Source - LSE Regulatory
RNS Number : 9675B
Electrocomponents PLC
15 June 2021
 

ELECTROCOMPONENTS PLC

 

 

ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MARCH 2021

NOTICE OF ANNUAL GENERAL MEETING 2021

 

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: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

·      Annual Report and Accounts for the year ended 31 March 2021 (2021 Annual Report and Accounts)

·      Circular and Notice of Annual General Meeting (Notice of AGM) to be held on 15 July 2021

·      Form of proxy for the Annual General Meeting (AGM) to be held on 15 July 2021

 

The 2021 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 2021 Annual Report and Accounts and Notice of AGM.

 

The information below, which is extracted from the 2021 Annual Report and Accounts, is included solely for the purpose of complying with Disclosure Guidance and Transparency Rule (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' Final Results announcement issued on 25 May 2021. 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 2021 Annual Report and Accounts. Statutory accounts for 2021 are included in the 2021 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 2021 Annual Report and Accounts. The Final Results announcement can be viewed or downloaded from the Investor Relation section of the Company's website www.electrocomponents.com.

 

Ian Haslegrave

Company Secretary

15 June 2021

 

LEI: 549300KVXDURRKVW7R37

 

 

Enquiries:

David Egan, Chief Financial Officer

Electrocomponents plc

020 7239 8400

Lucy Sharma, VP Investor Relations

Electrocomponents plc

020 7239 8427

Martin Robinson / Olivia Peters

Tulchan Communications

020 7353 4200

 

 

 

 

 

 

 

 

 

 

 

APPENDIX

 

Pages and note references in the text below relate to pages and notes in the 2021 Annual Report and Accounts.

 

Managing our risks effectively (pages 44 to 51)

The Group has risk management and internal control processes to identify, assess and manage

the risks likely to affect the achievement of its strategic priorities and business performance.

 

The risk management process

The Board has overall accountability for the Group's risk management, which is managed by the Senior Management Team (SMT) and 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 (emerging risks) are considered, and from within the Group, including the Board, senior, regional and country management teams. The sharing of identified risks is a two-way process: both from the local country teams to more senior management and from the Board to the broader management. The focus of the risk identification is on those risks which, if they occurred, and became issues, would have a material quantitative or reputational impact on the Group.

 

Before and during 2020/21, the COVID-19 pandemic demonstrated the wide scope of risks that all organisations face and the speed with which risks can develop. The business's mitigation actions were and continue to be effective. We have implemented improvements to the risk identification process with an increased focus on more global trends and assessments on the possible impacts on the business.

 

Assessment

Management identifies the controls for each risk and assesses the impact and likelihood of the risk occurring (using generally consistent measures). These assessments consider the effects of the existing controls (the resulting net or residual risk). This assessment is compared with the Group's risk appetite to determine the appropriate risk treatment. This process is supplemented by an annual risk and controls assessment completed by operating locations and Group-wide functions, which is then reviewed by the Group's risk team.

 

Ownership

The Group's principal risks are owned by the SMT with specific mitigation actions / controls owned by individual members of the team. The SMT collectively reviews the risk register, the controls and mitigating actions at specific Group risk review meetings.

 

The Board

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

 

How the process works

 

Accountable and responsible teams

 

Board

Overall accountability for the Group's approach to risk management and internal control including approving the Group's risk appetite and the principal risks.

SMT Risk Committee

Responsible for owning and reviewing the Group's risk management process, risks and mitigating internal controls and making recommendations to the Board.

Markets, regions and Group Functions

 

 

 

 

Supporting Teams

 

 

 

Audit Committee

Responsible for supporting the Board to ensure effective internal controls and risk management systems and to measure the Group's effectiveness in managing risk.

Operational Audit and Group Risk

 

       

 

 

Our Risk appetite

In accordance with the UK Corporate Governance Code, the Board has defined its risk appetite. This spans three risk categories: strategic; regulatory / compliance; and operational. These three categories use both quantitative and qualitative criteria. Owing to the types of risks and the associated reputational, financial and other possible consequences, the business's risk appetite is lowest for regulatory risks and greater for operational and strategic risks. During the year ended 31 March 2021, the Board reviewed its risk appetite across the three categories and made no significant changes.

