Annual Financial Report

RNS Number : 6899H

Volex PLC

24 June 2013

Volex plc

Publication and posting of Annual Report & Accounts 2013

& Notice of Annual General Meeting

Volex plc (the "Company") announces that it has posted to shareholders its Annual Report & Accounts 2013 (the "Annual Report") and the Notice of Annual General Meeting, which is to be held at 10 Eastbourne Terrace, London W2 6LG on Monday, 22 July 2013 at 2.00 p.m. (the "AGM"), together with a Form of Proxy for use in connection with the AGM.

A copy of the Annual Report and Form of Proxy is available on the Company's website, www.volex.com and has also been submitted to the UK Listing Authority's National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/NSM.

At the Company's forthcoming AGM, shareholders will be asked to approve an optional scrip dividend alternative scheme to shareholders (the "Scrip Dividend Scheme"). The Scrip Dividend Scheme will give shareholders the right to elect to receive new ordinary shares of the Company, par value £0.25 ("Ordinary Shares") (credited as fully paid) instead of future cash dividends when a scrip dividend alternative is offered. The Scrip Dividend Scheme will apply to the final dividend for the year ended 31 March 2013, although those shareholders that do not want to join the Scrip Dividend Scheme may nonetheless elect for a scrip dividend in respect of just the final dividend for the year ended 31 March 2013 only. The Scrip Dividend Scheme is intended to replace the Dividend Re-investment Plan which shareholders were previously invited to participate in. Furthermore, shareholders who have elected to join the Scrip Dividend Scheme will also automatically be deemed to have elected to withdraw from the Dividend Currency Election Facility.

The Company is also seeking shareholder approval at the AGM toamend the its Articles of Association in order to enable the Company to follow market practice in connection with the operation of the Scrip Dividend Scheme. The proposed amendments to Articles 149.4 and 149.5 of the Articles of Association of the Company would, if approved, permit Directors to calculate the number of Ordinary Shares that shareholders are entitled to receive under the Scrip Dividend Scheme as being based on the average of the middle market quotations for the Company's Ordinary Shares for the day on which they will be quoted "ex" dividend and the four subsequent dealing days as derived from the London Stock Exchange's Daily Official List, as opposed to the middle market quotation for the Company's Ordinary Shares on the last practicable business day before the notice is sent to shareholders (which is the position under the current Articles of Association of the Company). In accordance with Disclosure and Transparency Rule ("DTR") 6.1.2, the proposed changes to the Company's Articles of Association have been submitted to the UK Listing Authority's National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/NSM.

In compliance with DTR 6.3.5, the following information is extracted from the Annual Report and should be read in conjunction with the Company's Preliminary Announcement issued on Tuesday, 28 May 2013, both of which can be viewed at www.volex.com. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.

This material is not a substitute for reading the Annual Report in full and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Annual Report.

Statement of Directors' Responsibilities

The following statement is repeated here solely for the purpose of complying with DTR 6.3.5. This statement relates to, and is extracted from, page 57 of the Annual Report. Responsibility is for the full Annual Report not the extracted information presented in this announcement or the Preliminary Results Announcement. Reference to page numbers in the extracted information below refers to page numbers in the Annual Report.

The Directors are responsible for preparing the Annual Report, and the Group and parent Company financial statements in accordance with applicable law and regulations.

The Companies Act 2006 requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and parent Company financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. Under Companies Act 2006, 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 of the profit or loss of the Company 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 accounting estimates that are reasonable and prudent;

· state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for maintaining adequate 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 enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They have general responsibility 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 are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed in the section of Board of Directors on pages 40 and 41, confirm that, to the best of their knowledge:

· the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

· the business review contained in the Directors' Report and the operating and financial review section in this 2013 Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces;

· so far as each of the Directors is aware, there is no relevant audit information of which the Company's auditors are unaware;

· each of the Directors has taken all the steps he/she ought to have taken individually as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information; and

· The Directors consider the report and accounts as a whole to be fair, balanced and understandable, in a format to provide the information necessary for shareholders to assess the Company's performance and strategy.

Principal Risks

A description of the principal risks that the Company faces is extracted from pages 33 to 36 of the Annual Report.

The table below summarises our principal risks and what we do to manage these risks. The Board considers these to be the most significant risks that could materially affect the Group's financial condition, performance, strategies and prospects. The risks listed do not comprise all risks faced by the Group and are not set out in any order of priority. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business.

