 |
|
|
|
|
| |
 |
|
| |
 |
|
| |
 |
Our returns remain substantially higher
than the Group’s cost of capital >>>
Jeff Hewitt, Deputy
Chairman and Group Finance Director |
|
|
|
|
|
| |
Turnover, profits and earnings
of continuing operations
|
Key
figures |
2002 |
2001 |
|
|
Turnover
|
£759.6m |
£823.9m |
|
|
Operating
profit* |
£108.7m |
£130.9m |
|
|
Interest |
(£3.2m) |
(£6.8m) |
|
|
Profit
before tax*† |
£105.5m |
£124.1m |
|
|
Earnings
per share*†‡ |
17.3p |
20.2p |
|
|
Dividend
per share |
15.9p |
13.8p |
|
|
|
Key
statistics |
2002 |
2001 |
|
|
Gross
margin % |
51.0% |
49.1% |
|
|
Operating
margin %* |
14.3% |
15.9% |
|
|
Return
on sales % |
13.9% |
15.1% |
|
|
Effective
tax rate %*†‡ |
29.0% |
29.3% |
|
|
PBT on
net assets†‡ |
22.7% |
27.1% |
|
|
|
Growth
% |
2002 |
2001 |
|
|
Turnover
|
(7.8%) |
15.8% |
|
|
Turnover
– adjusted |
(7.7%) |
12.3% |
|
|
Operating
profit* |
(17.0%) |
10.7% |
|
|
Profit
before tax*† |
(15.0%) |
7.6% |
|
|
Earnings
per share*†‡ |
(14.4%) |
6.3% |
|
|
Dividend
per share |
15.2% |
15.0% |
|
|
*Before amortisation of goodwill
†2001: before exceptional loss on closure of
Pact
‡
2001: restated for the implementation of FRS19
Group turnover of continuing operations declined by 7.8%
to £759.6m. Before goodwill amortisation (and exceptional
charges last year) operating profit fell 17.0% to £108.7m,
profit before tax fell 15.0% to £105.5m and earnings
per share fell 14.4% to 17.3p. The prior year also included
the Pact business for nine months before it was discontinued
on 1 January 2001 and subsequently closed at an exceptional
cost of £6.9m.
Exchange rate movements had a positive translation effect
on our reported operating profit. At constant exchange
rates, sales would have been £1.7m lower and operating
profit would have been £1.0m lower, a decline of
17.7% over the prior year compared with the reported 17.0%.
Adjusting sales for the number of trading days in the
year and to constant exchange rates gives an underlying
sales decline of the continuing operations of 7.7%.
For the continuing operations, the gross margin was 51.0%,
which was up on last year. This partly reflects the lower
contribution of Allied to the overall sales mix, as Allied
has a lower gross margin than the RS businesses, and partly
more positive management across the whole Group of all
the factors that determine the gross margin.
Operating margins (before amortisation of goodwill) declined
from 15.9% to 14.3% for a number of reasons. A significant
factor was the lower gross profit resulting from the lower
sales notwithstanding the higher gross margin percentage.
The lower gross profit was not then fully offset by reductions
in the cost base of the Group. Though costs have been
managed down in light of the difficult trading of the
past year, care has been taken not to prejudice the growth
potential of the businesses when trading recovers and
so costs were not driven down to the same degree as the
fall in sales. The second factor, as last year, is that
our higher growth businesses are our smaller businesses
which have higher costs relative to sales than our larger
businesses, due to scale effects. Hence, the margin decline
partly reflects this change in mix of cost bases within
the Group. Thirdly, our strategic investments are higher
at £13.8m versus £12.8m last year: e-Commerce
costs were up to £7.7m from £4.0m whilst Japan
losses declined to £4.7m from £6.3m and China
investment to £1.4m from £2.5m.
Overall Process costs were £69.3m, or 9.1% of sales,
compared to 8.0% of sales of continuing operations last
year. Before the impact of any particular project activities,
these costs are anticipated to flatten and then decline
as a percentage of sales over time. The largest component
of these costs remained information systems, accounting
for about 40% of the total, and this component is likely
to increase over the next few years as the project to
upgrade the Group’s systems infrastructure, communications
and databases incurs depreciation and costs ahead of benefits.
The enterprise business systems projects cost £1.8m
in the year, up from £0.1m. The development costs
of e-Commerce within Processes were £5.0m, up from
£1.7m last year. Conversely, given our share price
development relative to the peer group, the funding of
the Long Term Incentive Plan required a charge of £0.1m
in the year compared to £2.5m last year and this
has benefited the Process costs. After adjusting for the
project costs and the LTIP, the Process costs grew by
1.6%.
