(DWSN) Dawson Intl

DAWSON INTERNATIONAL PLC

HALF YEAR REPORT FOR THE PERIOD ENDED 1 OCTOBER 2011

KEY POINTS

·       Home Furnishings business sold on 17 May, estimated net proceeds £6.5 million.

-        £4.4 million net proceeds received in the period.

-        Loss incurred in the six weeks to disposal £0.5 million.

·       Dawson now strategically positioned as a specialist cashmere business.

Continuing operations highlights:

·       Turnover £19.8 million (2010: £21.5 million).

·       Operating profit before exceptional items £0.3 million (2010: £1.2 million).

·       Operating profit after exceptional items £0.4 million (2010: £1.8 million).

·       Margins of US business impacted by significant cashmere price increases in the past two years.

·       Net cash outflow £5.1 million (2010: £7.1 million), includes net proceeds from the sale of the Home Furnishings business of £4.4 million and additional payments to pension schemes of £2.3 million.

·       Strong cash position of £5.0 million.

Commenting on the half year results, chairman, David Bolton said:

"I am pleased to report a profit after tax of £0.6 million for the first half of the financial year as we progress our strategy to re-position and develop the Company as a specialist cashmere business, the area in which we are renowned. The disposal of our non-cashmere business, Dawson Home Group Limited, was completed on 17 May 2011 and our focus is now on growing our cashmere business by expanding our customer base in both new and existing geographical areas and expanding our product offering in both cashmere and complementary accessories.

We entered this financial year recognising that difficult global economic conditions coupled with significant raw material price increases in each of the last two years would have a negative impact on our results. We have traded ahead of our expectations in the first half of the year but this is due at least in part to the timing of sales and our expectations for the full year remain broadly unchanged.

We are cautiously hopeful that our negotiations with the Pensions Trustees and the Pensions Regulator are reaching a conclusion which will provide a measure of certainty for our pension scheme members, employees, customers and shareholders going forward."

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Chairman's Statement           

I am pleased to report a profit after tax of £0.6 million for the first half of the financial year as we progress our strategy to re-position and develop the Company as a specialist cashmere business, the area in which we are renowned. The disposal of our non-cashmere business, Dawson Home Group Limited, was completed on 17 May 2011 and our focus is now on growing our cashmere business by expanding our customer base in both new and existing geographical areas and expanding our product offering in both cashmere and complementary accessories.

Continuing operations reported an operating profit before exceptional items of £0.3 million which compares with a profit of £1.2 million in the previous year. This deterioration was expected and is due principally to two factors: Talbots, one of the significant customers of our US business has chosen to source directly this year. Despite the addition of a number of new customers, net sales of the US business consequently fell by $1.2 million or 5 per cent.  Secondly, the US business has been particularly affected by the significant rise in cashmere raw material prices in the past two years with the result that margins have fallen by 6 per cent. Volatility of cashmere prices has always been a feature of our industry due to limited supply and variable quality but it is noteworthy that increased domestic consumption within China has now also impacted demand. We regard this as an opportunity and are currently exploring a number of options to market our products more widely in China. Further cost increases in cashmere fibre are possible in 2012, however when prices stabilise we expect to see margin recovery in the US business.

Our cashmere businesses in the UK and the USA are working more closely together to exploit marketing opportunities in the USA, Europe and the Far East. Where possible, cost savings have been achieved through integration and rationalisation of the management structure. We also recognise however the need to invest appropriately if we are to achieve growth and it is vital that this investment continues despite the difficult current economic conditions that we are operating in.

The results of continuing operations benefited from an exceptional credit of £0.1 million and from net finance income of £0.7 million relating to the defined benefit pension schemes. Including these items, the net profit from continuing operations was £1.1 million compared with a profit of £1.7 million last year.

The discontinued Home Furnishings business, Dawson Home Group Limited, made a loss of £0.5 million in the six week period to its disposal on 17 May 2011. Net proceeds of the sale, after disposal costs, are expected to be £6.5 million of which £4.8 million was received by the period end and the balance is due by 31 March 2012. The loss on sale of £2.5 million was fully provided in the last financial period.

As noted in the last annual report the most recent actuarial valuation of the UK defined benefit pension schemes indicated a funding deficit in excess of £50 million. While this figure is constantly moving as a result of changes in market conditions, it is of such a size that it has not been possible for the Company and the Trustee to agree realistic recovery plans despite protracted and expensive consultations. The Pensions Regulator has been involved through the course of these consultations and has recently been conducting its own review.  We expect that this review will be concluded shortly and that a meeting between the parties will be held without undue delay to agree how to secure the best possible outcome for pension scheme members and the Company.

