XP Power Limited
(“XP Power” or “the Group” or the
“Company”)
Annual Results for
the year ended 31 December 2017
XP Power, one of the world's leading developers and
manufacturers of critical power control components for the
electronics industry, today announces its annual results for the
year ended 31 December 2017.
|
2017 |
2016 |
Change |
Highlights |
|
|
|
Order intake |
£184.3m |
£133.5m |
+38% |
Revenue |
£166.8m |
£129.8m |
+29% |
Gross margin |
46.5% |
47.8% |
-130bps |
Final dividend per
share |
29.0p |
26.0p |
+12% |
Total dividend per
share |
78.0p |
71.0p |
+10% |
Adjusted |
|
|
|
Adjusted profit before
tax1 |
£36.1m |
£28.6m |
+26% |
Adjusted profit
attributable to equity holders2 |
£28.5m |
£22.1m |
+29% |
Adjusted diluted
earnings per share2 |
147.0p |
115.3p |
+27% |
Reported |
|
|
|
Operating cash
flow |
£29.7m |
£27.9m |
+6% |
Net (debt)/cash |
£(9.0)m |
£3.7m |
N/A |
Profit before tax |
£32.2m |
£27.8m |
+16% |
Profit attributable to
equity holders |
£28.3m |
£21.3m |
+33% |
Diluted earnings per
share |
146.0p |
111.2p |
+31% |
1Adjusted for £3.3 million (2016: £0.4 million)
for acquisition costs, both completed and aborted and intangibles
amortisation of £0.6 million (excluding amortisation for
Development costs) (2016: £0.4 million)
2Adjusted for £3.3 million (2016: £0.4 million)
for acquisition costs, both completed and aborted, intangibles
amortisation of £0.6 million (excluding amortisation for
Development costs) (2016: £0.4 million) and non-recurring tax
benefits of £3.7 million (2016: nil)
- Record order intake, revenues and earnings achieved in
2017
- Order intake of £184.3 million (2016: £133.5 million) – an
increase of 38% (31% in constant currency)
- Full year revenues increased by 29% (22% in constant currency)
to £166.8 million (2016: £129.8 million)
- Growth in all industry sectors and geographies
- Acquisition of Comdel adds Radio Frequency power capability to
our product portfolio expanding our available market
- Revenues from XP Power’s own-designed products increased by 34%
(24% in constant currency) to £127.4 million (2016: £95.3 million)
to reach a record 76% of total revenue (2016: 73%)
- Sales of high efficiency XP “Green Power” products grew by 31%
(22% in constant currency) in 2017 to £39.7 million (2016: £30.2
million)
- Balance sheet remains robust, with net debt of £9.0 million at
year end (2016: net cash of £3.7 million)
- Commenced construction of a second production facility in
Vietnam to expand manufacturing
capacity – new factory to be completed by end 2018
James Peters, Chairman,
commented:
“We are encouraged by the strong performance in 2017 and a good
start to 2018. The Group entered 2018 with a strong order backlog
and will also benefit from a full year’s trading from the acquired
Comdel business which expands our addressable market.
Although we cannot be immune from all external economic shocks
resulting from cyclicality in the capital equipment markets we
serve, we are optimistic regarding our prospects for 2018.”
Enquiries:
XP Power
Duncan Penny, Chief Executive
Officer
+44 (0)7776 178018
Gavin Griggs, Chief Financial
Officer
+44 (0)7824 144733
Citigate Dewe Rogerson
Kevin Smith/Jos
Bieneman
+44 (0)20 7638 9571
XP Power designs and manufactures power controllers, the
essential hardware component in every piece of electrical equipment
that converts power from the electricity grid into the right form
for equipment to function.
XP Power typically designs power control solutions into the end
products of major blue-chip OEMs, with a focus on the industrial
(circa 39% of sales), healthcare (circa 31% sales) and technology
(circa 30% of sales) sectors. Once designed into a programme,
XP Power has a revenue annuity over the life cycle of the
customer’s product which is typically 5 to 7 years depending on the
industry sector.
XP Power has invested in research and development and its own
manufacturing facilities in China
and Vietnam, to develop a range of
tailored products based on its own intellectual property that
provide its customers with significantly improved functionality and
efficiency.
Headquartered in Singapore and
listed on the Main Market of the London Stock Exchange since 2000,
XP Power serves a global blue-chip customer base from 27 locations
in Europe, North America and Asia.
For further information, please visit xppower.com
Chairman’s Statement
Our Progress in 2017
2017 was another year of significant progress in the development
of the Company. We have continued to execute our strategy well and
favourable market conditions, combined with new design wins
entering into production, have driven another set of strong
results. We delivered record order intake, revenues, profits and
earnings per share in the year. We also acquired Comdel, another
business that significantly expands our addressable market by
strengthening our capabilities in higher power applications. We
believe we now have the most comprehensive product offering in our
industry, making XP Power a compelling partner to provide power
solutions to our target customers to power their critical
systems.
Results
Our financial performance in the year was strong. Revenues were
£166.8 million, exceeding the prior year of £129.8 million. This
was an increase of 22% in constant currency. Order intake also set
a new record of £184.3 million, exceeding the £133.5 million
achieved in 2016, and representing a 31% increase in constant
currency.
Reported profit before tax was £32.2 million (2016: £27.8
million). After adding back acquisition costs, both completed and
aborted, of £3.3 million (2016: £0.4 million) and amortisation of
intangible assets of £0.6 million (2016: £0.4 million), adjusted
profit before tax was £36.1 million (2016: £28.6 million), an
increase of 26% over that reported in 2016. Basic earnings per
share increased by 32% to 148.3 pence
(2016:112.0 pence). Diluted adjusted
earnings per share increased by 27% to 147.0
pence (2016: 115.3 pence).
Acquisition
We have been clear for some time that we intend to use the
strength of our balance sheet and cash generation to acquire
complementary businesses that expand our product portfolio and
engineering capabilities. I was pleased to report the acquisition
of Comdel, a company specialising in Radio Frequency (RF) power, in
September 2017. This strategic
acquisition fulfils our ambition to add a high power capability to
our product portfolio and is an excellent fit with the rest of the
XP Power family. We are very excited about the prospects for these
products and the additional value we can now provide to our
customers.
Board Changes
I would like to welcome Gavin
Griggs, who joined us on 31 October
2017, to the Board as Chief Financial Officer. Gavin has
worked in a range of acquisitive businesses, both public and
private and with an international footprint, most recently Daisy
Group Ltd, where he was Group Finance Director. Gavin's
wide-ranging financial, commercial and M&A experience, will be
an asset to XP Power in the next phase of our development.
In December 2017 Peter Bucher, a
non-executive director, informed the Board that he would retire in
December 2018 and step down from the
Board.
We will begin a search for a new Non-Executive Director later
this year.
Dividend
Our continued strong financial performance, strong cash flows
and confidence in the Group’s long-term prospects have enabled us
to increase dividends consistently over a sustained period.
The Board is recommending a final dividend of 29 pence per share for the fourth quarter of
2017. This dividend will be payable to members on the register on
16 March 2018 and will be paid on
20 April 2018. When combined with the
interim dividends for the previous quarters, the total dividend for
the year will be 78 pence per share
(2016: 71 pence), an increase of
10%.
The compound average growth rate of our dividend has been 15%
over the last ten years, demonstrating the Board’s commitment to
our progressive dividend policy.
