Premier Farnell annual report 2014/2015
Transcription
Premier Farnell annual report 2014/2015
Annual Report and Accounts www.premierfarnell.com Premier Farnell at a glance Premier Farnell plc is a global, high service technology company, predominantly engaged in the marketing and distribution of products and services in the time-critical and innovation-focused electronic components distribution sector. With over 4,500 employees, operating in 36 countries, the Group is comprised of three distinct business units that focus on specific market segments. The element14 and CPC & MCM (MDD Other) businesses together comprise our Marketing and Distribution Division (MDD). Akron Brass is our Industrial Products Division (IPD). 2014/15 at a glance Group sales growth Group adjusted operating margin Premier Farnell is committed to reducing the impact of its activities on the environment. Adjusted earnings per share Dividend per share +3.3% 9.2% 13.8p 10.4p (2013/14: +2.6%) (2013/14: 9.6%) (2013/14: 14.3p) (2013/14: 10.4p) Throughout this Annual Report, unless otherwise stated, sales growth is based on sales per day for continuing businesses at constant exchange rates and like for like periods. Printed by CPI Colour This Report is printed on material derived from sustainable sources, and printed using vegetable based inks. Both the manufacturing paper mill and printer are registered to the Environmental Management System ISO 14001 and are Forest Stewardship Council® (FSC) chain-of-custody certified. CPI Colour is also a Carbon Neutral Printing Company and reduces its CO2 omissions to net zero in accordance with The CarbonNeutral Protocol. This carbon offsetting supports the Uchindile Mapanda reforestation programme in Tanzania, an environmental project to establish commercial forests at two locations in Africa. element14 80% This Report is recyclable and Bio-degradable - If you have finished with this document and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste. Thank you. £357.1M 46.4% Europe CPC & MCM 12% £117.1M £333.1M 43.3% Americas CPC & MCM Akron Brass element14 comprises both our Americas, Europe and Asia distribution business, selling electronic components and tools to engineers and manufacturing customers globally and our rapidly growing technology offering from Embest and AVID Technologies to component manufacturers. CPC & MCM are also distribution businesses. Focused on the sale of electronic products, the division serves a complementary marketplace to our main element14 business in the UK and North America. Akron Brass is a global leader in the sale and manufacture of high performance fire-fighting and emergency response equipment. Global reorganisation of element14 businesses Market leader in Raspberry Pi Integration of REACH Engineering New global web platform rollout complete CPC & MCM working closer together Over 30% sales outside US More technical expertise acquired through AVID Technologies New CPC catalogue launched Developed Tailored Customer Applications £960.1M £73.5M 8% Asia Pacific £79.3M 10.3% element14 Akron Brass Designed and produced by SampsonMay Telephone: 020 7403 4099 www.sampsonmay.com 1 Annual Report and Accounts 2014/15 In this report, we’ll discuss how Premier Farnell is supporting its customers’ and suppliers’ evolving needs, explain our strategy to deliver improved future financial performance and provide detail on how the Group operates and is governed. Visit our online community here: www.element14.com Contents Strategic Report Governance Report 02. 40. Corporate Governance Report 40. Chairman’s Overview 44. The Board of Directors 52. Nominations Committee Report 54. Audit Committee Report 58. Directors’ Report 62. Remuneration Report Chief Executive’s Overview Premier Farnell – Business and Markets 04. element14 08. CPC & MCM 10. Akron Brass Our Strategic Vision 13. Building the Global Destination 14. Strategic Focus 1: Engineering Customers Financial Statements 18. Strategic Focus 2: Manufacturing Customers 86. Independent Auditors’ Report 20. Strategic Focus 3: Component manufacturers 92. Consolidated Financial Statements 104. Notes to the Consolidated Financial Statements 139. Company Financial Statements 142. Notes to the Company Financial Statements Performance and Risks 22. Measuring our performance 24. Principal risks, uncertainties and opportunities 26. Financial and operational review 33. Sustainability report 38. Employees Further Information 149. Glossary 150. Shareholder Information 151. Historic Record 2 Premier Farnell Welcome to our 2014/15 Annual Report and Accounts Laurence Bain Chief Executive We have outlined our vision to become the global destination for electronics customers and set out the clear strategic priorities we will deliver to reach this goal. Through the investments we have made this year, along with the global reorganisation of our element14 business, Premier Farnell is positioned to improve its future financial performance. 2014/15 performance The past financial year has been a challenging period for Premier Farnell as we transform the business and position ourselves for future profitable growth. Group sales grew by 3.3% in 2014/15, up from 2.6% in the prior financial year, with growth supported by our strategic initiatives. During the year, we have evolved our strategy to focus on three complementary target customer segments. The first segment comprises the design and maintenance engineers who have historically made up the core of our business. We are building and leveraging our technical experience to attract customers at the cutting edge of technology. The second segment is manufacturing customers with small to medium production volume requirements. The third segment is the component manufacturers who have long been our key supplier partners. It is our intent to become the recognised technology experts for design services and the manufacturing of development kits. We have made significant investments in developing our proposition to each of these segments which has helped to improve the top line sales momentum. As we invest to grow revenues, we remain focused on managing gross margin in line with market conditions but recognise that progress in each customer segment and the resulting customer and product mix will most likely lead to dilution of our gross margin over time. Our focus is on growing gross profit year on year whilst improving the overall efficiency of our model. Whilst this transition has led to a 0.7 percentage point decline in gross margin to 36.8%, we have delivered growth in gross profits, on a constant currency basis, up 1.4% year on year. Focused cost control and improving the efficiency of our model are constant priorities for our business. The effective management of our cost profile has enabled us to offset the majority of the gross margin decline, delivering SG&A as a percentage of sales at 27.6%, a reduction of 0.4 percentage points at constant exchange rates. Through the management of sales, gross margin and costs our full year adjusted operating profit was maintained at broadly flat levels at constant currency compared to the prior year. A detailed review of our 2014/15 performance is set out from pages 26 to 32. 3 Annual Report and Accounts 2014/15 Figure 01: Our Seven Strategic Priorities Objective Strategic priority KPI Growth Become the recognised technology experts for design services and manufacturing of development kits for global component manufacturers 6% sales growth 3.3% Build and leverage technical expertise to attract engineering customers at the cutting edge of technology 4% ACB growth -2.1% Grow our business with engineering and manufacturing customers, especially in the emerging markets 10% emerging markets growth 13.1% Efficiency 2014/15 Evolve our operating model into a more efficient and effective global, function based structure >30% RONA 29.6% Develop attractive eCommerce channels that enable automation of processes 70% eCommerce 49.3% Profitability Optimise our business through effective management of gross margin and costs 10%-12% ROS% 9.2% Cash Optimise use of cash in the business and distribution of funds to shareholders through-the-cycle 6% FCF to sales 3.7% Further detail on 2014/15 performance against the KPIs is outlined on pages 22 and 23. Strategic priorities As shown in figure 01, we have outlined seven strategic priorities and the metrics by which we will measure our progress across the economic cycles in executing our strategy. In doing so, we will create sustainable shareholder value by growing our business, delivering efficiencies, optimising profitability and delivering free cash flow. We are on a journey to transform Premier Farnell and have made some positive strides this year. The investments planned and implemented this year have enhanced our customer proposition for all three of our target customer segments, thereby supporting our ambitions to improve sales growth. The global rollout of our new web platform is now complete and performing as expected. The new web platform provides us with the foundation on which to drive our eCommerce agenda and attain our eCommerce and Active Customer Base targets. And we have now embarked on the rationalisation of our operating model as we transform the regional element14 businesses into a new globally aligned organisation. In June 2014, we announced our move to become one element14 team. A new executive team was appointed with functional leaders for Sales and Marketing, Product and Suppliers, Supply Chain, and Technology, as well as global leaders for support functions including Finance, Human Resources and Legal. The leadership structures for Akron Brass and MDD, the other distribution businesses (CPC & MCM) remain unchanged. Since then, we have completed the design of a proposed new integrated, global organisational structure which involved over 70 functional experts from around the business. As well as better enabling the execution of our strategy, the simplified global structure will deliver operating efficiencies, economies of scale and our ability to better leverage our global assets in serving all our customers. Through this rigorous design process, we have identified efficiency savings beyond those initially anticipated. We are now targeting total annual cost benefits of £10m to £12m, once the new structure is fully implemented, with approximately £3m to £4m of benefit in 2015/16 and the further £7m to £8m of benefit in 2016/17. Whilst our 2014/15 performance in comparison to our targets reflects our journey to transform Premier Farnell, the investments made will enable us to deliver improving future financial performance. We are now focused on driving profitable growth, reducing costs and improving the efficiency of our model as we position the business for the future. With the transformation of the Group underway, the Board recommends that the full year dividend is maintained at 10.4p, reflecting our commitment to shareholder returns. Outlook As we look to the future, the investments we have made will enable us to accelerate the execution of our strategic growth initiatives as we strive to become the global destination for electronics customers. By delivering this vision, remaining focused on costs and completing the global transformation of element14, we believe that Premier Farnell will be well positioned to deliver enhanced medium term financial performance. 4 Premier Farnell element14 Building the global destination for electronics To support our ambition of becoming the trusted experts that link suppliers and the innovators of technology, we have begun to evolve and extend our business model. Beyond the distribution of small quantities of components, delivered to meet very short lead times, we now also provide a range of value-add services, such as the online community for design engineers which was enhanced during the year by the implementation of a state of the art design centre; the build out of our software offering; as well as the introduction of and investment in a higher volume production proposition. In addition, we now provide turnkey design, manufacturing and distribution solutions to our suppliers as we support their new product introductions. Through our multichannel sales and marketing approach, we seek to enhance the relationships with our core engineering customer base, especially online. By investing in extensive and innovative multichannel sales and marketing resources, we have developed an online ecosystem that combines technology expertise, 24 hours five days a week support, an online engineering community and local multichannel sales support for customers all around the globe. element14 – 2014/15 snapshot • Full year sales growth up 2.8% year on year • Price positioning actions taken to ensure the competitiveness of our proposition given the impact of currency fluctuations on local markets • Progress to enhance proposition for our three target customer segments: -- Engineering customers: development kit sales up over 20% year on year -- Manufacturing customers: investments completed to build small production proposition -- Component manufacturers: over 90 projects for 20 semiconductor manufacturers completed • The design of a global, functional organisation completed with a new Executive team appointed • Roll-out of new global web platform completed globally to enable growth of the eCommerce channel 5 Annual Report and Accounts 2014/15 Marketplace The entire global electronics market is worth The global electronic components marketplace has historically been comprised of three broad segments: high service distribution; volume distribution; and mass volume, which is typically serviced by the component manufacturers directly. These segments reflect the volume of products needed at each stage of the product lifecycle (see figure 02). The entire electronics market is worth approximately £300 billion globally. £300 billion The element14 business is one of the leaders in the global high service distribution marketplace, which is estimated to be worth approximately £20 billion globally. Here we sell relatively small quantities of components and tools to our many engineering customers, either directly or through purchasing professionals. These engineers are engaged at either the front end of the product lifecycle where they are conceptualising, designing and prototyping new electronic innovations or are involved in servicing, maintaining and repairing existing technology products. 2014/15 saw significant currency fluctuations which contributed to a more competitive global marketplace. Over the longer term, we expect customer behaviour to continue to evolve as more business is conducted online and as the distinction between high service and volume distribution blurs further. Against this backdrop, we have taken steps to ensure that our price positioning is appropriate and during the last year built a small volume production proposition for manufacturing customers that will enable us to compete more effectively in this market. element14 has entered a new market in design services and the manufacturing of development kits, developing a leading solution for a market that we estimate to be worth approximately £350 million globally. This is a fragmented marketplace typically served by a combination of independent design houses and contract equipment manufacturers. Through the services offered by our recent acquisitions of Embest and AVID Technologies, we now support component manufacturers through their innovative processes as they design new technology ahead of it being launched through our distribution channels, thereby turning these key suppliers into customers. Figure 02 Design Services Electronics Market £350mn global market Volume > £300bn global market; > £20bn addressable Component Manufacturing Direct Volume distribution Manufacturing Customers High services Component Manufacturer Maintenance Repair Service Pilot Prototype R&D Maker Production (OEM/CEM) 6 Premier Farnell Resources Our global infrastructure and resources include innovative online resources, regional contact centres, back office systems and a network of distribution centres. The reorganisation of our element14 business towards a global structure, which is being undertaken in the new financial year, will enable us to leverage these resources more effectively and efficiently as we support customer and supplier partners around the world. Leeds Liège Shanghai South Carolina Singapore Mexico Sydney 100 1 600,000 engineers at Embest & AVID Technologies element14 online community including the Design Center in stock products available 1.1m 1 1,270 sq ft warehouse space in our nine element14 distribution centres new global web platform, supporting 48 websites in 35 languages customer facing staff globally 7 Annual Report and Accounts 2014/15 Business model Value-add component distribution As outlined in figure 02, our core business is the distribution of products to engineering and manufacturing customers. We continue to evolve our proposition as we seek to add value at every stage of customers’ innovation, design and manufacturing processes. Further information on how we seek to add value to our three targeted and complementary customer segments is outlined in the strategic focus section beginning on page 13. How we create value: Stock We identify and stock the products and services our customers require, benefiting from web analytics and insights from the element14 community. In total, we stock over 600,000 products to help meet customers’ need for access to a vast range of technologies. Support Engineering customers require detailed information to ensure purchases meet their technical specifications. The element14 community allows engineers to collaborate as well as access technical insights. Sell Ship Customers interact and purchase from us in the way they prefer through our multichannel sales and marketing resources. Our innovative online presence combines with extensive telesales capability and 620 field sales resources as well as significant technical resources to make it easy for customers to do business with us. Fast and reliable distribution of locally stocked products is at the core of our customer proposition. Our distribution centres located around the globe ship 30,000 packages each day. • Digital Advisory Board provides insights on enhancing our online channels from external subject matter experts. • We maintain business continuity plans which are kept under review for all our locations and have ongoing reviews and testing of our IT infrastructure. How we will sustain and grow this value: • P roduct lifecycle management processes, including rigorous stocking criteria, mitigate inventory risk. • Where appropriate, we agree terms with suppliers to manage the risk posed by new product introductions including sale or return. • Insights from data resources used to enhance stocking processes. • We continue to develop and enhance our web capabilities as part of our multichannel sales strategy in order to maintain our competitive advantage digitally. • We are partnering increasingly closer with key suppliers to provide the technical specifications and legislative information that customers need. • By leveraging our supplier relationships to enhance our online channels. • Data and analytics allow us to personalise our customer proposition. • Services offered to component manufacturers provide leadership at the early stages of the product lifecycle. Enabling new technology & supporting business continuity By connecting suppliers to customers around the world, we play a role in enabling innovation in technologies and extending the life of existing products across a broad number of industry segments, from manufacturing to healthcare, renewable energy to marine technology. Through our business model, we aim to connect customers and suppliers while creating value for other stakeholders, including employees and shareholders. • Investment in systems and focus on workflow improvements will deliver operational efficiencies and allow us to meet a higher future demand. We remain focused on reducing the environmental impact of doing business. 8 Premier Farnell CPC & MCM Electrical & electronic product range for businesses and enthusiasts CPC and MCM supply electrical and electronic and associated products, such as audio visual, lamps and lighting, security, test equipment, tools, computing, mains electrical accessories and PA equipment to a huge range of customers in the United Kingdom and North America. CPC and MCM’s customer base complements our core brands as it includes major wholesalers, education, government, utility companies, IT companies, broadcasters, internet resellers and hobbyists. Following the lifecycle of a customer is central to the development of these businesses. Structured to optimise distribution efficiency within the North American and UK regions, CPC and MCM resources aim to provide a customer centric experience. This is supported by a multichannel strategy which leverages our extensive reach through online, print, contact centre and trade counter sales & marketing capabilities. All products are stocked onsite, ready for fast same day despatch to support the needs of our customers. CPC & MCM – 2014/15 snapshot • Full year sales growth up 7.9% year on year • Transfer to CPC & MCM of some Raspberry Pi business • MCM continues to benefit from operating ever closer with CPC • Rollout of new web platform completed • Harmonisation of the product offering is ongoing 9 Annual Report and Accounts 2014/15 Marketplace The gradual return of business investment and productivity in the UK and North American markets has generated increased demand in related market sectors, stimulating growth in the core MCM and CPC electrical, installation and tools product segments. This has led to the growth seen in CPC and MCM’s associated ranges for retail customers, including makers and electronics enthusiasts. Increased output in manufacturing and construction industries, underpinned by an upturn in the domestic and commercial real estate sector has helped to increase sales growth in our wholesale customer segment. Through new product strategy and a highly competitive Private Label offering, CPC and MCM have further enhanced the depth and relevance of our core MRO offering. This has resulted in accelerated new customer acquisition and a greater share of this market. Customer facing sales resources: +80 Warehouse staff: +250 Business model As broad line distributors with a diverse customer base, these businesses compete effectively by operating a low cost, fast paced model. By listening to customers and developing solutions that customers value, the businesses are highly appreciated by suppliers and customers alike. As a distribution business, CPC and MCM’s business model is similar to the core element14 business with four key stages of value creation: stock, support, sell and ship. We outline below how CPC and MCM add value at each point in the chain. How we create value: Stock CPC and MCM stock over 150,000 diverse products to help us meet customers’ needs for a one-stop shop of electronic products and supplies. Support Extensive product information available online and through our catalogues as well as customer support via our call centres. Sell Ship CPC and MCM’s range of customer channels make it easy to do business with them. Customers value the broad offering and our competitive product pricing. Fast and reliable distribution of locally stocked products is at the core of our customer proposition. • Continue to build business in growing customer segments such as the Maker space. • We have ongoing reviews and testing of our IT infrastructure. We offer free shipping for online orders over £10 in the UK. How we will sustain and grow this value: • Product lifecycle management processes, including rigorous stocking criteria, mitigate our inventory risk. • We use data resources and market feedback to enhance the insights used in stocking processes. • We continue to develop and enhance our web capabilities. • Continuous focus on workflow improvements will deliver operational efficiencies and allow us to meet increased future demand. We remain focused on reducing the environmental impact of doing business. 10 Premier Farnell Akron Brass Global leader in high performance fire-fighting and emergency response equipment Since its inception in 1918, Akron Brass has been an industry leader in fire-fighting equipment including handheld nozzles, monitors and valves. The business continues to add more products to its core water-flow categories while extending its portfolio with specialised electronics and lighting solutions. The business has invested in new product developments such as unique high-power LED lighting products for global applications and custom designed monitors and nozzles addressing specialised needs of customers in emerging markets. Akron Brass offers customers a balanced product portfolio within our five core categories: valves, monitors, nozzles, electronics and lighting. Each category is analysed for product evolution (investments to sustain business), category expansion (closing product line gaps, taking competitive share), and category revolution (all new products that expand and/or create categories). Headquartered in Wooster, Ohio, in the United States, Akron Brass has manufacturing facilities in Columbus, Ohio, Washington, Illinois and sales offices in Beijing, China, Dubai and UAE. With over 30% of 2014/15 sales coming from outside the United States, Akron Brass continues to expand its market reach and build a global brand. Akron Brass – 2014/15 snapshot • Full year sales growth up 1.3% year on year • Robust financial performance given strong prior year comparators • Reach Engineering fully integrated following prior year acquisition • Long term supply contract win for private label vehicle controls for primary US emergency vehicle builder • International project wins in China, India and Thailand 11 Annual Report and Accounts 2014/15 Marketplace Customers in over The strengthening US economy is boosting demand in the fire apparatus, ambulance, bus and commercial truck markets. Akron Brass’s share of the US fire apparatus market achieved a 9% growth rate, supported by its sales and distribution partners. Our Weldon business drove 38% growth in ambulance and 37% in commercial truck related sales fuelled by new products, strategic business agreements, and increasing vehicle demand. Overall concerns on exports by US manufacturers have not significantly slowed vehicle build rates; 2015 indicators for the US specialty markets are positive for Akron and will be further supported by differentiated product introductions planned within each segment. 100 countries Akron Brass’s fire protection and mitigation solutions for industrial markets saw sales growth of 11% as project momentum continued in petro-chemical systems for fixed-site and marine based segments. Lower global oil prices have resulted in oil producers reducing capital spending plans and this is expected to have a moderate impact on business with these customers which Akron Brass will mitigate through a solid project pipeline, regional focus, and downstream activities in oil tanking, transportation and refining. Excluding the large India contracts, Akron’s International sales were flat year on year despite increasing headwinds on US$ strength and a challenging economic environment in Europe. North American municipal equipment had similar results. While department funds are improving, cyclical spending for personal protective gear and breathing apparatus which are not part of the Akron Brass product proposition was a focus this past year. Municipal sales rebounded in the fourth quarter and momentum is forecast into the new financial year as spending shifts back towards Akron’s core product lines and several new products targeted at this segment are launched. Business model Akron Brass designs and develops products and systems, delivering value by manufacturing innovative and reliable, high performance solutions that improve the safety and efficiency of our customers’ personnel and equipment. The business creates value through a three step process encompassing innovating new solutions, high quality product manufacture and its global sales and marketing capability. How Akron creates value: Innovate Customer needs are at the centre of new product development at Akron Brass. Through customer insight and outcome-driven processes, Akron strives to deliver innovative products and services. Revenue from newly released products exceeds 20% of total sales. Manufacture Akron seeks to deliver continuous improvement of processes, capabilities, capacity and quality through its advanced manufacturing facilities and use of lean production techniques and the latest technologies. Customers benefit from access to highly customised, short lot parts with exceptional quality and short lead times. Sell Akron Brass sells through a global network of distributors and original equipment manufacturers (OEMs). Close collaboration and joint development efforts from end user to distributor to OEM ensure tight control of specification, delivery, installation and servicing of its products. Akron employs the largest factory-direct sales team of the industry. 12 13 Our Strategic Vision: Building the Global Destination for electronics customers The following pages describe the opportunities, investments and progress that we have made in meeting the requirements of the three customer segments that we have identified. 0.1 0.2 0.3 Engineering customers: our traditional targeted customer base of design engineers and maintenance engineers Manufacturing customers: supporting customers for longer through their production process Component manufacturers: turning our traditional supplier base into customers by supporting their new product innovations Each customer segment is complementary to the others. Our insight into new and coming soon technology from working with component manufacturers enhances our offering to engineers. We can follow the signs of activity with engineering customers to open up small production opportunities with manufacturing customers. The larger volume sales completed with manufacturing customers reinforces the value provided through demand generation to our component manufacturing customers. 14 Premier Farnell 0.1 Engineering customers Meeting the needs of engineers is at the core of our business proposition, making up the majority of element14 sales through the high service distribution of electronic components in relatively small quantities, as well as related equipment, tools, software and services. Partnering with engineering customers globally Engineers from all over the world, serving a wide range of industries, choose to partner with element14. These customers range from electronics design engineers to those engaged in maintenance and repair of existing electronics. At the core of this relationship is our capability to meet engineering customers’ five key service requirements: 1. Availability of an extensive range of products 2. Real time product data and information 3. Competitive Price positioning 4. Ease of doing business and 5. Reliable and timely shipment We are enriching our capabilities and the customer experience in each of the five areas. Our aim to partner more closely with a greater number of engineers is central to us delivering profitable growth. 25 Annual Report and Accounts 2014/15 Risks and uncertainties Relative increase / decrease compared to prior year Mitigating actions Opportunities People Business reorganisation as we evolve our business model S O The CEO, CFO and CPO are directly involved in managing this model change, supported by both experienced programme managers and high performing employees from across the business. Our new global structure will facilitate better sharing of expertise and resources across the business globally. It will allow us to enhance the service we provide to meet the needs of customers and suppliers across regional boundaries. Recruitment, development or retention of talented people We actively measure the retention of talent within our organisation which provides us with the ability to track trends and act with the appropriate and necessary actions. We seek to actively engage employees by focusing on training and development, customer relationships, leadership, social responsibility and communications. S O Reward schemes are continuously evaluated to drive and reward performance and ensure retention of key talent. New global structure will provide key people with better ways of working and development opportunities. new Systems, data and infrastructure Data and content quality inhibit effectiveness of our eCommerce strategy A dedicated data function has been established to ensure compliance with internal processes and external regulations. A data strategy and governance framework has been developed to support the information requirements of our strategic programmes. S O Significant failure or inefficiencies in our systems and infrastructure Business continuity plans are kept under review for all our locations. Our IT infrastructure is subject to ongoing review and we conduct regular testing of our systems. O Cyber security failure leading to revenue or reputational loss O new Sophisticated cyber security tools are employed to block external threats and attacks including enhanced, integrated security in the new global web platform. Increased planned investment in global systems, data and data management processes to provide our customers with high quality product information and suppliers with rich insights into customer behaviour as well as enabling greater operating efficiencies. We continually improve workflows and operational efficiencies and provide increased capacity and investment in capability. Providing a safe and secure online experience to customers is potentially differentiating compared with smaller, less established competitors. A computer incident response team has been established alongside enhanced internal training and review processes. Legal Legal and regulatory risks O We have exposure to a number of countries and their respective legal compliance requirements are addressed through a variety of controls. The increase in environmental legislation for electronics, such as the introduction of REACH, allows us to provide real value to our customers through our legislative expertise. Key S Strategic Requires a strategic response O Operational Requires an operational response R Regional Specific to one region 16 Premier Farnell 0.1 Engineering customers continued Enhancing our product range Providing easy access to a wide range of in-stock products is at the heart of our role as a high service electronics distributor. We offer over 600,000 in stock products, available for same day shipment. These products range from semiconductors and passive components, too small to count individually, through to larger items such as tools and testing equipment. We aim to carry everything that our targeted engineering customers require. In 2014/15, we achieved our product linefill target of 97%. This means that 97% of the time we have the products in stock and available for same day shipment that our customers are looking to buy. Over the past two years, we have made incremental inventory investments to enhance our product range, of which over £20m is targeted at engineering customers. With this inventory investment complete, we are focused on driving turns on this enhanced product offering. As part of the inventory investment, we added over 2,000 development kits and evaluation boards. These products are strategically important to us as their sales signal the commencement of design activity and flag an opportunity for us to partner with customers from the outset of their design process all the way through prototyping and into production. In addition, our work with component manufacturers, described on page 20 and 21, is seeing us become a significant partner in the launch of their latest technologies. Access to the latest products is differentiating for engineering customers, especially for electronics design engineers, as they look to benefit from the added capability and efficiency that new technology frequently brings. Trusted, technical expertise The technical nature of the products that we sell and the applications for which they are used makes product information highly valuable to our customers. The information that customers require includes the product’s key features and capabilities, sensitivity to different environments and also any relevant legislative information. The adoption by the European Union of the Restriction of Hazardous Substances (RoHS) directive in 2003 acted as a catalyst for the Group to enhance the data provided to customers, especially through its online resources, and we are now viewed as a trusted source of information. On our transactional websites, we have over 260,000 unique product datasheets, providing key technical information, which receive more than 550,000 downloads per week. Our product experts update more than 18,000 product datasheets per month, working in partnership with our suppliers so that our engineering customers have access to complete and up-to-date information. This resource is supplemented by 24/5 live chat online technical support and dedicated field application engineers who work closely with customers to bring new products to market. The element14 community is another important source of information for engineers. With over 300,000 registered members, the Community is a place where engineers from around the globe can come together to discuss solutions to their technical problems, share ideas and experiences of different products and interact with suppliers and experts. During the course of 2014/15, we have further improved this resource with the launch of the element14 Design Center. The Design Center is an online workspace where engineers can access the latest development kits and tools. Since the Design Center was launched in June 2014, it has received over 40,000 visits per week. Beyond physical products, we see the distribution of engineering software as an area of increasing importance to our customers and, for us, an opportunity for profitable growth. Having acquired CadSoft in 2009, a business which produces printed circuit board layout software, we are now focused on the launch of an online software licensing store by evolving the element14 Design Center launched this year. The software store will offer products for download from a range of software vendors. During 2014/15, we have signed a number of franchise agreements with key software partners, including ARM and Altium. A personalised customer experience Benefiting from the insights of a dedicated in-house customer and market research capability, we are developing a personalised experience which considers the requirements of engineering customers’ varying job roles, industries and environments, as well as the differences across geographic regions. An important aspect is the way that we interact with customers through our range of sales and marketing channels as we see that customers often choose to interact with us through multiple channels depending on what they are looking to achieve. For example, a large customer account might have a regular review with a field sales person, a dedicated contact at one of our call centres and an integrated eProcurement system for day-to-day order processing by the engineering team. This combination of channels makes it easier for our customers to do business, a key source of differentiation for element14. 17 Annual Report and Accounts 2014/15 Our multichannel sales and marketing approach is centred on the web with sales via eCommerce channels contributing to 49.3% of total MDD revenues. Our online resources include transactional websites in over 30 languages, eProcurement solutions and the industry leading element14 Community. Many engineering customers prefer ordering online as they benefit from the information resources that can be provided through this channel. Over the past year, we have increased the number of images with 360 degree visualisations on technical products such as development kits and test equipment. In addition to contributing to the customer experience, the increased data provided on products helps to optimise online search engine performance and attract new customers. This year, we completed the single largest IT systems development ever undertaken at Premier Farnell by implementing our new global web platform across the element14 business. By moving to a single global web platform, we now benefit from more efficient and faster processes as we rollout global marketing programmes and tailor our offering to the individual needs of customers. Additionally, we can now specify, develop and implement future enhancements far more quickly, such as the better mobile experience which is planned to go-live in 2015/16, and the new web platform also helps to provide better protection against cyber security risk. Customer reaction to the new web platform has been positive and the performance of our transactional sites has met our expectations through this transitional period. The web provides a digital shop window that plays an important role in attracting new customers as well as helping us to personalise the user experience. Growing the business transacted online also enables us to eliminate inefficient manual practices, reduce the opportunity for error, and free up resource to focus on value-add activities for customers and suppliers. Pricing to market A typical order placed with us comprises about three to four lines and has an average order value of approximately £170 in Europe and Asia or $430 in North America. Despite the relatively small order size, pricing does remain one of the factors considered by engineering customers before placing an order. With more business conducted online and in an economic environment characterised by slow growth, price perception has become more important to customers over recent years. In response to this changing market circumstance, we have been developing our approach to pricing that sees us maintaining a price competitive solution, whilst seeking to extract the value-add that our high service proposition provides in each market. Through the course of 2014/15, we used our eCommerce tools, data and analytics to dynamically adjust our pricing to the prevailing market levels. Given the considerable fluctuations in currency seen in the period, especially in relation to the US dollar and the Euro, we have aimed to ensure that our European and Asia propositions maintained their price competitiveness. As part of our engineering customer proposition, we offer a range of private label brands of more than 70,000 products, providing customers with a value range for commodity products which frequently form part of their order. These are high quality and high margin products that represent good value for money alternatives for customers. Delivering to promise Every day, we receive in the region of 30,000 orders through our sales teams and global websites which equates to over 75,000 lines of product globally. These orders are then processed by one of our 11 distribution centres, with the principal sites in the UK, Belgium and North Carolina, USA. Efficient processes mean that 99.95% of the time the order is shipped same day. Our regional distribution model enables us to deliver to promise time and again. Yet there remains scope to further enhance the effectiveness of our supply chain as we leverage our regional resources globally, share best practice and enable greater inventory visibility for our customers. This is an opportunity that we will continue to address through the transformation of the element14 business in 2015/16. Building our business with engineering customers By providing a competitive proposition that meets customers’ changing behaviour, we expect that the engineering customer base will remain the core of our business and a future growth opportunity. Through the investments made to enhance our offering this year, especially in developing considerable technical expertise, element14 is now better positioned to benefit from a number of growth drivers in electronics including our early visibility of coming soon technologies, the developing internet of things, shortening product lifecycles and growth in emerging markets. In addition, actions taken to transform element14 into a global business, as well as the completed rollout of the new global web platform will allow for greater leveraging of our regional resources and a superior customer experience. 18 Premier Farnell 0.2 Manufacturing customers Manufacturing customers, are engaged in the production phase of electronics manufacturing and require components as part of their scheduled production run. As described on page 5, the total electronics marketplace is worth over £300 billion annually. The vast majority of this marketplace is in the production phase of electronics manufacturing, a market which has historically been supported either directly by the component manufacturers or through volume distribution. With increasingly shortening production runs, and greater technical support and knowledge widely available due to the rise of the internet, the lines between volume and high service distribution are increasingly blurring. Our strategy opens an estimated £20 billion incremental addressable market to the element14 business as we target small production runs by supporting innovation from design into prototyping then production. Manufacturing customers are not new to us and account for approximately 20% of our element14 sales. Whilst we have long supported these customers at the early prototyping phase, especially in the UK and North America, we have not focused heavily on this area in the past. We are confident that with a more competitive proposition, we can successfully and profitably grow our business with these customers. Manufacturing customers largely benefit from our proposition to meet the needs of engineers. In addition, we have made substantial progress in 2014/15 to meet manufacturing customers’ specific product requirements and preferred ways to do business. 