Operating and Financial Review

In 2010 the Company changed its accounting reference date from 31 December to 31 March. The half year financial statements therefore compare the six month period to 1 October 2011 with the six month period to 2 October 2010 and the fifteen month period to 2 April 2011.

Income Statement Summary

Operating Results - continuing operations

Turnover from continuing operations for the six months ended 1 October 2011 was £19.8 million, a reduction of £1.7 million or 8 per cent. Pre-exceptional operating profit for the period was £0.3 million, a reduction of £0.9 million or 74 per cent.   

UK Knitwear

Turnover in the first half of the year was £5.0 million (2010: £4.9 million) and the operating profit £0.5 million (2010: £0.4 million). Both turnover and margins benefited from an improved sales mix with higher couture sales and lower sourced goods.  This excellent first half performance will not be repeated in the second half of the year which is seasonally weaker and will be impacted by yarn price increases.

US Knitwear

Turnover in the first half of the year in US Dollars was $24.0 million (2010: $25.2 million) and the operating profit $1.6 million (2010: $3.7 million). Sales fell by $5.0 million as a result of one customer, Talbots, choosing to source directly. The revenue shortfall was largely compensated for by a combination of new business and earlier timing of sales to existing customers; however these were at lower margin. Margins generally fell across the business as the substantial increases in cashmere fibre prices experienced in the past two years were reflected in higher product costs which could not be fully passed on to customers. The business successfully introduced a cashmere/silk scarf accessory line in the period and a number of other accessories to complement the core cashmere offering are being considered. The US Knitwear business is expected to be loss making in the second half which, as with the UK Knitwear business, is seasonally weaker.

Central Overheads

Central overheads were £1.2 million (2010: £1.6 million). Reductions of £0.3 million were achieved in payroll costs following the reorganisation of the Corporate Office while an exchange gain of £0.1 million compared with a loss of £0.1 million in the previous year. Pension costs are a significant proportion of central overheads with administration fees, consultancy fees and pension protection fund levies totalling £0.8 million (2010: £0.6 million).

Exceptional Items - continuing operations

Net exceptional income for the period was £0.1 million (2010: £0.7 million).  Exceptional income of £0.2 million resulted from the release of a provision for the costs of liquidating overseas dormant companies. Exceptional costs of £0.1 million were incurred to remove asbestos from a vacant factory which will now be demolished.

Net Finance Costs

Net finance costs, excluding pension related items were nil in the period (2010: £0.1 million).  Net finance income on pension obligations was £0.7 million (2010: nil). This is a notional figure only calculated as the expected return on scheme assets in the year less the unwinding of one year's discount on pension obligations.

Discontinued Operations

Dawson Home Group Limited incurred a loss of £0.5 million (2010: £0.4 million) in the six week period prior to its disposal on 17 May 2011.

Balance Sheet Summary

*           Net assets of the discontinued Home Furnishings business at 2 October 2010 are extracted from the total figures shown to demonstrate the impactof the disposal on comparative figures.

Fixed assets were £0.6 million (2010: £0.9 million) with the reduction primarily due to the disposal of Dawson Home Group Limited. 

Working capital was £10.0 million (2010: £13.2 million) with the reduction primarily due to the disposal of Dawson Home Group Limited. Working capital at 1 October 2011 includes receivables due from Inner Mongolia King Deer Cashmere Company Limited of £0.5 million and Dawson Home Group Limited of £2.2 million.

Provisions were £2.0 million (2010: £1.5 million) with the increase primarily due to an additional provision made at 2 April 2011 in respect of US environmental liabilities.

Tax assets were £0.4 million (2010: £2.0 million) with the reduction primarily due to the reversal of the US deferred tax asset of £1.8 million at 2 April 2011.

The net pension liability, calculated in accordance with IAS19, was £12.9 million (2010: £19.0 million).  The reduction reflects updated valuations by the scheme actuaries in the UK and the USA and deficit repair contributions of £2.2 million in the UK and £0.3 million in the USA.