Our People and Our Values
The success of an organisation is dependent on the people and
talent within it. We have significant strength and depth within our
Company, with the majority of our Executives boasting long tenures
with XP Power. We have conducted annual employee engagement surveys
since 2015 and I am pleased that we have shown strong scores each
time we repeat the survey, having taken actions to address any
issues arising from the results of the prior survey. One of the
main findings from these employee surveys was that our employees
are proud to be part of our Company, highlighting the significant
engagement we have between the business and our people. Our
cultural survey score is one of our non-financial key performance
indicators.
As the Company grows we continually look to acquire more talent
across the business to build even greater strength and depth. A key
focus is engineering, which remains a constraint on our ability to
address all the opportunities we see before us. Recruiting and
on-boarding more engineering colleagues will be a priority for
2018.
Manufacturing Capacity
Our continued growth means we need to add manufacturing
capacity. We therefore commenced construction of a second
manufacturing facility in Ho Chi Minh
City, Vietnam in October 2017,
which we expect to complete in the second half of 2018.
Outlook
We are encouraged by the strong performance in 2017 and a good
start to 2018. The Group entered 2018 with a strong order backlog
and will also benefit from a full year’s trading from the acquired
Comdel business which expands our addressable market.
Although we cannot be immune from any external economic shocks
resulting from cyclicality in the capital equipment markets we
serve, we are optimistic regarding our prospects for 2018.
We are continuing to build a leading position in our industry to
realise our vision of becoming the first choice power solutions
provider delivering the ultimate experience to our customers and to
our people.
James
Peters
Chairman
Performance: Operational Review
Review of Our Year
XP Power has enjoyed another excellent year, achieving record
order intake, revenues, profits and earnings per share. Improvement
in our underlying markets started to take hold from the third
quarter of 2016 and continued throughout 2017. Layered on top of
this recovery were new design wins entering production,
particularly in the healthcare sector, and a strong upturn in the
semiconductor manufacturing equipment market. These factors
combined to produce an excellent set of results. We continued to
move our product portfolio up to higher power and technically more
complex applications and to expand the number of design wins with
higher engineering solutions content.
We announced the acquisition of Comdel in September 2017. This business gives XP Power a
foothold in the Radio Frequency (RF) power market and meets our
strategic aim of moving up the power scale to expand our
addressable market and provide a broader product offering to our
key customers.
We made strong progress toward expanding our manufacturing
capacity in Vietnam when we
commenced construction of an additional facility at our existing
Ho Chi Minh City site during the
year. We expect this new facility to come on stream in the second
half of 2018. The expected capacity increase from this new facility
will be phased over a number of years but has the potential to
double our existing Vietnamese manufacturing capabilities in the
longer term.
We continue to be excited by the future prospects for our
business.
Marketplace
All industry sectors and all geographies experienced revenue
growth in 2017 over 2016 and, significantly, sequential growth in
the second half of 2017 over the first half. The order performance
was also strong, with order intake up 38% on the prior year (2016:
21%) and 31% ahead in constant currency (2016: 9%) which resulted
in a book to bill ratio of 1.11 (2016: 1.03), demonstrating the
strength of the 2017 performance. We enter 2018 with good momentum
and a healthy order book.
During 2017 we specifically targeted the semiconductor
manufacturing equipment market. This market is traditionally
cyclical and is currently enjoying a strong upturn which has
benefitted the Group. Despite its historic cyclicality this market
remains highly attractive due to its robust fundamentals, which are
being driven by the proliferation of applications involving the
internet of things (IoT), augmented intelligence (AI), autonomous
vehicles and big data.
North America revenues were
US$121.3 million in 2017 (2016:
US$93.7 million), an increase of 29%.
The acquisition of Comdel at the end of September 2017 contributed US$5.4 million (2016: nil) to North American
revenues. As well as a general recovery in the capital equipment
markets, our North American business benefitted from a very strong
performance in the semiconductor manufacturing equipment sector
which contributed US$37.3 million to
revenues (2016: US$20.8 million).
Order intake in North America was
also very strong at US$139.2 million
(2016: US$98.6 million), an increase
of 41%. The acquisition of Comdel contributed US$7.7 million (2016: nil) to North American
order intake in 2017. The strong book to bill ratio of 1.15 for
North America bodes well for
2018.
Our European business grew by 16% to £57.5 million (2016: £49.4
million) which is the third successive year of growth. The
industrial, healthcare and technology sectors all saw growth in
Europe but healthcare showed the
highest growth rate at 27%, as a number of significant new
programmes at blue-chip customers entered production.
Asia revenues grew by 18% in
2017 to US$19.0 million (2016:
US$16.1 million). Healthcare
displayed particularly good growth in 2017 in the Asia region.
Overall, North America
represented 57% of revenue (2016: 53%), Asia represented 9% of revenue (2016: 9%) and
Europe represented 34% of revenue
(2016: 38%). The average exchange rate for the US Dollar compared
to Sterling was 1.28 in 2017 versus 1.38 in 2016, representing a 7%
weakening of Sterling following the Brexit vote in June 2016. This caused North America and Asia revenues to be inflated, due to
translation, but similarly all of our US Dollar denominated product
costs to also be inflated when translated to sterling. We discuss
the potential impact of the Brexit vote and foreign exchange
volatility in more detail in our Financial Review.
Every sector grew in absolute terms but technology grew most
strongly due to the strength of semiconductor manufacturing
equipment sector demand, and also by healthcare due to a number of
new programme wins entering production. Industrial represented 39%
of revenue (2016: 46%), healthcare represented 31% of revenue
(2016: 29%) and technology represented 30% of revenue (2016: 25%).
All our products are designed into capital equipment so our
revenues will inevitably be affected by capital equipment cycles.
This is particularly so in the semiconductor manufacturing
equipment sector which made up 17% of our revenues in 2017 (2016:
12%), although this industry has more recently put forward the
argument that the sector will be much less cyclical in the future
due to the prevalence of semiconductor devices in our modern world.
However, our exposure to a large number of end markets helps
mitigate the cyclicality in any particular sector, producing an
underlying resilience in our diversified business model.
Adapting to the Market and the
Competition
Since listing on the London Stock Exchange in 2000, XP Power has
evolved from a specialist distributor of power conversion products
to a designer and then manufacturer of power solutions for the
industrial, healthcare and technology markets.
We continue to perform well against our traditional established
competition. Our broad range of standard products, now augmented by
recent acquisitions, and excellent customer service delivered by
the largest direct sales force in our industry is a compelling
proposition. We expect future competitors to emerge from
Asia as companies with low cost
manufacturing and engineering attempt to enter parts of the
industrial and healthcare markets in Europe and North
America. We need to continually adapt our product offering
and services to respond to this threat.
Low cost Asian competitors continue to become more prevalent,
particularly in the low power/low complexity end of the market. It
is straightforward to source low cost/low power products directly
from Asian manufacturers. Engineering solutions are not so easily
managed remotely and work most effectively when situated close to
the customer so design discussions and design reviews can take
place face-to-face. We continue to add more and more value to our
customers as we expand our engineering service groups across the
globe.
As well as providing a higher content of engineering solutions
we have moved our product portfolio up in terms of power level and
complexity to help protect our business from low cost Asian
competition, which remains a threat. Specifically, we have expanded
the capabilities within our product portfolio with the acquisition
of Comdel which gives us Radio Frequency (RF) power at high power
levels.
We are building a broad and compelling product offering which
will make us an increasingly attractive partner to leading
companies in the industrial, healthcare and technology sectors in
order to power their mission-critical applications.
Strategic Progress
We have followed a consistent strategy which has enabled us to
produce strong results over a sustained period of time. The
fundamental essence of the strategy - targeting key accounts where
we can add value and gaining more of the available business in
those accounts – continues to remain appropriate and effective.