 

Principal risks and uncertainties

The Group has identified 10 principal risks, reduced from 11 disclosed last year, with the combining of two operational risks related to failure in the business's critical infrastructure (key locations and technology infrastructure) together with other minor changes:

 

Categories

Risks

Characteristics

Strategic

·      Prolonged effects of the ongoing COVID-19

pandemic

·      Prolonged effects of the UK's exit from the EU

·      Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements

·      The Group's revenue and profit growth initiative are not successfully implemented

 

These risks are often caused by external developments. Mitigation is generally directed at a strategic level supported by local activities.

 

Regulatory /

compliance

·      Failure to comply with international and local

legal / regulatory requirements

External regulations and requirements can be very localised. Risk mitigations are often specific actions to ensure compliance

Operational

·      Failure in the business's critical infrastructure

·      Cyber security breach / information loss

·      UK defined benefit pension scheme cash

requirements are in excess of the cash available

·      People resources unable to support the existing and future growth of the business

·      Impact on the business if the macroeconomic environment deteriorates

These risks are generally related to internal factors e.g. the business's infrastructure, ways of working and people. Mitigating actions are often processes and direct controls.

 

 

 

Emerging risks

Risks

 

Climate change

·      Effects of climate change (both physical and transition risks) on the business's operations and its customers and supply chain.

 

 

Principal risks in focus

Two of the Group's principal risks require further explanation: the more prolonged effects of the ongoing COVID-19 pandemic and the UK's exit from the EU.

 

1.   COVID-19 pandemic

The Group is maintaining its operations and at present all our distribution centres (DCs) around the world are open and operating effectively. Our online business model continues to differentiate us and is helping us to continue to serve our customers.

 

The pandemic continues to affect some of our other, already identified, principal risks; these are explained in the relevant principal risk narratives.

 

Uncertainties related to this risk

Since the pandemic has its own specific uncertainties we continue to disclose it as a separate principal risk. These include:

•   Changes in demand across our diverse customer base and possible changed behaviours following the pandemic.

•   Potential impacts on cash flow, specifically the recoverability of trade receivables which is a key liquidity sensitivity.

•   Changes to sourcing inventory as suppliers' production capabilities are affected by the pandemic and demand levels change in any recovery phase.

•   Significant transport constraints and increased costs and how quickly these will recover following the pandemic.

•   Uncertainty about the duration and later frequency of future disease control activities.

•   The difficulties managing the business's return to partial office-based working as respective governments' restrictions on people movement are eased.

•   When the pandemic passes, the speed and extent to which industries can recover from the effects is unclear.

•   The longer-term effects of the pandemic on business activity, government finances and related levels of public expenditure.

 

 

Mitigating actions

The business has several structural factors, including the diverse nature of its customer base and strong online capabilities, that have helped protect it from some effects of the pandemic.  These have enabled the business to continue to support customers during the pandemic.

 

During the year the business took several mitigating actions, many of which are still in place, including:

•   The majority of our office-based staff working from home and enhanced personal protective equipment for our DC employees.

•   Appropriate cost actions taken to protect profit and focus on maintaining cash flow.

•   Improving the Group's balance sheet flexibility including securing additional funding facilities (see page 42).

•   Supporting employees' physical safety in our DCs and mental wellbeing for those during extended periods of home working.

 

 

The effectiveness of the business's operational controls during the COVID-19 pandemic have been reviewed by the Group's internal audit team on a risk-based approach. These were initially focused on COVID-19 effects whereas now these have been embedded within the team's ongoing market and functional audits.

 

2.     The UK's exit from the EU

The UK formally left the EU and the agreed transition period ended on 31 December 2020 and the principal risk that the Group was working to mitigate has now crystallised. Our

planning activities leading up to this date meant that the business was largely able, where possible, to mitigate the associated risks. Nonetheless, the business is monitoring the risk of further unforeseen consequences following the UK's exit from the EU (Brexit). There is now a hard border between the UK and the EU and this has led to more transactional friction when moving goods across this border. As expected, the business is experiencing more customs administration, tax, duty and brokerage fees when moving products across this border. Further, customs clearance processes continue to evolve in some areas, for example between Northern Ireland and Great Britain. For this reason, we continue to track and monitor the effects of Brexit on the operational activities of the business as a principal risk, albeit that this risk is lower than the prior year

 

 

Emerging risks

As part of the Board's Group risk reviews of developing risk themes, climate change is identified as an important emerging risk.

