Xp Power Regulatory News (XPP)

XP POWER LTD - Final Results

PR Newswire

London, March 7

XP Power Limited(“XP Power” or “the Group”)

Annual Results for the year ended 31 December 2016

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 2016.

Highlights

1 Adjusted for one-off costs associated with acquisitions of £0.4 million (2015: £0.3 million) and intangibles amortisation of £0.4 million (2015: nil)

James Peters, Chairman, commented: 

 “We are encouraged by the strong finish we had to 2016. The Group entered 2017 with a strong order backlog and, despite the mixed global economic picture, we have established positive momentum in the new financial year. The further utilisation of lower cost production capacity in Vietnam is giving us a competitive advantage and we will begin work on a second factory at the site towards the end of 2017, to address our future volume growth requirements.

In addition, the Group has a strong balance sheet and a highly cash generative business that will enable us to help fund further targeted acquisitions to broaden our product offering and engineering capabilities.

We remain excited about the opportunities we believe will be available to the Group in the years ahead.”

Enquiries:

XP Power Duncan Penny, Chief Executive +44 (0)7776 178018Jonathan Rhodes, Finance Director +44 (0)7500 944614

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 50% of sales), healthcare (circa 30% sales) and technology (circa 20% 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 20162016 was another year of significant progress; despite challenging economic conditions and political uncertainties, we achieved record revenues and earnings. In addition, we have enhanced our manufacturing capability by reducing our lead times and introducing lean manufacturing principles. We have also continued to ramp-up power converter production in our Vietnam facility, giving us a cost advantage over many of our competitors. Finally, we strengthened our Board, and set the stage for the next phase of our development.

ResultsOur financial performance for the year was again strong. Revenues were a record £129.8 million (2015: £109.7 million), an increase of 7% in constant currency. Order intake was £133.5 million (2015: £110.5 million) representing an increase of 9% in constant currency.

Gross margin showed a slight decline to 47.8% (2015: 49.8%) due to product mix and the weakening of Sterling against the US Dollar following the United Kingdom’s vote to leave the European Union, reflecting the fact that the majority of our underlying product costs are denominated in US Dollars.

Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) and amortisation of intangible assets of £0.4 million (2015: nil), adjusted profit before tax was £28.6 million (2015: £25.7 million), an increase of 11% over that reported in 2015. Basic earnings per share increased 8% to 112.0 pence (2015:103.7 pence). Diluted adjusted earnings per share increased 11% to 115.3 pence (2015: 104.3 pence).

Strategy ReviewThe Company’s strategy, which it has executed successfully over many years, has generated good results. The Executive Management team conducted a review of the strategy during 2016 with input and review by the Board, to ensure it remained appropriate and up-to-date. This review concluded that the essence of the strategy – to continue to move up the value chain and win a growing proportion of our customers’ available business – should be unchanged but that a number of refinements be adopted to further improve upon our success to date. In particular, we now identify expansion of our product range by targeted acquisitions and achieving operational excellence as additional specific strategic goals. Further detail on our updated strategy is provided in the Operating and Financial Review below.

Strengthening Our BoardWe were pleased to welcome Polly Williams, who joined our Board from 1 January 2016 as a Non-Executive Director, bringing with her a wealth of public company experience. Polly chairs XP Power’s Remuneration Committee and is a member of the Audit Committee.

With this latest appointment, we consider that the Board now has the appropriate experience and capabilities to take our Company to the next level of its development.

DividendOur 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. In line with our progressive dividend policy, the Board is recommending a final dividend of 26 pence per share for the fourth quarter of 2016. This dividend will be payable to members on the register on 17 March 2017 and will be paid on 21 April 2017.

When combined with the interim dividends for the previous quarters, the total dividend for the year will be 71 pence per share (2015: 66 pence); an increase of 8%.

The compound average growth rate of our dividend has been 10% over the last five years.

Our People and Our ValuesThe 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 consecutive strong and improving 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.

