Annual Financial Report

RNS Number : 4659Q

Electrocomponents PLC

06 June 2018

 

ELECTROCOMPONENTS PLC

ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MARCH 2018

NOTICE OF 2018 ANNUAL GENERAL MEETING

Pursuant to Listing Rule 9.6.1R copies of the documents listed below have been submitted to the Financial Services Authority National Storage Mechanism and will shortly be available for viewing at: http://www.morningstar.co.uk/uk/NSM

·    Annual Report and Accounts for the year ended 31 March 2018 (2018 Annual Report and Accounts)

·    Circular and Notice of Annual General Meeting (Notice of AGM) to be held on 19 July 2018

·    Form of proxy for the Annual General Meeting (AGM) to be held on 19 July 2018

The 2018 Annual Report and Accounts and Notice of AGM, which includes explanatory notes on proposed resolutions, are also available in the Investor Relations section of the Electrocomponents plc website at: www.electrocomponents.com

IMPORTANT: EXPLANATORY NOTE AND WARNING

The primary purpose of this announcement is to inform the market about the publication of Electrocomponents plc's 2018 Annual Report and Accounts and Notice of Meeting.

The information below, which is extracted from the 2018 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5R and the requirements it imposes on issuers as to how to make public annual financial reports. It should be read in conjunction with Electrocomponents' Preliminary Results announcement issued on 24 May 2018. Together these constitute the material required by DTR 6.3.5R to be communicated in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2018 Annual Report and Accounts. Statutory accounts for 2018 are included in the 2018 Annual Report and Accounts, which will be delivered to the Registrar of Companies in due course. Page and note references in the text below relate to pages and notes in the 2018 Annual Report and Accounts. The preliminary announcement can be viewed or downloaded from the Investor Relation section of the Company's website www.electrocomponents.com.

LEI: 549300KVXDURRKVW7R37

Enquiries:

Ian Haslegrave, Company Secretary	Electrocomponents plc	0207 239 8520
Polly Elvin, Head of Investor Relations & Corporate PR	Electrocomponents plc	020 7239 8427
David Allchurch / Martin Robinson	Tulchan Communications	020 7353 4200

APPENDIX

Pages and note references in the text below relate to pages and notes in the 2018 Annual Report and Accounts.

Managing our risks effectively (pages 34 to 37)

The Group has risk management and internal control processes to identify, assess and manage the risks likely to affect the achievement of its corporate objectives and business performance.

The risk management process

The risk management process is co-ordinated by the Group's risk team. The principal elements of the process are:

·    Identification

Risks are identified through a variety of sources both external, to ensure that developing risk themes are considered, and from within the Group, including senior, regional and country management teams. The focus of the risk identification is on those risks which, if they occurred, would have a material quantitative or reputation impact on the Group.

·    Assessment

Management identifies the controls for each risk and assesses (using consistent measures) the impact and likelihood of the risk occurring taking into account the effects of the existing controls (the net risk). This assessment is compared with the Group's risk appetite to determine whether further mitigating actions are required. This process is supplemented by an annual risk and controls assessment, which all operating locations and the Group-wide functions are required to complete.

·    Ownership

The Group's principal risks are owned by the Group's Senior Management Team with specific mitigating actions / controls owned by individual members of the team. The Senior Management Team collectively reviews the risk register, the controls and mitigating actions at specific Group risk review meetings held periodically throughout the year.

·    The Board

The Board confirms it has undertaken a robust review of the Group's principal risks (including those that could threaten its business model, future performance, solvency or liquidity) and assessed them against the Group's risk appetite. For a number of the principal risks management will, as part of ongoing activities, update the Board on these risks and their management. This allows the Board to determine whether the actions taken by management are sufficient.

Risk appetite

In accordance with the UK Corporate Governance Code, the Board defined its risk appetite across three risk categories: strategic, operating and regulatory / compliance. These three categories use both quantitative and qualitative criteria. During the year ended 31 March 2018, the Board again reviewed its risk appetite across the three categories with no significant changes being made.

Viability statement

The Board considers the longer-term viability of the Group as part of its regular monitoring and review of risk management internal control systems, as described on page 54. In addition to the risk mitigation plans, our business model is structured so that the Group is not reliant on one particular group of customers or geography, and has a very diverse customer base across our several geographies. Our capital position is supported by regular reviews of the Group's funding facilities and banking covenants' headroom, through the Board's Treasury Committee. The Group's financial position, in particular cash flow, is also reviewed through monthly management accounts and regular updates to the Board from the Group Finance Director and CEO. Details of the Group's sources of finance are outlined on page 116 with the earliest facility expiring being the Group's private placement loan notes of $100 million in June 2020.