 

Climate change

An important emerging risk for the Group is climate change, with ongoing work to investigate the potential implications of an increase in global temperatures upon the Group. This includes the impact on the Group's operations, customers and supply chain, and span physical, regulatory, market, technology and reputation risks.

 

The countries that signed the 2015 Paris Agreement committed to aim to keep increases in global average temperature to 'well below 2ºC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5ºC'.

 

Accordingly, governments in several countries where the Group has operations have committed to net-zero carbon emissions, including the UK, France and Japan. Other countries and regions are considering adopting net zero targets, including the EU.

 

In this context, there are several specific risks, and opportunities, that the Group, as a global distributor, faces due to climate change. These include physical risks with increased likelihood of more extreme events such as storms, significant rainfall episodes, droughts and heatwaves which could affect the business's physical sites or its distribution process. Other risks are more transition oriented, including regulatory change, often by governments, designed to reduce greenhouse gas (GHG) emissions. These may render certain products obsolete while increasing demand for others. Other potential impacts include increases, for example, in the costs of air transport of inventory to meet customer demands. There is also reputation risk if the business is not seen to be taking deliberate and tangible actions to reduce its GHG emissions.

 

 

 

Summary of the Group's principal risks

The Group's principal risks are categorised under one of three categories: strategic (see the Group's strategic priorities on pages 20 to 23); regulatory / compliance (see the business model on pages 24 and 25); and operational risks. 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

 

 

 

What is the risk and how could it

affect our business

Risk direction

What are we doing to manage the risk

Strategic risk category

1

Prolonged effects of the ongoing

COVID-19 pandemic

This includes the uncertainties associated with the pandemic including: changing customer demand, volatility in the recovery of receivables and associated liquidity

risk, and delays and difficulties sourcing inventory and associated cost volatility. This extends to the uncertainty about the recovery phase and the speed and extent to which confidence recovers from its effects. Looking further ahead there is the risk associated with further outbreaks.

COVID-19 may also affect other already identified principal risks; these are explained in more detail below.

The scale, duration and extent of the effects of the pandemic are better understood and being managed hence the risk is reducing.

Mitigating actions include:

·    Supporting employees' health, safety and wellbeing.

·    Cost controls to protect profit.

·    A focus on maintaining cash flow.

·    Actions to improve balance sheet flexibility.

 

Other actions include planning for opportunities following the passing of the pandemic.

2

Prolonged effects of the UK's exit from the EU

This risk includes the possible unforeseen consequences following the UK's exit from the EU. These include risks to the Group's supply chain activities across the UK and the EU.

Other related risks include migration of employees and potential impacts due to changes to existing legislation.

The UK / EU trade negotiations completed prior to the UK's exit from the EU and the end of the transition period on 31 December 2020.  However, the operational consequences may not have been completely understood for a further year, nonetheless, this risk is reducing as the date from the UK's exit extends.

·      A Brexit Steering Group and related support teams meet frequently to assess current issues associated with the UK's exit from the EU. Mitigating actions are identified and project managed with regular feedback on progress.

3

Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements

Unforeseen changes to customer and market assumptions upon which the Group performance plans are based. Such market changes have been accelerated by the ongoing COVID-19 pandemic.

Accelerating market developments.

·      Monitoring of market developments, including the competitive environment.

·      Ongoing strategic and market reviews by the Board and the SMT.

·      Investment in digital platforms.

·      Annual strategic planning process including the assessment of external market changes.

·      Mergers and acquisitions (M&A) governance structure with internal and external capability and support.

·      Specific planning for the business environment post the COVID-19 pandemic.

4

The Group's revenue and profit growth initiatives are not successfully implemented

This risk could lead to lower than forecast financial performance in terms of revenue growth, cost savings and operating profit with changes required to Group plans and any post-acquisition integration activities. These plans may be delayed by business decisions in light of the COVID-19 pandemic.

 

The Destination 2025 strategy uses similar Group and regional governance processes as were successfully used in previous recent strategic change processes. However, the business actions to manage the effects of the COVID-19 pandemic have affected the implementation of some growth initiatives. This, together with the accelerating market developments, means that this risk is increasing.

·      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 customers.

·      Governance structure with accountabilities designed to support delivery on time and to cost, within resources and capabilities.

·      Identification, assessment and management of the consequences of changes arising from plan initiatives.

