UK Accounting Standards respectively, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and
(b) the Chairman's Statement, Business and Financial Review and Directors' Report included in the consolidation taken as a whole; and
(c) the Chairman's Statement, Business and Financial Review and Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
By order of the Board
B J Cooke
Chairman
24th June 2009