Latest Results
Annual Results for the year ended 31 December 2012
XP, one of the world's leading developers and manufacturers of critical power control components for the electronics industry, today announces its annual results for the year ended 31 December 2012.
DownloadThese Results are available in PDF format. |
Presentation
The slides of the Preliminary Results Presentation are available to view here.
Highlights
| Year ended | Year ended | ||
| 31 December | 31 December | Change | |
| 2012 | 2011 | ||
| Bookings | £96.6m | £98.3m | -2% |
| Revenue | £93.9m | £103.6m | -9% |
| Gross margin | 47.8% | 49.1% | -130 bps |
| Adjusted profit before tax | £20.2m | £24.3m | -17% |
| Adjusted profit after tax | £15.5m | £20.3m | -24% |
| Diluted earnings per share adjusted1 | 81.3p | 106.4p | -24% |
| Operating cash flow | £23.6m | £16.2m | +46% |
| Net debt | £10.6m | £18.6m | -43% |
| Final dividend per share | 17.0p | 15.0p | |
| Total dividend per share | 50.0p | 45.0p | +11% |
- Gross margins reduced to 47.8% (2011: 49.1%) due to short term impact of start-up costs of Vietnam facility, low factory loading in the first quarter and costs of bringing third-party manufacturing in-house
- XP Power's own design revenues increased to a record 62% of total revenues (2011: 57% of total revenues) despite challenging market conditions throughout the year
- Sales of high efficiency ("green") products increased by 62% to £8.1 million, representing 9% of revenue (2011: £5.0 million or 5% of revenue)
- Chinese manufacturing facility continues to successfully secure new approved vendor agreements from blue chip customers
- Vietnam magnetics facility operational since March 2012 and producing high quality product
- 100% of own design products now manufactured in-house, ensuring full control of the production process and expected to enhance margins in FY2013
- Resilient earnings and continued strong cash flows provide basis for an increased total dividend of 50.0p per share for the year up 11% on the prior year
- Successful repositioning as a designer and manufacturer leaves the Group well positioned to continue to take market share
Larry Tracey, Chairman, commented:
"Against a backdrop of continuing macro-economic uncertainty, global capital goods markets remain subdued and we are cautious on the revenue outlook, with orders received to date indicating flat or only modestly increased revenue for 2013.
While striking this note of caution on current levels of capital equipment investment in our customers' end user markets, we believe XP remains well placed for the year ahead. The manufacturing initiatives implemented in 2012 should deliver gross margin improvements this year and we believe that our strategy of targeting blue chip customers with strong leadership positions in their respective markets will result in further successful factory audits and customer wins in 2013.
We remain confident that our well-established strategy will underpin our ability to take further market share and produce the strong cash flows necessary to maintain a progressive attitude to the dividend."
Chairman's Statement
Overview
Despite challenging market conditions for capital equipment, the successful execution of our well-established strategy of moving up the value chain in to design and manufacture, delivered a solid result for the year. Earnings per share of 81.3p for 2012 (2011: 106.4p) demonstrated the resilience of our business model. These earnings, combined with strong cash generation, allowed us to increase the dividend by 11% to 50 pence per share (2011: 45 pence per share) while at the same time reducing our net debt. The compound average growth rate of earnings per share has been 21% over the last 5 years and 28% over the last 10 years.
Financial
Total orders decreased by 2% to £96.6 million (2011: £98.3 million) in the year. Total revenues decreased by 9% to £93.9 million (2011: £103.6 million). Revenues from XP Power's own designed product were £57.6 million (2011: £59.2 million) or 62% of revenue (2011: 57%). As expected, gross margin declined slightly to 47.8% (2011: 49.1%) due to lower factory loading in the first quarter of 2012 and the start-up costs of our new Vietnamese manufacturing facility. Despite the decline in gross margin, operating profit was £21.0 million (2011: £25.3 million) or 22.4% of revenue (2011: 24.4%).
Net debt at the year-end was £10.6 million compared to £18.6 million at the end of 2011. Operating cash flow was £23.6 million (2011: £16.2 million) representing 112% of operating income.
Strategic Progress
In mid-2009 the Group achieved a key strategic objective when it began production at its full scale manufacturing facility in China. Our second manufacturing facility in Ho Chi Minh City, Vietnam commenced production of magnetic components during the first quarter of 2012, significantly enhancing the value proposition we offer our customers. Combined, these state-of-the-art factories dramatically enhance the Group's ability to secure preferred supplier status with larger customers and increase the proportion of its revenues which come from its higher margin, own-designed products.