Our strategy can be summarised as follows:
- Develop a broad range of competitive products;
- Target accounts where we can add value;
- Increase vertical penetration of target accounts;
- Enhance brand awareness;
- Accelerate operational excellence;
- Lead our industry on environmental matters; and
- Make selective acquisitions in identified strategic markets or
of complementary businesses to expand our product offering.
We continue to make significant progress against each of these
strategic objectives. We believe we have the broadest, most
up-to-date portfolio of products, many of which are class-leading
in terms of efficiency and low stand-by power. Our portfolio of XP
“Green” Power products grew by 31% in 2017 to £39.7 million (2016:
£30.2 million) demonstrating how well these products have been
adopted by our customers. We also continue to see revenues from our
own-designed/manufactured products grow at a faster rate than those
from other products.
We consider that our transition from a specialist distribution
company, through the addition of a design capability, to designer
and manufacturer is now complete. We are now clearly recognised as
both a designer and manufacturer by key customers in our target
markets. Revenues from our own-designed products set a new record
of £127.4 million in the year (2016: £95.3 million), representing
76% of revenue (2016: 73%). We expect further improvement in the
mix of own-designed products in 2018. We are now moving our
business further up the value chain by providing our key customers
with higher levels of engineering solutions where we add value,
enabling the customer to more easily integrate the power solution
into their critical systems. These services range from providing
simple voltage and connector changes, through to changes in
mechanical format, the addition of thermal management,
communication to the customer’s end equipment utilising firmware
and ultimately full custom designs. This is a much more engineering
intense activity but does mean we work very closely with the
customer’s design engineers to provide them with a complete power
solution in the shortest possible time, delivering genuine
value.
Acquisition of Comdel - Radio
Frequency (RF) Power
On 29 September 2017 XP Power
acquired the assets and business of Comdel, a company based in
Massachusetts, USA, specialising
in Radio Frequency (RF) power generation products which it supplies
to the industrial and technology sectors. Total consideration of
US$25.2 million (£18.8 million) was
paid in cash on completion.
Radio frequency power is used in a variety of applications. The
most common are plasma generation for deposition or etching of
materials in semiconductor manufacturing equipment or industrial
processes, ultra-sonic welding, induction heating, and dielectric
heating. RF power is also used in industrial lasers, medical
equipment and ion beam inspection equipment. Ultra-sonic welding is
used to splice wires to terminals, weld thin foils with precision,
and to weld aluminium parts in automotive applications.
Comdel and XP Power share several customers, and while there is
no direct overlap in product lines, the power supply solutions of
the two companies are highly complementary. Comdel’s products and
engineering capabilities will enhance the Group’s ability to
implement its strategy of winning a greater share of business from
its target customers by achieving wider vertical penetration of
these accounts. As well as a product offering suitable for an array
of applications used by some of XP Power’s existing customer base,
Comdel also brings a number of new customers to the Group.
The acquisition will enable XP Power to provide its existing
customers with a comprehensive product offering in RF power
generation and RF matching systems, a market segment with robust
demand fundamentals but one in which we did not previously
operate.
XP-Comdel has already experienced excellent growth in orders
since the acquisition, benefitting from the favourable conditions
in the semiconductor manufacturing equipment sector.
We are delighted to welcome Comdel to the XP Power Group and are
excited about the opportunity of offering their complementary
product ranges through our global sales channel.
The combination of XP Power’s existing low voltage power
offering with the high voltage/low power DC-DC converters acquired
through the acquisition of EMCO in November
2015 and now the RF power from Comdel substantially expands
XP Power’s addressable market and makes us a compelling power
solutions provider for many customers involved in industrial,
healthcare and semiconductor manufacturing equipment.
Engineering Solutions
As well as expanding our product offering we have continued to
expand our engineering solutions groups in Asia, Europe
and North America. Our customers
frequently require a high degree of customisation to allow the
power conversion system to operate within their end equipment or
simply to make it easier for the customer to integrate the power
conversion solution into their application. Our engineering
solutions groups work closely with the customer’s engineering teams
to provide these customised solutions. Speed and proximity to the
customer are critical as the power solution is often one of the
last parts of the system to be designed so is invariably one of the
gating items to get the end product to market. This is an area
where XP Power add significant value to the customer and we are
seeing increasing demand for these services. The addition of high
voltage and now RF power allows our engineering solutions groups to
leverage off additional standard products as building blocks to
expand our addressable market.
We will expand these resources in 2018 to address the
opportunities we continue to identify.
Research and Development
We have continued to invest in research and development to
further expand our portfolio of products and the size of our
addressable market opportunity. In particular, we increased our
design engineering resource and capabilities during 2017. We
released 27 new product families in 2017 (2016: 47) and 19 (2016:
33) of these can be classified as ultra-high efficiency.
The high level of new product introductions in 2016 was driven
by the addition of a new third-party supplier to enhance our DC-DC
product offering.
Manufacturing – Vietnam II
In 2012 we expanded our manufacturing footprint outside
China when we started
manufacturing magnetic windings in a new Vietnamese facility
situated close to Ho Chi Minh
City. This added much needed capacity and also enhanced our
cost competitiveness as production costs primarily labour in
Vietnam are significantly lower
than those of our existing Chinese facility.
Production volumes of magnetics windings at our Vietnam facility have continued to climb and
in 2017 we produced 6.7 million windings compared to 4.9 million in
2016. We have been actively transferring the lower power/lower
complexity products from China to
Vietnam to improve our cost
position and free up capacity in China. In 2017, we manufactured 1.0 million
power supplies in our Vietnam
facility compared to 0.4 million in 2016.
We continue to make process improvements in our manufacturing
facilities, where we are applying more lean process principles. Our
internal yields continue to improve and we have redesigned some of
our processes to reduce product lead times to provide improved
customer service and reduced freight costs.
In October 2017, we commenced
construction of a second manufacturing facility on our existing
site in Vietnam. Our Vietnamese
site currently houses a 2,100m2 administration building and a
three-storey 9,260m2
manufacturing facility. The new Vietnamese facility will be a
four-storey building with 11,000m2 of floor area. We have spent
US$0.3 million in 2017 and anticipate
a further spend of US$5.0 million in
2018 to complete the project. Our longer-term planning indicates we
will need this additional manufacturing capacity in the first half
of 2019.
Our key operational challenge in 2017 has been keeping pace with
the growth in the business. Our lean manufacturing initiatives have
helped in that regard but we still have opportunities to improve
our supply chain and planning processes to reduce our lead times
and make our supply chain more agile.
Outlook for 2018
We enter 2018 with a strong order book and good momentum in our
business, and a strong position in our marketplace. We will also
have the benefit of a full twelve months contribution from the
acquisition of Comdel, providing us with RF Power capability. While
we cannot be immune from any economic shocks or cyclicality in our
end markets, and in particularly the semiconductor manufacturing
equipment sector which represented 17% of our business in 2017, we
are optimistic regarding the outlook for 2018.
We remain excited and confident regarding the long-term
prospects for our Group.
Duncan Penny
Chief Executive Officer
Performance: Financial Review
XP Power delivered a strong performance in 2017. The significant
order and revenue growth, coupled with effective control of
operating expenditure, has delivered strong year-on-year growth in
profits. We have also made further investment in capital projects
in order to build the capabilities necessary to support our future
sales growth. The business exited the year with a robust financial
position.
Revenue and Order Intake
The Group generated revenue growth of 29% during the year on a
reported basis (22% in constant currency and 19% on an organic
constant currency basis). The Group’s performance was driven by
revenue growth from XP Power’s own-designed products, a key
indicator of XP Power’s strategy in action, which grew 34% (or
approximately 24% in constant currency) to £127.4 million (2016:
£95.3 million) representing 76% of revenue (2016: 73%).