Risk	Description & Possible Impact	Mitigation Activities
Uncertain economic environment	The financial performance and condition of Volex may be adversely impacted by a significant weakening in end-market demand, associated with a deterioration in global economic conditions. The Group's business and trading performance have been, and will continue to be, affected by global economic conditions. Should global economic conditions deteriorate or economic uncertainty increase, our customers and potential customers may experience deterioration of their businesses, which may result in the delay or cancellation of plans to purchase our products. Volex supplies power and interconnect solutions, on short lead-times, to the global consumer, telecoms/datacoms, healthcare and industrial sectors. End-market economic conditions in these sectors is subject to some uncertainty and may cause Volex to experience further reductions in trading activity, a lower share price, the financial failure of one or more of its key customers and suppliers, asset impairments, lower profitability and a material adverse impact on its financial position.	- The Board regularly reviews Group strategy which determines the markets in which the Group operates. - Current spread of Group's businesses, both geographic and by end-market served, provides some protection to the Group, should conditions in a particular market deteriorate. - Ongoing close working relationships with suppliers and customers to monitor performance. - Adapting product ranges to meet changing customer needs. - Early communication of adverse trading through functional and regional lines. Such early identification enables more effective management of trading risk.
Loss of a key customer	The Group's profitability, financial condition and future prospects may suffer significantly if it were to lose a key account. A significant proportion of the Group's trading activity is with a relatively small number of large global accounts. Over 80% of total Group revenue is generated by the Group's top 25 customers, mostly prestigious global OEMs. One of the Group's customers individually accounts for more than 10% of total Group revenue.	- The Group mitigates the risk of fluctuations in revenues from these customers by strong trading relationships with them, while diversifying into other markets and new customers. - Initiatives in place to align our capabilities and resources with customers' needs, and to improve quality systems. - Global key account managers in place for major customers. - In practice these key customers operate in many business sectors and regions with somewhat independent trading relationships in each sector/region. The loss of business in one particular area would not necessarily result in the loss of all of that customer's business. - Strong credit control.
Production challenges and risks	The Group's financial performance and condition may be materially adversely affected by production related challenges and risks. The Group operates nine production facilities across the globe and inefficiencies in the production process may lead to a deterioration in gross margins and operating profit. Examples of challenges that may lead to production inefficiencies include: - Our customers specify quality, performance and reliability standards. If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and product re-work or replacement costs. - Fluctuating customer production schedules as a result of customer design changes, changes in customer manufacturing strategies or customer inventory management initiatives, amongst others. - The majority of our manufacturing sites are located in China and other developing markets. Changes in these labour markets as well as the rapid economic growth and social progress may continue to result in high labour turnover and increases in labour costs. - Our operations and those of our suppliers and customers may be vulnerable to interruption by natural disasters or other catastrophic events. If a business interruption should occur, our business could be materially and adversely affected.	- Our operations are designed to be extremely flexible and can accommodate a degree of volume fluctuation. We work very closely with our key suppliers to minimise lead-times and maintain flexibility in material supplies. - Additionally, we work closely with key customers to ensure that we understand their requirements and develop our manufacturing capabilities to meet their needs. - We have invested in new moulds, tooling and technology and have acquired new skills as part of our quality continuous improvement programme to sustain high quality output. - We are constantly reviewing our global footprint to ensure that we are located in the most cost effective area. - We are also engaged in driving LEAN manufacturing and automation strategies to reduce our overall labour content. - Our newly expanded Batam factory will give better geographic coverage and reduce our exposure in China. Our coverage gives us flexibility in the event of business interruptions.
Non-compliance with legislation and regulation	Failure to comply with applicable legal and regulatory requirements may result in financial loss, a restriction on our business's ability to operate or reputational damage. The Group operates in diverse global markets and therefore is exposed to a wide range of legal, fiscal and regulatory frameworks, including employment, environmental and health and safety legislation, along with product liability and contractual risks. In particular, operating within the rapidly evolving developing nations can expose the Group's businesses to significant local risks and challenges.	- External consultants have been engaged to perform a number of corporate health checks in high risk markets to identify any compliance gaps and assist in the development of appropriate solutions. - We maintain a number of general compliance policies to ensure compliance with local laws, regulations and standards and any other laws with international reach, such as the UK Bribery Act, where relevant. These policies are reinforced through our ongoing training to employees. - Code of Business Conduct communicated to the Group and third parties to make sure business is carried out in line with our policies and procedures.
