REG-XP Power Ltd: Interim Results
01/08/2023 07:15
1 August 2023
XP Power Limited
Interim Results for the six months ended 30 June 2023
Significantly improved performance, full year outlook unchanged, longer term
outlook continues to be very strong
XP Power, one of the world's leading developers and manufacturers of critical
power control solutions for the Industrial Technology, Healthcare and
Semiconductor Manufacturing Equipment sectors, today announces its interim
results for the six months ended 30 June 2023.
Six months ended 30 June 2023 Six months ended 30 June 2022 % change actual exchange rate % change constant exchange rate
Order intake £115.6m £193.1m (40)% (44)%
Revenue £160.2m £123.6m 30% 24%
Gross margin 41.8% 40.2% 160bps 160bps
Total dividend per share 37.0p 37.0p -%
Adjusted
Adjusted operating profit 1 £21.8m £15.0m 45% 36%
Adjusted profit before tax 1 £15.8m £13.8m 14% -%
Adjusted diluted earnings per share 1 59.1p 52.2p 13%
Reported
Operating profit/(loss) £17.3m £(45.2)m 138%
Profit/(loss) before tax £10.9m £(47.4)m 123%
Diluted earnings/(loss) per share 38.7p (180.6)p 121%
Operating cash flow £27.5m £(13.1)m 310%
Net debt £148.4m £102.0m 45%
1For details on adjusted measures refer to note 5 and note 8 of the
consolidated financial statements.
Highlights:
* The trading performance in the last four quarters to June 2023 was much
improved as supply chain conditions stabilised, and better reflects the
Group’s capability.
* Revenue in the first half grew 30% compared to the prior year on a reported
basis and 24% at constant currency, with good performances in all sectors and
improving run rate momentum during the first half.
* The Group had an order book of circa £250 million at the end of the period,
which remains well above historic levels and provides good full year
visibility.
* As previously highlighted, and consistent with the end of 2022, order intake
was below revenue, with a book to bill of 0.72x. Customers moderated ordering
from the unprecedented levels seen in 2021 and the first half of 2022,
reflecting an easing of supply chain constraints and a softening of end market
demand.
* Gross margin increased by 160bps to 41.8%, benefiting from supply chain
stabilisation, operational leverage and prior year price increases. This is
expected to improve further in H2 and recover to historic levels over the
medium term.
* Adjusted operating profit of £21.8 million, a margin of 13.6%, was 36%
higher on a constant currency basis and 45% as reported. There is still a
level of disruption caused by availability of key components, but we are
seeing improvement.
* Net debt of £148.4 million was as expected, and represents a modest
reduction from the end of 2022. The reduction reflects improved profitability
and the start of the unwind of working capital which is expected to continue
through 2023 and 2024 as inventory levels normalise.
* Net debt/EBITDA leverage reduced to 2.3x at the end of H1, down from 2.7x at
prior year end, and we continue to expect progress towards 2x by year-end.
* The dividend for the second quarter of 19.0 pence per share is in line with
the prior year and together with the first quarter dividend of 18.0 pence per
share, brings the total first half dividends declared to 37.0 pence per share
(H1 2022: total dividends 37.0 pence).
* Our first Net Zero Transition Plan is being published today. The Plan
details how we will meet our 2040 net zero commitment, and includes key
actions, metrics, and policies in areas such as product R&D, operations and
waste management.
* The appointment of Matt Webb as Chief Financial Officer with effect from 4
September 2023, is being announced separately today. Matt will be appointed as
an Executive Director of the Board at the Board meeting currently scheduled
for 5 October 2023.
* The Comet legal action in the US remains ongoing. An appeal against the
damages awarded against the Group was filed in April 2023 and is expected to
be considered in the next 12-18 months. The damages and an estimate of fees
were provided for in 2022. As our first half performance demonstrates, it is
not distracting the wider business from the continuing delivery of its
strategy.
* Full year expectations are unchanged with, as guided, a modest second half
weighting.
Jamie Pike, Chair, commented:
“We are encouraged by our improving trading performance over the last 12
months but are working hard to drive further progress. While the supply chain
picture has improved, some residual issues persist and we have seen some
softening of end market demand. Despite the short term challenges, the Group
continues to invest in its future through ongoing product development and a
significant increase in manufacturing capacity in Asia. We anticipate strong
revenue growth over the medium to long term as we take advantage of the robust
growth trends across our markets.
For the second half of 2023, we have a good order book and significant
visibility, and while mindful of the ongoing challenges, our full year outlook
is unchanged. XP is a strong business with a clear strategic focus and we
remain excited about the growth opportunities in front of us.”
Enquiries:
XP Power
Gavin Griggs, Chief Executive Officer +44 (0)118 976 5155
David Stibbs, Interim Chief Financial Officer +44 (0)118 976 5155
Citigate Dewe Rogerson
Kevin Smith/ Lucy Gibbs +44 (0)20 7638 9571
Notes to editors:
XP Power designs and manufactures power controllers, the essential hardware
component in every piece of electrical equipment that converts power from the
electricity grid into the right form for equipment to function. Power
controllers are critical for optimal delivery in challenging environments but
are a small part of the overall customer product cost.
XP Power typically designs power control solutions into the end products of
major blue-chip OEMs, with a focus on the Industrial Technology (circa 43% of
sales in H1 2023), Healthcare (circa 23% sales in H1 2023) and Semiconductor
Manufacturing Equipment (circa 34% of sales in H1 2023) sectors. Once designed
into a programme, XP Power has a revenue annuity over the life cycle of the
customer’s product which is typically five to seven years depending on the
industry sector. XP Power has invested in research and development and its own
manufacturing facilities in China, North America, and Vietnam, to develop a
range of tailored products based on its own intellectual property that provide
its customers with significantly improved functionality and efficiency.
Headquartered in Singapore and listed on the Main Market of the London Stock
Exchange since 2000, XP Power is a constituent of the FTSE All Share Index. XP
Power serves a global blue-chip customer base from over 30 locations in
Europe, North America, and Asia.
For further information, please visit xppowerplc.com
INTERIM STATEMENT
H1 Overview
We are pleased with our first half performance, which continues the improving
trend established in the second half of the previous year. Whilst we are
encouraged by the headway we have made, we believe we can do better and are
working hard to deliver further progress in the balance of the year.
The Group delivered strong revenue growth across all sectors as supply chain
conditions eased, allowing us to increase production and begin to deliver on
our order backlog. As expected, revenue growth improved sequentially in the
second quarter, partly due to normal seasonal factors but also reflecting
growing operational momentum across the period. Our growth also benefited from
price increases that were implemented in 2022 working through as orders
entered production phase. Revenue for the period was £160.2 million (2022:
£123.6 million).
The higher revenue combined with, as expected, lower order intake saw our
backlog reduce to circa £250 million. Our order book remains well above
historic levels, at around 9 to 10 months, and we would expect a further
reduction in the second half of 2023. The lower order intake of £115.6
million reflects two factors; an expected moderation of demand from certain
customers who had ordered at unprecedented levels in 2021 and 2022 but who are
now reducing their own inventory as supply chains ease; and lower demand in
the Industrial Technology and Semiconductor Manufacturing Equipment sectors.
