Pension

The Group has defined benefit schemes in the UK (closed to new entrants in April 2003 and replaced by a new defined contribution scheme), Ireland (closed to new entrants) and Germany. Elsewhere, including the replacement UK scheme, the schemes are defined contribution.

SSAP 24 remains the accounting standard applied to pensions. A triennial valuation of the UK defined benefit scheme was carried out as at 31 March 2004 and completed during the year. It showed a deficit of £33.4m, net of deferred tax of £14.3m. In order to eliminate the deficit, based on the assumptions used in the valuation, the Group is making annual payments to the scheme for the next 15 years of £4.3m (increasing at 3% per year). Last year, an increased charge of £1.8m was taken.

The total charge for defined benefit schemes increased by £2.4m to £8.5m. From 1 April 2005, employee contributions to the scheme have also increased. The UK defined contribution scheme incurred a charge of £0.4m, an increase of £0.2m over last year.

The statutory minimum funding position of the UK defined benefit scheme remains relatively strong with a Minimum Funding Ratio of 135%-140% as at 31 March 2005 (last year 125%-130%).

FRS 17 was due to replace SSAP 24 in 2005 but has not been implemented due to the deferral by the Accounting Standards Board. The Group will move to IAS 19 next year, which should be similar in application to FRS 17, pending the approval of the recent amendment by the International Accounting Standards Board. Under FRS 17, the defined benefit schemes showed a combined deficit of £32.4m, net of deferred tax, compared to a deficit of £34.6m at the end of last year. The charge to profits arising from these schemes would have been £10.6m (last year £10.4m).

Risks

Business risks

In looking forward, the most significant potential business risk remains that the RS “business model” of high service, low volume distribution has diminishing relevance to our customers or prospective customers so that they are less willing to pay the price levels implied by such service. Providing these services means that the Group carries high costs. We continue to monitor this risk through the actual results of our businesses, the development of the customer base, and through market research. In the past year we have undertaken more extensive customer research in the UK and Europe. These indicate that our model has relevance in all our markets, but that it will need to evolve to meet customer needs and the increasing capability of more local competitors. Customers are becoming more value conscious and our pricing and discounting policies are developing to reflect such trends, which implies continued pressure on gross margin and the need for tight cost management.

The weak sales in the UK and Continental Europe in recent years could indicate that the market potential available to us might be smaller than previously anticipated. As these regions account for about 80% of the Group’s sales then trends in these markets have a significant impact. In large part the weak sales reflect our exposure to the manufacturing sector and we expect the pressures on manufacturing will continue. More emphasis is now being placed on our strengths in meeting particular customer needs whatever the sector in the refocused strategy. In particular concentration on the Electronics and Electromechanical offer for R&D and maintenance engineers builds our strength in an area where migration to lower cost countries is less likely. There is the risk however, that this strategy will have a more limited impact or take more resource and time than currently envisaged.

Over the longer term our businesses in China and in other low cost economies will benefit from the migration of manufacturing from Europe and indeed from North America and Japan.

The increased attention paid to pricing by some of our customers is expected to continue. Our price levels are scrutinised for “competitiveness” against relevant competitors: a procedure has been extended in recent years. We make adjustments to our catalogue prices to try and ensure that our prices are fair to customers for the products and services we provide. We have also responded with higher or more flexible discounts particularly for our larger customers related to business development, and we have in place appropriate management controls and guidelines.

The large systems projects inevitably carry implementation risks, particularly the EBS implementation in the UK during the coming year. As this implementation also includes the Group’s central logistics processes then the overall impact of a failed implementation would be very high. Hence our approach is to implement when both the system and the business are ready, and this takes precedence over the timetable and cost. Given the stress that such implementations put on the business, however, there is also every effort being made to complete the project as soon as possible. The lessons from previous implementations are being applied so more resources have been planned with the intent that there is no reduction in customer service. The training of all employees engaged in the change process has also been intensified. Project support, contingency plans and substantially increased stock levels have also been put in hand or are planned. Given the risks involved, the project is under the direct control of the Chief Executive and an experienced project team.