19 Annual Report and Accounts 2014/15 Investments in production inventory Manufacturing customers typically want to purchase board components in the packaging options that enable them to be loaded directly onto the automated assembly equipment on their production lines. This contrasts with our engineering customers who are looking to order products in small quantities for design, testing or repair purposes. Over the past two years, we have invested over £15m in incremental inventory targeted at the production space. Today, we have a compelling range of production inventory in stock featuring over 40,000 full reel products. Enabling product traceability Having full traceability of the product source is another key requirement for many of our manufacturing customers. Traceability of the product date and lot code is particularly important for customers in industries such as aerospace, defence and certain government related sectors. We have implemented systems and processes to allow us to trace certain date and lot codes on over 300,000 products while our South Carolina warehouse has been operating the AS9120 standard for the past six years. This means that it provides the high level of product traceability required by the aerospace industry. We are now looking to take the AS9120 standard to Europe as we see this as increasingly important to customers in other regions too. Further best practice is coming soon to the industry in terms of new anti-counterfeiting standards. We will be looking to be a leader in implementing such standards across the globe as we build on our position as a trusted source for electronics. Enhancing the buyer experience The relationship with manufacturing customers will typically be with a purchasing professional, especially when they are conducting small production runs. With many of the critical enhancements to the production proposition completed behind the scenes, we are now focused on delivering a leading experience for our buyer customers and communicating what we now offer. Achieving a competitive price is critical to winning larger orders. We made a substantial change to our pricing proposition this year by introducing additional price breaks in Europe for customers looking to purchase stock in higher volumes. These additional price breaks have increased the competitiveness of our offer and price perception for production customers coming to us via online channels. Having completed the rollout of our new web platform, we will now begin to implement upgrades to our websites targeted at production customers. For example, we will implement a bill of material upload function which will allow customers to automatically cross-check their shopping list against our inventory and receive an immediate quote. We will also provide customers with real-time stocking information, such as packaging options, availability of date and lot traceability and product lead times. Buyers will also soon be able to schedule and reschedule orders online, providing the flexibility needed to ensure their order is delivered just-in-time for their planned production runs. Building our business with manufacturing customers Over the past two years, we have made substantial investments to build a compelling production proposition for manufacturing customers. As we focus on attracting new manufacturing customers to our offering and drive improved turns on the incremental inventory, we expect to achieve a return on these investments over the medium term. 88 Premier Farnell Independent auditors’ report to the members of Premier Farnell Plc continued Valuation of post employment benefits Refer to the Accounting policies for the Directors’ disclosures of the related accounting policies, judgements and estimates. Presentation of income statement adjusting items Refer to page 56 (Audit Committee Report) and note 2 in the financial statements. The Group has defined benefit pension plans in the UK and US which have gross post retirement assets of £206.2 million and gross post retirement liabilities of £256.6 million. In addition to these two principal pension plans the Group provides other post-retirement medical benefits. The total post employment benefits obligation is a net liability of £70.7 million, which is significant in the context of both the overall balance sheet and the results of the Group. The Group’s strategy involves the development of a global customer and supply chain model. As part of this Group strategy, in FY15 the Group announced a move to an integrated global organisational structure in its element14 businesses and has reported costs associated with evaluating and designing the programme in FY15. These costs are reported by the Group as adjusting items on the Consolidated income statement and are presented separately in arriving at an adjusted profit performance measure. The valuation of the pension and post-retirement medical benefit liabilities requires significant levels of judgement and technical expertise in choosing appropriate assumptions, a number of which are volatile. Changes in a number of the key assumptions (including salary increases, inflation, discount rates and mortality) can have a material impact on the calculation of the liabilities. The Group uses independent third party actuarial experts to calculate the pension and post-retirement medical benefit liabilities. How our audit addresed the area of focus We evaluated the Group’s key judgements taking into account the specific characteristics of the Group’s UK and US pension plans and post-retirement medical benefits plan. We assessed the assumptions used by the Directors’ with respect to discount rates, inflation rates and mortality rates by comparing them to our own, independently formed expectations. Based on our audit work we found that the assumptions used by the Directors’ were supportable and within our expected range. We also read and assessed the disclosures made in the financial statements, including disclosures of the assumptions used, and concluded they were appropriate. We focused on this area because the presentation of such items is not defined by IFRSs and it therefore requires judgement by the Directors’ when identifying such items and justifying their separate disclosure. Consistency in identifying and disclosing these items as adjusting is also important to maintain comparability of the results year on year. The judgements involved in calculating and presenting these costs in the income statement include assessing that the costs relate to the period under review and assessing that the costs are not normal operating costs but by their nature, size or incident are appropriate to be classified as adjusting items. How our audit addresed the area of focus We evaluated the Directors’ approach to the identification and disclosure of adjusting items to confirm the basis for presenting and calculating adjusting items has been applied consistently and justifiably and assessing whether the classification was in line with the Company’s accounting policy set out on page 99 of the financial statements. In FY15, the adjusting items recorded on the income statement totalled £4.9 million. The costs identified as adjusting items are primarily costs associated with the reorganisation programme and include consultancy fees and severance costs. We tested a sample of costs which confirmed the costs relate to the period under review. We have also assessed whether these costs are non-operational in nature and therefore by their nature are appropriate to be classified as adjusting items. We found that the classification judgements and disclosures made by management were in line with the Group’s accounting policy and that the costs are appropriate to include within adjusting items in the consolidated income statement. 21 Annual Report and Accounts 2014/15 New product introductions Development kits play an important role in the success of new technologies as they are used by engineers to evaluate the attributes of the core semiconductor chip that is being considered for a design. As such they are used at the very outset of the product design process. Engineers frequently regard the development kit as a reference design for their product. Our research shows that in almost 50% of cases, a design engineer will re-use part of the development kit design in their prototype. Semiconductor manufacturers recognise the important role these products play in product selection and future demand generation, especially in ensuring the success of new technologies. As such, they will typically launch a development kit alongside their latest new products and will look to distributors to help them to ensure its success. The element14 community is viewed by many of our suppliers as an important tool in the product launch process. Engineering customers often come to the Community at the outset of their design process when they are researching possible solutions for their products. Through the Community, we can partner with suppliers to conduct social marketing, such as new product roadtests by influential members. In addition to creating customer engagement around the product, such activity allows for third party product endorsement and real-time feedback. In 2014/15, we enhanced the element14 community with the launch of the Design Center, an online hub for information on development kits and tools. Embest and AVID provide design services and manufacturing of development kits to a substantial number of the major semiconductor manufacturers including Freescale, NXP and AMD. Beyond the growth opportunity for element14 represented by this activity, the total available market is highly fragmented and estimated to be worth approximately £400m annually. Working on the design of the development kit means that we are partnering before the launch of the new technology. The insights that we gain from the coming-to-market technology can help us to enhance our proposition to our core engineering customers and drive leadership in the introduction of new technology products. Turning suppliers into customers The acquisition of Embest in 2012, a technology business based in China, saw us begin to evolve our business model beyond the distribution of products from suppliers to customers by providing design services and outsourced manufacturing solutions. The capability that we acquired through Embest means that we now provide turnkey solutions to our component manufacturer partners in the launch of their new technologies. As a result, we are working with our suppliers as they develop their technology from the design and manufacturing of their development kits all the way through to the launch of the product, supported by our established distribution business. We can now support component manufacturers across a number of key technology areas. Embest has embedded technology expertise – designs based on the popular ARM embedded architecture by the British technology leader, ARM. With Embest growing strongly, we required further resource to support demand. In April 2014, the Group acquired AVID Technologies, a design house based in Ohio, USA. AVID has enhanced our offering through its specialisation in wireless, connectivity, power and analog technologies. With over 200 engineers across the business, the technical capability we can provide is unparalleled in our space. We are now unique amongst distributors in influencing electronics at the outset of the amplifying effect. This is seeing us turn these key supplier partners into new customers and enhancing the value-add that we provide to them. In addition, we have the opportunity to enhance the value provided to auxiliary component manufacturer partners in technology areas such as connectors, as the development kit plays a critical role in their own demand generation. Given our existing relationships in distributing such products to engineering customers, we are uniquely positioned to work closely with these partners compared with the incumbent players in design services and manufacturing of development kits. Building our business with component manufacturers In 2014/15, Embest and AVID completed over 90 projects for more than 20 semiconductor manufacturers. The value of the projects has increased as component manufacturers’ confidence in us has grown and the future pipeline appears healthy as we look to 2015/16. While the total business conducted by Embest and AVID is still a relatively small part of the Group, with combined revenues of £9.4m in 2014/15, we anticipate that this business area will provide an incremental growth opportunity that will benefit our larger distribution activities. 114 Premier Farnell Notes to the consolidated financial statements continued The movement in the provision for impairment of trade receivables can be reconciled as follows: 2014/15 £m 2013/14 £m Provision brought forward 4.1 4.6 Provision for impairment 1.4 1.4 Amounts written off (0.6) (0.8) Provision released (0.5) (0.9) Exchange movement (0.1) (0.2) Provision carried forward 4.3 4.1 2015 £m 2014 £m Sterling 31.4 30.8 US dollars 65.8 55.8 Euro 27.7 26.7 The carrying amounts of trade and other receivables are denominated in the following currencies: Other 17.6 15.6 142.5 128.9 The fair value of trade and other receivables is approximate to their carrying value. 14 Cash and cash equivalents Cash and cash equivalents comprise balances at bank and short term deposits repayable on demand and available within one day without penalty. 15 Financial liabilities Note 2015 £m 2014 £m 6.3 1.8 66.4 39.2 – 51.8 Current Current borrowings Non-current Bank loans 3.0% US dollar Guaranteed Senior Notes payable 2016 5.2% US dollar Guaranteed Senior Notes payable 2017 20.0 18.3 4.4% US dollar Guaranteed Senior Notes payable 2018 38.8 35.5 4.8% US dollar Guaranteed Senior Notes payable 2021 60.7 55.4 4.0% US dollar Guaranteed Senior Notes payable 2024 56.5 – 1.4 5.2 243.8 205.4 52.5 63.4 296.3 268.8 Other loans Non-current borrowings Preference shares 16 The above current and non-current borrowings are unsecured. Further details of the Group’s borrowing facilities are given in note 19. 23 Annual Report and Accounts 2014/15 Strategic Objective 2: Efficiency Strategic Priorities • Evolve our operating model into a more efficient and effective global, function based structure • Develop attractive eCommerce channels that enable automation of processes KPI Definition >30% RONA The effective and efficient investment of our shareholders’ funds is a critical overall measure of the success of our strategy. RONA is defined as operating profit expressed as a percentage of net assets excluding cash, financial liabilities, taxation and goodwill. 70% of distribution sales from eCommerce eCommerce is a highly efficient route to market and an enabler of further efficiencies in our business model. Our target of 70% of sales in MDD via eCommerce means that the processing of transactions must be completed entirely through fully-automated processes. Trend 2014/15 29.6% 2013/14 32.3% 2012/13 34.3% 2014/15 49.3% 2013/14 55.1% 2012/13 56.8% Commentary Return on Net Assets of 29.6% was marginally below our KPI of >30%. As we move to a more efficient global operating model and drive increased inventory turns, we expect to improve our future performance against this metric. eCommerce penetration was 49.3%, down 5.8 percentage points from the prior year. The decline principally reflects the decommissioning of optical character recognition for the fully automated processing of faxes, which took place at the end of the prior year. With the rollout of the new web platform complete, we expect to make progress towards our medium term target in the year ahead. Strategic Objective 3: Profitability Strategic Priorities • Optimise our business through effective management of gross profit and costs KPI Definition 10%-12% ROS Through the ongoing management of gross profit and costs, the Group targets an operating margin in the range of 10% to 12% through the economic cycles. Trend 2014/15 9.2% 2013/14 9.6% 2012/13 10.0% Commentary Full year operating margin of 9.2% reflected a decline in gross margin, combined with the planned strategic investments to enhance our customer proposition as we transform our business and ongoing stringent management of costs. We continue to execute transformational programmes that drive the efficiency in our business model and focus on executing our profitable growth strategy. Strategic Objective 4: Cash Strategic Priorities • Optimise use of cash in the business and distribution of funds to shareholders through-the-cycle KPI Definition 6% FCF to sales We remain committed to generating cash flow performance through the economic cycles. Free cash flow comprises total cash generated from operations, excluding cash flows related to adjusting items, less net capital expenditure, interest, preference dividends and tax payments. Trend 2014/15 3.7% 2013/14 3.7% 2012/13 6.1% Commentary Adjusted free cash flow as a percentage of sales of 3.7% was below our through-the-cycle target of 6%, following further inventory investments to enrich our product offering for engineering and manufacturing customers. These strategic incremental inventory investments are now completed and we remain selective on our capital investments. We expect the investments made to deliver improved future cash performance. 24 Premier Farnell Principal risks, uncertainties and opportunities The Principal Risks and Uncertainties facing the Group are summarised below. The disclosure of risks and uncertainties in the table below reflects the approach of the Company to also look for the opportunities presented when addressing significant risks. The Principal Risks are formally reviewed twice per year by the Board. Updates in terms of emerging risks or significant actions undertaken are addressed as and when required at Board meetings. The Principal Risks are determined through an evaluation of likelihood of occurrence and potential impact, with a full review also undertaken by the Senior Executive Team (SET). Risks and uncertainties Management also reviews specific strategic, operational, and financial and compliance risks in regular focused forums during the year; SET meetings; quarterly business reviews with each of the businesses; major programmes and project reviews; and at other key executive management meetings. Further details on our risk management and internal control procedures are included on page 42. Relative increase / decrease compared to prior year Mitigating actions Opportunities Business Risks Competitive pressures increase We continue to build our high service proposition by adding new technologies and a broad range of products, working closely with suppliers as we provide end-to-end solutions throughout their product development process. S O We are rationalising our element14 organisation by globalising our operating model and leveraging the efficiencies of the web. Insufficient progress with improving performance in the Americas We continue to implement strategic initiatives to build customer loyalty and provide a differentiated proposition for our customer base. Our proposition is increasingly personalised to meet the needs of customers in targeted segments. We are partnering more closely with suppliers as we look to support the introduction of their new technology and drive market share gains in key market segments. We have a fully integrated multichannel sales and marketing plan that is aligned with the wider element14 strategy and the evolution of our global proposition. This plan is aimed at addressing the needs of our customers, including a focus on specific segmentation by type of customers and vertical industries. By enhancing and better targeting our offering, and developing the customer proposition by leveraging our global resources, we can significantly improve operating performance in the Americas. Embest and AVID’s engineers are working together to optimise performance of specific projects. Investments have been made to develop the leadership teams and back office systems at Embest. Leveraging our technology expertise offers significant opportunities in meeting the needs of our component manufacturer customers but also in our core engineering customer base. Long term evolution of the electronic component distribution model Software and services are increasingly part of our offering to product development customers. This increases the value that they extract from our proposition while diversifying our business model away from pure distribution. Environmental and technology trends are sources of electronics innovation which underpin sales to our product development customers. S The Group takes actions to reduce the impact of its business on the environment through carbon emissions and by encouraging recycling, especially of packaging. S O R Failure to leverage our technology expertise and partnerships with key suppliers new S Our regional warehouse model reduces the impact of carbon emissions compared to alternatives. Through ongoing focus on reducing the environmental impact of doing business, we are introducing more efficient processes and can offer further complementary services to our customers. 25 Annual Report and Accounts 2014/15 Risks and uncertainties Relative increase / decrease compared to prior year Mitigating actions Opportunities People Business reorganisation as we evolve our business model S O The CEO, CFO and CPO are directly involved in managing this model change, supported by both experienced programme managers and high performing employees from across the business. Our new global structure will facilitate better sharing of expertise and resources across the business globally. It will allow us to enhance the service we provide to meet the needs of customers and suppliers across regional boundaries. Recruitment, development or retention of talented people We actively measure the retention of talent within our organisation which provides us with the ability to track trends and act with the appropriate and necessary actions. We seek to actively engage employees by focusing on training and development, customer relationships, leadership, social responsibility and communications. S O Reward schemes are continuously evaluated to drive and reward performance and ensure retention of key talent. New global structure will provide key people with better ways of working and development opportunities. new Systems, data and infrastructure Data and content quality inhibit effectiveness of our eCommerce strategy A dedicated data function has been established to ensure compliance with internal processes and external regulations. A data strategy and governance framework has been developed to support the information requirements of our strategic programmes. S O Significant failure or inefficiencies in our systems and infrastructure Business continuity plans are kept under review for all our locations. Our IT infrastructure is subject to ongoing review and we conduct regular testing of our systems. O Cyber security failure leading to revenue or reputational loss O new Sophisticated cyber security tools are employed to block external threats and attacks including enhanced, integrated security in the new global web platform. Increased planned investment in global systems, data and data management processes to provide our customers with high quality product information and suppliers with rich insights into customer behaviour as well as enabling greater operating efficiencies. We continually improve workflows and operational efficiencies and provide increased capacity and investment in capability. Providing a safe and secure online experience to customers is potentially differentiating compared with smaller, less established competitors. A computer incident response team has been established alongside enhanced internal training and review processes. Legal Legal and regulatory risks O We have exposure to a number of countries and their respective legal compliance requirements are addressed through a variety of controls. The increase in environmental legislation for electronics, such as the introduction of REACH, allows us to provide real value to our customers through our legislative expertise. Key S Strategic Requires a strategic response O Operational Requires an operational response R Regional Specific to one region 26 Premier Farnell Financial and operational review Mark Whiteling Chief Financial Officer Sales Group sales for the financial year were £960.1 million (2013/14: £968.0 million) representing growth of 3.3%, based on sales per day for continuing businesses at constant exchange rates, reflecting the market conditions seen through the period and the execution of our strategic growth initiatives. Divisional performance The following commentary sets out the performance achieved by each of our business units. 2014/15 has been a challenging but important year in Premier Farnell’s development. As we seek to improve our future financial performance, we are focused on improving our growth trajectory, reducing costs and transforming our business through the proposed global reorganisation of element14. element14 Against a mixed economic backdrop, Europe delivered full year sales growth of 1.9% year on year. Excluding Raspberry Pi, Europe sales increased 2.5% year on year. Market conditions in the United Kingdom remain challenging, despite some encouraging manufacturing PMIs, with our business reporting a year on year sales decline of 2.2%. Continental Europe continued to perform more strongly, growing sales by 3.8% year on year. This performance was driven by above average sales growth in Germany, Italy, Spain, Benelux and Eastern Europe. Asia Pacific continues to provide the Group with long-term growth opportunities. We have continued to grow market share in the region, with full year sales up 16.1% over the prior year. Every market in the region delivered positive growth throughout the year with sales growth in the key emerging markets of China and India at 18.1% and 20.3%, respectively, whilst Australia delivered sales growth of 5.6% over the prior year. The total Europe and Asia Pacific’s MDD business delivered combined full year sales growth of 4.2% year on year. Americas’ element14 business delivered full year sales growth of 1.1% year on year as we began to implement plans to transform the region’s performance and integrated AVID Technologies into the Group. Excluding AVID Technologies, Americas’ full year sales were flat year on year. We anticipate that the Americas will benefit from our proposed global organisational structure as this will enable us to better leverage our global resources to enhance the customer proposition and sales effectiveness. CPC and MCM CPC and MCM delivered combined full year sales growth of 7.9% in 2014/15, despite a challenging market backdrop, benefitting from sales of the Raspberry Pi. This follows the transfer of some Raspberry Pi business from element14 to CPC and MCM in the first half of the year, as well as the launch of the CPC catalogue at the end of the first quarter. 27 Annual Report and Accounts 2014/15 Key financials 2014/15 (52 weeks) £m Total revenue 2013/14 (52 weeks) 960.1 968.0 Growth(a) 3.3% 88.0 93.0 -0.1% Total operating profit 83.1 91.5 -4.0% Adjusted profit before tax(b) 74.0 76.3 -3.0% Total profit before tax 69.1 74.8 -7.6% Adjusted earnings per share 13.8p 14.3p -3.5% Basic earnings per share 12.9p 14.0p -7.9% 35.2 36.1 -2.5% Adjusted operating profit Free cash flow(c) (b) Divisional analysis Revenue 2014/15 (52 weeks) 2013/14 (52 weeks) Growth(a) element14 Europe APAC Europe & APAC Americas CPC & MCM Total MDD Akron Brass Group 357.1 363.8 1.9% 79.3 72.1 16.1% 436.4 435.9 4.2% 333.1 347.1 1.1% 769.5 783.0 2.8% 117.1 109.7 7.9% 886.6 892.7 3.5% 73.5 75.3 1.3% 960.1 968.0 3.3% Adjusted operating profit/operating margin 2014/15 (52 weeks) Europe & APAC Americas CPC & MCM Total MDD Akron Brass 2013/14 (52 weeks) 57.2 60.3 13.1% 13.8% 19.5 19.7 5.9% 5.7% 11.7 12.1 10.0% 11.0% 88.4 92.1 10.0% 10.3% 13.7 14.0 18.6% 18.6% Head office (14.1) (13.1) Group 88.0 93.0 9.2% 9.6% Growth(a) 0.7% 4.3% -3.3% 0.9% 1.5% -0.1% Notes (a) In order to reflect underlying business performance, sales growth is based on sales per day for continuing businesses at constant exchange rates and like for like periods, and growth in operating profit is stated on a constant currency basis, consistent with the way that performance is measured by the business. References to financial results refer to ‘adjusted’ numbers unless otherwise stated (see note (b) below). (b) In 2014/15, adjusted operating profit, profit before tax and earnings per share exclude restructuring costs of £5.1m, net gain on US property disposal of £0.3m related to savings on expenses incurred in the prior year relocation of the MDD Americas Head Office and acquisition costs of £0.1m. In the prior year, adjusting items comprise restructuring costs of £3.9m, net gain on US property disposal of £1.6m and gain on remeasurement of contingent consideration of £0.8m. ree cash flow comprises total cash generated (c) F from operations, excluding cash flows related to adjusting items, less net capital expenditure, interest, preference dividends and tax payments. Notes: The current year results have been adjusted to exclude the following items: 1.Restructuring costs of £5.1m (MDD Europe & APAC £1.1m, MDD Americas £0.2m, Head Office £3.8m). 2.Net gain on US property disposal of £0.3m related to savings on expenses incurred in the prior year relocation of MDD Americas Head Office. 3. Acquisition costs of £0.1m. In the prior year, adjusting items comprise: 1.Restructuring costs of £3.9m (MDD Europe & APAC £0.6m, MDD Americas £1.0m, Head Office £2.3m). 2.Net gain on US property disposal of £1.6m. 3.Gain on remeasurement of contingent consideration of £0.8m. 28 Premier Farnell Financial and operational review continued Akron Brass Following a standout year in 2013/14, Akron Brass performed in line with our expectations with full year sales up 1.3% year on year. The comparators from last year’s contract win with the Hindustan Petroleum Company Limited were especially strong in the second half and Akron Brass sales declined 3.8% year on year in the period. The business is well positioned to continue its expansion into international markets and build on its market leading position in North America. Profitability As outlined in the KPIs on page 23, the Group targets an operating margin that optimises profitability through-the-cycle by seeking to maximise gross profit and managing costs both strategically, as we transform our business, and tactically in line with market conditions. Full year operating margin of 9.2% (adjusted) reflected a decline in gross margin, our planned strategic investments to enhance our customer proposition as we transform our business and ongoing focus on cost management. As a consequence of our focus on costs, adjusted operating profit reduced by only 0.1% at constant currency compared to the prior year. Gross profit A core objective of our strategy is that we will provide a customer proposition that delivers growth in sales and gross profits. We remain focused on managing gross margin in line with market conditions but we also anticipate that certain aspects of our strategy – namely the evolving customer and product mix – will result in further dilution to gross margin over time. Figure 4 illustrates the key drivers that are likely to impact gross margin resulting from the execution of our strategy. Figure 04: Gross margin vs. historic levels Customer mix Engineering distribution Manufacturing distribution Component manufacturers Product mix Development kits Semiconductors Raspberry Pi Electronic components Test & measurement Geog. mix Operating profit Adjusted operating profit was £88.0 million (2013/14: £93.0 million) representing a year on year decline of 0.1% at constant exchange rates. Americas APAC Europe Key is accretive is neutral Adjusting items Adjusting items include £5.1m of restructuring costs related to our global business re-organisation, of which £2.8m were recognised in the second half. Total cost to achieve the business re-organisation is expected to be approximately £10m with the remainder recognised in 2015/16. Prior year adjusting items included restructuring costs of £3.9m, a net gain on US property disposal of £1.6m and a one-off £0.8m gain following remeasurement of the expected contingent consideration payable in respect of the Embest acquisition. is dilutive In line with this objective, we have realigned our pricing to reflect the current competitive environment in an increasingly global marketplace and also continued to grow faster in strategically important products such as development kits and semiconductors, as well as in higher volume business and establishing our leadership in the embryonic single board computing space. Whilst this approach has led to a 0.7 percentage point decline in gross margin to 36.8%, we have delivered growth in gross profits, on a constant currency basis, up 1.4% year on year. Costs Focused cost control and improving the efficiency of our model are constant priorities for our business. Adjusted net operating expenses were reduced by £4.7 million on the prior year. The effective management of our cost profile has enabled us to offset the majority of the gross margin decline, delivering SG&A as a percentage of sales at 27.6%, a reduction of 0.4 percentage points at constant exchange rates. Total operating profit was £83.1m for the full year, reflecting a net cost from adjusting items of £4.9m (2013/14: £91.5m, after reflecting a net cost from adjusting items of £1.5m), resulting in a year on year decline of 4.0% at constant exchange rates. Return on net assets Return on net operating assets (operating profit expressed as a percentage of net assets excluding cash, financial liabilities, taxation and goodwill) for the year was 29.6% (2013/14: 32.3%), slightly below our target of greater than 30%. As we move to a more efficient global operating model, the Group will be able to better leverage its assets. Foreign currency In 2014/15, the average exchange rates for sterling against the US dollar and the Euro were, respectively, £1 = US$1.64 (2013/14: £1 = US$1.57) and £1 = €1.26 (2013/14: £1 = €1.18). Prior year comparatives for revenues and adjusted operating profit benefited by £38.9m and £4.9m, respectively, as a result of the foreign exchange rates compared to 2014/15. 29 Annual Report and Accounts 2014/15 A one cent movement in the exchange rate between the US dollar and sterling impacts the translation of the Group’s operating profit by approximately £0.2m per annum, and a one cent movement in the exchange rate between the Euro and sterling impacts the translation of the Group’s operating profit by approximately £0.4m per annum. Finance costs Net finance costs in the financial year were £14.0 million (2013/14: £16.7 million). This comprises net interest payable of £10.5 million (2013/14: £12.4 million), which was covered 8.4 times by adjusted operating profit, and a net charge of £3.5 million (2013/14: £4.3 million) in respect of the Company’s convertible preference shares. The net cost in respect of the Company’s convertible preference shares included the preference dividend for the year of £2.9 million (2013/14: £3.5 million), together with a £0.6 million (2013/14: £0.8 million) charge for the amortisation of the implied redemption premium on preference shares. The reduction in net finance costs reflects the repayment of the US$159m private placement notes in June 2013, combined with the retranslation of US$ interest charges on the Group’s US$ private placement notes, as well as the benefit of the repurchase and cancellation of 712,948 preference shares. Profit before tax Adjusted profit before taxation was £74.0 million compared to the prior year adjusted profit before taxation of £76.3 million. Total profit before taxation was £69.1 million (2013/14: £74.8 million). Profit attributable to ordinary shareholders after taxation was £47.5 million (2013/14: £51.4 million). Earnings per share Adjusted earnings per share for the financial year are 13.8 pence (2013/14: 14.3 pence). Basic earnings per share after the net impact of adjusting items are 12.9 pence (2013/14: 14.0 pence). Ordinary dividend The Board is recommending a final dividend of 6.0 pence per share (2013/14: 6.0 pence per share), amounting to a total dividend for the year of 10.4 pence per share (2013/14: 10.4 pence per share) and with a total impact in shareholders’ funds of £38.2 million. The final dividend, subject to approval at the Annual General Meeting on 16 June 2015, is payable on 25 June 2015 to shareholders on the register at 29 May 2015. Business acquisition In the first half, the Group acquired the business and assets of AVID Technologies, Inc. for a total consideration of £7.7 million, with additional acquisition costs of £0.1 million shown as an adjusting item. Of the total consideration of £7.7 million, £0.3 million relates to the fair value of net assets acquired and £7.4 million relates to goodwill. This acquisition enhances our offering to component manufacturer customers. Further information on our offering to component manufacturers is outlined on pages 20 to 21. Tax The taxation charge represents an effective tax rate for the 2014/15 financial year on profit before tax and preference dividends of 30.0% (2013/14: 29.9%). After including adjusting items the effective rate is 29.9% (2013/14: 30.0%). We expect that the effective tax rate should fall in 2015/16 by approximately 1% reflecting the continuing reduction in the UK tax rate. 30 Premier Farnell Financial and operational review continued The Group’s adjusted effective tax charge for continuing operations can be analysed as follows: £m 2014/15 Profit before tax Total profit before tax Tax charge % 2013/14 Profit before tax 69.1 Add back preference dividends Tax charge % 23.4 29.9 74.8 2.9 3.5 72.0 21.6 30.0 78.3 Adjust for: Restructuring costs Net gain on disposal of US property Gain on remeasurement of contingent consideration Acquisition costs 5.1 1.5 3.9 1.1 (0.3) (0.1) (1.6) (0.6) – – (0.8) – 79.8 23.9 0.1 – 76.9 23.0 29.9 30.0 Post-retirement benefits The Group accounts for pensions and other post-retirement benefits in accordance with IAS 19 (revised). The net charge for post-retirement benefits was £8.2 million (2013/14: £8.0 million) and can be analysed as follows: The Group’s two principal defined benefit pension plans are in the US and the UK. The movement in the balance sheet liability of these plans during the year was as follows: Charge £m Liability at beginning of year 2014/15 2013/14 Defined benefit pension plans 2.5 2.5 Defined contribution pension plans 5.0 4.8 Other post-retirement benefits 0.7 0.7 8.2 8.0 £m Expense Actuarial losses Contributions Currency translation Liability at end of year US Plan UK Plan (11.6) (18.1) (0.9) (1.2) (12.7) (10.3) – 5.7 (1.3) – (26.5) (23.9) The contributions expected to be paid during the 2015/16 financial year amount to £4.8 million in respect of the UK plan and £nil million in respect of the US plan. Post-employment benefits liabilities increased to £70.7m from £45.1m at the end of the previous financial year principally due to actuarial remeasurements. The main driver of these remeasurements was the significant fall in discount rates at the end of 2014/15, as a result of weak corporate bond yields. 31 Annual Report and Accounts 2014/15 Cash flow and net debt Adjusted free cash flow to sales was 3.7%, unchanged versus the prior year and reflects further inventory investments made to enhance the customer proposition. Free cash flow attributable to ordinary shareholders is summarised below: £m 2014/15 2013/14 Adjusted operating profit 88.0 93.0 Depreciation and amortisation 15.3 17.7 Changes in working capital (15.1) (23.7) Additional funding for post-retirement defined benefit plans Other non-cash movements Total cash generated from operations Capital expenditure Proceeds from sale of property, plant and equipment Interest and preference dividends (3.9) (2.6) 1.5 2.2 85.8 86.6 (20.7) (17.8) – 0.3 (12.5) Total cash generated from operations represented 97.5% of operating profit (2013/14: 93.2%). Net working capital increased by £15.1 million over the year reflecting strategic inventory investments made to enhance our customer proposition, particularly for our manufacturing customers. Capital expenditure of £20.7 million included £14.5 million of software development costs, principally to upgrade our customer web experience and enhance existing systems. The change in net financial liabilities is summarised below: £m UK Plan Opening net financial liabilities (225.8) Free cash flow after impact of adjusting items 27.6 Acquisition of businesses (deferred consideration) (7.8) Ordinary dividends (38.2) Issue of ordinary shares 0.1 Preference shares (0.6) (15.5) Derivative financial instruments 0.2 Amortisation of arrangement fees (0.6) Taxation (17.4) (17.5) Free cash flow before impact of adjusting items 35.2 36.1 Closing net financial liabilities Cash flow impact of restructuring costs (7.0) (6.2) Cash flow impact of US property disposal At 1 February 2015, the Group’s net financial liabilities comprised the following: (0.6) 3.9 Free cash flow after impact of adjusting items 27.6 33.8 Exchange movement £m Cash in bank and in hand Bank loans and overdrafts US$ Senior Notes Other loans Preference shares Derivative financial instruments The US$ Senior Notes comprise: $30.0 million due 2017 $58.5 million due 2018 $91.5 million due 2021 $85.0 million due 2024 (11.5) (256.6) 2014/15 2013/14 43.8 42.8 (66.4) (39.2) (176.0) (161.0) (7.7) (7.0) (52.5) (63.4) 2.2 2.0 (256.6) (225.8) 32 Premier Farnell Financial and operational review continued Treasury activities are monitored by the Tax and Treasury Committee which meets at least twice a year with major decisions and the overall treasury policy being approved by the Board. The maturity of the Group’s gross financial liabilities at 1 February 2015, excluding derivative financial instruments, is as follows: £m Due within one year 2014/15 2013/14 6.3 1.8 Between one and two years 52.6 4.0 Between two and five years 125.6 208.4 After five years 118.1 56.4 302.6 270.6 Net financial liabilities (including preference shares) increased to £256.6m from £225.8m at the end of the prior financial year. The impact of exchange rates in the period was to increase net financial liabilities by £11.5m, principally in relation to our US$ denominated private placement notes. Net debt to adjusted EBITDA was 2.5x following the acquisition of AVID Technologies and reflecting the impact of foreign exchange movements in the year. The Group has £250 million bank facilities, expiring in September 2019, which together with the Group’s continuing cash generation provide the operational and financial flexibility to meet the Group’s funding requirements. Based on these facilities, the Group’s headroom on bank borrowings at the end of the financial year was £181.2 million which, together with the net cash position of £43.8 million, gives us a secure funding position and will facilitate repayment of the preference shares on their maturity in 2016. In addition, the Group successfully refinanced $85m US private placement notes due August 2016 until 2024. 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. In addition, monthly reports are produced by the Group treasury function, which are used to report treasury activities. 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 of its counterparties. 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. 33 Annual Report and Accounts 2014/15 Sustainability report Principles The Principles element of our sustainability strategy centres on those activities which we believe will deliver competitive advantage or financial benefit to the Group. We don’t report on compliance activities, which we are required to fulfil (and that would not set us apart from other corporate ‘good citizens’) in favour of initiatives that we believe drive internal or external business value. Code of Conduct All employees are required to re-read and commit to the Premier Farnell Code of Conduct during their annual performance review. This gives them the opportunity to ask questions and raise concerns with their line manager. In FY15, 91% of employees confirmed that they had read and understood the Code of Conduct. The remaining 9% consists of employees who did not complete a year-end review and therefore did not submit their confirmation. 94% of new employees required to read the Code of Conduct as part of their induction confirmed that they had done so via the Group’s Online Learning Centre. The Trust Line Premier Farnell provides an anonymous telephone hotline for employees to report concerns about corporate ethics in their workplace. In FY15, nine issues were reported and investigated by the hotline. All issues raised were resolved within the year and none remain outstanding. Planet As a distributor with no owned logistics or freight, we have focused our environmental reporting on the direct impacts of our operations at our own facilities. The environmental impacts of the transport of products are managed by third-party carriers through their own procedures. Intensity metric Tonnes Carbon Dioxide equivalent per thousand square metres (CO2e/’000m2) 2014 2013 Scope 1 22 Scope 2 88 87 110 110 Total The decrease in tonnes CO2e emitted by the Group compared with the prior year is mainly due to the relocation of some office sites to smaller and more energy efficient buildings, in particular the movement of the MDD Americas head office to a LEED certified energy efficient building in downtown Chicago. Each region has developed plans to reduce absolute energy use and associated GHG emissions against the 2013 baseline. Efficiency investments will primarily target owned facility upgrades to reduce the consumption of electricity and natural gas and the resultant Scope 1 and Scope 2 emissions. We have appointed PricewaterhouseCoopers LLP to provide independent assurance on selected information in the GHG statement. Their assurance is performed in accordance with the International Standards on Assurance Engagements ISAE3410 and 3000, against a clear and public set of criteria which can be found online at http://www.premierfarnell.com/ sustainability. Their assurance report can be found on page 36 of this report. Resource use Waste generated (tonnes) Greenhouse gas (GHG) statement for the Group Summary of GHG emissions for the year ended 31 December 2014: Tonnes Carbon Dioxide equivalent (CO2e) 2014 Waste sent to landfill (tonnes) Waste recycled (tonnes) Waste recycled (%) 2013 Scope 1 3,964 Scope 2 15,831 16,278 Total 19,795 20,629 4,351 23 2014 2013 2012 4,381 4,488 4,409 742 903 922 3,639 3,585 3,488 83% 80% 79% Our overall performance on waste recycling has increased by 3% since 2013. In addition to segregating and recycling our own waste on site, our Distribution Centres offer a returns service for production reels and waffle trays. This scheme allows customers to return unwanted production packaging free-of-charge to be cleaned, sorted and re-used. People The success of our business is dependent on the skills and commitment of our people. It is vital to our sustainability strategy that we attract, develop and retain the right people to ensure our profitability continues in the long term. Our focus on developing a high performance culture with our employees is outlined on pages 38 and 39. 34 Premier Farnell Sustainability report continued Human rights Premier Farnell supports the fundamental human rights of all of its employees and stakeholders. Our policies and procedures are aligned with the principles of the United Nations Global Compact and we implement a Code of Conduct in our internal and external dealings to protect the integrity of the people with whom we interact. In Europe, DAW injury rates have increased primarily as a result of short term absences following minor injuries becoming more commonplace. A significant proportion of this is driven by legislation affecting sick pay entitlements at our Liege Distribution Centre. However, we have also seen minor injuries occurring in our European office locations that were unrelated to work processes. Our Private Label suppliers are subject to our Workplace Standards policy, setting out the expectation that human rights will be upheld by those companies with which we contract, including the elimination of forced and child labour, and we assess those suppliers’ performance to ensure that their commitment is being kept. Both Recordable and DAW rates remain below the computed OSHA industry average for the business types operated by Premier Farnell. Absenteeism We measure the sickness and injury-related absence rates of employees at our contact centres and distribution centres worldwide. As a high service business, the engagement and commitment of our staff is paramount to fulfilling our customer promise. Health and safety We monitor the injury rates at all facilities and our global performance is reported below. We target injury rates that are not higher than 50% of the average injury rate for our industry, based on the OSHA performance figures for industries in the US. Recordable DAW 1 injuries per injuries2 per 100,000 100,000 hours hours worked worked Business type Leeds, UK Distribution Centre 5.3% Business Contact Centre 9.0% Distribution Centre 5.5% Business Contact Centre 4.1% Preston, UK Gaffney, US Distribution Centre 2.2% Richfield, US Business Contact Centre 2.0% Distribution Centre 1.8% FY15 Target (50% computed OSHA average) 0.41 0.16 Dayton, US FY15 Performance 0.38 0.30 Singapore FY14 Performance 0.31 0.21 Notes: 1 Recordable injuries are those which require medical treatment beyond the application of on-site first aid. 2 Days Away from Work (DAW) injuries are those which result in an employee taking medical leave from work, or being assigned to restricted duties outside of their normal contract. Absence rate1 Location Distribution Centre 3.0% Business Contact Centre 8.0% Note: 1 Absence rates are calculated by the number of working days not attended by employees as a percentage of planned and agreed working days for the year. The UK Business Contact Centre experienced higher absences than usual as a result of concentrated long-term sickness absence, unrelated to working activities. 35 Annual Report and Accounts 2014/15 Supplier workplace standards We have continued our audit programme for Private Label Suppliers that are based in Asia. We have concluded that these are our highest-risk suppliers in terms of potential human rights violations. To date, 90% of Private Label suppliers (by spend) have been audited by a member of our Strategic Sourcing Team and the percentage of suppliers surveyed (by spend) has increased to 97%. No audits have identified any concerns for the welfare of suppliers’ employees. This accounts for all significant Private Label suppliers. Approximately 10% of suppliers are ‘inactive’, being used significantly less regularly to purchase products. We have continued to focus the audit programme on regularly used suppliers. This ensures that the significant majority of work for which we are responsible in the Asia Pacific region with subcontractors is conducted in high-standard environments. Community investment We focus our community investment activities on two key areas: STEM education and Assistive Technologies; as this directly supports our business in the longer term, developing a pool of both potential employees and potential customers. We continue to support the Make the Grade programme in the UK, which provides business support to local schools. Our support is focused on Swallow Hill Community College in Leeds, providing science and engineering support to technology departments, as well as broader mentoring and workplace skills sessions for students. Our online community, element14, is host to Project Nocturne – an international collaborative design project in partnership with DesignAbility. The project brings together electronic design engineers from across the globe to provide pro-bono development of a product to support sufferers of dementia and their carers. The Project Nocturne group on the element14 community website has attracted more than 30,000 page views since launch in 2012 (10,800 in FY15 alone) as it brings key stakeholders together across geographical boundaries to find an innovative solution to an important problem. 