The interest charge was £3.2m compared to £6.8m
last year, mainly due to lower interest rates and the
reduction in net debt over the year. The tax rate of 29.0%,
based on profit before tax and goodwill amortisation,
was marginally lower than the (restated) prior year rate
of 29.3%. FRS19 Deferred tax has been applied in arriving
at this rate. In accordance with FRS10, the £214.8m
of goodwill that arose on the acquisition of Allied is
being written off over 20 years and the amortisation in
the year was £11.9m. The acquisition of the business
activities in Norway also led to an increase in goodwill
amortisation of £0.1m during the year.
Profit before tax and after goodwill amortisation was
£93.5m and the effective tax rate on this profit
was 32.7%. After tax, the profit for the year amounted
to £62.9m, down 11.4%.
Earnings per share before goodwill amortisation (and before
exceptional items in the prior year) declined 14.4% to
17.3p from 20.2p. After goodwill amortisation (but before
exceptional items in the prior year), the decline
was 17.6% to 14.5p. Including the exceptional charge in
the prior year the decline was 11.6%.
With the recommended final dividend of 11.0p per share,
dividends rose 15.2% to 15.9p, which were covered 1.1
times by earnings before goodwill amortisation. Cash generation
and the impact of strategic investments that have been
expensed are also factors in considering cover. Taking
the cash earnings per share (earnings per share plus depreciation)
as adjusted for the after tax cost (at a rate of 29%)
of the strategic investments gives a dividend cover of
1.5 times.
Cash flow and balance sheet of
continuing operations
|
Cash
flow |
2002 |
2001 |
|
|
Stocks |
£29.0m |
(£8.6m) |
|
|
Debtors |
£18.5m |
(£4.5m) |
|
|
Creditors |
(£19.0m) |
(£1.2m) |
|
|
Working
capital |
£28.5m |
(£14.3m) |
|
|
Capital expenditure
on fixed asset additions |
(£47.2m) |
(£25.6m) |
|
|
Free Cash flow |
£76.3m |
£74.4m |
|
|
Net debt |
(£53.0m) |
(£75.5m) |
|
|
|
Key
statistics |
2002 |
2001 |
|
|
Stock turn |
2.7 |
2.5 |
|
|
Debtors days |
50.8 |
53.8 |
|
|
Creditors days |
33.7 |
40.1 |
|
|
Operating cash flow of continuing
operations was again healthy at £156.7m, up from
£138.0m last year and representing 144.2% of operating
profit (before amortisation of goodwill). Free cash flow
of continuing operations for the year was £76.3m
(£74.4m last year), and total free cash flow was
£81.6m (£78.6m), including the cash flows
from Pact.
Working capital cash inflows amounted to £28.5m
compared to a £14.3m outflow last year. Cash
inflow on stocks was £29.0m compared to an outflow
of £8.6m last year. Whilst maintaining high service
levels for customers, stock levels were tightly and effectively
managed throughout the year and stock turn improved to
2.7 times from 2.5 times. Debtors recorded an inflow of
£18.5m, compared with an outflow of £4.5m
last year. Debtor days were 50.8, down from 53.8 last
year. There was a cash outflow on creditors of £19.0m,
compared to an outflow of £1.2m last year. Creditor
days were 33.7, a decrease from 40.1 last year. The incidence
of the Easter holidays at the year end benefited the debtors
and creditors cash flows.
Capital expenditure on fixed assets additions was £47.2m,
significantly higher than last year (£25.6m for
continuing operations) though slightly lower than we expected
earlier in the year due to rephasing. The largest expenditure
in this year has been £25.2m on systems, of which
£20.2m was part of the £50m enterprise business
systems. This three year investment programme will substantially
improve the systems structure, data management and process
design across Europe and Asia. £1.5m was also spent
on e-Commerce infrastructure. Other major investments
have been in the new warehouse facilities in Germany (£13.7m)
and Italy (£2.8m). The combination of expenditures
in the year represents a peak and the overall level is
expected to be significantly lower in this year.
The closure of Pact provided a £5.3m inflow of cash
during the year (2001: £4.2m). The freehold property
previously occupied by Pact is subject to an offer.
The relevant assets of our distributor in Norway were
acquired on 28 September 2001 and our wholly owned business
commenced trade from 1 October 2001. The acquisition cost
£0.8m, all of which represented goodwill. The trading
results of the new business were immaterial to the Group
as a whole.
After higher tax and dividend payments of £32.9m
(including Pact) and £62.7m respectively, the decrease
in net debt was £22.5m or 30%, giving year end net
debt of £53.0m.
Note
7 to the Accounts indicates the effect
FRS17 would have had if it had been adopted. Full adoption
is required for the year ended 31 March 2004. The Group
has a well-funded defined benefit scheme in the UK with
much smaller defined benefit schemes in Ireland and Germany.
Elsewhere the schemes are defined contribution. Under
the FRS17 rules we are pleased that the defined benefit
schemes showed a combined surplus of £17.6m. The
last full valuation of the UK scheme was carried out as
at 31 March 2001 and showed a surplus of £22.1m.
The Group has been evaluating its long term pension arrangements
in the UK and is considering the introduction of a new
defined contribution scheme for new employees.
