Xp Power Regulatory News (XPP)

7 Feb 2006 07:02

XP Power PLC07 February 2006 Embargoed until 0700 7 February 2006 XP Power plc ("XP" or "the Group") Preliminary Results for the Year Ended 31 December 2005 XP Power, one of the world's leading providers of power supply solutions to themid-tier of the electronics industry, today announces Preliminary Results forthe year ended 31 December 2005. FINANCIAL HIGHLIGHTS £ Millions Year ended 31 Year ended 31 December 2005 December 2004 Income and expenditureRevenue 69.5 66.8 Gross margin 24.8 23.7Gross margin % 35.7% 35.5% Profit before tax 7.7 6.4 Profit before tax and amortisation of intangibles £0.1 million (2004: nil) 7.8 6.4 Cash flowNet cash flow from operating activities 7.3 4.1Free cash flow (see page 10) 5.3 3.5 Basic earnings per share 30.7p 23.1p Diluted earnings per share 30.1p 22.6p Diluted earnings per share adjusted for the amortisation of intangibles 30.6p 22.6p Proposed final dividend per share 9.0p 8.0p Total dividend per share (see note 5) 16.0p 14.0p HIGHLIGHTS • Further growth in own branded products, accounting for 59% of revenue (2004: 55%) • Improved diluted earnings per share • Investment in a manufacturing joint venture in China • Opening of office in Shanghai providing logistical and technical support • Share buy back of 1,030,000 shares for an average price of £3.427 during the period • Strong free cash flow (see page 10) • Dividend to be increased by 14% to 16p per share (see note 5) Larry Tracey, Executive Chairman said: "Technical accounting treatment was responsible for much of our growth inearnings during 2005. We aim to achieve reasonable growth in 2006 fromoperational successes. Growth in revenue is expected as is improvement in ourgross margins." Enquiries: XP Power plc www.xppower.comLarry Tracey, Executive Chairman 0118 984 5515James Peters, Deputy ChairmanDuncan Penny, Chief Executive Weber Shandwick Square Mile 020 7067 0700Kevin Smith/Nick Dibden Notes to editors: XP Power plc provides power supply solutions to the electronics industry. All electronic equipment needs a power supply. Power supplies convert theincoming AC supply into various levels of DC voltages to drive electroniccomponents and sub-assemblies within the end user's equipment. XP Power segmentsits business into Communications, Defence and Avionics, Industrial and Medical.By servicing these markets XP Power provides investors with access to technologyand industrial sectors of the North American and European electronics market. The market is highly fragmented and made up of a large number of small to mediumsized Original Equipment Manufacturers who source standard and modified standardpower supplies from several hundred power supply companies. For further information, please visit www.xppower.com XP Power plc ("XP" or "the Group") Preliminary Results for the Year Ended 31 December 2005 Business Performance The environment for industrial electronics, which is approximately 50% of ourbusiness, was somewhat tougher in 2005 than 2004. Despite this, XP has continuedto make progress toward our strategic goals. In 2005 59% of our revenues camefrom products containing XP intellectual property compared with 55% in 2004. Ourproduct development groups around the world have delivered a number of excitingnew products during 2005, which will help us achieve our goal of achieving 75%of our revenues from XP product in 2007. The business delivered earnings per share of 30.1 pence (2004: 22.6 pence) on adiluted basis. Approximately 4.0 pence of this improvement was due to the factthat, in accordance with International Accounting Standard (IAS) 38, £1.0million of product development costs were capitalised (2004: £nil). No productdevelopment costs were capitalised in the 2004 figures as the Group did not havethe necessary records and assessments in place during that time. Dividend The continued increase in profitability, together with strong free cash flow(see page 10), has enabled us to once again increase the dividend payable toshareholders. We will be proposing a final dividend of 9 pence per share at theAnnual General Meeting on 19 April 2006, making the total dividend for 2005 16pence per share (2004: 14 pence per share), an increase of 14%. In accordance with IAS 10, dividends are not recognised in the financialreporting information until they are declared. Strategy As we move into 2006 our strategy is a continuation of the goals set a few yearsago: • To focus on our key customers in the communications, defence and avionics, industrial and medical sectors • To expand the level of our own intellectual property in the product offering using our various design engineering teams across the world In recognition of the fact that an increasing number of our customers designtheir products in North America and Europe but outsource the manufacture ofthose products to Asia we have set up a small customer and manufacturing supportoffice in China during the latter part of 2005. In addition we have embarked ona manufacturing joint venture with one of our existing manufacturing partners. Financial Performance In the year to December 2005, XP continued to develop and expand its portfolioof own brand products and increase its geographic coverage. Revenues were up 4% at £69.5 million (2004: £66.8 million). Of the productshipped in 2005, 59% was our own XP brand, up from 55% in the same period a yearago. This generated an increase in gross margin but was partially offset bylower margins on distribution business and inventory write offs in the UK,together with start up costs associated with our manufacturing joint venture inChina. This is our sixth successive year of gross margin improvement, this year up 0.2%points to 35.7% and we expect to make further improvements in gross margin asthe proportion of revenues containing XP intellectual property continues togrow. Operating expenses were £16.7 million in the year compared with £17.1 million in2004. However, in accordance with the requirements of IAS 38, £1.0 million ofproduct development expenditure was capitalised in 2005 (2004: nil). Beforecapitalisation of product development costs, operating expenses would have been£17.7 million. Gross expenditure on product development was £2.6 million, or3.7% of revenue, compared to £2.3 million, or 3.4% of revenue in 2004. Profit before tax increased to £7.7 million from £6.4 million in the prior year.