We continue to expect order intake to improve during the latter part of 2023
and into 2024, even if macroeconomic conditions are challenging, supported by
recovery of the semiconductor market.
Adjusted operating profit of £21.8 million for the first half was much
improved on the soft prior year comparator of £15.0 million, largely driven
by operational leverage, but below the very strong second half performance in
2022, as expected. Our operational performance continues to trend positively
as supply chain issues ease but there is room for further improvement as
conditions become more predictable. We estimate that prior year price
increases have largely offset inflation in the period and expect margin to
improve further in the second half of the year as costs normalise and we see
further benefit from the price increases we have passed on to our customers.
Improving cash generation remains a priority for the Group. We made modest
progress in the first half of 2023 with work still to do, especially on
inventory, and further benefits to come. Inventory remains above historic
levels, with upside to come from a reduction in safety stocks on the
assumption that supply chains continue to stabilise.
While our period end financial leverage at 2.3x net debt/EBITDA remains above
our target range of 1-2x it has reduced from the 2022 full year, and remains
well within our banking covenants. We continue to invest to support our long
term growth ambitions and we have increased capital expenditure meaningfully,
as guided, to facilitate the construction of the new Malaysian factory and to
relocate to new, larger facilities in California. These investments reflect
the Board’s confidence in our prospects and are part of our detailed
business growth plans.
Sector performance
XP Power serves three distinct market sectors:
* Industrial Technology, which represented 43% of total H1 2023 revenue (H1
2022: 40%)
* Semiconductor Manufacturing Equipment 34% (H1 2022: 41%) and;
* Healthcare 23% (H1 2022: 19%)
In each sector we focus our resource on key accounts where customers value our
quality and high level of service and support, particularly during the
critical design-in stage. The addressable market in these sectors is
significant and we have leading positions in each of them. We have a proven
track record of outperforming the overall sector growth rate and gaining
market share.
Industrial Technology
The Industrial Technology sector saw a continued normalisation of order intake
in the period, combined with some destocking at our direct and distribution
customers. Orders were £51.2 million, 38% below the prior year, an
exceptional period when supply chain issues temporarily drove orders to
unprecedented levels. Revenue was £68.7 million up 30% as reported on the
equivalent prior year period as we made excellent progress with the delivery
of our backlog. The sector also benefited from improved availability of
components in the supply chain. We are bringing on a new ‘design-in’
distributor to target new areas within the key European markets with increased
on the ground resources and expect good revenue performance and improving
order trends in the second half of the year.
Semiconductor Manufacturing Equipment
As expected, orders in Semiconductor Manufacturing Equipment were weaker as a
result of the global semiconductor market slowdown, but we have seen areas of
continued demand strength with some of our key customers. Revenue was £54.4
million, 13% ahead of the prior year as reported. Order intake was £28.1
million giving a book to bill of 0.52. Demand has held up with some of our US
based customers but has been weaker with some of our Asian customers. We
believe we saw the trough in demand in the first half of the year and expect
to see a similar performance in the second half of the year. We continue to
win new design-ins in this sector, which will underpin our future growth, and
we remain confident in the medium and long term market outlook. Most
semiconductor market commentators expect the next market upswing to start
between Q4 2023 and Q3 2024 and the Group remain very well-placed to take
advantage of this. The longer term outlook for this sector is very attractive
and we expect to continue to grow ahead of the overall market. Market growth
will be driven by multiple factors including AI, Big Data and Machine
Learning, with automotive, smart manufacturing and smart MedTech being some of
the key application areas.
Healthcare
The Healthcare market continues to be an attractive sector for the Group
driven by the growing global demand for healthcare infrastructure and the pace
of innovation. Order momentum was sustained in the period and we saw a
continued recovery in revenue as component availability improved. Order intake
was £36.3 million and revenue was £37.1 million, up 65% on the prior year as
reported. The outlook remains positive and we expect to make further progress
in the second half of the year.
Regional Performance
Revenue in North America was US$109.2 million (H1 2022: US$91.6 million),
up 19% compared to the same period in the previous year, with growth in each
sector. The strongest growth was seen in Healthcare reflecting the soft
comparator in 2022.
Revenue in Europe was £52.2 million (H1 2022: £38.9 million), up 35% on a
constant currency basis from a year ago, driven again by all sectors.
Revenue in Asia was US$23.6 million (H1 2022: US$20.0 million), up 18% at
constant currency compared with the same period a year ago.
Strategy overview
Our strategy is clear and has been delivered consistently.
We are one of a few power companies in the world with a comprehensive product
portfolio spanning the power and voltage spectrum. We remain focused on
growth, primarily organically but also inorganically over the medium term, and
despite decades of strong performance our expanded addressable market and the
opportunity to further grow our market share in the markets in which we
operate and the sectors we focus on remains exciting. Looking ahead, we will
continue to use our product portfolio and engineering services capabilities to
provide customers with a broader range of power solutions and to continue to
increase our market share.
We are confident of delivering strong organic revenue growth, driven by our
core growth drivers:
* Growth in the use of electronics requiring a power converter – this is an
accelerating trend
* Exposure to long term ‘secular’ growth markets e.g., semiconductor
manufacturing equipment and healthcare – while orders in this sector are
currently lower, the long term opportunity is significant
* Market share gains – greater penetration of existing blue-chip customers.
We still have the potential to gain a greater share of our customers’
‘wallet’
* Expanding our addressable markets, including through distribution
* Underpinned by global GDP growth
We continue to make progress delivering our power strategy by:
* Developing a market leading range of competitive products – we have
further enhanced our product offering in the first half of the year and have
an exciting pipeline of new products
* Targeting accounts where we can add value – the share of revenue from our
top 30 customers continues to account for the majority of total Group revenue
and the long term nature of these relationships provides a solid base to grow
from
* Further enhancing our global supply chain through investment in capacity,
systems and capability
* Leading our industry in environmental matters
* When appropriate, making selective acquisitions in identified strategic
markets to expand our product offering and addressable markets, as we did with
FuG and Guth in 2022
Successful implementation of our strategy has enabled the Group to build a
presence across the whole range of power and voltage applications, with
well-performing acquisitions in more recent years adding capabilities in the
high power and high voltage applications, which are suited to XP’s direct
service model and where growth opportunities are exciting. In parallel, the
Group has significantly expanded its low cost Asian manufacturing base,
investing in new capacity in Vietnam and from late 2024 in Malaysia, to
support significant future growth in production volumes. In combination, the
Board believes these two strategic initiatives underpin a significant medium
term growth opportunity for the Group.
We remain focused on developing product platforms that are easy to modify and
which can be used over multiple sectors and applications. The
‘designed-in’, recurring nature of the portfolio creates long term,
committed relationships with our customers for the lifetime of their products,
typically seven years, but often longer.