Breach of financial covenants	The financial performance and condition of Volex may be adversely impacted if the Group was not to meet its financial covenants. The Group's $75m multi-currency revolving credit facility requires a quarterly assessment of the following two covenants (defined in the financial review): - Leverage covenant. - Interest covenant. Failure to meet these covenants would result in an 'Event of Default' which would allow the lender to cancel the facility and request immediate repayment.	- Through the development and delivery of the Group's strategy, sufficient profits should be generated to ensure no breach of the financial covenants. - The Group monitors forecast covenant ratios using the latest available financial information (budget/forecast). These calculations include sensitivities to de-risk the future performance. - If there were to be any indication of breach or headroom below 10%, mitigating actions would be implemented. - The Group maintains an open and transparent dialogue with the facility providers to ensure they are aware of developments in the business.
Rising commodity prices	The Group may experience short term volatility in gross margin and operating profit as a consequence of significant changes in raw material commodity input prices. Many of the Group's products, in particular power cords which represent the majority of the sales in the Consumer sector, are manufactured from components that contain significant proportions of copper and, to a lesser extent, other metals and oil-based products such as PVC. Increases in the prices of these commodities are reflected in the prices charged to our customers but delays in passing through these costs can cause short term volatility in the Group's gross margins. Copper price volatility is the single largest commodity price exposure facing the Group.	- The Board regularly reviews the prices of these commodities and effects a number of measures to mitigate the impact of volatility. - With respect to copper, prices are fixed quarterly with major suppliers based on average LME rate over prior quarter. - Approximately a third of the revenues in our Consumer sector are covered by copper clauses which provide for quarterly adjustments to our selling prices based on our input costs. - Occasionally, we employ back-to-back arrangements to match customer demand with cable supplier arrangements. - Strategic relationships established with key suppliers. - We maintained a copper hedging programme, which fixes the cost for a portion of our unmatched copper purchases. These forward copper purchase contracts extend out 12 months and are refreshed on a rolling monthly basis.
Failure to attract, develop and retain key personnel	Inability to retain key knowledge and adequately plan for succession could have a negative impact on Group performance. The knowledge, skills and performance of our employees are central to our success. We must attract, develop and retain the talent required to fulfil our ambitions.	- Remuneration policies designed to attract, retain and reward appropriate employees. - Talent strategy to provide opportunities for employees to develop careers. - Formalised objective setting in place for employees. - Bonus scheme in place for relevant employees based on business and individual objectives. - In FY2013 the Group continued its global cultural change initiative. This is a multi-year programme that will see all employees engaged in the development and implementation of 'One Volex' and its supporting values.
Increased competition	The Group's financial performance and future prospects may be adversely impacted through loss of business to competitors with new or alternative technologies if its businesses either do not adequately adapt to market developments, or are unable to protect, maintain and enforce their intellectual property. The markets in which the Group operates are mature and highly competitive with respect to price, geographic distinction, functionality, brand recognition and the effectiveness of sales and marketing strategies. Our competitive position results from a range of factors including the price, quality and performance of our products, technology innovation, the level of customer service levels and lead-times, the development of new technologies and our geographic footprint. Increased competition may result in price reductions, reduced margins increased expense or investment, or loss of contracts, any of which could adversely affect our business and trading performance.	- -Strategic relationships with customers. - Investing in new technology and developing new products to maintain the Group's competitive position, for example the Group's investment in Active Optical cable solutions during FY2013. - Close monitoring of market trends and industry developments (e.g. by participating in Standards Committees) to shape, or at least gain early sight of, future product requirements.
Exchange rate fluctuations	The Group's financial position and trading results may be adversely impacted by fluctuations in exchange rates. The Group operates in many different countries and is subject to currency fluctuations arising on transactional foreign currency exposures and the translation of overseas subsidiaries' results which could create earnings and balance sheet volatility.	- Group Treasury Policy Statement sets out procedures on exchange rate risk management. - During FY2012 the Group adopted the US Dollar as its presentation currency. With the majority of the Group's transactions denominated in US Dollars, or currencies tied to the US Dollar, this has continued to significantly reduce the effect of exchange rate fluctuations in the financial statements of the Group. - Billing currencies have been adjusted to achieve a higher level of natural hedging. - Where there are material remaining exposures, the Company enters into financial hedging to mitigate these exposures. - The impact of foreign exchange movements on the Consolidated Statement of Financial Position is mitigated by a natural hedge arising as a result of the Group's US Dollar and Euro denominated borrowings.