£1.0 million of this increase was due to the fact that £1.0m of productdevelopment costs is being capitalised (2004: £nil). Profit before tax alsoincludes a charge of £0.1 million for the amortisation of intangibles resultingfrom the acquisition of Powersolve Electronics Limited. The resultant dilutedearnings per share for the year ended 31 December 2005 was 30.1 pence (2004:22.6 pence). After adjusting for the amortisation of intangibles the dilutedearnings per share was 30.6 pence (2004: 22.6 pence). Continued strong margins allowed us to generate free cash flow (see page 10) of£5.3 million during 2005 (2004: £3.5 million). After returning £6.3 million toshareholders in the form of dividends and a share buy back, net debt (cash of£4.8 million less borrowings of £19.9 million, see note 7) at 31 December 2005was £15.1 million compared with £10.1 million at 31 December 2004. International Financial Reporting Standards (IFRS) This is the first year in which the Group is required to report its results inaccordance with IFRS as adopted by the EU. There are three main areas thataffect the reported earnings: • Goodwill amortisation - under IAS 38, the Group is no longer permitted to amortise goodwill. Prior to the conversion to IFRS, the 2004 financial statements included £1.4m of goodwill amortisation. This has been added back to profit and goodwill in restating the comparatives under IFRS. In accordance with IAS 36 the Group is required to conduct an annual impairment review regarding the carrying value of goodwill. The results of this review were that an impairment of the carrying value of goodwill is not required. • Development expenditure - the Group is now required to capitalise its development expenditure if it meets the criteria laid down by IAS 38 "Intangible Assets". In accordance with IAS 38, the Group has capitalised £1.0 million (net of amortisation) of product development costs in 2005, but we have not adjusted the 2004 figures as the Group did not have the necessary records and assessments in place. In 2005, the effect of this is to increase the reported profit before tax by £1.0 million and enhance earnings by approximately 4 pence per share. To assist the readers of our financial statements, we estimate that had the records and assessments been in place in 2004 the Group would have capitalised approximately £0.8 million of development expenditure in that year. • Amortisation of intangibles - the Group is now required to value any separately identifiable intangible assets acquired with a business. Intangible assets of £1.2 million arise on the acquisition of Powersolve Electronics Limited and an amortisation charge of £0.1 million has been made in 2005. Customers and Industry Segmentation We target customers in the communications, defence and avionics, industrial andmedical end user markets. We have senior strategic teams driving these sectorsin both North America and Europe, to identify the customers with whom weconsider we should be working in each of these sectors, support the sales peopleto penetrate these accounts and work with the product development organisationto determine what products we should develop. This structure has served us well and should help to drive future revenuegrowth. As our business grows in terms of scale and breadth of product offering,we are increasingly able to add value to the larger customers in the marketsectors we serve. Accordingly, we will be focusing more resource on winningprograms with larger customers during 2006. Partnerships Partnerships remain an important element of our business model, allowing XP tofocus on its core skills of market knowledge, design engineering and technicalsales. For high volume, low cost manufacturing, we will continue to partner witha select number of Asian manufacturers. Due to the diversity and scale of our customer base, we do not always have theinternal capacity to develop all the products our customers require. Wetherefore also partner with a small number of other organisations that designand manufacture products to our specification. In recent years the proportion of our sales derived from our own products hasincreased dramatically in line with our strategy of repositioning the businessas a manufacturer. We expect this trend to continue and that by 2007 75% of ourrevenues will come from products containing XP intellectual property. In orderto provide the broad array of products our customers require, we shall continueto partner with a number of third party manufacturers for the remaining 25%. Each of these partnerships is vital to the health of our business and we investmuch time and resource in nurturing these relationships. Manufacturing Joint Venture We are pleased to announce a 50:50 manufacturing joint venture with FortronSource, a leading power supply manufacturer situated in the Shanghai area ofChina. Fortron Source has been an excellent contract manufacturing partner of XPfor a number of years and operates a number of power supply manufacturingfacilities in China. Fortron Source is renowned in the industry for excellentquality and value for money. Many of the larger customers we deal with have reacted favourably to XP's moveinto manufacturing. We believe our joint venture will allow us to furtherpenetrate some of the key accounts we are targeting and result in more efficientsupply chain management. Set up costs of less than £0.1 million were incurred atthe end of 2005 and these have been charged to cost of sales in 2005. Set upcosts in the first half of 2006 will be charged to the profit and loss accountas incurred and should have an impact of less than 1 percentage point on ourgross margin. We expect that the facility will be producing pre-production units in the secondquarter and will be in full production during the third quarter. We expect thatthe facility will break even in the second half of 2006 and will be marginenhancing in 2007. XP has invested £0.9 million in this joint venture (excluding set up costswritten off). Markets After some improved momentum in the capital goods markets in 2004, last year hasbeen more difficult and we have struggled to show growth in our more maturemarkets in California and the UK. In other segments, we have enjoyed reasonablegrowth in continental Europe and from certain sales offices in North America. Revenues from the North American business decreased 4% to $68 million in 2005from $71 million in 2004. This decline was principally driven by lacklustredemand from the semiconductor manufacturing equipment sector where XP has abroad