We believe the continued execution of our strategy will create significant
long term value through a combination of organic revenue growth of circa 10%
on average through the cycle, supported by strong long term growth drivers and
attractive gross margins, to deliver an adjusted operating margin of around
20%. While our adjusted operating margins were below 20% in the last 12
months, we have achieved this target for short periods over more recent
months, which underpins our confidence that the business can operate
consistent with this guidance for a full year when supply chain conditions
ease fully. Our operating model, combined with operating cash conversion above
90%, will deliver attractive long term returns.
Manufacturing
Control of our own, low cost, high quality and geographically well-diversified
manufacturing assets remains an important component of XP’s competitive
advantage. In 2022 the Group commenced construction of a new manufacturing
facility in north-west Malaysia to increase capacity to meet the growing
demand across the Group. The new facility remains on track for commission in
H2 2024. The project is part of a global supply chain transformation, as we
scale our operations and establish a network supply chain model which will
provide greater resilience. We expect this important strategic capability of
having production facilities in Vietnam, China and Malaysia, to enable us to
win more design mandates from key customers. These investments are expected to
generate strong returns, supporting both our future growth and improved
margins.
Our People and Our Values
The success of any organisation is dependent on its culture and the people
and talent within it. The Board engages regularly with the Executive
Leadership Team and colleagues throughout the Group to ensure we are
continuing to identify and develop our key people and bringing new talent and
capabilities into the business to help underpin our growth ambitions. We
continue to make key hires in engineering, supply chain, manufacturing and
product management as we look to further enhance our capabilities in these
critical areas and to support the growth ambitions we have for the Group over
the longer term.
ESG
The Group continues to take an industry lead in environmental and social
matters. In the period, we have scoped and filed our near- and long-term
company-wide emission reductions targets in line with the Science Based
Targets initiative (SBTi) Net-Zero Standard. These are awaiting validation
from the SBTi. We are also publishing our first Net Zero Transition Plan
today, developed using the guidance from the Transition Plan Taskforce (TPT)
which was set up by the UK government to develop the ‘Gold Standard’ in
this area. Our transition plan details how our 2040 net zero commitment will
be delivered, spelling out the key actions, metrics, policies and procedures
that support the ambition in areas such as product R&D, operations and waste
management. The financial impact of our transition plan is accommodated in
our existing strategy and growth projections.
The Group also has appointed supply chain and health and safety executives to
strengthen and develop further in these areas, including their impact on ESG.
Comet Legal Action
Following a further hearing in March 2023, the Group is awaiting a ruling from
the Judge relating to the legal fees to be awarded in the case. In April 2023
the Group filed an appeal against the damages awarded against it in the case.
The appeal is expected to be considered in the next 12-18 months.
Despite the Comet legal action remaining ongoing, our first half performance
demonstrates that it is not distracting the wider business from the continuing
delivery of its stated and successful strategy . The Group has the financial
resources to invest in further growth and development despite the judgement.
Board Update
As planned, Jamie Pike, Non-Executive Director, was appointed Chair on 18
April 2023.
Matt Webb will join as Chief Financial Officer with effect from 4 September
2023 and he will be appointed as an Executive Director of the Board at the
Board meeting currently scheduled for 5 October 2023. Matt brings with him
over 25 years’ experience of working within international businesses at
Group and Divisional level, giving him a broad strategic and operational
skillset. Most recently he was Chief Financial Officer at Luceco plc, a FTSE
Main Market supplier of multiple LED lighting, EV charging and electrical
accessories.
Outlook
The Group has seen much improved trading over the last 12 months and we expect
this to continue through the second half based on our current momentum and
strong order book. Our full year outlook is unchanged, albeit we remain aware
of a range of macroeconomic risks. We continue to expect our financial
leverage to progress towards 2x by year-end.
Longer term, the Board believes XP’s clear strategy and financial framework
leave the Group well positioned to grow ahead of its end markets, drive
further market share gains, improve profitability and deliver strong cash
generation.
Financial Performance Review
Trading in the first half of 2023 has been in line with our expectations.
While order intake softened, as customers moderated ordering from the
unprecedented levels in 2021 and first half of 2022, our strong revenue growth
reflects the easing of supply chain constraints as we started to work through
the enlarged order backlog.
Total order intake was £115.6 million (H1 2022: £193.1 million), down 44% at
constant currency basis and 40% as reported, with book-to-bill of 0.72 (H1
2022: 1.56). The order book of circa £250 million continues to give excellent
visibility, that extends well into 2024. As a reminder, the Group has booked
orders in the last three years (to the end of June 2023) of £930 million.
Delivery of our strong order book and improved consistency in the supply chain
saw revenue grow by 30% on a reported basis to £160.2 million in the first
half compared to £123.6 million in the same period a year ago, an increase of
24% on a constant currency basis. Revenue growth improved sequentially in Q2
2023 from Q1, which included the normal impact of new year and associated
holidays in Asia and provides good momentum heading into H2.
Gross margin of 41.8% was a 160bps increase from the prior year (H1 2022:
40.2%), as operational leverage improved, in particular during Q2, with
increased factory output translating to better overhead absorption, along with
the impact of price increases and reduced freight and logistics costs. We
would expect higher gross margins in H2 2023.
Adjusted operating expenses (excluding the impact of one-offs) increased to
£45.2 million (H1 2022: £34.7 million), reflecting investment in key roles,
people and other cost inflation along with the impact of FX.
The resulting adjusted operating profit of £21.8 million was a 45% increase,
from £15.0 million in H1 2022, up 36% at constant currency.
The prior year included the impact of challenges from component shortages and
increased lead times for key components, which limited the Group’s
manufacturing output, combined with a five-week long COVID-19 imposed lockdown
in China. The improvement in H1 2023 was in line with our expectations and
demonstrated a recovery that began in H2 2022. While supply chains continue to
stabilise, we continue to be impacted by a level of disruption that in time
should alleviate and further improve our performance.
Interest rate rises and the higher level of gross debt, held by the Group in
US Dollars, contributed to net finance costs increasing to £6.0 million (H1
2022: £1.2 million), resulting in adjusted profit before tax of £15.8
million (H1 2022: £13.8 million), an increase of 14%, as reported.
The tax charge after adjusting for non-recurring tax benefits of £0.9 million
on adjusted profit before tax was £4.0 million, an effective tax rate of
25.3% (H1 2022: 23.9%), driven by the mix of profits across our regions in the
first half. We expect the full year tax rate to be within our guidance range
of approximately 18-20%, below the H1 % , consistent with prior years.
Adjusted diluted earnings per share was 59.1p, an increase of 13% compared to
the prior year.
Net debt and cash flow
Net debt at 30 June 2023 was £148.4 million, a moderate reduction from
£151.0 million at 31 December 2022 which reflects improved trading profits
and the start of the expected working capital unwind (£1.2 million). This was
offset by a significant increase in capital investment (£9.1 million) and
capitalised product development costs (£4.6 million), dividends (£11.2
million) and finance costs (£7.6 million) incurred in the half. There was
also a benefit from FX movements (£7.7 million) as gross debt is held in US
Dollars.
