Goodwin has two segments. Mechanical Engineering involves casting, machining and general engineering. The group produces a wide range of dual plate and axial nozzle check valves to serve the oil, petrochemical, gas, LNG and water treatment markets. Other markets include high alloy castings, machining and general engineering products which typically form part of large construction projects such as power generation plants, oil refineries, offshore structural components and bridges. Goodwin International, the largest business within the division also undertakes specialised CNC machining and fabrication work as well as manufacturing and designing the nozzle check valves. Noreva also designs and manufactures the valves and both businesses purchase the majority of their castings from other group companies. At Goodwin Pumps India, the group manufactures a range of submersible slurry pumps for end users in India, China, Brazil and Africa. Esat Antennas designs and builds bespoke radar antennas to the global market of major defence contractors, civil aviation authorities and border security agencies.
The Refractory Engineering division involves powder manufacture and mineral processing. Goodwin Refractory Services develops, manufactures and sells investment casting powders, waxes, silicone rubber and machinery for use in jewellery casting, aerospace, tyre moulding and the compressor wheels for turbochargers. Hoben international manufactures cristobalite that it sells into the group jewellery casting manufacturing companies and ground silica that goes into casting powders. Dupre Minerals focuses on producing exfoliated vermiculite that is used in insulation, brake linings and fire protection products including textiles that can withstand high temperatures. It also sells consumable to the shell moulding casting industry.
Goodwin has now released its final results for the year ending 2014.
Revenues increased when compared to last year with a £2M growth in Refractory Engineering and a £1.8M increase in Mechanical Engineering. We also see an increase in staff costs and depreciation, offset by a fall in other cost of sales so that gross profit increased by £4.3M. Distribution expenses increased and there was a £1.5M negative swing in the fair value movement of derivatives and we also see an increase in other admin expenses, offset by a net £400K fall in the money spent on R&D (related to higher efficiency electricity generation allied to CO2 capture) due to increased government grants, and a £1.5M favourable shift with regards to foreign exchange gains so that operating profit increased by £3.4M. We then see a reduction in bank loan interest and a small fall in tax due to the patent box relief, lower corporation tax in the UK and the revision of prior year estimates to give a profit for the year of £19.6M, an increase of £4M when compared to last year.
When compared to last year, total assets increased by £9.5M, driven by a £6.8M growth in plant & equipment, a £6.5M increase in land & buildings and a £1.7M growth in the value of derivative financial assets, all partially offset by a £2.6M fall in assets under construction and a £1.9M decline in trade receivables. Liabilities fell during the year due to a £9.6M decline in loans and borrowings, partially offset by a £1.8M increase in payments received on account and a £1.7M growth in trade payables. The end result, when we take out goodwill, is a net asset level of £69.1M, an impressive £15.1M increase when compared to last year.
Before movements in working capital, cash profits increased by £4M to £28.7M before favourable movements in working capital meant that cash from operations was £34.7M, an increase of £16.4M when compared to last year and this became an operational cash flow of £29.1M after paying tax and interest. This was easily enough to pay for the £15.1M of property, plant and equipment and the £241K cash spent on paying the non-controlling interest, partially offset by the £201K dividend received from an associate, mainly relating to Jewelry Plaster Ltd, to give a decent free cash flow of £14M. This was used to pay off £8.8M of loans and £3.8M in dividends and there was still a positive £1.1M cash inflow for the year to give a cash pile of £6.2M at the year end. This is an impressive performance.
Mechanical engineering profits were £19.3M, an increase of £400K when compared to last year and Refractory engineering profits were £3.8M, an increase of £600K when compared to 2013. When compared to last year, revenues in the US more than doubled with Europe providing the other growth area whereas revenues in the Pacific basin and the rest of the world declined. The group is quite well diversified as far as foreign sales are concerned with the largest potential issue being a 1% appreciation of the Dollar against Sterling which would reduce profits by £85K. As far as interest rates are concerned, a 1% increase in the base rate would reduce equity by £124K. As well as these risks, the main concern is that the group is susceptible to the economic cycles of its markets with the current problems being experienced in the oil and gas industry a case in point, although no customer accounts for more than 10% of turnover.
The improvement in profit came from the energy market sector remaining buoyant during the year with Goodwin International and Goodwin Steel Castings working nearly flat out. After struggling last year, the refractory division has improved despite continuing difficult market conditions and has delivered a 7% increase in sales and a 19% increase in profits and the board are hopeful that this trend will continue into next year.
It is worth noting that there is £500K of deferred consideration to pay on the acquisition of Noreva GmbH. There are also capital commitments totalling £4M at the year end and after the balance sheet date, a further £8.7M of capital expenditure has been approved by the board so it looks like costs may be increasing next year. The group are likely to have to invest further in their super nickel alloy casting manufacturing capability as well as in certain other projects in order to sustain future growth in exports. This expected growth in also likely to result in increased working capital needs so even more cash will be required.
During the year the group sold the rights that it acquired in 2011 to distribute vermiculite from a Ugandan mine with a net book value at disposal of £557K. This resulted in no profit/loss but did produce a cash receipt of £265K and £292K of adjustments to trading balances. As far as shareholdings are concerned, the shares are quite tightly held by the directors with the Goodwins owning 46% and the next biggest shareholder is J. Ridley who owns 7%, there does not seem to be a large institutional shareholding.
Outside the oil & gas and power generation industries, the mechanical engineering division continued to target work for large construction projects and the group order workload at the end of the year was 10% higher than at the end of last year at £101M which bodes well for the start of the next year. At the start of the new year, however, there has been a noticeable slow-down in order input from the oil and gas industry due to major oil companies slowing down their capital investment programmes in response to the falling oil price.
At the current share price the shares trade on a rather cheap looking 8.3 but there are no broker forecasts to determine a future looking ratio. After a 20% increase in the ordinary dividend (excluding the special dividend), the shares are now yielding 1.9%. At the end of the year, net debt stood at £4.1M, a considerable improvement on the figure of £14.1M this time last year and there is unutilised bank facilities totalling £37.3M so plenty of headroom in this regard. The group is targeting a debt to equity ratio of 30% so net debt is expected to increase in the coming year as the approved capital projects are financed.
Overall then, this is an excellent set of results, profits improved across both sectors, there was a good increase in net assets as debt was reduced and fixed assets were increased and the business is strongly cash generative with a huge amount of free cash, aided by favourable movements in working capital that is likely to reverse next year due to the growth expected. A lot of capital expenditure has been approved for last year which will result in a greater demand for cash and although the order book was at a record high, the start of the year has seen a slow-down in orders from the oil and gas industry so despite the excellent results I think I will hold off buying the shares until the situation within the oil and gas industry clears up, as this is the largest market for Goodwin.