During 2016, we rolled out a number of training programs built around our core values of integrity, knowledge, flexibility, speed and customer focus. These core values are part of our DNA and have been responsible for driving our performance and customer service commitment over the long term. Training programs were delivered across the world and were extremely well-received.

SustainabilitySustainability is extremely important to our people and our customers. We punch well above our weight in this regard and set ourselves the aspirational goal of leading our industry regarding environmental and sustainability matters. This is reflected in the work we have done to produce a portfolio of ultra-high efficiency products which consume less energy, use less materials and do not contain substances which are harmful to the environment. These XP “Green” Power products grew at an impressive rate of 28% in 2016.

Our Vietnam factory is one of the most environmentally friendly in the industry with an efficient building envelope, ultra-efficient air conditioning, low-energy lighting, water capture and recycling and solar panel array. This is not only important to our customers but resonates with our employees.

OutlookWe are encouraged by the strong finish we had to 2016. The Group entered 2017 with a strong order backlog and, despite the mixed global economic picture, we have established positive momentum in the new financial year. 

In addition, the Group has a strong balance sheet and a robust business that provides excellent cash generation to help fund targeted acquisitions that will broaden our product offering and engineering capabilities.

James PetersChairman

Operating and Financial Review

Review of our yearWhile, overall, the market for industrial electronics remained challenging in 2016, trading conditions improved during the second half and we had some positive momentum in order intake and revenues. We continued to make progress with the execution of our strategy and reported record revenues, as well as delivering our highest ever level of own designed/own manufactured product revenues which now represent 73% of the total.

We also undertook a review of our well-established strategy during the year, to ensure it remains appropriate and up-to-date. The results of this review are discussed in more detail below. 

We have been actively transferring more of the lower power/lower complexity product from our China facility to our Vietnam facility to maintain cost competitiveness and to free up capacity in China. We have also implemented a number of lean manufacturing principles which have allowed us to reduce lead times. We would also expect to see cost benefits from these initiatives as we trade through 2017.

We remain excited about the future prospects for our business.

Strategic progressDuring 2016, the Executive Management team critically reviewed the strategy we have been successfully executing and which has produced good results over a sustained period. The review concluded that the fundamental essence of the strategy - targeting key accounts where we can add value and gaining more of the available business in those accounts - remains appropriate and effective. However, a number of refinements were made to the strategy, including a greater emphasis on acquisitions to further expand our product offering and making the pursuit of operational excellence a specific strategic goal.

Our refined strategy can be summarised as follows:

We continue to make significant progress against each of these 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 28% in 2016 to £30.2 million (2015: £23.6 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 sales 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 the industrial, healthcare and technology markets. Revenues from our own-designed products set a new record of £95.3 million in the year, representing 73% of revenue (2015: 68%). We expect further growth in this area in 2017.

As we gain preferred or approved supplier status with our blue-chip customers we are gaining exposure to new opportunities in additional product areas. Our broad range of products, excellent customer service, low cost Asian manufacturing capability and engineering support on three continents makes us an ideal strategic partner to these larger blue-chip customers. We have established this position with our standard product offering but now we see attractive opportunities in these larger customers to engage on custom designs. We have already deployed more of our engineering services resource into these areas but also see opportunities for further acquisitions where our customer relationships and supplier approvals at key customers can be combined with acquired custom engineering expertise.

As we look forward, we see further opportunities to capitalise on our customer relationships and large direct sales channel by further expanding our product offering. Our acquisition of EMCO in November 2015 was an excellent example of this initiative and we have been actively seeking further opportunities to expand our product capability into complementary areas in which we do not currently operate or where we are under-represented.

Productivity will be a key area of future focus. We deliver excellent customer service and operating margins demonstrating that we have an efficient and effective business model. As our organisation grows geographically and in complexity we will ensure that we retain and build on the core values of knowledge, flexibility and speed that have served us well to date. In particular, we have continued to upgrade our systems and have brought new talent with experience in complex operations and lean process techniques into the organisation. We will be placing greater emphasis on operational excellence in 2017 to further enhance our productivity.

