Last checked at 25 Feb 2008 07:00
25 February 2008 XP Power Limited ("XP Power" or "the Group") Results for the Year Ended 31 December 2007XP Power, one of the world's leading providers of power supply solutions to themid-tier of the electronics industry, today announces results for the yearended 31 December 2007.FINANCIAL HIGHLIGHTS‚£ Millions Year Year ended ended 31 December 31 December 2007 2006 Income and expenditure Revenue 66.3 78.7 Gross profit 28.0 29.2 Gross profit % 42.2% 37.1% Profit before tax 5.0 8.0
Profit before tax, amortisation of intangibles associated with acquisitions ‚£0.3 million (2006: ‚£0.3 million) and 7.7 9.3 restructuring charges associated with moving to Singapore ‚£2.4 million (2006: ‚£1.0 million related to third party
terminations) Basic earnings per share 17.9p 27.9p Diluted earnings per share 17.8p 27.5p
Diluted earnings per share adjusted for the amortisation of intangibles associated with acquisitions and restructuring 31.4p 32.8p charges
Proposed final dividend per share 11.0p
10.0p
Total dividend per share (see note 6) 20.0p
18.0p HIGHLIGHTS
- Gross margin improves by 5.1% to 42.2% (2006: 37.1%) resulting from an increased amount
of XP Power intellectual property
- Own brand sales now represent 73% of revenues (2006:66%)
- Improved competitive position due to move to Asia
- Transition of the Company to a manufacturer enables penetration of larger customers
- Dividend to be increased by 11% to 20p per share
Larry Tracey, Executive Chairman, commented:
"Margin targets achieved, revenue growth is now the focus."
Enquiries:
XP Power Limited Larry Tracey, Executive Chairman 0118 984 5515James Peters, Deputy Chairman Duncan Penny, Chief Executive OfficerWeber Shandwick Financial 020 7067 0700
Terry Garrett, Nick Dibden, Hannah Marwood
Notes to editors:
XP 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 segments itsbusiness into Communications, Defence and Avionics, Industrial and Medical. Byservicing these markets, XP provides investors with access to technology andindustrial sectors of the worldwide electronics market.
The market is highly fragmented and made up of a large number of Original Equipment Manufacturers who source standard and modified standard power supplies from several hundred power supply companies.
The Investor Presentation covering XP's results will be available on the XP website at 9.30am on 25 February 2008.
For further information, please visit www.xppower.com
Chairman's statement XP Power Limited ("XP" or "the Group") Preliminary Results for the Year Ended 31 December 2007 Chairman's StatementBusiness PerformanceXP's revenues declined from ‚£78.7 million in 2006 to ‚£66.3 million in 2007.This reduction of 16% is disappointing. The discontinued third party businessaccounted for 12% of the reduction and the weakness of the dollar reducedrevenues on translation by 4%. Our ongoing business was flat for the year withgrowth in the first half being offset by a decline in the second half. Wecontinue to believe that our new product pipeline will result in revenue growthonce the current macro economic climate for capital equipment improves.Adjusted earnings per share of 31.4 pence is down by 4% from 2006 (2006: 32.8pence).StrategyIn 2003 we set ourselves the goal of achieving gross margins in excess of 40%by 2007. This goal was achieved during the year. Further modest improvement isexpected as we have now bought out our joint venture manufacturing partner inKunshan, China. More of the Group's resources are now in Asia and the move ofour headquarters to Singapore was completed in spring 2007.The change to producing our own I.P. products in our wholly owned manufacturingfacility is attractive to our target customer base. This enhances the mediumterm revenue prospects for XP Power.
Dividend
Despite the reduction in earnings we are proposing a final dividend of 11 penceper share at the annual general meeting on 26 March 2008. The total dividendfor 2007 of 20 pence represents an 11% increase on the 2006 payment (2006:
18pence).OutlookOur customers produce capital equipment and any downturn in global demand fortheir products affects our potential revenue. We believe that our competitiveposition is strong and that should enable us to take market share and increaserevenues when the economic climate improves.
Larry Tracey - Executive Chairman
Chief Executive's Review
The Chief Executive's Review is prepared solely to provide additionalinformation to shareholders to assess the Company's strategy and the potentialfor that strategy to succeed, and should not be relied on by any other party orfor any other purpose.The Chief Executive's Review contains certain forward-looking statements and(a) these statements are made in good faith based on the information availableup to the time of the approval of this report and (b) these statements shouldbe treated with caution due to the inherent uncertainties, including botheconomic and business risk factors, underlying any such forward lookinginformation.
