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|1 March 2018|
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.
|Final dividend per share||29.0p||26.0p||+12%|
|Total dividend per share||78.0p||71.0p||+10%|
|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%|
|Operating cash flow||£29.7m||£27.9m||+6%|
|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)
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.”
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
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.
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).
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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 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.
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 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.
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.
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.
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.
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.
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.
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.
Chief Financial Officer
XP Power Limited
Consolidated Statement of Comprehensive Income for the financial year ended 31 December 2017
|Cost of sales||(89.2)||(67.8)|
|Distribution and marketing||(31.7)||(26.6)|
|Research and development||(8.8)||(5.9)|
|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|
|Earnings per share attributable to equity holders of the Company (pence per share)|
|- Diluted adjusted||5||147.0||115.3|
XP Power Limited
Consolidated Balance Sheet
As at 31 December 2017
|Corporate tax recoverable||2.9||-|
|Cash and cash equivalents||15.0||9.2|
|Other current assets||3.8||2.4|
|Derivative financial instruments||0.2||0.4|
|Total current assets||83.5||65.7|
|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|
|Current income tax liabilities||3.5||3.3|
|Trade and other payables||21.4||16.1|
|Derivative financial instruments||0.2||0.4|
|Total current liabilities||25.1||25.8|
|Deferred income tax liabilities||4.2||4.7|
|Total non-current liabilities||29.6||6.2|
|Equity attributable to equity holders of the Company|
XP Power Limited
Consolidated Statement of Cash Flows
For the financial year ended 31 December 2017
|Cash flows from operating activities|
|Profit after tax||28.6||21.5|
|-Income tax expense||3.6||6.3|
|-Amortisation and depreciation||5.9||4.6|
|-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:|
|-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)|
|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:
|Research and development||(8.8)||(5.9)|
|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|
Reconciliation of 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:
|Amortisation of intangible assets||3.1||2.4|
(ii) A reconciliation of operating profit to adjusted operating profit is as follows:
|Amortisation of intangible assets||0.6||0.4|
|Adjusted Operating Profit||36.4||28.8|
(iii) A reconciliation of profit before income tax to adjusted profit before tax is as follows:
|Profit before income tax (“PBT”)||32.2||27.8|
|Amortisation of intangible assets||0.6||0.4|
(iv) A reconciliation of profit after tax to adjusted profit after tax is as follows:
|Profit after tax (“PAT”)||28.6||21.5|
|Amortisation of intangible assets||0.6||0.4|
|Non-recurring tax benefits1||(3.7)||-|
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
|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:
|Profit before tax||32.2||27.8|
|Tax on profit at standard Singapore tax rate of 17% (2016: 17%)||5.5||4.7|
|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|
Amounts recognised as distributions to equity holders in the period:
|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|
* 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:
|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|
|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)||
|Effect of potentially dilutive share options (thousands)||306||147|
|Weighted average number of shares for the purposes of dilutive earnings per share (thousands)||
|Earnings per share from operations|
The borrowings are repayable as follows:
|On demand or within one year||-||5.5|
|In the second year||-||-|
|In the third year||-||-|
|In the fourth year||24.0||-|
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
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.
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.
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