MarketplaceAll industry sectors and all geographies experienced revenue growth in 2016 over 2015 and, significantly, sequential growth in the second half of 2016 over the first half. We therefore entered 2017 with good momentum and a healthy order book.

North America revenues in 2016 were $93.7 million but they did benefit from incremental revenues from the acquisition of EMCO in November 2015. Without the benefit of the EMCO revenues, North America revenues would have been flat year-on-year. However, order intake in North America was strong in the second half of 2016 - with $51.6 million booked compared with $47.0 million in the first half. North America now has the benefit of good momentum going into 2017, with some promising new programs where we expect volumes to ramp-up significantly during the year.

Technology represented 31% of revenues in North America in 2016 compared to 30% in 2015. The industrial sector rebounded and represented 35% of revenues in 2016 compared to 31% in 2015. Healthcare also performed well in North America in absolute terms, with revenues ahead by 10% as a number of new programs ramped-up, but its share of revenues declined to 34% (2015: 39%) as it did not match the pace of the recovery we saw in the industrial sector.

Our Asia business continued to grow despite the widely reported slow-down in China. Asia revenues grew 18% in 2016 to $16.1 million (2015: $13.7 million). The customers driving this increase generally sell their end products outside of the emerging markets. Industrial and technology sectors showed good growth in Asia whilst healthcare remained flat year-on-year.

Our European business grew by 10% to £49.4 million (2015: £45.1 million) which is the third successive year of growth in challenging market conditions. The industrial, healthcare and technology sectors all saw growth in Europe and we gained increased traction with some of the bigger blue-chip clients, which we expect to drive further European growth in 2017.

The geographic split of reported revenue was broadly maintained year-on-year. Overall North America represented 53% of revenue (2015: 51%), Asia represented 9% of revenue (2015: 8%) and Europe represented 38% of revenue (2015: 41%). The average exchange rate for the US Dollar compared to Sterling was 1.38 in 2016 versus 1.54 in 2015 representing a 10% weakening of Sterling following the Brexit vote. This caused North America and Asia revenues to be inflated, due to translation, and all of our costs reported in Sterling to be inflated as our product costs are predominately denominated in US Dollars. We discuss the potential impact of the Brexit vote and foreign exchange volatility in more detail below.

The overall picture by sector reflects the narrative above. Industrial represented 46% of revenue (2015: 44%), healthcare represented 29% of revenue (2015: 31%) and technology represented 25% of revenue (2015: 25%). All our products are designed into capital equipment so our revenues will always be affected by capital equipment cycles, 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. 

We continue to perform well against our traditional established competition. Our broad range of standard products 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 ensure we continue to drive down our manufacturing costs and maintain our reputation as the experts in power to mitigate this threat.

Research and DevelopmentWe have continued to invest in research and development to further expand our portfolio of products and the size of our addressable market opportunity. We increased our design engineering resource and capabilities during 2016 in both our North America and United Kingdom design centres, including the introduction of a firmware capability for which we are seeing increasing demand. We released 47 new product families in 2016 (2015: 22) and 33 of these can be classified as ultra-high efficiency.

The high level of new product introductions was driven by the addition of a new third party supplier to enhance our DC-DC product offering.

ManufacturingThe addition of a manufacturing site in Vietnam in 2012 added much needed capacity and also enhanced our cost competitiveness as production costs in Vietnam are significantly lower than those of our existing Chinese facility.

Production volumes of magnetics windings at our Vietnam facility have continued to ramp-up and in 2016 we produced 4.9 million windings compared to 4.3 million in 2015. We have been actively transferring the lower power/lower complexity products from China to Vietnam in 2016 to improve our cost position and free up capacity in China. In 2016 we manufactured 377,700 power supplies in our Vietnam facility compared to 172,500 in 2015.

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. We expect to derive cost benefits from our lean manufacturing initiatives as we trade through 2017.

