REG-XP Power Ltd: Half-year Report
01/08/2019 07:05
1 August 2019
XP Power Limited
(“XP Power” or “the Group” or the “Company”)
Interim Results for the six months ended 30 June 2019
XP Power, one of the world's leading developers and manufacturers of critical
power control solutions for the electronics industry, today announces its
interim results for the six-month period ended 30 June 2019.
Six months ended Six months ended
30 June 2019 30 June 2018
(Unaudited) (Unaudited) Change
Highlights
Order intake £100.6m £101.4m -1%
Revenue Turnover £98.9m £93.2m +6%
Gross margin 44.6% 46.7% -210bps
Interim dividend per share 35.0p 33.0p +6%
Adjusted
Adjusted operating profit (1) £18.2m £20.7m -12%
Adjusted profit before income tax (1) £16.6m £20.3m -18%
Adjusted diluted earnings per share (2) 69.2p 83.7p -17%
Reported
Cash generated from operations £25.2m £15.8m +59%
Net debt £50.4m £52.0m (3) N/A
Profit before tax £12.9m £18.5m -30%
Profit attributable to equity holders £10.3m £14.6m -29%
Diluted earnings per share 52.8p 74.9p -30%
(1)Adjusted for completed acquisition costs of £0.4 million (1H 2018: £0.4
million), intangibles amortisation of £1.6 million (excluding amortisation
for development costs) (1H 2018: £1.0 million), changes in accounting policy
of £Nil (1H 2018: £0.4 million), legal costs of £1.2 million (1H 2018:
£Nil) and ERP implementation costs £0.5 million (1H 2018: £Nil)
(2)Adjusted for completed acquisition costs of £0.4 million (1H 2018: £0.4
million), intangibles amortisation of £1.6 million (excluding amortisation
for development costs) (1H 2018: £1.0 million), changes in accounting policy
of £Nil (1H 2018: £0.4 million), legal costs of £1.2 million (1H 2018:
£Nil), ERP implementation costs £0.5 million (1H 2018: £Nil) and
non-recurring tax benefits of £0.5 million (1H 2018: £0.1 million)
(3)Balance as at 31 December 2018
· Robust revenue growth in the Healthcare sector up 8%, Industrial
sector up 13%, and Technology sector up 12%, offset by weakness in the
Semiconductor Manufacturing Equipment sector down 34%.
· Order intake decreased by 1% to £100.6 million (7% decrease in
constant currency).
· Revenue increased by 6% to £98.9 million (flat at constant
currency).
· Own-design XP product revenues increased 6% on a reported basis
to a record £77.3 million (1H 2018: £72.6 million), and represent 78% of
total revenues (1H 2018: 78%).
· Gross margin reduced to 44.6% (1H 2018: 46.7%) due to the impact
of Section 301 trade tariffs imposed by the USA on goods imported from China,
adverse product and geographic mix, and the impact of component price
inflation incurred in 2018 when supplies of critical electronic components
tightened.
· Expansion of the Vietnamese manufacturing facility, which was
completed in Q1 2019, enables the Group to provide its USA customers with
products that are not subject to the 25% Section 301 tariffs. The Group has
transferred manufacturing of over 1,500 different products from China to
Vietnam in the past year.
· Restructuring of low power, high voltage DC-DC manufacturing
through transfer of operations from Nevada to Vietnam, resulting in annual
savings of circa £4.0 million from June 2020.
· A portion of the savings from the restructuring will be
reinvested in expanding our new product introduction team to facilitate the
transfer of further production volumes from the USA to Vietnam, resulting in
further savings over the medium term.
· Cash generated from operations up 59% to £25.2 million (1H
2018: £15.8 million) as a result of improved working capital management.
· Dividend for the first half of 2019 increased by 6% to 35.0 pence
per share (1H 2018: 33.0 pence per share), reflecting the confidence the Board
has in the Group’s longer term prospects.
James Peters, Chairman, commented:
“Our results for the first half reflect tougher trading conditions in the
second quarter. While growth in our Healthcare, Industrial and Technology
markets remained robust, this was offset by a cyclical slowdown in the
Semiconductor Equipment Manufacturing market and pressure on gross margins,
resulting from the increase in USA trade tariffs on Chinese manufactured
goods, historic component price inflation and product mix.
Notwithstanding these current headwinds, we continue to win new design slots
at our key customers and to take market share. We benefit from a broad
customer base as demonstrated by the resilience of our Industrial, Healthcare
and Technology sector performance. We are well positioned to take further
share and will benefit from any recovery in the Semiconductor Equipment
Manufacturing sector. While we remain mindful of potential short-term risks
and macroeconomic challenges, we continue to expect an improved revenue
performance in the second half of the year as a result of the increase in our
order book since the year end. With a proven strategy, strong design win
momentum and an expanded product portfolio, the Board remains positive
regarding the future of the Group.”
Enquiries:
XP
Power
Duncan Penny, Chief Executive
Officer
+44 (0)118 984 5515
Gavin Griggs, Chief Financial
Officer
+44 (0)118 984 5515
Citigate Dewe
Rogerson
Kevin Smith/Jos
Bieneman
+44 (0)20 7638 9571
Note 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.
XP Power typically designs power control solutions into the end products of
major blue-chip OEMs, with a focus on the Industrial (circa 48% of sales),
Healthcare (circa 24% of sales), Semiconductor Equipment Manufacturing (circa
17% of sales) and Technology (circa 11% of sales) sectors. Once designed
into a programme, XP Power has a revenue annuity over the life cycle of the
customer’s product which is typically 5 to 7 years depending on the industry
sector.
XP Power has invested in research and development and its own manufacturing
facilities in China and Vietnam, to develop a range of tailored products based
on its own intellectual property that provide its customers with significantly
improved functionality and efficiency.
Headquartered in Singapore and listed on the Main Market of the London Stock
Exchange since 2000, XP Power serves a global blue-chip customer base from 29
locations in Europe, North America and Asia.
For further information, please visit xppower.com.
1 August 2019
XP Power Limited
(“XP”, “XP Power” or “the Group”)
Interim Results for the six months ended 30 June 2019
INTERIM STATEMENT
Overview
The Group made a good start to 2019 with encouraging order intake in the first
quarter but the second quarter of the year has proved to be more challenging.
While we have continued to see robust growth in our Healthcare, Industrial
and Technology revenues, there has been a further slowdown in the
Semiconductor Equipment Manufacturing sector due to the weaker market for
memory. This has affected a number of our larger customers who are working
through inventory as they await a recovery in market conditions, which is not
expected before 2020. Furthermore, the imposition of Section 301 tariffs by
the USA on products we supply from China into the USA, which were increased
from 10% to 25% in May 2019, and the retaliatory tariffs China has placed on
USA manufactured products has caused downward pressure on our gross margins in
the first half. The strong performance we have delivered in the Healthcare,
Industrial and Technology sectors has not been enough to compensate for the
detrimental effect of these two factors.