36 Premier Farnell Independent Limited Assurance Report to the Directors of Premier Farnell plc The Directors of Premier Farnell plc engaged us to provide limited assurance on the information described below and set out in Premier Farnell plc’s Greenhouse Gas (GHG) Statement for the Group within the 2014 Sustainability Report and the Annual Report and Accounts for the year ended 1 February 2015. Our conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe the Selected Information for the year ended 31 December 2014 has not been prepared, in all material respects, in accordance with the Reporting Criteria. This conclusion is to be read in the context of what we say in the remainder of this report. Selected Information We assured the information for the year ended 31 December 2014 presented in the Greenhouse Gas Statement for the Group (the “Selected Information”), http://www.premierfarnell. com/sustainability. The Selected Information and the Reporting Criteria are summarised in the table below. Our assurance does not extend to information in respect of earlier periods or to any other information included in the Annual Report and Accounts for the year ended 1 February 2015. Selected Information Scope 1 emissions Scope 2 emissions Carbon intensity Reporting Criteria1 http://www.premierfarnell.com/ sustainability 1 The maintenance and integrity of Premier Farnell plc’s website is the responsibility of the Directors; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the reported Selected Information or Reporting Criteria when presented on Premier Farnell plc’s website Professional standards applied and level of assurance We have performed a limited assurance engagement in accordance with International Standard on Assurance Engagements 3410 ‘Assurance engagements on greenhouse gas statements’ (ISAE 3410) and, in respect of intensity measures information, in accordance with the International Standard on Assurance Engagements 3000 ‘Assurance Engagements other than Audits and Reviews of Historical Financial information’ (ISAE 3000) issued by the International Auditing and Assurance Standards Board. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks. Our Independence and Quality Control We have complied with the Institute of Chartered Accountants in England and Wales (ICAEW) Code of Ethics, which includes independence and other requirements founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. We apply International Standard on Quality Control (UK&I) and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our work was carried out by a team of sustainability and assurance specialists, independent of management. Understanding reporting and measurement methodologies Non-financial information needs to be read and understood in conjunction with the Reporting Criteria, given the characteristics of the subject matter and the methods used in determining such information. The absence of a significant body of established practice on which to draw allows for selection of different but acceptable measurement techniques which can result in materially different measurements and can affect comparability. The precision of different measurement techniques may also vary. Furthermore, the nature and methods used to determine such information, as well as measurement criteria and precision thereof, may change over time. The Reporting Criteria used as the basis of Premier Farnell plc’s reporting are as at 24 April 2015 and should therefore be read in conjunction with the Selected Information and associated statements as at 24 April 2015 reported on Premier Farnell plc’s website. 37 Annual Report and Accounts 2014/15 Work done Considering the risk of material misstatement of the Selected Information, we: • made enquiries of relevant management; • interviewed personnel; • performed analytical procedures; • considered the structure and basis of data management systems and controls; and • performed limited testing, on a selective basis, of supporting documentation to the Selected Information disclosed in the GHG Statement for the Group. Premier Farnell plc’s responsibilities The Directors of Premier Farnell plc are responsible for: • designing, implementing and maintaining internal controls over information relevant to the preparation of the Selected Information that is free from material misstatement, whether due to fraud or error; • establishing objective Reporting Criteria for preparing the Selected Information; • measuring and reporting the Selected Information based on the Reporting Criteria; and • the content of the Greenhouse Gas Statement for the Group and the Annual Report and Accounts for the year ended 1 February 2015. Our responsibilities We are responsible for: • planning and performing the engagement to obtain limited assurance about whether the Selected Information is free from material misstatement, whether due to fraud or error; • forming an independent conclusion, based on the procedures we have performed and the evidence we have obtained; and • reporting our conclusion to the Directors of Premier Farnell plc. This report, including our conclusions, has been prepared solely for the Directors of Premier Farnell plc as a body in accordance with the agreement between us, to assist the Directors in reporting Premier Farnell plc’s performance and activities. We permit this report to be disclosed in the Annual Report and Accounts for the year ended 1 February 2015, to enable the Directors to show they have addressed their governance responsibilities by obtaining an independent assurance report in connection with the Selected Information. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors as a body and Premier Farnell plc for our work or this report except where terms are expressly agreed between us in writing. PricewaterhouseCoopers LLP, Chartered Accountants, Leeds 24 April 2015 38 Premier Farnell Employees Sustainable, profitable growth in line with our strategic objectives can only be achieved by a high performing, engaged workforce with the right knowledge and skills. We are also conducting a detailed review of our talent pipeline and building tailored executive assessment and development solutions. As we have evolved from catalogue distributor to a global multichannel business focused on supporting customers’ requirements, we have acquired and developed critical new skills within our employee base including eCommerce expertise and technical capability. Today, the Group has over 4,500 employees based in 38 countries with 100 eCommerce specialists and 300 technical engineers amongst its ranks. Diversity and inclusion With thousands of customers around the world, Premier Farnell is an organisation which values both diversity and inclusion. The Group is committed to employment policies which follow best practice and provide equal opportunities for all employees. Through its range of employee initiatives, described below, the Group seeks to attract and develop its people around the globe. Performance management Effective performance management plays an important role in enabling all of our employees to understand how they contribute to the success of the organisation. Our Group-wide performance review process has been instrumental in shaping our journey towards a high performance culture. All employees within our core businesses participate in our annual performance review process, which links each individual’s work with the Company’s strategic and operational objectives. The performance review process also incorporates development planning, providing an opportunity for individuals to focus on their ongoing professional and personal development. In addition to structured reviews, ongoing performance discussions throughout the year provide an ideal platform for engaging and motivating employees. In line with our continuous improvement philosophy, we also ensure that we equip our people managers with the necessary skills, such as coaching, to bring out the best in their teams. We reward and recognise employees based on their performance and contribution to the success of the business and provide both competitive and fair remuneration in every country and region in which we operate. Learning and development To respond to our strategic ambitions, we have redefined the behaviours we need from all colleagues in the business. Our ‘Leadership Standards’ will also allow us to review our learning and development options and make sure we support colleagues to have the skills to effectively deliver in their roles as well as developing capability for the longer term. Local, functional and global learning programmes are available for all levels of employees and are available through a blend of classroom training, e-learning, coaching, mentoring and direct on-the-job learning. We review needs at all levels on a regular basis and proactively look for solutions to ensure that optimal learning is achieved in every region of the world. We are fully supportive of the benefits of a diverse workforce and our employee base proudly reflects the diversity of the various countries in which we operate. We believe that this ensures richness in both business and culture and an organisation that truly reflects our global business presence. We continually seek to recruit, develop and employ throughout the organisation suitably qualified, capable and experienced people irrespective of age, race, ethnicity, gender, religion or sexual orientation. By ensuring diversity within our talent and leadership pool, we are also ensuring we build a future team that best reflects our client, investor and global employee base. Full and fair consideration is given to applications for employment for disabled persons, having regard to their particular aptitudes and abilities. Appropriate arrangements are made for the continued employment and training, career development and promotion of disabled persons employed by the Group. If members of staff become disabled, the Group continues employment, either in the same or an alternative position, with appropriate retraining being given if necessary. Mentoring We continue to provide a platform to connect high potential colleagues with mentors across every function and geography, ensuring the nurturing of a global culture. Mentoring continues to be a powerful tool for the development of our key and emerging talent pool with the senior team including internal, external and Board mentors. Employee communications and involvement The Group provides employees with relevant information, consulting them or their representatives regularly, so that their views can be taken into account when making decisions that are likely to affect their interests. Within the group of operating companies, employee involvement and engagement is encouraged at all times, to ensure that employees are informed on matters relating to our business performance. Our people have access to information about our business, strategy and operational performance through various internal communication channels. These include our global intranet, weekly newsletters, regular video broadcasts and various town halls, with local business context, content and translation where appropriate. Our ongoing business updates, through regular, consistent and open communication, are essential to 39 Annual Report and Accounts 2014/15 Gender diversity (as at 1 February 2015) % Board employees (8 members) SET (12 employees) Senior Management (177 employees) Entire organisation (4,554 employees) Male 87% 92% 76% 56% Female 13% 8% 24% 44% engaging our people by keeping them informed. Further communications resources have been added to support employee engagement throughout our proposed global reorganisation programme. Great place to work We are starting to re-energise our employment brand – investing to ensure that we can attract and retain the best possible talent for our global business. We continue to encourage culturally specific events that resonate with the local population. Share option scheme Our share option reward schemes extend across the business in all regions, motivating employees through share price growth. We strongly believe in including employees for participation in the Group’s performance by providing a stake in our future together. Our values Core values are central to the long term success of any organisation and bind it together with an operating framework for employees. At Premier Farnell we believe: • Customers and suppliers are at the heart of everything we do. • Only by working together can we deliver results. • We must innovate; learning and adapting faster than anyone else. • Developing our people is crucial to our success. The previous leadership structures for Akron Brass and the Other Distribution businesses (CPC & MCM) remain in place and report to the Chief Executive directly. Making a Difference Awards People throughout Premier Farnell embrace our values every day. As part of the Group’s commitment to encourage high performance, outstanding contributions made by our employees are recognised and rewarded during the year through our Making a Difference Awards. These awards are categorised, with winners recognised for their dedication to focusing on our customers and suppliers, innovation at work, collaborating with each other, and a People’s Choice award, voted for by colleagues around the business, to find an individual who exemplifies coaching in action. Employees and managers are encouraged to submit details of an individual or team that they feel has gone above and beyond their required duties. All these nominations are then reviewed by the regional senior management team who select which of their regional nominations they believe has delivered exceptional service to the organisation. Those selected in this regional process are then sent to the members of the senior leadership team from around the Group for review. All of the global winners receive special recognition and an award presented by the CEO. This year, Premier Farnell recognised 93 colleagues from around the globe through the Making a Difference Awards. • Integrity and Trust are fundamental to our culture. New Executive Teams Premier Farnell is constantly evolving to become a highly efficient, global business. The proposed reorganisation of the element14 businesses to an integrated global structure is a critical step on this journey. In June 2014, we appointed a new Executive team to lead the simplified organisation. Led by Laurence Bain, the Group’s Chief Executive, the new team includes Mark Whiteling, the Group’s Chief Financial Officer, global functional leaders for Sales and Marketing, Product and Suppliers, Supply Chains, and Technology, as well as global leaders for support functions including Human Resources and Legal. The new team holds one face-to-face meeting every month. Subject matter experts attend where relevant to the meeting agenda. Strategic Report The Strategic Report was approved by a duly authorised Committee of the Board of Directors on 24 April 2015 and signed on its behalf by: Mark Whiteling Chief Financial Officer 24 April 2015 40 Premier Farnell Corporate Governance Report Val Gooding, CBE Chairman The 2014/15 financial year has been a challenging period for Premier Farnell but one in which we took steps to position the Company for improved future financial performance. As Laurence outlined in the Strategic Report, we have begun our transformation to become the global destination for electronics customers. During the year we made investments to support this evolution, including acquiring AVID Technologies and completing the rollout globally of our new web platform. We also commenced the process to transform our regional element14 businesses to one global business, a move that will deliver a more efficient and effective organisational structure. The Board has been actively involved in overseeing this transformation, developing the Group’s strategy and assessing the Group’s performance. The Group’s financial progress this year against its key performance indicators reflected the transitional nature of the past year. The focus on strategic priorities to deliver growth, reduce costs and optimise performance gives the Board confidence that the Company will deliver improved performance in the future. 41 Annual Report and Accounts 2014/15 The Board has also undergone a number of significant changes during the year. First, in its composition, as valued Board members have come to the end of their tenure and new talent has been brought in. Secondly, through actions taken to enhance how the Board can best fulfil its role of providing leadership within a framework of prudent and effective controls. The new element14 operating model The executive team began discussing the next stage of Premier Farnell’s evolution during the first half of the financial year. As Laurence outlined in his CEO statement (page 2), the Board is confident that moving the element14 business to a global model where duplication is removed and a consistent strategy can be executed world-wide is the right approach to deliver the next phase of Premier Farnell’s journey. Led by the executive team, the operational structure will move away from regional delivery to one in which defined global functions concentrate on Group-wide implementation to improve efficiencies and provide a clear and cohesive proposition. During the financial year 2015/16, the Board will continue to monitor carefully the implementation of the operating model to ensure that it is capable of delivering the expected levels of performance and long-term value for shareholders. Premier Farnell employees Change brings opportunity but also uncertainty. For some, this engenders excitement but in others discomfort. As the Group drives forward in its transformation, I continue to be sincerely impressed by the commitment, professionalism and passion of Premier Farnell’s employees, many of whom I and other members of the Board have had the pleasure to meet personally during our time spent in the business. These Board visits are highly appreciated by the Non-Executives, giving them the chance to spend time with local personnel and find out more about market conditions and culture and the pressing issues for the business on the ground. Particular highlights from the year include Paul Withers spending time with staff at our distribution centre in Leeds and Andrew Dougal visiting the new Chicago offices where he received positive feedback from employees about the improved working environment there. In October 2014 I had the opportunity to go to our business in India where I was impressed with the dedication and enthusiasm of our team and encouraged by the results they are achieving. The quality of our people is a regular theme in the updates provided by Board members after each visit. On behalf of the Board, I would like to thank each of Premier Farnell’s 4,500 employees globally for all their hard work and commitment. Board developments The Board’s evolution is consistent with the UK Governance Code1 (the Code), and its own performance evaluation. As the Group’s strategic transformation gains pace, the Board calendar has been expanded to include an additional Board meeting in each year. The Board also held an offsite strategy day in June 2014, set to be an annual event. We focused on market trends, the competitive landscape and stakeholder expectations as well as the Group’s proposed strategy and early proposals for the element14 business reorganisation. A joint Board and Digital Advisory Board meeting took place in October 2014. Attended by all members of both Boards, the meeting provided a unique forum in which the Digital Advisory Board members provided updates on the latest trends in the digital environment and discussed with the Board where growth and market opportunities could be embraced. 1 Known as the Code in this report. For reference, a copy of the Code can be found on the FRC website (https://www.frc.org.uk). 42 Premier Farnell Corporate Governance Report continued Board appointments During the year several changes were made to the composition of the Board and another is anticipated in the year ahead. We welcomed one new Director to the Board while one of our longstanding and highly valued Board members stepped down as an independent Non-Executive Director and another will step down following our AGM in June. After serving as a Non-Executive Director for nine years, Andrew Dougal will also be standing down from the Board immediately after the Annual General Meeting in June 2015. Andrew has been a substantial contributor to the Board throughout his tenure. He and Dennis will be greatly missed and we thank them for their dedication and commitment and wish both every success for the future. On 1 November 2014 Gary Hughes joined us as a Non-Executive Director. Gary was appointed because of his considerable business experience and his financial expertise. A qualified and experienced chartered accountant, with a background in corporate finance, Gary also has the credentials required to take on the appointment of chairing the Audit Committee, following Dennis Millard’s retirement from the Board at the end of January 2015. Risk and governance Good leadership and effective governance are critical at all times, but never more so than during times of change. The Board, under my direction, is responsible for delivering the longterm success of the Company. It has overseen the development of the Company’s new operating model and will maintain this oversight of its implementation throughout 2015/16, ensuring that the Company remains vigilant against risk. Dennis Millard joined the Board as a Non-Executive Director in 2007 and during his time with the Board acted as the Group’s Senior Independent Director and Chairman of its Audit Committee. With his financial expertise and wealth of experience, Dennis has been invaluable as a member of the Premier Farnell Board. Paul Withers has significant experience with the Board and considerable knowledge of the Company and, as Chair of our Remuneration Committee, has forged good working relationships with a number of the Group’s shareholders. He was accordingly nominated and agreed to take on the role of Senior Independent Director from 1 February 2015. The effectiveness of the Board, its composition and skills continue to be regularly reviewed in order to meet these demands. Premier Farnell is committed to good corporate governance across the Group and the Board is accountable for this. The report which follows describes how, throughout the year ended 1 February 2015, the Group complied with the principles and provisions of the Code. There is more on the Company’s principal risks on pages 24 and 25 and its system of internal controls on pages 56 and 57. 43 Annual Report and Accounts 2014/15 Relations with shareholders As Chairman, it is my responsibility to ensure the Board is accessible to our major shareholders and aware of any concerns they may have. In this I am supported by the significant work of the Senior Independent Director and the Chairman of the Remuneration Committee (on matters relating to executive remuneration) and the regular dialogue that Laurence and Mark have with our institutional shareholders. During the financial year 2014/15, Paul Withers and I held individual meetings, in person and by phone, with shareholders at which issues such as strategy, succession planning and executive remuneration were discussed. We undertook extensive consultation on certain of our proposals on executive remuneration which are explored in more detail in the Remuneration Report on pages 63 and 64. The Company also held a capital markets day in October 2014 where investors were updated on our strategy. I consider this engagement with our shareholders as essential. By maintaining a good dialogue with shareholders, we ensure that our objectives are understood and receive feedback on our strategy, performance and governance. It also enables the shareholders to build confidence in the Board’s ability to oversee the implementation of the strategy and to know with whom to raise any concerns they might have. The feedback we have received from shareholders during the year under review reflects that the year has been one of challenge but that we have started on a journey which presents significant opportunity to the Company. I look forward to continuing this dialogue in 2015/16 – at our AGM, as well as in other forums. 2015/16 Priority The Board’s priority in 2015/16 is to focus on improving the Company’s financial performance by achieving better sales growth, reducing costs and transforming our business through the global reorganisation of element14. Val Gooding, CBE Chairman 44 Premier Farnell The Board of Directors Val Gooding* Laurence Bain Mark Whiteling Paul Withers* Gary Hughes* Experience brought to the Board Val has a wealth of international business and leadership experience, having held senior strategic and operational roles in a variety of businesses focused on customer service and served on the boards of a number of global quoted companies, charities and governmental organisations. Val was CEO of BUPA during a 10-year period of strong growth and global expansion and was a senior manager at British Airways, serving latterly as Director for Asia Pacific. Val has also served as a NonExecutive Director of Standard Chartered plc, J Sainsbury plc, the BBC, the Lawn Tennis Association, the Home Office, Compass Group plc, BAA plc and CWC Communications plc. Laurence joined the Board as Chief Operating Officer on 1 July 2003. Laurence has extensive leadership experience in electronics manufacturing and distribution. Before joining Premier Farnell in July 2002 as Chief Operating Officer, Laurence was Vice President and Director of Operations for Motorola in Europe, Middle East and Africa. He was Chief Operating Officer of Premier Farnell from July 2002 until his appointment as CEO. Mark has considerable financial and commercial experience in the global distribution and electronics industries. Mark was Premier Farnell’s Chief Financial Officer and a member of the Board from 2006 to 2011, re-joining the Company in November 2012 in an expanded role. From August 2011 to November 2012 he was Chief Financial Officer of Autobar Limited. Before joining Premier Farnell in 2006 Mark was Group Finance Director of Communisis plc and, prior to that, of Tibbett & Britten plc. Mark formerly held the position of Non-Executive Director and chairman of the Audit Committee at Future plc. Mark is a chartered accountant. Paul has considerable experience of business expansion and operations in developing markets, particularly Asia, which is valuable to the Company as it continues its international expansion. Paul was formerly Group Managing Director of BPB plc, where he led their Emerging Markets operations. Paul’s extensive Board experience and the interaction he has with the Company’s shareholders in his role as chair of the Remuneration Committee made him the ideal candidate to take over from Dennis Millard as Senior Independent Director. Gary is a chartered accountant with extensive experience in financial and operational roles. Gary was formerly Chief Financial Officer of Gala Coral Group, Chief Executive Officer of the largest operating division of United Business Media plc and Group Finance Director of Emap plc. Gary’s background in finance and global business experience made him ideally placed to take over from Dennis Millard as Chairman of the Audit Committee on Dennis’s retirement. Committees Nominations (Chairman). Nominations. Committees: Remuneration (Chairman), Audit and Nominations. Audit (Chairman from 1 February 2015), Remuneration and Nominations. Other appointments Non-Executive Director of Vodafone Group Plc and TUI Travel plc, Trustee of Historic Royal Palaces, The Royal Botanic Gardens, Kew and the English National Ballet. Non-Executive Director of Devro plc and Senior Independent Director of Keller Group plc. Senior Member of the Operational Excellence team at Apax Partners LLP and a NonExecutive Director of J Sainsbury plc, Matomy Media Group plc, Smart Technologies Inc, The People’s Operator Plc and SECC Limited CBE Aged 64 Non-Executive Chairman since 15 June 2011. * Denotes Non-Executive Director Recent Board retirements: Dennis Millard (31 January 2015) CA Aged 61 Chief Executive Officer since 12 June 2012. M.COMM (HONS) Aged 52 Chief Financial Officer since 5 November 2012. Non-Executive Director of Hogg Robinson Group plc. MA Aged 58 Non-Executive Director since September 2007. Chairman of the Remuneration Committee and, from 1 February 2015, Senior Independent Director. Aged 52 Non-Executive Director since 1 November 2014. Chairman of the Audit Committee from 1 February 2015. 45 Annual Report and Accounts 2014/15 Thomas Reddin* Peter Ventress* Andrew Dougal* Steven Webb Tom’s primary areas of expertise are in marketing, branding and digital innovation. Tom’s extensive experience in these areas makes him well-placed to chair the Digital Advisory Board. Tom was formerly Vice President of Consumer Marketing at Coca-Cola USA and President, COO, and ultimately CEO, of LendingTree LLC, a market leader in webbased lending. Peter has broad international experience in the B2B environment. Prior to joining Berendsen in 2010, he was International President of Staples Inc and also spent 10 years in senior management positions with Corporate Express N.V., becoming Chief Executive in 2007. During his roles at Corporate Express and Staples, Peter was also a NonExecutive Director of Corporate Express Australia Ltd. Having served on the Board for nine years, Andrew is standing down in June 2015. Andrew has significant leadership experience in finance, operational and strategic roles. Formerly he served as Chief Executive Officer of Hanson plc, the international building materials company, following its demerger from Hanson plc, the Anglo American diversified industrial company where he had been Group Finance Director. Previously Andrew was a NonExecutive Director of Taylor Wimpey plc, Taylor Woodrow plc and BPB plc. Steven is a qualified lawyer with a specialism in company law and has served the boards in a number of regulated and non-regulated business and consumer industries. Before joining Premier Farnell, he was the Company Secretary and General Counsel of Kelda Group plc (formerly Yorkshire Water) and Company Secretary of Kalon Group plc. During the year under review Steven served as acting Chair of the Board of Governors of Leeds Beckett University. Nominations. Audit, Remuneration and, from 17 March 2015, Nominations. Audit, Remuneration and Nominations. Non-Executive Director of Asbury Automotive Group Inc., Deluxe Corporation and Tanger Factory Outlet Centers Inc. He is a Managing Partner of Red Dog Ventures, LLC, a venture capital and advisory firm in the digital arena, and also publisher of MortgageRates.us. Chief Executive Officer of Berendsen plc. Non-Executive Director and Chair of the Audit Committee of Carillion plc, Senior Independent Director and Chair of the Audit Committee of Creston Plc and Council Member of the Institute of Chartered Accountants of Scotland (ICAS). Andrew joined the Board of Victrex plc as a NonExecutive Director in March 2015. BSc, MBA Aged 54 Non-Executive Director from September 2010 and chair of the Digital Advisory Board. Aged 54 Appointed as a Non-Executive Director with effect from 1 October 2013. B Acc, CA Aged 63 Non-Executive Director from September 2006. LLB Solicitor Aged 52 Appointed as Company Secretary and General Counsel in December 2000. Member of the Board of Governors and Audit Committee of Leeds Beckett University. 46 Premier Farnell The Board of Directors continued Non-Executives (6) Fulfilled by Role/Remit Whose responsibilities are divided as follows: Val Gooding Chairman of the Board leading the Board to ensure effectiveness in all aspects of its role • ensure the membership of the Board is appropriate to meet business needs • oversee that the Board Committees carry out their duties • establish appropriate personal objectives for the Chief Executive • promote an open culture of debate, and • develop and maintain effective communication with shareholders Paul Withers SID* acting as deputy to the Chair of the Board • provide a line of communication to the Company for shareholders • lead the resolution of any significant Board issues that are not appropriate for the Chair or the CEO to handle • act as a sounding board for the Chairman, and • lead the other Non-Executive Directors in their annual appraisal of the Chairman’s performance Andrew Dougal Non-Executive Director Gary Hughes Non-Executive Director constructively challenging and helping develop proposals on strategy • scrutinise performance of management in meeting goals and objectives operational execution of the strategy • run the day-to-day business and operations of the Group • satisfy themselves on the integrity of financial information and that financial controls and systems are robust and defensible • determine appropriate levels of remuneration for Executive Directors, and • lead the process to appoint and remove Executive Directors and ensure adequate succession plans are in place Tom Reddin Non-Executive Director Peter Ventress Non-Executive Director Executives (2) Laurence Bain CEO • lead the development and delivery of strategy to enable the Group to meet the requirements of its shareholders • lead and oversee the executive management of the Group • meet the Group’s budget and strategic plans, and • provide the appropriate environment to recruit, engage, retain and develop the personnel needed to deliver the strategy Board support Mark Whiteling CFO execution of financial • support the CEO in developing and delivering the strategy and deliverables in driving financial and operational performance Steven Webb Company Secretary supporting the Chairman, the Board and its Committees • ensure good information flows within the Board and its Committees and between senior management and Non-Executive Directors • facilitate Director inductions and professional development • as requested, arrange independent professional advice for Directors at the Company’s expense, and • advise the Board through the Chairman on governance matters * Paul Withers appointed as SID from 1 February 2015. Dennis Millard held the role of SID throughout the year under review. 47 Annual Report and Accounts 2014/15 How is the Board made up? Board of Premier Farnell plc Val Gooding Chairman of the Board Nominations Committee* Audit Committee* Remuneration Committee* Chairman: Val Gooding Chairman: Gary Hughes Chairman: Paul Withers Andrew Dougal, Gary Hughes, Thomas Reddin, Paul Withers, Peter Ventress, Laurence Bain Nominations Committee report p52 Andrew Dougal, Peter Ventress, Paul Withers Andrew Dougal, Peter Ventress, Gary Hughes Audit Committee report p54 Remuneration Committee report p62 Digital Advisory Board** Chairman: Tom Reddin Objective: to offer counsel to the Board and the Chief Executive Officer on matters relating to the web, eCommerce and the digital arena Disclosure Committee** Chairman: Steven Webb Objective: to assist the Board in ensuring disclosures are fair, accurate and complete Tax and Treasury Committee** Chairman: Mark Whiteling Objective: to make recommendations to the Board on tax and treasury strategy and policy * A committee of the Board ** Not a formal committee of the Board but provides advice and/or information to the Board What are its responsibilities? What does it not do? • It is collectively responsible for the long-term success of the Group and delivering sustainable shareholder value. • It reviews strategic issues and sets strategy. • Led by Laurence Bain, the executive team are responsible for presenting to the Board proposals on strategic direction and business development. • It exercises control over the performance of the Company by agreeing budgetary targets and monitoring performance against those targets. • The Board reviews and challenges these proposals so that informed decisions are reached. • It is responsible for internal controls and risk management. • The executive team are responsible for implementing these decisions and for day to day operations and performance. • It sets values and standards, including good governance, sustainability, integrity and ethical conduct for adoption throughout the Group as a whole. 48 Premier Farnell The Board of Directors continued How did it work in 2014/15? There is a formal schedule of matters reserved for Board approval which covers items that are significant to the Group as a whole due to their strategic, financial or reputational implications. There is also a rolling schedule of agenda items to be brought to the Board in each year. The matters reserved are reviewed annually and the rolling agenda at each meeting to ensure they remain up to date and appropriate. In 2014/15 there were nine Board meetings of which six were formal scheduled meetings, two were to review market conditions and business performance and approve the Matter Strategy and Management release of the Group’s interim management statements and one was to deal with ad hoc matters arising. At each scheduled meeting the Board receives a report from the CEO and CFO on business performance and market conditions and, at most scheduled meetings, a presentation and question and answer session with a business or functional leader on their business or function. In addition to these reports and other matters arising for review by the Board, the following matters were dealt with at Board or Committee meetings in the year: Actions undertaken during the year • Set the Group’s strategic plans including the approval of the element14 operating model and the annual business plans for all business units • Kept under review management and business performance • Received feedback on and discussed with the Company’s brokers the market perception of the Company • Reviewed HR strategy and leadership succession planning • Received inputs on the digital arena in which the Company operates • Reviewed the Company’s sustainability and health and safety record and practices Corporate Governance and Communication • Reviewed compliance with the principles and provisions of UK Corporate Governance Code and good governance practice generally • Resolved on the Company’s approach to a number of changes in corporate reporting requirements • Ensured the maintenance of a sound system of internal control and risk management (further information included in the Audit Committee update on page 57) • Kept under review the Group’s high level risks • Approved resolutions to be put to shareholders at general meeting Board membership and committees • Approved appointments to and removals from the Board and its Committees including the appointment of Gary Hughes (for further details see page 53 of the Nominations Committee report) • Approved the terms of reference of Board Committees (http://www.premierfarnell.com/investors/board-committees). • Undertook a formal and rigorous performance evaluation and received updates on the outcome of previous reviews (page 49) Financial and Contracts • Reviewed and approved all financial announcements • Reviewed and approved various elements of the Group’s banking and finance arrangements, including the refinancing of the Group’s banking and private loan facilities • Reviewed and approved (as appropriate) various capital projects, investments and contracts of material value • Responsible for the approval of business acquisitions and disposals including the acquisition of AVID Technologies Inc (for further details about the AVID Technologies Inc acquisition see page 21 of the Strategic Report) • Considered and reported on the position of the Group as a going concern • Set the Group’s insurance strategy • Reviewed and approved the Group’s tax management and planning Policies and Procedures • Considered and approved the Company’s share dealing code • Approved procedures for the detection of fraud and the prevention of bribery • Approved the Group’s treasury policies • Approved the Company’s policies on non-audit services • Reviewed and approved the Directors’ expenses and travel policy 49 Annual Report and Accounts 2014/15 How well were the meetings attended? Board meetings Audit Committee meetings Remuneration Committee meetings Nominations Committee meetings 9/9 – – 2/2 Laurence Bain 9/9 – – 2/2 Mark Whiteling 9/9 – – – 2/2 Name of Director Chairman: Val Gooding Executive Directors: Non-Executive Directors: Andrew Dougal 9/9 4/4 5/5 Gary Hughes1 3/3 1/1 1/1 – Dennis Millard2 9/9 4/4 4/5 2/2 Thomas Reddin 9/9 – – 2/2 Paul Withers 9/9 4/4 5/5 2/2 Peter Ventress3 9/9 4/4 5/5 – – Not a member of the Committee (or not a member at the date of the relevent meetings). 1Gary Hughes joined the Board on 1 November 2014 and attended all Board and Committee meetings convened following his appointment to the Board and the relevant Committees. 2 Dennis Millard was unavoidably absent from the December Remuneration Committee meeting due to a prior commitment. He provided feedback on the papers, points for discussion and questions prior to the meeting, with apologies for his inability to attend. 3 Peter Ventress was appointed to the Nominations Committee on 17 March 2015. What does the Board think it can do better? A rigorous evaluation of the effectiveness of the Board, its Committees and each individual Director is conducted every year. In line with the Code, this process is externally facilitated in every third year, the last being 2012/13. In 2013/14 the evaluation determined the following: 2013/14 Performance review Outcome Action taken during the year Board and Committee agendas to be revised to enable increased focus on strategic issues and reduce time spent on routine matters The Chairman of the Board and the Company Secretary set agenda items to align with strategic priorities and financial events Each Board paper to include an executive summary and clearly identify key issues. Length of papers to be reviewed to ensure appropriate focus maintained The Company Secretary issued revised Board paper guidelines to contributors to clarify management’s view of key issues for Board consideration A full day meeting to be held each year to specifically review strategy The annual strategy day for 2014/15 was held in June 2014 More frequent feedback on the functioning of the Board Each Board meeting was ended with an informal discussion of what worked well and areas for improvement 50 Premier Farnell The Board of Directors continued In June 2014, for the financial year 2014/15, an internal Board evaluation took place led by Val Gooding. All Board members contributed to the appraisal of the performance of individual Directors, by way of a questionnaire, and the Chairman met each Director in order to provide him with feedback on his performance from the rest of the Board, discuss contribution and personal development requirements and consider wider approaches to enhance or refresh Board processes. The SID took feedback from the other Board members on the performance of the Chairman and discussed this with her. The recommendations made by each Board member were discussed in an open forum by the Board at the January 2015 meeting and the outcomes of the evaluation and resulting actions agreed. These were (in summary): 2014/15 Performance review Outcome Action planned and taken during the year Further refinement of Board papers is required. Papers should be concise and focus on strategic rather than tactical issues The Chairman of the Board and Chief Executive Officer agreed that papers will focus on strategic matters for discussion and decision The Board should consider holding NED only sessions at the end, rather than the start, of Audit Committee meetings The ordering of Audit Committee agendas has been revised by the Chairman of the Audit Committee and the Company Secretary The 2015/16 Board evaluation is to be externally facilitated The Chairman of the Board is to appoint an external facilitator ahead of the 2015/16 Board evaluation The Board should hold a full strategy day off-site each year to focus on strategic issues, shareholder value and business performance A strategy day is scheduled for 17 June 2015 Refreshing of the Board is to continue as vacancies arise The Chairman of the Board and Nominations Committee will continue to develop role specifications and as required search for prospective candidates to be recommended to the Board The Board requires greater insight into the Group’s technology function The Executive Directors are to provide the Board with regular updates on the Group’s technology function In addition to this rigorous evaluation process, the Board also takes time after each scheduled Board meeting to consider less formally what went well and whether the way the Board operates could be improved in any way. Do the Directors commit enough time to the Company? Any Director is obliged to seek authorisation before taking up any position that conflicts, or may possibly conflict, with the interests of the Company. The Board is empowered to authorise situations of potential conflict of interest, where it sees fit, so that a Director is not in breach of his or her duty. All existing external appointments and other such ‘situational conflicts’ of each Director have been reviewed and authorised by the Board and are recorded on a register which is reviewed annually and noted at each Board meeting. All Directors must ensure that their external appointments do not involve a time commitment that would adversely affect their responsibilities to Premier Farnell. If a conflict were to arise in relation to a transaction or other arrangement proposed between the Company and a party in which any Director had an interest, that Director would be obliged to declare the interest, would not receive Board papers and would take no part in any discussions or decisions on the matter. Premier Farnell recognises that there are significant advantages to both individuals and to the Board when our Directors serve on the boards of other companies. In line with the Code, the Company’s policy is that Executive Directors are permitted to hold one non-executive directorship with another company, with all external appointments being approved by the Board. On 30 November 2014, Mark Whiteling stood down from his position as Non-Executive Director and Chairman of the Audit Committee at Future plc in order to accept an appointment as a Non-Executive Director of Hogg Robinson Group plc on 1 December 2014, with the Board’s approval. Details of the remuneration for these external appointments are in the Remuneration Report on page 82. Val Gooding stepped down from her role as Non-Executive Director of the Home Office on 30 April 2014 and was appointed as a Trustee of The Royal Botanic Gardens, Kew on 1 October 2014. In 2014/15, all Directors committed an appropriate amount of time to fulfil their duties and responsibilities to the Board. Are the Non-Executive Directors independent? The Board considers each Non-Executive Director’s independence on an annual basis as part of his or her performance evaluation. In its 2014/15 review, the Board concluded that all the Non-Executive Directors who had served during the year were independent in accordance with the provisions set out in the Code. The Chairman met the independence criteria defined by the Code as at the date of her appointment. 51 Annual Report and Accounts 2014/15 In compliance with the Code, all of our Directors will retire at our Annual General Meeting in June 2015 and offer themselves for re-election (save for Gary Hughes who will seek election as this is his first year as a Non-Executive Director with the Company). Appointed on Start date for current term Andrew Dougal 01/09/2006 17/06/2014 (one year) Dennis Millard* 01/09/2007 17/06/2014 (one year) Name Paul Withers 01/09/2007 17/06/2014 (one year) Thomas Reddin 30/09/2010 18/06/2013 (three years) Val Gooding 15/06/2011 17/06/2014 (three years) Peter Ventress 01/10/2013 01/10/2013 (three years) Gary Hughes 01/11/2014 01/11/2014 (three years) Non-Executive Directors are appointed for specified terms, subject to re-election, and terms beyond six years are subject to rigorous review. Accordingly, Non-Executive Directors are appointed for a maximum of two terms of three years and thereafter annually subject to satisfactory performance and commitment. The respective periods of service of our Non-Executive Directors (including the Board Chairman) during 2014/2015 are: 2013 2014 2015 2016 2017 2018 * Dennis Millard stood down on 31 January 2015. How do they get to know and keep up to date with the business? All Directors receive a comprehensive induction. On his appointment in November 2014, Gary Hughes commenced a tailored induction programme which includes: • an overview of the Group, its functions and governance; • briefings on Directors’ regulatory and compliance responsibilities; • site visits to Group locations (with Leeds and Chicago planned for 2015); • detailed reviews of the strategic projects and initiatives underway; and • one-to-one meetings with the executive management team and other key personnel. To further their understanding of the Group and enhance constructive challenge, Non-Executive Directors are encouraged to visit Group locations and spend time with local personnel. During the year under review, visits have taken place to our facilities in Cleveland (USA), Chicago (USA), Ohio (USA), Bangalore (India) and Leeds (UK). The Board held its December meetings at CPC in Preston, UK enabling Non-Executive Directors to meet the management team there and review business performance. Each scheduled Board meeting includes a review and discussion of the Group’s businesses and the majority of scheduled meetings include a presentation by a business or functional leader of his or her area of responsibility. The Board also spends time and has regular correspondence with the executive management team; in 2014/15, this included at the joint Board and DAB meeting. The Board’s annual performance evaluation is used by the Chairman to assess the time commitment and the training and development needs of each Director. 