Within working capital, inventory reductions results in a £2.5 million cash
flow benefit. This was driven by a reduction in raw materials and WIP,
partially offset by the timing of delivery of finished goods which were
manufactured in Q2 and will ship in Q3. This follows a significant increase in
2022 to address exceptional ordering patterns and as industry-wide lead times
increased. The working capital unwind is expected to continue in H2 2023 and
into 2024 as inventory levels normalise, aiding our cash generation for the
foreseeable future.
As planned, work has continued at our new manufacturing facility in Malaysia
and relocation of our customer design centres in California which were key
drivers of the £8.8m capital investment in H1, (H1 2022: £4.2 million) and
are critical to increase capacity and resilience in our Asian supply chain to
meet our long term revenue growth ambitions and support growth in North
America. We still expect to spend c.£30 million in 2023.
Free cash flow, before acquisitions, dividends and borrowings, was an inflow
of £6.3 million (H1 2022: £25.5 million outflow) and the Group finished the
first half with net debt of £148.4 million (FY 2022: £151.0 million),
comprising cash and cash equivalents of £26.9 million and gross debt of
£175.3 million.
XP secured greater banking covenant flexibility from its lenders in Q4 2022
with the net debt to EBITDA covenant required to be less than 3.25x in June
2023 and then 3.0x in December 2023. The Group Net debt to EBITDA leverage of
2.30x was comfortably within this ratio at 30 June 2023, and was reduced from
2.68x at December 2022.
The Group continues to expect progress towards leverage of 2x in the full
year. As inventory and capital expenditure return to lower levels during 2024
following completion of the growth investment projects in Malaysia and North
America, the Group expects strong operating cash conversion to drive a return
to net debt/EBITDA leverage of 1-2x in the medium term.
Statutory Profit
As set out in note 5, in H1 2023, the Group incurred £4.5 million of specific
items impacting statutory operating profit and £4.9 million impacting profit
before tax (H1 2022: £60.2 million and £61.2 million).
The £4.5 million impacting statutory operating profit includes legal fees and
costs relating to the Comet legal case (£1.4 million). Damages were fully
provided for in 2022, and the Group awaits a ruling on opposition fees (for
which an estimate was also provided in the prior year). It also includes
restructuring costs of £0.8m relating to supply chain transformation as we
get ready for transferring business to the new site in Malaysia and £0.7
million in respect of the IFRS 16 amortisation incurred during the fit out and
construction of leased buildings in North America whilst the business is still
operating from its current locations. Acquisition related amortisation was
£1.6 million. In addition to the items impacting statutory operating profit,
finance charges, which impacts profit before tax, includes £1.0 million in
respect of the IFRS 16 interest on the leased buildings reported above and a
£0.6 million gain on the modification of RCF borrowings.
Statutory profit before tax was £10.9 million (H1 2022: statutory loss before
tax £47.4 million), with a tax charge of £3.1 million (H1 2022: tax credit
of £12.0 million) and profit after tax of £7.8 million (H1 2022: loss after
tax of £35.4 million).
Basic earnings per share were 38.9 pence (H1 2022: 181.4 pence loss per
share).
Capital Allocation and Dividend Policy
The Group improved operating cash flow in H1 2023 and continues to expect net
debt to adjusted EBITDA leverage to progress towards 2x in the full year as
benefits are realised from the ongoing unwind of working capital and as
profitability improves.
Dividend policy remains unchanged, and the Board has declared a dividend for
the second quarter of 19.0 pence per share (2022: 19.0 pence per share).
Together with the first quarter dividend, this brings the total first half
dividends declared to 37.0 pence per share (H1 2022: total dividends 37.0
pence).
The ex-dividend date for the second quarter dividend will be 7th September
2023 and the dividend will be paid on 12th October 2023 to shareholders on the
register at the record date of 8th September 2023. The last date for election
for the share alternative to the dividend under the Company’s Dividend
Reinvestment Plan is 21st September 2023.
Foreign Exchange
The Group reports its results in sterling, but the US dollar continues to be
its principal trading currency, with approximately 82% (2022: 85%) of our
revenue denominated in US dollars. The translation effect on Adjusted
Operating Profit comparing H1 2023 average rates with H1 2022 average rates is
an improvement of £1.4 million. Translational exchange rate losses in the
Income Statement in H1 2023 were £1.0 million, a period-on-period adverse
impact of £3.5 million. This results in a net exchange rate impact on
Adjusted Operating Profit for H1 2023 of £2.1 million adverse when compared
to H1 2022.
1 August 2023
Independent review report to XP Power Limited
Report on review of interim financial information
We have reviewed the accompanying condensed consolidated financial information
of XP Power Limited (“the Company”) and its subsidiaries (“the Group”)
set out on pages 11 to 20, which comprise the condensed consolidated balance
sheet of the Group as at 30 June 2023, the condensed consolidated statements
of comprehensive income, changes in equity and cash flows for the 6-month
period then ended and the other explanatory notes. Management is responsible
for the preparation and presentation of this condensed consolidated interim
financial information in accordance with International Accounting Standard 34
Interim Financial Reporting as issued by the International Standards Board.
Our responsibility is to express a conclusion on this condensed consolidated
interim financial information based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity. A review of interim financial information
consists of making inquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the interim report for the
6-month period ended 30 June 2023, which comprise the “Interim Results”
set out on pages 1 to 3, “Interim Statement” set out on pages 4 to 9 and
“Risks and uncertainties” set out on pages 21 to 23 and considered whether
it contains any apparent misstatements or material inconsistencies with the
information in the condensed consolidated interim financial information.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying condensed consolidated interim financial
information is not prepared, in all material respects, in accordance with
International Accounting Standard 34 Interim Financial Reporting as issued by
the International Accounting Standards Board.
Restriction on Distribution and Use
This report has been prepared solely for the Company in accordance with the
letter of engagement between us and the Company. To the fullest extent
permitted by law, we do not accept or assume liability or responsibility to
anyone other than the Company for our work or this report.
PricewaterhouseCoopers LLP
Public Accountants and Chartered Accountants
Singapore,
1 August 2023
XP Power Limited
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2023
£ Millions Note Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Revenue 5 160.2 123.6
Cost of sales (93.2) (73.9)
Gross profit 67.0 49.7
Other income - *
Expenses
Distribution and marketing (33.6) (26.4)
Administrative (4.7) (51.3)
Research and development (11.4) (17.2)
Operating profit/(loss) 17.3 (45.2)
Finance charge (6.4) (2.2)
Profit/(loss) before income tax 10.9 (47.4)
Income tax (expense)/credit 6 (3.1) 12.0
Profit/(loss) after income tax 7.8 (35.4)
Other comprehensive income/(loss):
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations (3.8) 5.8
(3.8) 5.8
Items that will not be reclassified subsequently to profit or loss:
Currency translation differences arising from consolidation * *
Other comprehensive (loss)/income, net of tax (3.8) 5.8
Total comprehensive income/(loss) 4.0 (29.6)
Profit/(loss) attributable to:
- Equity holders of the Company 7.6 (35.6)
- Non-controlling interests 0.2 0.2
7.8 (35.4)
Total comprehensive income/(loss) attributable to :
- Equity holders of the Company 3.9 (29.8)
- Non-controlling interests 0.1 0.2
4.0 (29.6)
Earnings/(Loss) per share attributable to equity holders of the Company Pence per Share Pence per Share
Basic 8 38.9 (181.4)
Diluted 8 38.7 (180.6)
* Balance is less than £100,000.
