Investing in innovation

Transcription

1 Investing in innovation Annual report and accounts 2009

2 Who we are Elektron Plc specialises in the design and manufacture of engineered products. Elektron owns a portfolio of leading brands with potential for significant growth. Who we are and what we do Financial highlights 01 Chairman s statement 02 Innovation explained 04 Operational review 06 Finance director s report 12 Directors and professional advisers 14 Report of the directors 15 Statement of directors responsibilities 20 Independent auditors report group 21 Group income statement 22 Group statement of recognised income and expense 22 Group balance sheet 23 Group cash flow statement 24 Notes to the group financial statements 25 Independent auditors report parent company 46 Parent company balance sheet 47 Notes to the parent company financial statements 48 Five year record 52 Notice of annual general meeting 53 Investor information 59 Operating units 60 IFC

3 What we do The Group is organised into 3 divisions formed from 7 operating subsidiaries worldwide. The Group employs more than 800 people. Our brands Our divisions > Elektron components (ECD) overview > ECD produces electro mechanical components. It manufactures nearly 100 million products per annum for customers in industries ranging from industrial communications, marine and water treatment, to white goods, small consumer appliances, and products used within the food preparation sector. brands > Bulgin operates in the industrial sector selling connectivity and sealed products for harsh environments. ARCOLECTRIC offers switching and indicator solutions for the consumer products market. sales > 21.3m operating profits > 1.6m hard metals (HMD) overview > HMD produces specialist components with ultra durable properties under the brand names Total Carbide and Titman. brands > TOTAL CARBIDE provides Tungsten Carbide Wear Part solutions to many of Europe s major companies and industries. TITMAN is the UK s largest manufacturer of industrial and professional Tungsten Carbide router cutters. sales > 7.3m operating loss > 0.3m Elektron instruments (EID) overview > EID manufactures a range of instrumentation products under the brand names Digitron, Sifam and Queensgate. brands > DIGITRON offers temperature, pressure, relative humidity and data logging instruments to multiple industries. SIFAM designs and manufactures analogue and digital meters, and control knobs. sales > 7.0m operating profits > 0.2m Queensgate provides nanopositioning and sensing solutions for high tech industries.

4 Financial highlights elektron plc / annual report and accounts > Sales 35.6 million (2008: 34.9 million) > Operating profit pre exceptionals 1.1 million, slightly ahead of guidance (2008: 2.1 million) > Exceptional charges previously announced of 3.2 million (2008: 1.0 million); cost base substantially reduced > Proposed final dividend per share up 2.2% to 0.46p; scrip issue alternative > Cash of 0.8 million (2008: 2.0 million) Total revenue ( m) (continuing operations) 36m Group strategy Increased focus on profits growth through: > Innovation: greater share of 2009/ million technical spend to be taken by new product development > Penetration of new geographical markets and market sectors > Investment in high flyers through training and mentoring > Selective capex throughout the recession in HMD and Group IT with a view to increasing efficiency > Continuous cost reduction programme investing in innovation: Elektron has implemented a Group wide innovation programme. Operating profit ( m) (pre exceptionals) m Dividend per share (pence) 0.46p Far left: Self pairing Bluetooth IP68 cable replacement products eliminate data cables and allow equipment with RS485 or RS232 data ports to communicate using wireless Bluetooth technology. Left: Designed as an OEM solution for cooker hood manufacturers, using advanced solid state electronics to operate the blower motor and lamps.

5 02 elektron plc / annual report and accounts 2009 Chairman s statement The Elektron Group specialises in the design and manufacture of engineered products. It is organised into three divisions: > Elektron Components (ECD) > Hard Metals (HMD) > Elektron Instruments (EID) It owns seven brands, each with potential for significant growth. Revenue by geographic region UK 15,672 2 Rest of Europe 10,284 3 North America 4,928 4 Rest of World 4,760 35, We are proud to report that the Elektron Group is in good shape even though every one of our subsidiaries is affected by the current recession. Although profits are down and we have had to bear significant restructuring costs in order to reduce the cost base, there are many initiatives in hand that will, we believe, return the Group to growth. I am particularly pleased to announce that the Board has been able to recommend an increased dividend which is accompanied by a scrip alternative. This is a sign of confidence in the business. In previous years the accent has been on cost cutting by offshoring production to low cost areas such as China and Tunisia. Elektron will continue to strive to be the lowest cost producer in its markets, but cost cutting on its own is not enough. Innovation The major focus in the current year will be on Innovation. Elektron has started to implement an Innovation Project, drawing on talent already available within the Group, with a view to achieving substantial growth and greatly enhancing shareholder value. The Group is budgeting 1.4 million in technical spend in the current financial year and we are determined that as much of this as possible will be used to develop new products for growing markets rather than simply maintaining the existing product range. Broadening our sales reach The Elektron Group sells its products in all major countries of the world. Nevertheless there are many areas in which our sales are low in comparison to the size of the economies of the countries concerned.