·      Specific and tailored post-acquisition integration plans.

Regulatory / compliance risk category

5

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;

·      Penalties for non-compliance in health and safety or other compliance areas; and / or

·      Penalties for failure to adhere to relevant trading related regulations, for example, trade, product and transport compliance and local statutory legislation.

 

No significant changes to the risk.

 

·      Specific COVID-19 health and safety initiatives.

·      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 focusing on anti-bribery, competition and data protection legislation with increased modern slavery awareness supported by training planned for the coming year.

·      Code of conduct for all employees and ethical sourcing policy for suppliers.

·      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 Global

Environment, Health and Safety.

·      Real-time monitoring of customer orders to ensure compliance with international trade control regulations.

Operational risk category

6

 

Failure in the business's critical infrastructure

An unplanned event disrupting the Group's critical infrastructure, including key locations, core transactional systems and third-party suppliers resulting in the business being unable to serve customers.

 

No significant changes to the risk.

 

·      Business continuity plans at operating locations.

·      Regular tests at key DCs, sales and back office locations.

·      Plant switching process whereby the activity of a DC unable to operate can be switched to another to meet a proportion of its customer demand.

·      Ongoing assessments of critical third-party suppliers.

·      Resilient IT systems infrastructure featuring operating redundancies and offsite disaster recovery.

·      Core transaction systems managed from a data centre.

·      Periodic testing of the IT disaster recovery plans across the Group.

·      Strict control over upgrades to core transaction systems and other applications.

7

Cyber security breach / information loss

An attack on the Group's systems, sites or data could lead to potential loss of

confidential information and / or disruptions to the Group's transactions with customers (including the transactional website) and transactions with suppliers (including the DCs). Accidental data loss could also occur because of employee or partner action (or inaction).

 

Increasing frequency and sophistication of cyber attacks on businesses. This has been noted during the current COVID-19 pandemic with increased and well-publicised malicious cyber activity aimed at individuals and companies.

·      The Group Information Security and Compliance team manages the Group's information security requirements.

·      Employee training and messaging on cyber risk awareness continues to be prioritised during the COVID-19 pandemic.

·      Anti-virus software to protect business PCs and laptops.

·      Procedures to update supplier security patches to servers and clients.

·      External emails identified to all business recipients.

·      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 suppliers.

·      Computer emergency readiness team (CERT) to track software vulnerabilities and respond to security incidents.

·      Cyber monitoring reflecting the business home working environment and increased external threats.

8

UK defined benefit pension scheme cash requirements are in excess of the cash available

The Company is required to contribute increased cash sums to the UK defined benefit pensions scheme due to the trustee exercising its power to close the scheme if in a deficit, as it is currently (the trustee has confirmed that it has no current intention to exercise this power to wind up the scheme).

 

No significant changes to related financial and other assumptions anticipated.

·      Quarterly reviews of the pension scheme funding position.

·      Company representatives regularly attend trustee meetings to update on business performance and risk management.

·      The pension scheme has a de-risked cash flow driven strategy.

·      Joint trustee / Company working group to review investment performance and strategy.

·      Company and trustee have a funding agreement to eliminate the deficit over time.

·      Company covenant and ability to support the scheme regularly reviewed by trustee.

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.

·      Continuous employee performance conversations to align personal objectives with the Group's strategy.

·      COVID-19 people-related support activities across the regions.

·      Regular employee talent reviews and succession planning for the business's more senior / critical roles.

·      Developing the business brand to attract high potential talent.

10

Impact on the business if the macroeconomic environment deteriorates

The Group's revenue, and hence profit are adversely affected by a decline in the global macroeconomic environment with other associated effects such as foreign exchange volatility.

 

No significant changes to the outlook for the macroeconomic environment.

·      Strong cash generative business.

·      Strong balance sheet.

·      Significant headroom maintained on debt covenants and banking facilities.

·      Relevant foreign exchange cash flow hedging for business trading purposes.

·      Cost management and control of inventory.

·      Weekly business financial performance reviews covering cash flow and profitability including revenue, gross margin and operating costs. This includes more significant costs such as freight.

 

 

Viability statement

 

Assessment of prospects

The Group's strategic priorities are focused on delivering sustainable growth and superior returns for all our stakeholders and include a number of initiatives. They are discussed in more detail on pages 20 to 23.