Risk

Description & Possible Impact

Mitigation Activities

Uncertain economic environment

The financial performance and condition of Volex may be adversely impacted by a significant weakening in end-market demand, associated with a deterioration in global economic conditions.

The Group's business and trading performance have been, and will continue to be, affected by global economic conditions. Should global economic conditions deteriorate or economic uncertainty increase, our customers and potential customers may experience deterioration of their businesses, which may result in the delay or cancellation of plans to purchase our products.

Volex supplies power and interconnect solutions, on short lead-times, to the global consumer, telecoms/datacoms, healthcare and industrial sectors. End-market economic conditions in these sectors is subject to some uncertainty and may cause Volex to experience further reductions in trading activity, a lower share price, the financial failure of one or more of its key customers and suppliers, asset impairments, lower profitability and a material adverse impact on its financial position.

- The Board regularly reviews Group strategy which determines the markets in which the Group operates.

- Current spread of Group's businesses, both geographic and by end-market served, provides some protection to the Group, should conditions in a particular market deteriorate.

- Ongoing close working relationships with suppliers and customers to monitor performance.

- Adapting product ranges to meet changing customer needs.

- Early communication of adverse trading through functional and regional lines. Such early identification enables more effective management of trading risk.

Loss of a key customer

The Group's profitability, financial condition and future prospects may suffer significantly if it were to lose a key account.

A significant proportion of the Group's trading activity is with a relatively small number of large global accounts. Over 80% of total Group revenue is generated by the Group's top 25 customers, mostly prestigious global OEMs.

One of the Group's customers individually accounts for more than 10% of total Group revenue.

- The Group mitigates the risk of fluctuations in revenues from these customers by strong trading relationships with them, while diversifying into other markets and new customers.

- Initiatives in place to align our capabilities and resources with customers' needs, and to improve quality systems.

- Global key account managers in place for major customers.

- In practice these key customers operate in many business sectors and regions with somewhat independent trading relationships in each sector/region. The loss of business in one particular area would not necessarily result in the loss of all of that customer's business.

- Strong credit control.

Production challenges and risks

The Group's financial performance and condition may be materially adversely affected by production related challenges and risks.

The Group operates nine production facilities across the globe and inefficiencies in the production process may lead to a deterioration in gross margins and operating profit. Examples of challenges that may lead

to production inefficiencies include:

- Our customers specify quality, performance and reliability standards. If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and product re-work or replacement costs.

- Fluctuating customer production schedules as a result of customer design changes, changes in customer manufacturing strategies or customer inventory management initiatives, amongst others.

- The majority of our manufacturing sites are located in China and other developing markets. Changes in these labour markets as well as the rapid economic growth and social progress may continue to result in high labour turnover and increases in labour costs.

- Our operations and those of our suppliers and customers may be vulnerable to interruption by natural disasters or other catastrophic events. If a business interruption should occur, our business could be materially and adversely affected.

- Our operations are designed to be extremely flexible and can accommodate a degree of volume fluctuation. We work very closely with our key suppliers to minimise lead-times and maintain flexibility in material supplies.

- Additionally, we work closely with key customers to ensure that we understand their requirements and develop our manufacturing capabilities to meet their needs.

- We have invested in new moulds, tooling and technology and have acquired new skills as part of our quality continuous improvement programme to sustain high quality output.

- We are constantly reviewing our global footprint to ensure that we are located in the most cost effective area.

- We are also engaged in driving LEAN manufacturing and automation strategies to reduce our overall labour content.

- Our newly expanded Batam factory will give better geographic coverage and reduce our exposure in China. Our coverage gives us flexibility in the event of business interruptions.

Non-compliance with legislation and regulation

Failure to comply with applicable legal and regulatory requirements may result in financial loss, a restriction on our business's ability to operate or reputational damage.

The Group operates in diverse global markets and therefore is exposed to a wide range of legal, fiscal and regulatory frameworks, including employment, environmental and health and safety legislation, along with product liability and contractual risks. In particular, operating within the rapidly evolving developing nations can expose the Group's businesses to significant local risks and challenges.

- External consultants have been engaged to perform a number of corporate health checks in high risk markets to identify any compliance gaps and assist in the development of appropriate solutions.

- We maintain a number of general compliance policies to ensure compliance with local laws, regulations and standards and any other laws with international reach, such as the UK Bribery Act, where relevant. These policies are reinforced through our ongoing training to employees.

- Code of Business Conduct communicated to the Group and third parties to make sure business is carried out in line with our policies and procedures.

Breach of financial covenants

The financial performance and condition of Volex may be adversely impacted if the Group was not to meet its financial covenants.