Over the coming year, product compliance with the new RoHS regulations will be an increasingly important and complex area with the potential risk of higher stock and/or increased stock write-offs if the product transition is not well managed. We also need to ensure that we are providing our customers with the service and assurance that they require. We have a senior management team working on the changes that will be required in co-operation with suppliers and customers. Our approach is well defined, but there remains uncertainty by suppliers and customers on the detailed application of the regulations in practice for them and so we are in continuous communication with them.

Though the Group’s pension position is relatively strong, the new UK regulations governing pensions do imply increased risk for the company. Changes in funding requirements could result in higher contributions. The Group works closely with the Trustees in agreeing a mutually sensible way forward.

The Board has conducted risk reviews annually for some years to consider the major risks and management’s mitigating actions. This process is being refreshed over the coming year with the implementation of broader risk management techniques across the Group. Business continuity, disaster recovery and other preventative practices are a major focus of the Group and are continually being enhanced and where practicable fully tested. Where appropriate, residual risk is covered by insurance, which is managed centrally.

Financial risks

Group Treasury operates as a centralised service centre and is managed to reduce the Group’s financial risks.

The Group’s foreign currency transaction risks typically arise because purchases in currencies other than Sterling are much less than its receivables in those currencies. Substantial hedging of net currency exposures over catalogue lives is implemented in order to “shelter” forecast gross profits. In this way the impacts of currency fluctuations are smoothed until selling or cost prices can be changed in light of the movement in exchange rates. The hedges are enacted through forward currency contracts entered into by Group Treasury on the basis of trading projections provided by local businesses.

Specific cash flows relating to material transactions in currencies other than the functional currency of the local business are hedged when the commitment is made.

Foreign currency translation exposures are not explicitly hedged, but local currency debt is used where economic and fiscally efficient in the financing of subsidiaries and this provides a partial hedge. This was particularly so of the US Dollar over the year as a large part of the debt is in US Dollars, originally arising from the acquisition of Allied, and the exchange rate movements relating to this debt offset the impact on underlying assets. Guidelines are in place for reviewing the impact of translation exposures should there be any material changes.

Multi-country cash pooling is in place with our banks across the Group to ensure daily netting of almost all the Group’s cash flows in all currencies with consequent improvements in liquidity and interest costs.

The investment management of liquid funds aims to maximise the return on net funds subject to the security of the principal and the liquidity of the Group. The Group has established policies to identify counterparts of suitable credit worthiness and has procedures to ensure that only these parties are used, that exposure limits are set and that these limits are not exceeded.

The Group does not intend to change materially its Treasury policies as a consequence of International Accounting Standard 39.

Corporate and Social Responsibility

We have long encouraged a social, ethical and environmentally responsible approach to our business activities. This is the third year of formally reporting on our corporate social responsibility policies and performance in accordance with the Association of British Insurers (ABI) guidelines. We are pleased to report progress in a number of areas although progress has not been uniform across the Group. In addition to this formal report, our communications with stakeholders regarding corporate social responsibility (CSR) are supplemented by periodic updates on the www.electrocomponents.com website.

Principles

During the year, a set of Corporate and Social Responsibility (CSR) principles were established that underpin the Group’s trading practices and the ethical standards and respect with which it manages employees. In particular the Group:

• requires compliance with the laws and regulations in the countries in which it operates
• requires that its resources are not used in any illegal manner and that it shall not enter into any anti-competitive arrangements
• strives to maintain the highest standards of personal ethics and behaviour
• respects the rights of every employee and provides a safe and healthy environment in which to work and
• maintains procedures for the confidential reporting of breaches of these principles.

Corporate accountability

The Board has overall responsibility for the Group’s CSR policies and performance. These include procedures for the identification, management and control of risks to the business arising from CSR issues.

The Chief Process Officer, Richard Butler, has specific responsibility for CSR matters, and for ensuring that the associated risks are incorporated into the overall Group risk management process.

Ethical trading

Electrocomponents’ products are sourced globally from a wide range of suppliers with whom we seek to foster long term and mutually beneficial relationships. Our Ethical Audit process for suppliers is based on the Ethical Trade Initiative guidelines. Since 2003 on-site audits have been conducted with 46 suppliers in Asian countries and a number of potential new suppliers have been rejected.

Environment

We are committed to minimising the impact of our activities on the environment and continuously improving our environmental performance.