 

Our business model, as described on pages 24 and 25, is structured so that the Group is a global omni-channel provider of product and service solutions for designers, builders and maintainers of industrial equipment and operations to a very broad spread of customers both in terms of industry sector and geography. The Group is not reliant on one particular group of customers or suppliers, with its largest customer accounting for under one percent of revenue and its largest supplier less than four percent of revenue. Our business model is differentiated by: our global network of 14 distribution centres; our talented and customer-centric team; our strong supplier relationships; our broad range of product and service solutions; and our strong digital presence. The Group has high inventory availability with products sourced from a large number of suppliers and provides customers with

a reliable and fast service.

 

The Group's results and financial position are reviewed monthly by both our SMT and the Board. Every day the SMT receives an analysis of the previous day's revenue and gross margin. The Board receives and reviews monthly management accounts, including cash flows, and also receives regular performance and forecast updates from the Chief Financial Officer and Chief Executive Officer.

 

As described in last year's Annual Report and Accounts, given the unprecedented level of uncertainty surrounding the COVID-19 pandemic, towards the end of March 2020 we modelled a range of potential scenarios for different durations and severities of the pandemic for each month of the year ended 31 March 2021 and during this year added each month of the year ending 31 March 2022. These have continued to be regularly updated to reflect latest trading trends and changes to our expectations. These have been regularly reviewed, and the assumptions approved, by the Board. The Board also discusses and approves the various mitigating actions the Group should take for each scenario. We have recently implemented a rolling 18-month planning process and tool which will replace these models and provide detailed bi-monthly forecasts of the Group's income statement, balance sheet and cash flows to enhance our forecasting and scenario modelling.

 

The Group's long-term prospects are assessed primarily through its strategic and financial planning process. This includes the preparation of a five-year strategic plan and an annual target setting process involving both Group and regional management which are updated annually and reviewed and approved by the Board. The SMT receives and reviews a scorecard each quarter showing progress against the strategic plan objectives. The Board also receives updates and, if appropriate, the strategic plan is updated depending on progress and performance.

 

The Board also considers the long-term prospects of the Group as part of its regular monitoring and review of risk management and internal control system, as described on page 83.

 

As described throughout this Annual Report and Accounts, the Group's performance over the past year has remained resilient despite the impacts of COVID-19 and Brexit, with like-for-like revenue growing by 1.4%. Trading momentum improved during the second half of the year and we have comfortably outperformed all the various scenarios we had modelled and described in last year's Annual Report and Accounts. During the year we have continued to produce and review weekly cash forecasts to closely track our net debt position, so we can take any necessary actions on a timely basis. Our capital position is supported by the Board's Treasury

Committee regularly reviewing the Group's funding facilities and banking covenants' headroom. In November 2020, we completed the refinancing of our bank facilities with a group of eight existing and new relationship banks. The previous syndicated multi-currency facility was for US$75 million, £85 million and €50 million and would have matured in August 2022.

 

The new increased facilities comprise a three-year revolving credit facility of £300 million, with an accordion of up to a further £100 million. The maturity of this facility may be extended at the option of the Group for up to two further one-year terms subject to individual lender approval. These new facilities were undrawn at 31 March 2021. In December 2020, we successfully completed an equity placing of ordinary shares to fund acquisitions and retain financial flexibility which raised £176.1 million, net of costs.

 

The Group's strong cash generation during the year, with free cash flow of £132.9 million, reduced net debt to £122.0 million (including lease liabilities of £61.5 million) at 31 March 2021 from £189.8 million (including lease liabilities of £56.3 million) at 31 March 2020. We also paid an additional interim dividend in lieu of the deferred final dividend for the year ended 31 March 2020 and paid, as normal, an interim dividend for the year ended 31 March 2021, resulting in total dividends paid during the year of £71.2 million (2019/20: £68.5 million). We have ended the year with a stronger balance sheet than with which we started.

 

The Group's debt covenants are EBITA to interest to be greater than 3 times and net debt to adjusted EBITDA to be less than 3.25 times. At 31 March 2021 EBITA to interest was 26.7x (2019/20: 33.6x) and net debt to adjusted EBITDA was 0.5x (2019/20: 0.7x) (see Note 3 on page 134 for reconciliations) and under our strategic plan these are also comfortably met.