The Group's $75m multi-currency revolving

credit facility requires a quarterly assessment of the following two covenants (defined in the financial review):

- Leverage covenant.

- Interest covenant.

Failure to meet these covenants would result in an 'Event of Default' which would allow the lender to cancel the facility and request immediate repayment.

- Through the development and delivery of the Group's strategy, sufficient profits should be generated to ensure no breach of the financial covenants.

- The Group monitors forecast covenant ratios using the latest available financial information (budget/forecast). These calculations include sensitivities to de-risk the future performance.

- If there were to be any indication of breach or headroom below 10%, mitigating actions would be implemented.

- The Group maintains an open and transparent dialogue with the facility providers to ensure they are aware of developments in the business.

Rising commodity prices

The Group may experience short term volatility in gross margin and operating profit as a consequence of significant changes in raw material commodity input prices.

Many of the Group's products, in particular power cords which represent the majority of the sales in the Consumer sector, are manufactured from components that contain significant proportions of copper and, to a lesser extent, other metals and oil-based products such as PVC. Increases in the prices of these commodities are reflected in the prices charged to our customers but delays in passing through these costs can cause short term volatility in the Group's gross margins.

Copper price volatility is the single largest commodity price exposure facing the Group.

- The Board regularly reviews the prices of these commodities and effects a number of measures to mitigate the impact of volatility.

- With respect to copper, prices are fixed quarterly with major suppliers based on average LME rate over prior quarter.

- Approximately a third of the revenues in our Consumer sector are covered by copper clauses which provide for quarterly adjustments to our selling prices based on our input costs.

- Occasionally, we employ back-to-back arrangements to match customer demand with cable supplier arrangements.

- Strategic relationships established with key suppliers.

- We maintained a copper hedging programme, which fixes the cost for a portion of our unmatched copper purchases. These forward copper purchase contracts extend out 12 months and are refreshed on a rolling monthly basis.

Failure to attract, develop and retain key personnel

Inability to retain key knowledge and adequately plan for succession could have a negative impact on Group performance.

The knowledge, skills and performance of our employees are central to our success.

We must attract, develop and retain the talent required to fulfil our ambitions.

- Remuneration policies designed to attract, retain and reward appropriate employees.

- Talent strategy to provide opportunities for employees to develop careers.

- Formalised objective setting in place for employees.

- Bonus scheme in place for relevant employees based on business and individual objectives.

- In FY2013 the Group continued its global cultural change initiative. This is a multi-year programme that will see all employees engaged in the development and implementation of 'One Volex' and its supporting values.

Increased competition

The Group's financial performance and future prospects may be adversely impacted through loss of business to competitors with new or alternative technologies if its businesses either do not adequately adapt to market developments, or are unable to protect, maintain and enforce their intellectual property.

The markets in which the Group operates are mature and highly competitive with respect to price, geographic distinction, functionality, brand recognition and the effectiveness of sales and marketing strategies.

Our competitive position results from a range of factors including the price, quality and performance of our products, technology innovation, the level of customer service levels and lead-times, the development of new technologies and our geographic footprint. Increased competition may result in price reductions, reduced margins increased expense or investment, or loss of contracts, any of which could adversely affect our business and trading performance.

- -Strategic relationships with customers.

- Investing in new technology and developing new products to maintain the Group's competitive position, for example the Group's investment in Active Optical cable solutions during FY2013.

- Close monitoring of market trends and industry developments (e.g. by participating in Standards Committees) to shape, or at least gain early sight of, future product requirements.

Exchange rate fluctuations

The Group's financial position and trading results may be adversely impacted by fluctuations in exchange rates.

The Group operates in many different countries and is subject to currency fluctuations arising on transactional foreign currency exposures and the translation of overseas subsidiaries' results which could create earnings and balance sheet volatility.

- Group Treasury Policy Statement sets out procedures on exchange rate risk management.

- During FY2012 the Group adopted the US Dollar as its presentation currency. With the majority of the Group's transactions denominated in US Dollars, or currencies tied to the US Dollar, this has continued to significantly reduce the effect of exchange rate fluctuations in the financial statements of the Group.

- Billing currencies have been adjusted to achieve a higher level of natural hedging.

- Where there are material remaining exposures, the Company enters into financial hedging to mitigate these exposures.

- The impact of foreign exchange movements on the Consolidated Statement of Financial Position is mitigated by a natural hedge arising as a result of the Group's US Dollar and Euro denominated borrowings.

- END -

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