Final Results

RNS Number : 2012B

Castings PLC

15 June 2016

 

Castings P.L.C.

Annual Financial Report

DTR 6.3.5 Disclosure

Year ended 31 March 2016

Chairman's Statement

The turnover of the group increased to £132 million (£131 million last year) with an increase in profits to £19.7 million compared to £17.5 million last year.

Foundry businesses

The foundries have enjoyed stable trading conditions throughout the year and increased profits compared with the previous year.

I am pleased to report that we are making good progress at William Lee; a full reorganisation has taken place during the year to ensure standards are raised in line with the Brownhills foundry. We continue to review foundry production techniques and technologies across the group and invest in areas that will enhance the returns in this segment.

The Brownhills warehouse is being extended so that part of the existing building can be used for expansion of our machining business; this will be complete by the end of the calendar year.

CNC Speedwell

CNC enjoyed a good year with improved profits, however a major contract ended in the last quarter of the year.  Replacement work will not come on stream immediately so it is expected profits will reduce during the current financial year.  It is anticipated an improvement will be seen in financial year 17/18 and onwards. Our investment in additional machining facilities reflects our commitment to this area and the potential opportunities for growth in the short to medium term.

Dividend

I am pleased to report that the directors recommend an increase in the final dividend to 10.33 pence per share to be paid on 19 August 2016. This, together with an increased interim dividend, gives a total for the year of 13.71 pence per share.

Supplementary dividend

In addition to the final dividend set out above, the board has reviewed the cash position of the group and considered the balance between increasing returns to shareholders whilst retaining flexibility for capital and other investment opportunities. As a result, the directors are declaring a supplementary dividend of 30 pence per share to be paid on 22 July 2016 to shareholders on the register on 24 June 2016. This dividend, being discretionary and non-recurring, in no way compromises our commitment to invest in market leading technologies to maintain our competitive advantage.

Outlook

It appears that customer demands remain steady at the present time and unless there is a substantial change we will only see a temporary reduction in profits due to the changing situation at CNC Speedwell.

It is also important that, whatever the result of the EU referendum, the Government return to the priority of focussing on the economy and recognising the important role of manufacturing in achieving higher levels of employment to the benefit of the country as a whole.

Directors

Paul King retired as non-executive director on 18 August 2015. I wish to thank him for his contribution over many years to Castings P.L.C.

In conclusion I wish to thank all our employees for their contribution during the year and hope we will now enjoy a period of stability.

B. J. Cooke
Chairman

15 June 2016

Business and Financial Review

Overview of business segment performance

The segmental revenue and results for the current and previous years are set out in note 2. An overview of the performance, position and future prospects of each segment, and the relevant KPIs, are set out below.

Foundry operations

The foundry businesses have experienced a slight reduction in output of 1.3% to 52,000 tonnes but an increase in external sales revenue of 1.3% to £114.7 million.

Sales revenue has been affected by the general reduction in raw material prices during the year. The increase in revenue on a lower tonnage output is a result of a slight change in mix of parts being sold; this year seeing an increase in more complex, machined parts compared to last year.

The segmental profit has increased to £14.7 million, from £13.1 million in the previous year, which represents a return of 10.9% on total segmental sales (2015 - 9.8%).

The management team at William Lee continue to make good progress following the increase in complexity in the work mix which impacted profitability in the previous year and progress will continue during the current year.

With customer requirements forecast to remain steady at the current levels, particularly in the commercial vehicles sector, our focus will be on our continuous efforts to improve productivity through careful investment and further developing production methods. Just before the year end, work commenced on an extension to one of the premises at the Brownhills site which will provide additional warehousing and machining capacity for the group. It is anticipated that this project will be completed by the end of the calendar year.

Machining

The machining business generated total sales of £33.2 million in the year compared to £31.4 million in the previous year. Of the total revenue, 53.3% was generated from external customers compared to 57.3% in 2015.

The segmental profit has increased to £4.7 million (2015 - £4.5 million) and the profit on total sales reduced to 14.2% (2015 - 14.4%).

The end of a contract in the last quarter of the financial year, where there was no direct replacement work, impacted the result for the year. Whilst new orders have been secured to fill some of the available capacity created, it is expected to take up to three years to be in full production on parts to fully utilise this capacity.