6 elektron plc / annual report and accounts Innovation programme elements in detail The key elements are: > Implementing strategies to increase sales of existing product families in new markets. > Targeting more aggressively emerging and growth markets, within which Elektron s brand strengths and core competencies offer growth potential (e.g. renewables, oil/gas and medical). > Using technology to evolve beyond the commoditised markets within which Elektron operates, with a structured approach to radical innovation. > Developing technology platforms and identifying areas of technology transfer which are applicable across a range of market sectors in volume. > Focussing on increased generation of intellectual property rights (IPR) to command higher margins and gain competitive advantage. > Using leading edge design tools to halve time to market for new products. > Fostering links with suitable departments at various universities. Each division is currently systematically analysing the geographical markets available for its products and aligning selling resources accordingly. Priority is being given to high growth markets (e.g. China and Brazil) and deep markets (e.g. USA). ECD has relied on a relatively passive sales approach through distribution houses, particularly in relation to the Bulgin brand. We are revisiting this traditional approach; in particular ECD is placing emphasis on sales to original equipment manufacturers by providing bespoke design solutions. Training and mentoring In order to help drive growth the Board decided to set up a Management Development Programme under which it would identify those individuals who have the greatest potential to assist the Group in its growth objective. The first three candidates have been selected. They are: John Wilson (Technical Director of Elektron Components Division and Group Technology Adviser; first class degree in Mechanical Engineering from Durham University); Mark Graves (Technical Manager of Elektron Instruments Division; double first class degree in Electronic Materials Engineering from Oxford University); and Allen Zhao (Sales Manager of Elektron Components Division, China; Bachelor of Electrical Engineering from Nantong University). These appointees will benefit from a personalised training programme and mentoring by the main Board of Elektron. In addition to the above, we employ many talented people who have worked hard for the success of the Group in difficult times. They too will be offered opportunities for training in appropriate cases. Outlook Without doubt, we shall continue to face challenging times in the current financial year. Whilst we are no longer seeing dramatic declines in our business, improvements in sales in some areas are counterbalanced by declines elsewhere. We believe that we have probably seen an end to destocking but it is debatable whether underlying demand has improved. We therefore intend to take a greater share of available markets in order to grow. We have been able to identify further cost savings that will improve profitability but will also involve further restructuring costs in the current year. We continue to evaluate a number of potential acquisition targets in all divisions. I am pleased to announce that the Group traded profitably (at the operating level before restructuring costs) in the first quarter of the financial year and we currently expect to be profitable for the year on the same basis. The Directors are confident that the Group is well positioned to create exceptional long term shareholder value. Keith Daley Chairman

7 04 elektron plc / annual report and accounts 2009 Innovation explained ADDING VALUE GLOBALLY As a part of our innovation process we are selectively seeking investment opportunities worldwide and have implemented a global management development programme to attract and retain high calibre individuals. Personnel selected for 2009/10 include > Dr Mark Graves Technical Manager (EID) Mark Graves, aged 40, graduated with a double first class degree in Engineering from Oxford University and a PhD in Computer Science from Cardiff University, where he held a prestigious 1851 Industrial Fellowship. He worked at Phillips Research Labs and Transtec PLC before moving to the USA as Engineering Director of OMP Foods. He joined the Elektron Instruments Division as Technical Manager in November John F Wilson Group Technology Adviser John F Wilson BSc (Dunelm): Group Technology Adviser, aged 33, is Technical Director of ECD. He joined Elektron in March 2008, from Cambridge Consultants, a world leading technology consultancy where he provided technical consultancy to global blue chip organisations, and leads Elektron s Innovation Programme. He has previously held senior management positions in the UK and North America, and specialises in fast track, innovative New Product Development. Allen B Zhao Sales and Marketing Director of Greater China Allen B Zhao, BSc Electrical Engineering, aged 34, has ten years sales and marketing experience in Greater China with multi national corporations and is fully conversant with European business and working culture. Previously he was with a large German corporation responsible for successfully establishing the sales organisation in China, and in three years grew the business from having no representation to being in the top four in the Chinese industrial connector market. He joined Elektron in January 2009.