The Group's prospects are assessed primarily through its strategic and financial planning process. This includes the preparation of a detailed annual budget and a longer-term strategic plan, updated annually, which are reviewed and approved by the Board. In prior years the strategic plan covered three years, with the first year being the budget, and this year this has been extended out a further two years by a high level extrapolation. Progress against budget, together with regular forecast updates, is reviewed monthly by both the Senior Management Team and the Board.

Assessment period

In their assessment of viability, the Directors have reviewed the assessment period and have determined that a three-year period to 31 March 2021 continues to be most appropriate. The robustness of the strategic plan is significantly higher in the first three years. The Group has few contracts with either customers or suppliers extending beyond three years and, in the main, contracts are for one year or less. The business operates with a minimal forward order book, generally taking orders and shipping them on the same day. In addition, as more business moves online and we become more agile, speed of change increases and so visibility is relatively short term. Of our long-term obligations, the UK pension plan is the largest and its triennial funding valuation forms the basis of our agreeing its funding with the trustee.

Assessment of viability

Each of the Group's principal risks and uncertainties on pages 36 and 37 has a potential impact on the Group's viability and so the Directors determined an appropriately severe but plausible stress test for each. They decided which stress tests would have the most impact on the viability of the Group and developed appropriate scenarios for these.

The strategic plan reflects the Directors' best estimate of the future prospects of the Group. Therefore, in order to assess the viability of the Group, the scenarios were modelled by overlaying them onto the plan to quantify the potential impact of one or more of them crystallising over the assessment period.

Principal risks and uncertainties which have the most impact on the viability of the Group and scenarios modelled

Scenario modelled	Principal risks and uncertainties tested
Scenario 1 - Brexit Revenue and operating profit margin fall with the impact of tariffs and higher costs; foreign exchange rates move back to pre-Brexit levels.	1	Consequences on the organisation of the UK exit from the EU
Scenario 2 - Revenue down Revenue falls significantly and takes time to recover.	2 3 4 10	Fail to respond to strategic market shifts The Group's revenue and profit growth initiatives are not successfully implemented Failure to comply with international and local legal / regulatory requirements Macroeconomic environment deteriorates
Scenario 3 - Revenue down and lower operating profit margin Scenario 2 plus operating profit margin further declines.	2 3 4 10	Fail to respond to strategic market shifts The Group's revenue and profit growth initiatives are not successfully implemented Failure to comply with international and local legal / regulatory requirements Macroeconomic environment deteriorates
Scenario 4 - Significant site failure Major incident at the largest warehouse which destroys the building and its contents	5	Failure in supply chain infrastructure
Scenario 5 - Major system failure Major system failure (possibly caused by a cyber attack) leading to a serious loss of service, fines for data breach and loss of reputation leading to halving of revenue growth	6 7	Prolonged system outage Information loss / cyber breach

The severe and plausible scenarios for the principal risks and uncertainties 8 'UK defined benefit pension scheme cash requirements are in excess of cash available' and 9 'People resources unable to support the existing and future growth of the business' were assessed to have less impact on the Group's viability.

In performing the above tests it was assumed that no major reorganisations or significant working capital initiatives would occur in mitigation, the stated dividend policy is not changed, capital expenditure is maintained at current levels and all existing debt facilities are not refinanced as they mature.

The results of the above stress tests showed the Group would be able to withstand the impact of these scenarios occurring. A reverse stress test was also undertaken to assess the circumstances that would threaten the Group's current financing arrangements and the Directors consider the risk of these circumstances occurring to be remote.

The above scenarios are hypothetical and extremely severe for the purposes of creating outcomes that have the ability to threaten the viability of the Group; however, multiple control measures are in place to prevent and mitigate any such occurrences from taking place.  If any of these scenarios actually happened, various options are available to the Group to maintain liquidity so as to continue in operation.

Confirmation of viability

Based on the assessment outlined above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three years to 31 March 2021.

Going concern

The Directors also believe that it is appropriate to continue to adopt the going concern basis in preparing the Group's accounts.