exposure to numerous accounts. Our UK business reported revenues of £20.6 million in 2005 up 16% from £17.8million in 2004. Of this revenue increase, £2.4 million came from theconsolidation of a new subsidiary. Despite increased revenues, operating profitof £3.0 million remained at the same level as 2004 due to weaker gross marginsresulting from the effects of a strengthening US dollar versus Sterling in thesecond half and more business going through distribution channels. The investment in our sales channel in Continental Europe is continuing to payoff with European revenues growing 19% to £11.2 million in 2005 from £9.4million in 2004. We believe we are taking market share principally from thesmall custom manufacturers which operate in these markets. We have considerablecost advantages over these local suppliers and the added advantage of being ableto offer a standard or modified standard product which is available more quicklythan the custom built designs we often compete with. China Operations During October 2005, XP opened its first office in Shanghai, China. Thisoperation carries out various support activities for our customers and ourmanufacturing operations. We continue to see a trend, particularly amongst ourlarger customers, where the design work is performed in Europe or North Americabut the customers' product is transferred to Asia for manufacture. Our Shanghaioperation now provides both local technical and logistical support to ourcustomers who chose to manufacture in China. As well as customer support activities XP Shanghai also undertakes qualityassurance audits of the various partners we use in Asia for outsourcedmanufacturing. The costs of opening and running this operation in 2005 were less than £0.2million. We have no plans for selling directly into China at this time. Product Development Offering our customers the widest product range in the marketplace is a keycomponent of XP's strategy. Therefore product development is vital to thelong-term success of our business. We continue to commit more resource to thisarea in line with our strategy of expanding our own brand product portfolio. In April 2005, the Group held its first worldwide sales conference and used thatas a springboard to launch its brand new flagship products. These included itsnew configurable fleXPower series, together with the ECM100 range which is theindustry's smallest convection cooled 100 Watt power supply. Both these productseries were developed by our Anaheim design team. The fleXPower series was recognised by Electronic Design News who listed theproduct in its "hot 100 products of 2005" and by Electronic Engineering ProductNews which placed fleXPower best in its category. In addition the Group launched its RCL175 range; a flexible quad output rangedeveloped to take market share from the multitude of small regional custommanufacturers with whom the Group competes. The RCL range is the first productrange to be developed by the team at XP Electronics, a company acquired at thebeginning of 2004. The small production runs and prototypes will be built in theUK with larger volumes being manufactured in Asia. This model will give XP anextremely quick time to market coupled with highly competitive pricing incomparison with small regional custom manufacturers. The award-winning ECM40/60 range launched in March 2004 is now starting to seeproduction revenues from the design-ins won at the time of its launch. We expectour new suite of products to show similar success in 2006. In addition to these flagship products the Group launched a further eight newproduct lines in its first Worldwide Catalogue issued during April 2005. In the last three years the Group has placed great emphasis on the release ofnew products to expand its XP product line. We consider that the Group has thebroadest product offering of any company in the industry. Furthermore, theseproducts have been specifically developed to meet the needs of the targetcustomers the Group has identified. These new products are gradually making upan ever-increasing proportion of our revenues and driving the increase in ourgross margins. Our product offering to our customers covers the whole range of options fromstandard product, to modified standard, through configurable to complete custombuild if required. In addition, we continue to partner with other manufacturerswho we consider to be the best in their specific areas of expertise. We willcontinue to sell other manufacturers' products where it makes sense for ourcustomers. Acquisitions XP Engineering Services (XPES) During October 2005 we completed the acquisition of the remaining 80% of theissued share capital of XP Engineering Services Limited ("XPES") that we did notalready own for a consideration of £480,000 in cash. XPES provides value added engineering services that enable customers tointegrate power supplies into their end user equipment more easily and costeffectively. This process may involve incorporating several power supplies intoone chassis, adding signals, special housings, thermal and EMC management andspecific cable harnesses or connectors. XP has worked very closely with XPES over the last four years and virtually allof its revenue comes from the Group. We consider that the acquisition of the remaining share capital of XPES willexpand the Group's value added engineering capabilities, enhance the Group'smargins as more of the intellectual property in this type of offering is ownedby XP; and add to XP's standard product design capability. MPI-XP Power A payment of 6.5 million Swiss Francs was made during December 2005 representingan instalment of 90% of the expected final consideration due for the purchase ofthe 75% of the issued share capital of MPI XP Power AG that XP does notcurrently own. The balance of the final payment is expected to be made inFebruary 2006. Powersolve Electronics Limited (Powersolve) In June 2005 we reached an agreement which committed the Group to acquire theremaining 60% of Powersolve Electronics Limited that we currently do not own.From June 2005 the results of Powersolve have been consolidated in the Groupresults. Revenue of £2.4 million and £0.5 million of pre tax profits were earnedby Powersolve during the period. Share Buy Back Between 9 November and 6 December 2005 the Company repurchased 1,030,000 sharesat an average price of £3.427. These shares are held in treasury to use forfunding the Company's various share option schemes or for other appropriatepurposes