We have invested £4.7 million during the year to accommodate new orders, many of which have not come into full production. This investment also includes expenditure on converting previous warehousing into a machining facility in Brownhills.

Business review and performance

Revenue

Group revenues increased by 0.9% to £132.4 million compared to £131.3 million reported in 2015, of which 67% was exported (2015 - 67%).

The revenue from the foundry operations to external customers increased 1.3% to £114.7 million (2015 - £113.3 million) with the dispatch weight of castings to third-party customers decreasing 1.3% to 52,000 tonnes (2015 - 52,700 tonnes).

Revenue from the machining operation to external customers decreased by 1.7% during the year to £17.7 million (2015 - £18.0 million).

Operating profit and segmental result

The group operating profit for the year was £19.5 million compared to £17.4 million reported in 2015, which represents a return on sales of 14.7% (2015 - 13.3%).

The foundry operations returned a segmental profit of £14.7 million compared to £13.1 million in 2015. This represents a rise in segmental profit as a percentage of total segment sales to 10.9% from 9.8% in 2015.

The segmental profit of the machining operation was £4.7 million in the year compared to £4.5 million in 2015, being 14.2% (2015 - 14.4%) of total segment sales.

Icelandic bank receipts

During the year we have received £0.32 million (2015 - £0.02 million) in respect of the failed Icelandic banks. Of the original balance of £5.7 million, the total received to date is £3.60 million which is £1.74 million in excess of the original estimate of recoverable amounts. Given the uncertainty over the quantum and timing of any possible further receipts, no allowance has been made for future recoverable amounts.

Finance income

The increase in the level of finance income from £0.14 million in 2015 to £0.19 million in the current year reflects the higher average deposit balances compared to the previous year; the average interest rates being consistent at 0.5%.

Profit before income tax

Profit before taxation has increased to £19.7 million from £17.5 million.

Taxation

The current year tax charge of £3.49 million (2015 - £3.67 million) is made up of a current tax charge of £3.89 million (2015 - £3.14 million) and a deferred tax credit of £0.40 million (2015 - charge of £0.53 million).

The effective rate of tax of 17.7% (2015 - 20.9%) reflects the falling UK corporation tax rate and therefore the remeasurement of deferred tax liabilities at the lower substantively enacted future rates of 19% and 18%.

Earnings per share

Underlying basic earnings per share increased 16.7% to 37.10 pence (2015 - 31.80 pence) reflecting a 12.1% increase in profits and a lower effective tax rate compared to the previous year. There has been no change in the weighted average number of shares in issue of 43,632,068.

Dividends

The directors are recommending an increase in the final dividend to 10.33 pence per share (2015 - 10.08 pence per share) to be paid on 19 August 2016. This would give a total normal distribution for the year of 13.71 pence per share (2015 - 13.30 pence per share).

In addition, recognising the strong cash position at the balance sheet date and the cash generative nature of the group, the directors are declaring a supplementary dividend of 30 pence per share to be paid on 24 July 2016. This discretionary, non-recurring distribution is considered appropriate to provide a balance between increasing returns to shareholders whilst maintaining the flexibility for capital and other investment opportunities.

Cash flow

The group generated cash from operating activities of £27.8 million compared to £20.4 million in 2015 with working capital levels remaining broadly consistent with the previous year.

Corporation tax payments during the year totalled £3.2 million compared to £4.4 million in 2015, reflecting the timing of quarterly payments and a lower tax rate compared to 2015.

Capital expenditure during the year amounted to £7.2 million (2015 - £8.2 million) with investment in production processes and warehousing in the foundry businesses and production facilities and machining centres within the machining operation. The charge for depreciation was consistent at £6.9 million.

The current interest-bearing deposit of £10 million taken out in the previous year was rolled-over and matures during the next financial year.

Repayments of £1.1 million were received from the final salary pension schemes during the year and advances were made to the schemes of £2.6 million.

Dividends paid to shareholders were £5.9 million in the year compared to £5.7 million in 2015. The resulting net cash and cash equivalents represented an increase of £10.4 million (2015 - decrease of £7.8 million) including the impact of the current interest-bearing deposit of £10 million in the previous year.

At 31 March 2016, the total cash and deposits position at the balance sheet date is £40.4 million (2015 - £30.0 million).

