Smith Anderson said it was well placed to move forward after returning to the black in the latest period during which the demise of its paper-making operation left it focused on packaging.

Accounts for Smith Anderson Group filed at Companies house show it made an operating profit of £1.7m in the year to March, which was a landmark for the Fife-based firm.

The surplus compares with an operating deficit of £3.4m in the preceding year, when the 150-year-old Smith Anderson & Co paper-making operation in Leslie was fighting for survival in the face of stiff competition and rising costs.

The subsidiary, which had employed more than 150 staff at its peak, ceased trading in June 2006, blaming soaring energy prices and the costs of funding its deficit-stricken pension schemes.

Since that date, privately-owned Smith Anderson has completed a rationalisation programme which has left the group focused on making paper and plastic packaging in Falkland.

Claiming to be the largest integrated bag manufacturer in the UK, it produces more than 45 million printed bags weekly for customers including fast- food and other high street retailers.

The shrinkage of the business was reflected in a sharp fall in turnover to £20.7m in the latest year, from £53.7m.

In their report to the accounts, the directors wrote that the costs and disruption associated with rationalisation had weighed on earnings.

However, they said Smith Anderson had taken advantage of the upheaval to introduce improved practices which would pay dividends in future. "The group believes that its overall financial position has been stabilised and that a relatively strong platform to take the business forward has been established," they wrote.

The improvement may mean good news for members of the closed defined benefit pension schemes operated by Smith Anderson, in respect of which there was a total deficit of £6.3m at March 31, compared with £8.3m in March 2006.

The directors said the group had made "significant progress" towards agreeing a package to eliminate the shortfall with trustees.

"The net asset position has improved to close to £5m and excess cash funds are available to be committed to the funding of its closed defined benefit (pension) scheme deficits," they wrote.

Last December, managing director David Robertson indicated the group had thought liabilities in respect of former employees of the paper-making business may be covered by the Pension Protection Fund.

The group made a pre-tax profit of £2.6m in the latest year, after losing £7.2m in the preceding year.