Our longer term planning indicates we will need additional manufacturing capacity in the first half of 2019. We have therefore allocated US$1.5 million of our capital budget in Q4 of 2017 to break ground on a second factory at the Vietnam site, as envisaged at the time of our original investment.

Enhancing our digital presenceIn December 2015 we launched our completely revamped website at xppower.com. The new mobile-optimised site was specifically designed to improve interaction and the overall user experience and has been well-received by customers.

DistributionIn the first quarter of 2014, we signed a distribution agreement with global electronic components distributor Digi-key, to complement our existing distribution partnership with Premier Farnell, incorporating Farnell in Europe, element14 in Asia and Newark in America. In the summer of 2016, we engaged with another global electronic components distributor, Electrocomponents plc, incorporating trading brands RS Components in Europe & Asia, and Allied Electronics in America. With this appointment, we now have a presence with three leading global high service level/online distribution channels, making our product more readily available to a larger number of small and medium-sized customers and enhancing our brand recognition. We are experiencing excellent growth through these channels, allowing our direct sales teams to concentrate on our larger blue-chip accounts.

Systems DevelopmentEfficient and robust systems are essential in order for us to manage an international business with a highly diverse customer base. In 2014 we upgraded our Customer Relationship Management systems across all three regions. This has allowed us to collaborate and share information much more effectively and provide even better customer service. From the beginning of January 2015 we replaced our North America business systems with SAP and are now running the same Enterprise Resource Management System across all three geographies which further enhances the speed and capability of our internal reporting.

This integrated approach ensures that we have the robust systems and reporting necessary to support our future growth.

Revenue and order intakeRevenues set a new record and grew 18% over the prior year (7% in constant currency) to £129.8 million (2015: £109.7 million). Order intake grew by 21% (9% in constant currency) to £133.5 million (2015: £110.5 million). Revenues from our own designed product – a key indicator of our strategic progress – grew by 28% (or approximately 15% in constant currency) to £95.3 million (2015: £74.6 million) representing 73% of revenue (2015: 68%) and setting another new record.

MarginsGross margin declined slightly to 47.8% (2015: 49.8%), largely due to product mix and the effect of the depreciation of Sterling versus the US Dollar. The majority of our product costs are denominated in US Dollars so while the weakening of Sterling helps our revenue line, product costs increase more than the revenues as a result of the weakness of Sterling. Operating margins declined from 23.3% in 2015 to 21.6%. This was partly due to the weakness of Sterling but also due to the operating margins of EMCO being lower than those of XP Power as a whole.

Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) adjusted profit before tax was £28.2 million, an increase of 10% over that reported in 2015.

TaxationThe tax charge for the year was £6.3 million (2015: £5.5 million) which represents an effective tax rate of 22.7% (2015: 21.7%). The effective rate is primarily determined by how our profits are distributed geographically. We expect a slight increase in the effective tax rate again in 2017.

Earnings per shareBasic earnings per share increased 8% to 112.0 pence compared to 103.7 pence in 2015. Diluted earnings per share increased by 8% to 111.2 pence compared with 102.8 pence in 2015.

After adding back costs associated with aborted acquisitions of £0.4 million (acquisition costs in 2015: £0.3 million) and intangible assets amortisation of £0.4 million (2015: nil) adjusted diluted earnings per share was 115.3 pence (2015: 104.3 pence) an increase of 11%.

Cash flow, funding and net cashOur high margin business model, with modest capital requirements, continues to produce excellent free cash flows.

We finished 2016 in a net cash position of £3.7 million compared with a net debt position of £3.7 million at the end of 2015. This position was achieved after returning £12.9 million to Shareholders in the form of dividends.

In order to finance the acquisition of EMCO in November 2015 the Group took out a US$12.0 million term debt facility with Bank of Scotland PLC. The facility is repayable in equal quarterly instalments of US$1.7 million commenced in June 2016 and ending in December 2017. The facility is priced at LIBOR plus a margin of 0.95%.

In September 2016 the Group renewed its annual working capital facility at a level of US$7.5 million (2015: US$ 12.5 million). The facility is priced at the Bank of England base rate plus a margin of 1.5%. Bank of Scotland PLC provides the facility.