Pensions

The pension valuation showed a broadly consistent surplus, on an IAS 19 (Revised) basis, of £14.7 million compared to the previous year. The surplus continues not to be shown on the balance sheet due to the IAS 19 (Revised) restriction of recognition of assets where the company does not have an unconditional right to receive returns of contributions or refunds.

Balance sheet

Net assets at 31 March 2016 were £129.9 million (2015- £119.3 million).  Other than the total comprehensive income for the year of £16.5 million, the only movement relates to the dividend charge of £5.9 million.  Non-current assets have decreased to £70.7 million (2015 - £71.6 million) primarily as a result of the change in the debtor due from the pension scheme of £3.4 million (2015 - £4.5 million). 

Current assets have increased to £82.4 million (2015 - £72.5 million) mainly as a result of net cash generated during the year and working capital movements.  Total liabilities have reduced to £23.2 million (2015 - £24.7 million), largely as a result of a reduction in trade payables, off-set slightly by an increase in the corporation tax creditor.

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2016

		2016 £000	2015 £000
Revenue		132,448	131,268
Cost of sales		(98,431)	(99,150)
Gross profit		34,017	32,118
Distribution costs		(2,251)	(2,162)
Administrative expenses
Excluding exceptional		(12,591)	(12,570)
Exceptional		315	24
Total administrative expenses		(12,276)	(12,546)
Profit from operations		19,490	17,410
Finance income		186	137
Profit before income tax		19,676	17,547
Income tax expense		(3,489)	(3,672)
Profit for the year attributable to equity holders of the parent company		16,187	13,875
Other comprehensive income for the year:
Items that will not be reclassified to profit and loss:
Movement in unrecognised surplus on defined benefit pension schemes net of actuarial gains and losses		228	283
Tax effect of items that will not be reclassified		-	-
		228	283
Items that may be reclassified subsequently to profit and loss:
Change in fair value of available-for-sale financial assets		(28)	(55)
Reclassification adjustments for gains/(losses) on available for sale assets included in profit		85	-
Tax effect of items that may be reclassified		5	11
		62	(44)
Total other comprehensive income/(losses) for the year (net of tax)		290	239
Total comprehensive income for the year attributable to the equity holders of the parent company		16,477	14,114
Earnings per share attributable to the equity holders of the parent company
Basic and diluted		37.10p	31.80p

Consolidated Balance Sheet

31 March 2016

		2016 £000	2015 £000
ASSETS
Non-current assets
Property, plant and equipment		66,948	66,572
Financial assets		354	467
Other receivables		3,383	4,538
		70,685	71,577
Current assets
Inventories		11,992	12,115
Trade and other receivables		30,047	30,342
Other current interest-bearing deposits		10,000	10,000
Cash and cash equivalents		30,385	20,021
		82,424	72,478
Total assets		153,109	144,055
LIABILITIES
Current liabilities
Trade and other payables		16,769	18,602
Current tax liabilities		2,029	1,336
		18,798	19,938
Non-current liabilities
Deferred tax liabilities		4,378	4,788
Total liabilities		23,176	24,726
Net assets		129,933	119,329
Equity attributable to equity holders of the parent company
Share capital		4,363	4,363
Share premium account		874	874
Other reserve		13	13
Retained earnings		124,683	114,079
Total equity		129,933	119,329

Consolidated Cash Flow Statement

for the year ended 31 March 2016

		2016 £000	2015 £000
Cash flows from operating activities
Profit before income tax		19,676	17,547
Adjustments for:
Depreciation		6,853	6,760
(Profit)/loss on disposal of property, plant and equipment		(62)	1
Loss on disposal of financial assets		48	-
Finance income		(186)	(137)
Excess of employer pension contributions over income statement charge		228	283
Decrease in inventories		123	506
Decrease/(increase) in receivables		2,925	(2,127)
Decrease in payables		(1,832)	(2,474)
Cash generated from operating activities		27,773	20,359
Tax paid		(3,202)	(4,423)
Interest received		165	115
Net cash generated from operating activities		24,736	16,051
Cash flows from investing activities
Dividends received from listed investments		21	22
Purchase of property, plant and equipment		(7,236)	(8,210)
Proceeds from disposal of property, plant and equipment		69	72
Transfer other current interest-bearing deposits		-	(10,000)
Proceeds from disposal of financial assets		122	-
Repayments from pension schemes		1,135	-
Advances to the pension schemes		(2,610)	-
Net cash used in investing activities		(8,499)	(18,116)
Cash flow from financing activities
Dividends paid to shareholders		(5,873)	(5,694)
Net cash used in financing activities		(5,873)	(5,694)
Net increase/(decrease) in cash and cash equivalents		10,364	(7,759)
Cash and cash equivalents at beginning of year		20,021	27,780
Cash and cash equivalents at end of year		30,385	20,021
Cash and cash equivalents:
Short-term deposits		27,786	19,253
Cash available on demand		2,599	768
		30,385	20,021