52 Premier Farnell Nominations Committee Report Nominations Committee Report Val Gooding Nominations Committee Chairman Who else is on the Committee? -- Andrew Dougal -- Laurence Bain -- Gary Hughes (from 1 February 2015) -- Dennis Millard (to 31 January 2015) -- Thomas Reddin -- Peter Ventress (from 17 March 2015) -- Paul Withers Committee Secretary: Steven Webb As recommended by the Code, the Committee comprises a majority of independent Non-Executive Directors. The Chief Executive Officer is also a permanent member. While only members of the Committee have the right to attend meetings, the Chief People Officer and external advisors may also be invited to contribute on specified agenda items. If the Committee is convened to discuss the Board Chairman’s position, the Senior Independent Director chairs the meeting. What does it do? Key objective: To lead a formal, rigorous and transparent process for the appointment of new Directors to the Board and its Committees. Responsibilities: • To review the composition of the Board including its balance of skills and experience • To lead the process for Board appointments and recommend the appointment of new Directors • To review the re-appointment of Non-Executive Directors • To make recommendations on the composition of the Board’s Committees • To consider succession for senior executive positions The Committee’s terms of reference are reviewed annually and are available on the Governance section of our website at www.premierfarnell.com. 53 Annual Report and Accounts 2014/15 What did the Committee do during the year under review? The Committee meets when necessary and was convened twice during the financial year to consider Board, Committee and Executive appointments, Directors’ tenure, succession and Board composition. Directors’ re-appointment and re-election In 2014, the Committee met to consider the re-appointment of Andrew Dougal, Paul Withers and Dennis Millard as Non-Executive Directors and Val Gooding as Non-Executive Chairman of the Board. Following a rigorous review, the Committee recommended to the Board that all three Non-Executive Directors each be reappointed for a term of one year from June 2014, and that the Chairman of the Board be reappointed for an additional three year term1. Dennis Millard has since retired and Andrew Dougal announced his intention to retire at the end of his current term. All Directors will continue to be considered for annual re-election or appointment at every AGM provided they demonstrate commitment and effective performance. Review of diversity The Nominations Committee recognises the benefits to the Group of diversity in the workforce and in the composition of the Board itself. It is the Company’s policy (whether it be at employee or Board level) to make all appointments based on the best candidate for the role regardless of gender or other diversity. In recognition of the benefit of greater female representation at all levels, the Group targets women to make up 30% of management grade employees. Women currently make up 24% of senior management positions and 8% of the senior executive team, while female membership of the Board stands at 13%. The proportion of women at both the executive team and Board level is below target and will continue to be a factor in future appointments. There is further information on the Company’s policy and practices on diversity on page 38 of the Strategic Report. 1 Subject to re-election at the Annual General Meeting in each year. Succession planning Succession planning is a key remit of the Committee and is reviewed regularly for the Board as a whole, the Board Committees and the wider leadership of the organisation. Membership of the Board and Committees was considered as part of the annual evaluation and re-election process in 2014/15. Laurence Bain presents annually to the Board on succession planning for the executive team, ensuring that there is a pipeline of prospective candidates for all senior executive positions. Appointment of Gary Hughes During the year the Nominations Committee recommended the appointment of Gary Hughes as an additional NonExecutive Director. Before starting the search for a new member, the Nominations Committee evaluated the desired qualities for the appointment by reviewing the balance of skills, experience, independence and knowledge of the Board. Given Dennis Millard’s stated intention to retire in January 2015, it was agreed that candidates must have the requisite experience (including recent and relevant financial experience) necessary to chair the Audit Committee. Catalyst Advisors (an agency with no connection to the Company) was appointed to help with the search and put forward candidates for interview by Val Gooding and Laurence Bain. Candidates also had the opportunity to meet Paul Withers and other Board members. From the shortlist of interviewed candidates, Gary Hughes was chosen for appointment due to his extensive business and broad non-executive board experience and for his financial acumen. Gary formally joined the Board on 1 November 2014 and attended his first face to face Board meeting in December 2014. 54 Premier Farnell Audit Committee Report Audit Committee Report Gary Hughes (from 1 November 2014, Chairman from 1 February 2015) Who else is on the Committee? What does it do? Committee Secretary: Steven Webb Responsibilities: • To review accounting policies and the integrity and content of the financial statements -- Dennis Millard (Chairman) to 31 January 2015 -- Andrew Dougal -- Peter Ventress -- Paul Withers Gary Hughes is a qualified chartered accountant, with a background in corporate finance, who brings to the role of Chairman of the Committee recent and relevant financial expertise from both his executive and non-executive appointments. Gary is supported by three independent Non-Executive Directors, all of whom have considerable recent financial experience. Further details on the Committee members’ experience can be found on pages 44 and 45. Other regular attendees at scheduled meetings include the Chief Executive, the Board Chairman, the other NonExecutive Directors, Chief Financial Officer, Head of Internal Audit and lead external audit partner. Committee members regularly take time before or after a meeting, without any Executive Directors or senior management present, to raise any questions and discuss issues with the external auditor or Head of Internal Audit. The Chairman of the Audit Committee meets each of the CFO, Head of Internal Audit and the external auditor separately to review current issues and developments prior to each meeting of the Audit Committee. The Head of Internal Audit reports directly to the Chief Financial Officer for line management purposes and functionally to the Chairman of the Audit Committee. Key objective: To ensure that the interests of shareholders are properly protected in relation to financial reporting and internal controls. • To monitor disclosure controls and procedures and the Group’s internal controls • To consider the adequacy and scope of external and internal audits • To oversee the appointment and ongoing relationship with the external auditor • At the Board’s request, to provide advice on whether the Annual Report and Accounts, taken as a whole, is fair balanced and understandable • To monitor the objectivity, independence and effectiveness of the external auditor, particularly with regard to the scope and expenditure on non-audit work • To review and approve the statements to be included in the Annual Report on internal control and risk management • To review and report on the significant issues considered in relation to the financial statements and how these have been addressed Annual Report and Accounts 2014/15 The Committee’s terms of reference are reviewed annually and are available on the Governance section of our website at www.premierfarnell.com. What did the Committee do during the year under review? The key activities for the Committee in 2014/15 were: Assessed and approved the audit process In accordance with the Code, the Committee monitored the effectiveness of both the internal audit and external audit functions – including the performance of the lead audit partner and Head of Internal Audit. The Committee reviewed and commented on the internal and external audit plans before they were approved. It considered progress during the year, assessing the auditor’s principal findings and taking feedback from management involved in the audit process. Having concluded their review in 2014/15, the Committee considers the external auditor to be independent, objective and effective in its role. Accordingly, the Committee intends to recommend to the Board that PricewaterhouseCoopers LLP are proposed for reappointment as the Company’s external auditor at the June 2015 Annual General Meeting. The Committee also considers internal audit to be effective in appraising the implementation and monitoring of internal controls and risk management. The Committee plans to put the Group’s requirement for audit services out to tender once in each ten year period, in accordance with the Code, FRC guidance and relevant EU legislation requiring mandatory audit tenders for all listed companies. The tender will coincide with the rotation of the lead audit partner which takes place every five years. The next rotation – and audit tender – is scheduled for 2017/2018. PricewaterhouseCoopers LLP were first appointed as the Group’s auditor in 1997. Monitored non-audit services The independence and objectivity of the external auditor was also considered by the Committee, as it is each year, with particular regard given to the level of non-audit fees. A formal policy is maintained on the provision of non-audit services which prohibits the provision of services such as financial information systems design and implementation, internal audit outsourcing or legal services and permits tax compliance services and certain audit-related services within defined monetary limits. All other permitted non-audit services are considered on a case by case basis by the Chair of the Audit Committee on behalf of the Committee. The full non-audit services policy is available in the Board Committees section of our website. At each meeting, the Audit Committee received a report on all non-audit services provided and the estimated cost since the last meeting. The Audit Committee monitors these costs in the context of the audit fee for the year, to ensure that the potential to affect auditor independence and objectivity does not arise. 55 The split between audit and non-audit fees for 2014/15 and information on the nature of the non-audit fees incurred is detailed on page 107 of the Consolidated Financial Statements. The Audit Committee has adopted and implemented a Group-wide policy restricting the employment by the Group of former employees of the external auditor. Reviewed the integrity of financial statements In addition to the Committee’s responsibility to review the Annual Report at the request of the Board, the Committee also monitors the integrity of all financial statements in the Annual Report and half year results statement and the significant financial reporting judgements contained in them. The Company Secretary reports to the Committee on the proceedings of each Disclosure Committee meeting which reviews the interim and preliminary results announcements following management verification, seeks assurance on management sign-offs and assesses the principal risks and uncertainties facing the business. Further details of the Committee’s processes to review the effectiveness of the Group’s systems of internal control during the year can be found in Risk management and internal control below. Determined the significant issues affecting the Group The Committee recognises that all financial statements include estimates and judgements by management. The key audit areas are agreed with management and the external auditor as part of the year-end audit planning process. This includes an assessment by management at both a business unit and Group level of the significant areas requiring management judgement. These areas are reviewed with the auditors to ensure that appropriate levels of audit work are completed and the results of this work are reviewed by the Committee. In 2014/15 these areas were: 1. Inventory and inventory valuation Consolidated Group inventories as at the year end were £260.9m. The accounting policy in respect of inventory and the valuation of inventory, is set out in the Accounting Policies note to the Group’s financial statements on page 102. The Group’s provisioning policy is generally applied on a consistent, systematic basis recognising the level of sales and level of inventory at the period end. The review of this calculation, its accuracy and the appropriateness of the end result with respect to the requirement to provide against slow moving and obsolete inventory was reviewed in detail. The history of inventory write-offs beyond the provision made at the year end is very low, reflecting the operating procedures of the Group and the commercial relationships in place with its supplier partners and, as such, management continues to believe that the systematic application provides a result which is consistent with its judgement on the provision required. The Audit Committee agrees with this assessment and considered, as part of this assessment, the potential impact of a move to a more global operating model and the changing inventory profile for the Group. 56 Premier Farnell Audit Committee Report continued 2. Adjusted items and profit and loss treatment In the first and second half the Group reported adjusting items. The details of these adjusted items are set out in note 2 of the financial statements. Management believe that this presentation is consistent with the fair, balanced and understandable requirement and, as such, have presented these items in this way. The Audit Committee agree with this assessment. 3. Tax accounting The Audit Committee has reviewed the tax position of the Group with both management and the auditor. The time lag between the Company’s financial statements and the finalisation of tax matters inevitably requires management judgement. The provision made reflects the latest view of the anticipated outcome, as well as the best estimate of the probable outcome, following filing of the tax returns for the relevant financial periods. 4. Going concern The Audit Committee has considered the ‘Going Concern’ basis assumed within the financial statements. The underlying assumptions, the reasonableness of those assumptions and the comparison of those assumptions versus previous years were all considered as part of the Going Concern review. In addition, this review encompasses a sensitivity analysis to exchange rate fluctuations, among other risks, as well as ranges of potential outcomes versus planned budgetary performance. In forming its view, the Committee considered the range of potential actions available to the Group to improve the cash generation over the coming period. This included an assessment of the robustness of working capital improvement plans, scale of planned capital expenditure and, more broadly, the efficiency of the Group’s balance sheet. The year-end position for net debt as well as known funding facilities at year end also impacts this assessment. The Committee agrees with these assumptions and the adoption of the ‘Going Concern’ basis for the preparation of the financial statements. Although there has been no change in the significant accounting issues affecting the Group this year compared to the prior year, the Committee reviewed other areas of judgement as part of its normal review process. The Committee is satisfied with the judgements in these areas and that sufficient audit work has been undertaken to support management’s position in other areas of the financial statements. Reviewed the effectiveness of risk management and internal controls One of the Board’s key responsibilities is to satisfy itself that management maintains a system of internal control which provides assurance of effective and efficient operations, internal financial controls and compliance with law and regulation. The Board’s consideration of the materiality of financial and other risks to the Group’s business and reputation ensures that appropriate controls are in place. Consideration is also given to the relative costs and benefits of implementing specific controls. A full overview of the Group’s principal risks, uncertainties and opportunities can be found on pages 24 and 25 of the Strategic Report. Assurance On behalf of the Board, the Audit Committee examines the effectiveness of: • the Group’s systems of internal control, primarily through approving the internal audit plan and reviewing its findings, reviews of the financial controls for financial reporting of the annual, preliminary and half yearly financial statements and a review of the nature, scope and reports of external audit; • the management of risk by reviewing evidence of risk assessment activity and internal audit reports on the process; and • any action taken to manage critical risks or to remedy any control failings or weaknesses identified, ensuring these are managed through to closure. The Audit Committee has completed its review of the effectiveness of the Group’s systems of internal control for the year under review, which is in compliance with the Turnbull Guidance on Internal Control published by the FRC. It confirms that the necessary action plans to remedy identified weaknesses in internal control are in place and have been throughout the year. Where appropriate, the Board also ensures that necessary actions have been, or are being, taken to remedy or mitigate significant failings or weaknesses identified from the review of effectiveness of internal controls. The Audit Committee confirms that no significant failings or 57 Annual Report and Accounts 2014/15 weaknesses were identified as part of the review process. The Group’s internal controls over the financial reporting and consolidation processes are designed under the supervision of the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the Group’s published financial statements for external reporting purposes in accordance with IFRS. Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance and may not prevent or detect all misstatements whether caused by error or fraud. The Group’s internal controls over financial reporting and the preparation of consolidated financial information include policies and procedures that provide reasonable assurance that transactions have been recorded and presented accurately. Finance officers of subsidiary businesses of the Group are required to certify that the financial information they have provided as part of the annual consolidation process has been properly prepared and reviewed in accordance with instructions from the Group Finance Department. Management regularly conducts reviews of the internal controls in place in respect of the processes of preparing consolidated financial information and financial reporting. During the year ended 1 February 2015, there were no changes to the internal controls over these processes that have affected, or are reasonably likely to materially affect the level of assurance provided over the reliability of the financial statements. Risk management and internal control system features Risk management system Internal control system As well as the risks that management identify through the ongoing processes of reporting and performance analysis, the Audit Committee has additional risk identification processes, which include: The internal controls which provide assurance to the Committee of effective and efficient operations, internal financial controls and compliance with law and regulation include: • Risk and control process for identifying, evaluating and managing major business risks. Coordinated by the Head of Internal Audit • Formal authorisation process for investments • Internal and external audit reports which comment on controls to manage identified risks and identify new ones • A confidential whistle-blowing helpline and an email address available for employees to contact the CEO in confidence • A quarterly compilation of all contingent liabilities identified by the business. The report is reviewed by the Disclosure Committee and then by the Audit Committee • The Tax and Treasury Committee which identifies and manages the Group’s risks for tax and treasury and provides implementation updates to the Audit Committee • An organisational structure with clearly defined authorities for financial management and maintenance of financial controls • The Code of Conduct which outlines the expected standards of business compliance and behaviour. This Code is a formal part of the employee induction process • The anti-bribery and corruption (‘AB&C’) policies and procedures and dedicated employee email • The comprehensive financial review cycle where the annual budget is approved by the Board and monthly variances are reviewed against detailed financial and operating plans • The Disclosure Committee where senior management review and sign off business unit internal controls, including financial, compliance and operational controls • A process of internal control self-assessment coordinated by the Internal Audit team The statement of Directors’ responsibilities in relation to the preparation of the Annual Report and Accounts is on pages 60 and 61 of the Directors’ Report. 58 Premier Farnell Directors’ Report The Directors of Premier Farnell plc present their report and the audited financial statements of the Group and Company for the year ended 1 February 2015. The Directors’ Report comprises these pages (58 to 61) and the other sections and pages of the Annual Report crossreferred below which are incorporated by reference. As permitted by legislation, certain disclosures normally included in the Directors’ Report have instead been integrated into the Strategic Report (pages 2 to 39). These disclosures include information relating to future business developments (references throughout the Strategic Report) and the Group’s principal risks and uncertainties (pages 24 and 25). What profit was made during the year? The Group’s total operating profit for the financial year was £83.1 million (2013/14: £91.5 million) and its adjusted operating profit was £88.0 million (2013/14: £93.0 million). Current year adjusting items comprise restructuring costs of £5.1 million, a net gain on the disposal of certain US property of £0.3 million and acquisition costs of £0.1 million. Profit attributable to owners of Premier Farnell plc for the financial year to 1 February 2015 was £47.5 million (2013/14: £51.4 million). What final dividend are the Directors recommending? The Directors recommend that a final dividend equivalent to 6.0 pence per ordinary share be paid on 25 June 2015 to those shareholders on the register of members at the close of business on 29 May 2015. If this is approved, this will result in a dividend on the ordinary shares for FY14/15 of: Ordinary shares £m Interim dividend of 4.4p per share paid on 23 October 2014 (2013/14: 4.4p per share) 16.2 Proposed final dividend of 6.0p per share (2013/14: 6.0p per share) 22.0 Total ordinary dividend of 10.4p per share (2013/14: 10.4p per share) 38.2 The Premier Farnell Executive Trust (EBT or Trust) holds ordinary shares in the Company (acquired in the market) in order to meet obligations under the Company’s executive share plans. Throughout the year under review, a waiver by the Trust’s right to receive dividends on ordinary shares held by it was in place (further details are set out in note 20 (page 126) to the consolidated financial statements). The Trustees of the EBT may vote or abstain from voting shares held in the Trust in any way they see fit. Who are the members of the Board? The names and biographical details of the Directors who are standing for election or re-election at the June 2015 AGM appear on pages 44 and 45. Information relating to Directors’ interests in the Company’s shares is included in the Remuneration Report on page 82. The Directors who held office during the year under review were: • Val Gooding • Laurence Bain • Mark Whiteling • Andrew Dougal • Gary Hughes (appointed 1 November 2014) • Dennis Millard (stood down 31 January 2015) • Tom Reddin • Peter Ventress • Paul Withers Are the Directors indemnified? The Company provided indemnities to each of its Directors during the year ending 1 February 2015 in accordance with the provisions of the Company’s Articles of Association, allowing the indemnification of Directors out of the assets of the Company to the extent permitted by law. These indemnities constitute qualifying indemnities for the purposes of the Companies Act 2006 and remain in force at the date of approval of this report without any payment having been made under them. Have the Directors disclosed information to the Company’s Auditors’? Each of the Directors confirms that, so far as he or she is aware, there is no relevant audit information of which the Company’s auditors are unaware and that he or she has taken all steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Resolutions to reappoint PricewaterhouseCoopers LLP as auditor and to authorise the Directors to determine the auditor’s remuneration will be proposed at the forthcoming Annual General Meeting of the Company. 59 Annual Report and Accounts 2014/15 What classes of shares does the Company have and do they have any rights or restrictions? The Company’s authorised share capital comprises ordinary shares of five pence each in nominal value and cumulative convertible redeemable preference shares of £1 each in nominal value. As at 1 February 2015, the ordinary shares and preference shares represented 85.16% and 14.84% respectively of the Company’s total share capital. Details of the Company’s issued share capital, including any changes which have taken place during the year under review, are set out in notes 16 (page 115) and 20 (page 123) to the consolidated financial statements. The rights attached to the Company’s ordinary shares and its preference shares, in addition to those conferred on their holders by law, are set out in the Company’s Articles of Association (the Articles), a copy of which can be obtained on request from the Company Secretary. A summary of the rights attached to the preference shares appears in note 16 to the consolidated financial statements. The Articles contain certain restrictions on the transfer of ordinary and preference shares and on the exercise of voting rights attached to them, including where the Company has exercised its right to prohibit transfer following the omission of their holder or any person interested in them to provide the Company with information requested by it in accordance with Part 22 of the Companies Act 2006. Holders of preference shares are entitled to receive notice of but not attend or vote at general meetings of the Company other than in limited circumstances. The preference shares are not classed as equity for the purposes of financial reporting. Does the Company have powers to buy back its own shares? At the forthcoming Annual General Meeting of the Company on 16 June 2015, the Company will seek authority from its shareholders to purchase its ordinary and preference shares. Authorities were previously granted at the Annual General Meeting in 2014 and expire at the close of the forthcoming meeting. The authorities sought will, if granted, empower the Directors to exercise them on behalf of the Company. During the year ended 1 February 2015 the Company did not purchase, acquire or dispose of any ordinary shares. The Company exercised its authority to acquire and subsequently cancel 712,948 cumulative convertible preference shares for a total consideration of £11,442,815. These shares had a nominal value of £712,948 and represented 18.1% of the cumulative convertible redeemable preference shares in issue prior to the purchase. The purchase was considered to be beneficial to the ongoing earnings and cash flow profile of the Group. Further details are set out in note 16 (page 115) to the consolidated financial statements. Are there any significant agreements or agreements to provide compensation upon takeover? There are no agreements between any Group company and any of its employees or any Director of the Company that provide for compensation to be paid to the employee or Director for termination of employment or for loss of office as a consequence of a takeover of the Company, other than provisions that would apply on any termination of employment. The Company’s multi-currency bank facilities and its private note placements are subject to provisions allowing the lenders to terminate the facilities and demand repayment following a change of control. Who are the major shareholders and what are their interests in the Company? The table below shows the notifiable voting rights in the Company’s ordinary share capital disclosed in accordance with the Financial Conduct Authority’s Disclosure and Transparency Rules (DTR5) at 1 February 2015 and any changes up to and including 15 April 2015. % holding as at 01/02/2015 % holding as at 15/4/2015 M&G 9.21% 9.21% UBS Global Asset Management 5.13% 5.13% J O Hambro Capital Management 5.08% 5.08% Company 5.04% 5.04% Baillie Gifford & Co Harris Associates Ltd Below 5% Below 5% BlackRock Inc Below 5% Below 5% Newton Investment 4.97% 4.97% Fidelity International (FIL) 4.90% 4.90% Artemis Investment 4.86% 4.86% Schroders plc 4.84% 4.84% 4.76% (3.05% Direct and 1.71% Indirect) 4.76% (3.05% Direct and 1.71% Indirect) Old Mutual Global Investors (UK) Limited 4.60% 4.60% Legal & General 4.03% 4.03% Norges Bank 3.92% 3.92% Standard Life Investments Limited 60 Premier Farnell Directors’ Report continued Is there anything else we should know? • Greenhouse gas emissions – disclosures on greenhouse gas emissions and environmental matters can be found in the Sustainability Report on page 33. • Employees and diversity – information about the Company’s employees and the Group’s policy on diversity can be found on pages 38 to 39 of the Strategic Report. • Political donations – the Group’s policy is not to make contributions to political parties and no donations were made during FY14/15. • Group subsidiaries – details of the Group’s principal trading subsidiaries can be found on page 143 (note D) to the Company’s financial statements. • Research and development – the Group’s expenditure on product research and development activities is included on page 106 (note 2) to the consolidated financial statements. • Financial Instruments – information on the Group’s financial risk management objectives and policies and on the exposure of the Group to relevant risks in respect of financial instruments is set out on page 118 (note 19) to the consolidated financial statements. • Disclosure of information under Listing Rule 9.8.4 – information on allotments of shares for cash pursuant to the Group’s employee share schemes can be found on page 123 (note 20) to the consolidated financial statements. • Publication of unaudited financial information – the Company published two Interim Management Statements (15 May 2014 and 14 November 2014) and a trading statement (5 February 2015) containing unaudited financial information relating to the financial year ended 1 February 2015. The actual audited figures for the same period are included in the consolidated financial statements pages 92 to 138. Directors’ Statements Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Under that law the Directors have prepared the consolidated financial statements and Annual Report in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and parent company financial statements in accordance with UK Generally Accepted Accounting Practice (UK GAAP). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the consolidated financial statements comply with IFRSs as adopted by the European Union and the parent company financial statements comply with UK GAAP; and • prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the consolidated financial statements, article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Annual Report and Accounts 2014/15 Directors’ responsibility statement pursuant to DTR 4 Each of the Directors, as listed on pages 44 and 45, confirms that, to the best of his or her knowledge: a. the 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 2006 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 taken as a whole; and b. the management report (Strategic Report) 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. Going concern The Directors have assessed, in the light of current and anticipated economic conditions, the Group’s ability to continue as a going concern, including its solvency and liquidity. The Directors confirm they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the “going concern” basis for preparing the financial statements. By order of the Board Steven Webb Company Secretary Premier Farnell plc Farnell House, Forge Lane Leeds LS12 2NE 24 April 2015 61 62 Premier Farnell Remuneration Report Annual message to shareholders from the Chairman of the Remuneration Committee What happened to the Directors’ remuneration in 2014/15? Dear shareholder In 2014 the Remuneration Committee put its Directors’ Remuneration Policy (Policy) to a binding shareholder vote at the Company’s Annual General Meeting (AGM) for the first time. We were very pleased that the Policy was well received and approved by shareholders and we thank our shareholders for their feedback and support. One year on, the Committee remains satisfied that the Policy continues to fulfil its principal objectives of providing a clear link between performance and reward and attracting, retaining and motivating high-calibre executives with the skills and experience to manage the business and deliver the strategy. We are not, therefore, proposing any changes to the Policy for the coming year. Executives’ salaries We reviewed the Executives’ salaries in June 2014 and, in line with the rest of the workforce, increased these by 2.5%. There are, however, a number of changes to practice planned for 2015/16, primarily resulting from the drive to ensure that, in implementing the Policy, we maximise alignment of reward with the achievement of our strategic priorities, while keeping our pay structures as clear and simple as possible. The changes will not increase the Executive Directors’ remuneration opportunity or expected level of payout and are within our Policy. In this annual statement, I will focus first on what the Committee did in 2014/15 before going on to outline the changes proposed for the year ahead. For ease of reference, a full copy of the Policy approved last year is included with this report (from page 66). Our annual report on the implementation of that Policy during the year under review starts at page 75. Non-Executives’ fees These were also reviewed at our June 2014 meeting. Base fees for the Non-Executive Directors were subject to a 2.5% increase, commensurate with changes to salaries across the Group. The fees payable to the Chairman of the Board, our Senior Independent Director and the Chairman of each of the Audit and Remuneration Committees were found to be significantly below median when they were benchmarked across the FTSE250 using a number of data sources. They were increased, accordingly, to bring them in line with market practice, as shown on page 76. Annual bonus payout The primary measure for payments under the FY15 annual bonus plan was operating profit, against which up to 60% of the annual bonus opportunity was measured, with the remaining 40% determined by reference to the achievement of strategic targets for cash-flow, growth in the Group’s customer base and gross margin. The Group exceeded the scheme’s cut-in for operating profit and cash but did not hit the measures for growth in customer base or gross margin. The payouts under the scheme, in cash and deferred shares, to the Executive Directors were: 63 Annual Report and Accounts 2014/15 Cash Bonus Award Amount Deferred Share Bonus Plan Award As a % of salary As a % of total maximum opportunity Amount As a % of salary As a % of total maximum opportunity Lawrence Bain £110,302 21.10% 21.10% £66,181 12.66% 21.10% Mark Whiteling £76,440 18.99% 21.10% £42,467 10.55% 21.10% Long-Term Incentive Awards The awards granted under the Company’s long-term incentive plan in 2011/12 were scheduled to mature in July 2014/15. Vesting was subject to the awards meeting stringent returns on sales and earnings per share targets by the end of January 2014. These metrics were not achieved and the awards lapsed. Following the Company’s interim results announcement in September 2014, awards were made to Laurence and Mark under the performance share plan and executive share option plan available for use under the Company’s long-term incentive scheme. Conscious of the continued need to reward sales growth without sacrificing profits, we reduced the return on sales target for awards made in 2014/15 but retained the growth in earnings per share target at the 2013/14 level. In order to better align long-term incentive payments with all aspects of shareholder return, the Committee decided to allow dividend equivalents to accrue on long-term incentive awards granted going forward as the Committee considers that such accruals represent a reasonable outcome. Dividend equivalents will accrue only to the extent that awards vest and will be made in the form of shares. The link between performance and remuneration outcome in FY15 Payouts under the variable remuneration elements have been low this year. While the Committee considers that the Company has made good progress on its strategy, the year has been challenging and the competitive nature of the market has prevented us from reaching a number of our targets. No discretion was exercised in relation to the outcome of long- or short-term awards and, in the circumstances, the Committee considers that the rewards achieved are appropriate. What changes are planned for 2015/16? The Committee keeps the Company’s remuneration policy and practices under regular review. During 2014/15, we identified a number of opportunities to reflect changes in best practice or better achieve the underlying aims of the Policy: specifically to simplify our reward structures and increase their alignment with the Company’s strategy. We have consulted extensively with our major shareholders on these proposals and, having taken account of their feedback and received broad support, intend to make the following changes to our remuneration practice in the year ahead: MIP scheme To reflect proposed changes to the Company’s operating model, the Committee intends to move to a simpler annual bonus plan across the Group in 2015/16. Operating profit will remain the primary measure of success, with up to 70% payable against this metric and the remaining 30% payable on hitting other strategically important and quantifiable targets. This contrasts with the 60:40 split operated in recent years. Performance will be measured across the year as a whole. The total maximum bonus opportunity will remain at up to 160% of base salary for Laurence and 140% for Mark, as in prior years, but the opportunity at threshold performance is reduced from 20% to 15% of maximum. If threshold operating profit is not achieved, no bonus will be payable save where the Committee exercises its discretion to make a payment of up to 10% of each Director’s total maximum bonus opportunity based on performance against the strategic targets. Long-Term Incentive Plan In recent years, the Company has made long-term incentive awards using a mix of performance shares and market-priced options under its executive share option scheme. In 2015/16 the Committee proposes to make awards to the Executive Directors under the performance share plan only and not under the executive share option scheme (ESOP). Doing so will simplify the Company’s long-term incentives and increase the emphasis on achieving performance targets; it will also reduce share dilution, compared with granting share options of equivalent potential value under the executive share option scheme, and is in line with market practice among other FTSE250 companies. Award sizes under the performance share plan will continue to have a maximum of 100% of base salary, based on the face value of the award at the date of grant. Actual award sizes may be below this limit and the Committee will continue to take account of a range of factors in determining any adjustment to award sizes at the time of grant, including market practice, overall performance of the Company and personal performance. For awards to be made in 2015 to Executive Directors, the level has been set at 85% of base salary, based on face value at grant. This compares with awards in prior years of 100% of base salary under the executive share option plan and 60% under the performance share plan, reflecting the move away from market-priced options. 64 Premier Farnell Remuneration Report continued In order to provide clear focus on growing profits, the Committee is also proposing to re-balance the two performance metrics applicable to awards. The primary measure, applying to 70% of each award, will remain growth in earnings per share (EPS), subject to adjustment where appropriate by the Committee to avoid distortions from exceptional events or changes in capital structure and to ensure that the result for vesting purposes accurately reflects underlying growth in profits. In 2014 the growth in EPS range for long-term incentive awards was from 5% to 12% per annum. For awards to be made in 2015 the target will be increased so that there will be no vesting at less than 7% growth in EPS and 14% growth must be achieved for maximum vesting. These are stretching targets and reflect the lower baseline figure as well as the Group’s confidence in the strategy over the longer term. A second performance metric which supports the Group’s strategic focus and which will apply to the remaining 30% of each award will be determined by the Committee prior to the annual grant of long-term incentive awards, scheduled this year for September 2015. What else did the Committee do in 2014/15? During the year, the Committee reviewed the rights of clawback and scaleback under the Company’s short-term and long-term incentive plans. These plans already allow for the reduction of awards or payments in the event of misconduct or misstated performance but the Committee considers that enhancements can be made to these rules to strengthen the Committee’s right to withhold outstanding awards and payments and recover those already made or vested in such circumstances. Changes to the schemes to achieve this were adopted by the Committee at its meeting on 16 March 2015. The Committee intends to introduce a new plan for senior employees and key talent below Board level, the approval of which by the Company’s shareholders will be sought at the AGM in June 2015. The purpose of the plan is to retain and reward such employees and, if approved, it is intended to be used in place of the executive share option plan. The grant of awards will be subject to individual performance but their vesting will have no further metric attached. Executive Directors will not be eligible to receive awards under this plan which will be subject to the dilution limits in place for all our plans. The Committee is wholeheartedly in favour of aligning the interests of shareholders and employees so I am pleased to report that, at the last AGM in 2014, the Company approved the adoption of a new save as you earn scheme allowing UK eligible employees to acquire shares in the Company on a discounted basis. On the behalf of all of the Committee, I would like to thank you for your ongoing support and for continuing to engage with us on all remuneration matters. Paul Withers Chairman of the Remuneration Committee 65 Annual Report and Accounts 2014/15 Remuneration Committee overview Remuneration Committee overview Paul Withers Chairman Who else was on the Committee? -- Andrew Dougal -- Gary Hughes (from 1 November 2014) -- Dennis Millard (to 31 January 2015) -- Peter Ventress Steven Webb acted as Secretary to the Committee throughout the year. The Committee members are all independent NonExecutive Directors. There are a number of regular attendees at Committee meetings, including the Group Chief Executive Officer, the Chairman of the Board and the Chief People Officer. No individual is present when his or her own remuneration or fees are discussed or decided. What does it do? Key objective: To develop policy on Executive remuneration, linking remuneration and performance, fix the remuneration of individual Executive Directors, the Chairman of the Board and executive team immediately below Board level and administer the Company’s share plans. Responsibilities: • To determine remuneration for Executive Directors and the executive team (the RemCo population) consistent with the Policy • To review and have regard to remuneration trends across the Group when setting the Policy and remuneration practice for the RemCo population • To approve design of and targets for performancerelated pay for the RemCo population, approving any payments to be made based on performance • To determine the fees of the Chairman • To approve contracts of employment with Executive Directors and any termination arrangements • To monitor the reward policies and structure for the RemCo population and the Group as a whole • To approve the design of and oversee awards under employee share schemes, including satisfaction of performance conditions • To operate any rights of clawback or scaleback under the short or long-term incentive schemes • To approve pension benefits additional to those under the Company’s pension schemes • To oversee changes to employee benefit structures • To consider risks to the Group as a result of the Policy or its implementation • To report on the Company’s remuneration, including approving this report. The Committee’s terms of reference are reviewed annually and are available on the Governance section of our website at www.premierfarnell.com. New Bridge Street (NBS) has been appointed by the Committee to provide Executive remuneration advice to the Committee and to the Company. NBS has not provided any other services and has no other connections with the Group. The Committee Chairman and other members of the Committee have direct access to advice from NBS and the Committee Chairman is informed of all material advice NBS provides to the Company. New Bridge Street is a founder member of the Remuneration Consultants Group and a signatory of its Code of Conduct setting out the role of Executive remuneration consultants and the professional standards by which they advise their clients. NBS charges for its advice on an hourly basis and the amount paid to them for their advice during the year was £70,000 excluding VAT. The appointment of NBS as advisers and the level of fees paid to them are reviewed by the Committee annually. The Committee members also use their experience serving on other boards to assess the objectivity and independence of the advice they receive. 66 Premier Farnell Policy on Directors’ Remuneration This section of the report sets out the Company’s Policy on Directors’ remuneration to 2016/17. The Policy was approved by shareholders at the Company’s Annual General Meeting on 17 June 2014, following which it came immediately into effect. As no changes have been made to the Policy since its approval, the Policy is included for information purposes only. What is our policy? We have, however, noted where there have been changes in practice (none of which affect policy) and have updated the sections on: • consultation with our shareholders to reflect the position during the year under review; • the mix of fixed and variable remuneration for the Executive Directors to illustrate current salaries, benefits and pension as shown on page 75 and proposed implementation of policy on long and short term incentives in 2015/16 and page numbers and cross-references to the Annual Remuneration Report have been updated throughout. All such changes are highlighted in italics and bold for further clarity. Overall, it is to: Be consistent and principled • maintain a consistent Executive compensation strategy, based on Link pay to strategy • support the Company’s strategy and its execution Align with shareholders’ interests • closely align Executive reward with shareholder returns Be competitive • ensure that the organisation can attract, motivate and retain clear principles and objectives high-calibre talent, to enable Premier Farnell to compete in an international market Link pay to performance • provide the opportunity for Executives and other colleagues to receive competitive rewards for performance, aligned to the sustained success of the overall Group, paying what is commensurate with achieving these aims Reflect the internal landscape • operate broadly-based incentives to recognise talented performers And be clear • be easy to understand and supported by clear communication throughout the Group And has these elements: Fixed Salary Benefits Pension or pension allowance Variable based on performance Annual bonus (including deferred shares) Long-term incentive plan, comprising one or more of the following: Performance share plan awards; Executive share options 67 Annual Report and Accounts 2014/15 Which for our Executive Directors are structured as follows: What?A Salary Why? How? And how much? To recruit and retain the right people to execute the strategy Based on: • skills and experience; • salaries across the Group, including of other senior employees; • salaries paid by other FTSE 250 companies and by other companies of similar size and complexity operating internationally. Reviewed annually, with changes usually implemented at mid-year each year. Changes could take place at other times on changes in role or responsibility. Such changes, along with personal and Company performance and levels of increase throughout the Company, are taken into account in deciding whether an increase should be made. No specific cap. However, increases granted to the Executives will normally be in line with those for the general workforce except where there is a change of role or responsibilities or in other exceptional circumstances. Not appropriate to be subject to recovery once paid. See page 75 for implementation in 2014/15. Benefits To recruit and retain the right people to execute the strategy Dependent on the requirements of the role and the individual, provided reasonable and in line with market practice. Benefits might include, for example: life and health insurance for the Director and his or her family; medical assessments and access to walk-in medical care; a car or car allowance; health club membership; independent tax, legal or financial advice; and relocation assistance where appropriate such as housing and education allowances, travel and tax equalisation arrangements and other costs of relocation where an Executive is asked to relocate or spend significant periods away from home. Where an Executive is recruited from overseas, other benefits typically provided in the Executive’s home country may also be provided to secure and retain that person’s services. Executives are also entitled to take advantage of benefits offered to other UK based employees including discounts on Company products, access to the Company’s sponsored discounted rewards programme, childcare vouchers, a cycle to work scheme and the right to take part in any HMRC approved all-employee share or savings scheme run by the Company, if eligible. No pre-determined maximum, but benefits generally constitute a small percentage of total remuneration. Not appropriate to be subject to recovery once provided. See page 75 for implementation in 2014/15. Pension To recruit and retain the right people to execute the strategy In the form of: i. money purchase benefits only; or ii. equivalent cash supplement; or iii. a mix of (i) and (ii). Not included as salary for the purposes of the annual bonus or LTI awards. No pre-determined maximum but in line with market practice for Executives. Not appropriate to be subject to recovery once provided. See page 77 for implementation in 2014/15. A. See notes on page 69. 