The above condensed consolidated statement of comprehensive income should be
read in conjunction with the accompanying notes.
XP Power Limited
Condensed Consolidated Balance Sheet
As at 30 June 2023
£ Millions Note At 30 June 2023 (Unaudited) At 31 December 2022 (Unaudited)
ASSETS
Current assets
Cash and cash equivalents 25.5 22.3
Inventories 106.5 114.4
Trade receivables 44.8 42.4
Bond receivables 35.7 37.0
Other current assets 5.6 8.0
Derivative financial instruments 0.1 *
Corporate tax recoverable 2.2 2.5
Total current assets 220.4 226.6
Non-current assets
Cash and bank balances 1.4 1.1
Goodwill 75.5 77.5
Intangible assets 9 67.3 69.9
Property, plant and equipment 40.5 36.6
Right-of-use assets 56.8 54.9
Deferred income tax assets 13.9 15.1
ESOP loans to employees 0.1 *
Other investment * *
Total non-current assets 255.5 255.1
Total assets 475.9 481.7
LIABILITIES
Current liabilities
Current income tax liabilities 5.8 4.8
Trade and other payables 50.8 52.6
Derivative financial instruments * 0.1
Lease liabilities 2.0 2.4
Borrowings 0.7 0.2
Provisions 44.0 46.1
Total current liabilities 103.3 106.2
Non-current liabilities
Accrued consideration 1.7 1.5
Borrowings 174.6 174.2
Deferred income tax liabilities 10.0 10.5
Provisions 0.8 0.9
Lease liabilities 53.3 48.9
Total non-current liabilities 240.4 236.0
Total liabilities 343.7 342.2
NET ASSETS 132.2 139.5
EQUITY
Equity attributable to equity holders of the Company
Share capital 27.2 27.2
Merger reserve 0.2 0.2
Share-based payment reserve 1.4 2.5
Treasury shares reserve * *
Translation reserve 0.6 4.2
Other reserve 7.1 6.1
Retained earnings 94.8 98.4
131.3 138.6
Non-controlling interests 0.9 0.9
TOTAL EQUITY 132.2 139.5
The above condensed consolidated balance sheet should be read in conjunction
with the accompanying notes.
XP Power Limited
Condensed Consolidated Statement of Changes in Equity
For the six months ended 30 June 2023
Attributable to equity holders of the Company
Note Share capital Share-based payment reserve Treasury shares reserve Merger reserve Translation reserve Other reserve Retained earnings Total Non-controlling interests Total Equity
Balance at 1 January 2022 27.2 5.6 * 0.2 (2.9) 4.4 137.0 171.5 0.9 172.4
Exercise of share-based payment awards - (0.9) * - - 0.9 * * - *
Employee share-based payment expenses, net of tax - (1.1) - - - - - (1.1) - (1.1)
Dividends paid 7 - - - - - - (11.2) (11.2) (0.3) (11.5)
Future acquisitions of non-controlling interests - - - - - 0.1 - 0.1 - 0.1
Exchange difference arising from translation of financial statements of foreign operations - 0.1 - - 5.7 - * 5.8 * 5.8
Profit for the year - - - - - - (35.6) (35.6) 0.2 (35.4)
Total comprehensive income for the period - 0.1 - - 5.7 - (35.6) (29.8) 0.2 (29.6)
Balance at 30 June 2022 (unaudited) 27.2 3.7 * 0.2 2.8 5.4 90.2 129.5 0.7 # 130.2 #
Balance at 1 January 2023 27.2 2.5 * 0.2 4.2 6.1 98.4 138.6 0.9 139.5
Exercise of share-based payment awards - (1.1) * - - 1.1 * * - *
Employee share-based payment expenses, net of tax - 0.1 - - - - - 0.1 - 0.1
Dividends paid 7 - - - - - - (11.2) (11.2) (0.1) (11.3)
Future acquisitions of non-controlling interests - - - - - (0.1) - (0.1) - (0.1)
Exchange difference arising from translation of financial statements of foreign operations - (0.1) - - (3.6) - - (3.7) (0.1) (3.8)
Profit for the year - - - - - - 7.6 7.6 0.2 7.8
Total comprehensive income for the period - (0.1) * - (3.6) - 7.6 3.9 0.1 4.0
Balance at 30 June 2023 (unaudited) 27.2 1.4 * 0.2 0.6 7.1 94.8 131.3 0.9 132.2
* Balance is less than £100,000.
# This amount is different from the summation of the vertical movements due to
rounding differences.
The above condensed consolidated statement of changes in equity should be read
in conjunction with the accompanying notes.
XP Power Limited
Condensed Consolidated Statement of Cash Flows
For the six months ended 30 June 2023
£ Millions Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Cash flows from operating activities
Profit/(loss) after income tax 7.8 (35.4)
Adjustments for:
- Income tax expense/(credit) 3.1 (12.0)
- Amortisation and depreciation 9.2 7.7
- Finance charge 6.4 2.2
- Share-based payment expenses 0.2 0.5
- Fair value (gain)/loss on derivative financial instruments (0.2) 0.3
- (Gain)/loss on disposal of property, plant and equipment * *
- Impairment loss on intangible assets 0.1 7.5
- Unrealised currency translation loss/(gain) 1.0 (4.2)
- Provision for doubtful debts * *
Change in the working capital, net of effects from acquisition of subsidiaries:
- Inventories 2.5 (20.1)
- Trade and other receivables (2.9) (2.4)
- Trade and other payables 1.4 43.2
- Provision for liabilities and other charges 0.2 1.0
Cash generated from/(used in) operations 28.8 (11.7)
Income tax paid (1.3) (1.4)
Net cash provided by/(used in) operating activities 27.5 (13.1)
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired - (32.3)
Additions to property, plant and equipment (8.8) (4.2)
Additions to development costs (4.6) (3.7)
Additions to software and software under development (0.3) (2.4)
Proceeds from disposal of property, plant and equipment * *
Proceeds from repayment of ESOP loans * *
Payment of accrued consideration * *
Interest received 0.8 *
Net cash used in investing activities (12.9) (42.6)
Cash flows from financing activities
Proceeds from borrowings 9.7 82.9
Repayment of borrowings * (1.5)
Principal payment of lease liabilities (0.6) (1.2)
Proceeds from exercise of share-based payment awards * -
Interest paid (7.6) (1.0)
Dividends paid to equity holders of the Company (11.2) (11.2)
Dividends paid to non-controlling interests (0.1) (0.3)
Bank deposits pledged (0.4) -
Net cash (used in)/generated from financing activities (10.2) 67.7
Net increase in cash and cash equivalents 4.4 12.0
Cash and cash equivalents at beginning of financial period 22.1 8.8
Effects of currency translation on cash and cash equivalents (1.0) 1.7
Cash and cash equivalents at end of financial period 25.5 22.5
* Balance is less than £100,000.
