Dawson International is battling the twin headwinds of rising cashmere prices and the spiralling costs of its legacy pension fund, as it uses disposal proceeds and a debtor windfall to keep the business afloat.

Dawson’s sole surviving UK business, Barrie Knitwear in the Borders where Dawson is now headquartered, and its US knitwear business made operating profits totalling £3 million in the 15 months to March 31.

But pension liabilities swallowed £1.5m, including £1.1m of adviser fees and Pension Protection Fund levy, along with a £500,000 contribution to repair the deficit – and a further £1.8m contribution already this year. That depressed operating profits to £115,000.

The business also ran up exceptional costs of almost £1m on restructuring in the UK and remediation provisions in the US.

However, King Deer, a Mongolian company which last year unexpectedly began to repay a historic $10m (£6.2m) debt, came to the rescue with a £2.7m windfall, along with a favourable movement in the pension deficit of £838,000. That enabled Dawson to post a £2.5m pre-tax profit for the period in its continuing operations, against £2.1m for the previous 12 months.

But the sale last year of the home furnishings business came at a £2.5m loss, and though the £6m proceeds have helped swell cash to a healthy £10.2m, the company admits that much of this will be swallowed up in pension costs. David Bolton, chairman, commented: “The challenge facing us is we are a relatively small business with the legacy of a large group which has got commitments that go back over the life of the business.”

On whether an agreement with trustees to contain the problem was likely, he said: “We hope so. It is complicated and very time-consuming.”

Mr Bolton, who was installed on the board by major shareholder Peter Gyllenhammar in 2008 along with non-executive Jan Holmstrom, said the King Deer repayments had possibly been prompted by the Mongolian company’s intention to seek a flotation. “Not only have they agreed to make repayments but they have kept to a schedule,” he added.

The chairman said both the UK and US knitwear businesses had performed well, returning operating profits of £700,000 and £2.3m respectively.

“That was against a background of rapidly escalating cashmere prices which increased by around 40% in 2010 and a further 20% in the first part of 2011.”

Trading results for the current financial year, now realigned with the trading year, would be impacted by the recent cashmere increases, reducing margins particularly in the US.

Buyers of knitwear from the Borders business, which counts major fashion houses among its customers, were “less price sensitive”, Mr Bolton said.

He added: “Our key priority is to resolve our pension funding issues as quickly as possible in a manner which takes full account of the financial circumstances of the company, and recognises fairly the interests of all stakeholders in the company.”

Dawson shares were steady at 2p, still above the 1.5p at which Mr Gyllenhammar bought his 29% stake three years ago.