Consolidated Statement of Changes in Equity

for the year ended 31 March 2016

	Equity attributable to equity holders of the parent
	Share capitala) £000	Share premiumb) £000	Other reservec) £000	Retained earningsd) £000	Total equity £000
At 1 April 2015	4,363	874	13	114,079	119,329
Profit for the year	-	-	-	16,187	16,187
Other comprehensive income/(losses):
Movement in unrecognised surplus on defined benefit pension schemes net of actuarial loss	-	-	-	228	228
Change in fair value of available for sale assets	-	-	-	(28)	(28)
Reclassification adjustment for gains/(losses) on available for sale assets included in profit	-	-	-	85	85
Tax effect of items taken directly to reserves	-	-	-	5	5
Total comprehensive income for the period ended 31 March 2016	-	-	-	16,477	16,477
Dividends (see note 5)	-	-	-	(5,873)	(5,873)
At 31 March 2016	4,363	874	13	124,683	129,933

 

	Equity attributable to equity holders of the parent
	Share capitala) £000	Share premiumb) £000	Other reservec) £000	Retained earningsd) £000	Total equity £000
At 1 April 2014	4,363	874	13	105,659	110,909
Profit for the year	-	-	-	13,875	13,875
Other comprehensive income/(losses):
Movement in unrecognised surplus on defined benefit pension schemes net of actuarial loss	-	-	-	283	283
Change in fair value of available for sale assets	-	-	-	(55)	(55)
Tax effect of items taken directly to reserves	-	-	-	11	11
Total comprehensive income for the period ended 31 March 2015	-	-	-	14,114	14,114
Dividends (see note 5)	-	-	-	(5,694)	(5,694)
At 31 March 2015	4,363	874	13	114,079	119,329

a) Share capital - The nominal value of allotted and fully paid up ordinary share capital in issue.

b) Share premium - Amount subscribed for share capital in excess of nominal value.

c) Other reserve - Amounts transferred from share capital on redemption of issued shares.

d) Retained earnings - Cumulative net gains and losses recognised in the statement of comprehensive income.

Notes to the financial report

1    Basis of preparation

The group financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards ('IAS') and Interpretations (collectively 'IFRS'), as endorsed for use in the EU.

The IFRSs applied in the group financial statements are subject to ongoing amendment by the IASB and subsequent endorsement by the European Commission and therefore subject to possible change in the future. Further standards and interpretations may be issued that will be applicable for financial years beginning on or after 1 April 2016 or later accounting periods but may be adopted early.

The preparation of financial statements in accordance with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the group's accounting policies.

The primary statements within the financial information contained in this document have been presented in accordance with IAS 1 Presentation of Financial Statements.

The accounts are prepared under the historical cost convention, except where adjusted for revaluations of certain assets, and in accordance with applicable Accounting Standards and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies used are consistent with those disclosed in the 31 March 2015 financial statements. The presentation currency used is sterling and the amounts have been presented in round thousands ("£000").

2    Operating segments

For internal decision-making purposes, the group is organised into three operating companies which are considered to be the operating segments of the group: Castings P.L.C. and William Lee Limited are aggregated into Foundry operations and CNC Speedwell Limited is the Machining operation.