Regionally, North America grew
strongly, up 38% (29% in constant currency and 24% on an organic
constant currency basis), supported by good revenue growth in
Europe of 16% (12% in constant
currency) where the Nordic markets and Italy were stand out performers up 21% and 26%
respectively, and Asia, up 26%
(18% in constant currency), with a notable performance in
South Korea, which was up 50%.
This performance was driven by strong order intake of £184.3
million, an increase of 38% over 2016 on a reported basis, or 31%
in constant currency.
Orders and revenue for 2017 represent a full year book to bill
ratio of 1.11 (2016: 1.03) reflecting the strength of customer
demand across the year.
Gross Profitability
Gross margin declined slightly to 46.5% (2016: 47.8%), largely
due to product mix and the effect of the depreciation of Sterling
versus the US Dollar. Proportionately more of our product costs are
denominated in US Dollars compared to our revenues. As Sterling
weakens, our reported revenue increases due to the translation
benefit but so does our cost of sales, although at a greater rate.
The result is higher gross margin in absolute terms but the gross
margin percentage declines. The average exchange rate for
converting US Dollars into Sterling in 2017 was 1.28 (2016: 1.38).
Operating margins declined from 21.6% in 2016 to 19.5%. This was
largely due to the weakness of Sterling.
Operating Expenses
The Group increased its investment in operating resources by
29.9% to £44.8 million, with the total operating costs to revenue
ratio increasing by 0.3% to 26.9% (2016: 26.6%). Payroll and staff
costs increased by 20.3% and were 17.1% of revenue as a result of
cost leveraging. Headcount has increased by 29.7% (2017: 1,953;
2016: 1,506). Non-cash share-based payment charges amounted to £0.1
million (2016: nil) and related to a grant to senior management
under the Long-Term Incentive Scheme during the year. Other
operating costs were up 60.3% and represented 7.0% of revenue.
Depreciation and amortisation increased by 28.6% and was 2.7% of
revenue, a consequence of the strong sales growth versus prior year
together with a significant element of capital expenditure being in
relation to projects which go live in the next financial year.
Exceptional Items
Exceptional items are excluded from management’s assessment of
profit because by their size or nature they could distort the
Group’s underlying earnings. In 2017, the Group incurred £3.3
million of exceptional costs, predominantly related to costs
associated with acquisitions, both completed and aborted, and £0.6
million for intangible assets amortisation.
Income Statement
The Group generated continuing profit before tax and exceptional
items of £36.1 million, up 26.2% compared to last year, lower than
revenue growth due to a gross margin dilution of 130bps and an
increase of 299bps investment in operating costs.
When reviewing XP Power’s performance, the Board and management
team particularly focus on adjusted results rather than statutory
results. There are a number of items that are included in statutory
results but which are considered to be one-off in nature or not
representative of the Group’s performance and which are excluded
from adjusted results. The tables on page 19 show the full list of
adjustments between statutory operating profit and adjusted
operating profit by business, as well as between statutory profit
before tax and adjusted profit before tax at Group level for both
2017 and 2016.
For the current financial year, adjusted EBITDA was up 26.4% to
£41.7 million and adjusted operating profit was 26.4% ahead at
£36.4 million. Both metrics demonstrate the strength of performance
that the Group delivered in 2017.
Taxation
The effective tax rate from continuing operations before
exceptional items decreased by 1220bps to 10.1% (2016: 22.3%). This
arose mainly from the recently enacted Tax Cuts and Jobs Act in
the United States, and prior year
refunds predominantly in Singapore. The Tax Cuts and Jobs Act has
resulted in a non-cash tax credit in 2017 relating to the
revaluation of US deferred tax balances of circa £1.3 million,
based on the net deferred tax liability at the end of 2017. This
credit is as a result of the reduction in the federal tax rate from
35% to 21% and will be excluded from adjusted earnings.
The effective tax rate from continuing operations after
exceptional items decreased by 1,150bps to 11.2% (2016: 22.7%).
Going forward, XP Power expects the effective tax rate to be
approximately 15-17% depending predominantly on the regional mix of
profits.
Earnings Per Share
Basic and diluted earnings per share from continuing operations
before exceptional items increased by 32% and 31% to 148.3 pence and 146.0
pence respectively (2016: 112.0
pence and 111.2 pence). This
was driven by the increase in continuing profit before tax during
the year.
After adding back costs associated with acquisitions of £3.3
million (2016: £0.4 million), £3.7 million non-recurring tax
benefits (2016: nil) and intangible assets amortisation of £0.6
million (2016: £0.4 million), adjusted diluted earnings per share
was 147.0 pence (2016: 115.3 pence), an increase of 27%.
Statement of Financial Position
The Group continues to enjoy a healthy financial position
including a low level of net debt at £9.0 million (2016: net cash
at £3.7 million). The reduction in cash includes the consideration
for Comdel at £18.2 million (excluding associated legal fees of
£0.2 million and consideration payable of £0.6 million) and the
dividend paid out of £14.0 million, partially offset by free cash
flow generated of £19.4 million. Net assets increased by £10.0
million to £116.9 million during the year (2016: £106.9
million).
As part of the acquisition of Comdel, XP Power entered into a
revolving credit facility of US$40
million with a further US$20
million accordion structure for a further four years (with a
potential one year extension) to September
2021. The finance charge associated with this facility was
£0.2 million in 2017. Due to the average level of debt in 2018, the
charge in 2018 is expected to be double the 2017 level.
At the forthcoming AGM, the Board is proposing an ordinary
resolution to change the borrowing restriction currently stipulated
in the Company’s Articles of Association in order to make it more
appropriate for the size of business that XP Power has become. The
resolution proposes that Group borrowings must not exceed the
greater of £125 million (previously £50 million) and three times
adjusted capital. This is to provide sufficient headroom in the
Articles to support future growth through external borrowing,
should the Board consider this appropriate in the future. It should
be noted that the Board will continue to use net debt / EBITDA as
the primary metric with which to measure and control the Group’s
leverage. The Board believes this proposed amendment to the
Articles of Association to be in the best commercial interests of
the Group. As at 1st March 2018, the
Group has available to its committed external borrowing facilities
of up to US$40 million.
Fixed Asset Additions
We continue to invest in our business with the majority of spend
on manufacturing and supporting our future sales growth. The
majority of the manufacturing spend relates to our new Vietnam site located adjacent to our current
facility. We plan to invest circa £10 million during the new
financial year, a £4 million increase on 2017. This acceleration is
principally due to the building of our new Vietnam site and an investment in upgrading
our ERP system.
Statement of Cash Flows
Our high margin business model, with modest capital
requirements, continues to produce excellent free cash flows.
We finished 2017 in a net debt position of £9.0 million compared
with a net cash position of £3.7 million at the end of 2016. This
position was achieved after funding the acquisition of Comdel
(£18.2 million) and returning £14.0 million to Shareholders in the
form of dividends. There was a working capital outflow which is
predominately made up of higher inventory which reflects a high
level of orders to be shipped in early 2018, offset by a movement
in trade and other payables of £5.3 million.
Dividends
The attractive cash flow generated by the XP Power business
model has enabled the Company to pursue a progressive dividend
policy over a sustained period of time.
The policy is to increase dividends progressively whilst
maintaining an appropriate level of cover. This year’s financial
performance in terms of both profitability and cash flow has
enabled us to recommend a final dividend of 29 pence per share which, together with the
quarterly dividends already paid, gives a total dividend for the
year of 78 pence per share (2016:
71 pence per share), an increase of
10%. Dividend cover for the year was 2.0 times.
