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
Brownhills
West 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.