 

Viability 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 2024 continues to be most appropriate. The robustness of the strategic plan is significantly higher in the first three years with the final two years being a high-level extrapolation. 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 the Group's long-term obligations, the UK pension scheme is the largest and its triennial funding valuation forms the basis of our agreeing its funding with its trustee.

 

Assessment of viability

Each of the Group's principal risks and uncertainties on pages 47 to 49 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 to model for these.

 

The recently updated strategic plan is currently considered to reflect 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 this updated strategic plan to quantify the potential impact of one or more of them crystallising over the assessment period.

 

The scenarios modelled and how they link to the principal risks and uncertainties are summarised in the table below.

 

 

 

Scenarios modelled and how they link to the principal risks and uncertainties

Scenario modelled

Link to principal risks and uncertainties

Scenario 1 - Revenue down and operating costs up

Revenue falls in 2021/22 by more than that seen in the first half of 2020/21 with a further decline in 2022/23. No mitigation taken on non-variable operating costs in 2021/22 and then these move in line with revenue in future years.

1.     Prolonged effects of the ongoing COVID-19 pandemic

2.     Prolonged effects of the UK's exit from the EU

3.     Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder activity

4.     The Group's revenue and profit growth initiatives are not successfully implemented

5.     Failure to comply with international and local legal / regulatory requirements

10.   Impact on the business if the macroeconomic environment deteriorates

Scenario 2 - Gross margin down

Gross margin declines in 2021/22 by 4 percentage points and remains at that level with no cost mitigations.

1.     Prolonged effects of the ongoing COVID-19 pandemic

2.     Prolonged effects of the UK's exit from the EU

3.     Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder activity

4.     The Group's revenue and profit growth initiatives are not successfully implemented

10.   Impact on the business if the macroeconomic environment deteriorates

Scenario 3 - Cash collection down

Cash collection from trade receivables deteriorates leading to trade receivables impaired by 5% of revenue in 2021/22.

1.     Prolonged effects of the ongoing COVID-19 pandemic

10.   Impact on the business if the macroeconomic environment deteriorates

Scenario 4 - Significant infrastructure failure

Major incident at the largest DC which destroys the building and its contents.

6.     Failure in the business's critical infrastructure

Scenario 5 - Major cyber breach / information loss

Major system failure (possibly caused by a cyber attack) resulting in   a serious loss of service, fines for data breach and loss of reputation, leading to halving of revenue growth.

6.     Failure in the business's critical infrastructure

7.     Cyber security breach / information loss

 

 

The severe and plausible stress tests for the principal risks and uncertainties 8 'UK defined benefit pension scheme cash requirements are in excess of the 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 occur in mitigation, capital expenditure is unchanged from that in the updated strategic plan, dividends continue to be paid and there are no changes in debt financing.

 

The results of the above stress tests showed the Group would be able to withstand the impact of these scenarios occurring.

 

Reverse stress tests were also undertaken to assess the circumstances that would threaten the Group's current financing arrangements and all would have to result in adjusted operating profit margin falling to under 2% in at least one of the following three years. These reverse stress tests also assumed that no major reorganisations or significant working capital initiatives occur in mitigation, capital expenditure is unchanged from that in the updated strategic plan, dividends continue to be paid and there are no changes in debt financing. The Directors consider the risk of these circumstances occurring to be remote.

 

The above scenarios are hypothetical and extremely severe for the purpose 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 against any such occurrences. 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 2024.

 

Going concern

Based on the assessment outlined above, the Directors also believe that it is appropriate to continue to adopt the going concern basis in preparing the Group's accounts.

 

RELATED PARTIES (Note 27 - page 160)

 

The Group's joint venture (Note 17) is a related party and during the year, the Group made sales of £1.9 million (2019/20: £2.3 million) to the joint venture, and a balance of £1.8 million (2019/20: £0.9 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 10.

 

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

 

2021

£m

2020

£m

Short-term employee benefits

9.0

5.8

Post-employment benefits

0.2

0.1

Termination benefits

0.2

0.5

Share-based payments

4.0

1.1

 

13.4

7.5

 

Transactions and balances between the Company and its subsidiaries have been eliminated on consolidation.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES (page 115)

 

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 accounting standards in conformity with the Companies Act 2006 and prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRIC) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and Company accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS 102), 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 72 and 73 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 and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;

•  The Group accounts, which have been prepared in accordance with IFRS as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in 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              Chief Financial Officer

 

 

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.

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