Our decision to establish manufacturing capability in Vietnam in 2012 and the
subsequent capacity expansion which was completed in the first quarter of 2019
have proved to be extremely timely. Our Vietnam manufacturing plant allows
us to offer our USA customers products which are not subject to the 25%
Section 301 tariff imposed by the Trump administration on power converters
manufactured in China. The majority of our competition have a predominantly
Chinese manufacturing footprint. We have transferred the production of over
1,500 different products from China to Vietnam in the last 12 months. We are
also announcing plans to transfer the manufacture of all our low power, high
voltage DC-DC converters to Vietnam by mid-2020, which we expect will lead to
significant cost savings.
Notwithstanding these headwinds, we are continuing to win new design slots
with our key customers and take market share. The acquisitions of Comdel in
Radio Frequency (“RF”) power and Glassman High Voltage in high power, high
voltage have significantly expanded our addressable market. They are
providing a springboard for future growth in our existing customer base as our
sales teams find interesting new applications for these products.
Our Strategy and Value Proposition
We remain committed to our strategy and continue to invest for the medium and
longer term. We continued to execute well against our strategy in the
period, gaining further design wins from our newer product introductions and
our increased focus on engineering solutions which provide more value to our
customers. The successful implementation of our strategy continues to drive
market share gains and the strength of our new programme wins is encouraging.
The Group has applied a consistent strategy of moving up the value chain and
our growth derives in part from the targeting of key customers. Once we are
approved to supply these larger customers, we have a strong track record of
successfully gaining a larger share of their available business. We also
continue to expand the breadth of our product portfolio, both organically and
by acquisition, in what remains a highly fragmented sector, therefore enabling
us to increase our addressable market. Since the end of 2015, we have
completed three acquisitions which have allowed us to expand into the high
voltage and RF power market sectors increasing our addressable market by circa
US$2.0 billion (75%).
Our acquisition of the Glassman High Voltage business in May 2018 opened up
the circa US$500 million high power, high voltage market to the Group. The
combination of the XP Power sales force with the engineering and manufacturing
capability at Glassman is compelling, and we are finding good opportunities
for this product line. We now have an enviable product portfolio of over 300
product families from low voltage to 500 kilo Volts at power levels up to 200
kilo Watts. This breadth of range combined with our excellent customer
support and Engineering Services capabilities makes us the ideal choice of
power solutions provider to our target customers.
Our value proposition to customers is to reduce their overall costs of design,
manufacture and operation and get their product to market as quickly as
possible. We achieve this by providing excellent sales engineering support
and producing new highly reliable products that are easy to design into the
customer’s system, consume less power, take up less space and reduce
installation times.
Our vision is to be the first-choice power solutions provider, delivering the
ultimate experience for our customers and as a place of work for our people.
XP Power supplies power control solutions to Original Equipment Manufacturers
(“OEMs”) who supply the Healthcare, Industrial, Semiconductor Equipment
Manufacturing and Technology markets with high value, high reliability
products. The increasing importance of energy efficiency for environmental,
reliability and economic reasons; increasing demand for digital connectivity
of power conversion products; the necessity for ever smaller products; the
accelerating rate of technological change; and the increasing proliferation of
electronic equipment and semiconductor devices, have established a strong
foundation for growth in demand for XP Power’s products.
Trading and Financial Review
On a statutory basis, revenue was £98.9 million (1H 2018:
£93.2 million), representing growth of 6%. Operating profit was £14.5
million (1H 2018: £18.9 million), a decrease of 23% against the prior year,
with operating margin at 14.7% (1H 2018: 20.3%). Net finance costs were
£1.6 million (1H 2018: £0.4 million), resulting in profit before
tax of £12.9 million (1H 2018: £18.5 million). Income tax expense was
£2.5 million (1H 2018: £3.8 million), equivalent to an effective tax rate
of 19.4% (1H 2018: 20.5%). Basic earnings per share were 53.8 pence (1H
2018: 76.4 pence), a decrease of 30%.
Adjusted Results
Throughout this Interim Results statement, adjusted and other alternative
performance measures are used to describe the Group’s performance. These
are not recognised under International Financial Reporting Standards
(“IFRS”) or other Generally Accepted Accounting Principles (“GAAP”).
When reviewing XP Power’s performance, the Board and management team focus
in particular on adjusted results rather than statutory results. There are a
number of items included in our statutory results which are considered by the
Board to be one-off in nature or not representative of the Group’s
performance and are thus excluded from adjusted results. The tables in note
5 show the full list of adjustments between statutory operating profit and
adjusted operating profit by business, as well as between statutory profit
before tax and adjusted profit before tax at Group level for both 2019 and
2018.
Order Intake
Order intake of £100.6 million (1H 2018: £101.4 million) was down 1% on a
reported basis. Given that the majority of orders are placed in US Dollars,
the reported results reflect the impact of the weaker Sterling:US Dollar
exchange rate of 1.29 in 2019, compared to 1.39 in the prior year. When
adjusted to constant currency, 2019 orders were down 7% compared with the
prior year. In constant currency, compared to the same period a year ago,
Asia orders increased by 11%, Europe orders increased by 1%, while North
America orders decreased by 12% (19% organic). The majority of our
Semiconductor Equipment Manufacturing customers are in North America, and the
downturn in this sector is the key driver of the decline in orders in North
America.
Order intake in the first half of 2019 exceeded revenues with a resultant
book-to-bill ratio of 1.02 (1H 2018: 1.09). We enter the second half of the
current year with an order book of £86.1 million (December 2018: £81.5
million).
Revenue Performance
Reported revenues grew by 6% to £98.9 million in the six months to 30 June
2019 compared to £93.2 million in the same period a year ago. When
adjusting to constant currency, 2019 revenues were flat compared to 2018.
Revenues in North America were US$72.9 million (1H 2018: US$79.0 million),
down 8% compared to the same period a year ago. Excluding revenues from
Glassman High Voltage which was acquired in May 2018 of US$7.6 million (1H
2018: US$1.4 million), organic revenues declined by 16%, reflecting the weak
performance of the Semiconductor Equipment Manufacturing sector. Revenues in
Europe were £32.9 million (1H 2018: £29.7 million), up 11% on the same
period a year ago (approximately half the European revenues are denominated in
US Dollars). Our business in Europe is very diverse but heavily weighted
towards the Industrial sector which has held up well. While difficult to
quantify, there is anecdotal evidence of some customers reporting inventory
build up to buffer potential adverse effects arising from a disorderly Brexit.
Revenues in Asia were US$12.3 million (1H 2018: US$9.0 million), up a
healthy 36% compared with the same period a year ago driven by a Technology
sector programme coming back to life and strong performance from RF
programmes.