Principal risks and uncertainties

The Group has identified 10 principal risks, which are similar to those disclosed last year, with the only changes being the development of some already identified risks.  The Group's principal risks are categorised under one of three headings:  strategic (see the Group's strategy on page 14), compliance and operating risks (see the Business Model on pages 4 and 5). These categories mirror those used by the Group to assess its risk appetite.

Risk direction definition

↑           The risk is likely to increase within the next 12 months

↔          The risk is likely to remain stable within the next 12 months

↓           The risk is likely to reduce within the next 12 months

 

Risk description	Risk direction	Mitigating activities
Strategic risks
1 Consequences on the organisation of the UK exit from the EU This includes the risk to the Group's supply chain activities across the UK and the EU including possible changes to customs duties and tariffs (around 80% of our purchases for the global RS brand are routed through the UK to serve our global customer base).  Other related risks include migration of employees and potential impact with changes to existing legislation.	↔ Possible implications not fully defined and dependent on national negotiations with effect from 2020 onwards	· A Group risk assessment in advance of the UK referendum led to reviews across business areas that would be affected by a UK withdrawal from the EU. · These reviews include:  understanding the potential impacts on the Group's global supply chain infrastructure, including the transport of products between the UK and EU; and Group purchasing arrangements both within and outside the EU.  Other areas that are being considered include employee mobility, treasury management and indirect taxation. · A specific team headed by the Group Finance Director with senior representatives from the business areas most likely to be affected by the UK exit, together with the Group Head of Risk, meet regularly to monitor the possible effects on, and mitigating actions open to, the Group.
2 Fail to respond to strategic market shifts e.g. changes in customer demands and / or competitor activity Unforeseen changes in customer and market assumptions that the Group performance plans are based upon.	↔ No significant high-service level competitor changes anticipated	·  Monitoring of market developments. ·  Ongoing strategic and market reviews by the Board and the Senior Management Team. ·  Annual strategic planning process including the assessment of external market changes. ·  Ongoing review of the competitive environment.
3 The Group's revenue and profit growth initiatives are not successfully implemented This risk could lead to lower than forecast financial performance both in terms of revenue growth and cost saving with changes required to Group plans and any post-acquisition integration activities.	↔ Second phase of the Performance Improvement Plan (PIP) will apply similar Group governance and internal control processes as used in the first phase	· Prioritised set of proposals and projects, including revenue growth initiatives and supporting activities across shared business services and supply chain infrastructure, focused on getting the basics right for our customers. · Governance structure with accountabilities designed to support delivery on time and budget, within our resources and capabilities. · Identification, assessment and management of the consequences of changes arising from plan initiatives with demonstrable and successful implementation of the first phase of the PIP. · Specific and tailored post-acquisition integration plans.
Compliance risks
4 Failure to comply with international and local legal / regulatory requirements Failure to manage these collective risks adequately could lead to: ·  Death or serious injury of an employee or third party, and / or ·  Penalties for non-compliance in health and safety or other compliance areas.	↔ No significant changes to new or existing legislation	· Employment of internal specialist expertise, supported, where needed, by suitably qualified / experienced external partners for example to provide relevant EU General Data Protection Regulation (GDPR) guidance. · Ongoing reviews of relevant national and international compliance requirements. · Training and awareness programmes in place focusing on anti-bribery, competition and data protection legislation. · Global whistleblowing hotline managed by an independent third party providing employees with a process to raise non-compliance issues. · Global Health and Safety policy, Target Zero accidents initiative. · Local health and safety forums in place with the VP of Global Environment, Health and Safety. · Real-time monitoring of customer orders to ensure compliance with international trade control regulations.