Landmark Year
2007 has been a landmark year in the Group's history. On 24 April 2007 theCompany completed its Scheme of Arrangement to move the domicile of the parentcompany to Singapore. We are rapidly becoming a much more Asian centricorganisation. In parallel with this fundamental change we also announced thebuy out of our manufacturing joint venture with Fortron Source. From 1 January2008 XP became a "fully fledged" Asian manufacturer.Since our London Stock Exchange Listing in 2000, XP has transformed itself froma specialist distributor to a successful designer, seller and now manufacturerof electronic power supplies. This strategy is enabling us to make inroads intomuch larger customers. We have also realised a steady and dramatic increase inour gross margins from 28.0% in 2000 to 42.2% in 2007 reflecting the resourceswe have deployed in product development to increase the proportion of revenuesgenerated from our own intellectual property.Our business model today has developed substantially since 2000 and we considerthat we are excellently positioned for the time when greater confidence returnsto our markets.AsiaAsia is increasingly important to our industry and to our own internaloperations. For some time we have seen a trend where our customers, whogenerally perform their product development and design work in Europe and NorthAmerica, are increasingly manufacturing and selling their end products in Asia.It has been essential for us to put resource in place in Asia to support thesecustomers technically and logistically. More companies, and in particular ourlarger customers, are now building product design teams in Asia. It is clearthat Asia will no longer just be the place where electronic products aremanufactured but also increasingly where they are designed and the intellectualproperty is created.In conjunction with these changes we are observing that within our customers,our supply chain has become dominated by Asian manufacturers. The majority ofthe product we sell is manufactured in Asia and we have put in place varioussupply chain operations across Asia to support our manufacturing activitieswhether they be within our own facilities or outsourced. It is important thatour purchasing people are in the same time zone and speak the same language asour component suppliers. We also believe that our future competition will emerge from Asia rather thanEurope or North America. In order to compete in this climate we will need tohave the same low cost structure as these emerging companies and access to theplentiful and talented work force in Asia.
For the reasons set out above we concluded that we needed to not only build resource in Asia but locate our headquarters there so we could view the world from an Asian perspective to take advantage of the opportunities as they present themselves.
Asia is rapidly changing the shape of the world economy and we are determined to take advantage and be a part of this.
Manufacturing
At the end of 2005 we announced a 50:50 manufacturing joint venture in Kunshan,close to Shanghai in China, in association with Fortron Source, a leading powersupply manufacturer. Fortron Source has been an excellent contractmanufacturing partner of XP for many years and operates a number of powersupply manufacturing facilities in China. Fortron Source is renowned in theindustry for excellent quality and cost efficiency.This manufacturing joint venture has been extremely beneficial to XP. By movingcloser to the manufacturing end of the supply chain we have been able totransfer knowledge into our design centres to assist designing in componentsthat are lower cost and/or easier to source in Asia. This has helped us drivedown our product cost. More significantly the manufacturing joint venture hasenabled us to target a whole new group of customers who will only do businessdirectly with a manufacturer. As we engaged with this new group of customers itbecame clear that the quality standards they demand from their suppliersrequire us to have complete control of the manufacturing facilities andprocesses. For this reason we needed to become a "fully fledged" manufacturer.Consequently, in November 2007 we announced an agreement to buy out the jointventure for US$2.5 million (approximately ‚£1.2 million) in cash and takecomplete control from 1 January 2008.
We expect that our new product families will be manufactured in our Kunshan facility.
Product Strategy
In April 2006 we made a decision to discontinue selling a number of third partyproduct lines in order to focus on our own product lines. These lines weregenerally low margin and contributed little compared to the resource theyconsumed. We stopped taking orders for these third party product lines from 1July 2006. Later in 2006 two other third party lines decided to terminate theirrelationship with XP as a result of our product strategy. Our 2006 revenuesincluded approximately ‚£9.0 million from the discontinued product lines, whichis approximately ‚£12.0 million on an annualised basis. Despite the resultantdecline in revenue in 2007 we believe it was the right approach as it hasallowed us to increase our emphasis on our larger target customers.Approximately a quarter of our revenues are still generated from selling thirdparty lines. The remaining partnerships are important to our success as theyallow us to meet our customers' needs in areas where we do not have suitableproduct of our own. We share product roadmaps with these partners to avoidconflict between our respective product lines.
Financial Performance
Our financial performance has been impacted by three main factors during 2007:
The deliberate termination of certain third party lines during 2006 which is discussed above;
Softer end markets in North America and the UK in the second half of 2007; and
The marked weakening of the US Dollar versus Sterling resulting in significant translational effects when converting our US Dollar revenues and earnings to Sterling for reporting purposes.
The average exchange rate used to translate our US Dollar earnings in 2007 wasapproximately 2.00 US Dollars to Sterling compared with approximately 1.83 in2006. If the average rate of 1.83 experienced in 2006 had continued in 2007 wewould have reported additional revenues of ‚£3.3 million in the year to 31December 2007.Overall revenues decreased by 15.8% to ‚£66.3 million (2006: ‚£78.7 million). Asset out above ‚£9.0 million of this decrease can be attributed to termination ofthe third party lines and ‚£3.3 million to the translation effect of the weakerUS dollar. Of the product shipped in 2007, 73% was our own XP brand, up from66% in the same period a year ago. This helped drive a significant increase ingross margin to 42.2% (2006: 37.1%). This is our eighth successive year ofgross margin improvement and justifies our strategy.The Group made a profit before tax of ‚£5.0 million compared to a profit beforetax of ‚£8.0 million in the prior year. The profit before tax includes a chargeof ‚£0.3 million (2006: ‚£0.3 million) for the amortisation of intangiblesresulting from the acquisition of Powersolve Electronics Limited (Powersolve)and ‚£2.4 million of charges relating to the Scheme of Arrangement and costsassociated with the move to Singapore (2006: ‚£1.0 million relating to thetermination of third party lines as discussed above). After adding back theseitems the adjusted profit before tax was therefore ‚£7.7 million in 2007compared with ‚£9.3 million in 2006. The basic earnings per share for the yearended 31 December 2007 was 17.9p (2006: 27.9p). The diluted earnings per sharefor the year ended 31 December 2007 was 17.8p (2006: 27.5 p). After adjustingfor the charges relating to the Scheme of Arrangement and costs associated withthe move to Singapore and the amortisation of intangibles associated withacquisitions, the diluted earnings per share was 31.4 pence (2006: 32.8 pence).The 2006 earnings per share have been adjusted by ‚£0.8 million, or 4.2 pence,relating to dividends paid to minority shareholders in 2006. Continued strong margins allowed us to generate free cash flow of ‚£5.7 millionduring 2007 (2006: ‚£3.7 million). After returning ‚£3.6 million to shareholdersin the form of dividends, net debt (cash of ‚£3.6 million less borrowings of ‚£23.0 million) at 31 December 2007 was ‚£19.4 million compared with ‚£17.8 millionat 31 December 2006. Free cash flow is defined as net cash flow from operatingactivities plus dividends from associates; less net purchases of property,plant and equipment; less capitalised development costs; plus exceptionalcharges; less interest paid.