8 elektron plc / annual report and accounts Elektron products are sold worldwide direct to original equipment manufacturers (OEMs), an extensive network of distributors and business end users. 1 UK > From its head office in Essex, the Group manages its three divisions. Hard Metals and Elektron Instruments currently manufacture from sites in Buckinghamshire, Essex and Devon. 3 USA > Elektron Components Division is represented in North America from its sales and distribution office in California. 2 Germany > Hard Metals Division is represented in Europe from its sales office based in Münster. 4 Tunisia > Elektron Components Division products sold in Europe are manufactured at its wholly owned subsidiary in Tunis. 5 China > Elektron Components Division products sold in Asia and North America are manufactured at its wholly owned foreign enterprise in Shenzhen Distributor locations

9 06 elektron plc / annual report and accounts 2009 Operational review Elektron Components Division (ECD) ECD is continuing its commitment to develop new products. The division intends to build design capability in China at point of manufacture and the first engineers there have already been recruited. ECD comprises two brands: Bulgin, which operates in the industrial sector selling connectivity and sealed products for the harsh environments; and Arcolectric, which offers switching and indicator solutions primarily for consumer and commercial applications. The division will shortly take over from EID Sifam brand control knobs and meters. We design, manufacture and market products and solutions for customers in diverse industries ranging from industrial communications, marine and water treatment, to white goods, small consumer appliances and products used within the food preparation sector. Our global reach extends to all continents, with organisations in Europe, America, Asia/Pacific and North Africa, and an extensive sales channel network in 125 countries. elektron components Division + antenna for NysE quoted company Having witnessed first hand Elektron s capabilities in the development of this antenna, we are delighted to be working closely with them on further exciting opportunities.

10 elektron plc / annual report and accounts Key achievements in 2008/09 Despite the challenges presented at the close of 2008 sales were in line with internal expectations. We have completed the project to relocate most remaining UK based manufacturing offshore. The new moulding shop and automatic assembly plant are established and running in China and the UK divisional footprint has reduced by 60%. These initiatives are yielding the expected cost savings. We managed to offset the high cost of materials through pricing adjustments, and the pressure on the top line by the ability to strip out further costs quickly. Towards the end of the year we made further mitigating gains from corresponding swings in the currency markets. Market focus Our reconfiguring of the US sales network has been designed to capitalise on the US trend in being early adopters of emerging technologies. Strengthening of our field applications resources has resulted in a number of exciting opportunities to partner blue chip OEMs in the development of value added solutions. We have enhanced our Central and South American selling force and stocking agreements were signed with four new distributors in Brazil. Our China sales resources have been refreshed and reinforced with renewed focus on developing partnerships with large OEMs delivering innovative solutions with enabling technologies. We shall be helped by the new Wholly Owned Foreign Enterprise (WOFE) legal structure that has been set up in China. This will enable us to sell directly to indigenous manufacturers, opening up this vast market. In anticipation of the downward pressure on prices in commodity class products, we continue our focus on new products and the development of partnerships with large and key OEMs, to develop engineering opportunities for custom products. Technical Our wireless portfolio continues to grow, with the introduction of a range of sealed antenna and Bluetooth solutions. We have developed concepts for the emerging alternative, sustainable and renewable energy markets, with solar energy and electric vehicles being of particular focus. We are also working to exploit our expertise in harsh environments and will imminently launch products designed for the intrinsic safety marketplace, where margins are highly attractive. Simon Howard Divisional Managing Director the challenge > To develop an IP68 rated, 2.4GHz antenna for a clip on power monitor, to reliably transmit data from remote locations to a control centre in extreme winter weather conditions. our solution > Our multi disciplinary team designed and developed an IP68 rated, well engineered, waterproof and rugged antenna capable of extreme weather operation, resulting in cost savings on repairs and an improvement in service quality for customers. elektron Components Division sales 21.3m elektron Components Division operating profit 1.6m

11 08 elektron plc / annual report and accounts 2009 Operational review continued Elektron Hard Metals Division (HMD) Turnover by operating division ECD 21,322 2 HMD 7,299 3 EID 7,023 35, the challenge > To improve the materials in machine heads used to remove bark from felled trees, in order to increase machine head durability and so reduce machine downtime. our solution > A specific grade of carbide was identified and used to produce trial tool sets. Initial trials showed significant improvements, with subsequent modifications resulting in further gains, giving a 42% improvement in performance. Elektron s innovation programme has already resulted in the identification of various target markets with the opportunity for entry and potential for generation of intellectual property. HMD comprises two brands: Howle, which produces specialised items for industries requiring hard metal components; and Titman, a producer of router cutters for the woodworking industry. Towards the end of the financial year HMD management was strengthened by the appointment of new Managing and Operations Directors. HMD suffered a downturn in demand during the financial year, which worsened as the year progressed, and current trading continues to be difficult. It operates in areas which traditionally lag the business cycle. Nevertheless it continued to invest in modern machinery at Howle in order to improve productivity. This will allow the Company to take full advantage of the upturn when it arrives.