such as funding small acquisitions. At the year end there were1,849,325 shares remaining in treasury. People In June, we announced the resignation of Rich Sakakeeny as non-executivedirector of the Company. We have identified a new non-executive director whohas indicated his willingness to join the Board from April 2006. We strive to inspire all of our people to become experts in power to fulfil ouraim of delivering genuine value to our customers. The role of our field salesengineers, who interface directly with our customers' engineering teams todesign our power supplies into their systems, is crucial and we believe that wehave not only the largest direct sales force in our industry sector, but alsothe best trained and the most technical. The Group needs to attract and retain the best people in the industry - peoplewho will continue to drive the business forward and who, above all, act in ourcustomers' interests. XP has a culture that rewards excellent performance withprofit sharing, sales commissions and equity participation. Over 100 of our 322employees have some sort of equity interest in the Group. Outlook We expect that the market conditions in 2006 will improve marginally over thosein 2005, in particular in the semiconductor manufacturing equipment sector.Overall we would expect to grow our earnings again in 2006 at a healthy ratesubject to any external economic shocks. We believe that we remain on track to achieve a revenue mix of approximately 75%XP intellectual property and 25% from our third party vendors in 2007 whichshould result in improved gross margins. We should also expect furtherimprovements in our operational gearing as our investment in the geographicexpansion of our sales channel bears fruit. Larry TraceyExecutive Chairman Consolidated Income and Expenditure StatementYear Ended 31 December 2005 £ Millions Note 2005 2004 Revenue-continuing operations 69.5 66.8Cost of sales (44.7) (43.1) -------------------Gross profit 24.8 23.7 -------------------Selling and distribution costs (12.3) (11.9)Administrative expenses (4.4) (5.2)Share of results of associates 0.3 0.4Other operating income 0.1 - -------------------Profit from operations 8.5 7.0 ------------------- Finance costs (0.8) (0.6) --------------------Profit before tax 7.7 6.4 ------------------- Tax 4 (1.8) (1.9) -------------------Profit for the year from continuing operations attributable to equity shareholders of the parent 5.9 4.5 ------------------- Earnings per share from continuing operationsBasic 6 30.7p 23.1p Diluted 6 30.1p 22.6p Consolidated Statement of Recognised Income and ExpenseYear ended 31 December 2005 £ Millions 2005 2004 Exchange differences on translation of foreign operations 1.9 (1.3)Tax on items taken directly to equity (0.2) 0.4 -------------------Net income/(expense) recognised directly in equity 1.7 (0.9)Profit for the year 5.9 4.5 -------------------Total recognised income and expenses for the period attributable to equity shareholders of the parent. 7.6 3.6 ------------------- Consolidated Balance Sheet31 December 2005 £ Millions 2005 2004 Non-current assets Goodwill 27.8 23.1 Other intangible assets 2.2 - Property plant and equipment 3.0 2.5 Interests in associates 0.3 1.8 Deferred tax asset 0.3 0.1 Total non-current assets 33.6 27.5 Current assets Inventories 8.1 7.5 Trade and other receivables 17.2 13.1 Cash 4.8 2.7Total current assets 30.1 23.3 Current liabilities (32.6) (16.8)Net current (liabilities)/assets (2.5) 6.5 Total assets less current liabilities 31.1 34.0 Non-current liabilities (3.7) (8.1)-------------------------------------------------------------------------------Net assets 27.4 25.9------------------------------------------------------------------------------- Equity Share capital 0.2 0.2 Share premium account 27.0 27.0 Merger reserve 0.2 0.2 Own shares (6.7) (3.4) Translation reserve 1.7 (0.2) Retained earnings 5.0 2.1------------------------------------------------------------------------------- Equity attributable to equity shareholders of the parent 27.4 25.9------------------------------------------------------------------------------- Consolidated Cash Flow StatementYear Ended 31 December 2005 £ Millions Note 2005 2004 Net cash flow from operating activities 8 7.3 4.1 Investing activitiesDividends received from associates 0.6 0.2Purchases of property plant and equipment (0.8) (0.2)Acquisition of investment in associates (0.3) -Expenditure on product development (1.0) -Loan to majority shareholder of associated undertaking - (0.5)Acquisition of investment in subsidiary 9 (3.7) (0.6)Net cash used in investing activities (5.2) (1.1) Financing activities Dividends paid to minority shareholders - (0.1)Interest paid (0.8) (0.6)Equity dividends paid to XP Power shareholders (2.8) (2.5)Payments for share buy back (3.5) (3.5)Proceeds from sale of own shares 0.2 0.1Increase/(decrease) in bank loans 3.1 (0.3)Increase in bank overdrafts 4.0 2.1Overdraft acquired with subsidiary (0.2) -Net cash from/(used in) financing activities - (4.8) -------------------Net increase/(decrease) in cash 2.1 (1.8) ------------------- Cash at beginning of the year 2.7 4.5 -------------------Cash at the end of the year 4.8 2.7 ------------------- Reconciliation to free cash flow £ Millions Net cash inflow from operating activities 8 7.3 4.1Dividends from associates 0.6 0.2Purchase of property, plant and equipment (0.8) (0.2)Development expenses capitalised (1.0) -Interest paid (0.8) (0.6)Free cash flow 5.3 3.5 Notes to the preliminary statementYear ended 31 December 2005 1. General information XP Power plc is a company incorporated in the United Kingdom under the CompaniesAct 1985. These financial statements are presented in pounds sterling becausethat is the currency of the primary economic environment in which the groupoperates. Foreign operations are included in accordance with the policies setout in note 2. 2. Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) for the first time, as adopted by the EU. The financial information has been prepared on the historical cost basis. Theprincipal accounting policies are set out below. Basis of consolidationThe consolidated financial information incorporates the financial information ofthe Company and entities controlled by the Company (its subsidiaries). Controlis achieved where the Company has the power to govern the financial andoperating policies of an investee entity so as to obtain benefits from itsactivities. The results of subsidiaries acquired or disposed of in the year are included inthe consolidated income and expenditure statement from the effective date ofacquisition or up to the effective date of disposal as appropriate. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Business combinationsThe acquisition of subsidiaries is accounted for using the purchase method. Thecost of the acquisition is measured at the aggregate of the fair values, at thedate of exchange, of assets given, liabilities incurred or assumed, and equityinstruments issued by the Group in exchange for control of the acquiree, plusany costs directly attributable to the business combination. The acquiree'sidentifiable assets, liabilities and contingent liabilities that meet theconditions for recognition under IFRS 3 are recognised at their fair value atthe acquisition date, except for non-current assets (or disposal groups) thatare classified as held for resale in accordance with IFRS 5 Non Current AssetsHeld for Sale and Discontinued Operations, which are recognised and measured atfair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measuredat cost being the excess of the cost of the business combination over theGroup's interest in the net fair value of the identifiable assets, liabilitiesand contingent liabilities recognised. If, after reassessment the Group'sinterest in the net fair value of the acquiree's identifiable assets,liabilities and contingent liabilities exceeds the cost of the businesscombination, the excess is recognised immediately in profit or loss. Investment in associatesAn associate is an entity over which the group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting except whenclassified as held for sale (see below). Investments in associates are carriedin the balance sheet at cost as adjusted by post-acquisition changes in thegroup's share of the net assets of the associate, less any impairment in thevalue of individual investments. Losses of the associates in excess of thegroup's interest in those associates are not recognised. Any excess of the cost of acquisition over the Group's share of the fair valuesof the identifiable net assets of the associate at the date of acquisition isrecognised as goodwill. Any deficiency of the cost of acquisition below theGroup's share of the fair values of the identifiable net assets of the associateat the date of acquisition (i.e. discount on acquisition) is credited in profitand loss in the period of acquisition. Where a Group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. Losses may provide evidence of an impairment of the asset transferredin which case appropriate provision is made for impairment. Investment in associatesThe investment in the Joint Venture has been proportionately consolidated. GoodwillGoodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary, associate or jointly controlled entityat the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately in profit or loss and is notsubsequently reversed. On disposal of a subsidiary, associate or joint venture, the attributable amountof goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Revenue recognitionRevenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, VAT and other sales relatedtaxes. Sales of goods are recognised when goods are shipped and title has passed. Dividend income from investments is recognised when the shareholders' rights toreceive payment have been established. LeasingLeases are classified as finance leases whenever the terms of the lease transfersubstantially all of the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Foreign currenciesTransactions in currencies other than pounds sterling are recorded at the ratesof exchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Non-monetaryassets and liabilities carried at fair value that are denominated in foreigncurrencies are translated at the rates prevailing at the date when the fairvalue was determined. Gains and losses arising on retranslation are included innet profit and loss for the period, except for exchange differences arising onnon-monetary assets and liabilities where the changes in fair value arerecognised directly in equity. On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the periodunless exchange rates fluctuate significantly. Exchange differences arising, ifany, are classified as equity and transferred to the Group's translationreserve. Such translation differences are recognised as income or as expenses inthe period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. The Group has elected to treat goodwill and fairvalue adjustments arising on acquisitions before the date of transition to IFRSas sterling denominated assets and liabilities. Borrowing costsAll borrowing costs are recognised in profit or loss in the period in which theyare incurred. Retirement benefit costsPayments to defined contribution retirement benefit schemes are charged as anexpense as they fall due. TaxationThe tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on the taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Group intends to settle its current tax assets and liabilities on a netbasis. Property, plant and equipmentProperty, plant and equipment, including land and buildings, are stated at costless accumulated depreciation and any recognised impairment losses. Depreciation is charged so as to write off the cost or valuation of the assetsover their estimated useful lives, using the straight-line method, on thefollowing bases: Plant and machinery - 25 - 33%Motor vehicles - 25%Office equipment - 25 - 33%Leasehold improvements - 10% or over the life of the lease if shorterLong leasehold buildings - 2%Long leasehold land is not depreciated The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sale proceeds and the carrying amount of theasset, and is recognised in income. Internally generated intangible assets - research and development expenditureExpenditure on research activities is recognised as an expense in the period inwhich it is incurred. An internally generated intangible asset arising from the Group's productdevelopment is recognised only if all of the following conditions are met: • An asset is created that can be separately identified; • It is probable that the asset created will generate future economic benefits; and • The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basisover their useful lives, which vary between 4 and 7 years depending on the exactnature of the project undertaken. Where