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. These teams identify the customers with whomwe consider we should be working in each of these sectors, support the salespeople to penetrate these accounts and work with the product developmentorganisation to specify future product requirements.
This structure has served us well and should help to drive future revenue growth. 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 market sectors we serve. Accordingly, we will be focusing more resource on winning programmes with larger customers.
Markets
As reported in our interim statement for the six months to 30 June 2007 andreiterated in our trading update issued at the end of October 2007 the marketswe serve have been soft in the second half of 2007 particularly in the UK andNorth America. As noted above, this was exacerbated by the weakening of the USDollar. Although our program design-in base and program identification remainsgood it is difficult to predict what our customers' demand is likely to be in2008 given the widely reported macro economic concerns in North America.Despite the current economic uncertainty we have not, as yet, seen any changein pricing pressure in the market. We do see increased pressure on input costsdue to the gradual increase in the strength of the Chinese currency which isexpected to continue plus labour cost increases in China but these should beoffset by improvements in component costing on our new products.
Product Development
Offering our target customers industry leading products is a key component ofXP's strategy, therefore product development is vital to the long-term successof our business. We continue to commit more resource to this area in line withour strategy of expanding our own brand product portfolio. We plan to open anew design centre in Singapore during 2008.
We expect to release a number of important products to the market during 2008.
Duncan Penny - Chief Executive
Consolidated Income Statementfor the financial year ended 31 December 2007‚£ Millions Note 2007 2006 Restated Sales 4 66.3 78.7 Cost of sales (38.3) (49.5)Gross profit 28.0 29.2 Expenses Distribution and marketing costs (16.4) (16.4) Administrative costs (0.8) (0.7) Research and development costs (1.8) (1.9) Reorganisation costs 5 (2.4) (1.0) Other operating income 0.1 0.1 Operating profit 6.7 9.3 Finance cost (1.7) (1.3) Profit before tax 4 5.0 8.0 Income tax expense (1.4) (2.0) Total profit/(loss) 3.6 6.0 Attributable to:
Equity holders of the Company 3.4
5.2
Minority interests (2006 restated) 7 0.2
0.8 Total profit 3.6 6.0
Earnings per share for profit from continuing operations attributable to equity holders of the Company (pence per share)
- Basic 7 17.9 27.9 - Diluted 7 17.8 27.5 - Diluted adjusted 7 31.4 32.8 Consolidated Balance Sheetfor the financial year ended 31 December 2007‚£ Millions Note 2007 2006 Restated ASSETS Current Assets Cash and cash equivalents 3.6 4.2 Derivative financial instruments - 0.1 Trade and other receivables 13.2 14.6 Inventories 10.5 11.1 Total current assets 27.3 30.0 Non-current assets Interest in associates 0.1 0.1 Property, plant and equipment 3.4 3.2 Goodwill 29.6 30.1 Intangible assets 3.2 2.6 ESOP loans to employees 3.0 2.6 Deferred income tax assets 0.4 0.6 Total non-current assets 39.7 39.2 Total assets 67.0 69.2 LIABILITIES Current liabilities Trade and other payables 8.0 9.6 Current income tax liabilities 2.4 2.4 Bank loans and overdraft 2.7 7.6 Provisions for other liabilities and charges 0.1 1.9 Total curent liabilities 13.2 21.5 Non-current liabilities Borrowings 20.3 14.4 Deferred income tax liabilities 1.4 1.4 Provision for other liabilities and charges 2.3 2.5 Total non-current liabilities 24.0 18.3 Total liabilities 37.2 39.8 NET ASSETS 29.8 29.4 EQUITY Share capital 8 27.2 0.2 Share premium account 8 - 27.0 Merger reserve 0.2 0.2 Own shares 8 - (5.9) Translation reserve (as restated) 8 (2.5) (2.3) Retained earnings (as restated) 8 4.7 10.2 29.6 29.4 Minority interest 7 0.2 0.0 TOTAL EQUITY 29.8 29.4 Consolidated Cash Flow StatementYear ended 31 December 2007‚£ Millions 2007 2006 Restated
Cash flows from operating activities
Total profit 3.6 6.0 Adjustments for - Income tax expense 1.4 2.0
- Amortisation, depreciation and impairment
1.1 1.2 - Finance expenses 1.7 1.3
- Unrealised translation (gains)/losses
0.6 0.5 Change in the working capital - Inventories 0.6 (2.9)
- Trade and other receivables 1.3 0.1 - Trade and other payables (2.0) 0.4 Income tax paid (1.4) (2.5) Net cash provided by operating activities 6.9 6.1
Cash flows from investing activities Acquisition of a subsidiary, net of cash acquired -
(0.8)
Purchases and construction of the property, plant and equipment (0.9) (1.2)
Purchases of intangible assets (R&D)
(1.0) (0.9)
Payment of deferred consideration
(1.4) (1.0)
Net cash used in investing activities (3.3) (3.9)
Cash flows from financing activities
Proceeds from borrowings 5.9 3.2 Sale of treasury shares 0.4 0.4 Interest paid (1.7) (1.3) Dividends paid to equity holders of the Company
(3.6) (3.2)
Dividends paid to minority shareholders
(0.2) (0.8)
Net cash provided by financing activities 0.8 (1.7) Net increase/(decrease) in cash and cash equivalents 4.4 0.5 Cash and cash equivalents at beginning of financial year
(3.4) (3.9)
Effects of currency translation on cash and cash equivalents (0.1) -
Cash and cash equivalents at end of financial year 0.9 (3.4) ‚£ Millions 2007 2006 Net cash inflow from operating activities 6.9 6.1 Purchase of property, plant and equipment (0.9) (1.2) Development expenses capitalised (1.0) (0.9) Restructuring cost 2.4 1.0 Interest expense (1.7) (1.3) Free cash flow 5.7 3.7 XP Power Limited
Notes to the Results for the year ended 31 December 2007
General information
XP Power Limited (the "Company") is listed on the London Stock Exchange and incorporated and domiciled in Singapore.