The above condensed consolidated statement of cash flows should be read in
conjunction with the accompanying notes.
XP Power Limited
Notes to the condensed consolidated financial statements
1. General information
XP Power Limited (the ’Company’) is listed on the London Stock Exchange
and incorporated and domiciled in Singapore. The address of its registered
office is 19 Tai Seng Avenue, #07-01, Singapore 534054.
The nature of the Group’s operations and its principal activities is to
provide power supply solutions to Semiconductor, Industrial Technology and
Healthcare markets across the globe.
These condensed consolidated interim financial statements are presented in
Pounds Sterling (GBP).
1. Basis of preparation
The condensed consolidated interim financial statements for the period ended
30 June 2023 have been prepared in accordance with the Disclosure and
Transparency Rules of the United Kingdom’s Financial Conduct Authority and
with International Accounting Standards (‘IAS’) 34 Interim Financial
Reporting as issued by the International Accounting Standards Board.
The condensed consolidated interim financial statements should be read in
conjunction with the annual financial statements for the year ended 31
December 2022 which have been prepared in accordance with International
Financial Reporting Standards (‘IFRSs’) as issued by the International
Accounting Standards Board (IFRS as issued by the IASB) and Singapore
Financial Reporting Standards (International) (SFRS(I)s’).
1. Going concern
The Directors reviewed budgets and forecasts to assess the cash requirements
of the Group to continue in operational existence for a minimum period of 12
months from the date of the approval of these interim financial statements.
The Directors also reviewed downside scenarios to the budgets and forecasts,
which reflect the possible impact of risks identified in the risk management
framework. The greatest consideration was given to those risks with the
highest potential impact if they occurred and those with the highest
probability of occurring. Throughout these downside scenarios, the Group
continues to have significant headroom on its financial debt covenants.
Therefore, after making the above enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. The Group therefore continues to adopt
the going concern basis in preparing its consolidated financial statements.
1. Accounting policies
The condensed consolidated interim financial statements have been prepared
under the historical cost convention except as disclosed in the accounting
policies within the Group financial statements for the year ended 31 December
2022.
The same accounting policies, presentation and methods of computation are
followed in these condensed consolidated interim financial statements as were
applied in the presentation of the Group’s financial statements for the year
ended 31 December 2022.
A number of new or amended standards became applicable for the current
reporting period. The adoption of these new or amended standards did not
result in substantial changes to the Group’s accounting policies and had no
material effect on the amounts reported for the current or prior financial
years.
5. Segmented and revenue information
The Board of Directors considers and manages the business on a geographic
basis. Management manages and monitors the business based on the three primary
geographical areas: North America, Europe and Asia. All geographic locations
market the same class of products to their respective customer base.
Revenue
The Group derives revenue from the transfer of goods at a point in time in
the following major business lines and geographical regions.
Analysis by class of customer
The revenue by class of customer is as follows:
Six months ended 30 June 2023
£ Millions
Europe North America Asia Total
Primary geographical markets
Semiconductor Manufacturing Equipment 2.5 43.7 8.2 54.4
Industrial Technology 35.4 25.5 7.8 68.7
Healthcare 14.3 19.6 3.2 37.1
52.2 88.8 19.2 160.2
Six months ended 30 June 2022
£ Millions
Europe North America Asia Total
Primary geographical markets
Semiconductor Manufacturing Equipment 1.4 40.0 6.9 48.3
Industrial Technology 28.2 19.0 5.7 52.9
Healthcare 9.3 10.5 2.6 22.4
38.9 69.5 15.2 123.6
5. Segmented and revenue information (continued)
Reconciliation of segment results to profit after income tax/(loss):
£ Millions Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Europe 12.3 10.4
North America 28.4 18.3
Asia 6.8 3.3
Segment results 47.5 32.0
Research and development (11.0) (9.7)
Manufacturing (5.3) (3.0)
Corporate cost from operating segment (9.4) (4.3)
Adjusted operating profit 21.8 15.0
Finance expenses (6.4) (2.2)
Specific items (4.5) (60.2)
Profit/(loss) before tax 10.9 (47.4)
Income tax (expenses)/credit (3.1) 12.0
Profit/(loss) after tax 7.8 (35.4)
£ Millions At 30 June 2023 (Unaudited) At 31 December 2022
Total assets
Europe 88.7 85.5
North America 239.7 237.1
Asia 131.4 141.5
Segment assets 459.8 464.1
Unallocated deferred and current income tax 16.1 17.6
Total assets 475.9 481.7
Reconciliation of adjusted measures
The Group presents adjusted operating profit and adjusted profit before tax by
adjusting for costs and profits which management believes to be significant by
virtue of their size, nature or incidence or which have a distortive effect on
current year earnings. Such items may include, but are not limited to, costs
associated with business combinations, amortisation of intangible assets
arising from business combinations, reorganisation costs, and ERP
implementation costs.
In addition, the Group presents an adjusted profit after tax measure by
adjusting for certain tax charges and credits which management believe to be
significant by virtue of their size, nature, or incidence or which have a
distortive effect.
5. Segmented and revenue information (continued)
Reconciliation of adjusted measures (continued)
The Group uses these adjusted measures to evaluate performance and as a method
to provide shareholders with clear and consistent reporting. See below for a
reconciliation of operating profit to adjusted operating profit and a
reconciliation of profit before tax to adjusted profit before tax.
(i) Reconciliation of operating profit to adjusted operating profit:
£ Millions Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Operating profit/(loss) 17.3 (45.2)
Adjusted for:
Comet legal costs (refer to note 10) 1.4 47.8
Impairment loss on intangible assets re:Comet - 7.5
Amortisation of intangible assets due to business combination 1.6 2.1
Restructuring costs 1.5 -
Costs related to ERP implementation 0.2 3.6
Fair value (gain)/loss on derivative financial instruments (0.2) 0.3
Acquisition costs * 0.9
Foreign exchange impact on EUR-denominated loan drawn down to finance the acquisition - (2.4)
RCF fees * 0.4
4.5 60.2
Adjusted operating profit 21.8 15.0
Adjusted operating margin 13.6% 12.1%
(ii) Reconciliation of profit before tax to adjusted profit before tax:
Profit/(Loss) before tax 10.9 (47.4)
Adjusted for:
Comet legal fees (refer to note 10) 1.4 47.8
Impairment loss on intangible assets re:Comet - 7.5
Amortisation of intangible assets due to business combination 1.6 2.1
Restructuring costs 2.5 -
Costs related to ERP implementation 0.2 3.6
Fair value (gain)/loss on derivatives financial instruments (0.2) 0.3
Acquisition costs * 0.9
Foreign exchange impact on EUR-denominated loan drawn down to finance the acquisition - (2.4)
RCF fees * 0.4
(Gain)/Loss on modification of RCF borrowings (0.6) 1.0
4.9 61.2
Adjusted profit before tax 15.8 13.8
6. Taxation
The effective tax rate on statutory profit before tax as at 30 June 2023 is
28.4% (2022: 25.3%). This is an estimate based largely on local statutory
rates. The full year rate is expected to be approximately 20%.