On a sector basis, revenues from Healthcare customers grew by 8% to US$30.2
million (1H 2018: US$28.0 million). Revenues from Industrial customers
increased by 13% to US$60.9 million (1H 2018: US$54.1 million). Revenues
from Technology customers grew 12% to US$13.9 million (1H 2018: US$12.4
million). In contrast to the robust growth in the Healthcare, Industrial and
Technology sectors, revenues from Semiconductor Equipment Manufacturing
customers declined significantly by 34% to US$22.7 million (1H 2018: US$34.6
million) as a result of weakness in the market for memory. We are not
expecting any recovery in the Semiconductor Equipment Manufacturing market
before 2020. The acquired Glassman High Voltage business contributed US$5.3
million (1H 2018: US$1.0 million) to Semiconductor Equipment Manufacturing
revenues in 1H 2019, giving an organic decline in revenue of 48% in this
sector compared to organic growth of 68% in 2018. Notwithstanding the
decline in the Semiconductor Equipment Manufacturing sector, we regard this
sector as having highly attractive growth prospects which are being driven by
the growth of Big Data, Augmented Intelligence and the Internet of Things.
XP Power’s expansion of its capabilities into higher voltage, higher power
and RF power has made us an attractive power solutions provider to the many
Healthcare and Semiconductor Equipment Manufacturers who use these types of
products and value our engineering solutions capability.
In terms of overall revenue for the first half of 2019, Industrial represented
48% (1H 2018: 42%), Technology represented 11% (1H 2018: 10%), Healthcare
represented 24% (1H 2018: 22%) and Semiconductor Equipment Manufacturing
represented 17% (1H 2018: 26%).
Our customer base remains highly diversified with the largest customer
accounting for only 9% of revenue (1H 2018: 16%), spread over 180 different
programmes/part numbers.
Gross Margin
Gross margin in the first half of 2019 was 44.6% (1H 2018: 46.7%), a 210 bps
decline on a reported basis and 150 bps in constant currency. The 150 bps
decline in gross margin in constant currency resulted from a combination of
the higher component costs incurred in 2018 now being reflected within our
cost of sales, adverse geographic and product mix, and the impact of Section
301 tariffs which we have not been able to fully recover from customers.
Whilst we expect the Section 301 tariffs to be resolved in the short to
medium term, we are continuing to work with customers on tariff recovery and
mitigation, and expect our gross margin to benefit from this in the second
half of 2019 as a result.
Adjusted Operating Expenses and Margins
Adjusted operating expenses in the first half were £25.9 million (1H 2018:
£23.2 million reported and £23.9 million in constant currency) after
adjusting for £1.6 million of intangibles amortisation (1H 2018: £1.0
million), £0.4 million of acquisition related costs (1H 2018: £0.4 million),
£0.5 million of Enterprise Resource Planning (“ERP”) system
implementation costs (1H 2018: £Nil) and £1.2 million of legal costs (1H
2018: £Nil). The legal costs relate to an ongoing legal dispute in North
America. The dispute is non-customer related and is currently in
mediation.
The principal increase in operating expenses was in Product Development. We
are engaging in ever more sophisticated and complex programmes with many of
our key customers. These customers value XP Power’s engineering solutions
and power conversion expertise to solve their power-related challenges and get
their products to market more quickly. Systems are becoming more complex
and there is increasing demand for power conversion solutions that communicate
with both the customers’ applications and with the outside world as the
concept of an Internet of Things promulgates. This area of the market allows
us to add more value to our customers’ engineering teams and is less crowded
with low cost Asian competition. As such, we continue to reinvest part of
the cash returns generated from our growth to fund further expansion of our
engineering capabilities, particularly our engineering solutions groups in
Asia, Europe and North America.
Gross product development spend was £8.9 million (1H 2018: £6.6 million),
£4.4 million of which was capitalised (1H 2018: £2.8 million), and £1.8
million amortised (1H 2018: £1.4 million). We will continue to invest in
engineering resources to drive future revenue growth.
We have also continued to invest in additional customer support and
engineering resources as we remain committed to the future growth of the
business.
The reduction in gross margin combined with the increase in expenses resulted
in a lower adjusted operating margin of 18.4% (1H 2018: 22.2%).
Finance Cost
Net finance cost increased to £1.6 million (1H 2018: £0.4 million) due to
increased average borrowings following the acquisition of Glassman High
Voltage in May 2018 and the requirement to build additional inventory in the
second half of 2018 as a result of significant increases in component lead
times. Our raw material inventory in Asia has started to reduce toward more
normal levels although the longer lead times remain for some of our
components. The Group also recognised an interest expense of £0.1 million (1H
2018: £Nil) in relation to leases due to the adoption of IFRS 16 from 1
January 2019.
Interest cover (EBITDA as a multiple of net interest expense as defined by
our Revolving Credit Facility) was 18.8 times (1H 2018: 74.6 times) which
is well in excess of the minimum required in our banking covenants.
Adjusted Profit before Tax
The Group generated adjusted profit before tax of £16.6 million (1H 2018:
£20.3 million), down 18% year-on-year despite the growth in revenue due to a
gross margin dilution of 210bps and an increase of 170bps investment in
operating costs and the increased finance charge.
Specific Items
Specific items are excluded from management’s assessment of profit because
they distort the Group’s underlying earnings either due to their size or
nature. In the first half of 2019, the Group incurred £3.7 million (1H
2018: £1.8 million) of specific items, which consisted amortisation of
intangible assts due to business combinations of £1.6 million (1H 2018: £1.0
million), £1.2 million of legal costs (1H 2018: £Nil), £0.5 million of ERP
system implementation costs (1H 2018: £Nil) and £0.4 million of
acquisition related costs (1H 2018: £0.4 million).
Taxation
The tax charge for the period was £2.5 million (1H 2018: £3.8 million),
representing an effective tax rate of 19.4% (1H 2018: 20.5%). After
adjusting for specific items, the effective tax rate for the period was 18.1%
(1H 2018: 18.7%).
We currently expect our future effective tax rate to be in the range of 17% to
19% depending on the geographic distribution of our future profits.
Operating Cash Flows and Net Debt
The Group generated net cash from operations of £25.2 million, up 59% from
the £15.8 million generated in the previous year. The higher level of
operating cash flows was largely due to better working capital management,
with net working capital inflows of £4.6 million compared to outflows of
£8.4 million in 2018, with inventory levels reducing from the higher levels
seen in 2018. We expect a further unwinding of working capital in the second
half of 2019.
Net debt was £50.4 million at 30 June 2019, compared with £52.0 million at
31 December 2018. The Group continued its progressive dividend policy which
resulted in returning £10.2 million (1H 2018: £9.2 million) to shareholders
in the form of dividends.
Product Development
New products are fundamental to our revenue growth. The broader our product
offering, the higher the probability that we will have a product which will
work in the customer’s application, with or without a modification by our
engineering team. By expanding into high voltage and RF power, we have
increased our addressable market from around US$3.0 billion to approximately
US$4.7 billion.