no internally generated intangible assetcan be recognised, development expenditure is recognised as an expense in theperiod in which it is incurred. Impairment of tangible and intangible assets excluding goodwillAt each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carryingamount, the carrying amount of the asset is reduced to its recoverable amount.An impairment loss is recognised as an expense immediately, unless the relevantasset is carried at a revalued amount, in which case the impairment loss istreated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the assetis increased to the revised estimate of its recoverable amount, but so that theincreased carrying amount does not exceed the carrying amount that would havebeen determined had no impairment loss been recognised for the asset in prioryears. A reversal of the impairment loss is recognised as income immediately,unless the relevant asset is carried at a revalued amount, in which case thereversal of the impairment loss is treated as a revaluation increase. InventoriesInventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and thoseoverheads that have been incurred in bringing the inventories to their presentlocation and condition. Cost is calculated using the weighted average method.Net realisable value represents the estimated selling price less all estimatedcosts of completion and costs to be incurred in marketing, selling anddistribution. Financial instrumentsFinancial assets and financial liabilities are recognised on the Group's balancesheet when the Group becomes a party to the contractual provisions of theinstrument. Trade receivablesTrade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. Bank borrowingsInterest-bearing bank loans and overdrafts are recorded at the proceedsreceived, net of direct issue costs. Finance charges, including premiums payableon settlement or redemption and direct issue costs, are accounted for on anaccruals basis to the profit and loss account and are added to the carryingamount of the instrument to the extent that they are not settled in the periodin which they arise. Trade payablesTrade payables are not interest bearing and are stated at their nominal value. Cash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits and othershort-term highly liquid investments that are readily convertible to a knownamount of cash and are subject to a an insignificant risk of changes in value. Equity instrumentsEquity instruments issued by the Group are recorded at the proceeds received,net of direct issue costs. The Group has elected not to restate any comparatives under IAS 32 and IAS 39. Share based paymentsThe Group has applied the requirements of IFRS 2 Share-based Payments. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1January 2005. The Group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vestingperiod, based on the Group's estimate of shares that will eventually vest. Usingthe Black Scholes valuation model, the charge to the Income and ExpenditureAccount and the affect on net assets is immaterial, therefore no charge isdisclosed. 3. Segmental reporting For management purposes, the Group is organised on a geographic basis bylocation. This is the basis on which the Group reports its primary segmentinformation. The Group's products are essentially a single class of business,however from a sales and marketing perspective, the Group's sales activities areorganised by class of customer. The same geographic assets deliver the sameclass of products to the different classes of customer. The sales information byclass of customer has been provided to assist the user of the accounts, howeversince the assets are not separated by classes of business further information onnet assets and capital additions by class of customers has not been provided. Geographic segmentThe geographical segmentation is as follows: £ Millions 2005 2004Revenue Europe 31.8 27.3 USA 37.7 39.5Total revenue 69.5 66.8 Profit on ordinary activities before taxation Europe 4.2 4.0 USA 5.3 3.6Interest, corporate operating costs and associates (1.8) (1.2) Profit before tax 7.7 6.4Tax (1.8) (1.9)Profit after tax 5.9 4.5 Other information Year to 31 December 2005 Year to 31 December 2004 Europe USA Total Europe USA Total Capital additions 0.8 0.3 1.1 0.2 0.1 0.3Depreciation 0.3 0.3 0.6 0.3 0.3 0.6 Year to 31 December 2005 Year to 31 December 2004Operating net assets Europe USA Total Europe USA TotalGoodwill 8.5 19.3 27.8 3.8 19.3 23.1Other intangible assets 1.2 1.0 2.2 - - -Property plant and equipment 2.2 0.8 3.0 1.7 0.8 2.5Interests in associates 0.3 - 0.3 1.8 - 1.8Deferred tax asset 0.3 0.3 - 0.1 0.1Inventories 3.6 4.5 8.1 3.0 4.5 7.5Trade and other receivables 10.2 7.0 17.2 6.8 6.3 13.1Current liabilities (7.7) (5.0) (12.7) (6.3) (5.8) (12.1)Non-current liabilities (3.7) - (3.7) - - - -------------------------------------------------------Total operating net assets 14.6 27.9 42.5 10.8 25.2 36.0 ------------------------------------------------------- Operating net assets are defined as net assets adjusted for net borrowings (cashof £4.8 million (2004: £2.5 million) less borrowings of £19.9 million (2004:£12.8 million) see note 7). Business segmentsThe revenue by class of customer was as follows: 31 December 2005 31 December 2004 Europe USA Total Europe USA TotalCommunications 6.8 11.0 17.8 5.0 11.1 16.1Industrial 16.8 16.3 33.1 15.4 17.8 33.2Medical 3.2 9.3 12.5 3.3 9.8 13.1Defence and Avionics 5.0 1.1 6.1 3.6 0.8 4.4 -------------------------------------------------------Total 31.8 37.7 69.5 27.3 39.5 66.8 ------------------------------------------------------- 4. Tax on profit on ordinary activities £ Millions 2005 2004 United Kingdom corporation tax - current year 3.2 0.5 - prior year (0.3) - Double tax relief (2.1) - Overseas corporation tax - current year 1.3 1.3 - prior year (0.8) -Share of associate tax charge 0.1 0.1Total current tax 1.4 1.9 Deferred tax 0.4 - Total tax 1.8 1.9 Taxation for other jurisdictions is calculated at the rates prevailing in therespective jurisdictions. The differences between the total current tax shown above and the amountcalculated by applying the standard rate of United Kingdom corporation tax tothe profit before tax is as follows. £ Millions 2005 2004 Profit on ordinary activities before tax 7.7 6.4 Tax on profit on ordinary activities at standard United Kingdom tax rate of 30% (2004: 30%) 2.3 1.9 Higher rates of overseas corporation tax 0.2 -Non-deductible expenditure 0.8 (0.1)Timing differences (0.4) 0.1Prior year adjustments (1.1) -Current tax charge for the period 1.8 1.9 Subject to the mix of the Group's profits in the various territories in which itoperates, the Group is not currently aware of any factors, other than the above,which may have a material impact on the future tax charges. 