7. Dividends
Amounts recognised as distributions to equity holders of the Company in the
period:
Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Pence per share £ Millions Pence per share £ Millions
Prior year third quarter dividend paid 21.0 4.1 21.0 4.1
Prior year final dividend paid 36.0 7.1 36.0 7.1
Total 57.0 11.2 57.0 11.2
The dividends paid recognised in the interim financial statements relate to
the third quarter dividend and final dividend for 2022.
A second quarterly dividend of 19.0 pence per share (2022: 19.0 pence per
share) will be paid on 12 October 2023 to shareholders on the register at 8
September 2023.
8. Earnings per share
Earnings per share attributable to equity holders of the company arise from
continuing operations as follows:
£ Millions Six months ended 30 June 2023 (Unaudited) Six months ended 30 June 2022 (Unaudited)
Earnings/(loss)
Earnings/(loss) for the purposes of basic and diluted earnings per share (profit for the period attributable to equity holders of the company) 7.6 (35.6)
Amortisation of intangibles due to business combinations 1.6 2.1
Acquisition costs * 0.9
Foreign exchange impact on EUR-denominated loan drawn down to finance the acquisition - (2.4)
Non-recurring tax benefits (0.9) (15.3)
Costs related to ERP implementation 0.2 3.6
Legal costs (refer to note 10) 1.4 47.8
Impairment loss on intangible assets - 7.5
RCF fees * 0.4
(Gain)/loss on modification of RCF (0.6) 1.0
Fair value loss on derivative financial instruments (0.2) 0.3
Restructuring costs 2.5 -
Earnings for adjusted earnings per share 11.6 10.3
Number of shares
Weighted average number of shares for the purposes of basic earnings per share (thousands) 19,555 19,625
Effect of potentially dilutive share options (thousands) 58 90
Weighted average number of shares for the purposes of dilutive earnings per share (thousands) 19,613 19,715
Earnings/(loss) per share from operations
Basic 38.9p (181.4p)
Basic adjusted 59.3p 52.5p
Diluted 38.7p (180.6p)
Diluted adjusted 59.1p 52.2p
9. Intangible assets
Product Development costs Brand Trademarks Technology Customer relationships Customer contracts Intangible software Assets under development Total
£ Millions
Cost
At 31 December 2022 43.9 1.8 1.1 8.3 26.0 2.7 23.7 28.3 135.8
Additions 0.3 - - - - - 0.4 4.2 4.9
Transfer 0.2 - - - - - 1.6 (1.8) -
Foreign currency translation (1.6) (0.1) * (0.4) (1.2) (0.1) (1.1) (1.4) (5.9)
At 30 June 2023 42.8 1.7 1.1 7.9 24.8 2.6 24.6 29.3 134.8
Accumulated amortisation and impairment losses
At 31 December 2022 32.0 0.6 1.0 3.8 12.7 1.4 6.4 8.0 65.9
Amortisation charge for the year 1.4 0.1 * 0.4 0.8 0.3 1.1 - 4.1
Impairment loss for the year * - - - - - - 0.1 0.1
Foreign currency translation (1.0) * * (0.2) (0.7) (0.1) (0.2) (0.4) (2.6)
At 30 June 2023 32.4 0.7 1.0 4.0 12.8 1.6 7.3 7.7 67.5
Carrying amount
At 30 June 2023 10.4 1.0 0.1 3.9 12.0 1.0 17.3 21.6 67.3
At 31 December 2022 11.9 1.2 0.1 4.5 13.3 1.3 17.3 20.3 69.9
* Balance is less than £100,000.
The amortisation period for development costs incurred on the Group’s
products varies between three and seven years according to the expected useful
life of the products being developed.
Amortisation commences when the product is ready and available for use.
The remaining amortisation period for customer relationships ranges from one
to ten years.
10. Comet legal matter
Full details in respect of the Comet legal matter were provided in the 31
December 2022 Annual Report and Accounts. There have been no developments of
note since then. The US $ denominated provision amounts established and the
appeal bond receivable are unchanged from 31 December 2022 other than for the
impact of exchange rate. £1.4m of legal fees were incurred during the 6
months to 30 June 2023 and these have been reported as Adjusting Items
consistent with prior year (see note 5).
Risks and uncertainties
The Board has continued to review the Group’s existing and emerging risks
and the mitigating actions and processes in place in the first half of 2023.
Following this review the Board believes there has been no material change to
the relative importance or quantum of the Group’s principal risks in the
first half of 2023. The risk assessment and review are an ongoing process, and
the Board will continue to monitor risks and the mitigating actions in place.
The principal risks are summarised below.
An event that causes a disruption to one of our manufacturing facilities
An event that results in the temporary or permanent loss of a manufacturing
facility would be a serious issue. As the Group manufactures the majority of
its revenues, this would undoubtedly cause at least a short-term loss of
revenues and profits and disruption to our customers and therefore damage to
reputation.
Risk mitigation – We now have two facilities (China and Vietnam) where we
are able to manufacture the majority of our power converters and we have
disaster recovery plans in place for both facilities. Not all power converter
series can be produced in both facilities, but we continue to identify
opportunities to transfer capability and increase flexibility and resilience
in our supply chain. We have commenced construction of a new manufacturing
facility in Malaysia in 2022 to increase flexibility and our capacity to meet
the demand from across the Group.
We have undertaken a risk review with manufacturing management to identify and
assess risks which could cause a serious disruption to manufacturing, and then
identified and implemented actions to reduce or mitigate these risks where
possible.
Fluctuations of revenues, expenses, and operating results due to an economic
downturn or external shock
The revenues, expenses and operating results of the Group could vary
significantly from period to period because of a variety of factors, some of
which are outside its control. These factors include general economic
conditions; adverse movements in interest rates; inflation, conditions
specific to the market; seasonal trends in revenues, capital expenditure and
other costs; and the introduction of new products or services by the Group, or
by their competitors. In response to a changing competitive environment, the
Group may elect from time to time to make certain pricing, service, marketing
decisions or acquisitions that could have a short-term material adverse effect
on the Group’s revenues, results of operations and financial condition.
Risk mitigation – Although not immune from an economic shock or the
cyclicality of the capital equipment markets, the Group’s diverse customer
base, geographic spread and revenue annuities reduces exposure to this risk.
The Group’s business model is not capital intensive and the strong profit
margins lead to healthy cash generation which also helps mitigate risks from
these external factors.
The Group benefits from good order exposure 12 months out allowing it to
recognise market changes and mitigate the impact.