Financial Instruments
The Group’s financial instruments consist of cash, money market
deposits, and various other items such as trade receivables and
trade payables that arise directly from its business
operations.
The Group uses forward currency contracts to hedge highly
probable forecast transactions. The instruments purchased are
denominated in the currencies of the Group’s principal markets. The
Group had £13.7 million of forward currency contracts outstanding
as at 31 December 2017 (2016: £11.5
million).
Brexit and Foreign Exchange
The weakening of Sterling versus the US Dollar in the period
following the United Kingdom Referendum on EU membership in
June 2016 had a material effect on
the presentation of our financial results in both 2016 and
2017.
Approximately 82% (2016: 75%) of our revenues are denominated in
US Dollars and the translation of these revenues into Sterling for
reporting purposes has had a beneficial effect. However, the
majority of our cost of sales and a large proportion of our
operating expenses are also denominated in US Dollars. While a
stronger US Dollar helps our overall gross margin in absolute terms
(albeit to a limited degree) it also has the effect of reducing the
gross margin percentage as costs rise disproportionately to the
revenues. We estimate that our reported 2017 gross margin
percentage could be approximately 60bps (2016: 130bps) lower as a
result.
In terms of the broader economic impacts of Brexit on our
business, we do not consider that they will be material. Our
products are made in Asia and are
already imported into Europe where
we have warehouses in both Germany
and the United Kingdom and hence
we could ship our product destined for the European Union directly
into Germany or another
appropriate location.
Systems Development
Efficient and robust systems are essential in order for us to
manage an international business and supply chain with a highly
diverse customer base. We operate a global Customer Relationship
Management system covering all three regions which allows us to
collaborate, share information and provide efficient and effective
customer service. The cornerstone of our supply chain is built on
the SAP Enterprise Resource Management System. In 2018, we are
embarking on a project to implement the latest version of SAP
across our entire global supply chain with the first focus being on
our China and Vietnam manufacturing facilities. We expect
this first stage to have significant benefits in terms of factory
planning and will of course give us significant operational
advantages with the factory systems running on the same platform as
sales companies. Further gains will be realised when we migrate the
supply chain across.
This integrated approach ensures that we have the robust systems
and reporting necessary to support our future growth.
Outlook
We have started the new financial year well with continuing
momentum in new orders and revenue. We intend to invest further
capital expenditure in our business in key areas such as supply
chain, manufacturing and systems to support the anticipated growth
of our business. We currently anticipate that orders and revenue in
2018 will be above the level seen in 2017.
Gavin Griggs
Chief Financial Officer
XP Power Limited
Consolidated Statement of
Comprehensive Income for the financial year ended 31 December 2017
£ Millions |
Note |
2017 |
2016 |
|
|
|
|
Revenue |
2 |
166.8 |
129.8 |
|
|
|
|
Cost of sales |
|
(89.2) |
(67.8) |
Gross profit |
|
77.6 |
62.0 |
|
|
|
|
|
|
|
|
Expenses |
|
|
|
Distribution and marketing |
|
(31.7) |
(26.6) |
Administrative |
|
(4.6) |
(1.5) |
Research and development |
|
(8.8) |
(5.9) |
Operating profit |
|
32.5 |
28.0 |
|
|
|
|
Finance charge |
|
(0.3) |
(0.2) |
|
|
|
|
Profit before income tax |
2 |
32.2 |
27.8 |
Income tax expense |
3 |
(3.6) |
(6.3) |
|
|
|
|
Profit after tax |
|
28.6 |
21.5 |
|
|
|
|
Profit attributable to: |
|
|
|
Equity holders of the Company |
|
28.3 |
21.3 |
Non-controlling interests |
|
0.3 |
0.2 |
|
|
28.6 |
21.5 |
|
|
|
|
Earnings per share attributable to
equity holders of the Company (pence per share) |
|
|
|
- Basic |
5 |
148.3 |
112.0 |
- Diluted |
5 |
146.0 |
111.2 |
- Diluted adjusted |
5 |
147.0 |
115.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XP Power Limited
Consolidated Balance Sheet
As at 31
December 2017
£ Millions |
Note |
2017 |
2016 |
|
|
|
|
ASSETS |
|
|
|
Current
assets |
|
|
|
Corporate tax
recoverable |
|
2.9 |
- |
Cash and cash
equivalents |
|
15.0 |
9.2 |
Inventories |
|
37.8 |
32.2 |
Trade receivables |
|
23.8 |
21.5 |
Other current
assets |
|
3.8 |
2.4 |
Derivative financial
instruments |
|
0.2 |
0.4 |
Total current
assets |
|
83.5 |
65.7 |
|
|
|
|
Non-current
assets |
|
|
|
Goodwill |
|
40.4 |
37.7 |
Intangible assets |
|
23.5 |
15.3 |
Property, plant and
equipment |
|
22.5 |
19.1 |
Deferred income tax
assets |
|
1.4 |
0.4 |
ESOP loan to
employees |
|
0.3 |
0.7 |
Total non-current
assets |
|
88.1 |
73.2 |
Total
assets |
|
171.6 |
138.9 |
|
|
|
|
LIABILITIES |
|
|
|
Current
liabilities |
|
|
|
Current income tax
liabilities |
|
3.5 |
3.3 |
Trade and other
payables |
|
21.4 |
16.1 |
Accrued
consideration |
|
- |
0.5 |
Borrowings |
6 |
- |
5.5 |
Derivative financial
instruments |
|
0.2 |
0.4 |
Total current
liabilities |
|
25.1 |
25.8 |
|
|
|
|
Non-current
liabilities |
|
|
|
Accrued
consideration |
|
1.4 |
1.5 |
Borrowings |
6 |
24.0 |
- |
Deferred income tax
liabilities |
|
4.2 |
4.7 |
Total non-current
liabilities |
|
29.6 |
6.2 |
Total
liabilities |
|
54.7 |
32.0 |
NET ASSETS |
|
116.9 |
106.9 |
|
|
|
|
EQUITY |
|
|
|
Equity attributable
to equity holders of the Company |
|
|
|
Share capital |
|
27.2 |
27.2 |
Merger reserve |
|
0.2 |
0.2 |
Treasury reserve |
|
0.4 |
(0.5) |
Hedging reserve |
|
(0.2) |
0.3 |
Translation
reserve |
|
(0.4) |
3.5 |
Other reserve |
|
(0.8) |
- |
Retained earnings |
|
89.6 |
75.4 |
|
|
116.0 |
106.1 |
Non-controlling
interests |
|
0.9 |
0.8 |
TOTAL
EQUITY |
|
116.9 |
106.9 |
XP Power Limited
Consolidated Statement of Cash
Flows
For the financial year ended
31 December 2017
£ Millions |
Note |
2017 |
2016 |
|
|
|
|
Cash flows from
operating activities |
|
|
|
Profit after tax |
|
28.6 |
21.5 |
Adjustments for |
|
|
|
-Income tax expense |
|
3.6 |
6.3 |
-Amortisation and depreciation |
|
5.9 |
4.6 |
-Finance charge |
|
0.3 |
0.2 |
-Equity award charges, net of tax |
|
0.4 |
0.3 |
-Fair value (gain)/loss of derivative financial instruments |
|
(0.5) |
0.2 |
-Unrealised currency translation (gain)/loss |
|
(2.9) |
5.0 |
|
|
|
|
Change in working
capital, net of effects from acquisitions: |
|
|
|
-Inventories |
|
(2.5) |
(3.5) |
-Trade and other receivables |
|
(1.6) |
(4.0) |
-Trade and other payables |
|
5.3 |
1.5 |
-Provision for liabilities and other charges |
|
(0.8) |
(0.1) |
Cash generated from
operations |
|
35.8 |
32.0 |
Income tax paid |
|
(6.1) |
(4.1) |
Net cash provided
by operating activities |
|
29.7 |
27.9 |
|
|
|
|
Cash flows from
investing activities |
|
|
|
Acquisition of a
business, net of cash acquired |
|
(18.2) |
- |
Purchases and
construction of property, plant and equipment |
|
(4.9) |
(2.6) |
Capitalisation of
research and development expenditure |
|
(5.2) |
(4.2) |
Proceeds from disposal
of property, plant and equipment |
|
0.4 |
0.1 |
Repayment of ESOP
loans |
|
0.4 |
- |
Payment of accrued
consideration |
|
(0.5) |
- |
Net cash used in
investing activities |
|
(28.0) |
(6.7) |
|
|
|
|
Cash flows from
financing activities |
|
|
|
Proceeds from
borrowings |
|
25.2 |
- |
Repayment of
borrowings |
|
(5.4) |
(3.7) |
Sale of treasury
shares |
|
1.0 |
0.3 |
Purchase of treasury
shares by ESOP |
|
(1.6) |
(0.1) |
Interest paid |
|
(0.2) |
(0.2) |
Dividend paid to
equity holders of the Company |
|
(14.0) |
(12.9) |
Dividend paid to
non-controlling interests |
|
(0.2) |
(0.2) |
Net cash provided
by/(used in) financing activities |
|
4.8 |
(16.8) |
|
|
|
|
Net increase in
cash and cash equivalents |
|
6.5 |
4.4 |
Cash and cash
equivalents at beginning of financial year |
|
9.2 |
4.3 |
Effects of currency
translation on cash and cash equivalents |
|
(0.7) |
0.5 |
|
|
|
|
Cash and cash
equivalents at end of financial year |
|
15.0 |
9.2 |
|
|
|
|
Notes to the Annual Results Statement
For the year ended 31 December 2017
1.