The design-in cycles required by our customers to qualify the power converter
in their equipment and to gain the necessary safety agency approvals are
lengthy. Typically we see a period of around 18 months, or even longer in
healthcare, from first identifying a customer opportunity to receiving the
first production order. Revenue will then start to build from this point,
often peaking a number of years later. The positive aspect of this
characteristic is that our business has a strong annuity base where programmes
typically last seven to eight years. Another aspect of this model is that
the many new products we have introduced over the last three years have yet to
make a meaningful impact on our revenue, creating a significant benefit for
future years.
XP Power launched 9 new product families in the first half of 2019 (1H 2018:
12). We continue to lead our industry in the introduction of high
efficiency, “green” products, with all of the new product families
released in the first half of 2019 having high efficiency and/or low stand-by
power.
Following the acquisition of Glassman High Voltage in May 2018, we released
our first high power, high voltage product family. The EY Series is a range
of high voltage, rack mount, laboratory type power supplies that can also be
used in Original Equipment Manufacturer (“OEM”) applications.
Delivering up to 1,200 Watts of power, there are models covering output
voltages from 1 kilo Volts to 60 kilo Volts.
We have also demonstrated our continued move up the power level in low voltage
with the release of a new family of 5 kilo Watt products. In addition, we
brought our offering of medical external power supplies up to date with new
product families at 150 and 200 Watts, together with the introduction of
low-cost next generation 40 and 60 Watt open frame products.
With larger customers continuing to reduce the number of vendors they deal
with, XP Power’s broad product offering, excellent global engineering
support, in-house manufacturing capability and industry-leading environmental
credentials leave the Group well-placed to secure further preferred supplier
agreements. The addition of RF power and high voltage, high power products
to our range via the acquisitions of Comdel and Glassman further enhances this
proposition. Combining this with our Engineering Services offering makes us
a compelling partner to our larger customers who come to us to provide leading
edge power solutions to power their complex applications.
Manufacturing Progress
XP Power’s move into manufacturing in 2006 has been instrumental in enabling
the Group to win approved and preferred supplier status with new Blue-Chip
customers who value suppliers that have complete control over their
manufacturing and supply chain to ensure the highest levels of quality and
agility.
To supplement our original Chinese manufacturing facility in Kunshan near
Shanghai, our Vietnamese manufacturing facility, located in Ho Chi Minh City,
began production of its first magnetic components in 2012. Since the fourth
quarter of 2014, our Vietnamese facility has been producing complete power
converters of the same standard as our Chinese facility.
We completed the construction of a second factory on our existing site in
Vietnam in the first quarter of 2019, and this is expected to add US$130
million of manufacturing capacity per year. This will increase our total
manufacturing capacity in Asia from US$170 million to US$300 million per year.
The move into Vietnam and the recently completed capacity expansion have
proved particularly timely given the deterioration in trade relations between
China and the USA and the imposition of Section 301 tariffs at a rate of 10%
from September 2018 and 25% since 10 May 2019. The majority of our
competitors have Chinese based manufacturing facilities which puts them at a
significant commercial disadvantage if they are selling into the USA. The
ability to manufacture in Vietnam has become a compelling value proposition to
our USA customers. Realising this advantage in full will take time as some
customers will need to approve the transfer of production from our Chinese
facility to our Vietnamese facility. Kunshan will continue to focus on the
higher power, higher complexity products and products destined for the Chinese
market.
Since the summer of 2018, we have been working to ensure all products less
than 1.5 kilo Watts can be manufactured in both China and Vietnam to provide
supply flexibility and business continuity. This process is now complete.
Vietnam is now qualified to produce a total of 1,819 different products (1H
2018: 282), demonstrating the effect and resources that have gone into the
transfer of production. XP Power manufactured 779,800 (1H 2018: 716,900)
power converters in total during the first half of 2019, and 619,600 (1H 2018:
504,800) of these were produced in Vietnam. We expect to be able to win more
design slots with our key customers in the coming months due to this important
strategic capability. Our Vietnamese facility would continue to enjoy a cost
advantage over competitors with a predominantly Chinese manufacturing
footprint, even in the event that the Trump administration decides to levy
Section 301 tariffs on power converters produced in Vietnam.
Having the capability to produce the majority of our products in both China
and Vietnam also significantly helps with business continuity planning.
Restructuring of Low Power, High Voltage Manufacturing and Transfer to Vietnam
In order to take advantage of our expanded Vietnam capacity, competitive
labour rates and excellent quality, we will be transferring the manufacture of
all our low power, high voltage DC-DC modules to our Vietnamese facility.
Our manufacturing facility in Minden, Nevada will close by June 2020. We
expect that this will result in annualised cost savings of approximately £4.0
million. Approximately £1-2 million of these cost savings will be
reinvested back into the business to expand and strengthen our new product
introduction team. The enlarged team will facilitate further transfers of
existing engineering services production from our facility in Sunnyvale,
California to Vietnam, as well as new standard products as they are
introduced, resulting in additional future savings. We expect to incur
approximately £1-2 million in costs associated with the full closure of the
site over the next 12 months.
Supply Chain
In 2018, we saw significant cost inflation and extension of lead times for
many of the electrical components that we incorporate into our products,
particularly Mosfet transistors and multilayer surface mount capacitors. As
a result of this, we increased our safety inventories significantly and
secured critical components at prices above our standard costs in order to
ensure we could continue to support our customers production requirements.
Since the summer of 2018, we have seen certain component lead times reduce
but the supply of certain critical components such as Mosfets remains
constrained. We are continuing to manage our component inventory, building
in a sufficient margin of safety stock on critical lines wherever possible.
There has been significant focus on reducing inventory where possible, and we
have seen factory-held component inventory reduce in the first half of 2019.
New Enterprise Resource Planning (“ERP”) System
Efficient and robust systems are essential in order for us to manage an
international business and supply chain with a highly diverse customer base.
We already operate a global Customer Relationship Management system across
all our businesses, which allows us to collaborate, share information and
provide efficient and effective customer service. In our 2017 Annual Report,
we announced a project to implement the latest version of SAP across our
entire global supply chain. The project will first focus on our sales
companies in Asia, Europe and North America, which already run a version of
SAP, followed by our China and Vietnam manufacturing facilities and our recent
acquisitions.
We expect this implementation to have significant benefits in terms of factory
planning and customer responsiveness and it will give us significant
operational advantages with our factory systems running on the same platform
as our sales companies. Further gains will be realised when we migrate the
acquired Comdel and Glassman High Voltage businesses to the new platform.
We expect to go live with the sales companies in the second half of 2019, and
with the Chinese and Vietnamese factories in 2020. The Group capitalised
£1.8 million (1H 2018: £Nil) of development costs and incurred £0.5 million
(1H 2018: £Nil) of other project related costs in the first half of 2019 in
respect of this project.
Dividend
The Company makes quarterly dividend payments. Our strong cash flows and
confidence in the Group’s prospects have enabled us to increase total
dividends for the first half by 6% to 35.0 pence per share (1H 2018: 33.0
pence per share) despite the headwinds we are facing from the Semiconductor
Equipment Manufacturing sector and Section 301 tariffs.
