Financial review

A review of the Group’s results and operations is given here (results) and here (operations). Other financial matters are noted below.

Net finance costs

Net finance costs for the year of £16.8 million (2007: £20.8 million) comprised net interest payable of £10.8 million (2007: £13.0 million) and a net cost of £6.0 million (2007: £7.8 million) relating to the Company’s convertible preference shares.

The net interest charge of £10.8 million (2007: £13.0 million) was covered 8.1 times (2007: 6.4 times) by operating profit. The lower net interest charge reflects the Group’s improved net borrowing position with the underlying level of net financial liabilities at 3 February 2008 (after adjusting for exchange rates) being £30 million lower than a year ago, together with the benefit from the impact of the US dollar exchange rate.

The net cost in respect of the Company’s convertible preference shares, included the preference dividend for the year of £5.6 million (2007: £6.7 million), together with a £1.3 million (2007: £1.4 million) charge for the amortisation of the implied redemption premium on preference shares.

During the year the Company purchased and cancelled 1,236,500 of its preference shares for a total cash cost of £17.7 million. Based on the book value and fair value of the instruments at the date of purchase, the financial liability element of the preference shares was reduced by £18.5 million and the equity element by £3.2 million. A gain of £0.9 million was recognised in the income statement being the difference between the book value and fair value of the financial liability element at the date of purchase. The gain arising from the difference between the book value and fair value of the equity element of £3.1 million was recognised as a movement in retained earnings. In 2007, the Company purchased and cancelled 565,000 of its preference shares for a total price including costs of £8.4 million, resulting in a gain of £0.3 million being recognised in the income statement. Further details relating to the Company’s preference shares are given in note 15 to the Consolidated Financial Statements.

Taxation

The Group’s effective tax charge for continuing operations can be analysed as follows:

After adjusting for the effect of the UK rate reduction on deferred tax, the effective tax rate was in line with the prior year. This effective tax rate compares favourably with the corporate tax rates of 30.0% in the UK and 35.0% in the US, reflecting the Group’s efficient financing structure.

Business acquisition

On 31 January 2008, the Group acquired that part of the trade and net assets of Hynetic Electronics Private Limited used in carrying on its business in India as an existing authorised distributor of Farnell products, for a total consideration including costs of £0.9 million. The fair value of the net assets acquired, including intangible assets, was not significant, resulting in goodwill arising of £0.9 million.

Business disposal

On 10 April 2007, the Group disposed of its BuckHickman business, part of the Marketing and Distribution Division, Europe and Asia Pacific, to BSS Group plc. The pre-tax loss on disposal was £13.6 million, after the write-off of goodwill allocated to this business of £19.3 million, and the net cash consideration received during the year was £24.4 million. BuckHickman generated sales in 2007 of £99.8 million and an operating loss of £0.8 million. The results of this business have been reclassified as a discontinued operation and are included in the income statement as a single line below profit after taxation from continuing operations, with comparatives restated accordingly. The comparative information in respect of discontinued operations also includes the results of the Kent business which was disposed on 31 July 2006.

Ordinary dividend

The Board is recommending an increased final dividend of 5.2 pence per share (2007: 5.0 pence per share), which, together with the interim dividend, amounts to a total dividend per share of 9.2 pence (2007: 9.0 pence), and with a total impact on shareholders’ funds of £33.4 million. The final dividend is subject to approval at the Annual General Meeting on 17 June 2008.

Post-retirement benefits

The Group accounts for pensions and other post-retirement benefits in accordance with IAS 19. The net charge for post-retirement benefits from continuing operations was £0.3 million (2007: £0.4 million) and can be analysed as follows:

The liability relating to the UK plan at the year end was £13.5 million (2007: £21.6 million) with the decrease on the prior year arising principally from an increase in the market-related bond rate used to discount the scheme’s liabilities at the year end, partly offset by the overall asset performance being below actuarial expectations, and contributions made to the plan of £3.4 million in the year.