The following shows the revenues, results and total assets by reportable segment in the year to 31 March 2016:

	Foundry operations £000	Machining £000	Elimination £000	Total £000
Revenue from external customers	114,738	17,710	-	132,448
Inter-segmental revenue	20,393	15,496	-	35,889
Segmental result	14,682	4,699	22	19,403
Unallocated costs:
Exceptional credit for recovery of Icelandic bank deposits previously written off				315
Defined benefit pension cost				(228)
Finance income				186
Profit before income tax				19,676
Total assets	129,704	33,089	(9,684)	153,109
Non-current asset additions	2,511	4,725	-	7,236
Depreciation	3,331	3,522	-	6,853

All non-current assets are based in the United Kingdom.

The following shows the revenues, results and total assets by reportable segment in the year to 31 March 2015:

	Foundry operations £000	Machining £000	Elimination £000	Total £000
Revenue from external customers	113,300	17,968	-	131,268
Inter-segmental revenue	20,532	13,398	-	33,930
Segmental result	13,064	4,521	84	17,669
Unallocated costs:
Exceptional credit for recovery of Icelandic bank deposits previously written off				24
Defined benefit pension cost				(283)
Finance income				137
Profit before income tax				17,547
Total assets	122,650	31,919	(10,514)	144,055
Non-current asset additions	4,303	3,907	-	8,210
Depreciation	3,507	3,253	-	6,760

All non-current assets are based in the United Kingdom.

3    Exceptional items

	2016 £000	2015 £000
Recovery of past provision for losses on deposits with Icelandic banks	(315)	(24)
	(315)	(24)

The company reported in the year ended 31 March 2009 that £1.86 million was included in other receivables as the net recoverable after provision from various Icelandic banks. So far £3.6 million has been received of the original balance of £5.7 million with the excess over the £1.86 million being shown as an exceptional credit.

4    Income tax

	2016 £000	2015 £000
Corporation tax based on a rate of 20% (2015 - 21%)
UK corporation tax
Current tax on profits for the year	4,015	3,730
Adjustments to tax charge in respect of prior periods	(121)	(586)
	3,894	3,144
Deferred tax
Current year origination and reversal of temporary differences	20	80
Prior year deferred tax movement	63	448
Change in rate of corporation tax	(488)	-
	(405)	528
Taxation on profit on ordinary activities	3,489	3,672
Profit on ordinary activities before tax	19,676	17,547
Tax on profit on ordinary activities at the standard rate of corporation tax in the UK of 20% (2015 - 21%)	3,935	3,685
Effect of:
Expenses not deductible for tax purposes	54	66
Adjustment to tax charge in respect of prior periods	(121)	(586)
Adjustment to deferred tax charge in respect of prior periods	63	448
Change in rate of future tax	(488)	-
Pension adjustments	46	59
Total tax charge for period	3,489	3,672
Effective rate of tax (%)	17.7	20.9

The reduction in the UK corporation tax rate to 19% from 1 April 2017 and 18% from 1 April 2020 were substantively enacted in October 2015. Accordingly, these rates have been applied in the measurement of the group's deferred tax assets and liabilities at 31 March 2016.

5    Dividends

	2016 £000	2015 £000
Final paid of 10.08p per share for the year ended 31 March 2015 (2014 - 9.83p)	4,398	4,289
Interim paid of 3.38p per share (2015 - 3.22p)	1,475	1,405
	5,873	5,694

The directors are proposing a final dividend of 10.33 pence (2015 - 10.08 pence) per share totalling £4,507,193 (2015 - £4,398,112). In addition, the directors have declared a supplementary dividend of 30 pence per share, totalling £13,089,620. These dividends have not been accrued at the balance sheet date.

6    Earnings per share

Earnings per share is calculated on the profit on ordinary activities after taxation of £16,187,000 (2015 - £13,875,000) and on the weighted average number of shares in issue at the end of the year of 43,632,068 (2015 - 43,632,068). There are no potentially dilutive shares, hence the diluted earnings per share is the same as above.