The first quarter dividend payment of 17.0 pence per share was made on 11 July
2019. The second quarter dividend of 18.0 pence per share will be paid on 10
October 2019 to shareholders on the register at 13 September 2019.
The compound average growth rate in dividends over the last 10 years has been
14%.
Brexit
As previously reported, the Group analysed the implications of a no deal
Brexit and concluded that it would have limited operational implications. In
the first quarter of 2019, we implemented our contingency plan for a no deal
Brexit which involved transferring certain inventories held in support of 15
key accounts from our UK warehouse to our German warehouse. While we will
not be immune to any macroeconomic consequences of a no deal Brexit, we are
confident that the actions we have taken will prevent any internal operational
issues.
We have seen evidence of some customers bringing orders forward and increasing
their inventories as part of their Brexit planning. The magnitude of this
activity on the phasing of our orders and revenues is difficult to quantify
but we do not believe it to be substantial.
Environmental Impact and “Green” Products
XP Power has placed improved environmental performance at the heart of its
operations both in terms of minimising the impact its activities have on the
environment and, as importantly, in its product development strategy.
We have developed a class-leading portfolio of “green” products with
efficiencies up to 95% and many of these products also have low stand-by power
(a feature to reduce the power consumed while the end equipment is not
operational but in stand-by mode). Revenues for these ultra-high efficiency
“green” products continue to grow and are up by 43% on a reported basis to
£28.1 million (1H 2018: £19.7 million) representing 28% of total revenue (1H
2018: 21%). The RF power products added to our portfolio as a result of the
acquisition of Comdel and the majority of the high power, high voltage
products added to our portfolio as a result of the acquisition of Glassman
High Voltage are not classified as “green” products.
Outlook
We continue to see a robust performance from our Healthcare, Industrial and
Technology businesses, however, a combination of continued softness in the
Semiconductor Equipment Manufacturing sector and the task of recovering
Section 301 tariffs present us with a continuing challenge as we enter the
second half.
Our Vietnamese manufacturing capability puts us in a strong position to
mitigate the impact of Section 301 tariffs. The transfer of production from
China to Vietnam, and the qualification of product by our key customers once
transferred, is key to restoring our margins to historical levels. Once this
is achieved, our production footprint should give us a compelling cost
advantage over the majority of our competitors who produce predominantly in
China. Our margins in 2020 will also start to benefit from the closure of
our Minden facility and the transfer of the Minden-built products to Vietnam.
Although we do not anticipate any meaningful upturn in the Semiconductor
Equipment Manufacturing sector before 2020, once the recovery takes hold we
expect the combination of our recent design wins and the cyclical recovery to
produce significant growth in this sector.
We remain conscious of potential risks arising from the global macroeconomic
challenges, the Board expects further revenue growth in the second half of the
year notwithstanding the current softness in the Semiconductor Equipment
Manufacturing market.
We believe we are well along the path to achieving our vision of becoming the
first-choice power solutions provider to our existing and target customer
base.
Independent review report to XP Power Limited
Report on review of interim financial information
Introduction
We have reviewed the accompanying condensed consolidated financial information
of XP Power Limited (“the Company”) and its subsidiaries (“the Group”)
set out on pages 14 to 26, which comprise the condensed consolidated balance
sheet of the Group as at 30 June 2019, the condensed consolidated statements
of comprehensive income, changes in equity and cash flows for the 6-month
period then ended and the related 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 adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom’s Financial Conduct Authority. Our
responsibility is to express a conclusion on this 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 half-yearly financial
report, which comprise the “Interim Results” set out on pages 1 to 3,
“Interim Statement” set out on pages 4 to 12 and “Risks and
uncertainties” set out on pages 27 to 28, and considered whether it contains
any apparent misstatements or material inconsistencies with the information in
the 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 adopted by
the European Union and the Disclosure and Transparency Rules of the United
Kingdom’s Financial Conduct Authority.
PricewaterhouseCoopers LLP
Public Accountants and Chartered Accountants
Singapore,
1 August 2019
XP Power Limited
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2019
£ Millions Note Six months ended 30 June 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Revenue 5 98.9 93.2
Cost of sales (54.8) (49.7)
Gross profit 44.1 43.5
Expenses
Distribution and marketing (20.3) (18.3)
Administrative (3.0) (1.1)
Research and development (6.3) (5.2)
Operating profit 14.5 18.9
Finance charge (1.6) (0.4)
Profit before income tax 12.9 18.5
Income tax expense 6 (2.5) (3.8)
Profit after income tax 10.4 14.7
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges * 0.5
Exchange differences on translation of foreign operations (0.2) 1.3
(0.2) 1.8
Items that will not be reclassified subsequently to profit or loss:
Currency translation differences arising from consolidation * -
Other comprehensive (loss)/income, net of tax (0.2) 1.8
Total comprehensive income 10.2 16.5
Profit attributable to:
- Equity holders of the Company 10.3 14.6
- Non-controlling interests 0.1 0.1
10.4 14.7
Total comprehensive income attributable to :
- Equity holders of the Company 10.1 16.3
- Non-controlling interests 0.1 0.2
10.2 16.5
Earnings per share attributable to equity holders of the Company Pence per Share Pence per Share
Basic 8 53.8 76.4
Diluted 8 52.8 74.9
* 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 2019
£ Millions Note At 30 June 2019 (Unaudited) At 31 December 2018
ASSETS
Current assets
Corporate tax recoverable 0.8 0.8
Cash and cash equivalents 10.8 11.5
Inventories 51.2 56.5
Trade receivables 33.2 33.0
Other current assets 3.5 3.3
Derivative financial instruments 0.1 *
Total current assets 99.6 105.1
Non-current assets
Goodwill 54.0 54.1
Intangible assets 9 46.6 43.6
Property, plant and equipment 31.4 30.7
Right-of-use assets 11 5.5 -
Deferred income tax assets 1.0 0.6
ESOP loans to employees 0.1 0.2
Total non-current assets 138.6 129.2
Total assets 238.2 234.3
LIABILITIES
Current liabilities
Current income tax liabilities 3.6 4.2
Trade and other payables 22.4 22.4
Derivative financial instruments 0.1 0.2
Lease liabilities 11 1.9 -
Total current liabilities 28.0 26.8
Non-current liabilities
Accrued consideration 1.4 1.4
Borrowings 61.2 63.5
Deferred income tax liabilities 5.4 4.7
Provisions 0.1 0.5
Lease liabilities 11 3.8 -
Total non-current liabilities 71.9 70.1
Total liabilities 99.9 96.9
NET ASSETS 138.3 137.4
EQUITY
Equity attributable to equity holders of the Company
Share capital 27.2 27.2
Treasury shares and share option reserve 2.1 1.1
Merger reserve 0.2 0.2
Hedging reserve 0.1 0.1
Translation reserve 3.8 4.0
Other reserve (0.8) (0.8)
Retained earnings 104.8 104.6
137.4 136.4
Non-controlling interests 0.9 1.0
TOTAL EQUITY 138.3 137.4
* Balance is less than £100,000.