At 31 December 2016, no working capital facility was drawn down.

DividendsThe attractive cash flow aspect of our business model has enabled us to pursue a progressive dividend policy over a sustained period of time.

Our 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 26 pence per share which together with the quarterly dividends already paid gives a total dividend for the year of 71 pence per share (2015: 66 pence per share) an increase of 8%. Dividend cover for the year was 1.6 times.

DerivativesThe Group’s financial instruments consist of cash, money market deposits, overdrafts, 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 £11.5 million of forward currency contracts outstanding at 31 December 2016 (2015: £11.3 million).

BrexitThe weakening of Sterling versus the US Dollar in the period following the United Kingdom Referendum on EU membership on 23 June 2016 has obviously had a material effect on the presentation of our financial results in 2016.

Approximately 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 2016 gross margin percentage could be approximately 130 basis points lower as a result.

For our United Kingdom business invoiced in Sterling, which represents approximately 13% of our worldwide revenues, margins were reduced in the second half of 2016 as the associated product cost is denominated in US Dollars. We have therefore been raising prices as customers place new orders to compensate for this effect. Although no customer is ever happy with a price increase, our reasons for doing so are well understood. We therefore expect to recover a significant portion of our margin losses in the United Kingdom in 2017.

In terms of the broader economic impacts of Brexit on our business, we do not consider that they will be material. The evidence to date is that some of our United Kingdom customers are benefiting from the weakening of Sterling as they are frequently net exporters.

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.

Outlook for 2017Although there continue to be a number of economic and political uncertainties which could potentially affect our business in 2017, we consider that we are well positioned in our marketplace. We have good momentum as our design pipeline continues to grow. Our order intake in the fourth quarter of 2016 was strong at £37.1 million and we entered 2017 with a healthy order book.

We also continue to work to identify acquisition opportunities that would be complementary to our product portfolio.

We remain excited and confident regarding the long term prospects for our Group.

Duncan Penny Jonathan RhodesChief Executive Finance Director 

XP Power LimitedConsolidated Statement of Comprehensive Income for theFinancial year ended 31 December 2016

XP Power LimitedConsolidated Balance SheetAs at 31 December 2016

XP Power LimitedConsolidated Statement of Cash FlowsFor the financial year ended 31 December 2016

Notes to the Annual Results StatementFor the year ended 31 December 2016

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:

Analysis by end market

The revenue by end market was as follows:

3. Income taxes

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:

4. Dividends

Amounts recognised as distributions to equity holders in the period:

* Dividends in respect of 2015 (66.0p)

^ Dividends in respect of 2016 (71.0p)

The third quarter dividend of 16.0 pence per share was paid on 12 January 2017. The proposed final dividend of 26.0 pence per share for the year ended 31 December 2016 is subject to approval by Shareholders at the Annual General Meeting scheduled for 19 April 2017 and has not been included as a liability in these financial statements. It is proposed that the final dividend be paid on 21 April 2017 to members on the register as at 17 March 2017.

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:

6. Borrowings

The borrowings are repayable as follows:

The other principal features of the Group's borrowings are as follows:

1. Bank overdrafts are repayable on demand. The bank overdrafts are secured on the assets of the Group. At 31 December 2016, the Group had an overdraft of £Nil million (2015: £0.6 million). In December 2016, the Group renewed its annual working capital facility to US$7.5 million (2015: US$12.5 million). The facility is priced at the Bank of England base rate plus a margin of 1.5%. Bank of Scotland PLC (BOS) provides the facility.

2. The Group has a term loan facility of US$12.0 million (£8.0 million) with BOS with quarterly repayments of US$1.7 million commenced in June 2016 and ending in December 2017. The term loan is priced at LIBOR plus a margin of 0.95% (2015: priced at LIBOR plus a margin of 0.95%).