12 elektron plc / annual report and accounts elektron hard metals DIVISION + major scandinavian company By focusing its technical expertise on the brief of improving the efficiency of machine heads, Elektron s project team were able to successfully produce trial tool sets that reduced unnecessary downtime, resulting in longer production runs and therefore increased efficiencies. During the year, around 1 million was invested in new equipment. Howle had operated on two sites for many years and during the year it was decided to consolidate operations at Princes Risborough, which will improve efficiency. It is a strategic aim of Howle to focus on larger value added contracts and, in the year, it had some success in increasing its market share of business placed by the larger oil and gas service companies. The division continues to make technological advances in its chosen sectors of oil and gas exploration, cutting tip technology and mechanical seal development using modern CNC technology and advanced materials technology to facilitate competitive advantages for customers. In order to increase innovation within the division contacts are being made with some of the leading UK universities. A project to streamline manufacturing processes will enable Howle to improve on levels of service to customers. Howle has initiated a rebranding exercise. It will shortly change its name to Total Carbide. The new name emphasises the focus on providing a total solution to engineering problems involving wear parts, incorporating design, alloy preparation and manufacture. Titman Tools continues to be a market leader in the high end wood routing industry. It has traditionally concentrated on the UK and German markets. Management has plans to move the business into new markets and products. Neill Ricketts Divisional Managing Director elektron Hard Metals Division sales 7.3m elektron Hard Metals Division operating loss 0.3m

13 10 elektron plc / annual report and accounts 2009 Operational review continued Elektron Instruments Division (EID) elektron instruments division + King Edward VII s Hospital Sister Agnes We have wireless temperature transmitters in our fridges and kitchens, throughout the pharmacy, operating theatre and blood fridges, ensuring drugs, bone marrow, etc. are maintained at correct temperature, with appropriately monitored security. We plan to improve competitiveness by following the strategy of moving manufacture of certain products offshore, further investing in automation and developing in house new higher value added technology. EID comprises three brands: Digitron, temperature and pressure measuring devices; Queensgate, the nanomeasurement specialist; and Sifam, control knobs and meters. The Sifam brand will be transferred to ECD during the current financial year allowing EID to concentrate on Digitron and Queensgate, which offer greater potential for growth. The recession began to affect order intake from November 2008 and orders have been weaker since that time. Further action to reduce costs has been taken. The offshoring of control knob production is running to schedule and will lead to improving margins as the year progresses.

14 elektron plc / annual report and accounts the challenge > To provide cost effective, efficient temperature monitoring systems for catering and clinical functions of an acute care hospital. Routine data collection and monitoring solutions needed to offer time savings and guaranteed accuracy. our solution > Digitron s instantly accessible, paperless DigiTrak system provides an automatic integrated solution, monitoring temperature, delivering automated data collection and customisable report generation. Fault and location detection and incident logging are fast and accurate. The increased management and development focus on Digitron will put us in a strong position to benefit from the rapid growth in applications for wireless sensors and associated data management as well as in extending our range of hand held instrumentation. We will increase our exploration of new applications for Queensgate technologies, notably by construction of nanometric sensors in new high technology materials offering faster response times. We will begin the same process with our analogue panel meters later this year, which will have a further beneficial effect when completed in We have accelerated our efforts to improve performance outside the UK and have targeted the Middle East and South East Asia as the first step in this programme. Our new head of development is now well established and we are seeing significant benefits in our product development programme as well as exciting new ideas for the future and improved contacts with universities. Several new products will launch this summer and autumn, fully modernising our existing range. Announcements will be made as appropriate. The increased management and development focus on Digitron will put us in a strong position to benefit from the rapid growth in applications for wireless sensors and associated data management as well as in extending our range of hand held instrumentation. We will increase our exploration of new applications for Queensgate technologies, notably by construction of the nanometric sensors in new high technology materials offering faster response times. Tony Williams Divisional Managing Director elektron Instruments Division sales 7.0m elektron Instruments Division operating profit 0.2m

