Volex Regulatory News (VLX)

Risk

Description and possible impact

Mitigation Activities

Non-compliance with legislation and regulation

The Group operates in diverse markets and therefore is exposed to a wide range of legal, fiscal and regulatory frameworks. We must understand and comply with all applicable legislation. Any breach could have a financial impact and damage our reputation.

·; 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 Bill, where relevant. These policies are reinforced through our on-going training for 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.

·; We have completed director fiduciary duty training with all Directors of Volex subsidiary companies.

Loss of a key customer

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.

Two of the Group's customers individually account for more than 10% of total Group revenue, with the Group's largest customer, operating in the Consumer sector, accounting for 19% of total Group revenue in FY2012.

·; The Group mitigates the risk of fluctuations in revenues from these customers by emphasising 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 the customer's business.

·; The relationship with the Group's largest customer has strengthened notably during the year, aided by substantial investment by Volex.

Failure to maintain an effective system of internal control

Without effective internal controls, we could be exposed to financial irregularities and losses which may have a significant impact on the ability of the business to operate. We must safeguard business assets and ensure accuracy and reliability of records and financial reporting.

·; Adoption of detailed authorisation matrices to ensure segregation of duties.

·; Minimum Internal Control Standards are in place; all business units are expected to be 100% compliant.

·; Detailed General, Finance, Operational, Sales and HR Policy Statements set out the required policies and procedures.

·; Rolling internal audit plan: all business units are reviewed by Group Business Assurance in collaboration with external audit firms. A site that receives an unsatisfactory rating is re-audited within 6 months to ensure improvement.

·; Group financial performance monitored with monthly Board reports and regular forecasting.

·; Senior executive team undertake detailed monthly business and financial reviews.

·; All senior managers are required to complete an Annual Certificate of Compliance, confirming compliance with the Group Policy Statements.

·; We run a Right- to - Speak email / phone hotlines for whistle blowing. All reported issues are investigated and appropriate actions taken, overseen by Executive Management and the Audit Committee.

Exchange rate fluctuations

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. Given that the substantial majority of the group's transactions are conducted in US Dollars, or currencies tied to the US Dollar, this will significantly reduce the translation impact of exchange rate fluctuations.

·; 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 due to the Group's US Dollar and Euro denominated borrowings.

Increased competition

The Group's markets are highly competitive and we expect this will continue.

Our competitive position results from a range of factors including the price, quality and performance of our products, technology innovation, customer service levels and lead times, and our geographic footprint.

Competition may intensify, from global competitors and/or new entrants. Increased competition may result in price reductions, increased expense or investment, or loss of contracts, any of which could adversely affect our trading performance.

·; Developing strategic relationships with customers.

·; Investing in new technology and developing new products to maintain the Group's competitive position.

·; 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.

Failure to attract, develop and retain key personnel

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

·; Remuneration policies designed to attract, retain and reward key 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 2011 the Group embarked on a 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 supporting values.

Rising commodity 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 graph above illustrates how LME copper spot prices have fluctuated during the period from April 2010 to May 2012

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

·; With specific 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.

·; During FY2012 we initiated copper commodity derivative contracts which fix the cost for a portion of our copper purchases. These contracted extend out 12 months and are refreshed on a rolling monthly basis.

Adverse trading 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. This may have a material adverse effect on the Group's trading results.

·; Regular review of pricing, promotion and marketing strategies.

·; On-going close working relationships with suppliers and customers to monitor performance.

·; Adapting product ranges to meet changing customer needs.

·; Early communication of adverse trading conditions through functional and regional lines. Where these can be managed, we will address these with appropriate action plans/strategies to mitigate them where possible (and to the extent deemed appropriate after assessing the costs and benefits).

Production Challenges/Risks

The volume and timing of sales to our customers may vary due to fluctuating demand for their own products; our customers' attempts to manage their inventory; design changes; changes in their manufacturing strategy etc. Partly as a result, many customers do not commit to long-term production schedules.

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

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 have resulted in high labour turnover and considerable 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.

·; We work very 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 mouldings, tooling, technology and have acquired new skills as part of our quality continuous improvement programme.

·; 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.

·; The investment in our Batam factory will give better geographic coverage and reduce our exposure in China. We continue to develop our business interruption plans.

Matt Nydell, Company Secretary

+44 20 3370 8830

Andrew Cherry, Group Finance Director

+44 20 3370 8830

Buchanan

Charles Ryland / Helen Chan/ Louise Hadcocks

+44 20 7466 5000