3. The Group has pledged all assets as collateral to secure banking facilities granted to the Group by BOS.

4. Management assessed all loan covenants have been complied with as of 31 December 2016.

7. Deferred consideration

The Group owns 84.0% (2015: 84.0%) of the shares of Powersolve Electronics Limited (“Powersolve”) and had entered into an amended agreement on 29 October 2016 to purchase the remaining 16.0% of the shares in 2017 and 2022. The Group will acquire 5.9% of Powersolve’s shares in early 2017 and the remaining 10.1% in early 2022. The Group owns 51% (2015: 51%) of the shares of Hanpower Co. Ltd (“Hanpower”) and had entered into an agreement on 20 May 2015 to purchase additional 15.0% of the shares in 2020 and another 15.0% of the shares in 2025.

The commitment to purchase the additional ownership has been accounted for as deferred consideration and is calculated based on the expected future payment which will be based on a predefined multiple of the earnings for 3 years.

8. Prior year comparatives

In accordance with IFRS 3 Business Combinations, the management has assessed the fair value of the identified intangible assets. Accordingly, goodwill recognised last year has now been adjusted to reflect the revised fair value of the intangible assets.

The previously reported goodwill as at 31 December 2015 is £36.3 million. The restated goodwill as at 31 December 2015 is £35.9 million, reflecting an adjustment of (£0.4) million.

The previously reported intangible assets as at 31 December 2015 is £11.9 million. The restated intangible asset as at 31 December 2015 is £12.3 million, reflecting an adjustment of £0.4 million in customer relationship.

9. Principal risks and uncertainties

Board ResponsibilityLike 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 fluctuationsThe 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 and Finance Director.

Competition from new market entrants and new technologiesThe 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 program size, the barriers to entry are low 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.

Disruption of one of our manufacturing facilitiesAn event that results in the temporary or permanent loss of a manufacturing facility would be a serious issue. As the Group manufactures 73% 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, currently only certain series can be produced in both facilities.

We have disaster recovery plans in place for both facilities.

We have also undertaken a risk review to 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.

Dependence on key personnelThe 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 any of their respective Executive Officers or other key employees could have a material adverse effect on their businesses.

Risk mitigation – The Group undertakes performance evaluations and reviews to help it stay close to its key personnel. Where considered appropriate the Group also makes use of financial retention tools such as equity awards.

Loss of key customers/suppliersThe Group is dependent on retaining its key customers and suppliers. Should the Group lose a number of its key customers or a key supplier this could have a material impact on the Group’s business financial condition and results of operations. However, for the year ended 31 December 2016, no one customer accounted for more than 7% 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 Management team. On the supply side we conduct regular audits of our key suppliers and in addition keep large amounts of safety inventory of key components.

Product recallA 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, that 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.

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 our 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, the introduction of new products or services by the Group, or by our 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 downturn 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.

Information Technology SystemsThe business of the Group relies to a significant extent on information technology systems used in the daily operations of its operating subsidiaries. Any failure or impairment of those systems or any inability to transfer data onto any new systems introduced could cause a loss of business and/or damage to the reputation of the Group together with significant remedial costs. The Group is also potentially exposed to cyber-attacks of its internal systems or website or software viruses in general which could have an adverse impact on the business

Risk mitigation – The Group has disaster recovery plans in place to help deal with disruption including information technology issues.

The Group’s key data is replicated on different sites and backed up or is held in the cloud. The Group has firewall and other data security infrastructure to protect ourselves from outside threats. It also operates policies to prevent employees using unauthorised software inside the Company’s premises which could introduce a virus or malware into the Group’s internal systems.

Risks relating to regulation and taxationThe 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 – The Group hires employees with relevant skills and uses external advisors to keep up-to-date with changes in regulations and to remain compliant.

The Group also employs a treasurer who keeps our taxation position under continual review.

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 2015 or 2016. The financial information for the year ended 31 December 2015 is derived from the XP Power Limited statutory accounts for the year ended 31 December 2015, 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 2016 will be finalised on the basis of the financial information presented by the Directors in this preliminary 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 preliminary 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 8 March 2017.