15 12 elektron plc / annual report and accounts 2009 Finance director s report We continue to look for suitable acquisition opportunities where we can add value. Results for the year The year under review has been challenging as result of the economic turmoil, but overall Group sales were slightly up on the previous year, which included six months sales from EID, acquired in August 2007, to 35.6 million (2008: 34.9 million). On a like for like basis we have experienced a sales decrease of 9%. The gross margin was 32% compared with 35% in the previous year. This is anticipated to improve in the next financial year as a result of switch production moving to China. Operating profits were 1.1 million (2008: 2.1 million). Currency movements resulted in exchange gains of 0.47 million compared with exchange losses of 0.15 million in the previous year. Exceptional costs Exceptional costs of 3.2 million (2008: 1.0 million) were incurred in the year. The parent company incurred 0.2 million in restructuring costs. ECD has reduced headcount from almost 1,000 in January 2008 to just over 700 following the completion of manufacturing transfer to China and response to trading conditions. This has resulted in an exceptional charge of 0.9 million but a significantly reduced cost base. HMD closed its Tenbury Wells facility and consolidated into the Tungsten Carbide operation at Princes Risborough in order to save costs. During the year the workforce has been reduced by almost 30%. These actions have resulted in an exceptional charge of 0.8 million and a significantly reduced cost base. EID closed its Bracknell office and has consolidated its Queensgate unit at Torquay. During the year the UK workforce has been reduced by 20% to 113 people. These actions have resulted in an exceptional charge of 0.4 million but a significantly reduced cost base. Since the purchase of our 23% stake in Hartest Holdings Plc (an AIM quoted instrumentation group) economic conditions have led to a lower valuation being placed on the Company. We have therefore written down Profit/(loss) by operating division 1, ECD 1,562 2 HMD (309) 3 EID Central costs (327) 1, (309) (327)

16 elektron plc / annual report and accounts the value of the stake in our accounts at the year end to reflect its market value, which has resulted in an exceptional charge of 0.9 million. Taxation The tax credit of 233,000 represents an average tax rate of 10% and is due mainly to the non allowable write down of the Hartest investment and unrecognised deferred tax assets. Earnings/loss per share Earnings per share metrics, after taking account of the effects of IFRS 2 Share based Payments were: > basic loss from continuing operations of 2.36p and diluted of 2.36p; and > basic earnings of 0.61p and diluted of 0.61p excluding exceptional items. Information systems The replacement of the Group s legacy systems is continuing with the HMD expected to go live this year. This project, when complete, will greatly enhance management productivity and reporting systems. Dividends The Board is proposing a final dividend of 0.46p per share (2008: 0.45p) payable on 11 August 2009 to shareholders on the register at 19 June The Board is proposing a scrip issue alternative and full details will be contained in the documentation convening the Annual General Meeting. Cash and facilities The Group generated 4.0 million of cash from trading of which 1.5 million came from working capital decreases. It paid 2.2 million in restructuring and other exceptional costs, 1.4 million for its investment in Hartest, 1.0 million (net of finance) to purchase plant and machinery and 0.6 million in dividends and share repurchases, resulting in 1.2 million net utilised in the year. Current banking headroom (comprising cash balances plus undrawn invoice discounting facilities but excluding acquisition facilities subject to preconditions) amounted to 2.0 million. The Group s facilities consist principally of invoice discounting arrangements, acquisition facilities and lease facilities with its bankers HSBC. These facilities are terminable in the event of default and in the case of the discounting facilities, by three months written notice. The Group meets its day to day working capital requirements through the invoice discounting facilities. The Group s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level and terms of its current facilities. The Group has held discussions with its bankers and no matters have been drawn to its attention to suggest that continuation of invoice discounting facilities will not be forthcoming on acceptable terms. Balance sheet Net assets of the Group are 7.9 million (2008: 10.2 million) with net debt at 31 January 2009 of 3.3 million compared to 1.6 million the previous year. Net gearing has increased from 15% to 41%. Summary I am pleased to report that the Group has a strong balance sheet, sufficient banking headroom and remains profitable. The actions to cut costs during the year have given us financial stability and will ensure that any future increase in demand will feed quickly through to the bottom line. Chris Leigh Group Finance Director Current order book 4.4m Net gearing 41% following the purchase of a 23% stake in Hartest Holdings Plc