These financial statements are presented in Pounds Sterling.
Reverse acquisition
The Company' was incorporated on 12 February 2007. On 24 April 2007 the Companybecame the holding company of XP Power plc pursuant to a scheme of arrangementunder section 425 of the Companies Act 1985 of the United Kingdom ('the Schemeof Arrangement').Under International Financial Reporting Standard ("IFRS") 3, BusinessCombinations, this Group reconstruction effected by the Scheme of Arrangementhas been accounted for as a reverse acquisition of the Company by XP Powerplc. This consolidated financial information issued in the name of the legalparent, the Company, accordingly has been prepared and presented in substanceas a continuation of the financial information of the legal subsidiary, XPPower plc. The following accounting treatment has been applied in respect ofthe reverse acquisition:
the assets and liabilities of the legal subsidiary, XP Power plc, are recognized and measured in the consolidated financial information at the pre-combination carrying amounts, without restatement to fair values;
the retained earnings and other equity balances recognized in the consolidatedfinancial information reflect the retained earnings and other equity balancesof XP Power plc immediately before the business combination. The results of theperiod from 1 January 2007 to the date of the business combination are those ofXP Power plc, as the Company did not trade prior to the transaction. However,the equity structure appearing in the consolidated financial statements (i.e.the number and type of equity issued) reflect the equity structure of theCompany, being the legal parent to effect the combination; andThe comparative figures of the Group have not been audited. However they wereprepared based on the audited financial statements of the legal subsidiary, XPPower plc, for the year ended 31 December 2006.
Basis of accounting policies
2.1 Basis of preparation
The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union andtherefore the Group's financial statements comply with Article 4 of the EU IASRegulations.
The financial statements have been prepared on the historical cost basis. The principal accounting policies are set out below.
The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets, liabilities, income andexpenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying amounts of assets and liabilities that are not readily apparentfrom other sources.On 1 January 2007, the Group adopted the new standards, amendments andinterpretations that are mandatory for application from that date. Changes tothe Group's accounting policies have been made as required, in accordance withthe transitional provisions in the respective standards, amendments andinterpretations.The following are the new or amended IFRS and interpretations that are relevantto the Group:Amendments to IFRS 1 Presentation of Financial Statements - Capital DisclosuresIFRS 7 Financial Instruments: DisclosuresIFRIC 8 Scope of IFRS 2IFRIC 10 Interim Financial Reporting and Impairment
The adoption of the above IFRS interpretations did not result in any substantial changes to the Group's accounting policies or any significant impact on the disclosures in this Earnings' Release. IFRS 7 and the complementary amended IFRS 1 introduce new disclosures relating to financial instruments and capital respectively which will be reflected in the audited financial statements.
The Group has not applied early adoption of any new Standards or interpretations.
Foreign currencies
Functional and presentation currency
Items included in the financial statements of each entity in the Group aremeasured using the currency of the primary economic environment in which theentity operates ("functional currency"). The financial statements are presentedin Pounds Sterling.The financial statements are being presented in Pounds Sterling, as themajority of the Company's shareholders are based in the UK and the Company islisted on the London Stock Exchange. It is the currency that the directors ofthe Group use when controlling and monitoring the performance and financialposition of the Group.
Foreign currency transactions and balances
Transactions in foreign currencies are translated into the functional currencyat the exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of such transactionsand from the translation at year-end exchange rates of monetary assets andliabilities denominated in foreign currencies are recognized in the incomestatement, except when deferred in equity as qualifying cash flow hedges andqualifying net investment hedges.
(c) Group companies
The assets and liabilities of the Group's foreign operations are translated atexchange rates prevailing on the balance sheet date. Income and expense itemsare translated at the average exchange rates for the period unless exchangerates fluctuate significantly. Exchange differences arising, if any, areclassified as equity and transferred into the Group's translation reserve.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on the acquisitions before the date of transition to IFRS as Pound Sterling denominated assets and liabilities converted using the exchange rates at the dates of acquisition.
Revenue recognition
Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods provided in the normalcourse of business, net of discounts, Value Added Tax/Goods and Services Taxand other sales related taxes.a) Sales of goods are recognised when a Group entity has shipped the goods tolocations specified by its customers in accordance with the sales contract andthe collectability of the related receivable is reasonably assured.
b) Interest income is recognised using the effective interest method.