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 2019
£ Millions
Attributable to equity holders of the Company
Note Share capital Treasury shares and share option reserve Merger reserve Hedging reserve Translation reserve Other reserve Retained earnings Total Non-controlling interests Total Equity
Balance at 1 January 2018 27.2 0.4 0.2 (0.2) (0.4) (0.8) 89.6 116.0 0.9 116.9
Changes in accounting policy - - - - - - 0.4 0.4 - 0.4
Restated total equity as at 1 January 2018 (unaudited) 27.2 0.4 0.2 (0.2) (0.4) (0.8) 90.0 116.4 0.9 117.3
Sale of treasury shares - 0.7 - - - - (0.2) 0.5 - 0.5
Employee share option plan expenses, net of tax - 0.3 - - - - - 0.3 - 0.3
Dividends paid 7 - - - - - - (9.0) (9.0) (0.2) (9.2)
Exchange difference arising from translation of financial statements of foreign operations - - - - 1.2 - - 1.2 0.1 1.3
Net change in cash flow hedges - - - 0.5 - - - 0.5 - 0.5
Profit for the year - - - - - - 14.6 14.6 0.1 14.7
Total comprehensive income for the period - - - 0.5 1.2 - 14.6 16.3 0.2 16.5
Balance at 30 June 2018 (unaudited) 27.2 1.4 0.2 0.3 0.8 (0.8) 95.4 124.5 0.9 125.4
Balance at 1 January 2019 27.2 1.1 0.2 0.1 4.0 (0.8) 104.6 136.4 1.0 137.4
Sale of treasury shares - 0.3 - - - - (0.1) 0.2 - 0.2
Employee share option plan expenses, net of tax - 0.7 - - - - - 0.7 - 0.7
Dividends paid 7 - - - - - - (10.0) (10.0) (0.2) (10.2)
Exchange difference arising from translation of financial statements of foreign operations - - - - (0.2) - - (0.2) - (0.2)
Net change in cash flow hedges - - - - - - - - - -
Profit for the year - - - - - - 10.3 10.3 0.1 10.4
Total comprehensive income for the period - - - - (0.2) - 10.3 10.1 0.1 10.2
Balance at 30 June 2019 (unaudited) 27.2 2.1 0.2 0.1 3.8 (0.8) 104.8 137.4 0.9 138.3
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 2019
£ Millions Six months ended 30 June 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Cash flows from operating activities
Profit after income tax 10.4 14.7
Adjustments for:
- Income tax expense 2.5 3.8
- Amortisation and depreciation 6.1 3.9
- Finance charge 1.6 0.4
- Equity award charges 0.5 0.3
- Fair value (gain)/loss on derivative financial instruments (0.2) 0.4
- Unrealised currency translation (gain)/loss (0.3) 0.7
Change in the working capital, net of effects from acquisitions:
- Inventories 5.3 (10.1)
- Trade and other receivables (0.6) (4.5)
- Trade and other payables 0.4 6.1
- Provision for liabilities and other charges (0.5) 0.1
Cash generated from operations 25.2 15.8
Income tax paid (2.6) (2.4)
Net cash provided by operating activities 22.6 13.4
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired - (35.6)
Purchases and construction of property, plant and equipment (2.6) (2.8)
Capitalisation of research and development expenditure (4.4) (2.8)
Capitalisation of intangible software and software under development (1.9) -
Proceeds from disposal of property, plant and equipment 0.1 -
Repayment of ESOP loans 0.1 0.1
Net cash used in investing activities (8.7) (41.1)
Cash flows from financing activities
Proceeds from borrowings - 37.3
Repayment of borrowings (2.4) (3.5)
Payment of lease liabilities (0.8) -
Sale of treasury shares 0.3 0.7
Interest paid (1.4) (0.4)
Dividends paid to equity holders of the Company (10.0) (9.0)
Dividends paid to non-controlling interests (0.2) (0.2)
Net cash (used in)/provided by financing activities (14.5) 24.9
Net decrease in cash and cash equivalents (0.6) (2.8)
Cash and cash equivalents at beginning of financial period 11.5 15.0
Effects of currency translation on cash and cash equivalents (0.1) (0.1)
Cash and cash equivalents at end of financial period 10.8 12.1
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 401 Commonwealth Drive, Lobby B #02-02, Haw Par
Technocentre, Singapore 149598.
The nature of the Group’s operations and its principal
activities is to provide power supply solutions to the electronics industry.
These condensed consolidated interim financial statements are
presented in Pounds Sterling (GBP).
2. Basis of preparation
The condensed consolidated interim financial statements for the
period ended 30 June 2019 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 adopted by the European Union.
The condensed consolidated interim financial statements should be
read in conjunction with the annual financial statements for the year ended 31
December 2018 which have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as adopted by the European Union.
3. Going concern
The directors, after making enquiries, are of the view, as at the time of
approving the financial statements, that there is a reasonable expectation
that the Group will have adequate resources to continue operating for the
foreseeable future and therefore the going concern basis has been adopted in
preparing these financial statements.
4. Accounting policies
The condensed consolidated interim financial statements have been
prepared under the historical cost convention except for the fair value of
derivatives in accordance with IFRS 9 Financial Instruments.
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 2018 except for the adoption of new
and amended standards as set out below.
New and amended standards adopted by the Group
A number of new or amended
standards became applicable for the current reporting period and the
Group had to change its
accounting policies and make modified retrospective adjustments as a result of
adopting IFRS 16 Leases.
The impact of the adoption of the new lease standard and
accounting policy is disclosed in note 11. The other standards did not have
any impact on the Group’s accounting policies and did not require
retrospective adjustments.
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 product lines and geographical regions.
