28th May 2009 16:12
Premier Farnell plc28 May 2009Annual Financial Report
Following the release on 19 March 2009 of the Company's preliminary full year results announcement for the year ended 1 February 2009 (the "Preliminary Announcement"), the Company announces it has published its Annual Report and Accounts for 2008/09 (the "Annual Report and Accounts").
Copies of the Annual Report and Accounts and the Notice of the Annual General Meeting for 2009 are available to view on the Company's website:
www.premierfarnell.com
In accordance with Disclosure and Transparency Rule 6.3.5 (2) (b) additional information is set out in the appendices to this announcement.
The Preliminary Announcement included a set of condensed financial statements and a fair review of the development and performance of the business and the position of the Company and the group.
Pursuant to Listing Rule 9.6.1, two copies of each of the Directors' Report and Accounts, the Notice of the Annual General Meeting for 2009 and the form of proxy in relation to the Annual General Meeting for 2009 are being submitted to the UK Listing Authority. These documents will shortly be available for inspection at the Document Viewing Facilities of the UK Listing Authority which is situated at:
Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS
Appendices
The following information is extracted from the Annual Report and Accounts. Page references are to pages in the Annual Report and Accounts.
Appendix A: Directors' responsibility statement (page 68)
Each of the Directors, as listed on page 59, confirms that, to the best of his or her knowledge:
(a) the Group's Consolidated Financial Statements in this report, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, IFRIC interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, and the Company Financial Statements in this report which have been prepared in accordance with UK GAAP give a true and fair view of the assets, liabilities, financial position and profit of the Group or of the Company, respectively, taken as a whole; and
(b) the Business Review contained in this Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
Appendix B: Principal Risks and Uncertainties (pages 41 - 43)
There are a number of risks and uncertainties that could have an effect on the Group's performance. As at the date of this report, the Board considers the risks described below to be the principal risks facing the Group.
During the year the Board also considered carefully the rapidly changing economic environment that has affected all businesses. As a result, the Board decided to take steps to refinance the Company's banking facilities due to expire in mid 2010 and this process was successfully completed, as described in the Financial Review on page 40. The new facilities expire in January 2013 and, together with the Group's continuing strong cash generation, provide the necessary level of operational and financial flexibility to meet the Group's funding requirements. Based on these new facilities, our headroom on bank borrowings at the financial year end would have been £37 million which, together with our net cash of £39 million, gives us a healthy funding position.
Initiatives that drive operational and cash efficiencies are particularly important in current market conditions and the action taken by the Group in this regard is set out in the Business Review, together with information on the Group's markets and the impact of economic cycles.
The Group's risk management structure is kept under review in order to ensure that it adapts to changing market conditions. The process by which risks are identified, managed and mitigated forms part of the Group's system of internal control that is described in detail on page 63. The key risks identified through that process and how they are managed are outlined below. During the year the Board recognised the need to put in place additional measures to identify and manage risks to the Group's balance sheet arising from the turmoil in the financial sector. An example of this is the refinancing of the Group's bank facilities described above.
Market migration
By comparison with the migration of manufacturing to lower cost economies in recent years, Premier Farnell's markets have remained geographically relatively stable. While lower wage rates have attracted high volume manufacturing to Eastern Europe and Asia, the migration of research and development and small scale manufacturing, two of Premier Farnell's primary customer groups, is less pronounced. Work carried out as part of the Group's review of strategy, announced in October 2006, confirmed that much of the electronic design engineering work which forms a large part of the Group's customer base has remained in regions in which the Group has a strong presence. In addition, there is a large installed base of electronic equipment in Premier Farnell's traditional geographic markets that needs maintaining, providing an ongoing market for the Group's maintenance and repair products. Nevertheless, there is likely to be an ongoing decline in the Group's manufacturing customer base in these geographic markets. This risk is being addressed in two ways: first, by emphasising growth in the electronic design engineering segment of the Group's customer base and, second, by continuing to increase the Group's presence in Asia and Eastern Europe. Further progress was made in this area during the year with the launch of local transactional websites in a number of Eastern European countries and in India and the acquisition of certain assets and trading rights of the Microdis Holdings Group, the Company's former distributor in Poland, Hungary and the Czech Republic. The Group will continue to increase its presence in developing markets to mitigate dependence on territories where the market for its products and services is more mature.
Systems and infrastructure
The operations of the Group's main businesses are heavily dependent on its principal distribution facilities in Gaffney (US), Leeds (UK) and Li¨ge (Belgium), from which a significant proportion of customer orders are despatched, and on the Group's IT hardware and software. The Group takes steps to protect these distribution facilities with measures such as sprinkler protection and the separate storage of highly flammable products and works closely with its insurers in assessing the risks of damage to these facilities. In addition, business continuity plans exist and are under review with the aim of minimising the adverse impact on the business should significant damage occur. For the UK and European business, this planning is assisted by the Group's ability to switch order fulfilment between distribution facilities in Leeds and Li¨ge, as these facilities hold a proportion of common products. In the US a review of warehouse management systems has led to improvements in performance and more robust contingency plans.
The resilience of the Group's IT infrastructure is regularly reviewed by management; external penetration testing and internal disaster recovery tests are carried out and regularly audited and the Group runs automated intrusion protection systems. Plans are developed to address areas of potential weakness and, where practicable, these plans are fully tested.