Basis of preparation
This financial information is presented in Pounds Sterling and
has been prepared using the accounting principles incorporated
within International Financial Reporting Standards (IFRS) as
adopted by the European Union.
2.
Segmental reporting
The Group is organised on a geographic basis. The Group's
products are a single class of business; however, the Group is also
providing information in respect of sales by end market to assist
the readers of this report.
The geographical segmentation is as follows:
£
Millions |
|
2017 |
2016 |
|
|
|
|
Revenue |
|
|
|
Europe |
|
57.5 |
49.4 |
North
America |
|
94.4 |
68.6 |
Asia |
|
14.9 |
11.8 |
Total
Revenue |
|
166.8 |
129.8 |
|
|
|
|
Segment result |
|
|
|
Europe |
|
14.6 |
11.6 |
North
America |
|
27.6 |
21.6 |
Asia |
|
5.9 |
3.5 |
Segment result |
|
48.1 |
36.7 |
Research
and development |
|
(8.8) |
(5.9) |
Finance
charge |
|
(0.3) |
(0.2) |
Corporate
cost from operating segment |
|
(6.8) |
(2.8) |
Profit
before income tax |
|
32.2 |
27.8 |
Income
tax expense |
|
(3.6) |
(6.3) |
Profit
after tax |
|
28.6 |
21.5 |
Analysis by end market
The revenue by end market was as follows:
|
Year to 31 December 2017 |
Year to 31 December 2016 |
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
North |
|
|
£ Millions |
Europe |
America |
Asia |
Total |
Europe |
America |
Asia |
Total |
|
|
|
|
|
|
|
|
|
Technology |
7.7 |
39.2 |
3.3 |
50.2 |
7.1 |
21.4 |
3.6 |
32.1 |
Industrial |
33.7 |
24.2 |
7.7 |
65.6 |
29.6 |
23.7 |
6.5 |
59.8 |
Healthcare |
16.1 |
31.0 |
3.9 |
51.0 |
12.7 |
23.5 |
1.7 |
37.9 |
Total |
57.5 |
94.4 |
14.9 |
166.8 |
49.4 |
68.6 |
11.8 |
129.8 |
Reconciliation of adjusted
measures
Adjusted measures
The Group presents adjusted operating profit, adjusted EBITDA
and adjusted profit before tax by making adjustments for costs and
profits which management believes to be significant by virtue of
their size, nature or incidence or which have a distortive effect
on current year earnings. Such items may include, but are not
limited to, costs associated with business combinations, gains and
losses on the disposal of businesses, fair value movements,
exceptional operating costs, and amortisation of intangible assets
arising on business combinations. Exceptional operating costs
include reorganisation costs, acquisition related charges and
similar items of a significant and a non-recurring nature.
The Group discloses adjusted EBITDA, being adjusted operating
profit before depreciation of property, plant and equipment and
amortisation of intangible assets. Adjusted EBITDA is broadly used
by analysts, rating agencies, investors and the Group’s banks as
part of their assessment of the Group’s performance. A
reconciliation of adjusted EBITDA from operating profit is shown
below.
In addition, the Group presents an adjusted profit after tax
measure by making adjustments for certain tax charges and credits
which management believe to be significant by virtue of their size,
nature or incidence or which have a distortive effect.
The Group uses these adjusted measures to evaluate performance
and as a method to provide shareholders with clear and consistent
reporting. See below for a reconciliation of profit before tax to
adjusted profit before and after tax and a reconciliation of
operating profit to adjusted EBITDA and adjusted operating
profit.
(i) A reconciliation of operating
profit to adjusted Earnings Before Interest, Taxes, Depreciation
and Amortisation (“EBITDA”) is as follows:
£ Millions |
2017 |
2016 |
|
|
|
Operating Profit |
32.5 |
28.0 |
Amortisation of intangible
assets |
3.1 |
2.4 |
Depreciation |
2.8 |
2.2 |
EBITDA |
38.4 |
32.6 |
|
|
|
Adjusted for: |
|
|
Acquisition costs |
3.3 |
0.4 |
Adjusted EBITDA |
41.7 |
33.0 |
|
|
|
(ii) A reconciliation of operating
profit to adjusted operating profit is as follows:
£ Millions |
2017 |
2016 |
|
|
|
Operating Profit |
32.5 |
28.0 |
|
|
|
Adjusted for: |
|
|
Acquisition costs |
3.3 |
0.4 |
Amortisation of intangible
assets |
0.6 |
0.4 |
|
3.9 |
0.8 |
Adjusted Operating
Profit |
36.4 |
28.8 |
(iii) A reconciliation of profit before income tax
to adjusted profit before tax is as follows:
£ Millions |
2017 |
2016 |
|
|
|
Profit before income tax
(“PBT”) |
32.2 |
27.8 |
|
|
|
Adjusted for: |
|
|
Acquisition costs |
3.3 |
0.4 |
Amortisation of intangible
assets |
0.6 |
0.4 |
|
3.9 |
0.8 |
Adjusted PBT |
36.1 |
28.6 |
(iv) A reconciliation of profit after tax to
adjusted profit after tax is as follows:
£ Millions |
2017 |
2016 |
|
|
|
Profit after tax (“PAT”) |
28.6 |
21.5 |
|
|
|
Adjusted for: |
|
|
Acquisition costs |
3.3 |
0.4 |
Amortisation of intangible
assets |
0.6 |
0.4 |
Non-recurring tax
benefits1 |
(3.7) |
- |
|
0.2 |
0.8 |
Adjusted PAT |
28.8 |
22.3 |
1 Adjusted for tax on
exceptional expense for both completed and aborted acquisitions of
£1.1 million (2016: nil), one-off tax adjustment of £1.3 million
(2016:nil) and tax effect of change in US federal tax of £1.3
million (2016: nil).