Cyber security / Information systems failure
The Group is reliant on information technology in multiple aspects of the
business from communications to data storage. Assets accessible online are
potentially vulnerable to theft and customer channels are vulnerable to
disruption. Any failure or downtime of these systems or any data theft could
have a significant adverse impact on the Group’s reputation or on the
results of operations.
Risk mitigation – The Group has a defined Business Impact Assessment which
identifies the key information assets; replication of data on different
systems or in the Cloud; an established backup process in place as well as a
robust anti-malware solution on our networks.
Internally produced training materials are used to educate users regarding
good IT security practice and to promote the Group’s IT policy.
A cyber assessment carried out by the outsourced internal auditor resulted in
recommendations that are being implemented to further mitigate cyber risk and
safeguard the Group’s assets.
Dependence on key customers
The Group is dependent on retaining its key customers. Should the Group lose a
number of its key customers or key suppliers, this could have a material
impact on the Group’s financial condition and results of operations.
However, for the period ended 30 June 2023, no single customer accounted for
more than 18% of revenue and on the largest accounts the Group will be working
on many individual programmes.
Risk mitigation – The Group mitigates this risk by providing excellent
service. Customer complaints and non-conformances are reviewed monthly by
members of the Executive Leadership team.
Product recall
A product recall due to a quality or safety issue would have serious
repercussions to the business in terms of potential cost and reputational
damage as a supplier to critical systems.
Risk mitigation – We perform 100% functional testing on all own-manufactured
products and 100% hi-pot testing, which determines the adequacy of electrical
insulation, on own-manufactured products. This ensures the integrity of the
isolation barrier between the mains supply and the end user of the equipment.
We also test all the medical products we manufacture to ensure the leakage
current is within the medical specifications.
Where we have contracts with customers, we always limit our contractual
liability regarding recall costs.
Competition from new market entrants and new technologies
The power supply market is diverse and competitive. The Directors believe that
the development of new technologies could give rise to significant new
competition to the Group, which may have a material effect on its business. At
the lower end of the Group’s target market, in terms of both power range and
programme size, the barriers to entry are lower and there is, therefore, a
risk that competition could quickly increase, particularly from emerging
low-cost manufacturers in Asia.
Risk mitigation – The Group reviews activities of its competition, in
particular product releases, and stays up to date with new technological
advances in our industry, especially those relating to new components and
materials. The Group also tries to keep its cost base competitive by operating
in low-cost geographies where appropriate.
The general direction of our product roadmap is to move away from lower
complexity products and to increase our engineering solutions capabilities so
reducing the inherent market competitiveness.
The Group ensures own and external intellectual properties are protected.
Risks relating to legal, compliance and taxation
The Group operates in multiple jurisdictions with applicable trade and tax
regulations that vary. Failing to comply with local regulations or a change in
legislation could impact the profits of the Group. In addition, the effective
tax rate of the Group is affected by where its profits fall geographically.
The Group’s effective tax rate could therefore fluctuate over time and have
an impact on earnings and potentially its share price.
Risk mitigation – An outsourced internal audit function has been introduced
to provide risk assurance in targeted areas of the business and
recommendations for improvement. The scope of these reviews includes
behaviour, culture, and ethics.
The Group hires employees with relevant skills and uses external advisers to
keep up to date with changes in regulations and to remain compliant.
The Group establishes clear healthy and safety policy and procedures.
Strategic risk associated with valuing or integrating new acquisitions
The Group may elect from time to time to make strategic acquisitions. A degree
of uncertainty exists in valuation and in particular in evaluating potential
synergies. Post-acquisition risks arise in the form of change of control and
integration challenges. Any of these could influence the Group’s revenues,
results of operations and financial condition.
Risk mitigation – Preparation of robust business plans and cash projections
with sensitivity analysis and the help of professional advisers if
appropriate.
Post-acquisition reviews are performed to extract ‘lessons learned’.
Loss of key personnel or failure to attract new personnel
The future success of the Group is substantially dependent on the continued
services and continuing contributions of its Directors, senior management, and
other key personnel. The loss of the services of key employees could have a
material adverse effect on own business.
Risk mitigation – The Group undertakes performance evaluations and reviews
to help it stay close to its key personnel as well as annual employee
engagement surveys. Where considered appropriate, the Group also makes use of
financial retention tools such as equity awards.
Exposure to exchange rate fluctuations
The Group deals in many currencies for both its purchases and sales including
US Dollars, Euro, and its reporting currency Pounds Sterling. In particular,
North America represents an important geographic market for the Group where
virtually all the revenues are denominated in US Dollars. The Group also
sources components in US Dollars and the Chinese Yuan. The Group therefore has
an exposure to foreign currency fluctuations. This could lead to material
adverse movements in reported earnings.
Risk mitigation – The Group reviews balance sheet and cash flow currency
exposures and where considered appropriate, uses forward exchange contracts to
hedge these exposures.
The Group does not hedge any translation of its subsidiaries’ results to
Sterling for reporting purposes.
Risk associated with Supply Chain
The Group is dependent on retaining its key suppliers and on their ability to
meet their obligations to the Group. Global supply chains continued to be
under pressure mainly due to component shortages and global logistics.
As the proportion of our own-manufactured products has increased, the reliance
on suppliers for third party product has been mitigated proportionally. There
has been a shift from a finished goods risk to a raw materials risk.
Risk Mitigation - We conduct regular audits of our key suppliers and in
addition keep large amounts of safety inventory of key components, which we
also regularly review. We also dual source our components where possible to
minimise dependency on any single supplier.
Climate related risks
The Group is exposed to climate related risks that can have a negative impact
on the business. Extreme weather events or local power supply robustness can
cause disruptions to our manufacturing sites and supply chain. Failure to meet
the defined net zero targets may cause reputational damage, dissuade potential
investors, or result in greater costs from any introduction of carbon pricing.
Risk Mitigation - The Group operates with flexibility in capacity across sites
and can also respond to temporary outages with changes in working patterns to
compensate. We are also currently constructing a third major site in Malaysia,
which will provide further manufacturing flexibility and reduce reliance on
the Vietnam site.
We perform regular review on relevant policies and KPIs to ensure set targets
are deliverable.
Directors’ responsibility statement
The Directors confirm to the best of their knowledge that:
* the unaudited interim results have been prepared in accordance with IAS 34
Interim Financial Reporting issued by International Accounting Standards
Board; and
* the interim results include a fair view of the information required by DTR
4.2.7 (indication of important events during the first six months and
description of principal risks and uncertainties for the remaining six months
of the year) and DTR 4.2.8 (disclosure of related party transactions and
changes therein).
The Directors of XP Power Limited are as follows:
Jamie Pike Non-Executive Chair
Gavin Griggs Chief Executive Officer
Andy Sng Executive Vice President, Asia
Polly Williams Senior Independent Director
Pauline Lafferty Non-Executive Director
Sandra Breene Non-Executive Director
Amina Hamidi Non-Executive Director
Signed on behalf of the Board by
Jamie Pike Gavin Griggs
Non-Executive Chair Chief Executive Officer
1 August 2023
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