Competitive pressures
The Group's Marketing and Distribution Division, which accounts for 90% of the Group's sales, operates in a fragmented market with a number of international and many regional competitors. This environment creates pressure on the prices that the Division is able to charge for its products and on the levels of service it provides. It is therefore fundamental that the Division's proposition to its customers remains attractive and at the forefront of its chosen markets. The Group maintains awareness of developments in the market, including actions by competitors, and anticipates and responds to such developments. The results of the review of strategy announced in October 2006 clearly defined the Group's emphasis on areas of profitable growth via differentiation from its main competitors. An important factor in recent years has been customer demand for the ability to transact with the Group electronically. Electronic channels are increasingly preferred by customers and also bring efficiencies to the Group. There is, therefore, a significant focus on the Group's progress in continually upgrading its eCommerce capabilities and offering. This year has seen the roll out of new transactional websites based on its global eCommerce platform in India and in Eastern Europe and the development and testing of the Company's online community to support design engineers globally, which is to be launched next year. During the year the Group has introduced significant enhancements to the customer experience of its existing websites, including eQuotes, the personalised quoting facility in the USA, and, in Europe and Asia Pacific, iBuy, the eProcurement tool to assist customers with budgeting and buying efficiencies. New analytical tools continue to help identify opportunities to improve both functional and user experience. The increased speed and stability of the websites has led to significant increases in eCommerce revenues. Improving electronic channels is part of delivering a multi-channel approach that provides flexibility for customers and reduces the cost to serve.
Web resilience
As the volume of the Group's business transacted via the web grows, it is increasingly important to ensure that the Group's websites are available to customers. In common with many other organisations, the Group's websites are occasionally subject to denial of service attacks by third parties and to attempts to extract large volumes of data. This risk is addressed by regular testing of the security of the websites using both internal and external security scans and vulnerability tests. IP addresses identified as the source of attacks are blocked so that they cease to have access to the websites. In addition, all sites have redundant servers that can be used in the event that the operating server is not available for any reason. Infrastructure improvements are made on a regular basis to address other causes of unavailability of the sites.
Foreign currency
As a relatively high proportion of the Group's sales and operating profits arise in North America, the Group's reported results may be adversely affected should the US dollar weaken in value against sterling. During the year under review, the US dollar strengthened compared with sterling but, should it weaken significantly, the consequent profit translation risk would amount to approximately £0.2 million per annum of operating profit for each one cent movement in the US dollar exchange rate. The Group has denominated most of its external borrowings in US dollars in order to mitigate this risk and provide a hedge against dollar denominated operating cash flows and the Group's US investments.
In addition to the US dollar, the other major currency for which the Group has a translation risk is the Euro. While there was a benefit from the strengthening of the Euro towards the end of 2008, a significant weakening of the Euro would adversely affect the Group's results. This profit translation risk is approximately £0.2 million per annum of operating profit for each one cent movement in the Euro exchange rate.
The Group's policy is not to hedge profit translation risk unless there is a real cash exposure since such hedges provide only a temporary deferral of the effect of movements in exchange rates.
Human resources
As a service business, Premier Farnell relies heavily on its employees. It would be damaging to the Group if it were unable to attract and retain personnel at key management levels. The ways in which this risk is addressed are described in detail in the Resources and relationships section of this report.
Pension risks
The Group operates defined benefit pension schemes in the UK, US and Canada. The net financial asset/liability of each scheme (as quantified through actuarial review) is reflected in the Group's balance sheet. Movements resulting from changes to the actuarial valuation results are reflected through the Group's reserves and not through the income statement.
As at 1 February 2009, the pension schemes had combined assets of £170 million comprising £99 million equity investment and £71 million bonds/cash/others. A 10% reduction in global equity values would therefore have an impact of reducing Group Net Worth by approximately £10 million. The trustees of the pension schemes (or their equivalent in the US and Canada) are advised on investment decisions by Watson Wyatt or its associated operations outside of the UK and, where appropriate, take action to ensure that the assets of the pension schemes contains an suitable mix of investments.
The liabilities of the pension scheme reflected in the Group's balance sheet are calculated by discounting future cash flows. A 1% reduction in the long-term discount rate assumed by the schemes' actuaries would have the impact of reducing Group net worth by £29.2 million. The relevant discount rate is the expected rate over a 30 year period and as such is relatively stable.
Recently, both the US and UK governments have engaged in on-market repurchases of corporate and government backed securities (quantitative easing). It is not clear as of yet what the impact of these programmes will be on long-term yields. It is possible that this will cause a degree of disruption in the short-term and greater volatility than would be expected.
Legal risks
The Group operates internationally and is subject to laws and regulations in a large number of countries. Combined with this, the large numbers of customers and suppliers to the Group result in a complex set of contractual obligations and a risk of non-compliance.
The Group addresses this risk in a number of ways:
* Through reviews and training provided by the in-house legal department; * Advice provided by external counsel; * Monitoring and reporting of issues by the Internal Audit function; * Internal reporting controls processes requiring local management to report on areas of potential non-compliance; and * Controls on the level of management required to approve proposed contractual arrangements.
This announcement does not constitute statutory accounts. The report of the auditors on the statutory account for the year ended 1 February 2009 has been made and is unqualified and will shortly be delivered to the registrar of companies.
vendorRelated Shares:
PFL.L