Analysis by class of customer
The revenue by class of customer is as follows:
Six months ended 30 June 2019
£ Millions
Europe North America Asia Total
Primary geographical markets
Semiconductor Equipment Manufacturing 0.2 17.1 0.2 17.5
Technology 3.0 7.3 0.5 10.8
Industrial 24.1 15.4 7.7 47.2
Healthcare 5.6 16.5 1.3 23.4
32.9 56.3 9.7 98.9
Six months ended 30 June 2018
£ Millions
Europe North America Asia Total
Primary geographical markets
Semiconductor Equipment Manufacturing 0.2 24.2 0.5 24.9
Technology 2.9 5.6 0.5 9.0
Industrial 21.0 14.0 4.1 39.1
Healthcare 5.6 13.2 1.4 20.2
29.7 57.0 6.5 93.2
5. Segmented and revenue information (continued)
Reconciliation of segment results to profit after income tax:
£ Millions Six months ended 30 June 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Europe 8.8 8.3
North America 15.6 20.1
Asia 3.3 2.1
Segment results 27.7 30.5
Research and development (4.5) (4.0)
Manufacturing (2.2) (1.7)
Corporate cost from operating segment (2.8) (4.1)
Adjusted operating profit 18.2 20.7
Finance charge (1.6) (0.4)
Specific items (3.7) (1.8)
Profit before income tax 12.9 18.5
Income tax expense (2.5) (3.8)
Profit after income tax 10.4 14.7
£ Millions At 30 June 2019 (Unaudited) At 31 December 2018
Total assets
Europe 30.8 28.8
North America 128.9 128.7
Asia 76.7 75.4
Segment assets 236.4 232.9
Unallocated deferred and current income tax 1.8 1.4
Total assets 238.2 234.3
Reconciliation of adjusted measures
The Group presents adjusted operating profit and adjusted profit before tax by
making adjustments for costs and profits which management believes to be
significant by virtue of their size, nature or incidence or which have a
distortive effect on current year earnings. Such items may include, but are
not limited to, costs associated with business combinations, 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 making
adjustments for certain tax charges and credits which management believe to be
significant by virtue of their size, nature or incidence or which have a
distortive effect.
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 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Operating profit 14.5 18.9
Adjusted for:
Acquisition costs 0.4 0.4
Costs related to ERP implementation 0.5 -
Amortisation of intangible assets due to business combination 1.6 1.0
Changes in accounting policy - 0.4
Legal costs (refer to note 10) 1.2 -
3.7 1.8
Adjusted operating profit 18.2 20.7
Adjusted operating margin 18.4% 22.2%
(ii) Reconciliation of profit before tax to adjusted profit before tax:
Profit before tax (“PBT”) 12.9 18.5
Adjusted for:
Acquisition costs 0.4 0.4
Costs related to ERP implementation 0.5 -
Amortisation of intangible assets due to business combination 1.6 1.0
Changes in accounting policy - 0.4
Legal costs (refer to note 10) 1.2 -
3.7 1.8
Adjusted PBT 16.6 20.3
6. Taxation
Income tax expense is recognised based on management’s best estimate of the
weighted average annual income tax expected for the full financial year. The
effective tax rate as at 30 June 2019 is 19.4% (2018: 20.5%).
7. Dividends
Amounts recognised as distributions to equity holders of the Company in the
period:
Six months ended 30 June 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Pence per share £ Millions Pence per share £ Millions
Prior year third quarter dividend paid 19.0 3.7 18.0 3.4
Prior year final dividend paid 33.0 6.3 29.0 5.6
Total 52.0 10.0 47.0 9.0
7. Dividends (continued)
The dividends paid recognised in the interim financial statements relate to
the third quarter and final dividends for 2018.
The first quarterly dividend of 17.0 pence per share (2018: 16.0 pence per
share) was paid on 11 July 2019. A second quarterly dividend of 18.0 pence
per share (2018: 17.0 pence per share) will be paid on 10 October 2019 to
shareholders on the register at 13 September 2019.
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 2019 (Unaudited) Six months ended 30 June 2018 (Unaudited)
Earnings
Earnings for the purposes of basic and diluted earnings per share (profit for the period attributable to equity holders of the company) 10.3 14.6
Amortisation of intangibles associated due to business combinations 1.6 1.0
Acquisition costs 0.4 0.4
Non-recurring tax benefits (0.5) (0.1)
Costs related to ERP implementation 0.5 -
Changes in accounting policy - 0.4
Legal costs (refer to note 10) 1.2 -
Earnings for adjusted earnings per share 13.5 16.3
Number of shares
Weighted average number of shares for the purposes of basic earnings per share (thousands) 19,145 19,114
Effect of potentially dilutive share options (thousands) 359 369
Weighted average number of shares for the purposes of dilutive earnings per share (thousands) 19,504 19,483
Earnings per share from operations
Basic 53.8p 76.4p
Basic adjusted 70.5p 85.3p
Diluted 52.8p 74.9p
Diluted adjusted 69.2p 83.7p
* Balance is less than £100,000.
9. Intangible assets
Development costs Brand Trademarks Technology Customer relationships Customer contracts Intangible software Intangible software under development Total
£ Millions
Cost
At 31 December 2018 36.4 1.0 1.0 5.2 18.6 0.6 0.2 1.7 64.7
Additions 4.4 - - - - - * 1.9 6.3
Foreign currency translation * * * * * * * * 0.2
At 30 June 2019 40.9 1.0 1.0 5.2 18.6 0.6 0.3 3.6 71.2
Amortisation
At 31 December 2018 16.3 0.1 0.9 0.8 2.4 0.6 * - 21.1
Charge for the year 1.8 0.1 - 0.3 1.2 - * - 3.4
Foreign currency translation * * - * * * * - 0.1
At 30 June 2019 18.1 0.2 0.9 1.1 3.6 0.6 0.1 - 24.6
Carrying amount
At 30 June 2019 22.8 0.8 0.1 4.1 15.0 - 0.2 3.6 46.6
At 31 December 2018 20.1 0.9 0.1 4.4 16.2 - 0.2 1.7 43.6
* 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 three
to nine years.
10. Contingent liabilities
The Group is involved in a non-customer related legal dispute in North
America, which is currently in mediation. No provision in relation to the
dispute has been recognised in these condensed interim financial statements as
it is not probable that an outflow of economic benefits will occur, and the
amount of outflow, if any, cannot be estimated reliably.
11. Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 Leases on the
Group’s financial statements and discloses the new accounting policies that
have been applied from 1 January 2019 below.
The Group has adopted IFRS 16 retrospectively from 1 January 2019, but has not
restated comparatives for the 2018 reporting period, as permitted under the
specific transitional provisions in the standard. The reclassifications and
the adjustments arising from the new leasing rules are therefore recognised in
the opening balance sheet on 1 January 2019.
11. Changes in accounting policies (continued)
(a) Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities in relation to
leases which had previously been classified as ‘operating leases’ under
the principles of IAS 17 Leases. These liabilities were measured at the
present value of the remaining lease payments, discounted using the lessee’s
incremental borrowing rate as of 1 January 2019. The weighted average
lessee’s incremental borrowing rate applied to the lease liabilities on 1
January 2019 was 5.3%.
£ Millions
Operating lease commitments disclosed as at 31 December 2018 7.8
Discounted using the lessee’s incremental borrowing rate of 5.3% at the date of initial application 6.7
(Less): short-term leases recognised on a straight-line basis as expense (0.2)
(Less): low-value leases recognised on a straight-line basis as expense (0.2)
Lease liability recognised as at 1 January 2019 6.3
1 January 2019
Current 1.5
Non-current 4.8
Total lease liability 6.3
The associated right-of-use assets for property leases and other
right-of-use assets were measured at the amount equal to the lease liability,
adjusted by the amount of any prepaid or accrued lease payments relating to
that lease recognised in the balance sheet as at 31 December 2018. There
were no onerous lease contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
The recognised right-of-use assets relate to the following types
of assets:
£ Millions 30 June 2019 1 January 2019
Properties 5.3 6.1
Equipment 0.2 *
Total right-of-use assets 5.5 6.1
* Balance is less than £100,000.