68 Premier Farnell Policy on Directors’ Remuneration continued What?A Annual Bonus Why? How? And how much? To motivate and reward performance to further strategic and operational goals over the year Performance assessed against the achievement of key elements of the Company’s financial results. This may be combined with personal objectives driving other key elements of strategy, if the Committee thinks appropriate, although the principal weighting will be on financial measures.B The deferred element promotes retention and alignment with shareholders The Company’s policy is that the annual bonus is paid partly in cash, with a significant proportion paid by way of share award under the Deferred Share Bonus Plan (DSBP), the vesting of such award being dependent on the Executive remaining with the Company for two years from grant. Targets set by the Remuneration Committee at the beginning of the year and achievement reviewed by it after the year end. Considered to be commercially sensitive but disclosed in the subsequent year’s Annual Report. The current practice is that the ratio of cash to deferred shares is approximately 60:40, but the Committee reserves the right to vary this ratio if it thinks it appropriate to do so. DSBP awards may be made by way of nil cost option, conditional award or forfeitable share award and may be satisfied with new issue shares, market purchase or treasury shares, at the Committee’s discretion. DSBP awards are subject to the executive shareholding policy, requiring one half of shares vesting (after tax and costs) to be retained throughout employment until a holding of the requisite level is achieved and that level of holding maintained. The Committee determines the percentage of salary to be achieved and other terms of the policy. The Committee has the discretion to provide that dividends will accrue on awards made prior to vesting, to the extent that awards vest. The annual bonus offers the following maximum opportunity at maximum performance: • 160% of salary for the CEO; • 140% for the CFO made up of a combination of cash and deferred share awards. Subject to claw-back or scale-back if performance is misstated or in the event of misconduct. See page 77 for implementation in 2014/15. Long-Term Incentive Plan (LTIP) To reward long-term success and provide alignment with shareholders Made up of awards under: (i) a performance share plan (PSP) with no exercise price; and/or (ii) an executive share option plan (ESOP) with an exercise price set by reference to the market price at grant. Which, if used together, provide the opportunity to blend awards not subject to share price volatility (allowing focus on performance targets) with those whose value depends on absolute share price growth, aligned with the interests of shareholders. Currently, both have two performance conditionsB measured over a minimum three-year period, starting not earlier than the beginning of the year in which the grant is made: growth in earnings per share (EPS) and a second measure, being return on sales (RoS) in 2014/15 and to be defined for 2015/16. The Committee retains the discretion to determine the weightings of each measure and may select other measures, if it considers it appropriate to do so to ensure alignment with the Group’s strategy. The Committee sets the targets relevant to any grant and decides for each grant whether and the extent to which each performance condition has been met and the awards vest. The Committee can amend performance condition(s) for a grant if an intervening event makes it appropriate to do so, provided the revised conditions are considered by the Committee to be no less challenging in all the circumstances. Awards under the PSP may be made by way of nil cost option, conditional award or forfeitable share award and may be satisfied with new issue shares, market purchase or treasury shares, at the Committee’s discretion. A See notes on page 69. B See notes on page 70. 69 Annual Report and Accounts 2014/15 What?A Why? How? And how much? Awards under the ESOP may be made by way of option (which for UK participants may be approved or unapproved and for US participants may be an incentive stock option or non qualifying option) or share appreciation right (SAR) (save in the case of approved options) and may be satisfied with new issue shares, market purchase or treasury shares, at the Committee’s discretion. SARs are market priced options that, on exercise, deliver only the gain in shares, rather than all of the shares comprised in the option, thus reducing the Company’s share usage. The Committee may also grant phantom awards or satisfy awards in cash with the Executive’s agreement and can settle options as SARs. The maximum grant permissible under each plan (and this policy) is 100% of base salary, based on face value, save in exceptional circumstances when awards of up to 150% can be made under each plan. For information, the Committee’s practice until the end of 2014/15 has been to make awards below the maximum permitted under the policy, as follows (as a percentage of base salary): • For the CEO 60% under the PSP and 100% under the ESOP; • For the CFO 60% under the PSP and 100% under the ESOPC. In 2015/16, awards are proposed to be made to the CEO and CFO under the PSP only at 85% of base salary. Awards are usually granted annually although awards may exceptionally be granted more frequently: for example, to a new appointee. The Committee has the discretion to provide that dividends will accrue on awards made prior to vesting, to the extent that awards vest. Awards under the LTI are subject to the Company’s executive shareholding policy, requiring one half of shares vesting (after tax and costs) to be retained throughout employment until a holding of the requisite level is achieved and that level of holding maintained. The terms of the policy, including the percentage of salary to be achieved, are set by the Committee. Subject to claw-back or scale-back in the event of misstated performance or misconduct. See pages 70 and 71 for an illustration of the amounts potentially receivable by the Executives for minimum, on-target and maximum performance under current policy and practice. This shows that, at targeted performance, 43% and, at maximum performance, 64% of the CEO’s total remuneration (and 43% and 63% of the CFO’s) is performance-linked. See page 79 for implementation in 2014/15. Notes: A Differences in policy compared with other employees: Generally, remuneration for the Executives is more heavily weighted to performance-related pay than that of less senior employees, so that the Executive Directors are personally motivated to deliver the strategy successfully and to enhance the link between their interests and shareholders’. Fixed elements vary by role, grade and geography but are largely consistent in policy. Base salary: No differences in policy. The Group’s overall salary budget and percentage increases made to other employees with similar levels of performance are taken into account in setting the Executives’ salaries. Benefits: No differences in policy; benefits vary by grade, jurisdiction and with job role. For example: cars or car allowances and health and life insurance are only available in the UK where, in the case of a car, there is a need based on role or to managers of above a certain grade. Pension: The level of contribution made by the Company varies with jurisdiction and the age and grade of the employee. Annual bonus: All employees of management grade are eligible to participate in the annual bonus scheme, with maximum opportunity varying with grade and performance. Financial objectives are primarily based on the profit centre to which the individual contributes and, in the event that the bonus was structured to take account of personal objectives, these would be relevant to the employee’s role. LTIP: Employees of management grade and nominated talented performers participate in the LTI plan. The senior executive team have awards subject to performance conditions. Other managers and talented performers receive awards under the ESOP without performance conditions. Maximum available opportunity varies according to grade and individual performance. 70 Premier Farnell Policy on Directors’ Remuneration continued B Performance conditions: Annual bonus: the performance conditions for the annual bonus may be entirely based on key aspects of the Company’s financial performance but may also be measured against strategic or operational targets relevant to the individual’s role and designed to drive the Company’s strategy, at the Committee’s discretion. DSBP awards, once granted, have no performance conditions as their grant requires each Executive to have met the performance targets relevant to the annual bonus before any award can be granted to him or her. LTIP: for awards made in the year under review, the EPS and RoS conditions apply equally to awards under the PSP and the ESOP, where both are granted. EPS was chosen as an appropriate measure of the Company’s strategy for profitable growth, expressed as a compound growth rate to assist in the clear communication of targets. RoS is a key strategic financial target for Premier Farnell. By measuring RoS performance, the Remuneration Committee seeks to promote the corporate goal of targeting sales growth and managing margin. The combination of the two measures requires both return and growth for the awards to achieve value. The Committee reserves the right to vary the weighting of the measures for any grant. Details of changes proposed in 2015/16 are set out in the annual statement of the Chairman of the Remuneration Committee on pages 63 and 64. C Other share-based schemes: In common with all eligible employees of the Group, Executive Directors in the UK are entitled to participate in any HMRC approved, all-employee share plan. These options are not subject to the satisfaction of a performance condition as such schemes are not restricted to Executive Directors and senior executives and are subject to maximum contribution limits set by HMRC. The Committee sets the terms of each grant offered under such plan. So what could the Executive Directors earn under this policy? Performance-related elements have the potential to make up a substantial portion of Executives’ remuneration, especially if maximum performance is achieved. The mix of fixed and performance-related pay of the Executives at varying levels of performance (based on proposed implementation of the Policy in 2015/16) is illustrated in the bar charts below and shows that: • at on-target performance, 43% of the CEO’s and the CFO’s total remuneration; and • at maximum performance, 64% of the CEO’s and 63% of the CFO’s total remuneration is performance-linked. Chief Executive total remuneration scenarios £000’s 64% Maximum 36% 42% 22% £2,010 43% On-target performance 57% Minimum 100% £0 Total fixed See note on page 71. £500 Total annual incentive 26% £1,286 17% £729 £1,000 Total long-term incentive £1,500 £2,000 £2,500 71 Annual Report and Accounts 2014/15 Chief Financial Officer remuneration scenarios £000’s 63% Maximum 37% £1,435 24% 39% 43% On-target performance 57% Minimum 100% £0 Total fixed 24% £926 19% £529 £1,500 £1,000 £500 £2,000 £2,500 Total long-term incentive Total annual incentive Notes to the charts above: 1. Total fixed includes salary applicable at the date of this report, plus the value of benefits and pension contributions in the single figure table on page 75. 2. Total annual incentive is the sum of cash and deferred annual bonus. 3. Total long-term incentive is the face value of performance shares proposed to be awarded in 2015/16. The value at maximum is the amount granted; the value at on-target is taken to be half the amount granted. And what do Non-Executive Directors earn? What? Fees Why? How? And how much? To recruit and retain the right people to contribute to the Company’s success without compromising their independence Annual fee for Chairman. Annual base fee for Non-Executive Directors. Additional fees payable to the Senior Independent Director (SID) and the Chairmen of the Audit and the Remuneration Committees and to the Chair of the Digital Advisory Board. All fees are paid in cash and cover time spent in travel as well as attendance at meetings and site visits. Fees reviewed annually by the Board (or the Remuneration Committee, in the case of the Board Chairman) to avoid conflicts. No prescribed cap or standard percentage increase. However, fee levels are benchmarked against market levels. Not appropriate to be subject to recovery once paid. See page 75 for implementation in 2014/15. Non-Executive Directors are not entitled to participate in any of the Company’s incentive plans (including the annual bonus scheme and the LTIP) or in any Company pension arrangements and are not entitled to any payment in compensation for any early termination of their appointment. What would we pay to recruit a new Director to the Board? The Company’s policy is to pay what is necessary to attract individuals with the skills and experience appropriate to the role to be filled. This would take account of the remuneration offered by other FTSE250 companies and other companies of similar size and complexity and, in the case of appointments to Executive positions, the levels and structure of remuneration across the Group, including to other senior appointees. The Committee would seek to align the pay of any incoming Director with each of the elements of remuneration described in the policy tables for an Executive or a Non-Executive Director, as appropriate. This includes the expectation that, for incoming Executive Directors, pay would be linked to performance as it is for our current Executives, through the annual bonus and long-term incentive plan. The maximum amounts receivable under those arrangements would be within the policy maxima available to the other Executives. However, the Committee may offer additional cash and/or share-based elements where it considers these to be in the best interests of the Company and its shareholders. This includes the use of awards made under 9.4.2 of the Listing Rules. Such elements would take account of remuneration foregone by the individual in order to take up the role, including the terms of that remuneration, its amount, how and when it might be payable and any performance measures applicable to it. 72 Premier Farnell Policy on Directors’ Remuneration continued If the appointment were internal, any variable pay awarded in respect of the individual’s former role with the Group would be allowed to pay out in accordance with its terms, adjusted as appropriate to take account of the appointment. In addition, any other ongoing remuneration obligations of the Group which exist prior to the individual’s appointment may continue in force. The salary for a new Executive may be set below the normal market rate, with phased increases over the first few years as the Executive gains experience in his or her new role. The Company would seek to include similar provisions in any contract with any incoming Executive, recognising that it may be necessary to agree to a longer notice period, in exceptional circumstances, with that period reducing to 12 months over a set period. In the unusual circumstance in which an Executive Director were to leave without notice as a result of summary dismissal, his or her salary, benefits and pension contributions would normally stop immediately. Fees for Non-Executive Directors would be set in accordance with the fee structure for Non-Executives in place at the time of appointment, with additional fees or remuneration awarded where appropriate to take account of additional responsibilities. Any annual bonus normally ceases to be receivable once an Executive gives or is given notice to leave. However, the Committee may make annual bonus payments, subject to performance and payable following the end of the bonus year, in respect of the period during the year when the individual has served as a Director or employee, if it deems it appropriate. What would a Director get on leaving or if there were a takeover? On an Executive leaving, the approach of the Committee would be to consider all relevant surrounding circumstances in deciding whether or not to exercise any discretion open to it and to act in accordance with the rules of any relevant incentive plan and any contractual provisions. There are specific rules under each of the Company’s share plans (including the DSBP, PSP and ESOP) dealing with the treatment of awards on leaving. In summary, if an Executive were a ‘good leaver’, he or she may be entitled to retain his or her award, although, for unvested awards: Executive Directors’ service contracts are usually terminable by the Company on 12 months’ notice and by the individual on six months’ notice. The Company would continue to pay salary, benefits and pension in line with its contractual obligations during any notice period and, in the case of the existing Executive Directors, can: • oblige the Executive to mitigate his or her loss, where payments are made monthly, and reduce monthly payments or cease them altogether on his or her accepting alternative employment (save that the Company’s right to pay monthly does not apply where termination results from a change of control); and • pay salary and benefits in lieu of the whole or part of the notice period in a single payment or by way of monthly instalments. • the number of shares under an award may be reduced to reflect any unexpired performance period (referred to as pro rating); and • the award would normally remain subject to any applicable performance condition. A ‘good leaver’ is someone who leaves by reason of injury, disability, redundancy, on the sale or transfer out of the Group of his or her employing business, on retirement with the agreement of the Committee or in other special circumstances at the Committee’s discretion. (Someone dying in service would also be a good leaver, with their personal representatives assuming their rights in respect of their awards). How awards are treated if someone is a good leaver also depends on the type of award made under the relevant plan. The following table summarises the position for each of our current plans. 73 Annual Report and Accounts 2014/15 Plan DSBP Good leaver? Type of Award Vested Unvested Yes Conditional or forfeitable share award NA Vests on leaving date, but subject to pro rating2 Option Exercisable for 12 months from leaving2 Exercisable for 12 months from leaving (or from vesting, in the event of death) but subject to pro rating2 Conditional or forfeitable share award NA1 Lapses Option Lapses Lapses Conditional or forfeitable share award NA1 Vests at end of performance period, subject to performance and pro rating3 Option Exercisable for 12 months from vesting3 Exercisable for 12 months from end of performance period, subject to performance and pro rating3 Conditional or forfeitable share award NA1 Lapses Option Exercisable for three months from vesting4 Lapses Yes Option Exercisable for 12 months from Exercisable for 12 months from leaving (or death if relevant)3 leaving (or from vesting, in the event of death) subject to performance and pro rating3 No Option Exercisable for three months from vesting4 No PSP Yes No ESOP5 1 Lapses 1 Not applicable as the shares under award vest automatically if the award is a conditional or forfeitable share award and will therefore have been exercised at the point of leaving. 2 Subject to pro rating for unvested awards, unless the Committee applies its discretion otherwise, and to claw-back. The 12 month exercise period for options is subject to an end date of 10 years from grant (seven years for Irish residents) if sooner. 3 Subject to the award meeting its performance condition and subject to pro rating, for unvested awards, unless the Committee applies its discretion otherwise, and to claw-back. Approved options under the ESOP are not subject to claw-back and, on death, become and remain exercisable for 12 months. The Committee has the discretion to extend the period of exercise for good leavers other than on death, provided it ends not later than 42 months from the date the award was granted. 4 Subject to claw-back, save for approved options under the ESOP. 5 Rules may vary if options were to be granted to non UK Directors to take account of local laws or regulation. For example in Denmark where compulsory leaver provisions are imposed under local law. Under the SAYE scheme, unvested awards normally lapse on leaving, although ‘good leavers’ are given six months from leaving to exercise their unvested awards (and that period is extended to 12 months from vesting in the case of death). If the award has passed its third anniversary of grant, all leavers other than those who are dismissed for misconduct have six months from leaving to exercise their awards (or 12 months from the vesting date if the participant dies within six months after the date of vesting). Otherwise, awards lapse on leaving. A ‘good leaver’ for the purposes of the SAYE scheme is largely as above but includes retirees as of right. If there were a takeover of Premier Farnell plc or if the Company were wound up, awards vest over such number of shares as the Committee determines, subject to claw-back and after applying any performance condition and pro rating, if the Committee thinks fit. Awards made as options have a one month exercise period. The Committee has authority to allow awards to vest early on similar terms in the event of a demerger and to require awards to be surrendered and replaced with equivalent awards in the acquiring company in the case of an internal reorganisation. The discretion to apply performance conditions and to pro rate the number of shares 74 Premier Farnell Policy on Directors’ Remuneration continued under award does not apply to DSBP awards, as they do not have performance conditions. Awards under the SAYE scheme become exercisable early in the case of a takeover (when the Committee has discretion to set an exercise period of up to six months), a compulsory acquisition, scheme of arrangement or winding-up and are subject to rollover in the event of a merger. For how long are the Directors employed? The Executives’ service contracts do not have a set duration, while Non-Executive Directors, engaged under letters of appointment, are initially retained for a three-year term. In accordance with the UK Corporate Governance Code, all Directors stand for election when first appointed, and then annual re-election, by the shareholders at the Company’s Annual General Meeting. No one can continue in office as a Director if not elected or re-elected, as appropriate. Provided that they are re-elected, Non-Executive Directors’ appointments are normally renewed for a second three-year period and then annually for a total of not more than three more years. The letters of appointment set out the time commitment expected of the Non-Executive Directors in the performance of their duties, with more time expected to be spent by the Chairmen of the Audit and Remuneration Committees. The Executives’ service contracts and the Non-Executive Directors’ letters of appointment can be viewed by shareholders at the Company’s registered office. What is the Company’s policy on Executive Directors taking non-executive roles with other companies? The Company’s policy is that Executives are normally permitted to hold one non-executive directorship with another company, provided that the appointment is approved by the Board. Any fees payable in respect of that external appointment are retained by the Executive. In exceptional circumstances the Board may permit an Executive to hold more than one outside directorship. Does the Committee take account of pay across the Group? In setting the remuneration policy for Executive Directors, the Remuneration Committee takes account of the pay arrangements for other colleagues in the Premier Farnell Group. The same principles apply to remuneration policy for all colleagues: that pay should be benchmarked against relevant markets to ensure competitiveness while controlling costs; that there should be performance-based components for all senior and most customer and supplier-facing staff; and that performance-related pay should be aligned with and help to drive the achievement of the Company’s business strategy. In determining any increase in the level of base salaries for Executive Directors, the policy requires that the rate of increase for other colleagues be considered. The Committee receives a report annually on those remuneration arrangements and employment conditions across the Group. Employees are not specifically consulted on Executive remuneration. They are, however, invited to take part annually in an all-employee engagement survey when they have the opportunity to raise any question, issue or concern that they might have. The results of the survey are reviewed by the Board and any significant concerns relating to Executive remuneration would be taken into account by the Committee1. Does the Committee consult shareholders on remuneration policy? The Remuneration Committee is committed to an open dialogue with shareholders on Executive remuneration. The Chairman of the Board and the Chair of the Remuneration Committee have met and spoken to major shareholders about Executive pay and policy on a number of occasions during the year. These consultations have covered a number of aspects of our pay policy (including, in 2014/15 as in 2013/14, the proposed changes to the annual bonus and the long-term incentive plan, as well as our executive shareholding policy, and in 2014/15 the proposed introduction of a new share plan for employees below Board level and the clawback provisions in the Company’s LTIP). In both years, the feedback received has been taken into account in shaping the implementation of the Policy. 1 An all-employee engagement survey was held in 2013/14 and in each prior year from 2007 onwards. No survey was conducted in 2014/15. 75 Annual Report and Accounts 2014/15 Annual Report on Remuneration This section of the Remuneration Report sets out how the Company has implemented its Policy on Directors’ remuneration during the period to 1 February 2015. What did the Directors earn in the year under review? The following table shows the remuneration paid to our Directors in 2014/15 and in the prior year (audited). (£000’s) Base salary and fees Benefits1 Company pension contribution Annual bonus2 LTI awards3 vesting for performance period ending during Total 2014/15 2013/14 2014/15 2013/14 2014/15 2013/14 2014/15 2013/14 2014/15 2013/14 2014/15 2013/14 Laurence Bain 517 506 65 72 140 137 176 179 – – 898 894 Mark Whiteling 398 389 18 20 108 104 119 120 – – 643 633 Val Gooding 167 157 – – – – – – – – 167 157 Andrew Dougal 51 50 – – – – – – – – 51 50 Gary Hughes4 13 - – – – – – – – – 13 – Dennis Millard 65 62 – – – – – – – – 65 62 Tom Reddin 82 80 – – – – – – – – 82 80 Paul Withers 60 59 – – – – – – – – 60 59 Peter Ventress 51 17 – – – – – – – – 51 17 1,404 1,320 83 92 248 241 295 299 – – 2,030 1,952 Executives NonExecutives Total 1 Benefits for both Executive Directors comprise a cash allowance in lieu of a company car, life and health insurance. Laurence’s benefits include £45,000 in respect of life cover. 2 Annual bonus for 2014/15: For Laurence Bain is 62.5% in cash and 37.5% in deferred shares under the DSBP. For Mark Whiteling is 64.3% in cash and 35.7% in deferred shares under the DSBP. Details of the performance conditions, weightings and performance achieved against targets are set out later in this report. Annual bonus for 2013/14: For Laurence Bain is 62.5% in cash and 37.5% in deferred shares under the DSBP. For Mark Whiteling is 64.3% in cash and 35.7% in deferred shares under the DSBP. 3 Long-term incentive: performance conditions, weightings and performance achieved against targets are detailed in subsequent sections of this report. 4 Gary Hughes joined the Board on 1 November 2014. 76 Premier Farnell Annual Report on Remuneration continued What changes were there to salaries and fees? With effect from July 2014, and in line with the general workforce, a 2.5% increase in salary and in base fees was awarded to our Executives and our Non-Executive Directors respectively. Following a review against market levels, the fees of the Chairmen and the SID were found to be significantly below median for FTSE250 companies. Increases to the fees payable to the Company’s Non-Executive Directors in 2015/16 were as follows: Percentage increase Fee for role at 2 February 2014 Fee for role at 1 February 2015 Chair of the Board 7.5% £160,000 £172,000 Non-Executive Director’s base fee 2.5% £50,000 £51,264 Chair of the Audit Committee 11.1% £9,000 £10,000 Chair of the Remuneration Committee 11.1% £9,000 £10,000 SID 100% £3,000 £6,000 Chair of the DAB 6.7% £30,000 £32,000 At 2 February 2014 At 1 February 2015 Percentage increase Laurence Bain £510,000 £522,756 2.5% Mark Whiteling £392,700 £402,528 2.5% 7.5% Role The Directors’ salaries or fees at the beginning and end of the financial year were: Executives Non-Executives Val Gooding £160,000 £172,000 Dennis Millard1 £62,000 – – Andrew Dougal £50,000 £51,264 2.5% Gary Hughes – £61,2642 – Tom Reddin £80,000 £83,2643 4.1% Peter Ventress £50,000 £51,264 Paul Withers £59,000 £67,2644 1 2 3 4 2.5% 14.0% (or 3.84% excluding the £6,000 fee payable in respect of his new role as SID) Including fees of £9,000 for chairing the Audit Committee and £3,000 for acting as SID. Dennis retired from the Board on 31 January 2015. Gary Hughes joined the Board on 1 November 2014. His fees include fees of £10,000 for chairing the Audit Committee. Including fees of £32,000 for chairing the Company’s Digital Advisory Board. Including fees of £10,000 for chairing the Remuneration Committee and £6,000 for acting as SID. What pensions are Directors entitled to? Throughout the year, Laurence Bain elected to receive a cash supplement in place of the contributions which would otherwise have been made by the Company on his behalf to the Premier Farnell UK Pension Scheme (the UK Scheme) and a funded unapproved scheme previously in place. This supplement is paid at the same rate as the Company’s previous contributions to the UK Scheme and the funded unapproved scheme. Mark Whiteling may elect to have defined contributions made to the UK Scheme or a registered personal pension scheme, to take a cash allowance or for some combination of the two, up to the amount of the Company’s contribution under his service contract. Mark chose to have some of his contributions made to his personal pension plan, with a cash allowance in respect of the balance. 77 Annual Report and Accounts 2014/15 The pension benefits of the Executives as at 1 February 2015 were (audited): Nature of benefit Company contribution (or allowance) as a percentage of salary1 Laurence Bain Cash allowance 27% £139,709 (2013/14: £136,575) Mark Whiteling Combination of cash allowance and contributions to Mark’s personal pension plan 27% £107,607 (2013/14: £103,984) Annual cost for 2014/15 (2013/14) 1 As set out in the Executive’s service contract and subject to his making personal contributions of a minimum percentage amount. The normal retirement age under the Executives’ service contracts is 65 years of age. No Executive Director receives any final salary pension benefits. How was the amount of the annual bonus determined for 2014/15? For the Chief Executive Officer and the Chief Finance Officer, 60% of the maximum bonus opportunity is payable on achieving defined levels of operating profit (OP), with the remaining 40% payable by reference to other objectives linked to key elements of the strategy (SOs). The following table sets out the percentages available for each measure at threshold and stretch performance and compares this potential with the actual payouts achieved. Percentage of total bonus opportunity payable at threshold performance for this measure Percentage of total bonus opportunity payable at stretch performance for this measure Actual payout for this measure in respect of 2014/15, as a percentage of total bonus opportunity Operating profit (60% of total bonus opportunity) 12% 60% 16.1% Strategic objectives (40% of total bonus opportunity) Related to achieving budgeted: 8%1 made up as follows: 40%1 made up as follows: 5% achieved as follows: Measure and weighting cash flow 3% 15% 5% growth in customer base 2% 10% 0% gross margin 3% 15% 0% 1 Provided OP is met. If OP is not met, the Committee has the discretion to award a total bonus of up to 10% of the maximum opportunity based on performance against the SOs. The Company exceeded its threshold targets for operating profit (achieving £91.08m1 against a plan target of £94.97m) and cashflow (achieving £66.60m against a plan target of £68.81m) but did not hit its threshold metric for customer growth and margin (where the targets at plan were 2.9% and 37.7% respectively). Based on this performance, the amounts paid or awarded were: Face value of DSBP award at grant (number of shares) In respect of OP achieved In respect of SOs achieved Total annual bonus Cash award Laurence Bain £134,662 £41,821 £176,483 £110,302 £66,181 (or 34,649 shares2) Mark Whiteling £90,730 £28,177 £118,907 £76,440 £42,467 (or 22,233 shares2) 1 The actual operating profit figure used for the purposes of the annual bonus is that at the budget exchange rates in effect at the time the operating profit target was set (in order to remove the effect of exchange rate movements from the outcome) and therefore differs from the reported operating profit figure for 2014/15 which is arrived at using the average exchange rates for the year. 2 At a share price on grant of 191.0p. 78 Premier Farnell Annual Report on Remuneration continued How will the amount of the annual bonus be determined for 2015/16? The Committee will operate a simplified annual bonus plan in 2015/16, under which the same maximum available opportunity, operating profit underpin and maximum 10% discretionary payment in the event that operating profit is not met will apply as for 2014/15 but of the total bonus opportunity in 2015/16: • 70% will be payable based on Group operating profit; and • 30% will be payable based on the achievement of personal objectives linked to the strategy. A summary of the composition of the 2015/16 Bonus scheme can be seen in the table below. The targets for the strategic objectives against which the personal performance of the CEO and CFO are assessed are commercially sensitive. Bonus opportunity as a percentage of salary Weighting between cash and shares Total bonus opportunity Percentage in cash (max) Percentage in shares (max) CEO 160% 100% 60% CFO 140% 90% 50% Percentage of total bonus opportunity payable against this measure for stretch performance Weightings of the measures and potential at threshold and stretch performance Weighting Percentage of total bonus opportunity payable against this measure for threshold performance Operating profit for 2015/16 70% 10.5% 70% Other performance objectives linked to the strategy 30% 4.5% if OP met1 30% if OP met1 Measure 1 If OP is not met, the Committee has the discretion to award a total bonus of up to 10% of the maximum bonus opportunity based on performance against the strategic objectives. What happened in relation to the LTIPs in 2014/15? Awards maturing in 2014/15 The following awards were made to Laurence Bain in 2011, subject to the following performance targets, and were scheduled to vest in July 2014: Number of shares under the PSP Chief Executive 1 140,937 Performance target for the PSP (pence) EPS of 21.9 for threshold vesting and 25.8 for full vesting Performance achieved in 2013/14 (pence) EPS of 14.3 Number of shares under the ESOP 157,765 Performance target for the ESOP Performance achieved in 2013/14 Adjusted RoS of 12% for threshold vesting and 15% for full vesting Adjusted RoS of 9.6% 1 Awarded to Laurence Bain in July 2011 in his former role as Chief Operating Officer. Awards made to Mark Whiteling in July 2011 lapsed when Mark left the Company in August 2011. These awards therefore lapsed in full without vesting. 79 Annual Report and Accounts 2014/15 Awards granted in 2014/15 The Remuneration Committee reviews the performance conditions that apply to long-term incentives each year to ensure that they remain relevant and stretching. Awards made in 2014/15 under the PSP and the ESOP are subject to the same two performance conditions, with one half of the award under each scheme subject to an EPS target (expressed as a compound growth rate) and the other half subject to an adjusted RoS performance measure. The targets for awards made in 2014/15 are: CAGR in EPS 2014/15 – 2016/171 EPS required in 2016/17 for vesting (pence) 12% or more Vesting percentage 20.1 or more 100% Between 5% and 12% 16.6 to 20.1 Between 20% and 100% on a straight-line basis Less than 5% Under 16.6 0% 1 The baseline against which growth in EPS over the three year performance period to 2016/17 is measured is EPS performance in 2013/14. Adjusted return on sales in 2016/17 Vesting percentage 11.5% or more 100% Between 20% and 100% on a straight-line basis Between 9.5% and 11.5% Less than 9.5% 0% Details of the awards made to Laurence and Mark during the year are set out in the table below. The Committee exercised its discretion to allow dividend equivalents to accrue on PSP awards granted to Executive Directors in the year, to the extent that such awards vest. If they do, dividend equivalents will accrue at the rate that dividends would have been paid on a number of shares equal to the vested shares during the period from grant to vesting and will be awarded as shares. What long-term incentive awards were made to the Directors during 2014/15? In 2014/15, awards were made to the Executives under the ESOP and PSP as follows (audited): Exercise price2 (pence) Percentage vesting at threshold performance3 £313,653 (60%) 0 10% 2014/15 to 2016/17 24 September 2014 £241,516 (60%) 0 10% 2014/15 to 2016/17 275,134 24 September 2014 £522,756 (100%) 190.00 10% 2014/15 to 2016/17 211,856 24 September 2014 £402,528 (100%) 190.00 10% 2014/15 to 2016/17 Type of award No of shares Date of grant Face value1 (percentage of salary on grant) Laurence Bain Nil cost option 165,080 24 September 2014 Mark Whiteling Nil cost option 127,113 Laurence Bain Market value option Mark Whiteling Market value option Performance period4 PSP ESOP 1 Face value is the maximum number of shares which will vest if all performance targets are achieved in full multiplied by the share price at grant (being 190.0p per share for the PSP and ESOP). Awards under the PSP and ESOP are made on the basis of the maximum percentage of salary specified. 2 This is the price to exercise the award. This is different from the price at grant used to calculate face value for the PSP as this is a nil cost option. 3 Assuming that either the adjusted RoS or the EPS performance condition is met in respect of one half of an award and that the performance condition for the other half lapses. 4 Performance conditions for the PSP and ESOP awards are above. Non-Executive Directors are not entitled to receive share awards. 80 Premier Farnell Annual Report on Remuneration continued What share awards were held by the Executive Directors at the end of the financial year? The Executive Directors have share awards outstanding under the DSBP, ESOP, PSP and SAYE schemes as detailed below. Laurence Bain (audited): Scheme DSBP ESOP3 PSP 3 SAYE At 2 February 20141 Grant date Awarded Market price on award2 (pence) Exercised/ vested Exercise price (pence) Market price on exercise (pence) (vesting) 59,983 18/03/2011 – 280.2 59,983 0 187.35 (220.00) 10,114 19/04/2013 – 203.3 – 0 – End of performance/ vesting period3 Lapsed At 1 February 20151 – – March 2013 – 10,114 April 2015 – 08/04/2014 28,589 234.4 – 0 – – 28,589 157,765 26/07/2011 – 190.16 – 190.16 – 157,765 – January 20144 April 2016 289,521 09/07/2012 – 172.7 – 172.7 – – 289,521 January 20154 254,491 28/06/2013 – 200.4 – 200.4 – – 254,491 January 20164 – 24/09/2014 275,134 190 – 190 – – 275,134 January 20174 140,937 26/07/2011 – 190.16 – 0 – 140,937 – January 20145 173,713 09/07/2012 – 172.7 – 0 – – 173,713 January 20155 152,694 28/06/2013 – 200.4 – 0 – – 152,694 January 20165 – 24/09/2014 165,080 190 – 0 – – 165,080 January 20175 5,056 01/06/2013 – 222.5 – 178 – – 5,056 June 2016 – 01/06/2014 4,787 234.4 – 188 – – 4,787 June 2017 Lapsed At 1 February 20151 End of performance/ vesting period3 Notes for both Laurence and Mark’s outstanding share awards are opposite. Mark Whiteling (audited): Scheme DSBP ESOP3 PSP 3 SAYE Exercised/ vested Exercise price (pence) Market price on exercise (pence) (vesting) At 2 February 20141 Grant date Awarded Market price on award2 (pence) 1,709 19/04/2013 – 203.3 – 0 – – 1,709 April 2015 – 08/04/2014 18,345 234.4 – 0 – – 18,345 April 2016 157,786 10/12/2012 – 183 – 183 – – 157,786 January 20154 195,958 28/06/2013 – 200.4 – 200.4 – – 195,958 January 20164 – 24/09/2014 211,856 190 – 190 – – 211,856 January 20174 105,191 10/12/2012 – 183 – 0 – – 105,191 January 20155 117,574 28/06/2013 – 200.4 – 0 – – 117,574 January 20165 – 24/09/2014 127,113 190 – 190 – – 127,113 January 20175 5,056 01/06/2013 – 222.5 – 178 – – 5,056 June 2016 – 01/06/2014 4,787 234.4 – 188 – – 4,787 June 2017 Notes for both Laurence and Mark’s outstanding share awards are opposite. 81 Annual Report and Accounts 2014/15 1 The market price of the Company’s ordinary shares at 2 February 2014 was 217.5p. The market price at 1 February 2015 was 169.0p (both priced on the immediately preceding trading day, as the last day of each financial year fell on a Sunday). The range during the year was 160.9p to 240.5p. 2 Save in the case of SAYE awards, this is the market price on the day prior to grant, being the price used to determine the number of shares under award. For SAYE awards, this is the market price used to determine the discounted price at which the awards were offered to all eligible employees. 3 Awards under the ESOP and the PSP have performance conditions. Awards under the DSBP and SAYE are dependent on the participant remaining employed by the Company for two and three years respectively from grant (unless a good leaver) and on the participant making the necessary contributions to the savings plan, in the case of the SAYE. 4 Outstanding awards under the ESOP are subject to the following performance conditions: Financial year awarded Performance period ends Performance condition and vesting scale (% of award) 2012/13 January 2015 Adjusted RoS: range from 12.0% to 15.0% 2013/14 January 2016 50% on Adjusted RoS: range from 10% to 12% 50% on CAGR in EPS: range from 5% to 12% 2014/15 January 2017 50% on Adjusted RoS: range from 9.5% to 11.5% 50% on CAGR in EPS: range from 5% to 12% 5 Outstanding awards under the PSP are subject to the following performance conditions: Financial year awarded Performance period ends Performance condition and vesting scale (% of award) 2012/13 January 2015 CAGR in EPS: range from 5% to 12% 2013/14 January 2016 50% on Adjusted RoS: range from 10% to 12% 50% on CAGR in EPS: range from 5% to 12% 2014/15 January 2017 50% on Adjusted RoS: range from 9.5% to 11.5% 50% on CAGR in EPS: range from 5% to 12% What is intended in relation to the LTIPs for 2015/16? In 2015/16, awards will be made to Executive Directors under the PSP only at a value of 85% of base salary (face value). There will be two performance measures for each award. To provide a clearer focus on growing profits, 70% of each award will be subject to a growth in EPS performance metric, measured over the three financial years to FY18. The EPS range for the 2015 awards will require Compound Annual Growth Rate of 7% at threshold (for 20% of maximum vesting) and 14% at stretch performance for 100% vesting, with a straight-line interpolation between these two points. The remaining 30% of each award will be subject to a second performance measure, aligned to the Group’s strategic imperatives, which the Committee will determine prior to the grant of awards in September 2015. Does the Company have a policy or issue guidelines on Directors’ shareholdings? The Company’s executive shareholding policy requires Executive Directors and the rest of the RemCo population to retain a number of shares equal to a percentage of the individual’s annual base salary. Only shares beneficially owned are taken into account for these purposes; vested but unexercised share awards are not included in calculating a holding. Once achieved, the minimum level of shareholding is then to be maintained until the Executive leaves office. Non-Executive Directors are not subject to the shareholding policy or other requirements to build up a holding of shares. Laurence and Mark are each required to reach a shareholding with a value equal to their annual base salary. The table below includes their current shareholdings and shows that, as at 1 February 2015, both Laurence and Mark have achieved the minimum level of holding. It also shows the holdings of our Non-Executive Directors at the end of the year. There were no changes to these holdings in the period from the year end to 24 April 2015 (the nearest practical day prior to the publication of this report). 82 Premier Farnell Annual Report on Remuneration continued (audited) Shareholdings Interests in shares LTIP2 % holding achieved1 Executive PSP ESOP DSBP SAYE Laurence Bain 495,661 214.9% 491,487 819,146 38,703 9,843 Mark Whiteling 204,314 109.4% 349,878 565,600 20,054 9,843 Non-Executive Val Gooding 19,903 Andrew Dougal 10,000 Gary Hughes 10,500 Dennis Millard 27,5003 Tom Reddin 15,000 Peter Ventress 15,000 Paul Withers 70,000 1 As at the year end and at the share price at that time. 2 Subject to performance conditions. 3 Shown at the year end only, as Dennis Millard retired from the Board on this date. As employees and potential beneficiaries of the Trust, the Executive Directors are also deemed to be interested in 3,862,021 ordinary shares held by the Premier Farnell Executive Trust. Neither they nor any other employee is expected to receive from the Trust a greater number of shares than he or she is entitled to on exercise of his or her awards under the Company’s share plans. How dilutive are the Company’s share-based incentive schemes? As at 1 February 2015, based on the number of awards outstanding under employee share plans to be satisfied using new issue shares: • the number of new shares issued or to be issued under all share option plans over the last 10 years, including both executive and all-employee plans, totalled an amount equal to 3.87% of the Company’s issued ordinary capital; • the number of new shares issued or to be issued under all executive share option plans over the last 10 years totalled an amount equal to 3.25% of the Company’s issued ordinary share capital. These totals are well within the dilution limits of 10% and 5% respectively set by the Association of British Insurers and reflected in the rules of the Company’s share plans. Do the Executive Directors have other directorships? Mark Whiteling stood down from his role as Non-Executive Director and Chairman of the Audit Committee of Future plc on 30 November 2014 and was appointed a Non-Executive Director at Hogg Robinson Group plc on 1 December 2014. In line with the Company’s Policy, Mark is entitled to retain the fees he receives from these appointments. During 2014/15 these totalled £43,333, made up as follows: Company Future plc Hogg Robinson plc Fees Payable in respect of the period £37,500 2 February 2014 to 30 November 2014 £5,833 1 December 2014 to 1 February 2015 83 Annual Report and Accounts 2014/15 When were the Directors appointed and what are the current dates of their service contracts or letters of appointment? Dates of appointment Service contracts Laurence Bain1 12 June 2012 5 November 2012 Val Gooding Mark Whiteling 5 November 2012 23 November 2012 Dennis Millard Dates of appointment Letters of appointment 15 June 2011 17 June 2014 1 September 2007 17 June 2014 Andrew Dougal 1 September 2006 17 June 2014 Tom Reddin 30 September 2010 18 June 2013 Paul Withers 1 September 2007 17 June 2014 2 Peter Ventress 1 October 2013 1 October 2013 Gary Hughes 1 November 2014 1 November 2014 1 As CEO. Laurence was Chief Operating Officer from 2003. 