Net funds were £5.0 million (2010: £5.5 million).  In the six months to 1 October 2011 total cash outflow was £5.1 million (2010: £7.1 million outflow) with the significant items as follows: 

-     The cash outflow from continuing operating activities was £8.1 million (2010: £6.6 million) of which £2.3 million was additional contributions to pension schemes (2010: £0.2 million).  The cash outflow before pension contributions reflects the seasonal build of working capital.

-     The cash outflow from discontinued operating activities was £1.3 million (2010: £0.3 million).

-     Net cash proceeds from the disposal of Dawson Home Group Limited were £4.4 million (2010: nil).

Going Concern

In carrying out their duties in respect of going concern, the Directors have reviewed the Group's financial position and cash flow forecasts for a period of twelve months from the date of signing this Half Year Report. These have been based on a comprehensive review of revenue, expenditure and cash flows, taking into account the likelihood of recovering the balance of King Deer debt and the deferred consideration from the disposal of Dawson Home Group Limited and specific business risks and the uncertainties brought about by the current economic environment.

The key assumption made in these forecasts is that there is no demand for a pensions' deficit repair contribution beyond the means of the Group to pay. Based on current negotiations with the Trustees and the Pensions Regulator, the Directors consider that the imposition of a Contribution Notice by either the Pensions Regulator or the scheme actuary is unlikely. The Company has not taken any steps which are materially detrimental to the pension schemes and, in any event, a Contribution Notice is likely to result in the insolvent realisation of Company assets which is not expected to be in any stakeholders' best interests. 

On this basis, the Group's forecasts and projections, taking account of reasonably possible changes in trading performance and other business risks, show that the Group should be able to operate within the level of its current and forecast facilities. Accordingly, the Directors have continued to adopt the going concern basis of preparing the financial statements.

Strategy and Outlook

We entered this financial year recognising that difficult global economic conditions coupled with significant raw material price increases in each of the last two years would have a negative impact on our results. We have traded ahead of our expectations in the first half of the year but this is due at least in part to the timing of sales and our expectations for the full year remain broadly unchanged.

We are committed to our strategy of developing our core cashmere business and achieving growth both by accessing new markets and extending our product range. We are cautiously hopeful that our negotiations with the Pensions Trustees and the Pensions Regulator are reaching a conclusion which will provide a measure of certainty for our pension scheme members, employees, customers and shareholders going forward.

David Bolton

Chairman

NOTES TO THE HALF YEAR REPORT                                                                              

1.   Basis of preparation and significant accounting policies

      Basis of preparation

      This half year report contains the condensed consolidated financial information of the Company and its subsidiaries ("the Group") for the six month period ended 1 October 2011 prepared in accordance with the AIM rules. It is unaudited and has not been reviewed by the auditors. The report does not contain all of the information and disclosures required in the annual financial statements and does not therefore constitute statutory accounts as defined in section 435 of the Companies Act 2006. It should be read in conjunction with the 2011 annual report.

      In 2010 the Company changed its accounting reference date from 31 December to 31 March. The half year financial statements therefore compare the six month period to 1 October 2011 with the six month period to 2 October 2010 and the fifteen month period to 2 April 2011. Comparative information for the six month period to 2 October 2010, which has been extracted from management accounts, is unaudited and has not been reviewed by the auditors. Comparative information for the fifteen month period to 2 April 2011 is based on the statutory accounts for that period which were prepared under International Financial Reporting Standards as adopted by the EU and have been delivered to the Registrar of Companies.   The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

      The financial information is prepared on the historical cost basis and is presented in Sterling, rounded to the nearest thousand.

      The condensed financial statements have been prepared on the going concern basis which the Directors consider to be appropriate based on a review of projected cashflows which take into account (i) the general economic environment, which continues to be challenging and (ii) the business specific risks and uncertainties which are discussed on pages 13 and 14 of the 2011 annual report and are not considered to have changed. Further details are given in the Operating and Financial Review.

      This half year report contains certain forward looking statements which are subject to various risks and uncertainties and should therefore be treated with an appropriate level of caution and not regarded as a forecast of future results.

      Significant accounting policies

      The interim condensed consolidated financial statements have been prepared applying the same accounting policies that are expected to be adopted in the Group's full financial statements for the twelve month period ended 1 April 2012 which are not expected to be significantly different to those set out in note 1 of the Group's audited financial statements for the period ended 2 April 2011.

      The following new standards, amendments to standards and interpretations are mandatory for the first time for financial periods commencing on or after 1 January 2011 but have had no material impact on the financial statements of the Group.