Dividend
Our continued strong financial performance, strong cash flows and confidence in the Group's long term prospects have enabled us to consistently increase dividends.
In line with our progressive dividend policy, a final dividend of 17 pence per share for the fourth quarter of 2012 is proposed. This dividend will be payable to members on the register on 15 March 2013 and will be paid on 10 April 2013.
When combined with the interim dividends for the previous quarters, the final proposed dividend results in a total dividend of 50 pence per share for the year (2011: 45 pence); an increase of 11%. The compound average growth rate of our dividend has been 20.1% over the last 5 years and 15.3% over the last 10 years.
Board Changes
On 18 December 2012 the Group announced that Michael Hafferty, who had served as a Non-Executive Director since April 2007, would retire as a Non-Executive Director with effect from 31 December 2012.
On behalf of the Board, I would like to thank Michael for his contribution to XP Power over many years and wish him well for the future.
Outlook
Against a backdrop of continuing macro-economic uncertainty, global capital goods markets remain subdued and we are cautious on the revenue outlook, with orders received to date indicating flat or only modestly increased revenue for 2013.
While striking this note of caution on current levels of capital equipment investment in our customers' end user markets, we believe XP remains well placed for the year ahead. The manufacturing initiatives implemented in 2012 should deliver gross margin improvements this year and we believe that our strategy of targeting blue chip customers with strong leadership positions in their respective markets will result in further successful factory audits and customer wins in 2013.
We remain confident that our well-established strategy will underpin our ability to take further market share and produce the strong cash flows necessary to maintain a progressive attitude to the dividend.
Larry Tracey
Chairman
Chief Executive's Review
Overview
2012 was a challenging but significant year for XP Power. Macro-economic concerns continued to weigh on the capital equipment markets in which our customers operate and there seems little sign of improvement as we enter into 2013.
Notwithstanding the more uncertain economic backdrop, we continued to invest for the future, successfully implementing two key manufacturing initiatives during the year. Our new magnetics facility in Vietnam is now operational and producing excellent quality product. We have also brought in-house all the manufacture of our own-design products, which had previously been produced by a third party contract manufacturer. The Group now manufactures 100% of the products developed in its design centres, giving it total control over production and enhancing margins. Inevitably, the Vietnam start-up costs and the engineering costs of bringing our own-design product in house, in combination with low factory loading in the first quarter of 2012, did have some short term impact on our gross margins for the year. However, these factors are now behind us and should allow an increase in gross margins in 2013.
Despite the factors discussed above the Group continued to produce class leading operating income of £21.0 million and excellent free cash flow of £20.9 million enabling a reduction in net debt from £18.6 million at the beginning of 2012 to £10.6 million at the year-end.
The Group continued to make excellent progress in its strategy of increasing penetration of its key customer accounts. We expect that this continued focus on customers with leadership positions in their respective markets will enable us to continue to gain market share.
Our broad and up-to-date portfolio of class leading products, many of which are highly efficient, combined with excellent engineering support, and the assured quality and reliability facilitated by our move into manufacturing, is increasingly making us the power converter provider of choice for many large customers.
A record 62% of our revenues came from our own designed products in 2012 (2011: 57%) and 93% of our total revenues now carry the XP Power brand (2011: 90%). Own designed products generate higher margins, and give XP Power the capability to design tailor-made power control solutions for specific customer orders.
Markets
XP Power supplies power control solutions to Original Equipment Manufacturers ("OEMs") of capital goods, who themselves supply the healthcare, technology and industrial markets with high value products. The increasing importance of energy efficiency, for both environmental and economic reasons, the necessity for ever smaller products, the rate of technological change and the increasing proliferation of electronic equipment, all contribute to underpin the strength of medium term demand for XP Power's power conversion products.
The worldwide available market for XP Power's products was estimated to be £1.5 billion per annum in 2011. Early indications suggest that our markets may have declined by approximately 12% in 2012. We estimate XP Power's global market share to be around 7% in 2012. Across North America and Europe, XP Power currently has around 10% and 12% respectively of our available market, while across Asia our share is estimated to be 1%. This illustrates the significant commercial opportunities that remain open to XP Power, and the Board is confident that the Group's competitive advantages over many of its peers will allow it to take further share in each of its key markets.
The sector split of 2012 revenues was as follows: Industrial declined 7% to £43.8 million (2011: £46.9 million), Healthcare declined 2% to £26.0million (2011: £26.6 million) and Technology declined 20% to £24.1 million (2011: £30.1 million). The decline in the Technology sector was primarily attributable to weak demand from our customers in the semiconductor equipment sector.