2 Dennis retired from the Board on 31 January 2015. How much does the Company spend on pay compared with dividends? The following table sets out the amounts spent in each of 2013/14 and 2014/15 on pay for all employees across the Group and on dividends in respect of the same period, together with the difference in spend between those years. Item £s in millions In 2013/14 i Total compensation expense ii Dividends In 2014/15 Percentage change 168.21 165.31 -1.7% 38.1 38.2 0.3% 1 Includes £2.0m (2013/14 £2.0m) in respect of Directors’ total remuneration. How much did your Chief Executive Officer’s pay change compared with pay for your other employees? The table below shows the percentage change from 2013/14 to 2014/15 in the salary, benefits and annual bonus paid to the CEO and in those of the average comparable UK employee. ‘Comparable’ here means other employees who have been employed on a full-time basis in the UK throughout this two year period and who have not been on sick, maternity, paternity or other extended leave in that period; it excludes the CEO’s salary, benefits and annual bonus. This comparator group has been chosen because it provides a stable comparison and because the Company has not to date collated this information to this level of detail on its employees in other parts of the Group. Percentage change Salary Benefits CEO 2.29% -1.36% Annual Bonus -1.24% Average UK employee 5.27% -6.10% -12.94% 84 Premier Farnell Annual Report on Remuneration continued How did shareholders vote on your Directors’ Remuneration Policy and your Annual Remuneration Report at your June 2014 AGM? At the AGM held on 17 June 2014 shareholders voting at the meeting and by proxy voted on the resolutions to approve the Annual Remuneration Report and the Directors’ Remuneration Policy as follows: Resolution to approve the Annual Remuneration Report Number of votes cast % of votes cast 307,368,164 97.95 6,440,884 2.05 313,809,048 100% 538,778 – Number of votes cast % of votes cast 298,328,556 95.43 14,295,499 4.57 312,624,055 100% 1,721,856 – Votes for Votes against Total Votes withheld Resolution to approve the Directors’ Remuneration Policy Votes for Votes against Total Votes withheld How has the Company performed in the last six years? How does that compare with what the CEO received? The graph below shows the total shareholder return for a holding of the Company’s ordinary shares for the six financial years of the Company, with 2014/15 being the last. This is compared to the total shareholder return over the same period for a hypothetical holding in (i) the FTSE mid-250 Index (being the index of which the Company is a constituent) and (ii) the FTSE All-Share Index. Both indices exclude investment trusts. Total shareholder return 400 Total shareholder return 350 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015 This graph compares the TSR performance of Premier Farnell, assuming dividends are re-invested, with the TSR performance of the FTSE250 (excluding Investment Trusts), and the FTSE All-Share (excluding Investment Trusts) over the period 1 February 2009 to 1 February 2015. The other points plotted show the TSR performance at intervening financial year ends. Premier Farnell Source: Thompson Reuters FTSE250 Index (excl. Investment Trusts) FTSE All-Share Index (excl. Investment Trusts) 85 Annual Report and Accounts 2014/15 This table sets out the total remuneration of the Chief Executive Officer of the Company over the same period, with awards vesting in each year under the annual bonus and LTI shown as a percentage of maximum opportunity in each case. Total remuneration Annual bonus as a percentage of maximum opportunity 2014/15 £898,000 2013/14 2012/13 Year LTI vesting as a percentage of maximum opportunity1 PSP ESOP In aggregate2 CEO 21.1% 0% 0% 0% Laurence Bain £894,000 21.9% 0% 0% 0% Laurence Bain £316,6693 7.3% 0% 0% 0% Laurence Bain £378,000 0% 0% 0% 0% Harriet Green 2011/12 £1,632,826 0% 79% n/a 79% Harriet Green 2010/11 £1,539,531 100% 49% n/a 49% Harriet Green 2009/10 £1,151,270 57% 59% 100%4 79.5% Harriet Green 1 Indicating the extent to which the relevant awards vesting in this year met their performance conditions. 2 Showing the aggregate value of the LTIP (PSP and ESOP combined) received at vesting divided by the aggregate value which could have vested if all performance measures had been met. 3 Paid in respect of the period of tenure of Laurence Bain as Chief Executive, but excluding his period of tenure as Chief Operating Officer. 4 Share options granted and meeting their performance conditions but underwater at the date of becoming exercisable. These awards subsequently lapsed without exercise. Approved by the Board on 24 April 2015. Signed on behalf of the Board by Paul Withers Chairman of the Remuneration Committee 86 Premier Farnell Independent auditors’ report to the members of Premier Farnell Plc Report on the financial statements What we have audited Premier Farnell Plc’s financial statements comprise: Our opinion • the Consolidated balance sheet as at 1 February 2015; In our opinion: Premier Farnell Plc’s consolidated financial statements and Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 1 February 2015 and of the Group’s profit and cash flows for the year then ended; • the Company balance sheet as at 1 February 2015; • the Consolidated income statement and consolidated statement of comprehensive income for the year then ended; • the Consolidated statement of cash flows for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; • the Consolidated statement of changes in equity for the year then ended; • the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the notes to the financial statements, which include other explanatory information. • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). • the Accounting policies; and Our audit approach Overview • Overall Group materiality: £4 million, which represents 5% of profit before tax before those Materiality Audit Scope items which are identified as adjusting items set out separately on the face of the consolidated income statement. • We conducted audit work in 10 countries covering 31 reporting units. • The reporting units subject to audit procedures accounted for 81% of Group revenues and 85% of Group adjusted profit before tax. Areas of focus • element14 inventory valuation. • Valuation of pension obligations. • Presentation of income statement adjusting items. 87 Annual Report and Accounts 2014/15 The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. Area of focus element14 inventory valuation Refer to page 55 (Audit Committee Report) and the Accounting policies for the Directors’ disclosures of the related accounting policies, judgements and estimates. The Group has significant inventory holdings at a number of reporting units. Group inventories at the year end were £260.9 million. Of this balance, a significant proportion is electronic component inventory in the element14 business, 91% of which is included within the reporting units subject to audit procedures. The Group’s operating model is designed to facilitate a high level of electronic component inventory availability to enable the Group to provide customers with access to a broad range of stock and to be able to provide fast and efficient delivery of products. The products are regularly updated to provide the latest technologies to customers and the Group has made significant investments in new electronic and technology components in the last two years to increase product availability and extend the range. Accordingly, inventory management is a critical business process. The changes in technology and investment in new products increase the risk of inventory becoming slow moving or obsolete. Inventory is held at cost less a provision for slow moving and obsolete stock. The inventory provision methodology is based on the level and value of inventory, the volume of sales and assessment of slow moving and obsolete inventory and requires a significant amount of judgement. How our audit addressed the area of focus As the element14 provisioning methodologies are dependent on the accurate recording and valuation of electronic component inventory, we understood and tested the key controls over inventory recording in the element14 business. To confirm the completeness and accuracy of inventory recording and reporting, we tested the automated three-waymatch control of purchase orders, goods received notes and purchase invoices and the controls over the complete and accurate updating of inventory records. We tested cycle count controls over inventory held at distribution centres, attending a sample of cycle counts and checking the items counted at the distribution centres were accurately recorded in the inventory records. Our testing supported the completeness and accuracy of inventory recording and reporting. In order to test the value attributed to the inventory, we tested the controls for the authorisation of changes to inventory cost data and performed substantive testing of inventory costing by agreeing a sample of inventory costs to external invoice which supported the value attributed to the inventory. We evaluated and challenged the Directors’ judgements on the application of provisioning policies and the methodologies used and considered if these remained appropriate in light of the products held by the Group and agreed that they did. We tested application of the Group’s provisioning methodologies by agreeing that the value of inventory, the ageing of inventory and product sales information which determine the appropriate category for the provision were being appropriately extracted from the system on a sample of products and re-performed the calculation of inventory provision on that sample of products which confirmed the inventory provisions were being calculated appropriately. We examined the level of inventory write offs and compared them to previous provisions held by the Group to assess the Directors’ accuracy in estimating inventory provisions and found them to be reasonable. To assess new product categories, we examined sales reports which demonstrated the sales profile of new products over a three year period and confirmed the Group policy for calculating provisions for new products is also reasonable. 88 Premier Farnell Independent auditors’ report to the members of Premier Farnell Plc continued Valuation of post employment benefits Refer to the Accounting policies for the Directors’ disclosures of the related accounting policies, judgements and estimates. Presentation of income statement adjusting items Refer to page 56 (Audit Committee Report) and note 2 in the financial statements. The Group has defined benefit pension plans in the UK and US which have gross post retirement assets of £206.2 million and gross post retirement liabilities of £256.6 million. In addition to these two principal pension plans the Group provides other post-retirement medical benefits. The total post employment benefits obligation is a net liability of £70.7 million, which is significant in the context of both the overall balance sheet and the results of the Group. The Group’s strategy involves the development of a global customer and supply chain model. As part of this Group strategy, in FY15 the Group announced a move to an integrated global organisational structure in its element14 businesses and has reported costs associated with evaluating and designing the programme in FY15. These costs are reported by the Group as adjusting items on the Consolidated income statement and are presented separately in arriving at an adjusted profit performance measure. The valuation of the pension and post-retirement medical benefit liabilities requires significant levels of judgement and technical expertise in choosing appropriate assumptions, a number of which are volatile. Changes in a number of the key assumptions (including salary increases, inflation, discount rates and mortality) can have a material impact on the calculation of the liabilities. The Group uses independent third party actuarial experts to calculate the pension and post-retirement medical benefit liabilities. How our audit addresed the area of focus We evaluated the Group’s key judgements taking into account the specific characteristics of the Group’s UK and US pension plans and post-retirement medical benefits plan. We assessed the assumptions used by the Directors’ with respect to discount rates, inflation rates and mortality rates by comparing them to our own, independently formed expectations. Based on our audit work we found that the assumptions used by the Directors’ were supportable and within our expected range. We also read and assessed the disclosures made in the financial statements, including disclosures of the assumptions used, and concluded they were appropriate. We focused on this area because the presentation of such items is not defined by IFRSs and it therefore requires judgement by the Directors’ when identifying such items and justifying their separate disclosure. Consistency in identifying and disclosing these items as adjusting is also important to maintain comparability of the results year on year. The judgements involved in calculating and presenting these costs in the income statement include assessing that the costs relate to the period under review and assessing that the costs are not normal operating costs but by their nature, size or incident are appropriate to be classified as adjusting items. How our audit addresed the area of focus We evaluated the Directors’ approach to the identification and disclosure of adjusting items to confirm the basis for presenting and calculating adjusting items has been applied consistently and justifiably and assessing whether the classification was in line with the Company’s accounting policy set out on page 99 of the financial statements. In FY15, the adjusting items recorded on the income statement totalled £4.9 million. The costs identified as adjusting items are primarily costs associated with the reorganisation programme and include consultancy fees and severance costs. We tested a sample of costs which confirmed the costs relate to the period under review. We have also assessed whether these costs are non-operational in nature and therefore by their nature are appropriate to be classified as adjusting items. We found that the classification judgements and disclosures made by management were in line with the Group’s accounting policy and that the costs are appropriate to include within adjusting items in the consolidated income statement. 89 Annual Report and Accounts 2014/15 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group financial statements comprise a consolidation of 61 reporting units in 22 countries. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed by us, as the Group engagement team, or component auditors from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. The Group’s operating reporting units vary significantly in size and we identified 29 reporting units that, in our view, required an audit of their complete financial information, due to their size or risk characteristics. Specific audit procedures over certain balances and transactions were performed at a further two reporting units, to give appropriate coverage of all material balances at both divisional and Group levels. We conducted work in 10 countries and the Group engagement team visited multiple reporting sites in the UK and North America. Together, the reporting units subject to audit procedures were responsible for 81% of Group revenues and 85% of Group adjusted profit before tax. Further specific audit procedures over central functions and areas of significant judgement, including adjusting items, taxation, goodwill, treasury, pension obligations and share-based payments, were performed at the local headquarters of each of the divisions and at the Group’s Head Office. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality £4 million (2014: £4 million). How we determined it 5% of profit before tax before those items which are identified as adjusting items set out separately on the face of the consolidated income statement. Rationale for benchmark applied We believe that profit before tax adjusted for those items which are set out separately on the face of the consolidated income statement provides us with a consistent year on year basis for determining materiality, eliminating the volatility of their impact and applying our materiality calculations to the reported profit on which the Group is normally measured. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.2 million (2014: £0.2 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the Directors’ statement, set out on page 61, in relation to going concern. We have nothing to report having performed our review. As noted in the Directors’ statement, the Directors’ have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the Directors’ intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern. 90 Premier Farnell Independent auditors’ report to the members of Premier Farnell Plc continued Other required reporting Consistency of other information Companies Act 2006 opinions In our opinion: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the information given in the Corporate Governance Report set out on pages 40 to 43 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • Information in the Annual Report is: -- materially inconsistent with the information in the audited financial statements; or -- apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Company acquired in the course of performing our audit; or We have no exceptions to report arising from this responsibility. -- otherwise misleading. • the statement given by the Directors on page 60, in accordance with provision C.1.1 of the UK Corporate Governance Code (“the Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Company’s performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. • the section of the Annual Report on page 54, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. We have no exceptions to report arising from this responsibility. Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements and the part of the Directors’ Remuneration Report to We have no exceptions to report arising from this responsibility. be audited are not in agreement with the accounting records and returns. Directors’ remuneration Directors’ Remuneration Report – Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review. Annual Report and Accounts 2014/15 91 Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statement of Directors’ responsibilities set out on pages 60 and 61, the Directors’ are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the Directors’; and • the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report and Accounts (the “Annual Report”) to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Caroline Roxburgh (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 24 April 2015 92 Premier Farnell Consolidated income statement Financial year ended 1 February 2015 Note Revenue 2014/15 £m 2013/14 £m 960.1 968.0 Cost of sales (606.9) (605.1) Gross profit 353.2 362.9 1 Net operating expenses – adjusted operating expenses 2 (265.2) (269.9) – adjusting items 2 (4.9) (1.5) Total net operating expenses 2 (270.1) (271.4) – adjusted operating profit 1 88.0 93.0 – adjusting items 2 (4.9) Total operating profit 1 83.1 91.5 Finance income 3 0.7 0.4 – interest payable 3 (11.2) (12.8) – preference dividends 3 (2.9) (3.5) – premium on redemption of preference shares 3 (0.6) (0.8) Total finance costs 3 (14.7) (17.1) Profit before taxation 4 69.1 74.8 Taxation 5 (21.6) (23.4) 47.5 51.4 Basic 12.9p 14.0p Diluted 12.8p 13.9p Operating profit (1.5) Finance costs Profit attributable to owners of the parent Earnings per share (pence) 6 The accounting policies and notes on pages 97 to 138 are an integral part of these consolidated financial statements. 93 Annual Report and Accounts 2014/15 Consolidated statement of comprehensive income Financial year ended 1 February 2015 Note Profit for the year 2014/15 £m 2013/14 £m 47.5 51.4 (26.7) (4.0) 7.8 0.7 (18.9) (3.3) Other comprehensive (expense)/income: Items that will not be reclassified to profit or loss Remeasurements of post-employment benefit obligations 26 Deferred tax credit on remeasurements of post-employment benefit obligations 18 Items that may be reclassified to profit or loss Net exchange adjustments Net fair value gains on cash flow hedges Total other comprehensive expense for the year Total comprehensive income for the year attributable to owners of the parent 19 0.3 (5.9) 0.2 6.0 0.5 0.1 (18.4) (3.2) 29.1 48.2 The accounting policies and notes on pages 97 to 138 are an integral part of these consolidated financial statements. 94 Premier Farnell Consolidated balance sheet At 1 February 2015 Note 2015 £m 2014 £m Goodwill 8 47.1 38.3 Other intangible assets 9 40.4 32.6 10, 26 1.0 0.8 Property, plant and equipment 11 52.3 49.5 Deferred tax assets 18 3.5 4.9 144.3 126.1 Assets Non-current assets Investments held at fair value Total non-current assets Current assets Inventories 12 260.9 236.0 Derivative financial instruments 19 2.4 2.0 Trade and other receivables 13 142.5 128.9 0.5 2.1 Current tax receivable Cash and cash equivalents 14 Total current assets 43.8 42.8 450.1 411.8 Liabilities Current liabilities Financial liabilities 15 (6.3) (1.8) Derivative financial instruments 19 (0.2) – Trade and other payables 17 (130.7) (118.4) (12.7) (12.4) Total current liabilities (149.9) (132.6) Net current assets 300.2 279.2 Current tax payable Non-current liabilities Financial liabilities 15 (296.3) (268.8) Post-employment benefits 26 (70.7) (45.1) Deferred tax liabilities 18 (0.3) (6.7) (367.3) (320.6) 77.2 84.7 Total non-current liabilities Net assets Equity Ordinary shares 20 18.6 18.6 Equity element of preference shares 16 8.5 10.4 32.8 32.7 Capital redemption reserve 5.2 4.4 Hedging reserve 2.2 2.0 Cumulative translation reserve 17.3 17.0 Retained earnings (7.4) Share premium Total equity 77.2 (0.4) 84.7 The consolidated financial statements on pages 92 to 138 were approved by the Board of Directors on 24 April 2015 and were signed on its behalf by: Mark Whiteling Director The accounting policies and notes on pages 97 to 138 are an integral part of these consolidated financial statements. 95 Annual Report and Accounts 2014/15 Consolidated statement of changes in equity Financial year ended 1 February 2015 Note Equity at 3 February 2013 Equity Ordinary element of share preference capital shares £m £m Capital Share redemption premium reserve £m £m Hedging reserve £m 18.5 10.4 32.0 4.4 (4.0) Profit for the year – – – – – Other comprehensive income/ (expense): – – – – Total comprehensive income – – – – Cumulative translation reserve £m 22.9 Retained earnings £m Total equity £m (12.0) 72.2 – 51.4 51.4 6.0 (5.9) (3.3) (3.2) 6.0 (5.9) 48.1 48.2 Transactions with owners: – Ordinary dividends paid 7 – – – – – – (38.1) (38.1) – Ordinary share capital subscribed 20 0.1 – 0.7 – – – – 0.8 – Share-based payments 21 – – – – – – 1.6 1.6 0.1 – 0.7 – – – (36.5) (35.7) 18.6 10.4 32.7 4.4 2.0 17.0 (0.4) 84.7 Profit for the year – – – – – – 47.5 47.5 Other comprehensive income/ (expense): – – – – 0.2 0.3 (18.9) (18.4) Total comprehensive income – – – – 0.2 0.3 28.6 29.1 7 – – – – – – (38.2) (38.2) – Ordinary share capital subscribed 20 – – 0.1 – – – – 0.1 – Purchase of preference shares 16 Equity element – (1.9) – – – – 1.9 – Transfer to non-distributable reserves – – – 0.8 – – (0.8) – – – – – – – 1.5 1.5 0.1 0.8 – – (35.6) (36.6) 32.8 5.2 2.2 17.3 (7.4) 77.2 Total transactions with owners Equity at 2 February 2014 Transactions with owners: – Ordinary dividends paid – Share-based payments Total transactions with owners Equity at 1 February 2015 21 – 18.6 (1.9) 8.5 The accounting policies and notes on pages 97 to 138 are an integral part of these consolidated financial statements. 96 Premier Farnell Consolidated statement of cash flows Financial year ended 1 February 2015 Note 2014/15 £m 2013/14 £m 23 78.8 80.4 0.7 0.4 (10.3) (12.4) (2.9) (3.5) Taxation paid (17.4) (17.5) Net cash generated from operating activities 48.9 47.4 Cash flows from operating activities Cash generated from operations Interest received Interest paid Dividends paid on preference shares Cash flows from investing activities Acquisition of businesses 22 (7.8) (2.2) Net (outflow)/inflow from sale of property, plant and equipment 23 (0.6) 4.2 (6.2) (5.1) Purchase of property, plant and equipment Purchase of intangible assets (computer software) (14.5) (12.7) Net cash used in investing activities (29.1) (15.8) 20 0.1 0.8 Cash flows from financing activities Issue of ordinary shares Purchase of preference shares 16 (11.5) Proceeds from bank loans 24 63.3 27.3 Repayment of bank loans 24 (35.1) (108.6) 7 (38.2) (38.1) (21.4) (118.6) (1.6) (87.0) Dividends paid to ordinary shareholders Net cash used in financing activities Net decrease in cash, cash equivalents and bank overdrafts 24 Cash, cash equivalents and bank overdrafts at beginning of year Exchange gains/(losses) Cash, cash equivalents and bank overdrafts at end of year 14, 24 – 42.8 131.6 2.6 (1.8) 43.8 42.8 The accounting policies and notes on pages 97 to 138 are an integral part of these consolidated financial statements. Annual Report and Accounts 2014/15 97 Accounting policies Premier Farnell plc (the “Company”) is a company incorporated and domiciled in the UK and is listed on the London Stock Exchange. The address of the Company’s registered office is Farnell House, Forge Lane, Leeds LS12 2NE, England. The Company’s registered number is 876412. These consolidated financial statements have been approved by the Board of Directors on 24 April 2015. Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. These consolidated financial statements have been prepared on a going concern basis, as referred to in the Directors’ Report on page 61, and under the historical cost convention with the exception of certain financial assets and financial liabilities (including derivative financial instruments) which are recognised at fair value through profit and loss. A summary of the more important Group accounting policies adopted in the preparation of the consolidated financial statements is set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Standards, amendments to published standards and interpretations effective for the year ended 1 February 2015 There are no IFRSs or IFRIC interpretations that are effective that have a material impact on the Group. (b) New standards, amendments and interpretations issued but not effective for the year ended 1 February 2015 not early adopted There are no IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Key sources of estimation and uncertainty The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimates is contained in the Accounting Policies and Notes to the consolidated financial statements, and the key areas are summarised below: The key sources of estimation uncertainty that have the most significant effect on the carrying value of assets and liabilities are: • The estimation of the cost of pensions and other post-employment benefits (note 26); • The estimation of the net realisable value of inventory (note 12); • The estimation of the recoverable amount of goodwill used when assessing goodwill for impairment (note 8); • The estimation of vesting conditions in the calculation of cost of share-based payments (note 21); and • The estimation of deferred tax (note 18). Basis of consolidation The consolidated financial statements incorporate the results of the Company and each of its subsidiaries for the financial year ended 1 February 2015, a 52 week period (financial year ended 2 February 2014: 52 week period). Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The results of subsidiaries are included in the consolidated financial statements from the date the control commences until the date that control ceases. Consistent accounting policies have been adopted across the Group. A list of principal trading subsidiaries of the Group is shown in note D of the Company financial statements. Intra-group balances and transactions are eliminated on consolidation. 98 Premier Farnell Accounting policies continued Business combinations and goodwill All business acquisitions are accounted for by applying the purchase method. Goodwill arises where the fair value of the consideration paid exceeds the fair value attributed to the net assets acquired and is measured at cost less accumulated impairment losses. Goodwill arising on acquisitions after 1 February 1998 and prior to 2 February 2004, the transition date to IFRS, was capitalised and amortised over its estimated useful life. As a result of the transition to IFRS, such amortisation ceased on the transition date to IFRS. Goodwill arising on acquisitions made prior to 1 February 1998 was written off directly to reserves in the year of acquisition. Under IFRS 1 and IFRS 3 such goodwill will remain eliminated against reserves and will not be written back to the income statement in the event of a disposal. Any business combination on or after 31 January 2011 will be accounted for in accordance with IFRS 3 (revised), ‘Business Combinations’, as follows: • Transaction costs are expensed as incurred; • Consideration transferred for the acquisition of subsidiaries is the fair value of assets transferred, liabilities incurred and equity interests issued by the Group which includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, and who has been identified as the Board of Directors. Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in pounds sterling, which is the Group’s presentation currency. Monetary assets and liabilities are translated at the exchange rates ruling at the end of the financial period. Non-monetary assets and liabilities are translated at historic transaction rates. Exchange profits or losses on trading transactions are included in the Group income statement except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges, which, along with other exchange differences arising from non-trading items are dealt with through reserves. The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement are translated at the average exchange rate for the period; and • with effect from the transition date to IFRS all resulting exchange differences are recognised as a separate component of equity and included in the Group’s cumulative translation reserve. When a foreign entity is sold, such translation differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Revenue recognition Revenue from the Group’s principal business segments is recognised on the following basis: MDD Revenue comprises the fair value of the sale of goods to external customers, net of sales taxes, returns and discounts. Revenue is recognised on despatch of goods when the significant risks and rewards of ownership have passed to the customer and the amount of revenue can be measured reliably. Freight costs charged to customers are included within revenue. 99 Annual Report and Accounts 2014/15 The MDD business segment operates a variety of sales promotion schemes that give rise to goods being sold at a discount to standard list price. Revenue is adjusted to show sales net of all related discounts which are primarily recognised at point of sale. Design service revenue is earned principally on the sale of development kits and tools and design software to external customers and is recognised on despatch of the goods or delivery of the design software. Customer support services such as technical support and access to the Group’s online community website form part of the Group’s ongoing customer proposition, do not attach to any separable transaction and are not charged to external customers. IPD Revenue comprises the fair value of the sale of goods to external customers, net of sales taxes and discounts which are primarily recognised at point of sale. Revenue is recognised on the sale of goods when the significant risks and rewards of ownership have passed to the customer and the amount of revenue can be measured reliably. Revenue is recognised on this basis according to the terms of the customer contract which is typically on despatch to customers but can be according to other trigger points as documented in the relevant contract, for example on customs clearance at destination. Freight costs charged to customers are included within revenue. Expense classification Cost of sales comprises the cost of goods delivered to customers including the cost of freight, packaging and inventory adjustments. Distribution costs represent all operating expenses including sales, marketing, product and purchasing, warehousing, information technology and electronic commerce. Administrative expenses comprise the cost of central head office and the Group Board. Adjusting items Non-recurring charges/credits and restructuring costs that are considered to be sufficiently significant to have a material impact on the Group’s financial results are disclosed in the appropriate category separately on the face of the income statement as “adjusting items” and are described in detail in note 2. Catalogue costs Catalogue costs are treated as an expense as incurred and included in distribution costs. Research and development Expenditure on research and development activities undertaken with the prospect of gaining new technical knowledge and understanding is expensed in the income statement as incurred. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to working condition for its intended use. Depreciation is calculated to write off the cost of the individual assets, less the estimated residual value, from the time they become operational by equal annual instalments over their estimated useful lives. Asset lives and residual values are reviewed annually. Depreciation rates are principally as follows: Freehold land Freehold buildings Plant and equipment not depreciated between 20 and 50 years between 5 and 10 years Property, plant and equipment is reviewed for impairment when there are indications that the carrying value may not be recoverable. 100 Premier Farnell Accounting policies continued Intangible assets Intangible assets are stated at cost less accumulated amortisation and impairment losses. Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Development costs, including internal labour, are capitalised where directly attributable to the design and testing of identifiable and unique software assets controlled by the Group, and where the following criteria are met: • technically feasible to complete the software so that it will be available for use; • management intends to complete the software for use; • ability exists to use the software; • probable future economic benefits of the software can be demonstrated; • adequate technical, financial and other resources are available to complete and use the software; and • expenditure attributable to the software during development can be reliably measured. These costs are amortised on a straight-line basis over their estimated useful lives, between three and seven years. Other intangible assets acquired through business combinations are recognised at fair value on acquisition and amortised on a straight-line basis over their estimated useful lives as follows: Contractually-based customer relationships and trade names Patents Between 4 and 20 years Up to 20 years Impairment The carrying amounts of the Group’s goodwill are reviewed annually, or when there are indications that the carrying value may not be recoverable, to determine whether there is any indication of impairment. Goodwill is allocated to cash generating units for the purpose of impairment testing. If any such indication exists, the assets’ recoverable amount is estimated and if the carrying value exceeds the recoverable amount, a loss is recognised in the income statement. The recoverable amount is the greater of the assets’ net selling price and value in use where value in use is based on the present value of the estimated future cash flows arising from the asset. A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of a past event subsequent to the asset’s initial recognition. The Group assesses whether objective evidence exists for each financial asset or group of financial assets at the balance sheet date to determine whether any impairment has arisen. Financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not have or issue speculative derivative arrangements. All transactions in financial instruments are matched to an underlying business requirement. Derivative financial instruments are recognised at fair value. At period ends, the gain or loss on remeasurement to fair value is recognised in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resulting gain or loss will depend upon the nature of the item being hedged (see accounting policy on hedging). Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Annual Report and Accounts 2014/15 101 Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in other comprehensive income. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or liability, the associated gains or losses that were recognised directly in other comprehensive income are reclassified into profit or loss in the same period(s) during which the income/expense is recognised. For other cash flow hedges, the associated cumulative gain or loss is removed from other comprehensive income and recognised in the income statement in the same period(s) as which the hedged forecast transaction affects profit or loss. The gain or loss on any ineffective part of the hedge, or when the hedge no longer meets the hedging criteria, is immediately recognised in the income statement. Hedge of net investment in foreign operations The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined as an effective hedge is recognised directly in other comprehensive income. The gain or loss on any ineffective portion of the hedge is recognised immediately in the income statement. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. The costs of operating leases are charged to the income statement on a straight-line basis over the period of the lease. Dilapidation provisions The Group is required to perform dilapidation repairs on leased properties prior to the properties being vacated at the end of their lease term. Provision for such costs is made where a legal obligation is identified and the liability can be reasonably quantified. Employee benefits Pensions The Group operates both defined benefit and defined contribution pension plans. In respect of defined benefit plans (where the amount of pension is defined, usually based on factors such as age, years of service and compensation), the net asset or obligation of each plan at the balance sheet date is calculated by a qualified actuary using the projected unit credit method. The obligation is calculated by discounting the amount of future benefits that employees have earned in return for their service in the current and prior periods. Plan assets are recorded at fair value. The net income statement credit/charge comprises principally the service cost, and the finance income/costs, which are recognised in the period in which they arise. The net income statement impact is credited/ charged in arriving at operating profit. The net pension deficit/surplus of each pension plan is recorded on the balance sheet. All actuarial gains and losses at the date of transition to IFRS have been recognised in equity at that date. Actuarial gains and losses that arise subsequent to the transition date to IFRS in calculating the Group’s obligation in respect of each plan, are recognised in other comprehensive income in the period in which they arise. Administration costs are recognised in the income statement when the administration services are provided. Payments to defined contribution pension plans (where the Group pays fixed contributions into a separate entity) are charged as an employee benefit expense as they fall due. The Group has no further payment obligations once contributions have been paid. Other post-employment benefits In the US, the Group provides unfunded post-employment medical benefits to certain US employees. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses are recognised in other comprehensive income in the period in which they arise. Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. 102 Premier Farnell Accounting policies continued Share-based payments The Group operates five equity settled, share-based incentive schemes: an Executive Share Option Plan, a Performance Share Plan, a Restricted Share Plan, a Deferred Share Bonus Plan and a Save As You Earn Scheme. These are accounted for in accordance with IFRS 2, Share-based Payments, which requires an expense to be recognised in the income statement over the vesting period. The expense is based on the fair value of each instrument at the grant date, using appropriate option pricing models. The expense is credited to retained earnings. All of the Group’s share-based incentives have non-market based performance measures (earnings per share or return on sales), for which the Black Scholes model is used and the value of the expense is adjusted to reflect expected and actual levels of vesting. The fair value of SAYE grants is calculated using the Black Scholes model and the expense is only adjusted to reflect forfeitures. Share capital and distribution of dividends Ordinary share capital is classified as equity. Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they are approved. The Group’s preference shares are split into debt and equity components, with the associated dividend being recognised on an accruals basis in the income statement as a finance cost. The fair value of the debt element is established on issue of the shares, based on the discounted cash flows of the instrument to the date of maturity, and is then increased each year on an amortised cost basis through the income statement in order to arrive at the redemption amount payable on maturity of the shares. On purchase and cancellation of preference shares by the Company, a gain or loss is recognised in the income statement based on the difference between the book value and fair value of the financial liability element of the instrument at the date of purchase. The difference between the book value and fair value of the equity element of the instrument is recognised as a movement in retained earnings. In addition, a transfer is made to non-distributable reserves from retained earnings in order to maintain the legal nominal value of share capital. Inventories Inventories are stated at the lower of cost and net realisable value on a first-in first-out basis. Cost comprises all expenditure, including related production overheads where appropriate, incurred in the normal course of business in bringing the inventory to its present location and condition at the balance sheet date. Net realisable value is the estimated selling price less any selling costs. Provision is made against slow moving and obsolete inventory where appropriate. Current and deferred income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity, or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future periods has been entered into by the subsidiary. Annual Report and Accounts 2014/15 103 Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. Investment in own shares Shares acquired by the Premier Farnell Executive Trust are shown as a reduction in shareholders’ funds. The cost of administering the trust is borne by the Company as incurred. Trade and other receivables Trade and other receivables are initially recognised at fair value and subsequently held at amortised cost. A provision for impairment is made when there is objective evidence, for example default or delinquency in payments, that the full amount will not be collectible. Such amounts are written down to their estimated recoverable amounts, with the charge being made to operating expenses. Cash and cash equivalents Cash and cash equivalents comprise cash balances and short-term deposits repayable on demand and available within one day without penalty. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement, but shown separately within current liabilities in the balance sheet. Trade and other payables Trade and other payables are initially recognised at fair value and subsequently held at amortised cost. 104 Premier Farnell Notes to the consolidated financial statements 1 Segmental information The Group is organised into four reportable business segments: the Marketing and Distribution Division (MDD), comprising the Americas, Europe and Asia Pacific, and Other Distribution Businesses, and the Industrial Products Division (IPD). The segments presented below are consistent with the information presented to the Board which is deemed to be the Group’s chief operating decision-maker (CODM). The Marketing and Distribution Division (MDD) supports customers around the world who range from engineers to purchasing professionals and electronics enthusiasts. MDD includes both the element14 businesses in Americas, Europe and Asia Pacific as well as CPC and MCM. The Industrial Products Division comprises Akron Brass, an innovator in life safety and the world leader in the manufacture of high-performance components for fire-fighting. 2014/15 £m 2013/14 £m Americas 333.1 347.1 Europe and Asia Pacific 436.4 435.9 Segment revenue MDD Other Distribution Businesses Total MDD Industrial Products Division 117.1 109.7 886.6 892.7 73.5 75.3 960.1 968.0 Revenues between business segments are not significant. 2014/15 2013/14 Before adjusting items £m Adjusting items (note 2) £m After adjusting items £m Before adjusting items £m Adjusting items (note 2) £m After adjusting items £m Americas 19.5 – 19.5 19.7 0.6 20.3 Europe and Asia Pacific 57.2 56.1 60.3 0.2 60.5 Other Distribution Businesses 11.7 11.7 12.1 – 12.1 Total MDD 88.4 Industrial Products Division 13.7 Head Office costs (14.1) 88.0 Segment result (operating profit) MDD (1.1) – (1.1) 87.3 92.1 0.8 92.9 13.7 14.0 – 14.0 (3.8) (17.9) (13.1) (2.3) (15.4) (4.9) 83.1 93.0 (1.5) 91.5 – Head Office costs do not meet the definition of a segment as defined under IFRS 8 ‘Operating Segments’ but are presented in order to reconcile to the operating profit presented in the consolidated income statement. Segment depreciation and amortisation 2014/15 £m 2013/14 £m Americas 5.4 6.5 Europe and Asia Pacific 8.1 9.5 Other Distribution Businesses 0.5 0.4 14.0 16.4 1.3 1.3 15.3 17.7 MDD Total MDD Industrial Products Division 105 Annual Report and Accounts 2014/15 2015 £m Segment assets 2014 £m MDD Americas 175.2 147.4 Europe and Asia Pacific 270.3 250.9 45.9 43.6 491.4 441.9 51.0 42.5 0.8 0.9 543.2 485.3 Other Distribution Businesses Total MDD Industrial Products Division Head Office Total segment assets Unallocated assets 43.8 42.8 Derivative financial instruments 2.4 2.0 Current tax receivable 0.5 2.1 Deferred tax assets 3.5 4.9 Cash and cash equivalents Investments held at fair value 1.0 0.8 594.4 537.9 Head Office assets do not meet the definition of a segment as defined under IFRS 8 ‘Operating Segments’ but are presented in order to reconcile to assets presented in the consolidated balance sheet. Cash and cash equivalents are managed on a Group basis and thus it is not practical to allocate these assets to segments. The Group is domiciled in the UK. Revenue based on origin and non-current assets other than deferred tax assets by main geographical area are split as follows: Revenue Non-current assets 2014/15 £m 2013/14 £m 2014/15 £m 2013/14 £m Americas 438.4 450.9 50.4 34.4 UK 283.9 234.7 70.7 67.6 Rest of Europe and Asia Pacific 237.8 282.4 18.5 18.4 960.1 968.0 139.6 120.4 No one single customer accounts for more than 1.5% of revenue. 106 Premier Farnell Notes to the consolidated financial statements continued 2 Net operating expenses 2014/15 Distribution costs/(credit): Administrative expenses Research and development expenditure Before adjusting items £m 2013/14 Adjusting items £m After adjusting items £m Before adjusting items £m Adjusting items £m After adjusting items £m 242.3 1.1 243.4 247.8 (0.8) 247.0 14.1 3.8 17.9 13.1 2.3 15.4 8.8 – 8.8 9.0 – 9.0 265.2 4.9 270.1 269.9 1.5 271.4 Adjusting items included within distribution costs comprise £1.3 million of restructuring costs, a £0.3 million net gain on US property disposal and £0.1 million of acquisition costs (2013/14: a net credit of £0.8 million, comprising a £1.6 million net gain on a US property disposal and a £0.8 million gain on remeasurement of the fair value of contingent consideration, offset by £1.6 million of restructuring costs). Adjusting items included within administrative expenses comprise £3.8 million of restructuring costs (2013/14: £2.3 million of restructuring costs). Total restructuring costs of £5.1 million (2013/14: £3.9 million) were incurred during the current year, relating to the Group’s global business re-organisation and comprise the cost of redundancies completed in the period and change programme costs including consultancy in developing the proposed new organisational design. The net impact of restructuring costs after tax was £3.6 million. Acquisition costs of £0.1 million (2013/14: £nil) relate to the acquisition of AVID Technologies Inc (AVID) during the current financial year (note 22). The net acquisition costs after tax were £0.1 million. The £0.3 million net gain on US property disposal relates to savings on expenses incurred in the relocation of the MDD Americas Head Office. The net gain after tax was £0.2 million. Research and development (R&D) expenditure comprises product R&D expensed by the Industrial Products Division of £3.3 million (2013/14: £3.2 million), and the R&D costs incurred by the Marketing and Distribution Division in researching and developing new and improved solutions to customer service of £5.5 million (2013/14: £5.8 million). 