5. Dividends Amounts recognised as distributions to equity holders in the period Pence 2005 Pence 2004 per share £m per share £mPrior year final dividend paid 8.0p* 1.5 7.0p 1.4Interim paid 7.0p^ 1.3 6.0p* 1.2Total 15.0p 2.8 13.0p 2.6 Proposed final dividend for the year ended 31December 2005 of 9p (2004: 8p) per share 9.0p^ 1.7 8.0p 1.5 * Dividend in respect of 2004 16.0p^ Dividend in respect of 2005 14.0p 6. Earnings per shareContinuing operations The calculation of the basic and diluted earnings per share attributable to theordinary equity holders of the parent is based on the following data Earnings 2005 2004 £ millions £ millions Earnings for the purposes of basic and diluted earnings per share (profit for the year attributable to equity shareholders of the parent) 5.9 4.5Amortisation of intangibles 0.1 -Earnings for adjusted earnings per share 6.0 4.5 Number of shares Weighted average number of shares for the purposes of basic earnings per share (thousands) 19,240 19,510 Effect of dilutive potential ordinary shares Share options (thousands) 377 411 Weighted average number of shares for the purposes of dilutive earnings per share (thousands) 19,617 19,921 Basic earnings per share 30.7p 23.1pDiluted earnings per share 30.1p 22.6pDiluted earnings per share adjusted for the amortisation of intangibles 30.6p 22.6p 7. Borrowings £ Millions 2005 2004 The Group's borrowings are repayable as follows: On demand or within one year 19.9 4.7 In the second year - 8.1 In the third year - - Total 19.9 12.8 The bank loan at 31 December 2005 represents the amount drawn down under themulti-currency revolving credit facility from Bank of Scotland. This is due forrenewal in September 2006 and hence has been shown as a current liability. Theboard expects the facility to be renewed. 8. Notes to the cash flow statement £ Millions 2005 2004 Profit from operations (excluding associates) 8.2 6.6Adjustments for:Depreciation of property plant and equipment 0.6 0.6Foreign currency differences 1.5 (0.7)Operating cash flows before movements in working capital 10.3 6.5Increase in inventories - (0.7)Increase in receivables (3.0) (1.5)Decrease in payables 0.7 0.6Cash generated by operations 8.0 4.9Corporation tax paid (0.7) (0.8)Net cash inflow from operating activities 7.3 4.1 9. Acquisitions In 2005 the Group made a payment of Swiss Francs 7.2 million (£3.2 million),representing 90% of the expected consideration for the remaining 75% of theissued share capital of MPI-XP Power. The Group is committed to paying anadditional Swiss Francs 1 million (£0.4 million) in February 2006. In total thisis £1.1 million higher than the amount provided for in 2004, and is attributableto the increased profitability of the business in the year. The difference isshown as an adjustment to goodwill. In June 2005, the Group agreed to acquire the 60.6% of Powersolve ElectronicsLimited it did not already own. Balance sheets at acquisition £ Millions Powersolve XP Engineering Electronics Limited Services Limited Property plant and equipment 0.1 -Inventories 0.3 0.1Trade and other receivables 0.5 0.1Cash and overdrafts (0.2) -Trade and other payables (0.4) (0.1)Net assets acquired 0.3 0.1Fair value adjustments:Separable intangibles acquired 1.3 -Associated deferred tax liability (0.4) -Fair value of net assets acquired 1.2 0.1Goodwill 2.1 0.4Purchase consideration 3.3 0.5 Satisfied by;Cash - 0.5Deferred contingent consideration 3.3 -Total 3.3 0.5 The group acquired the 80% of XP Engineering Services Limited (XPES) it did notalready own for a total cash consideration of £480,000 in November 2005. Therewere no differences between the book value and the fair value of the assetsacquired. Goodwill of £400,000 was generated on the transaction. The goodwillrecorded within Investments of £0.2 million at 31 December 2004 when the companywas treated as an associate has been transferred to Goodwill. The goodwillarising on the acquisition is attributable to cost and revenue synergies whichwill enable the Group to generate enhanced profitability from XPES's value addedproducts. The group is committed to acquiring the remaining 60.6% of the shares ofPowersolve Electronics Limited between 2007 and 2012. There were no differencesbetween the book value and the fair value of the assets acquired. The currentbest estimate of the consideration payable is £4.4million. A prepayment of £0.5million was made to the majority shareholder during 2004 which is repayable infull in 2012, so the net amount payable between 2007 and 2012 is £3.9million.The goodwill recorded within Investments of £0.4 million at 31 December 2004when the company was treated as an associate has been transferred to Goodwill.The goodwill is attributable to cost and revenue synergies which will enable togroup to generate enhanced profitability from Powersolve's products as well asanticipated market benefits to the groups existing products. 10. Explanation of transition to IFRS This is the first year that the company has presented its financial statementsunder IFRS. The following disclosures are required in the year of transition.The last financial statements under UK GAAP were for the year ended 31 December2004 and the date of transition to IFRSs was therefore 1 January 2004. Reconciliation of equity at 1 January 2004 (date of transition to IFRS) Effect of transition£ Millions Note UK GAAP to IFRS IFRS Goodwill 22.4 - 22.4Property plant and equipment 2.9 - 2.9Interests in associates 1.1 - 1.1 ---------------------------------Total non-current assets 26.4 - 26.4 Inventories 6.6 - 6.6Trade and other receivables 11.5 - 11.5Cash 4.5 - 4.5 ---------------------------------Total current assets 22.6 - 22.6 ---------------------------------Total assets 49.0 - 49.0 ---------------------------------Current liabilities 1,2,3 (12.0) 0.9 (11.1)Non current liabilities (10.6) - (10.6) ---------------------------------Total liabilities (22.6) 0.9 (21.7) ---------------------------------Total assets less total liabilities 26.4 0.9 27.3 ---------------------------------Called up share capital 0.2 - 0.2Share premium account 27.0 - 27.0Merger reserve 0.2 - 0.2Translation reserve 1.1 1.1Retained earnings (2.2) 0.9 (1.3)Total shareholders equity 26.3 0.9 27.2Minority interest 0.1 - 0.1 ---------------------------------Total equity 26.4 0.9 27.3 ================================= Notes to the reconciliation of equity at 1 January 2004 1) IAS 10 'Events after the Balance Sheet Date' states that if an entitydeclares dividends to holders of equity instruments after the balance sheetdate, the entity shall not recognise those dividends as a liability at thebalance sheet date. Therefore the proposed dividend of £1.4 million has beenreversed. 