3.
Income taxes
£ Millions |
2017 |
2016 |
Singapore corporation
tax |
|
|
- current year |
3.1 |
2.6 |
- over-provision in prior financial
year |
(1.5) |
(0.1) |
|
|
|
Overseas corporation tax |
|
|
- current year |
2.6 |
3.5 |
- over-provision in prior financial
year |
(0.4) |
(0.2) |
Current income tax |
3.8 |
5.8 |
|
|
|
Deferred income tax |
|
|
- current year |
1.1 |
0.6 |
- adjustment in respect of prior
year |
- |
(0.1) |
- change in tax rate |
(1.3) |
- |
Income tax expense |
3.6 |
6.3 |
The differences between the total income tax expense shown above
and the amount calculated by applying the standard rate of
Singapore income tax rate to the
profit before income tax are as follows:
£ Millions |
2017 |
2016 |
|
|
|
Profit before
tax |
32.2 |
27.8 |
|
|
|
Tax on profit at
standard Singapore tax rate of 17% (2016: 17%) |
5.5 |
4.7 |
Tax incentives |
(0.9) |
(0.4) |
Higher rates of
overseas corporation tax |
2.0 |
2.4 |
Deduction for gain on
employee share options |
0.2 |
- |
Adjustment in respect
of prior year |
(1.9) |
(0.4) |
Change in tax rate |
(1.3) |
- |
|
|
|
Income tax
expense |
3.6 |
6.3 |
4.
Dividends
Amounts recognised as distributions to equity holders in the
period:
|
|
|
|
2017 |
2016 |
|
|
Pence per share |
|
|
|
£
Millions |
Pence per
share |
|
£
Millions |
|
|
|
|
|
|
|
|
|
|
Prior year third
quarter dividend paid |
|
16.0 |
* |
|
|
3.0 |
15.0 |
|
2.8 |
Prior year final
dividend paid |
|
26.0 |
* |
|
|
5.0 |
24.0 |
|
4.6 |
First quarter dividend
paid |
|
15.0 |
^ |
|
|
2.9 |
14.0 |
* |
2.6 |
Second quarter
dividend paid |
|
16.0 |
^ |
|
|
3.1 |
15.0 |
* |
2.9 |
Total |
|
73.0 |
|
|
|
14.0 |
68.0 |
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
* Dividends in respect of 2016 (71.0p).
^ Dividends in respect of 2017 (78.0p).
The third quarter dividend of 18.0
pence per share was paid on 11
January 2018. The proposed final dividend of 29.0 pence per share for the year ended
31 December 2017 is subject to
approval by Shareholders at the Annual General Meeting scheduled
for 6 April 2018 and has not been
included as a liability in these financial statements. It is
proposed that the final dividend be paid on 20 April 2018 to members on the register as at
16 March 2018.
5.
Earnings per share
The calculations of the basic and diluted earnings per share
attributable to the ordinary equity holders of the Company are
based on the following data:
£ Millions |
2017 |
2016 |
Earnings |
|
|
|
|
|
Earnings for the
purposes of basic and diluted earnings per share (profit
attributable to equity holders of the Company) |
28.3 |
21.3 |
Amortisation of
intangibles associated with acquisitions |
0.6 |
0.4 |
Exceptional
reorganisation |
3.3 |
0.4 |
Tax on exceptional
reorganisation |
(1.1) |
- |
One off tax
incentive |
(1.3) |
- |
Tax effect of change in
US federal tax rate |
(1.3) |
- |
Adjusted Earnings
for earnings per share |
28.5 |
22.1 |
|
|
|
Number of
shares |
|
|
Weighted average number
of shares for the purposes of basic earnings per share
(thousands) |
19,082 |
19,015 |
|
|
|
Effect of potentially
dilutive share options (thousands) |
306 |
147 |
Weighted average number
of shares for the purposes of dilutive earnings per share
(thousands) |
19,388 |
19,162 |
|
|
|
Earnings per share
from operations |
|
|
Basic |
148.3p |
112.0p |
Diluted |
146.0p |
111.2p |
Diluted
adjusted |
147.0p |
115.3p |
6.
Borrowings
The borrowings are repayable as follows:
£ Millions |
2017 |
2016 |
|
|
|
On demand or within one
year |
- |
5.5 |
In the second year |
- |
- |
In the third year |
- |
- |
In the fourth year |
24.0 |
- |
Total |
24.0 |
5.5 |
The other principal features of the Group's borrowings are as
follows:
1. The Group had a term loan facility of
US$12.0 million (£8.0 million) with
Bank of Scotland on 20 November 2015. The facility was repayable in
equal quarterly instalments of US$1.7
million which commenced in June
2016 and the Group has repaid the balance of the term loan
in September 2017. The term loan was
priced at LIBOR plus a margin of 0.95% (2016: priced at LIBOR plus
a margin of 0.95%).
2. The Group has entered into a new revolving
credit facility of US$40.0 million
with a US$20.0 million additional
accordion option with HSBC and Fifth Third Bank on 27 September 2017. The facility has no fixed
repayment terms until maturity. The revolving loan is priced at
LIBOR plus a margin of 1% for the utilisation facility and a margin
of 0.4% for the unutilised facility.
3. Management assessed all loan covenants have
been complied with as of 31 December 2017.
7.
Accrued consideration
The Group owns 89.9% (2016: 84.0%) of the shares of Powersolve
Electronics Limited (“Powersolve”) and entered into an amended
agreement on 29 October 2016 to
purchase the remaining 10.1% of the shares in 2022. The Group owns
51% (2016: 51%) of the shares of Hanpower Co. Ltd (“Hanpower”) and
entered into an agreement on 20 May
2015 to purchase an additional 15.0% of the shares in 2020
and another 15.0% of the shares in 2025.
The commitment to purchase the remaining ownership interests has
been accounted for as accrued consideration and is calculated based
on the expected future payment which will be based on a predefined
multiple of the average earnings for three years.
The future payment is discounted to the present value, with the
discount amortised to interest expense each period as the payment
draws nearer. At each reporting period, the anticipated future
payment is recalculated and an adjustment made accordingly, with a
corresponding adjustment to goodwill for Powersolve. For Hanpower,
the amount that is payable under the agreement is initially
recognised at the present value of the redemption amount within
liabilities with a corresponding charge directly to equity. The
liability is subsequently accreted through finance charges up to
the redemption amount that is payable in 2020 and 2025. As a result
of the purchase commitment and the amount of control XP Power
Limited exerts over both subsidiaries, their results are fully
consolidated in the Group. Dividends are attributed to the
non-controlling interests based on their respective interests in
the subsidiaries.
8.
Principal risks and uncertainties
Board Responsibility
Like many other international businesses, the Group is exposed
to a number of risks which may have a material effect on its
financial performance. The Board has overall responsibility for the
management of risk and sets aside time at its meetings to identify
and address risks.
Exposure to exchange rate
fluctuations
The Group deals in many currencies for both its purchases and
sales including US Dollars, Euro and its reporting currency Pounds
Sterling. In particular, North
America represents an important geographic market for the
Group where virtually all the revenues are denominated in US
Dollars. The Group also sources components in US Dollars and the
Chinese Yuan. The Group therefore has an exposure to foreign
currency fluctuations. This could lead to material adverse
movements in reported earnings.
Risk mitigation – The Group reviews balance sheet and cash flow
currency exposures and where considered appropriate, uses forward
exchange contracts to hedge these exposures. Any forward contract
requires the approval of both the Chief Executive Officer and Chief
Financial Officer.
The Group does not hedge any translation of its subsidiaries’
results to Sterling for reporting purposes.