3 Net finance costs Note 2014/15 £m 2013/14 £m 0.7 0.4 Finance income – interest receivable on short-term deposits Finance costs – interest payable on bank borrowings (2.9) (2.0) – other interest payable (7.7) (10.3) – amortisation of arrangement fees – preference dividend 16 – premium on redemption of preference shares 16 (0.6) (0.5) (2.9) (3.5) (0.6) (0.8) Total finance costs (14.7) (17.1) Net finance costs (14.0) (16.7) Other interest payable relates to US private placement notes. 107 Annual Report and Accounts 2014/15 4 Profit before taxation – analysis by nature Profit before taxation is stated after charging/(crediting): Note 2014/15 £m 2013/14 £m Employee benefits expense 25 165.3 168.2 Depreciation of property, plant and equipment 11 7.2 7.4 9 8.1 10.3 23 – (0.1) 5.5 6.1 Amortisation of intangible assets Gain on sale of other property, plant and equipment Operating lease rentals – land and buildings 1.2 1.5 12 549.9 550.1 2 8.8 9.0 13 1.4 1.4 1.4 1.1 – other Cost of inventories recognised as an expense (included in cost of sales) Research and development expenditure Impairment of trade receivables Exchange losses (except those arising on financial instruments) Adjusting items: Restructuring costs 2 5.1 3.9 Net gain on US property disposal 2 (0.3) (1.6) Acquisition costs 2 0.1 – Remeasurement of contingent consideration 2 – (0.8) 4.9 1.5 During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor as detailed below: 2014/15 £m 2013/14 £m 0.4 0.4 The audit of the Company’s subsidiaries 0.3 0.3 Total audit services 0.7 0.7 Taxation compliance services 0.1 0.2 Audit services Fees payable to the Company’s auditors for the audit of the parent company and the consolidated financial statements Other services Fees payable to the Company’s auditors and its associates for other services: Other services 0.1 0.1 0.9 1.0 The fee for audit services shown above includes £0.1 million (2013/14: £0.1 million) in respect of the Company. Taxation services paid to the Company’s auditors, PricewaterhouseCoopers LLP, are in respect of assignments carried out on a worldwide basis. It is the Group’s policy to employ PricewaterhouseCoopers LLP on assignments additional to their statutory duties where their expertise and experience of the Group is important, or where they are awarded assignments on a competitive basis. 108 Premier Farnell Notes to the consolidated financial statements continued 5 Taxation 2014/15 £m 2013/14 £m 18.5 17.9 0.3 (0.4) 18.8 17.5 – current year 3.0 5.4 – adjustment in respect of prior years (0.2) 0.5 2.8 5.9 Total tax charge 21.6 23.4 Note Current taxation charge – current year – adjustment in respect of prior years Deferred taxation charge 18 Tax on items charged directly to equity/other comprehensive income: – deferred tax credit on actuarial losses (7.8) (0.7) The overall tax for the financial year can be reconciled to the rate of corporation tax in the UK of 21.3% (2013/14: 23.2%) as follows: Profit before taxation Preference dividends Profit before tax and preference dividends Profit before tax and preference dividends multiplied by 21.3% (2013/14: 23.2%) 2014/15 £m 2013/14 £m 69.1 74.8 2.9 3.5 72.0 78.3 2014/15 £m 2013/14 £m 15.4 18.2 Effect of prior year adjustments 0.1 0.1 Adjustments in respect of foreign tax rates 3.7 3.5 Other current year items 2.4 1.6 21.6 23.4 Total tax charge Factors affecting current and future tax charges: During the year, the UK main corporation tax rate was reduced from 23% to 21% from 1 April 2014, with a further reduction to 20% from 1 April 2015 substantively enacted in July 2013. Deferred tax balances were remeasured in the 2014 statements and remain at the 20% rate for 2015. No further reductions to the UK corporation tax rate have been announced since July 2013. 109 Annual Report and Accounts 2014/15 6 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders for the year by the weighted average number of ordinary shares in issue during the year, excluding those shares held by the Premier Farnell Executive Trust (note 20). For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume issue of all dilutive potential ordinary shares, being those share options and awards with a non-market based performance condition granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year. Reconciliations of earnings and the weighted average number of ordinary shares used in the calculations are set out below: 2014/15 Earnings £m Basic earnings per share pence Diluted earnings per share pence 47.5 12.9 5.1 Profit attributable to owners of the parent Restructuring costs Tax attributable to restructuring costs Acquisition costs Tax attributable to acquisition costs Net gain on US property disposal Tax attributable to net gain on US property disposal Remeasurement of contingent consideration Profit attributable to owners of the parent before adjusting items 2013/14 Earnings £m Basic earnings per share pence Diluted earnings per share pence 12.8 51.4 14.0 13.9 1.4 1.4 3.9 1.1 1.1 (1.5) (0.4) (0.4) (1.1) (0.3) (0.3) 0.1 – – – – – – – – – – – (0.3) (0.1) (0.1) (1.6) (0.4) (0.4) 0.1 – – 0.6 0.1 0.1 – – – (0.8) (0.2) (0.2) 51.0 13.8 13.7 52.4 14.3 14.2 Adjusted earnings per share have been provided in order to facilitate year-on-year comparison. 2014/15 Number 2013/14 Number 367,511,796 367,069,378 1,498,900 2,763,398 369,010,696 369,832,776 2014/15 £m 2013/14 £m Interim paid of 4.4p (2013/14: 4.4p) per share 16.2 16.1 Prior year final paid of 6.0p (2013/14: 6.0p) per share 22.0 22.0 38.2 38.1 Weighted average number of shares Dilutive effect of share options Diluted weighted average number of shares 7 Ordinary dividends paid during the year Ordinary dividends paid during the year were as follows: Dividends amounting to £0.4 million (2013/14: £0.5 million) in respect of the Company’s ordinary shares held by the Premier Farnell Executive Trust (note 20) have been waived in arriving at the aggregate of ordinary dividends paid. The Directors are proposing a final dividend in respect of the financial year ended 1 February 2015 of 6.0 pence per share which will absorb £22.0 million of shareholders’ funds. This is subject to approval at the Annual General Meeting and thus has not been provided for at 1 February 2015. Once approved, the final dividend will be paid on 25 June 2015 to shareholders on the register of members on 29 May 2015. 110 Premier Farnell Notes to the consolidated financial statements continued 8 Goodwill £m Cost and net book value At 3 February 2013 37.9 Acquisition of business (note 22) 0.7 Currency translation adjustment At 2 February 2014 (0.3) 38.3 Acquisition of business (note 22) 7.4 Currency translation adjustment 1.4 At 1 February 2015 47.1 Of the total goodwill at 1 February 2015 of £47.1 million, £8.3 million relates to MDD Americas, £33.8 million to MDD Europe and Asia Pacific, £0.1 million to MDD Other Distribution Businesses and £4.9 million to the IPD business. In accordance with IAS 36, goodwill of £26.6 million (2014: £26.6 million) for the purpose of impairment testing has been allocated to the cash generating unit that comprises Farnell UK (part of MDD Europe and Asia Pacific Division). The recoverable amounts have been measured based on value in use. The key assumptions in the value in use calculations, which were performed for the cash generating unit that comprises Farnell UK, based on data available at the mid-point of the financial year, were as follows: • sales growth for the current year was based on internal forecasts with growth in the five subsequent years broadly in line with historic UK GDP and a terminal growth rate of 2.5% (2014: 2.5%); • gross margins were projected based on recent trends; and • a market risk premium, of 4.0% (2014: 5.0%), was used in calculating the weighted average cost of capital. Forecast cash flows have been prepared for a period of five years. From the second year onwards, the rate of growth used does not exceed the long-term growth rate for the industry in which the business operates. The pre-tax cash flows that these projections produce have been discounted at a pre-tax discount rate of 12.1% (2014: 11.9%). No impairment arose during the current financial year as a result of this test. The remaining goodwill of £20.5 million (2014: £11.7 million) is allocated across six (2014: five) different cash generating units. Impairment tests have been performed on the other amounts based on value in use and using similar assumptions to that above. No impairments arose during the year in relation to these amounts. The Directors believe there are no reasonably possible changes to a key assumption which would give rise to an impairment charge. 111 Annual Report and Accounts 2014/15 9 Other intangible assets Computer software £m Other £m Total £m 138.2 10.3 148.5 12.6 – 12.6 Cost At 3 February 2013 Additions Currency translation adjustment (3.3) (0.1) (3.4) 147.5 10.2 157.7 Additions 14.5 – 14.5 Disposals (4.3) – (4.3) At 2 February 2014 Currency translation adjustment 6.7 0.4 7.1 164.4 10.6 175.0 113.7 3.8 117.5 Charge for the year 9.5 0.8 10.3 Currency translation adjustment (2.7) – (2.7) At 2 February 2014 120.5 4.6 125.1 Charge for the year 7.5 0.6 8.1 Disposals (4.3) – (4.3) Currency translation adjustment 5.6 0.1 5.7 129.3 5.3 134.6 At 1 February 2015 Accumulated amortisation At 3 February 2013 At 1 February 2015 Net book amounts At 1 February 2015 35.1 5.3 40.4 At 2 February 2014 27.0 5.6 32.6 At 3 February 2013 24.5 6.5 31.0 Amortisation of £8.1 million (2013/14: £10.3 million) is included in operating expenses. Computer software comprises software that is separately identifiable from plant and equipment and includes software licences and the capitalisation of internal labour relating to software development. During the current financial year £7.0 million (2013/14: £6.7 million) of internal labour was capitalised. Commitments to acquire intangible assets authorised and contracted at 1 February 2015 amounted to £nil million (2014: £0.5 million). Other intangible assets relate to the following items acquired through business combinations: 2015 £m 2014 £m Useful life Contractually based customer relationships and trade names 5.2 5.5 9–20 years Patents 0.1 0.1 16–20 years 5.3 5.6 112 Premier Farnell Notes to the consolidated financial statements continued 10 Investments held at fair value Listed fixed income and equity funds 2015 £m 2014 £m 1.0 0.8 The Group has £1.0 million (2014: £0.8 million re-presented) of assets held in Trust on behalf of certain US employees as post employment benefits. The assets are primarily invested in fixed income and equity funds under each employee’s instructions. Further details are given in note 26. 11 Property, plant and equipment Freehold land and buildings £m Plant and equipment £m Total £m Cost 59.1 111.6 170.7 Additions At 3 February 2013 0.1 5.0 5.1 Disposals (note 23) (7.2) (2.6) (9.8) Currency translation adjustment (2.3) (4.3) (6.6) At 2 February 2014 49.7 109.7 159.4 Additions 3.4 5.8 9.2 Disposals (note 23) (0.7) (19.8) (20.5) Currency translation adjustment 2.5 3.0 5.5 54.9 98.7 153.6 At 3 February 2013 25.6 90.0 115.6 Charge for the year 1.3 6.1 7.4 Disposals (note 23) (6.5) (1.8) (8.3) Currency translation adjustment (1.0) (3.8) (4.8) At 2 February 2014 19.4 90.5 109.9 Charge for the year 1.2 6.0 7.2 Disposals (note 23) (0.3) (19.4) (19.7) Currency translation adjustment 1.8 2.1 3.9 22.1 79.2 101.3 At 1 February 2015 Accumulated depreciation At 1 February 2015 Net book amounts At 1 February 2015 32.8 19.5 52.3 At 2 February 2014 30.3 19.2 49.5 At 3 February 2013 33.5 21.6 55.1 Capital commitments authorised and contracted at 1 February 2015 amounted to £0.5 million (2014: £0.5 million). The Group has no significant assets held under finance leases. 113 Annual Report and Accounts 2014/15 12 Inventories 2015 £m 2014 £m Raw materials 9.7 4.2 Work in progress 8.4 6.6 242.8 225.2 260.9 236.0 Finished goods and goods for resale The cost of inventory recognised as an expense and included in cost of sales amounted to £549.9 million (2013/14: £550.1 million). During the current financial year £2.1 million (2013/14: £2.3 million) was recognised as an expense relating to the write-down of inventory to net realisable value. 13 Trade and other receivables Trade receivables Less: provision for impairment Net trade receivables Other receivables Prepayments and accrued income 2015 £m 2014 £m 127.1 116.4 (4.3) (4.1) 122.8 112.3 3.2 3.3 16.5 13.3 142.5 128.9 2015 £m 2014 £m 108.9 99.9 12.9 12.4 5.3 4.1 127.1 116.4 Trade receivables can be analysed as follows: Not past due Past due but not impaired Past due and impaired The trade receivables which were past due but not impaired relate to a number of independent customers for whom there is no recent history of default. The ageing of trade receivables classed as past due but not impaired is as follows: 2015 £m 2014 £m Up to one month past due 9.4 9.2 Between one and two months past due 2.9 2.6 Over two months past due 0.6 0.6 12.9 12.4 114 Premier Farnell Notes to the consolidated financial statements continued The movement in the provision for impairment of trade receivables can be reconciled as follows: 2014/15 £m 2013/14 £m Provision brought forward 4.1 4.6 Provision for impairment 1.4 1.4 Amounts written off (0.6) (0.8) Provision released (0.5) (0.9) Exchange movement (0.1) (0.2) Provision carried forward 4.3 4.1 2015 £m 2014 £m Sterling 31.4 30.8 US dollars 65.8 55.8 Euro 27.7 26.7 The carrying amounts of trade and other receivables are denominated in the following currencies: Other 17.6 15.6 142.5 128.9 The fair value of trade and other receivables is approximate to their carrying value. 14 Cash and cash equivalents Cash and cash equivalents comprise balances at bank and short term deposits repayable on demand and available within one day without penalty. 15 Financial liabilities Note 2015 £m 2014 £m 6.3 1.8 66.4 39.2 – 51.8 Current Current borrowings Non-current Bank loans 3.0% US dollar Guaranteed Senior Notes payable 2016 5.2% US dollar Guaranteed Senior Notes payable 2017 20.0 18.3 4.4% US dollar Guaranteed Senior Notes payable 2018 38.8 35.5 4.8% US dollar Guaranteed Senior Notes payable 2021 60.7 55.4 4.0% US dollar Guaranteed Senior Notes payable 2024 56.5 – 1.4 5.2 243.8 205.4 52.5 63.4 296.3 268.8 Other loans Non-current borrowings Preference shares 16 The above current and non-current borrowings are unsecured. Further details of the Group’s borrowing facilities are given in note 19. 115 Annual Report and Accounts 2014/15 Current and non-current borrowings and preference shares are repayable as follows: Within one year 2015 £m 2014 £m 6.3 1.8 Between one and two years 52.6 4.0 Between two and five years 125.6 208.4 After five years 118.1 56.4 302.6 270.6 During the year, the available multi-currency revolving credit facilities were increased by £50 million (note 19). 16 Preference shares Cumulative, convertible, redeemable preference shares of £1 each. Authorised Allotted and fully paid 2015 Number 2014 Number 32,000,000 32,000,000 3,236,471 3,949,419 Under IAS 39, the Company’s cumulative, convertible, redeemable preference shares are required to be split into debt and equity components with the preference dividend being classified as a finance cost. The fair value of the debt element is established on issue of the shares, based on the discounted cash flows of the instrument to the date of maturity, and is then increased each year on a straight-line basis through the income statement in order to arrive at the redemption amount payable on maturity of the shares. The movement in the debt and equity elements during the year is as follows: Equity element £m Debt element £m 10.4 63.4 – 0.6 Purchase of preference shares (1.9) (11.5) At 1 February 2015 8.5 52.5 At 2 February 2014 Premium on redemption During the year the Company purchased and cancelled 712,948 of its preference shares at a total cash cost of £11.5 million. Based on the book value and fair value of the instrument at the date of purchase, the financial liability element of the preference shares was reduced by £11.5 million and the equity element by £1.9 million. There was no difference between the book value and fair value of the financial liability element at the date of purchase thus £nil gain or loss was recognised. A transfer from retained earnings of £0.8 million to non-distributable reserves was made in order to maintain the legal nominal value of share capital. Preference dividends paid 2014/15 £m 2013/14 £m 2.9 3.5 At 1 February 2015, the preference shares comprised 96,172 (2014: 107,682) US$1.35 cumulative, convertible, redeemable preference shares of £1 each (the “US preference shares”) and 3,140,299 (2014: 3,841,737) 89.2 pence cumulative, convertible, redeemable preference shares of £1 each (the “sterling preference shares” and, together with the US preference shares, the “preference shares”). The rights and restrictions attaching to the preference shares are as follows: 116 Premier Farnell Notes to the consolidated financial statements continued 1) Currency Holders of preference shares are entitled to receive a preferential dividend, a distribution on a winding-up and a payment on redemption. Holders of US preference shares receive such payments in US dollars. Holders of sterling preference shares receive such payments in sterling. 2) Changeover A holder of US preference shares may serve notice on the Company requiring that some or all of their US preference shares be changed to sterling preference shares. 3) Income a) Each holder has a right to receive a fixed cumulative preferential dividend at the rate of US$1.35 per annum for every £1 of nominal value for the US preference shares and at the rate of 89.2 pence per annum for every £1 of nominal value for the sterling preference shares. Dividends on the preference shares are payable half-yearly in arrears in equal amounts, on 26 January and 26 July. b) The fixed cumulative preferential dividends payable in respect of the preference shares are paid in priority to any dividend payable to the holders of ordinary shares and in priority to or pari passu with the holders of any other class of preference shares in the capital of the Company. c) If a holder of US preference shares has elected to changeover his or her US preference shares to sterling preference shares then the fixed cumulative preferential dividend and any arrears payable after the changeover date will be paid at the sterling rate set out above. 4) Conversion a) Each holder of preference shares is entitled to convert all or any of his fully paid preference shares into fully paid ordinary shares at the rate of 10.3434 pence in nominal amount of ordinary share capital for every £1 in nominal amount of preference share capital so converted (the “conversion rate”). b) The preference shares may be converted on any date at the option of the holder on and from the date of issue up to and including 22 April 2016. c) If at any time 75% or more of all the preference shares have been converted into ordinary shares (but assuming, for this purpose only, that any preference shares which have been converted into ordinary shares pursuant to the special conversion right made available in 2002 had never been issued or converted), the Company may give written notice to the remaining holders of preference shares to convert the remaining preference shares into ordinary shares. d) The conversion rate may be subject to adjustment if, inter alia, the Company makes an issue of ordinary shares by way of capitalisation of profits or reserves, a rights issue or another offer to ordinary shareholders or if there is a change of control in the Company following a take-over offer or if a capital distribution is made. 5) Redemption The Company shall (subject to any statutory restrictions) on 29 April 2016 redeem all the US preference shares in issue at US$25 for every £1 of nominal value and all the sterling preference shares in issue at £16.518 for every £1 of nominal value. 6) Voting Each preference share entitles the holder to receive notice of but not to attend or vote at general meetings of the Company save in limited circumstances. Subject to being entitled to vote on any resolution, each holder of preference shares has one vote on a show of hands and on a poll every such holder has one vote for every ordinary share to which he would be entitled on conversion of his or her preference shares. 7) Winding-up Subject to the rights attached to any shares issued on any special terms and conditions, on a return of capital on a winding-up of the Company the assets available for distribution will be applied, first, in paying to each holder of a preference share any arrears and accruals of the preferential dividend; second, in repaying US$25 for every £1 of nominal value for the US preference shares and £16.518 for every £1 of nominal value for the sterling preference shares; third, in repaying the capital paid up on each ordinary share; and fourth, in distributing the remainder rateably among the members of the Company according to the amounts paid up on their respective holdings of shares in the Company, each preference share being treated for this purpose as if converted at the conversion rate applicable into fully paid ordinary shares immediately prior to the commencement of the winding-up. 117 Annual Report and Accounts 2014/15 17 Trade and other payables Trade payables Payroll and other taxes Other payables Accruals and deferred income 2015 £m 2014 Re-presented (note 26) £m 79.9 70.4 6.2 7.0 3.4 4.4 41.2 36.6 130.7 118.4 2014/15 £m 2013/14 £m 18 Deferred tax Deferred tax is calculated in full on temporary differences under the liability method. The movement on the net deferred tax asset/(liability) is as follows: Brought forward (1.8) 1.2 Charge for the year (note 5) (2.8) (5.9) – 2.2 Credited to other comprehensive expense (employee benefits) 7.8 0.7 Carried forward 3.2 (1.8) Reclassification from current tax payable Comprising: Non-current assets 3.5 4.9 Non-current liabilities (0.3) (6.7) 3.2 (1.8) The deferred tax charge for the year comprises the following: 2014/15 £m 2013/14 £m Accelerated tax depreciation 2.3 0.9 Employee benefits 2.3 1.7 – (0.1) Fair value of intangible assets Preference shares (0.3) (0.2) Tax losses 0.3 2.2 Other temporary differences (1.8) 1.4 2.8 5.9 Deferred tax assets have been recognised in respect of any significant tax losses and other temporary differences giving rise to deferred tax assets where it is probable that these assets will be recovered. The deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) at the financial year end are analysed below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. 118 Premier Farnell Notes to the consolidated financial statements continued Liabilities Assets 2015 £m 2014 £m (13.4) (11.1) – – – 13.8 Fair value of property, plant and equipment acquired (1.3) (1.3) – Fair value of intangible assets acquired (1.0) (1.0) – Preference shares (0.2) (0.5) – – Accelerated tax depreciation Employee benefits Tax losses Other temporary differences 2015 £m Net 2015 £m 2014 £m – (13.4) (11.1) 8.3 13.8 8.3 – (1.3) (1.3) – (1.0) (1.0) – – (0.2) (0.5) 1.0 1.3 1.0 1.3 2014 £m (1.3) (2.0) 5.6 4.5 4.3 2.5 (17.2) (15.9) 20.4 14.1 3.2 (1.8) £3.5 million (2014: £4.9 million) of the deferred tax assets were not available for offset against deferred tax liabilities and have therefore been included within non-current assets. 19 Financial instruments 1) Financial risk factors The Group is exposed to a number of different market risks in the normal course of business including liquidity, credit, interest rate and foreign currency risks. Liquidity risk Established procedures are in place to ensure that the operational and working capital requirements of the Group can be met at all times. These include: • regular review, monitoring and forecasting of working capital requirements across Group companies; • use of short term, local bank facilities; • operation of short term money market dealing lines; and • the implementation and ongoing review of committed multi-currency bank facilities, which are available at short notice. During the year the Group refinanced its bank borrowing facilities with the amendment and extension of its multi-currency revolving facilities to £250 million expiring in September 2019, carrying a LIBOR based floating rate of interest. At 1 February 2015 the Group’s headroom on this facility was £181.2 million (2014: £159.5 million on a £200 million facility). • during the year the Group also refinanced US$85 million US private placement notes repayable in August 2016 to September 2024. Credit risk The Group has a customer credit policy in place and the exposure to credit risk is monitored on an ongoing basis through the use of customer credit limits. Investments to maximise the return on surplus cash are allowed only in short term instruments and only with counterparties that have sound credit ratings. The Group’s treasury policy stipulates minimum ratings that institutions must have before deposits can be made above a series of defined thresholds. Given the high credit quality of counterparties with whom the Group has investments, the Directors do not expect any counterparty to fail to meet its obligations. At 1 February 2015 and 2 February 2014 there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset included in the balance sheet. Interest rate risk The Group adopts a policy of ensuring that it has an appropriate mix of fixed and floating rates in managing its exposure to changes in interest rates on borrowings. If interest rates on variable rate foreign currency denominated borrowings had been 50 basis points higher/lower with all other variables held constant, pre-tax profit for the year would have been £0.1 million lower/ higher (2013/14: £0.1 million). If interest rates on variable rate pound sterling denominated borrowings had been 50 basis points higher/lower with all other variables held constant, pre-tax profit for the year would have been £0.3 million lower/higher (2013/14: £0.2 million). 119 Annual Report and Accounts 2014/15 Foreign currency risk The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in currencies other than pounds sterling. The currencies giving rise to this risk are primarily the Euro and US dollar. The Group hedges significant foreign currency exposures in respect of forecast sales and purchases of inventory through foreign exchange contracts. All such foreign exchange contracts have maturities of less than one year. 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 effects of movement in foreign exchange rates. Similarly, whilst 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. If the average US dollar rate against the pound sterling was higher/lower by one cent, with all other variables held constant, operating profit for the year would have been £0.2 million lower/higher, mainly due to the translation of overseas results. Net assets would have been £0.4 million lower/higher as a result of a similar one cent change at 1 February 2015. If the average Euro rate against the pound sterling was higher/lower by one cent, with all other variables held constant, operating profit for the year would have been £0.4 million lower/higher, mainly due to the translation of overseas results. Net assets would have been £0.1 million lower/higher as a result of a similar one cent change at 1 February 2015. 2) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an appropriate capital structure. In order to maintain or adjust the capital structure, the Group will take into consideration the amount of dividends paid to shareholders, the level of debt and the number of shares in issue. When monitoring capital, the Group takes into consideration its gearing ratio, both including and excluding its post-retirement benefit obligations. This is calculated as the ratio of net debt to total capital (total equity adjusted for post-retirement benefit obligations as appropriate, as shown in note 26). Net debt is calculated as total borrowings (including current and non-current borrowings and the debt element of preference shares as shown in the consolidated balance sheet) less cash and cash equivalents. At the year end, the net debt to total capital ratio was 1.7 (2014: 1.8). The Group has two principal debt covenants in respect of its US private placement notes and revolving credit facility. These covenants relate to the Group’s Net Borrowings to EBITDA ratio and EBITDA to Net Interest Payable ratio (both on a rolling 12 month basis). At the year end, the Group comfortably met these covenants. 3) Derivative financial instruments 2015 Current assets £m Current liabilities £m 2014 Current assets £m Current liabilities £m Forward foreign exchange contracts Cash flow hedges relating to trade transactions 2.4 (0.2) 2.0 – 2.4 (0.2) 2.0 – Forward foreign currency contracts Forward foreign currency contracts hedge currency exposures for sales receipts and payments for inventory purchases within the next 12 months and will recycle to the income statement over that period. During the financial year ended 1 February 2015, £3.6 million net fair value gains were recognised in other comprehensive income (2013/14: £1.7 million net fair value gains). Gains of £3.4 million (2013/14: £4.3 million losses) have been transferred to cost of sales for contracts which matured during the year. Hedge of net investment in foreign subsidiaries The Group’s US dollar denominated private placement notes of US$265 million (2014: US$265 million) partially hedge the Group’s investment in its US subsidiaries. The Group’s Euro denominated unsecured loans of €25 million partially hedge the Group’s investment in its Eurozone subsidiaries. 120 Premier Farnell Notes to the consolidated financial statements continued 4) Fair values The category, book values, and fair values of the Group’s financial instruments are as follows: At 1 February 2015 Loans and receivables £m Financial liabilities Assets at fair value measured at through profit and amortised cost loss £m £m Derivatives at fair value used for cash flow hedging £m Total £m Fair value £m Non-current assets – – 1.0 – 1.0 1.0 – – – 2.4 2.4 2.4 Trade and other receivables 126.0 – – – 126.0 126.0 Cash and cash equivalents 43.8 – – – 43.8 43.8 Financial liabilities – (6.3) – – (6.3) (6.3) Derivative financial instruments – – – (0.2) (0.2) (0.2) Trade and other payables – (129.9) (0.8) – (130.7) (130.7) Bank and other loans – (67.8) – – (67.8) (67.5) Private placement notes – (176.0) – – (176.0) (184.6) Preference shares – (52.5) – – (52.5) (52.0) 169.8 (432.5) 0.2 2.2 (260.3) (268.1) Investments held at fair value Current assets Derivative financial instruments Current liabilities Non-current liabilities Total 121 Annual Report and Accounts 2014/15 Loans and receivables £m Financial liabilities measured at amortised cost £m Assets at fair value through profit and loss £m Derivatives at fair value used for cash flow hedging £m Total £m Fair value £m – – 0.8 – 0.8 0.8 – – – 2.0 2.0 2.0 Trade and other receivables 115.6 – – – 115.6 115.6 Cash and cash equivalents 42.8 – – – 42.8 42.8 Current borrowings – (1.8) – – (1.8) (1.8) Trade and other payables – (117.7) (0.7) – (118.4) (118.4) At 2 February 2014 Non-current assets Investments held at fair value Current assets Derivative financial instruments Current liabilities Non-current liabilities Bank and other loans – (44.4) – – (44.4) (44.2) Private placement notes – (161.0) – – (161.0) (165.2) Preference shares – (63.4) – – (63.4) (63.1) 158.4 (388.3) 0.1 2.0 (227.8) (231.5) Total Prepayments are excluded from trade and other receivables balance, as this analysis is required only for financial instruments. The main methods and assumptions used in estimating the fair values of financial instruments are as follows: • investments held at fair value: are valued using listed market prices. The fair values are within Level 1 of the fair value hierarchy; • derivatives: forward exchange contracts are marked to market using listed market prices. The fair values are within Level 2 of the fair value hierarchy; • current borrowings: fair value is equal to current value, as the impact of discounting is not significant. The fair values are within Level 2 of the fair value hierarchy; • bank loans bear short term floating interest rates of LIBOR plus a premium, and as a result the fair values are the same as the book values. The fair values are within Level 2 of the fair value hierarchy; • US dollar private placement notes bear coupons between 4.0–5.2%. The fair value is based on discounted future principal and interest cash flows, using discount rates of 3.0– 5.1% calculated from treasury yields for similar terms and adjusted to reflect the Group credit rating. The fair values are within Level 2 of the fair value hierarchy; • convertible redeemable preference shares: fair value is based on quoted market prices. The fair values are within Level 1; • trade and other receivables/payables: the notional amounts for trade and other receivables/payables with a remaining life of less than one year are deemed to reflect their fair value; and • contingent consideration: the fair value measurements are included in note 22. At 1 February 2015, cash and cash equivalents are subject to offsetting and enforceable master pooling arrangements and is presented in the consolidated balance sheet as a net amount of £43.8m. 5) Fair value estimation The valuation methods for Group financial instruments held at fair value are defined by the following fair value measurement hierarchy: • quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); • inputs other than quoted prices included within Level 1 that are observed for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); • inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). 122 Premier Farnell Notes to the consolidated financial statements continued The following table presents the Group’s assets and liabilities that are measured at fair value. Level 1 £m Level 2 £m Level 3 £m Total balance £m Investments held at fair value 1.0 – – 1.0 Derivatives used for hedging – 2.4 – 2.4 Derivatives used for hedging – (0.2) – (0.2) Contingent consideration – – (0.8) (0.8) 1.0 2.2 (0.8) 2.4 Level 1 £m Level 2 £m Level 3 £m Total balance £m At 1 February 2015 Assets Liabilities Net assets/(liabilities) At 2 February 2014 Assets Investments held at fair value 0.8 – – 0.8 Derivatives used for hedging – 2.0 – 2.0 – – – – Liabilities Derivatives used for hedging Contingent consideration Net assets/(liabilities) – – (0.7) (0.7) 0.8 2.0 (0.7) 2.1 The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques which maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to the present value. 6) Maturity of financial liabilities The table below analyses the Group’s financial liabilities, which will be settled on a net basis, into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m 13.8 9.4 151.3 136.3 2.9 53.5 – – Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m Borrowings 9.0 11.7 163.7 65.3 Preference shares 3.5 3.5 65.1 – At 1 February 2015 Borrowings Preference shares At 2 February 2014 123 Annual Report and Accounts 2014/15 The table below analyses the Group’s derivative financial instruments which will be settled in the relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The fair value of derivative instruments covering trading cash flows is included, as these contracts are managed on a net fair value basis. At 1 February 2015 Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m (0.2) – – – 2.4 – – – Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m – – – – 2.0 – – – 2015 Nominal value £m 2014 Nominal value £m 25.0 25.0 18.6 18.5 Forward foreign exchange contracts – cash flow hedges Outflow Inflow At 2 February 2014 Forward foreign exchange contracts – cash flow hedges Outflow Inflow 20 Ordinary shares Group and Company Authorised 500,000,000 ordinary shares of 5p each (2014: 500,000,000) Allotted, called up and fully paid At 2 February 2014 (371,222,670 shares) Allotted under share option schemes (109,797 shares) At 1 February 2015 (371,332,467 shares) – 0.1 18.6 18.6 Allotments during the year On various dates during the year, allotments were made under the Company’s Executive Share Option Plans totalling 109,797 (2013/14: 845,043) ordinary shares with a nominal value of £5,490 (2013/14: £42,252) for a cash consideration of £0.1 million (2013/14: £0.8 million). Potential issues of ordinary shares Executive Share Option Plan The Executive Share Option Plan (ESOP) is available to Executive Directors and senior management. Grants are normally made with a value of up to 100% of an individual’s annual salary, although this may be increased to 150% in exceptional circumstances. The vesting of options made to the Company’s Executives and most senior managers are subject to performance conditions set by the Company’s Remuneration Committee. The conditions currently applicable are based on both the level of return on sales and earnings per share growth achieved in the third financial year counting from the financial year in which the options were granted. Further details on the performance conditions are set out in the Remuneration Report starting on page 62. Awards without performance conditions may be made to eligible employees who are not Board Directors or Executive Committee members at the time of grant. Approved, unapproved options or share appreciation rights may be granted under the ESOP and all are exercisable, subject to their meeting any applicable performance condition, between three and 10 years from the date of grant. 124 Premier Farnell Notes to the consolidated financial statements continued At 1 February 2015, the aggregate number of shares covered by options under the Company’s Executive Share Option Scheme is 11,822,381 (2014: 11,151,607) and the total potential consideration is £22.7 million (2014: £21.7 million). The following table summarises information about these options: Range of exercise prices £1.00 – £2.00 £2.00 – £3.00 2015 Number 2015 Weighted average remaining contractual life (years) 7,879,665 7.9 2014 Weighted average remaining 2014 contractual Number life (years) 6,275,951 7.9 3,942,716 7.6 4,875,656 8.4 11,822,381 7.8 11,151,607 8.1 Performance Share Plan Under the Company’s Performance Share Plan (PSP), an Executive Director or senior manager may receive an award of up to 100% of his or her salary in any year and in exceptional circumstances this can be increased to 150%. Awards may be structured as nil or nominal cost options, conditional awards or forfeitable shares and all are subject to performance conditions set by the Company’s Remuneration Committee. The vesting of awards made in 2015 is subject to performance conditions requiring the Company’s level of return on sales and earnings per share to be at specific levels in the third financial year from the year of grant. Further details of the performance conditions applicable to awards under the PSP are available in the Remuneration Report starting on page 62. At 1 February 2015, the aggregate number of outstanding shares covered by grants under the PSP was 2,479,856 (2014: 2,354,527) as follows: Number of ordinary shares Date of grant 2015 2014 April 2006 7,759 8,918 April 2008 18,983 27,390 July 2011 – 626,434 July 2012 707,404 780,773 December 2012 105,191 105,191 June 2013 656,986 805,821 September 2014 983,533 – 2,479,856 2,354,527 Deferred Share Bonus Plan Grants may be made under the Company’s Deferred Share Bonus Plan (DSBP) to any employee of the Company or its subsidiaries who is entitled to receive a bonus, with awards usually made to the Company’s Executive Directors and managers. Grants can be structured as conditional awards, nil or nominal cost options or grants of forfeitable shares. There is no performance condition applicable to awards under the DSBP, which normally vest on the second anniversary of their grant, provided that the recipient of the relevant award remains employed by the Group at that time. 125 Annual Report and Accounts 2014/15 At 1 February 2015, the aggregate number of shares covered by the grants under the DSBP was 739,160 (2014: 566,212) as follows: Number of shares outstanding Date of grant Vesting date 2015 2014 March 2011 March 2013 – 78,934 March 2014 – 171,217 September 2014 – 1,363 April 2013 April 2015 276,737 311,352 June 2013 June 2015 – 3,346 April 2014 April 2017 462,423 – 739,160 566,212 March 2012 September 2012 Restricted Share Plan Under the Company’s Restricted Share Plan (RSP), individuals are granted rights to ordinary shares which carry no vesting conditions other than the requirement that the employee must still be in the Company’s employment at the vesting date. During the year 128,288 (2013/14: 128,591) shares vested under the plan, nil (2013/14: 264,425) shares were granted under the plan, nil (2013/14: nil) shares lapsed under the plan and 6,593 (2013/14: nil) shares were cancelled under the plan. At 1 February 2015, there were 31,596 (2014: 166,477) outstanding ordinary shares granted under the plan of which 31,596 vest in the financial year ending 31 January 2016 and nil vest in the financial year ending 31 January 2017. Number of shares outstanding Date of grant Vesting date 2015 2014 April 2012 April 2014 – 6,855 April 2012 April 2015 – 9,140 March 2013 April 2014 – 9,772 March 2013 April 2015 9,772 9,772 June 2013 July 2014 – 65,466 June 2013 July 2015 21,824 65,472 31,596 166,477 Save As You Earn Option Scheme Grants under the Save As You Earn (SAYE) option scheme are available to all eligible UK employees and are not subject to any performance conditions, although they do require the employee to save over a three or five-year period. SAYE options are exercisable within six months after the end of the savings contract. At 1 February 2015, the aggregate number of shares covered by options under the Company’s SAYE option scheme is 1,281,848 (2014: 1,038,284) and the total potential consideration of £2.3 million (2014: £1.8 million) is made up as follows: Number of shares outstanding Date of grant Option price 2015 2014 April 2009 102p – 84,992 April 2010 173p 53,203 62,191 April 2011 222p 23,748 136,725 April 2012 176p 310,564 365,167 April 2013 178p 323,332 389,209 April 2014 188p 571,001 – 1,281,848 1,038,284 126 Premier Farnell Notes to the consolidated financial statements continued Premier Farnell Executive Trust The Premier Farnell Executive Trust has acquired ordinary shares in the open market in order to partially meet obligations under the Premier Farnell Performance Share Plans or to provide similar employee benefits. The costs of administering the plan are borne by the Company. The Trustees have waived the right to receive dividends in respect of the ordinary shares held by the Trust. During the year the Company issued to the Trust 2,949 of the Company’s ordinary shares (2013/2014: 404,677) and the Trust used 402,630 (2013/14: 1,511,278) ordinary shares to satisfy vesting conditions under the Company’s option schemes. At 1 February 2015, the Trust held 3,862,021 (2014: 4,261,702) ordinary shares with a total nominal value of £193,101 (2014: £213,085) and a total market value of £6.6 million (2014: £9.3 million). Reconciliation of option movements during the year A reconciliation of option movements under the ESOP and SAYE is as follows: Number (’000) 2014/15 2013/14 Weighted average exercise price Number (’000) Weighted average exercise price 12,190 £1.92 10,752 £1.92 Granted 3,554 £1.88 4,248 £1.98 Forfeited (2,416) £1.96 (2,358) £2.03 Exercised (107) £1.23 (440) £1.82 Cancelled (20) £1.95 (12) £2.08 Expired (97) £2.08 – – End of year 13,104 £1.91 12,190 £1.92 Exercisable 3,088 £2.08 1,624 £2.29 Beginning of year Weighted average remaining contractual life (years) 7.2 8.1 The weighted average share price at the date of exercise for share options exercised during the year was £2.14 (2014: £2.15). Reconciliation of share award movements during the year A reconciliation of movements in awards under the PSP and DSBP is as follows: Number of awards (’000s) 2014/15 2013/14 Beginning of year 2,921 3,950 Granted 1,510 1,194 Exercised (296) (1,405) Forfeited (916) (818) End of year 3,219 2,921 Exercisable 27 36 Weighted average remaining contractual life (years) 1.7 2.4 127 Annual Report and Accounts 2014/15 21 Share-based payments The total charge for share-based payments was £1.5 million (2013/14: £1.6 million) all of which related to equity-settled transactions. After tax, the total charge was £1.8 million (2013/14: £2.5 million). The fair value of the Company’s principal grants made in the year and the assumptions used in the calculations are as follows: 2014/15 Plan ESOP PSP DSBP EPS/ROS/none EPS/ROS n/a n/a 24/9/14 24/9/14 8/4/14 2/5/14 Share price at grant date £1.90 £1.90 £2.34 £2.25 Exercise price £1.90 n/a n/a £1.88 Primary performance condition Grant date Number granted Option pricing model Vesting period (years) Expected volatility Contractual life (years) SAYE 3yr/5yr 2,901,283 983,533 526,738 553,793/99,242 Black Scholes Black Scholes Black Scholes Black Scholes 3 3 2 3/5 35% 35% 35% 35% 10 3 2 3.5/5.5 Correlation with comparators n/a n/a n/a n/a Risk free rate n/a 1.3% n/a 1.2%/1.9% Dividend yield 5.7% 5.7% 4.4% 4.6% Fair value per instrument £0.40 £1.61 £2.14 £0.54/£0.58 2013/14 Plan Primary performance condition Grant date ESOP PSP DSBP SAYE 3yr/5yr EPS/RoS/none EPS/RoS n/a n/a 28/6/13 28/6/13 19/4/13 19/4/13 Share price at grant date £2.00 £2.00 £2.03 £2.03 Exercise price £2.00 n/a n/a £1.78 Number granted Option pricing model Vesting period (years) Expected volatility Contractual life (years) 3,804,842 855,650 338,773 389,366/53,584 Black Scholes Black Scholes Black Scholes Black Scholes 3 3 2 3/5 35% 35% 35% 35% 3.5/5.5 10 3 2 Correlation with comparators n/a n/a n/a n/a Risk free rate n/a 0.7% n/a 0.3%/0.7% Dividend yield 5.1% 5.1% 5.1% 5.1% Fair value per instrument £0.43 £1.72 £1.87 £0.42/£0.44 The expected volatility is based on historical volatility over the last 10 years. The risk-free rate of return is the yield, based on the Bank of England’s projected nominal yield curve, on zero-coupon UK Government bonds of a term consistent with the assumed option life. No performance conditions were included in the fair value calculations where the condition is based on earnings per share performance. 128 Premier Farnell Notes to the consolidated financial statements continued 22 Businesses acquisitions and disposals Acquisitions On 17 April 2014, the Group acquired the trade and assets of AVID Technologies Inc (AVID), a full service product development business. This strategic acquisition enhances the Group’s technology capability at the front end of the electronics design cycle, supporting suppliers’ new product introduction strategies and extending the Group’s business model. The following table summarises the consideration paid for the trade and assets of AVID and the fair value of assets acquired and liabilities assumed at the acquisition date. Recognised amounts of identifiable assets acquired and liabilities assumed £m Inventory 0.3 Trade and other receivables 0.7 Trade and other payables (0.7) Total identifiable net assets 0.3 Goodwill 7.4 Total 7.7 Total consideration (cash) 7.7 Acquisition costs of £0.1 million have been charged to operating expenses in the consolidated income statement for the current financial year ended 1 February 2015, and have been included as an adjusting item separately disclosed on the face of the income statement (note 2). The fair value of trade and other receivables acquired was £0.7 million and included trade receivables with a fair value of £0.6 million. The gross contractual amount for trade receivables due was £0.6 million. No other material assets or liabilities were separately identified. The goodwill of £7.4 million arising from the acquisition, which cannot be directly attributed to identifiable assets and liabilities acquired, is underpinned by a number of elements, including the strategic premium attributed to the existing, well-positioned business, highly skilled workforce and established reputation in the electronics design and product development sector. Other elements of this goodwill include the strengthening and expansion of the Group’s strategic customer and supplier proposition, the opportunity to leverage the insights from AVID’s design opportunities to support the Group’s strategic programmes within its distribution businesses and the scope to develop AVID’s customer base through the existing Service Agreement relationships the Group has with certain suppliers. All of the goodwill is expected to be deductible for tax purposes. The trading results of AVID for the period since acquisition, and also for the period since the start of the financial year had the acquisition taken place on that date, are not material to the Group’s results. Acquisitions in prior year On 13 September 2013, the Group acquired the trade and assets of Reach Engineering LLC (Reach), a specialist in custom electronic systems to the emergency and industrial vehicles market. Contingent consideration of £0.7 million relates to goodwill attributable to the future profitability of the business, and is dependent on the sales performance of specific Reach products, primarily within the next four years. Cash consideration of less than £0.1 million was payable in relation to the fair value of identifiable net assets acquired. 