2) IAS 19 'Employee benefits' requires entities to measure the expected costs ofaccumulated compensated absences which can be carried forward. An accrual forholiday pay of £0.2 million has been charged. 3) IAS 12 'Income Taxes' applies a balance sheet approach to deferred tax. Itrequires full provisioning based on temporary differences. The adoption of IFRSgives rise to a deferred tax adjustment. On the date of transition a deferredtax liability of £0.3 million is recognised in relation to goodwill amortisationallowable in the USA Reconciliation of equity at 31 December 2004 Effect of transition£ Millions Note UK GAAP to IFRS IFRS Goodwill 3 21.7 1.4 23.1Property plant and equipment 2.5 - 2.5Interests in associates 1.8 - 1.8Deferred tax asset 0.1 - 0.1 ---------------------------------Total non-current assets 26.1 1.4 27.5 Inventories 7.5 - 7.5Trade and other receivables 13.1 - 13.1Cash and cash equivalents 2.7 - 2.7 ---------------------------------Total current assets 23.3 - 23.3 ---------------------------------Total assets 49.4 1.4 50.8 ---------------------------------Current liabilities 1,2 (18.0) 1.2 (16.8)Non current liabilities (8.1) - (8.1) ---------------------------------Total liabilities (26.1) 1.2 (24.9) ---------------------------------Total assets less total liabilities 23.3 2.6 25.9 ---------------------------------Called up share capital 0.2 - 0.2Share premium account 27.0 - 27.0Merger reserve 0.2 - 0.2Own shares (3.4) - (3.4)Translation reserve (0.2) - (0.2)Retained earnings (0.5) 2.6 2.1 ---------------------------------Total equity 23.3 2.6 25.9 =================================Notes to the reconciliation of equity at 31 December 2004 1) IAS 10 'Events after the Balance Sheet Date' states that if an entitydeclares dividends to holders of equity instruments after the balance sheetdate, the entity shall not recognise those dividends as a liability at thebalance sheet date. Therefore the proposed dividend of £1.5 million has beenreversed. 2) IAS 19 'Employee benefits' requires entities to measure the expected costs ofaccumulated compensated absences which can be carried forward. An additionalaccrual for holiday pay of £0.1 million has been charged, making the totalbalance sheet provision £0.3 million. 3) IAS 38 'Intangible Assets' requires goodwill to have an indefinite usefullife. The goodwill was frozen on the date of transition to IFRS (1 January 2004)therefore the charge of £1.4 million for the year to 31 December 2004 is nolonger recognised under IFRS. 4) IAS 12 'Income Taxes' applies a balance sheet approach to deferred tax. Itrequires full provisioning based on temporary differences. The adoption of IFRSgives rise to a deferred tax adjustment. On the date of transition a deferredtax liability of £0.3 million is recognised in relation to goodwill amortisationallowable in the USA in 2003. This liability increases in 2004 to £0.4 milliongiving rise to a charge of £0.1 million to the income and expenditure account inthat period. Also, a deferred tax asset of £0.4 million is recognised for thefuture tax deduction on the exercise of share options. This is recognised inequity. Reconciliation of profit for 2004 Effect of transition£ Millions Note UK GAAP to IFRS IFRS Revenue 66.8 - 66.8Cost of sales (43.1) - (43.1) ---------------------------------Gross profit 23.7 - 23.7 ---------------------------------Distribution costs 2 (11.8) (0.1) (11.9)Administrative expenses 1 (6.6) 1.4 (5.2)Share of associates' operating profit 0.4 - 0.4Finance costs (0.6) - (0.6) --------------------------------- (18.6) 1.3 (17.3) ---------------------------------Profit before tax 5.1 1.3 6.4Tax expense 3 (1.8) (0.1) (1.9) ---------------------------------Net profit/(loss) 3.3 1.2 4.5 ================================= Notes to the reconciliation of profit for 2004 1) IAS 38 'Intangible Assets' requires goodwill to have an indefinite usefullife. The goodwill was frozen on the date of transition to IFRS (1 January 2004)therefore the charge of £1.4 million for the year to 31 December 2004 is nolonger recognised under IFRS. 2) IAS 19 'Employee benefits' requires entities to measure the expected costs ofaccumulated compensated absences which can be carried forward. An accrual forholiday pay of £0.1 million has been charged. 3) The adoption of IFRS gives rise to a deferred tax adjustment. On the date oftransition a deferred tax liability of £0.3 million is recognised in relation togoodwill amortisation allowable in the USA in 2003. This liability increases in2004 to £0.4 million giving rise to a charge of £0.1 million to the income andexpenditure account in that period. 4) A deferred tax asset of £0.4 million is recognised for the future taxdeduction on the exercise of share options. This is recognised in equity. 11. General The financial information set out in this announcement does not constitute theCompany's statutory accounts for the years ended 31 December 2005 or 2004. Thefinancial information for the year ended 31 December 2004 is derived from the XPPower plc statutory accounts for the year ended 31 December 2004 as amended forthe adoption of International Accounting Standards, which have been delivered tothe Registrar of Companies. The auditors reported on those accounts; theirreport was unqualified and did not contain a statement under s237 (2) or (3)Companies Act 1985. The statutory accounts for the year ended 31 December 2005will be finalised on the basis of the financial information presented by thedirectors in this preliminary announcement and will be delivered to theRegistrar of Companies following the Company's Annual General Meeting. Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company expects to publish full financial statements thatcomply with IFRSs in March 2006. This announcement was approved by the directors on 6 February 2006. This information is provided by RNS The company news service from the London Stock Exchange