·      Revised IAS 24 - Related party disclosures.

·      Amendment to IFRIC 14 - Prepayments of a Minimum Funding Requirement.

·      IFRS 2010 Improvements - Improvements to IFRSs 2010.

      This half year report was approved by the Board of Directors on 30 November 2011. Copies of this report and the 2011 Annual Report are available on the Company's website at www.dawson-international.co.uk                                                

2.   Segmental analysis

The 'Chief Operating Decision Maker' has been identified as the Board of Directors.

The Board reviews the internal reports of the Group in order to assess performance and allocate resources and has determined the operating segments based on these internal reports as follows:

UK Knitwear

This segment comprises the Barrie business which manufactures cashmere and woollen garments which are sold mainly in the European market. It sells both to private label customers and under its own labels which include Barrie, John Laing and Glenmac.

US Knitwear

This segment comprises the Forte business which sources cashmere garments from China which are sold in the American market, primarily to large private label customers. It also sells to smaller boutique customers under its own 'Kinross' label. This business is highly seasonal, making most of its sales and profit in the third calendar quarter of the year.

Net finance charges are not allocated across segments as borrowing requirements are managed on a Group wide basis.

The results of discontinued operations are disclosed in note 4.

(i)    In January 2010 the Company restructured a debt of $8.9 million (£5.7 million) due by Inner Mongolia King Deer Cashmere Company Limited ("King Deer") into a Loan Balance of $4.3 million (£2.8 million) due to be repaid in instalments by December 2011 and an Equity Balance of $4.6 million (£2.9 million), which had no fixed repayment date but was secured by an equity stake in King Deer. The Loan Balance of £2.8 million was recognised as exceptional income in the 15 month period to March 2011. Instalments of $3.5 million (£2.3 million) have been received to date with the balance of $0.8 million (£0.5 million) due in December 2011.

(ii)   During the period a provision for the costs of dissolving dormant overseas subsidiaries was reassessed and £175,000 released.

(iii)  During the period costs of £50,000 were incurred for the removal of asbestos from a vacant property which is planned to be demolished.

4.   Discontinued operations

As detailed in the 2011 annual report the Company completed the disposal of Dawson Home Group Limited on 17 May 2011. The consideration was based on net asset value at completion less a discount of £2.0 million. A provision of £2.5 million for loss on sale was made at March 2011 comprising the discount to net asset value and estimated disposal costs of £0.5 million. Immediately prior to the sale £2.5 million of stock was transferred to a Group company and was sold back to Dawson Home Group Limited in the six month period following the sale. Net assets at completion were £4.5 million. An initial consideration of £4.0 million was paid at completion. The balance of £0.5 million together with the stock sold since completion of £2.5 million is payable over the period to 31 March 2012.

The results of discontinued operations, which have been included in the Group Income Statement, were as follows:

Adjusted earnings (loss) per share is calculated on the profit or loss for the period from continuing operations before exceptional items.

8.   Retirement benefit obligations

The Group operates two defined benefit pension schemes in the UK (the "Staff" and the "Works" schemes) which are closed to new members and a defined benefit pension scheme in the USA which is closed to all members. The UK schemes have less than 60 active members and the Company is considering closing the schemes to future accrual for existing members.

Full actuarial valuations of the UK schemes are made triennially by an independent, professionally qualified actuary and these form the basis of a recovery plan which is agreed by the Company and the pension Trustees. The assumptions applied by the actuary when calculating the deficit and recovery plan differ from those prescribed by IAS 19 for financial reporting purposes. In particular, the assumptions used for valuing liabilities are more conservative and can result in a significantly higher liability than that reported in the balance sheet. As discussed in the Chairman's Statement, the size of the deficit has meant that the Company and the Trustee have been unable to agree a recovery plan based on the latest actuarial valuation and are now discussing with the Pensions Regulator how to address this issue.

An update of the UK pension schemes valuation on an IAS 19 basis was carried out by the scheme actuary at 1 October 2011. There was no update of the US scheme valuation by the scheme actuary due to its smaller size and lower volatility.

The movements in the schemes were as follows:

During the period deficit repair contributions of £2.0 million were made to the UK schemes, £1.8 million of which had been agreed with the Trustee following the disposal of Todd & Duncan in 2009.

The significant change in actuarial assumptions compared with those at 2 April 2011 was to the discount rate applied to UK scheme liabilities which was reduced from 5.6% to 5.2%.