129 Annual Report and Accounts 2014/15 23 Cash generated from operations 2014/15 £m 2013/14 £m 47.5 51.4 5 21.6 23.4 11 7.2 7.4 – amortisation of intangible assets 9 8.1 10.3 – net gain on sale of US property 2 (0.3) (1.6) – (0.1) Note Profit after tax Adjustment for: – tax – depreciation – gain on sale of other property, plant and equipment 16 2.9 3.5 – interest income 3 (0.7) (0.4) – interest expense 3 11.2 12.8 16 0.6 0.8 (4.5) (2.6) – preference dividends – premium on redemption of preference shares – additional funding for post-retirement defined benefit plans (UK plan) – increase in net pension liability (US plan) – decrease in other post-retirement obligations – share-based payments 21 – non-cash impact of restructuring costs – non-cash impact of remeasurement of contingent consideration – non-cash impact of acquisition costs – non-cash impact of US property disposal 0.9 1.0 (0.3) (0.3) 1.5 1.6 (1.5) (2.3) – (0.8) 0.1 – (0.4) – (14.1) (25.8) (9.7) (3.5) Changes in working capital: – increase in inventories – increase in trade and other receivables 8.7 5.6 78.8 80.4 Note 2014/15 £m 2013/14 £m 11 0.8 1.5 0.3 1.6 – increase in trade and other payables Total cash generated from operations Proceeds from the sale of property, plant and equipment comprise: Net book value Net gain on sale of US property (included within adjusting items) (Loss)/gain on sale of other property, plant and equipment (included within adjusting items) (0.8) 0.1 Non-cash impact of US property disposal costs (0.9) 1.0 Net proceeds (0.6) 4.2 130 Premier Farnell Notes to the consolidated financial statements continued 24 Analysis of changes in net debt Cash and cash equivalents £m Loans due within one year £m Loans due after one year £m Preference shares £m Derivative financial instruments £m 131.6 (102.8) (193.6) (62.6) (2.2) (229.6) (87.0) – – – – (87.0) Increase in debt – (0.3) (27.0) – – (27.3) Repayment of borrowings – 101.6 7.0 – – 108.6 Premium on redemption of preference shares – – – (0.8) – (0.8) Derivative financial instruments – – – – 4.2 4.2 Amortisation of arrangement fees – – (0.5) – – (0.5) At 3 February 2013 Net decrease in cash, cash equivalents and bank overdrafts Exchange movement Net financial liabilities £m (1.8) (0.3) 8.7 – – 6.6 42.8 (1.8) (205.4) (63.4) 2.0 (225.8) (1.6) – – – – (1.6) Increase in debt – (4.4) (58.9) – – (63.3) Repayment of borrowings – – 35.1 – – 35.1 Premium on redemption of preference shares – – – (0.6) – (0.6) Purchase of preference shares – – – 11.5 – 11.5 Derivative financial instruments – – – – 0.2 0.2 Amortisation of arrangement fees – – (0.6) – – (0.6) At 2 February 2014 Net decrease in cash, cash equivalents and bank overdrafts Exchange movement At 1 February 2015 2.6 (0.1) (14.0) – – (11.5) 43.8 (6.3) (243.8) (52.5) 2.2 (256.6) Note 2014/15 £m 2013/14 £m 134.1 136.1 21.5 22.5 8.2 8.0 25 Employees and Directors Employee benefit expense during the year was as follows: Wages and salaries Social security costs Post retirement 26 Share-based payments 21 1.5 1.6 165.3 168.2 In addition to the above, restructuring costs, including £1.8 million relating to severance (2013/14: £1.4 million), and internal labour costs of £7.0 million (2013/14: £6.7 million), comprising wages and salaries and social security costs, were capitalised (note 9). 131 Annual Report and Accounts 2014/15 The average monthly number of persons employed (including Executive Directors) was as follows: 2014/15 Number 2013/14 Number Americas 1,258 1,285 Europe and Asia Pacific 2,406 2,361 430 419 4,094 4,065 393 386 Marketing and Distribution Division Other Distribution Businesses Industrial Products Division Head Office 61 56 4,548 4,507 Directors’ remuneration A detailed analysis of Directors’ remuneration, including salaries, performance-related bonuses and long term incentives, is provided in the Remuneration Report on pages 62 to 85, which forms part of these financial statements. The total remuneration of the Directors comprises: Aggregate emoluments Company contributions to money purchase pension schemes 2014/15 £m 2013/14 £m 1.8 1.8 0.2 0.2 2.0 2.0 None of the Directors have retirement benefits accruing under the Group pension plans (2014: none). In addition to the above, there was an accounting charge for share-based payments in respect of the Directors of £0.3 million (2013/14: £0.1 million). Gains made by Directors on the exercise of share options during the year amounted to £112,378 (2013/14: £571,456). Details of the highest paid Director are given on page 75. Further details on Directors’ pension arrangements are given on pages 76 and 77. The key management of the Group are deemed to be the Board of Directors who have authority and responsibility for planning and controlling all significant activities of the Group. 26 Pension commitments and other post-retirement obligations Note 2015 £m 2014 £m Retirement benefit liabilities 26A (51.3) (30.6) Post-retirement medical benefits 26B (19.4) (14.5) (70.7) (45.1) Non-current liabilities 132 Premier Farnell Notes to the consolidated financial statements continued The following remeasurements were recognised in the year through the consolidated statement of comprehensive income following the year end valuations of the Group’s pension and post-retirement plans: Defined benefit pension plans 2015 £m 2014 £m – UK (10.3) (3.5) – US (12.7) 0.1 0.1 0.4 (3.8) (1.0) (26.7) (4.0) – Other Post-retirement medical benefits Defined benefit pension plans and post-retirement medical plan A) Pensions The Group operates pension plans throughout the world covering the majority of its employees. These plans are devised in accordance with local conditions and practices in the countries concerned and include defined contribution and defined benefit plans. The Group’s two principal defined benefit plans are in the UK and in the US under broadly similar regulatory frameworks. The UK and US plans are final salary pension plans providing a guaranteed level of pension payable for life. The US Plan also includes a cash balance pension for US participants. Both these plans are closed to further accrual of future pensionable service with pensions calculated based on salaries up until the date of closing the plan. For UK participants, pensions in payment can be updated in line with the UK inflation indices, subject to caps and collars, whereas with US participants, pensions generally do not receive inflationary increases once in payment. Benefit payments for both plans are from trustee (or equivalent) administered funds. Plan assets are held in trust funds and are governed by local regulations in their relevant jurisdictions by a trustee board/advisory committee, which is independent of the Group. In conjunction with the Group, the trustees (or equivalent) are responsible for the operation and governance of the fund, including making decisions relating to funding and investment strategy. The Group is a partner in the Premier Farnell Pension Funding Scottish Limited Partnership (SLP), under which the Group has contributed an interest in the SLP worth £18.0 million to the UK Plan, and transferred a number of properties under sale and leaseback arrangements to the SLP. The SLP made distributions to the UK Plan of £1.5 million during the year, and will make annual contributions of £1.5 million per year until 31 January 2026, or until the UK Plan is fully funded, if earlier. The UK Plan’s interest in the SLP reduces the deficit on a funding basis, although it does not impact the deficit on an IAS 19 accounting basis, as the investment held by the UK Plan in the SLP does not qualify as an asset for the purposes of the fair value of scheme assets included in the Group’s consolidated financial statements. The defined benefit plans expose the Group to actuarial risks, such as longevity risk, currency risk, inflation risk, interest rate risk and market (investment) risk. The Group is not exposed to any unusual, entity specific or plan specific risks. In respect of the defined contribution plans, the Group has no further payment obligations once the contributions have been paid. Re-presentation The Group operates a deferred compensation plan in the US for certain employees. Contributions paid by Premier Farnell Corporation (a US subsidiary) into this plan are held in trust on behalf of employees until post employment. Although the investment risk on the trust’s assets is borne by the employee, the assets are ultimately available to the creditors of Premier Farnell Corporation and so do not meet the definition of plan assets for IAS 19 purposes. The financial information for the year ended 2 February 2014 is derived from the statutory financial statements for that year, except certain comparative information has been re-presented to conform with the current year presentation. The Group has re-presented £0.8 million of pension assets as investments held at fair value (note 10), and also re-presented £0.4 million of accruals for Company contributions to trade and other payables within current liabilities (note 17), with a corresponding net £0.4 million adjustment to post retirement obligations. There is no overall effect on the Group’s income statement, net assets or overall cash flows from these re-presentations. 133 Annual Report and Accounts 2014/15 The net pension charge and balance sheet liability of the Group’s pension plans are as follows: 2014/15 £m Defined benefit plans 2013/14 £m – UK (1.2) (1.2) – US (0.9) (0.9) (0.4) (0.4) Defined contribution plans (5.0) (4.8) Total net pension charge in the year (7.5) (7.3) – Other plans 2015 £m 2014 £m Defined benefit balance sheet liability: – UK Plan (23.9) (18.1) – US Plan (26.5) (11.6) – Other plans (0.9) (0.9) (51.3) (30.6) The disclosures relating to the UK and US defined benefit plans are set out below based on valuations performed by Towers Watson, as at 1 February 2015, using the projected unit credit method. The principal assumptions are as follows: UK Plan 2015 % UK Plan 2014 % US Plan 2015 % US Plan 2014 % 3.3 3.9 – – Rate of increase in pensionable salaries – – 2.6 2.9 – RPI inflation capped at 5% pa 2.6 2.9 – – – RPI inflation capped at 3% pa 2.0 2.5 – – Discount rate 3.0 4.4 3.3 4.4 Inflation assumption (RPI) 2.7 3.1 – – Inflation assumption (CPI) 1.7 2.1 – – Life expectancy of a 60-year-old male/female current retiree 27yrs/29yrs 27yrs/30yrs 26yrs/29yrs 25yrs/28yrs Life expectancy of a 60-year-old male/female future retiree 28yrs/30yrs 28yrs/31yrs 27yrs/29yrs 26yrs/28yrs Rate of increase in pensions in payment (where applicable): For 2015, the rates of longevity for the UK Plan are based on the standard tables known as the “S2” tables projected from 2007 using the 2014 Core Projection Model with a long term rate of 1.25%. For 2014, the rates of longevity for the UK Plan were based on the “S1” tables projected from 2002 using the 2011 Core Projection Model with a long term rate of 1.25%. The mortality tables have been based on a postcode mortality study, carried out as part of the 5 April 2014 funding valuation. For the US Plan, the rates of longevity are based on standard tables RP-2014 and MP-2014 projection scale for 2015. For 2014, the rates of longevity are based on RP-2000 with generational projections using scale BB. The amounts recognised in the balance sheet are as follows: Present value of defined benefit obligations Fair value of plan assets Net liability UK Plan 2015 £m UK Plan 2014 £m US Plan 2015 £m (122.3) (102.1) (134.3) (106.4) 98.4 84.0 107.8 94.8 (23.9) (18.1) (26.5) (11.6) US Plan 2014 £m 134 Premier Farnell Notes to the consolidated financial statements continued The major categories of plan assets as a percentage of total plan assets are as follows: UK Plan 2015 % UK Plan 2014 % US Plan 2015 % US Plan 2014 % – – 4.0 5.0 Equities Diversified growth funds 46.3 50.1 – – Index-linked gilts 28.0 24.4 – – Corporate bonds 24.5 24.9 – – 1.2 0.6 96.0 95.0 Cash/LDI The UK Plan’s assets do not include shares issued by the Group other than immaterial investments included within the diversified growth fund investment portfolio. The UK Plan’s investment strategy is to invest broadly 50% in return-seeking assets (via diversified growth funds) and 50% in matching assets (index-linked gilts and corporate bonds). This strategy reflects the UK Plan’s liability profile and the Trustees’ and Group’s attitude to risk. As the Fund matures, the Trustees and the Group expect to gradually reduce the proportion allocated to return-seeking assets and increase the proportion allocated to matching assets. The majority of the US Plan assets follow a Liability Driven Investment (LDI) strategy. At 1 February 2015, 95% of the US Plan’s assets were invested under this strategy, which comprised a mixture of corporate bonds, government bonds, swaps and futures. The US Plan assets at 1 February 2015 included ordinary shares issued by Premier Farnell plc with a fair value of £3.9 million (2014: £5.1 million). Premier Farnell Preference shares are not included in either UK or US investments. The amounts recognised in the income statement are as follows: UK Plan 2014/15 £m UK Plan 2013/14 £m US Plan 2014/15 £m US Plan 2013/14 £m Net interest cost (0.7) (0.7) (0.5) (0.4) Administrative costs paid (0.5) (0.5) (0.4) (0.5) Total charge (included in total net operating expenses) (1.2) (1.2) (0.9) (0.9) UK Plan 2014/15 £m UK Plan 2013/14 £m US Plan 2014/15 £m (102.1) (99.4) (106.4) (116.6) (4.6) Changes in the present value of the defined benefit obligation are as follows: Beginning of year Interest cost Actuarial gains/(losses) due to plan experience Actuarial (losses)/gains due to changes in financial assumptions US Plan 2013/14 £m (4.4) (4.5) (4.5) 0.3 (0.2) (0.2) 0.1 (21.2) (2.0) (17.5) 3.3 Actuarial gains/(losses) due to changes in demographic assumptions 1.0 – (2.3) – Actual benefit payments 4.1 4.0 6.5 6.6 Currency translation adjustment End of year – – (9.9) 4.8 (122.3) (102.1) (134.3) (106.4) 135 Annual Report and Accounts 2014/15 Changes in the fair value of plan assets are as follows: Beginning of year Interest income on plan assets UK Plan 2014/15 £m UK Plan 2013/14 £m US Plan 2014/15 £m US Plan 2013/14 £m 84.0 82.2 94.8 105.4 3.7 3.8 4.0 4.2 Contributions 5.7 3.8 – – Return on plan assets greater/(less) than discount rate 9.6 (1.3) 7.3 (3.3) Actual benefits paid (4.1) (4.0) (6.5) (6.6) Administrative costs paid (0.5) (0.5) (0.4) (0.5) – – 8.6 (4.4) End of year 98.4 84.0 107.8 94.8 Actual return on plan assets 13.3 2.5 11.3 0.9 UK Plan 2014/15 £m UK Plan 2013/14 £m US Plan 2014/15 £m US Plan 2013/14 £m (18.1) (17.2) (11.6) (11.2) (1.2) (1.2) (0.9) (0.9) Currency translation adjustment Analysis of the movement in the balance sheet liability: Liability at beginning of year Total expense as above Contributions Remeasurements recognised in the year Currency translation adjustment Liability at end of year 5.7 3.8 – – (10.3) (3.5) (12.7) 0.1 – – (1.3) 0.4 (23.9) (18.1) (26.5) (11.6) The UK Plan is undergoing its triennial valuation as at 5 April 2014. The contributions expected to be paid during the financial year ending 31 January 2016 amount to £4.8 million (including £0.5 million for expenses) in respect of the UK Plan and £nil in respect of the US Plan. With regard to the US costs these are paid by the US Plan. The weighted average duration of the defined obligation for the UK is 17 years and for the US Plan, 15 years. Assets and obligations associated with the schemes may be sensitive to changes in market values of assets and market related assumptions used in the valuation of scheme liabilities. Changes to asset values, discount rates or inflation could change future pension costs and funding requirements. A sensitivity analysis on the principal assumptions used to measure the plan assets and liabilities at the year-end, with all other variables held constant, is given below: UK Plan Discount rate 1 Inflation (and inflation related assumptions)2 Mortality 1 2 US Plan Sensitivity analysis (Increase) in plan obligations £m Increase in plan assets £m Net balance sheet impact £m (Increase) in plan obligations £m Increase in Net balance plan assets sheet impact £m £m 1% decrease (22.5) 2.0 (20.5) (23.2) 12.3 (10.9) 0.5% increase (3.1) 2.5 (0.6) (2.9) 1.7 (1.2) Increase of 1 year in expected lifetime of plan participants (3.7) – (3.7) (3.4) – (3.4) The change in discount rate is assumed to be due to a 1% per annum decrease in corporate bond yields. The sensitivities to inflation assumption changes include corresponding changes to the future salary and pension increase assumptions. 136 Premier Farnell Notes to the consolidated financial statements continued In practice the assumption that all other variables are held constant is unlikely to occur and changes in some of the assumptions may be correlated. The same method for calculating the sensitivity of the defined benefit obligation to changes in the principal assumptions has been applied as that used when calculating the pension liability recognised within the statement of financial position. Through its defined benefit pension plans, the Group is exposed to a number of direct risks, the most significant of which are detailed below. Asset volatility – plan liabilities are calculated using a discount rate set with reference to corporate bond yields. If plan assets underperform this yield, this will create or increase a deficit. Changes in bond yields – decreases in corporate bond yields will increase plan liabilities, partially offset by an increase in the value of the plans’ bond holdings. Inflation risk – some of the Group’s pension obligations (UK’s) are linked to inflation. Rises in inflation will lead to higher liabilities (with caps and floors on the level of inflationary increases to protect against extreme inflation). The index-linked bonds within plan assets will be directly affected by inflation, with the remainder being unaffected directly. Life expectancy – plan obligations are to provide benefits for the lifetime of the member. Increases in life expectancy will lead to increased plan liabilities. B) Post-retirement medical benefits In the US, the Group sponsors a retiree medical plan that provides certain healthcare benefits to Union participants in the US. The plan was closed to new participants in May 2003 and based on service earned as of that date employees are eligible for either healthcare coverage until death or until eligible under Medicare. The plan is unfunded and is contributory, with participants paying for a portion of their coverage. Any changes to the plan are negotiated with the Union. The costs of this plan are paid by the Group up to a maximum of $400,000 per claim. Above this threshold the Group is insured. The method of accounting for these is similar to that used to account for defined benefit pension obligations. The charge for the year was £0.7 million (2013/14: £0.7 million) and the balance sheet obligation at 1 February 2015 amounted to £19.4 million (2014: £14.5 million). The disclosures relating to post-retirement medical benefits are based on an actuarial valuation performed by Towers Watson, as at 1 February 2015. The principal assumptions were as follows: 2015 2014 Discount rate 3.2% 4.4% Medical inflation 5.0%* 5.0%* Life expectancy of a 60-year-old male current retiree 26 yrs 25 yrs Life expectancy of a 60-year-old male future retiree 27 yrs 26 yrs * The assumed long term rate of medical inflation is 5.0% per annum. In 2015, the initial rate has been assumed to be 7.0%, which is assumed for one year and then to reduce to the long term rate at 0.25% per annum over eight years. In 2014, the initial rate was assumed to be 7.5% for one year and then to reduce to the long term rate at 0.5% per annum over five years. For 2015, future life expectancy is based on RP-2014 and MP-2014 projection scale. For 2014, the rates of longevity are based on RP-2000 with generational projections using scale BB. The amounts recognised in the income statement are as follows: 2014/15 £m 2013/14 £m Service cost 0.1 0.1 Interest cost 0.6 0.6 Total charge (included in total net operating expenses) 0.7 0.7 137 Annual Report and Accounts 2014/15 Changes in the present value of the defined benefit obligation are as follows: 2014/15 £m Beginning of year Total charge 2013/14 £m (14.5) (14.5) (0.7) (0.7) 1.0 1.1 Actuarial losses (3.8) (1.0) Currency translation adjustment (1.4) 0.6 (19.4) (14.5) Payments End of year The contributions expected to be paid during the financial year ending 31 January 2016 amount to £1.0 million (including £0.1 million for expenses). Cumulative actuarial gains and losses recognised in equity: 2014/15 £m Beginning of year Net actuarial losses recognised in the year End of year 2013/14 £m (7.9) (6.9) (3.8) (1.0) (11.7) (7.9) Experience gains and losses: 2014/15 2013/14 Experience (losses)/gains on defined benefit obligation: Amount (£m) Percentage of the present value of liabilities (0.6) (1.6) (2.9%) (11.4%) (2.7) 0.6 (14.2%) 4.4% (0.5) – (2.5%) – (Losses)/gains arising from change in economic assumptions: Amount (£m) Percentage of the present value of liabilities Losses arising from change in demographic assumptions: Amount (£m) Percentage of the present value of liabilities The weighted average duration of the post-employment medical obligation is 11 years. A sensitivity analysis on the principal assumptions used to measure the plan liabilities at the year end, with all other variables held constant, is given below: Increase £m Discount rate Medical costs Mortality 1% decrease 2.4 1% increase 2.6 Increase of 1 year in expected lifetime 1.0 138 Premier Farnell Notes to the consolidated financial statements continued The post-employment medical plan is exposed to the following risks: Life expectancy – plan obligations are to provide benefits for the lifetime of the member. Increases in life expectancy will lead to increased plan liabilities. Medical inflation – plan obligations will increase/decrease as the cost of healthcare in the US rises/falls. As an unfunded plan the post-employment medical plan is not directly exposed to other risks such as currency risk, interest rate risk and market (investment) risk. 27 Operating lease commitments The Group has total minimum lease payments under non-cancellable operating leases as follows: Land and buildings 2015 £m Due within one year Due between one and five years Due after five years Other assets 2014 £m 2015 £m 2014 £m 5.6 5.4 1.0 1.1 12.6 10.1 1.4 1.8 3.0 1.6 – – 21.2 17.1 2.4 2.9 139 Annual Report and Accounts 2014/15 Company financial statements Company balance sheet At 1 February 2015 Note 2015 £m 2014 £m Fixed assets Intangible assets C 11.8 – Investments D 292.7 291.7 304.5 291.7 Current assets Debtors – due within one year E 64.7 54.4 Debtors – due after more than one year E 919.6 904.8 984.3 959.2 Total debtors Cash and cash equivalents Creditors – amounts falling due within one year F G Net current assets Total assets less current liabilities Creditors – amounts falling due after more than one year Provision for liabilities and charges (deferred tax) G I Net assets – – 984.3 959.2 (122.8) (159.3) 861.5 799.9 1,166.0 1,091.6 (797.4) (663.9) – (0.1) 368.6 427.6 18.6 18.6 Capital and reserves Called up share capital K Preference shares H 8.5 10.4 Share premium L 32.8 32.7 Capital redemption reserve L 5.2 4.4 Merger reserve L 0.6 0.6 Hedging reserve L – – L 302.9 360.9 M 368.6 427.6 Profit and loss account Total shareholders’ funds The Company financial statements on pages 139 to 148 were approved by the Board of Directors on 24 April 2015 and were signed on its behalf by: Mark Whiteling Director Premier Farnell plc Registered number 876412 The accounting policies and notes on pages 140 to 148 form an integral part of the Company financial statements. 140 Premier Farnell Accounting policies to the Company financial statements Premier Farnell plc (the “Company”) is a company incorporated and domiciled in the UK and is listed on the London Stock Exchange. The address of the Company’s registered office is Farnell House, Forge Lane, Leeds LS12 2NE, England. The Company’s registered number is 876412. These Company financial statements have been approved by the Board of Directors on 24 April 2015. Basis of preparation The financial statements of the Company have been prepared under the historical cost convention, with the exception of derivative financial instruments which are recognised at fair value, and in accordance with applicable UK accounting standards. The financial statements have been prepared on a going concern basis and in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. A summary of the more important accounting policies of the Company, which the Directors consider to be the most appropriate, is set out below and they have been applied consistently throughout the year. The Company has not been required to adopt any new accounting standards or interpretations during the year that have a significant impact on the Company’s financial results. The financial year ended 1 February 2015 was a 52 week period (financial year ended 2 February 2014: 52 week period). Cash flow statement The cash flows of the Group are included in the consolidated cash flow statement of Premier Farnell plc, which is set out on page 96 of this document. Accordingly, the Company has taken advantage of the exemption under FRS 1 “Cash flow statements” not to publish a cash flow statement. Related party transactions The Company has taken advantage of the exemption granted by paragraph 3(b) of FRS 8 “Related party disclosures” not to disclose transactions with other Group companies. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the contracted rate or the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account. Retirement benefits Employees of the Company are able to participate in the Premier Farnell UK Pension Scheme, comprising both a defined benefit and a defined contribution plan. The assets of the plan are held separately from those of the Company in an independently administered fund. Defined benefit plan The Company is unable to identify its share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis and therefore, as permitted by FRS 17, accounts for the plan as if it were a defined contribution plan. The consolidated financial statements include full disclosures of the UK defined benefit plan in accordance with IAS 19 (note 26). Defined contribution plan Payments to the defined contribution plan are charged as an expense as they fall due. Deferred taxation Full provision is made, on an undiscounted basis, for deferred taxation resulting from timing differences between the profits computed for taxation purposes and profits stated in the accounts to the extent that there is an obligation to pay more tax in the future as a result of the reversal of those timing differences. Deferred tax assets are recognised to the extent that they are expected to be recoverable. Deferred tax is provided at the tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Financial instruments Under FRS 25, the Company’s cumulative, convertible, redeemable preference shares are required to be split into debt and equity components with the preference dividend being reclassified as a finance cost. The fair value of the debt element is established on issue of the shares, based on the discounted cash flows of the instrument to the date of maturity, and is then increased each year on an amortised cost basis through the income statement in order to arrive at the redemption amount Annual Report and Accounts 2014/15 141 payable on maturity of the shares. On purchase and cancellation of preference shares by the Company, a gain or loss is recognised in the profit and loss account based on the difference between the book value and fair value of the financial liability element of the instrument at the date of purchase. The difference between the book value and fair value of the equity element of the instrument is recognised as a movement in the profit and loss account. In addition, a transfer is made to nondistributable reserves from profit and loss account in order to maintain the legal nominal value of share capital. The accounting for the Company’s preference shares in accordance with FRS 25 is identical to that under IAS 32, further details for which are given in note 16 to the consolidated financial statements. The Company uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from financing and investment activities. In accordance with its treasury policy, the Company does not have or issue speculative derivative arrangements. All transactions in financial instruments are matched to an underlying business requirement. Derivative financial instruments are recognised at fair value. At period ends, the gain or loss on remeasurement to fair value is recognised in profit and loss. However, where derivatives qualify for hedge accounting, recognition of any resulting gain or loss will depend upon the nature of the item being hedged (see accounting policy on hedging). The fair value of forward currency contracts has been determined based upon market forward exchange rates at the balance sheet date. The fair value of short term deposits, loans and overdrafts with maturities of less than one year are assumed to approximate to their book values. The fair value of the Company’s US dollar Guaranteed Senior Notes is based on discounted cash flows using a discount rate for similar instruments. The fair value of the Company’s preference shares is based on the quoted market price. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or liability, the associated gains or losses that were recognised directly in equity are reclassified into profit or loss in the same period(s) during which the income/expense is recognised. For other cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the profit and loss account in the same period(s) as which the hedged forecast transaction affects profit or loss. The gain or loss on any ineffective part of the hedge is immediately recognised in the profit and loss account. Share-based payments The Company operates five equity settled, share-based incentive schemes: an Executive Share Option Plan, a Performance Share Plan, a Restricted Share Plan, a Deferred Share Bonus Plan and a Save As You Earn Scheme. These are accounted for in accordance with FRS 20, Share-based Payments. For incentives granted to employees of Premier Farnell plc, an expense is required to be recognised in the profit and loss account over the vesting period. The expense is based on the fair value of each instrument at the grant date, using appropriate option pricing models. The expense is credited to reserves. For incentives granted to employees of Group companies other than Premier Farnell plc, the cost for share-based incentives, again based on the fair value of each instrument at grant date, is treated as an increase in investments, with the corresponding credit being made directly to reserves. All of the Group’s share-based incentives have non-market based performance measures (earnings per share or return on sales), for which the Black Scholes model is used and the value of the expense is adjusted to reflect expected and actual levels of vesting. The fair value of SAYE grants is calculated using the Black Scholes model and the expense is only adjusted to reflect forfeitures. Called up share capital Called up share capital is classified as equity and dividends are recognised as a liability in the period in which they are approved. Shares in subsidiary undertakings Shares in subsidiary undertakings are initially stated at cost. Provision is made where, in the opinion of the Directors, a permanent diminution in value has occurred. Intangible assets and amortisation Intangible assets are stated at cost less accumulated amortisation. Intangible assets acquired are capitalised at cost, and are amortised to nil by equal annual instalments over their useful economic lives. 142 Premier Farnell Notes to the Company financial statements A. Premier Farnell plc – profit and loss account Premier Farnell plc has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006. The loss after taxation for the financial year dealt with in the financial statements of the Company is £22.4 million (2013/14: profit after taxation of £189.9 million) which relates entirely to continuing operations. Gains/losses that have been credited/charged directly to reserves are detailed in note L to the Company financial statements. The audit fee in respect of the Company was £0.1 million (2013/14: £0.1 million). B. Employees and Directors Staff costs during the year were as follows: 2014/15 £m 2013/14 £m Wages and salaries 11.2 9.4 Social security costs 1.2 1.0 Pension costs 0.7 0.7 Share-based payments (note P) Average monthly number of persons employed (including Executive Directors) 0.5 0.5 13.6 11.6 2014/15 Number 2013/14 Number 100 77 Directors’ remuneration is summarised in note 25 to the consolidated financial statements. A detailed analysis of Directors’ remuneration, including salaries, performance-related bonuses, retirement benefits and long term incentives, is provided in the Remuneration Report on pages 62 to 85, which forms part of these financial statements. Details of the highest paid Director are given on page 75. The Executive Directors received all of their remuneration from Premier Farnell plc. However, it is not practical to allocate such costs between their services as Executives of the Company and their services as Directors of the Group. C. Intangible assets £m Cost At 2 February 2014 – Additions 11.8 At 1 February 2015 11.8 Accumulated amortisation At 2 February 2014 – Charge for the year – At 1 February 2015 – Net book amounts At 1 February 2015 At 2 February 2014 11.8 – On 1 February 2015 Premier Farnell plc purchased the element14 brand and associated trademarks for the Asia Pacific region from element14 Pte Limited, a subsidiary company, for £11.8m. The brand will be amortised over its useful economic life of 15 years. 143 Annual Report and Accounts 2014/15 D. Investments Shares in subsidiary undertakings Share-based payments (note P) 2015 £m 2014 £m 279.5 279.5 13.2 12.2 292.7 291.7 The principal trading subsidiary undertakings of Premier Farnell plc, owned either directly or indirectly through subsidiaries, are as follows: Country of incorporation and operation Premier Farnell UK Limited UK element14 Pty Ltd Australia element14 Limited New Zealand Farnell GmbH Germany CadSoft Computer GmbH Germany Farnell Danmark AS Denmark Oy Farnell (Finland) AB Finland Farnell Components AB Sweden Farnell AG Farnell Components (Ireland) Limited Farnell (France) SAS Farnell (Netherlands) BV Farnell Newark Brasil Distribuidora de Produtos Electronicos Limitada element14 Pte Ltd element14 SDN BHD eluomeng Limited Farnell Components SL Farnell Italia SRL Farnell (Belgium) NV eluomeng electronics (China) Co. Ltd element14 India Pvt Ltd Switzerland Eire France Netherlands Brazil Singapore Malaysia Hong Kong Spain Italy Belgium China India Newark Corporation US Newark Electronics Corporation US MCM Electronics Inc US Akron Brass Company US Premier Farnell Canada Limited Canada element14. S.DE.R.L.de C.V Mexico Shenzhen Embest Technology Co. Ltd element14 Limited element14 Asia Pte Limited AVID Technologies Inc. All of the above are wholly owned. China Hong Kong Singapore US 144 Premier Farnell Notes to the Company financial statements continued Companies incorporated in the UK are registered in England. All companies are involved in distribution activities. Akron Brass Company is also involved in manufacturing activities. The Directors consider that to list all subsidiary undertakings would lead to a statement of excessive length. A full list of subsidiary undertakings will be annexed to the Company’s next annual return. The Directors believe that the carrying value of investments is supported by their underlying net assets or future cash flows. E. Debtors 2015 £m 2014 £m 64.2 53.9 0.2 0.3 Amounts falling due within one year: Corporate tax recoverable Other debtors Prepayments and accrued income 0.3 0.2 64.7 54.4 919.6 904.8 919.6 904.8 Amounts falling due after more than one year: Amounts owed by subsidiary undertakings The balances above do not include any impaired assets. The Company does not hold any collateral as security. The carrying amount of debtors is a reasonable approximation to fair value. F. Cash at bank and in hand Cash at bank and in hand comprise bank and short term deposits repayable on demand and available within one day without penalty. G. Creditors 2015 £m 2014 £m Bank overdrafts (unsecured) 116.2 153.1 Taxation and social security 0.3 0.1 Other creditors 2.8 0.7 Amounts falling due within one year: Accruals and deferred income 3.5 5.4 122.8 159.3 145 Annual Report and Accounts 2014/15 2015 £m 2014 £m Unsecured loans 242.4 200.2 Amounts owed to subsidiary undertakings 502.5 400.3 744.9 600.5 52.5 63.4 797.4 663.9 66.4 39.2 – 51.8 Amounts falling due after more than one year: Preference shares Unsecured loans comprise: Bank loans 3.0% US dollar Guaranteed Senior Notes payable 2016 5.2% US dollar Guaranteed Senior Notes payable 2017 20.0 18.3 4.4% US dollar Guaranteed Senior Notes payable 2018 38.8 35.5 4.8% US dollar Guaranteed Senior Notes payable 2021 60.7 55.4 4.0% US dollar Guaranteed Senior Notes payable 2024 56.5 – 242.4 200.2 116.2 153.1 Between one and two years 52.5 – Between two and five years 185.9 208.2 56.5 55.4 411.1 416.7 Bank overdrafts, unsecured loans and preference shares are repayable as follows: Within one year After five years During the year, the available multi-currency revolving credit facilities were increased by £50 million (note 19). H. Preference shares Cumulative, convertible, redeemable preference shares of £1 each. Authorised Allotted, called up and fully paid Equity element Debt element 2015 Number 2014 Number 32,000,000 32,000,000 3,236,471 3,949,419 2015 £m 2014 £m 8.5 10.4 52.5 63.4 The accounting and disclosure for preference shares in accordance with FRS 25 and FRS 26 is identical to IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments Recognition and Measurement. Further details relating to the accounting, rights and restrictions of the preference shares are given in note 16 to the consolidated financial statements, together with an explanation of movements in the equity and debt elements during the year. 146 Premier Farnell Notes to the Company financial statements continued I. Deferred tax 2014/15 £m 2013/14 £m (Liability)/asset at beginning of year (0.1) 0.4 Credit/(charge) in the year 0.1 (0.5) – (0.1) 0.2 0.4 (0.2) (0.5) – (0.1) Liability at end of year Deferred tax provision comprises: Short term timing differences Preference shares J. Financial instruments The Company is exposed to a number of different market risks in the normal course of business including liquidity, credit and interest rate risk. The policies and procedures in place to control these risks are detailed in note 19 to the consolidated financial statements. The Company’s objectives, policies and strategies with respect to financial instruments are outlined in the Company’s accounting policies. Maturity of financial liabilities The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m 158.5 9.3 150.8 134.9 2.9 53.5 – – At 1 February 2015 Borrowings Preference shares 3.1 – – – 164.5 62.8 150.8 134.9 Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m Over 5 years £m 175.2 7.5 163.3 63.9 Preference shares 3.5 3.5 65.1 – Trade and other creditors 0.8 – – – 179.5 11.0 228.4 63.9 Trade and other creditors At 2 February 2014 Borrowings 147 Annual Report and Accounts 2014/15 During the year the Group refinanced its bank borrowing facilities with the amendment and extension of its multi-currency revolving facilities to £250 million expiring in September 2019, carrying a LIBOR based floating rate of interest. During the year the Group refinanced US$85 million US private placement notes repayable in September 2024. US dollar private placement notes bear coupons between 4.0% and 5.2%, and are repayable between July 2017 and September 2024. The book and fair values of the Company’s financial instruments are as follows: Book value 2015 £m Fair value 2015 £m Book value 2014 £m Fair value 2014 £m 242.4 251.0 200.2 204.4 52.5 52.0 63.4 63.1 116.2 116.2 153.1 153.1 Other creditors 2.8 2.8 0.7 0.7 Other debtors 0.2 0.2 0.3 0.3 Long term borrowings Preference shares Short term borrowings K. Called up share capital Details of the Company’s ordinary share capital are given in note 20 to the consolidated financial statements. L. Movements in share capital and reserves Called up share capital £m Equity element of preference shares £m Share premium £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Profit and loss account £m Total £m 18.6 10.4 32.7 4.4 0.6 – 360.9 427.6 New share capital subscribed – – 0.1 – – – – 0.1 At 2 February 2014 Loss for the year – – – – – – (22.4) (22.4) Share-based payments – – – – – – 1.5 1.5 Ordinary dividends paid – – – – – – (38.2) (38.2) Purchase of preference shares – Equity element – (1.9) – – – – 1.9 – Transfer to nondistributable reserves – – – 0.8 – – (0.8) – 18.6 8.5 32.8 5.2 0.6 – 302.9 368.6 At 1 February 2015 148 Premier Farnell Notes to the Company financial statements continued M. Reconciliation of movements in shareholders’ funds 2014/15 £m 2013/14 £m (Loss)/profit after taxation (22.4) 189.9 Ordinary dividends paid (38.2) (38.1) New share capital subscribed 0.1 0.8 Share-based payments 1.5 1.6 – (1.8) Net change in shareholders’ funds (59.0) 152.4 Shareholders’ funds at beginning of year 427.6 275.2 Shareholders’ funds at end of year 368.6 427.6 Derivative financial instruments N. Contingent liabilities The Company has guaranteed the loans of certain subsidiary undertakings which at 1 February 2015 amounted to £nil (2014: £0.5 million) and bank guarantees issued on behalf of certain subsidiary undertakings which at 1 February 2015 amounted to £7.4 million (2014: £12.2 million). O. Ordinary dividends Ordinary dividends paid and ordinary dividends proposed but not yet paid in respect of the financial year ended 1 February 2015 are detailed in note 7 to the consolidated financial statements. P. Share-based payments The charge for share-based payments in respect of the Company was £0.5 million (2013/14: £0.5 million) which relates to grants made to employees of Premier Farnell plc. In addition, the cost for share-based payments in respect of shares in the Company granted to employees of Group companies other than Premier Farnell plc was £1.0 million (2013/14: £1.1 million), and is treated as an increase in investments in subsidiary undertakings. The credit relating to the combined amount of £1.5 million (2013/14: £1.6 million) has been credited directly to reserves. Other than noted above, the methods of accounting and assumptions adopted for share-based payments are consistent with those adopted in the consolidated financial statements (note 21). Details of potential issues of ordinary shares under share option schemes for the Group are given in note 20 to the consolidated financial statements. In respect of the Company, the number of outstanding options under these schemes as at 1 February 2015 was as follows: 2015 Number 2014 Number Executive Share Option Plan 3,391,827 3,135,973 Performance Share Plan 1,255,551 1,253,468 Deferred Share Bonus Plan Restricted Share Plan Save As You Earn Option Scheme 120,872 99,311 20,684 101,008 263,573 163,234 5,052,507 4,752,994 149 Annual Report and Accounts 2014/15 Glossary AGM Annual General Meeting CEO or Chief Executive or Chief Executive Officer Chief Executive Officer of Premier Farnell plc CFO or Chief Financial Officer Chief Financial Officer of Premier Farnell plc Claw-back The right to reduce awards in the event of misstated performance or misconduct Code The UK Corporate Governance Code CPO The Chief People Officer of Premier Farnell plc CAGR Compound Annual Growth Rate DSBP Premier Farnell’s Deferred Share Bonus Plan DAB Digital Advisory Board DTR The Financial Services Authority’s Disclosure on Transparency Rules EBITDA Adjusted profit before interest, tax, depreciation and amortisation EPS Earnings Per Share ESOP Executive Share Option Plan EU European Union Executive or Executive Director An Executive Director of Premier Farnell plc FCF Free cash flow FRC Financial Reporting Council FRS Financial Reporting Standard FSC Forestry Stewardship Council GAAP Generally Accepted Accounting Practice GDP Gross Domestic Product IAS International Accounting Standard IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards IPD Industrial Products Division KPI Key Performance Indicator LTI or LTIP Long-Term Incentive Plan MDD Marketing and Distribution Division MIP Management Incentive Plan MRO Maintenance Repair and Operation NBS New Bridge Street, the Company’s remuneration advisers OP Operating profit PMI Purchasing Managers Index Pro rating or pro rate The reduction of the number of shares under share award to reflect any unexpired performance period PSP Performance Share Plan RONA Return On Net Assets ROS Return On Sales RPI Retail Price Index RSP Restricted Share Plan SAR Share Appreciation Right, where market priced options, on exercise, deliver only the gain in shares, rather than all of the shares comprised in the option SAYE Save As You Earn plan SIA Semiconductor Industry Association SET Senior Executive Team SG&A Operating expenses TSR Total shareholder return: the growth in value of a share plus the value of dividends paid, assuming that dividends are reinvested in the Company’s shares on the day they are paid UK Scheme The UK pension plan 150 Premier Farnell Shareholder information 2015 Financial calendar Annual General Meeting 16 June 2015 Interim results 17 September 2015 Financial year end 31 January 2016 Final ordinary dividend key dates Ordinary shares Record Payment Ex-dividend Record Payment 28 May 2015 29 May 2015 25 June 2015 24 September 2015 25 September 2015 22 October 2015 Final preference dividend key dates Preference shares Interim ordinary dividend key dates Ex-dividend Half-yearly preference dividend key dates Ex-dividend Record Payment Ex-dividend Record Payment 02 July 2015 03 July 2015 27 July 2015 24 December 2015 29 December 2015 26 January 2016 Annual General Meeting The 2015 Annual General Meeting will be held at the offices of Allen & Overy LLP, One Bishops Square, London E1 6AD on 16 June 2015 at 11 am. Registrar Enquiries concerning shareholdings or dividends should be addressed in the first instance to the Company’s Registrar, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, United Kingdom or telephone +44 (0) 870 707 1648. Alternatively, shareholders can contact Computershare online via www.investorcentre.co.uk/contactus. Shareholders have the ability to register for electronic shareholder communications, set up or amend bank details for direct credit of dividend payments, amend address details, view payment history and access information on the Company’s share price. For more information or to register please visit www.investorcentre.co.uk. Share dealing service A telephone dealing service has been arranged with Stocktrade (a division of Brewin Dolphin Limited.) which provides a simple way of buying or selling Premier Farnell plc shares. Basic commission is 0.5% up to £10,000, reducing to 0.2% thereafter (subject to a minimum commission of £17.50). For further information call +44 131 240 0414 (between 8 am and 4.30 pm Monday to Friday) and quote reference ‘Premier Farnell dial and deal service’. Please note that some transactions may be subject to money laundering regulations and you may be required to provide certain personal details to Stocktrade prior to any sale or purchase of shares. Please also note that these services are not available in the US. Registrar and share transfer office Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE 151 Annual Report and Accounts 2014/15 Historic record Revenue from continuing operations Operating profit before restructuring costs, gains on disposal of businesses and pension changes 2014/15 £m 2013/14 £m 2012/13 £m 2011/12 £m 2010/11 £m 960.1 968.0 952.0 973.1 990.8 88.0 93.0 95.1 107.3 112.1 Adjusting items (4.9) (1.5) (5.8) 16.1 – Total operating profit from continuing operations 83.1 91.5 89.3 123.4 112.1 Profit before taxation and accounting for preference shares 72.6 79.1 73.3 108.9 97.6 Preference dividends (2.9) (3.5) (3.5) (3.5) (3.5) Premium on redemption of preference shares (0.6) (0.8) (0.8) (0.8) (0.8) Profit before taxation from continuing operations 69.1 74.8 69.0 104.6 93.3 Profit after taxation from continuing operations 47.5 51.4 48.6 76.9 66.2 Profit attributable to ordinary shareholders 47.5 51.4 48.6 76.9 66.2 – proposed 10.4p 10.4p 10.4p 10.4p 10.4p – paid 10.4p 10.4p 10.4p 10.4p 9.6p Basic earnings per share (pence) 12.9p 14.0p 13.3p 21.2p 18.3p Dividend per share Adjusting items (pence) Adjusted earnings per share (pence) 0.9p 0.3p 1.3p (3.8)p 13.8p 14.3p 14.6p 17.4p – 18.3p 152 Premier Farnell Premier Farnell is committed to reducing the impact of its activities on the environment. Printed by CPI Colour This Report is printed on material derived from sustainable sources, and printed using vegetable based inks. Both the manufacturing paper mill and printer are registered to the Environmental Management System ISO 14001 and are Forest Stewardship Council® (FSC) chain-of-custody certified. CPI Colour is also a Carbon Neutral Printing Company and reduces its CO2 omissions to net zero in accordance with The CarbonNeutral Protocol. This carbon offsetting supports the Uchindile Mapanda reforestation programme in Tanzania, an environmental project to establish commercial forests at two locations in Africa. This Report is recyclable and Bio-degradable - If you have finished with this document and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste. Thank you. Designed and produced by SampsonMay Telephone: 020 7403 4099 www.sampsonmay.com Premier Farnell plc Registered in England and Wales No. 876412 Registered office: Farnell House, Forge Lane, Leeds LS12 2NE www.premierfarnell.com Group Headquarters 55 The Strand London WC2N 5LR T +44 (0) 20 7851 4100 F +44 (0) 20 7851 4110