Competition from new market entrants
and new technologies
The power supply market is diverse and competitive. The
Directors believe that the development of new technologies could
give rise to significant new competition to the Group, which may
have a material effect on its business. At the lower end of the
Group’s target market, in terms of both power range and programme
size, the barriers to entry are lower and there is, therefore, a
risk that competition could quickly increase, particularly from
emerging low cost manufacturers in Asia.
Risk mitigation – The Group reviews activities of its
competition, in particular product releases, and stays up-to-date
with new technological advances in our industry, especially those
relating to new components and materials. The Group also tries to
keep its cost base competitive by operating in low cost geographies
where appropriate.
The general direction of our product roadmap is to move away
from lower complexity products and to increase our engineering
solutions capabilities so reducing the inherent market
competitiveness.
An event that causes a disruption to
one of our manufacturing facilities
An event that results in the temporary or permanent loss of a
manufacturing facility would be a serious issue. As the Group
manufactures 76% of revenues, this would undoubtedly cause at least
a short-term loss of revenues and profits and disruption to our
customers and therefore damage to reputation.
Risk mitigation – We now have two facilities (China and Vietnam) where we are able to produce power
supplies. However, not all power converter series can be produced
in both facilities.
We have disaster recovery plans in place for both
facilities.
We have undertaken a risk review with the manufacturing
management to identify and assess risks which could cause a serious
disruption to manufacturing, and then identified and implemented
actions to reduce or mitigate these risks where possible.
Loss of key personnel or failure to
attract new personnel
The future success of the Group is substantially dependent on
the continued services and continuing contributions of its
Directors, senior management and other key personnel. The loss of
the services of key employees could have a material adverse effect
on own business.
Risk mitigation – The Group undertakes performance evaluations
and reviews to help it stay close to its key personnel as well as
annual employee engagement surveys. Where considered appropriate,
the Group also makes use of financial retention tools such as
equity awards.
Dependence on of key
customers/suppliers
The Group is dependent on retaining its key customers and
suppliers. Should the Group lose a number of its key customers or
key suppliers, this could have a material impact on the Group’s
financial condition and results of operations. However, for the
year ended 31 December 2017, no
single customer accounted for more than 11% of revenue.
Risk mitigation – The Group mitigates this risk by providing
excellent service. Customer complaints and non-conformances are
reviewed monthly by members of the Executive Leadership team.
As the proportion of our own-manufactured products has
increased, the reliance on suppliers for third party product has
been mitigated proportionally. There has been a shift from a
finished goods risk to a raw materials risk.
We conduct regular audits of our key suppliers and in addition
keep large amounts of safety inventory of key components.
Product recall
A product recall due to a quality or safety issue would have
serious repercussions to the business in terms of potential cost
and reputational damage as a supplier to critical systems.
Risk mitigation – We perform 100% functional testing on all
own-manufactured products and 100% hi-pot testing, which determines
the adequacy of electrical insulation, on own-manufactured
products. This ensures the integrity of the isolation barrier
between the mains supply and the end user of the equipment. We also
test all the medical products we manufacture to ensure the leakage
current is within the medical specifications.
Where we have contracts with customers we always limit our
contractual liability regarding recall costs.
No single customer project accounts for more than 4% of overall
revenue.
Fluctuations of revenues, expenses and
operating results due an economic downturn or external shock
The revenues, expenses and operating results of the Group could
vary significantly from period to period as a result of a variety
of factors, some of which are outside its control. These factors
include: general economic conditions; adverse movements in interest
rates; conditions specific to the market; seasonal trends in
revenues, capital expenditure and other costs; and the introduction
of new products or services by the Group, or by their competitors.
In response to a changing competitive environment, the Group may
elect from time to time to make certain pricing, service, marketing
decisions or acquisitions that could have a short-term material
adverse effect on the Group’s revenues, results of operations and
financial condition.
Risk mitigation – Although not immune from an economic shock or
the cyclicality of the capital equipment markets, the Group’s
diverse customer base, geographic spread and revenue annuities
reduces exposure to this risk.
The Group’s business model is not capital intensive and the
strong profit margins lead to healthy cash generation which also
helps mitigate risks from these external factors.
The Group benefits from good order exposure 12 months out
allowing it to recognise market changes and mitigate the
impact.
Cyber-security/Information systems
failure
The Group is reliant on information technology in multiple
aspects of the business from communications to data storage. Assets
accessible online are potentially vulnerable to theft and customer
channels are vulnerable to disruption. Any failure or downtime of
these systems or any data theft could have a significant adverse
impact on the Group’s reputation or on the results of
operations.
Risk mitigation – The Group has a defined Business Impact
Assessment which identifies the key information assets; replication
of data on different systems or in the Cloud; an established backup
process in place as well as a robust anti-malware solution on our
networks.
Internally produced training materials are used to educate users
regarding good IT security practice and to promote the Group’s IT
policy.
A cyber assessment carried out by the outsourced internal
auditor resulted in recommendations that are being implemented to
further mitigate cyber risk and safeguard the Group’s assets.
Risks relating to regulation,
compliance and taxation
The Group operates in multiple jurisdictions with applicable
trade and tax regulations that vary. Failing to comply with local
regulations or a change in legislation could impact the profits of
the Group. In addition, the effective tax rate of the Group is
affected by where its profits fall geographically. The Group’s
effective tax rate could therefore fluctuate over time and have an
impact on earnings and potentially its share price.
Risk mitigation – An outsourced internal audit function has been
introduced to provide risk assurance in targeted areas of the
business and recommendations for improvement. The scope of these
reviews includes behaviour, culture and ethics.
The Group hires employees with relevant skills and uses external
advisers to keep up-to-date with changes in regulations and to
remain compliant.
Strategic risk associated with valuing
or integrating new acquisitions
The Group may elect from time to time to make strategic
acquisitions. A degree of uncertainty exists in valuation and in
particular in evaluating potential synergies. Post-acquisition
risks arise in the form of change of control and integration
challenges. Any of these could have an effect on the Group’s
revenues, results of operations and financial condition.
Risk mitigation – Preparation of robust business plans and cash
projections with sensitivity analysis and the help of professional
advisers if appropriate.
Post-acquisition reviews are performed to extract “lessons
learned”.
10. Responsibility
Statement
The Directors confirm to the best of their knowledge and believe
that this condensed set of financial statements:
- Gives a fair view of the assets, liabilities, financial
position and profit of the Group; and
- Includes a fair review of the information required by the
Disclosure and Transparency Rules.
11. Other
information
XP Power Limited (the “Company”) is listed on the London Stock
Exchange and incorporated and domiciled in Singapore. The address of its registered
office is 401 Commonwealth Drive, Lobby B, #02-02, Haw Par
Technocentre, Singapore
149598.
The financial information set out in this announcement does not
constitute the Company’s statutory accounts for the years ended
31 December 2016 or 2017. The
financial information for the year ended 31
December 2016 is derived from the XP Power Limited statutory
accounts for the year ended 31 December
2016, which have been delivered to the Accounting and
Corporate Regulatory Authority in Singapore. The auditors reported on those
accounts; their report was unqualified. The statutory accounts for
the year ended 31 December 2017 will
be finalised on the basis of the financial information presented by
the Directors in this earnings announcement and will be delivered
to the Accounting and Corporate Regulatory Authority in
Singapore following the Company’s
Annual General Meeting.
Whilst the financial information included in this earnings
announcement has been computed in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European
Union, this announcement does not itself contain sufficient
information to comply with IFRS as adopted by the European Union.
The Company expects to publish full financial statements that
comply with IFRS as adopted by the European Union later this
month.
This announcement was approved by the Directors on 1 March 2018.