Risk description	Risk direction	Mitigating activities
Operating risks
5 Failure in supply chain infrastructure An unplanned event disrupting the Group's supply chain, impacting its ability to maintain customer service.	↔ No changes to the Group's supply chain infrastructure	· Business continuity plans at operating locations. · Regular tests at key warehouse, sales and back office locations.
6 Prolonged system outage The loss of a core transactional system resulting in the business being unable to serve customers.	↔ No significant changes to the Group's IT infrastructure	· Resilient IT systems infrastructure featuring operating redundancies and off-site disaster recovery. · Regular testing of the IT disaster recovery plans across the Group. · Strict control over upgrades to core transaction systems and other applications. · Core transaction systems managed from a data centre upgraded in the last two years.
7 Information loss / cyber breach An attack on the Group's systems / data could lead to potential loss of confidential information and disrupt the Group's transactions with customers (including the transactional website) and transactions with suppliers.	↑ Increasing frequency and sophistication of cyber attacks on businesses	·  Creation of Chief Information Security Officer role to manage the Group's information security requirements. ·  Anti-virus software to protect business PCs and laptops. ·  Procedures to update supplier security patches to servers and clients. ·  Software scanning of incoming emails for known viruses. ·  Firewalls to protect against malicious attempts to penetrate the business IT environment. ·  IT control reviews to consider the security implications of IT changes. ·  Security reviews with selected third-party vendors. ·  Computer emergency readiness team (CERT) to track software vulnerabilities.
8 UK defined benefit pension scheme cash requirements are in excess of cash available The Company is required to contribute increased cash sums to the UK defined benefit pension scheme.	↔ No significant changes to related financial and other assumptions anticipated	· Quarterly reviews of the pension scheme funding position. · Regular interaction with the pension scheme trustees. · Joint trustee / Company working group to review investment strategy. · Consultation with scheme members on future individual funding options for defined benefit scheme.
9 People resources unable to support the existing and future growth of the business The business is not able to attract and retain the necessary high-performing employees to ensure that the business achieves its targeted performance.	↔ No significant changes to the supply and retention of quality employees	·  Development of existing employee competencies and the introduction of external expertise where appropriate. ·  Annual employee appraisal process to align personal objectives with the Group's strategy.
10 Macroeconomic environment deteriorates The Group's revenue, and hence profit, are adversely affected by any decline in the global macroeconomic environment with other associated effects such as foreign exchange volatility.	↔ Economic indicators currently showing no significant change in the global outlook	·  Strong cash generative business. ·  Strong balance sheet. ·  Significant headroom maintained on banking covenants and facilities. ·  Relevant cash flow foreign exchange hedging for business trading purposes. ·  Tight cost management and control of inventory.

RELATED PARTIES (Note 26 - page 121)

Transactions and balances between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

The Group's joint venture (Note 16) is a related party and during the year, the Group made sales of £2.1 million (2017: £1.4 million) to the joint venture, and a balance of £1.8 million (2017: £1.2 million) was outstanding at the year end.

The Group's pension schemes are related parties and the Group's transactions with them are disclosed in Note 9.

The key management personnel of the Group are the Directors and the Senior Management Team, whose compensation was:

	2018 £m	2017 £m
Short-term employee benefits	7.9	6.3
Post-employment benefits	0.2	0.2
Termination benefits	-	0.3
Share-based payments	2.3	2.6
	10.4	9.4

STATEMENT OF DIRECTORS' RESPONSIBILITIES (page 83)

The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulation.

Company law requires the Directors to prepare accounts for each financial year. Under that law the Directors have prepared the Group accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Company accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102

'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the

accounts, the Directors are required to:

·    select suitable accounting policies and then apply them consistently

·    state whether applicable IFRS as adopted by the European Union have been followed for the Group accounts and United Kingdom Accounting Standards, comprising FRS 102, have been followed for the Company accounts, subject to any material departures disclosed and explained in the accounts

·    make judgements and accounting estimates that are reasonable and prudent and

·    prepare the accounts on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the accounts and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group accounts, Article 4 of the IAS Regulation.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed on pages 48 and 49 confirm that, to the best of their knowledge:

·    the Company accounts, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit / loss of the Company

·    the Group accounts, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group and

·    the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.

In the case of each Director in office at the date the Directors' Report is approved:

·    so far as the Director is aware, there is no relevant audit information of which the Group and Company's Auditors are unaware and

·    they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's Auditors are aware of that information.

By order of the Board

Lindsley Ruth                            David Egan

Chief Executive Officer                Group Finance Director

SAFE HARBOUR

This financial report contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without

limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Electrocomponents plc and its

subsidiaries is not warranted or guaranteed. These statements typically contain words such as 'intends', 'expects', 'anticipates', 'estimates' and words of similar import. By their nature,

forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Electrocomponents plc believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors, which may be beyond the control of Electrocomponents plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Other than as required by applicable law or the applicable rules of any exchange on which our securities may be listed, Electrocomponents plc has no intention or obligation to update forward-looking statements contained herein.

 

END

 

 

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