Group accounting
(a) Subsidiaries
The consolidated financial statements incorporate the financial statements 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 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.In preparing the consolidated financial statements, transactions, balances andunrealised gains on transactions between group entities are eliminated.Unrealised losses are also eliminated but are considered an impairmentindicator of the asset transferred. Accounting policies of subsidiaries havebeen changed where necessary to ensure consistency with the policies adopted bythe Group.Minority interests are that part of net results of operations and of net assetsof a subsidiary attributable to the interests, which are not owned directly, orindirectly by the Group. They are measured at the minorities' share of fairvalue of the subsidiaries' identifiable assets and liabilities at the date ofacquisition by the Group and the minorities' share of changes in equity sincethe date of acquisition, except when the minorities' share of losses in asubsidiary exceeds its interests in the equity of that subsidiary. In suchcases, the excess and further losses applicable to the minorities areattributed to the equity holders of the Company, unless the minorities have abinding obligation to, and are able to, make good the losses. When thatsubsidiary subsequently reports profits, the profits applicable to the minorityinterests are attributed to the equity holders of the Company until theminorities' share of losses previously absorbed by the equity holders of theCompany are fully recovered.The results of subsidiaries acquired or disposed of in the year are included inthe consolidated income statement from the effective date of acquisition or upto the effective date of disposal as appropriate.
(b) Transactions with minority interests
The Group applies a policy of treating transactions with minority interests astransactions with parties external to the Group. Disposals to minorityinterests result in gains and losses for the Group that are recognised in theincome statement.
Purchases from minority interests result in goodwill, being the difference between any consideration paid and the Group's incremental share of the carrying value of identifiable net assets of the subsidiary.
(c) Associated companies
Associated companies are entities over which the Group has significantinfluence, but not control, generally accompanied by a shareholding giving riseto between and including 20% and 50% of the voting rights. Investments inassociated companies are accounted for in the consolidated financial statementsusing the equity method of accounting. Investments in associated companies inthe consolidated balance sheet include goodwill (net of any accumulatedimpairment losses) identified on acquisition.Investments in associated companies are initially recognised at cost. The costof an acquisition is measured at the fair value of the assets given, equityinstruments issued or liabilities incurred or assumed at the date of exchange,plus costs directly attributable to the acquisition.In applying the equity method of accounting, the Group's share of itsassociated companies' post-acquisition profits or losses is recognised in theincome statement and its share of post-acquisition movements in reserves isrecognised in equity directly. These post-acquisition movements are adjustedagainst the carrying amount of the investment. When the Group's share of lossesin an associated company equals or exceeds its interest in the associatedcompany, including any other unsecured non-current receivables, the Group doesnot recognise further losses, unless it has obligations or has made payments onbehalf of the associated company.
Unrealised gains on transactions between the Group and its associated companies are eliminated to the extent of the Group's interest in the associated companies.
Unrealised losses are also eliminated unless the transaction provides evidenceof an impairment of the asset transferred. Accounting policies of associatedcompanies have been changed where necessary to ensure consistency with theaccounting policies adopted by the Group.
(d) Joint ventures
The Group's joint ventures are entities over which the Group has contractualarrangements to jointly share the control over the economic activity of theentities with one or more parties. The Group's interest in joint ventures isaccounted for in the consolidated financial statements using proportionateconsolidation.Proportionate consolidation involves combining the Group's share of the jointventure's income and expenses, assets and liabilities and cash flows of thejointly controlled entities on a line-by-line basis with similar items in theGroup's financial statements.When the Group sells assets to a joint venture, the Group recognises only theportion of unrealised gains or losses on the sale of assets that isattributable to the interest of the other ventures. The Group recognises thefull amount of any loss when the sale provides evidence of a reduction in thenet realisable value of current assets or an impairment loss.When the Group purchases assets from a joint venture, it does not recognise itsshare of the profits of the joint ventures arising from the Group's purchase ofassets until it resells the assets to an independently party. However, a losson the transaction is recognised immediately if the loss provides evidence of areduction in the net realisable value of current assets or an impairment loss.
The Group has changed accounting policies of joint ventures where necessary to ensure consistency with the accounting policies adopted.
Property, plant and equipment
Items of property, plant and equipment, including land and buildings, are stated at cost less accumulated depreciation and any recognised impairment losses.
The cost of an item of property, plant and equipment initially recognised includes its purchase price and any cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
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 leaseif shorterLong leasehold buildings - 2%
Long leasehold land is not depreciated. Long leasehold land relates to 99 year renewable land rent agreements in the UK.
The residual values, estimated useful lives and depreciation method of property, plant and equipment are reviewed, and adjusted as appropriate, at each balance sheet date. The effects of any revision are recognised in the income statement when the changes arise.
Subsequent expenditure relating to property, plant and equipment that hasalready been recognised is added to the carrying amount of the asset only whenit is probable that future economic benefits associated with the item will flowto the Group and the cost of the item can be measured reliably. All otherrepair and maintenance expense is recognised in the income statement whenincurred.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset, and is recognised in the income statement.
Intangible assets
Goodwill on acquisitions
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition.
Goodwill is recognised as an asset and reviewed for impairment at leastannually. For the purpose of impairment testing, goodwill is allocated to eachof the Group's cash-generating-units ("CGU") expected to benefit from synergiesarising from the business combination. An impairment loss is recognised whenthe carrying amount of a CGU, including the goodwill, exceeds the recoverableamount of the CGU. Recoverable amount of a CGU is the higher of the CGU's fairvalue less cost to sell and value-in-use. The total impairment loss of a CGU isallocated first to reduce the carrying amount of goodwill allocated to the CGUand then to the other assets of the CGU pro-rata on the basis of the carryingamount of each asset in the CGU.