The change in accounting policy affected the following items in
the balance sheet on 1 January 2019:
i) right-of-use assets – increase by £6.1 million
ii) lease liabilities – increase by £6.3 million
iii) accrued lease payments – decrease by £0.2 million
There was no impact on retained earnings on 1 January 2019.
11. Changes in accounting policies (continued)
(a) Adjustments recognised on adoption of IFRS 16 (continued)
Practical expedients applied
In applying IFRS 16 for the first time, the group has used the following
practical expedients permitted by the standard:
· the use of a single discount rate to a portfolio of leases with
reasonably similar characteristics;
· reliance on previous assessments on whether leases are onerous;
· the accounting for operating leases with a remaining lease term of
less than 12 months as
at 1 January 2019 as short-term leases;
· the exclusion of initial direct costs for the measurement of the
right-of-use asset at the date
of initial application;
· the use of hindsight in determining the lease term where the contract
contains options to
extend or terminate the lease; and
· for all leases, the Group has elected not to separate lease and
non-lease components, and instead accounts for these as a single lease
component.
The Group has also elected not to reassess whether a contract is, or contains,
a lease at the date of initial application. Instead, for contracts entered
into before the transition date, the Group relied on its assessment made
applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a
Lease.
(b) The Group’s leasing activities and how these are
accounted for
The Group leases various offices, warehouses and
equipment. Rental contracts are typically made for fixed periods of 2 to 6
years but may have extension options as described below. Lease terms are
negotiated on an individual basis and contain a wide range of different terms
and conditions. The lease agreements do not impose any covenants, but leased
assets may not be used as security for borrowings purposes.
Until the 2018 financial year, leases of property,
plant and equipment were classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) were charged
to profit or loss on a straight-line basis over the period of the lease.
From 1 January 2019, leases are recognised as a
right-of-use asset and a corresponding liability at the date at which the
leased asset is available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost is
charged to profit or loss over the lease period so as to produce a constant
periodic rate of interest on the remaining balance of the liability for each
period. The right-of-use asset is depreciated over the shorter of the
asset’s useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are
initially measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
· fixed payments (including in-substance fixed payments), less any
lease incentives receivable;
· variable lease payments that are based on an index or a rate;
· amounts expected to be payable by the lessee under residual value
guarantees;
· the exercise price of a purchase option if the lessee is reasonably
certain to exercise that
option; and
· payments of penalties for terminating the lease, if the lease term
reflects the lessees exercising
that option.
The lease payments are discounted using the
interest rate implicit in the lease. If that rate cannot be determined, the
lessee’s incremental borrowing rate is used, being the rate that the lessee
would have to pay to borrow the funds necessary to obtain an asset of similar
value in a similar economic environment with similar terms and conditions.
11. Changes in accounting policies (continued)
(b) The Group’s leasing activities and how these are accounted for
(continued)
Right-of-use assets are measured at cost comprising the following:
· the amount of the initial measurement of lease liability;
· any lease payments made at or before the commencement date less any
lease incentives
received;
· any initial direct costs; and
· restoration costs.
Payment associated with short-term leases and leases of low-value assts are
recognised on a straight-line basis as an expense in profit or loss.
Short-term leases are leases with a lease term of 12 months or less.
Low-value assets comprise of IT equipment.
Extension and termination options
Extension and termination options are included in a number of property and
equipment leases across the Group. These terms are used to maximise
operational flexibility in terms of managing contracts. The majority of
extension and termination options held are exercisable only by the Group and
not by the respective lessor.
In determining the lease term, management considers all facts and
circumstances that create an economic incentive to exercise an extension
option, or not exercise a termination option. Extension options (or periods
after termination options) are only included in the lease term if the lease is
reasonably certain to be extended (or not terminated).
Risks and uncertainties
Like many other international businesses, the Group is exposed to a number of
risks and uncertainties which might have a material effect on its financial
performance. These include:
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 78% of
revenues, this would undoubtedly cause at least a short-term loss of revenues
and profits and disruption to our customers and therefore damage to
reputation.
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.
Shortage, non-availability or technical fault with regard to key electronic
components
The Group is reliant on the supply, availability and reliability of key
electronic components. If there is a shortage, non-availability or technical
fault with any of the key electronic components, this may impair the Group’s
ability to operate its business efficiently and lead to potential disruption
to its operations and revenues.
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.
Fluctuations of revenues, expenses and operating results due to an economic
shock
The revenues, expenses and operating results of the Group could vary
significantly from period to period as a result of a variety of factors, some
of which are outside its control. These factors include general economic
conditions; adverse movements in interest rates; conditions specific to the
market; seasonal trends in revenues, capital expenditure and other costs and
the introduction of new products or services by the Group, or by their
competitors. In response to a changing competitive environment, the Group
may elect from time to time to make certain pricing, service, marketing
decisions or acquisitions that could have a short-term material adverse effect
on the Group’s revenues, results of operations and financial condition.
Dependence on key customers/suppliers
The Group is dependent on retaining its key customers and suppliers. Should
the Group lose a number of its key customers or key suppliers, this could have
a material impact on the Group’s financial condition and results of
operations. However, for the six months ended 30 June 2019, no one customer
accounted for more than 9% of revenue.
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.
Risks relating to regulation, compliance and taxation
The Group operates in multiple jurisdictions with applicable trade and tax
regulations that vary. Failing to comply with local regulations or a change
in legislation could impact the profits of the Group. In addition, the
effective tax rate of the Group is affected by where its profits fall
geographically. The Group effective tax rate could therefore fluctuate over
time and have an impact on earnings and potentially its share price.
Risks and uncertainties (continued)
Strategic risk associated with valuing or integrating new acquisitions
The Group may elect from time to time to make strategic acquisitions. A
degree of uncertainty exists in valuation and in particular in evaluating
potential synergies. Post-acquisition risks arise in the form of change of
control and integration challenges. Any of these could have an effect on the
Group’s revenues, results of operations and financial condition.
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.
Exposure to exchange rate fluctuations
The Group deals in many currencies for both its purchases and sales including
US Dollars, Euros 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 Renminbi. The Group
therefore has an exposure to foreign currency fluctuations. This could lead
to material adverse movements in reported earnings.
Directors’ responsibility statement
The interim results were approved by the Board of Directors on 1 August 2019.
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 as adopted by
the European Union; 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:
James Peters Non-Executive Chairman
Duncan Penny Chief Executive Officer
Gavin Griggs Chief Financial Officer
Andy Sng Executive Vice President, Asia
Terry Twigger Senior Non-Executive Director
Polly Williams Non-Executive Director
Signed on behalf of the Board by
James
Peters
Duncan Penny
Non-Executive
Chairman
Chief Executive Officer
1 August 2019
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