17 14 elektron plc / annual report and accounts 2009 Directors and professional advisers Keith Daley (54) Non executive Chairman MA Cantab Keith trained as a Corporate banker. For the past 25 years he has been an active professional investor specialising in the shares of small quoted companies. He has owned and managed a number of businesses and also invests in the unquoted sector. He has been a shareholder in Elektron since Christopher Leigh (49) Group Finance Director BA (Hons), FCA Chris is a Chartered Accountant with 25 years post qualification experience. He trained with a large city practice and spent time in industry carrying out projects in the UK and abroad before joining Elektron in Keith Roy (59) Non executive Director BSc (Hons), MSc Keith was a main board director of Halma plc, a FTSE 250 global manufacturing company. Whilst at Halma, he held executive responsibility in the management of companies throughout the world with particular experience in innovation, new product development, global sales and marketing. Company secretary Christopher Leigh BA (Hons), FCA Registered office Melville Court Spilsby Road Romford Essex RM3 8SB Registered in England No Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0GA Nominated adviser and broker FinnCap 4 Coleman Street London EC2R 5TA Auditors Bright Grahame Murray 131 Edgware Road London W2 2AP Bankers HSBC Bank plc 70 Pall Mall London SW1Y 5EZ Solicitors Wollastons Brierly Place New London Road Chelmsford Essex CM2 0AP

18 Report of the directors elektron plc / annual report and accounts The Directors present their annual report on the affairs of the Group together with the audited financial statements for the year ended 31 January Principal activity The principal activity of the Group is the design and manufacture of engineered components. The principal operating subsidiaries are listed in Note 13. Business review A review of the Group s trading operations is contained in the Chairman s statement, Operational review and Finance Director s report on pages 2 to 13. We are required by the Companies Act 1985 to include a Business review in the Report of the Directors and describe the principal risks and uncertainties facing the Group. Analysis using financial key performance indicators has to be shown. We produce a wide variety of daily key figures for all of our businesses that enable us to identify performance against budget and the previous year. Other key performance indicators are shown below: Gross profit margin The ratio of gross profit to sales expressed as a percentage 31.8% 34.8% Net operating profit percentage of sales The ratio of net operating profit before exceptional items, negative goodwill and discontinued operations, to the total of sales invoiced to customers, excluding value added tax, expressed as a percentage 3.1% 6.1% Interest cover The ratio of profit before finance and exceptional costs from continuing operations to net interest payable on borrowings Earnings per share The profit after tax but before exceptional and discontinued items and negative goodwill divided by the weighted average number of ordinary shares in issue during the year 0.61p 2.48p Dividend cover The ratio of earnings per share on continuing operations before exceptional items, negative goodwill and loss on disposal of businesses to dividends per share expressed as a multiple Net gearing The ratio of total borrowings less cash to shareholders funds expressed as a percentage 41% 15% Tangible net assets per share Tangible net assets divided by the number of ordinary shares in issue at the balance sheet date expressed in pence per share 9.2p 11.7p Principal risks and uncertainties The management of the business and the nature of the Group s strategy are subject to a number of risks and uncertainties. The Directors have set out below the principal risks facing the business: Competition The Group sees increasing levels of competition both from suppliers based in low cost countries and traditional European suppliers struggling to maintain market share by reducing prices. We counter this by continuing to develop innovative products for niche applications with higher margins and by manufacturing in lower cost locations. Commodity prices A significant amount of the Group s purchases are plastic moulding powders, metal parts and rare metal powders. Consequently movements in oil, copper, silver, tungsten and cobalt market prices can lead to significant movements in the gross margin. Whilst it is difficult to pass these costs on to customers in the short term, we are confident that our product designs use less than, or at least no more than, the same amount of these costly materials in product offerings of our competitors which compete directly. Fluctuations in currency exchange rates A significant amount of the Group s sales are in US Dollars and Euros. We are therefore exposed to foreign currency fluctuations. The Group manages its foreign exchange risk by purchasing materials in matching currencies where possible in order to partially offset this exposure. We do not enter into forward foreign exchange contracts and other derivatives/financial instruments since this would only smooth the short term fluctuations. The longer term strategy to reduce currency risks is to incur greater proportions of Group costs in currencies linked to our sales.