In 2003 we developed a generic Environmental Management Standard (EMS) model and benchmarking process to support our businesses in implementing EMS and to spread best practice. We continue to be supportive of our businesses adopting an externally accredited EMS where these provide tangible business and environmental benefits. The Group has three businesses (UK, Germany and Austria) certificated to ISO14001 Environmental Management Standard, whilst our Japanese business is pursuing certification.

We have no manufacturing operations and are not intensive users of energy or generators of waste. Our main environmental impacts and those we can directly control and influence are associated with national and international distribution, specifically packaging and paper consumption and the energy used in our facilities and that associated with transportation where we work with our subcontractors.

Although we have not sought to quantify the benefit, an important part of the Group’s contribution to sustainable developments is our capability to provide customers with a single source for a wide range of products, thus consolidating multiple highly fragmented global supply chains and reducing overall environmental impact.

We are supportive of the objectives of the Waste Electrical and Electronic Equipment (WEEE) and RoHS legislation. The legislation will place new demands on our businesses, but our preparations are well advanced.

Packaging and catalogues

We use a variety of packaging both for product packaging and for transit purposes and have a philosophy of “reduce, re-use and recycle” in our use of packaging materials wherever practicable. Last year the UK business recycled 415 tonnes of packaging materials (compared with 406 tonnes last year). We continue to promote the use of reusable plastic “replenishment modules” (RMs) as transit packaging for stock shipments between suppliers and our warehouses whenever appropriate for the product. Currently, 34% of all products delivered to our UK warehouses from suppliers are in RMs (last year 35%) thus reducing costs and waste by eliminating the need for transit packaging.

Production of paper catalogues and promotional literature is organised to minimise environmental impact, with use of optimised grades of paper to help reduce paper consumption and where practicable distribution costs. All paper for catalogues and promotional literature is sourced from pulp from Forestry Stewardship Council (FSC) approved sources. Catalogues and other promotional literature are printed in facilities accredited to the ISO14001 Environmental Management Systems standard.

Health and safety

We are committed to health and safety best practice as an integral part of our business activities and the Group Health and Safety policy statement forms a sound basis for health and safety management throughout the Group. The policy, which is the responsibility of the Group Board, is to develop effective health and safety management processes using risk management principles to promote continuous improvement. RS Components in the UK is certified to Occupational Health and Safety Standard OHSAS18001 and we are using the OHSAS18001 model to develop our approach systems throughout the business.

It is with regret that we report that in January 2005 a fatality occurred at our Nuneaton facility to an engineer undertaking warehouse maintenance activities.

We closely monitor the number of accidents and occupational conditions where employees are absent from work for over 24 hours. During 2004/05 there were 31 “Lost Time” accidents across the Group compared to 26 in 2003/04. The lost time accident rate rose from 0.306 accidents per 100,000 hours in 2003/04 to 0.312 accidents per 100,000 hours in 2004/05. This increase was primarily due to an increase in the number of manual handling and slip and trip injury reports.

Employees

We value the commitment of our employees. Our employment policies are designed to attract, retain, motivate and train our people and to respect their human rights, including freedom of association, and to ensure equal opportunity and diversity. We comply with the core International Labour Organisation conventions that prohibit the use of child, under-age or forced labour.

In addition to in-house magazines, we communicate with our employees through the corporate Intranet and the Electrocomponents Forum, which includes employees elected from each Operating Company and Process. This year we have also established a UK Information & Consultation forum that will comply with the Information & Consultation Regulations. We have made good progress in extending the corporate Intranet service across the Group, and in ensuring that all employees have access to it and are trained in its use. In the UK, we achieved “Investor in People” in recognition of our training and development activities in October 2004.

Community activities

We have a strong sense of community responsibility and we encourage our businesses around the world to enhance relationships with the communities in which they operate by contributions “in kind” as well as financial. Links with educational establishments are developed and remain strong.

International Financial Reporting Standards

The Group will report using International Financial Reporting Standards for the year ending 31 March 2006. The next set of interim financial statements, for the six months ending 30 September 2005, will consequently also be prepared using these standards.

A project team has been working for 18 months to estimate the extent of the changes to the Group results. The main changes for the Group include accounting for defined benefit pension schemes, share option plans, dividends and goodwill. The changes to reported profit will also change the presentation of earnings per share.

We plan to make a separate announcement on the extent of changes arising from the conversion to International Financial Reporting Standards in July 2005.

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