Any impairment is recognised immediately in profit or loss and is not subsequently reversed.
On disposal of a subsidiary, associate or joint venture, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Internally generated intangible assets - research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the Group's product development 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 theexact nature of the project undertaken. Where no internally generatedintangible asset can be recognised, development expenditure is recognised as anexpense in the period in which it is incurred.
Impairment - non-financial assets
At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indicationthat those assets have suffered an impairment loss. If any such indicationexists, the recoverable amount of the asset is estimated in order to determinethe extent of the impairment loss (if any). Where the asset does not generatecash flows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs.
Borrowing costs
All borrowing costs are recognised in profit or loss using the effective interest method
Financial assetsClassificationThe Group classifies its financial assets depending on the purpose for whichthe assets were acquired. Management determines the classification of itsfinancial assets at initial recognition. The Group's financial assets compriseloans and receivables.Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They arepresented as current assets, except for those maturing later than 12 monthsafter the balance sheet date, which are presented as non-current assets. Loansand receivables are presented as "trade and other receivables" and "cash andcash equivalents" on the balance sheet.
Recognition/derecognition
Purchases and sales of financial assets are recognised on the trade-date - thedate on which the Group commits to purchase or sell the asset. Financial assetsare derecognised when the rights to receive cash flows from the financialassets have expired or have been transferred and the Group has transferredsubstantially all risks and rewards of ownership. On disposal of a financialasset, the difference between the carrying amount and the sale proceeds isrecognised in the income statement. Any amount in the fair value reserverelating to that asset is transferred to the income statement.
Measurement
Loans and receivables are initially recognised at fair value plus transaction costs and subsequently at amortised cost using the effective interest method.
Impairment
The Group assesses at each balance sheet date whether there is objectiveevidence that a loan or receivable is impaired and recognises an allowance forimpairment when such evidence exists. Significant financial difficulties of thedebtor, probability that the debtor will enter bankruptcy, and default orsignificant delay in payments are objective evidence that these financialassets are impaired.The carrying amount of these assets is reduced through the use of an impairmentallowance account, which is calculated as the difference between the carryingamount and the present value of estimated future cash flows, discounted at theoriginal effective interest rate. When the asset becomes uncollectible, it iswritten off against the allowance account. Subsequent recoveries of amountspreviously written off are recognised against the same line item in the incomestatement.The allowance for impairment loss account is reduced through the incomestatement in a subsequent period when the amount of impairment loss decreasesand the related decrease can be objectively measured. The carrying amount ofthe asset previously impaired is increased to the extent that the new carryingamount does not exceed the amortised cost had no impairment been recognised
inprior periodsLeasesLeases where substantially all risks and rewards incidental to ownership areretained by the lessors are classified as operating leases. Payments made underoperating leases (net of any incentives received from the lessors) arerecognised in the income statement on a straight-line basis over the period ofthe lease.
Derivative financial instruments and hedging activities
The Group's activities expose it primarily to the financial risks of changes inforeign currency exchange rates and interest rates. The Group periodically usesforeign exchange forward contracts to hedge the foreign currency exposures. TheGroup does not use derivative financial instruments for speculative purposes.
The fair value changes of the currency forward contracts are recognized in the income statement directly. The Group does not apply hedge accounting.
Fair value estimation of financial assets and liabilities
The fair values of financial instruments that are not traded in an activemarket are determined by using valuation techniques. The Group uses a varietyof methods and makes assumptions that are based on market conditions existingat each balance sheet date. Where appropriate, quoted market prices or dealerquotes for similar instruments are used. Valuation techniques, such asdiscounted cash flow analyses, are also used to determine the fair values ofthe financial instruments. The Group does not have any financial instrumentstraded in an active market.
The fair values of currency forwards are determined using actively quoted forward exchange rates.
The fair values of current financial assets and liabilities carried at amortised cost approximate their carrying amounts.
Inventories
Inventories 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 and reductions for estimated irrecoverable amounts.
Income taxes
The tax expense represents the sum of the tax currently payable and deferred tax.
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.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects 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.
Share based payments
The Group has applied the requirements of IFRS 2 Share-based Payments. Inaccordance with transitional provisions, IFRS 2 has been applied to all grantsof equity instruments after 7 November 2002 that were unvested as of 1 January2005.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. Ateach balance sheet date, the Group revises its estimates of the number ofshares under options that are expected to become exercisable on the vestingdate and recognises the impact of the revision of the estimates in the incomestatement, with a corresponding adjustment to the share option reserve over theremaining vesting period.
When the options are exercised, the proceeds received (net of transaction costs) and the related balance previously recognised in the share option reserve are credited to share capital account, when new ordinary shares are issued, or to the "treasury shares" account, when treasury shares are re-issued to employees.
Retirement benefit costsThe Group operates several defined contribution plans. Payments to definedcontribution retirement benefit schemes are charged as an expense as they falldue. The Group has no further payment obligations once the contributions havebeen paid.Employee leave entitlements
Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for leave as a result of services rendered by employees up to the balance sheet date.
Share capital and treasury shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new ordinary shares are deducted against the share capital account.