7    Property, plant and equipment

	Land and buildings £000	Plant and other equipment £000	Total £000
Cost
At 1 April 2015	32,256	116,781	149,037
Additions during year	2,323	4,913	7,236
Disposals	-	(716)	(716)
At 31 March 2016	34,579	120,978	155,557
Depreciation and amounts written off
At 1 April 2015	6,175	76,290	82,465
Charge for year	811	6,042	6,853
Disposals	-	(709)	(709)
At 31 March 2016	6,986	81,623	88,609
Net book values
At 31 March 2016	27,593	39,355	66,948
At 31 March 2015	26,081	40,491	66,572
Cost
At 1 April 2014	30,950	110,370	141,320
Adjustment to opening position	24	(24)	-
Additions during year	1,282	6,928	8,210
Disposals	-	(493)	(493)
At 31 March 2015	32,256	116,781	149,037
Depreciation and amounts written off
At 1 April 2014	5,400	70,725	76,125
Charge for year	775	5,985	6,760
Disposals	-	(420)	(420)
At 31 March 2015	6,175	76,290	82,465
Net book values
At 31 March 2015	26,081	40,491	66,572
At 31 March 2014	25,550	39,645	65,195

The net book value of group land and buildings includes £2,527,000 (2015 - £2,527,000) for land which is not depreciated. Included within the land and buildings are assets in the course of construction with a net book value of £1,971,000 (2015 - £1,015,000 and 2014 - £nil) which are not depreciated. The cost of land and buildings includes £359,000 for property held on long leases (2015 - £359,000).

8    Commitments and contingencies

	2016 £000	2015 £000
Capital commitments contracted for by the group but not provided for in the accounts	6,087	1,174

The group does not insure against the potential cost of product warranty or recall. Accordingly, there is always the possibility of claims against the group for quality related issues on parts supplied to customers. As at 31 March 2016, the directors do not consider any significant liability will arise in respect of any such claims (2015 - £nil).

9    Pensions

The company operates two defined benefit pension schemes which were closed to future accruals at 6 April 2009. The funded status of these schemes at 31 March 2016 was a surplus of £14,694,000 (2015 - £14,564,000). The pension surplus has not been recognised as the group does not have an unconditional right to receive returns of contributions or refunds under the scheme rules.

10  Preliminary statement

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2016 or 2015, but is derived from those accounts.  Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 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 Section 498 of the Companies Act 2006.

The annual report and accounts will be posted to shareholders on 24 June 2016 and will be available on the company's website, www.castings.plc.uk, from 1 July 2016.

Appendix A - Principal Risks and Uncertainties

Risk

In common with all trading businesses, 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, damage to stocks, public and product liability and employers liability.

The directors have carried out a robust assessment of the principal risks facing the entity. Whilst it is difficult to either completely record or to quantify every material risk that the group faces, below is a summary of those risks and, where possible, how they are being managed or mitigated, 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.

Operational and commercial

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 major customer relationship could have a material impact on the group's results.

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.

Foreign exchange

The group is exposed to foreign exchange risk on both sales and purchases that are denominated in currencies other than sterling, being primarily euro and US dollar. Foreign exchange rate risk is sometimes partially mitigated by using forward foreign exchange contracts.

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. The machining business also operates from two separate locations enabling the transfer of some production if required.

Suppliers and trade credit

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 dependent, this is not always possible to guarantee without risk of short-term business disruption, additional costs and potential damage to relationships with key customers. The ability of our suppliers to maintain credit insurance on the group and its principal operating businesses is an important issue. We have excellent relationships with our suppliers and we continue to work closely with them on a normal commercial basis. A reduction in the level of cover available to suppliers may impact on our trading relationship with them and may have a significant effect on cash flows.

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 ferro-silicon, copper, 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.

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 price adjustment clauses. At 31 March 2016, the group has electricity contracts in place until 30 September 2018. Consumption levels at the balance sheet date are well within the agreed tolerance levels and this situation is not expected to change.

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

A review of credit ratings is undertaken prior to making new deposits and the maximum exposure to any one counterparty is restricted. However, institutions can be downgraded before maturity thereby possibly placing these deposits at risk.

Environmental

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. Further information is set out on page 9.

Pension scheme funding

The fair value of the assets and liabilities of the group's defined benefit pension schemes is substantial. As at 31 March 2016 the schemes were in surplus on an IAS 19 (Revised) basis. Further details are set out in note 6 to the accounts. The potential risks and uncertainties resulting from factors such as investment return, interest rates and mortality rates 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 6 April 2009, which only leaves past service liabilities to be funded.

Appendix B

The statements below have been prepared in connection with the group's full annual report for the year ended 31 March 2016. Certain parts thereof are not included within this announcement.

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, Strategic Report 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

15 June 2016

 

END

 

 

FR DZLFFQQFLBBB