Treasury continued to operate as a centralised service
centre. Its ethos remained the managed reduction of the
Group’s financial risks. The Treasury Committee continued
to oversee any policy or procedural changes.
Treasury manages the Group’s foreign currency transaction
risks. These typically arise because the Group’s purchases
in currencies other than Sterling are much less than its
receivables from catalogues with fixed prices in those
currencies. Substantial hedging of net currency exposures
over the catalogue lives was once again implemented in
order to “shelter” forecast gross profits through the
catalogue lives. In this way the impact of currency fluctuations
is smoothed until selling or cost prices can be changed
in light of the changed exchange rates. The hedges are
enacted through forward currency contracts entered into
by Group Treasury on the trading projections provided
by local businesses. Note
26 to the Accounts gives a summary of the Group’s
hedging positions at the year end. In addition, supplier
negotiations continued such that more product purchases
will be made in the underlying currencies of the source,
as against Sterling. This then allows increased netting
of currency flows internally.
Over the course of the year, the Euro remained weak and
the US Dollar strengthened. In itself this reduced our
gross margins because a large part of our product supply
is directly or indirectly sourced in US Dollars whilst
a large part of our currency receipts are from sales in
Sterling or Euros. As noted above, however, other management
actions overcame this negative influence and our gross
margins increased over the year.
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. Treasury guidelines
are in place for reviewing the impact of translation exposures
should there be any material changes. Note
26 to the Accounts summarises the financial assets
and liabilities by major currencies at the year end.
The Allied acquisition in July 1999 was financed by term
loans from our relationship banks and these are being
paid down from trading cash flows. The financing structures
of other subsidiaries continue to be reviewed for overall
financial and fiscal effectiveness. Multi-country cash
pooling has been successfully implemented across the Group
with our banks to ensure daily netting of almost all the
Group’s cash flows in Sterling, US Dollar, Euro, Yen,
Singapore Dollar and Hong Kong Dollar with consequent
improvements in liquidity and lower interest costs.
At the year end the Group had net debt of £53.0m
to give gearing of 12.9% and interest cover (before amortisation
of goodwill and exceptional charges) of 33 times. The
Group remains robustly financed.
Within net debt, total debt was £74.4m, of which
£39.0m was denominated in US Dollars and £24.2m
in Yen, whilst cash of £5.1m and short term investments
of £16.3m were largely in Euro deposits. Group policy
on investment management is to maximise the return on
net funds subject always to the security of the principal
and the liquidity of the Group. The Group has established
policies to identify counterparties 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. During the year and at
the year end the Group did not make use of any financial
instrument for the purpose of hedging changes in interest
rates. Note
26 to the Accounts provides a summary of the deposit
structure of the Group at the year end.
Profit before tax (and after goodwill amortisation) on
net assets was 22.7%, down from 27.1% (before exceptional
loss on Pact) last year. These returns remain substantially
higher than the Group’s cost of capital. Trading performance
and the investments made to implement the Group’s strategy
have depressed the reported returns.
Our reduction in total shareholder return over the year
was 10.3% reflecting the share price decrease between
the year ends, which compared to the negative 3.2% in
the Allshare index.
On 1 January 2002 Electrocomponents was reclassified from
Distributors into the Business Support Services sector
of the stock market, a move that we regard as beneficial
to shareholders. All shareholders should benefit from
the increased coverage of the Group by analysts and others
that focus on this much larger sector.
Our move into the Support Services sector has meant that
a significant number of investors and analysts that have
not previously known the Group wish to build their understanding.
This will help in broadening the market for Electrocomponents’
shares. Hence, in January 2002, Electrocomponents hosted
a site visit to our Nuneaton (United Kingdom) facility
for investors and analysts to provide a first hand view
of this major part of our fulfilment infrastructure and
to learn more of our strategy. Managers of some of our
major operations took part in the day and their full presentations
are available on our corporate website.
Providing attractive returns for our shareholders relative
to the market over the long term remains the primary goal
of our strategy. In our selected markets the growth potential
for our businesses is large and we believe that superior
returns are available to the Group over the long term.
The sales and profit performance of our main European
businesses are important pointers, as is our progress
in Japan and in the major Asian markets. Though Allied
has had a very difficult year as a result of the electronics
cycle, our experience of this business gives us confidence
in its quality and in the opportunities for the Group
in the North American market.
We are not distracted from pursuing our strategy by the
short term trading difficulties encountered over the past
year. The global economic backdrop influences the timing
of the realisation of the Group’s potential (“The Prize”),
but does not alter our belief in its ultimate attainability.
We are convinced that as our businesses realise the considerable
sales potential of their markets over time, and consequently
achieve the economies of scale, their profitability, absolute
profits and cash generation will increase. In the larger
economies our opportunities should be substantially larger
than those reflected by our UK business.
We will continue to strive to make real these very attractive
investment prospects.
|
|
|
|
