Financial Review

A review of the Group’s results and operations is given in the Review of Operations section. Other financial matters are noted below.

Net finance costs

Net finance costs for the year of £12.6 million (2008: £16.8 million) comprised net interest payable of £11.9 million (2008: £10.8 million), which was covered 7.5 times by underlying operating profit, and a net cost of £0.7 million (2008: £6.0 million) relating to the Company’s convertible preference shares.

The increase in net interest payable reflects the negative impact of exchange rates with the benefit of lower interest rates on the Group’s bilateral banking facilities, which carry a LIBOR based floating rate of interest, offset by the interest cost of additional borrowings to fund the Group’s purchase and cancellation of preference shares.

The net cost in respect of the Company’s convertible preference shares, included the preference dividend for the year of £3.5 million (2008: £5.6 million), together with a £0.9 million (2008: £1.3 million) charge for the amortisation the implied redemption premium on preference shares.

During the year the Company purchased and cancelled 1,824,302 of its preference shares for a total cash cost of £23.6 million. Based on the book value and fair value of the instruments at the date of purchase, the financial liability element of the preference shares was reduced by £27.4 million and the equity element by £4.8 million. A gain of £3.7 million was recognised in the income statement being the difference between the book value and fair value of the financial liability element at the date of purchase. The gain arising from the difference between the book value and fair value of the equity element of £4.8 million was recognised as a movement in retained earnings.

In the prior year, the Company purchased and cancelled 1,236,500 of its preference shares for a total cash cost of £17.7 million, resulting in a gain of £0.9 million being recognised in the income statement. Further details relating to the Company’s preference shares are given in note 15 to the Consolidated Financial Statements.

Taxation

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

This effective tax rate of 29.0% compares favourably with the corporate tax rates of 28.0% in the UK and 35.0% in the US, reflecting the Group’s efficient financing structure.

Business acquisition

On 16 December 2008, the Group acquired part of the assets and trading rights of Microdis Electronics, part of Microdis Holding AG, used in carrying on its business as an existing authorised distributor of Farnell products in Poland, the Czech Republic and Hungary, for a total consideration, including costs, of £1.0 million of which £0.2 million is payable in calendar year 2009. The fair value of the intangible assets acquired was £1.0 million which is being amortised over a period of 10 years.

Ordinary dividend

The Board is recommending a final ordinary dividend of 5.2 pence per share (2008: 5.2 pence per share), which, together with the interim dividend, amounts to a total dividend per share of 9.4 pence (2008: 9.2 pence) an increase of 2.2%, and with a total impact on shareholders’ funds of £34.0 million. The final dividend is subject to approval at the Annual General Meeting on 16 June 2009, is payable on 24 June 2009 to shareholders on the register at 29 May 2009. The Board believes that the growth in earnings and increase in free cash flow support the level of dividend proposed. It recognises the value of the dividend to shareholders and will continue to assess the appropriate level of dividend, taking into consideration the earnings and cash requirements of the Group.

Post-retirement benefits

The Group accounts for pensions and other post-retirement benefits in accordance with IAS 19. The net charge for post-retirement benefits from continuing operations was £0.9 million (2008: £0.3 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 asset/(liability) of these plans during the year was as follows:

Actuarial losses of £74.8 million were recognised during the year relating to the US Plan, due primarily to the decline in US equity markets, partly offset by currency translation gains, with a resulting liability at the year end of £2.8 million. During the fourth quarter, the US Plan’s exposure to equity markets was reduced with the Plan having 40.0% of its assets invested into bonds.

The UK Plan, which has 58.5% of its investments in equities, was also impacted by the fall in the market value of shares during the year, partly offset by scheduled company contributions of £3.4 million, to give a closing liability of £20.5 million.

The impact of the year end valuation on our defined benefit pension plans will result in an estimated net charge to the income statement in the year ending 31 January 2010 of £4.8 million, compared to net income of £2.2 million in 2009. Company contributions to the US and UK Plans in the next financial year will be nil and £3.1 million, respectively.

Further details on the Group’s US and UK defined benefit pension plans are given in note 27 to the Consolidated Financial Statements.

Cash flow and net debt

Free cash flow attributable to ordinary shareholders is summarised below.

Cash generated from continuing operations represented 120% of operating profit, or 117% excluding the impact of restructuring costs (2008: 111%). This reflects the improvement in working capital during the year of £2.7 million as we continue to ensure that our investment in inventory to meet the needs of the EDE customer is achieved through well controlled working capital management. Total working capital as a percentage of sales was 28.4% compared to 25.7% in the prior year.

Capital expenditure of £16.1 million included £9.1 million of software development costs, principally to enhance existing systems. The disposal of surplus property in Germany generated proceeds of £3.3 million.

The change in net financial liabilities is summarised below:

The impact from exchange rates during the year was to increase financial liabilities by £59.2 million, principally in relation to our $225 million private placement notes.

At 1 February 2009, the Group’s net financial liabilities comprised the following:

Debt maturity

The maturity of the Group’s gross financial liabilities at 1 February 2009 of £331.1 million, excluding derivative financial instruments, is as follows:

On 28 January 2009, we announced we had reached agreement to replace our £200 million bilateral facilities which were set to expire in mid-2010 with £150 million syndicated committed bank facilities. The new facilities expire in January 2013 and, together with the Group’s continuing strong cash generation, provide the necessary level of operational and financial flexibility to meet the Group’s funding requirements for the longer term. The impact of the higher margin and fees payable under the new facilities are offset by a decrease in LIBOR and will thus result in the blended cost of finance for the Group being broadly unchanged.

Under these new facilities, which were drawn down on 9 February 2009, £109.8 million of the financial liabilities categorised as “between one and two years” as at 1 February 2009 would be re-categorised as due “between two and five years”. Based on the new facilities, our headroom on bank borrowings at the year end would have been £37 million which, together with our net cash position of £39 million, gives us sufficient working capital funding.

The Group anticipates that the combination of free cash-flow, existing cash resources and available bank facilities will enable it to meet the repayment of the US$66 million Senior Notes which become due in June 2010.

Treasury operations

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

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

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

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

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

International Financial Reporting Standards (IFRSs)

The Group’s consolidated financial statements have been reported in accordance with IFRSs. The Group has not been required to adopt any other new accounting standards during the year which have had a significant impact on the consolidated financial statements.

With effect from 2 February 2009, the Group has adopted IFRS 8, “Operating Segments”. This will not affect the financial results of the Company but will have an impact on the Group’s segmental disclosure, in order to reflect a format more consistent with the internal reporting provided to the Board on which operating decisions are made. The 2009 results under the revised segmental format would be as follows:

Details of the new accounting standards that are not yet effective are given in the Accounting Policies.

The financial statements of the Company for the year ended 1 February 2009 continue to be prepared in accordance with UK GAAP.