The US plan remains over-funded and a contribution holiday will continue for the foreseeable future. The pension asset relating to this plan at the year end was £53.4 million (2007: £56.8 million), with the reduction on the prior year arising from the net income in the year of £2.9 million, together with a benefit from the improved discount rate, being more than offset by the underperformance of US equity markets compared to actuarial expectations.

Cash flow and net debt

Free cash flow attributable to ordinary shareholders is summarised below.

Cash generated from continuing operations represented 111% of operating profit and reflects the continued tight control of working capital across the Group. Working capital increased by £4.7 million in the year, or 2.5%, well below the rate of sales growth. Despite the addition of 88,000 stocked products during the year to enhance our offering to EDE customers, inventory increased by only £2.2 million as the inventory profile and inventory turns improved. Total working capital as a percentage of sales improved from 27.1% to 25.7% during the year.

Capital expenditure of £17.5 million included £10.4 million of software development costs, principally to enhance existing systems. The disposal of surplus property in the UK generated proceeds of £1.9 million.

The change in net financial liabilities is summarised below:

At 3 February 2008, the Group’s net financial liabilities comprised the following:

The maturity of the Group’s gross financial liabilities at 3 February 2008 of £288.8 million, excluding derivative financial instruments, is as follows:

The Group has multi-currency bilateral bank facilities of £198.1 million, which carry a LIBOR based floating rate of interest. These facilities expire mid-2010 and, at 3 February 2008, £112.3 million of these facilities were unutilised.

Treasury operations

The Group is exposed to a number of different market risks, including movement in interest rates and foreign currency exchange rates. The Group has established policies and procedures within the treasury function to monitor and manage the exposures arising from volatility in these markets, with derivative instruments being entered into when considered appropriate by management.

The Group treasury function is responsible for sourcing and structuring borrowing requirements, managing interest rate and foreign exchange exposure and managing any surplus funds, which are invested mainly in short-term deposits with financial institutions that meet the credit criteria approved by the Board. Specifically, counterparty creditworthiness is determined by reference to credit ratings as defined by the global rating agency Fitch. For all deposits of more than £1 million, minimum short-term credit ratings are F1 (”highest credit quality”) and minimum long-term ratings are A (”high credit quality”). For deposits of over £5 million, the minimum ratings increase to F1+ and AA – for short-term and long-term ratings, respectively. In addition, monthly reports are produced by the Group treasury function which are used to monitor treasury activities. Important treasury management decisions are approved by the Board and an annual report detailing the Group’s debt, cash and hedging activity is reviewed by the Board. Group policy prohibits speculative arrangements in that transactions in financial instruments are matched to an underlying business requirement, such as forecast debt and interest repayments and expected foreign currency revenues. The Group uses derivatives only to manage its foreign currency and interest rate risks arising from underlying business activities. The Group treasury function is subject to periodic independent reviews by the Internal Audit Department. Controls over interest rate and foreign exchange exposures and transaction authenticity are in place and dealings are restricted to those banks with the relevant combination of geographic presence and suitable credit rating.

The Group monitors the credit ratings of its counterparties and credit exposure for each counterparty.

The Group typically hedges transactions primarily related to the purchase and sale of inventories denominated in foreign currencies through foreign exchange forward contracts. These contracts reduce currency risk from exchange rate movements with respect to these transactions and cash flows.

The Group does not hedge profit translation exposure, unless there is a corresponding cash flow, since such hedges provide only a temporary deferral of the effect of movements in exchange rates. Similarly, while a significant proportion of the Group’s borrowings are denominated in US dollars, the Group does not specifically hedge all of its long-term investments in overseas assets.

International Financial Reporting Standards (IFRS)

The Group’s consolidated financial statements have been reported in accordance with IFRS. The Group has adopted IFRS 7, Financial Instruments: Disclosures, which requires additional disclosures in respect of financial instruments, details of which are given in notes 12 and 19 to the consolidated financial statements. The Group has not been required to adopt any other new accounting standards during the year which have had a significant impact on the consolidated financial statements.

The financial statements of the Company for the year ended 3 February 2008 continue to be prepared in accordance with UK GAAP.