19 16 elektron plc / annual report and accounts 2009 Report of the directors continued Principal risks and uncertainties continued Control of overseas operations In order to achieve competitively priced products the Group has manufacturing facilities in Tunisia and China. Risks and uncertainties of this strategy include management issues at the factories, the possibility of changes in import duties, taxes and shipping delays. We manage these risks by employing suitably experienced local staff and a UK based team that works closely with the factories. If necessary, the majority of products manufactured at one location could be moved to another location. Quality The components supplied by the Group are frequently critical to the operation of customers equipment, where consequential losses due to component malfunction may lead to customer costs significantly in excess of the component value. The Group relies on robust terms and conditions excluding consequential losses and rapid response to customer complaints to maintain good working relationships. Skills shortages It is becoming increasingly difficult to find the necessary skills to maintain manufacturing in the UK. Coupled with the continuous improvement in skill levels in offshore countries where we operate, the risks associated with the transfer of manufacturing offshore are correspondingly reduced. IT systems As the Group grows it becomes more complex to manage efficiently with the variety of legacy IT systems. The Group has commenced the process of upgrading to modern systems which should lead to efficiency improvements. Energy prices The continuous increases in energy prices impact both the gross margins and operating expenses. Our competitors are also affected by these rising costs. Results and dividends There was a loss for the year after taxation of 2,032,000 (2008: profit after taxation of 2,396,000) and the Directors are recommending the payment of a final dividend of 0.46p per share (2008: 0.45p per share). The Directors are proposing a scrip issue alternative and full details are contained in the Notice of Annual General Meeting. Research and development The Board considers that research and development continues to play a vital role in maintaining and increasing the Group s competitive position in the market. Details are set out in Note 4 to the financial statements. Directors and their interests The Directors at 31 January 2009 together with their interests in the Company s ordinary shares of 5p each were: At 31 January 2009 At 1 February 2008 Beneficial interests K A Daley 3,400,000 2,600,000 C M Leigh 84,000 84,000 K J Roy 405,000 Mr K J Roy was appointed a Non executive Director on 9 June Mr A C Girling served as a Director until his resignation on 7 July 2008.

20 elektron plc / annual report and accounts Executive share option schemes On 17 January 2001 the shareholders, in General Meeting, approved the adoption of an Executive Share Option Scheme. Mr C M Leigh was granted the following options to acquire ordinary shares of 5p each at an adjusted price of 15.09p: 26 February ,000 ordinary shares; and 1 October ,000 ordinary shares. These options are subject to performance criteria and are exercisable after three years but before ten years from the date of granting. The middle market price of the ordinary shares at 31 January 2009 was 7.6p per share and the range during the year was 6.5p to 17.25p per share. Share capital Details of share capital are given in Note 18 to the financial statements. During the year, 1,150,000 ordinary shares of 5p were purchased on market at a cost of 164,000 and subsequently cancelled. Charitable and political donations The Group made no political contributions or charitable donations during the year. Supplier payment policy The Group applies a policy of agreeing the terms of payment as part of the commercial arrangement negotiated with suppliers. It is Group policy that payments to suppliers are made in accordance with those terms, provided that suppliers also comply with all relevant terms and conditions. The average creditor days in the year for the Group were 49 days and for the Company were Nil. Employees All employees receive equal opportunities for training and career development. The sole criterion for selection and promotion is the individual s suitability for the position of employment offered. The Group supports the employment of disabled persons wherever appropriate. Each individual operating company within the Group operates its own communication and consultative programmes relevant to its own particular workforce. Corporate governance Whilst there is currently no requirement for AIM companies to comply with current corporate governance guidelines, the Board believes that it is appropriate to comply with those provisions insofar as they are appropriate for a company of this size. Directors (i) The Board The Board consists of a Non executive Chairman, a Finance Director and a Non executive Director and their biographies appear on page 14. These indicate the level and range of business experience which, the Board believes, enables it to provide clear and effective leadership of the Company. The Non executive Chairman is currently acting as Chief Executive Officer. The Board meets at least ten times each year and more frequently where business needs require. The Board has a schedule of matters reserved to it for decision and the requirement for Board approval on those matters is known to senior management within the Group. This includes subjects such as material capital and revenue commitments, business acquisitions and disposals and appointments to the boards of subsidiary companies. There is an agreed procedure for Directors to take independent professional advice if necessary and at the Company s expense. In addition, each Director has access to the services of the Company Secretary. The Secretary is charged by the Board with ensuring that all relevant regulations are complied with. (ii) Chairman and Chief Executive Officer The differing roles of Chairman and Chief Executive Officer are acknowledged by the Board. The appointment of a Chief Executive Officer is currently under review by the Board. (iii) Remuneration and Audit Committees Mr K A Daley chairs the Audit Committee and Mr K J Roy chairs the Remuneration Committee. Board remuneration is recommended by Mr K J Roy and is agreed by the Board, excluding the Director whose pay is under review.

