Earlier today, engineering company Bradken Limited (ASX: BKN) reported weak results for the year ending 30 June 2015. Revenues were down 14.9% to $968.4 million and statutory losses were $241.3 million. Underlying profit was down 57.8% to $33.9 million and underlying earnings per share fell 39% to 19.8 cents.
Shares were only down about 2% in early trade, but have fallen almost 75% in the last year. At a current market capitalisation of $180 million, it could be argued that the bad news was already priced in.
The reason for the difference between the statutory and underlying result is that the company incurred significant restructuring costs and wrote down the value of its assets during the year.
In particular, manufacture restructure costs were $50.5 million, impairment of property plant and equipment was $55.8 million, impairment of intangibles was $167.2 million and impairment of the group's holding in Austin Engineering Ltd. (ASX: ANG) was $36 million. These were partly offset by a gain on sale of property of $26.6 million.
Except for the restructure costs, all the above charges have no cash impact because the cash was spent when the assets were first acquired. The restructure is expected to deliver $25 million of annual cash savings and involved merging four existing divisions into one, shutting expensive facilities and moving products to low cost locations.
The key reason for Bradken's poor performance is the slowdown in the mining industry which means that the company is selling less goods and services at lower prices. Sales of capital goods such as rail wagons have fallen sharply over recent years but sales of consumable products have been more resilient. Consumables make up the bulk of Bradken's revenues and are worth about $800 million per year providing a floor if conditions deteriorate further.
On 26 June 2015, SK Group and Champ Private Equity approached Bradken over a possible merger with Magotteaux, owned by SK Group. The parties agreed to a 60-day exclusivity period to review the deal which expires on 29 August 2015. Nick Greiner, chairman of Bradken, is also the deputy chairman of Champ Private Equity.
Shortly after the merger was proposed, Bradken issued $70 million of redeemable preference shares (RPS) to Sigdo Koppers and CHAMP Equity. The RPS will pay distributions twice a year and the rate will start at 7.5% increasing to 13% over time. The holders have the option to convert to ordinary shares in Bradken at $2 per share.
The directors have decided not to pay a dividend this year compared with total dividends of 26 cents last year. This appears to be a prudent move given Bradken now has net debt of $398 million after including the recently issued RPS.
Whilst it may be in the best long-term interests of the company, the dividend halt is still bad news for investors and personally, I prefer to invest in companies with defensive qualities that can consistently grow dividends year on year. The name of one such company is included in the free report available by clicking on the links below.