When any entity within the Group purchases the Company's ordinary shares('treasury share'), the consideration paid including any directly attributableincremental cost is presented as a component within equity attributable to theCompany's equity holders, until they are cancelled, sold or reissued.When treasury shares are subsequently cancelled, the cost of treasury sharesare deducted against the share capital account if the shares are purchased outof capital of the Company, or against the retained earnings of the Company ifthe shares are purchased out of earnings of the Company.When treasury shares are subsequently sold or reissued pursuant to the employeeshare option scheme, the cost of treasury shares is reversed from the treasuryshare account and the realised gain or loss on sale or reissue, net of anydirectly attributable incremental transaction costs and related income tax, isrecognised in the capital reserve of the Company.
Dividends to Company's shareholders
Dividends to the Company's shareholders are recognised when the dividends are approved for payment.
Segment reportingA business segment is a distinguishable component of the Group engaged inproviding products or services that are subject to risks and returns that aredifferent from those of other business segments. A geographical segment is adistinguishable component of the Group engaged in providing products orservices within a particular economic environment that is subject to risks andreturns that are different from those of segments operating in other economicenvironments.
Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies, as described in note 2, management has made the following judgements and estimations that have the most significant effect on the amounts recognised in the financial statements.
Recoverability of Capitalised R&D
During the year ‚£ 0.9 million of development costs were capitalised bringingthe total amount of development cost capitalised as intangible assets as of 31December 2007 to ‚£2.6 million, net of amortisation. Management has reviewed thebalances by project, compared the carrying amount to expected future revenuesand profits and is satisfied that no impairment exists and that the costscapitalised will be fully recovered as the products are launched to market. Newproduct projects are monitored regularly and should the technical or marketfeasibility of a new product be in question, the project would be cancelled andcapitalised costs to date removed from the balance sheet and charged to theincome statement.
(b) Impairment of Goodwill
The Group tests annually for impairment or more frequently if there are indications that goodwill might be impaired.
The recoverable amount of the goodwill is determined from value in usecalculations. The key assumptions and estimates for the value in usecalculations are those regarding the discount rates, growth rates and expectedchanges to sales and overheads during the period. Management estimates discountrates using pre-tax rates that reflect current market assessments of the timevalue of money and the risks specific to the cash generating units.The Group prepares cash flow forecasts derived from the most recent financialbudgets approved by management (which take into account past experience andindustry growth forecasts) for the next five years and extrapolates cash flowsfor the following five years assuming no growth from that date. The carryingamount of goodwill as at 31 December 2007 is ‚£ 29.6 million with no impairmentadjustment required for 2007.
(c) Estimation of future deferred consideration payments
As of the 31 December 2007 balance sheet date the Group has recorded estimatedfuture payments related to the payment for the remaining of 30.3% ofPowersolve. When discounted to present value the total of these payments areestimated at ‚£ 2.3 million and that amount is reflected on the balance sheet asof 2007 year end. Since the final payments will be dependent on the actualfuture financial performance of the business an estimate is required toapproximate future business conditions.
4. Segmental reporting
For management purposes, the Group is organised on a geographic basis bylocation of where the sales originated. This is the basis on which the Groupreports its primary segment information. The Group's products are essentially asingle class of business; however, from a sales and marketing perspective, theGroup's sales activities are organised by class of customer. The samegeographic assets deliver the same class of products to the different class ofcustomer. The sales information by class of customer has been provided toassist the user of the accounts; however, since the assets are not separated byclass of business further information on net assets and capital additions byclass of customers has not been provided.
Geographical segmentation
The geographical segmentation is as follows:
‚£ Millions 2007 2006 Revenue Europe 34.2 36.3 North America 35.6 45.7 Asia 9.4 0.6 Intercompany elimination (12.9) (3.9) Total Revenue 66.3 78.7 Profit on ordinary activities before taxation Europe 4.7 3.3 North America 5.4 6.2 Asia 1.1 0.4
Interest, corporate operating costs and associates (6.2) (1.9)
Profit on ordinary activities before taxation 5.0 8.0 Tax (1.4) (2.0) Profit after tax 3.6 6.0 Analysis by customer
The revenue by class of customer is as follows:
Year to 31 December 2007 Year to 31 December 2006 North North ‚£ Millions Europe America Asia Total Europe America Asia Total Communications 7.4 5.4 0.2 13.0 7.9 11.5 - 19.4 Industrial 14.6 17.9 2.5 35.0 15.4 22.8 0.6 38.8 Medical 5.1 8.9 - 14.0 4.7 8.3 - 13.0 Defence & avionics 3.5 0.8 - 4.3 6.6 0.9 - 7.5 Total 30.6 33.0 2.7 66.3 34.6 43.5 0.6 78.7 Reorganisation costs
The reorganisation costs associated with the Scheme of Arrangement and move of the parent company and headquarters to Singapore are analysed as follows:
‚£ Millions 2007 Relocation 1.0 Legal fees 0.4 Financial advice 0.3 Broker fees 0.3 Reporting accountants 0.2
Stock Exchange, Registrars, printing and other costs 0.1
Systems configuration and set up 0.1 Total 2.4
In 2006, there was a total restructuring cost of ‚£1.0 million. This was comprised of inventory write-offs of ‚£0.3 million associated with the termination of third party lines and ‚£0.7 million redundancy costs for the closure of Benelux and reduction of headcount in various parts of our business.
6. Dividends
Amounts recognised as distributions to equity holders in the period
2007 2006 Pence per ‚£ Pence per ‚£ share Millions share Millions Prior year final dividend paid 10.0 p* 1.9 9.0 p 1.7 Interim paid 9.0 p^ 1.7 8.0 p* 1.5 Total 19.0 p 3.6 17.0 p 3.2
* Dividends in respect of 2006 (18.0p)
^ Dividends in respect of 2007 (20.0p)
The proposed final dividend for 2007 is subject to approval by shareholders atthe Annual General Meeting scheduled for 26 March 2008 and has not beenincluded as a liability in these financial statements. It is proposed that thefinal dividend be paid on 4 April 2008 to members on the register as at 28March 2008.