21 18 elektron plc / annual report and accounts 2009 Report of the directors continued Directors continued (iv) Supply of information To enable the Board to function effectively and allow Directors to discharge their responsibilities, full and timely access is given to all relevant information. The agenda for regular Board Meetings includes a Chairman s report and a Finance Director s report together with documents regarding specific matters. (v) Appointments to the Board The Board does not consider it appropriate to appoint a Nomination Committee given the Board is small in number. It is the Board s policy to encourage each member to meet individually and collectively with prospective Directors. (vi) Reappointment Any Director appointed during the year is required, in accordance with the Company s Articles of Association, to retire and seek appointment by shareholders at the next Annual General Meeting. The Articles also require that one third, but not more than one third, of the Directors (excluding the Chief Executive Officer) retire by rotation each year and seek reappointment at the Annual General Meeting. The Directors required to retire will be those who have been longest in office since their last appointment or reappointment and the date for determination of the number of Directors is not earlier than 28 days prior to the date of the Notice of Annual General Meeting. Directors remuneration (i) Executive remuneration Details of Directors remuneration are contained in Note 8 of the financial statements. Directors indemnities The Company has granted indemnities to each of its Directors in respect of all losses arising out of or in connection with the execution of their powers, duties and responsibilities as Directors to the extent permitted by the Companies Acts and the Company s Articles of Association. In addition, Directors and officers of the Company and its subsidiaries are covered by Directors and officers liability insurance. Communication with shareholders (i) Dialogue The Company places a great deal of importance on constructive communication with its shareholders. (ii) Use of the Annual General Meeting All shareholders have the opportunity to put questions at the Company s Annual General Meeting. In view of the low number of attendees at General Meetings, the Board does not make formal business presentations but instead allows time for informal discussion after the conclusion of formal proceedings. Accountability and audit (i) Internal financial control The Board of Directors has overall responsibility for the Group s system of internal financial control, which is designed to provide reasonable, but not absolute, assurance against material misstatement or loss. The key procedures that are in place are: > a comprehensive budgeting system including reviews at operating unit level and formal reviews and approvals of the annual budget by the Directors; > monitoring of actual results and comparison to budget for each operating unit on a monthly basis; > a clearly defined organisation structure within which individual responsibilities are identified and can be monitored; and > defined procedures for the appraisal, review and authorisation of capital and major revenue and development expenditure. (ii) Financial reporting It is the Board s responsibility to always present a balanced assessment of the Group s position and prospects. The respective responsibilities of the Directors and the Auditors in connection with these financial statements are explained on pages 20, 21 and 46. The Report of the Directors on the business as a going concern is given overleaf.

22 elektron plc / annual report and accounts Going concern After making due enquiries, the Directors formed a judgement when approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The Group s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman s statement on pages 2 and 3 and the Operational review on pages 6 to 11. The principal risks and uncertainties facing the business are described in the Report of the Directors on pages 15 and 16. The Finance Director s report on pages 12 and 13 gives details of the Group s principal banking facilities. As highlighted in the Finance Director s report the Group meets its day to day working capital requirements through invoice discounting facilities. The Group s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level and terms of its current facilities. The Group has held discussions with its bankers and no matters have been drawn to its attention to suggest that continuation of invoice discounting facilities will not be forthcoming on mutually acceptable terms. The Group also has a loan currently standing at 1,100,000 repayable at 400,000 per annum in equal quarterly instalments and which is subject to certain covenants measured against the annual and interim accounts. These covenants were met at 31 January 2009 and it is expected that the Group will continue to meet them for the foreseeable future. Auditors and disclosure of information to auditors Bright Grahame Murray have expressed their willingness to continue in office as Auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. The Directors who held office at the date of approval of this Directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s Auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company s Auditors are aware of that information. Annual General Meeting The Notice of the Annual General Meeting is on page 53 and includes four resolutions relating to special business that allow for: > the issue of up to 5,721,000 of ordinary shares for non cash consideration; > the issue of up to 20% of the issued ordinary shares without pre emption rights; > the purchase of up to 14.99% of the Group s issued ordinary shares on market; and > the adoption of new Articles of Association to reflect changes in company law introduced by certain provisions of the Companies Act The first three resolutions will assist the Board in pursuing its stated objectives of acquiring complementary businesses as well as enabling it to potentially increase earnings per share should the share price not reflect the underlying value of the business. By order and on behalf of the Board C M Leigh Company Secretary Melville Court 24 June 2009 Spilsby Road Romford Essex RM3 8SB

23 20 elektron plc / annual report and accounts 2009 Statement of directors responsibilities The Directors are responsible for preparing the Report of the Directors and the Group and parent company financial statements, in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The Group financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position and performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company. In preparing each of the Group and parent company 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; > for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU; > for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and > prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.