7. Earnings per share
The calculations of the basic and diluted earnings per share attributable tothe ordinary equity holders of the parent Company are based on the followingdata: 2007 2006 Restated Earnings ‚£ Millions ‚£ Millions
Earnings for the purposes of basic and diluted earnings per share (profit for the year attributable to equity shareholders of the parent) 3.4 5.2 Amortisation of intangibles associated with acquisitions 0.3 0.3 Reorganisation costs (note 5)
2.4 1.0 Tax effect of restructuring (0.1) (0.3)
Earnings for adjusted earnings per share
6.0 6.2 Number of shares No. No.
Weighted average number of shares for the purposes of basic 18,946 18,627 earnings per share (thousands) Effect of potentially dilutive share options (thousands) 184 270 Weighted average number of shares for the purposes of Dilutive earnings per share (thousands) 19,130 18,897 Earnings per share from operations
Basic 17.9 p 27.9 p Diluted 17.8 p 27.5 p Diluted adjusted 31.4 p 32.8 p The minority shareholders are entitled to their share of any dividend declaredby Powersolve. The dividend payable to minority shareholders in for 2007 was ‚£0.2 million. This amount has been charged to the income statement in 2007. In2006 the dividend paid to minority shareholders was ‚£0.8 million. This amountwas not reflected in the 2006 income statement but has now been adjusted as aprior year adjustment.
The 2006 restatement resulted in the basic earnings per share changing from 32.2p to 27.9p and the adjusted diluted earnings per share changing from 37.0p to 32.8p.
8. Share capital and reserves
Called up share capital‚£ Millions 2007 2006
Authorised 35,000,000 ordinary shares 0.4
0.4
Allotted and fully paid 19,242,296 (2006: 20,704,621) 27.2
0.2
Under the Singapore Companies Act Chapter 50, share premium is part of theshare capital. Own shares‚£ Millions 2007 2006 Balance at 1 January (5.9) (6.7)
Cancellation of Treasury Shares 5.2
0.0 Sale of shares 0.7 0.8 Balance at 31 December 0.0 (5.9)
Prior to the Company's Scheme of Arrangement becoming effective on 24 April 2007 the Company held 1,462,325 shares in treasury. It was not possible for these shares to participate in the Scheme of Arrangement. Therefore all 1,462,325 treasury shares were cancelled on 19 April 2007.
The Company does not currently hold any treasury shares.
Translation reserve‚£ Millions 2007 2006 Restated Restated balance at 1 January (2.3)
(2.1)
Exchange differences on translation of foreign operations (0.2) (0.2) Balance at 31 December (2.5) (2.3) Retained earnings ‚£ Millions 2007 2006 Restated Restated balance at 1 January 10.2 8.6 Dividends paid (3.6) (3.2) Profit for the year 3.4 5.2
Cancellation of treasury shares (5.2)
- Sale of treasury shares (0.3) -
Tax on items taken directly to equity 0.2
0.1
Charge to equity for equity-settled share-based payments -
(0.5) Balance at 31 December 4.8 10.2 In the 2006 Annual Report and Accounts, the opening balances for thetranslation reserve and retained earnings were ‚£1.5 million and ‚£5.0 millionrespectively. A transfer of ‚£3.6 million has been made from the translationreserve to the retained earnings. This amount relates to the misclassificationbetween these two reserve accounts on the implementation of IFRS in 2005. Priorto the implementation of IFRS there was no requirement to disclose thetranslation reserve separately to the retained earnings figure. Included inthis ‚£3.6 million is ‚£0.5 million of exchange difference which should have beencharged to the income statement, but which was charged to the translationreserve in 2004 in error. The minority shareholders are entitled to their share of any dividend declared.The dividend payable to Powersolve minority shareholders in 2007 is ‚£0.2million. This amount has been charged to the income statement in 2007. In 2006the dividend paid to minority shareholders of Powersolve was ‚£0.5 million andMPI was ‚£0.3. These amounts were not reflected in the 2006 income statement buthave now been charged as a prior year adjustment.
9. Subsequent events
On 6 February 2008 following the decrease in US dollar interest rates the Groupentered into a three year interest rate swap agreement to swap its variable US$LIBOR interest rate on US$31.9 million for a fixed rate of interest of 3.23% inorder to manage exposure to interest rate movements. The Group pays a borrowingmargin of 1.0% to 1.5% depending on covenant performance on top of the fixedrate of 3.23%.10. Other information
The financial information set out in this announcement does not constitute theCompany's statutory accounts for the years ended 31 December 2007 or 2006. Thefinancial information for the year ended 31 December 2006 is derived from theXP Power plc statutory accounts for the year ended 31 December 2006, which havebeen delivered to the Registrar of Companies. The auditors reported on thoseaccounts; their report was unqualified and did not contain a statement unders237 (2) or (3) Companies Act 1985. The statutory accounts for the year ended31 December 2007 will be finalised on the basis of the financial informationpresented by the directors in this preliminary announcement and will bedelivered to the Accounting and Corporate Regulatory Authority in Singaporefollowing 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 statementsthat comply with IFRSs in March 2008.
This announcement was approved by the directors on 22 February 2008.
XP POWER PLC