According to geography our 2012 revenues were split: Asia down 16% to £7.7 million (2011: £9.2 million), Europe down 10% to £40.8 million (2011: £45.4 million) and North America down 7% to £45.4 million (2011: £49.0 million).
Our major blue chip customers require market leading, highly reliable products. We maintained a consistent investment in research and development throughout the year and our product pipeline remains the broadest and freshest in the industry. The attractions of this continually evolving portfolio of market leading products enabled the Group to win a number of new customers in the year, underpinning revenue growth in future years.
Increasingly, the design and manufacturing process of major international OEMs takes place across different continents, with these blue chip companies demanding global support. In response, XP Power has established an international network of offices which offers the necessary customer support across technical sales, design engineering, logistics and operations. This network gives XP Power a strong competitive advantage over both its smaller competitors, who do not have the scale and geographic reach to serve global customers, and its larger competitors, who often lack the operational flexibility to provide excellent service and speed. We believe that this balance is key to our success in winning new contracts and offers XP Power the opportunity to further increase its market share.
International Network
XP Power's mix of quick response capability and global reach is a major competitive advantage. XP Power maintained a network of 27 sales offices spread over North America, Europe and Asia, with a further 16 distributors, supporting its smaller customers, during the year. The size and scope of this network is kept under continuous review to ensure the business remains best placed to capitalise on growth opportunities in each of its geographies.
XP Power has the largest, most technically trained sales force in the industry. Our detailed in-house training programme demands that the sales force pass numerous technology and customer service modules, making them a "value add" partner to our customers' product development teams. Management believes that this gives the business a competitive edge compared to many within its peer group.
Our North American network consists of 17 sales offices and an extensive engineering services function, based in Northern California. This network allows XP Power to provide its major customers with local face to face support and rapid response times.
In Europe, the XP Power network consists of eight sales offices and a further nine distributor offices, providing the same level of customer support as North America. In addition, XP Power has engineering services centres in Germany and the UK.
The Asian sales activities are run from Shanghai and Singapore, where we also manage a network of seven distributors serving the region. In the medium term we expect revenues derived from Asia to be an increasing proportion of XP Power's worldwide revenues.
Market Leading Technology
A long term commitment to invest in research and development of new products has been the cornerstone of XP Power's growth strategy. We believe that we now have the broadest, most up to date portfolio of products in the industry, many with class leading efficiency.
Research and development gross spend was £5.3 million in 2012 (2011: £5.3 million), and nineteen new product families were introduced in the year. As previously reported, having established such a broad portfolio, the rate of new product introductions has slowed with more of our engineering resource now focused on modifications to existing products to meet the precise requirements of individual customers. Over half of the products we sell have been modified from the original, standard version.
Manufacturing Capabilities
Our target customers demand extremely high levels of quality control to ensure the reliability and safety for the life of their equipment. Complete control of manufacturing is therefore critical to ensure strict management of the production processes and components that go into our products, and also gives us opportunities to reduce our product costs. The capability and performance of our Kunshan facility, which was commissioned in 2009, has been instrumental in winning new programs and customers.
In 2012 we have achieved a further major milestone with the commencement of production at our new magnetics facility in Ho Chi Minh City, Vietnam. The Vietnam facility gives us the capability to produce our own magnetics components, which not only enhances our value proposition to our customers - in terms of control of the manufacturing process, flexibility and lead times - but also provides a second geographical base to mitigate the effect of rapidly increasing costs in China.
The new Vietnam facility commenced production in the first quarter of 2012 and has been producing excellent quality magnetics. The start-up losses of this facility were approximately £0.5 million during the year and we expect the facility to be in a breakeven position by the end of 2013.
We also embarked on an additional major initiative during 2012 which was to bring all of our own-design products assembled by contract manufacture in house. This was a major engineering challenge for our manufacturing teams and research and development centres. Nearly 200 products have been transferred into our Kunshan facility. While this activity caused a drag on gross margins in 2012, it is expected to be gross margin enhancing in 2013 as factory utilisation improves. Full control of manufacturing will also allow us to offer more attractive lead times to our customers. We are currently carrying a buffer inventory of approximately £1.0 million to support our customers during this transition stage.
The Environment and Sustainability
In 2009 we established an Environmental Committee that immediately set the goal of making XP Power the leader in environmental issues within our industry. Much has been achieved since 2009 and our progress will be set out in detail in the Environmental Report contained within our 2012 Annual Report.
Our new Vietnamese magnetics facility is the most environmentally friendly power converter manufacturing facility in the world and we incorporated green technologies into the plant from the outset. The facility meets the Gold Plus rating of the BCA Green Mark requirements which are the leading standards set by the Singapore Building and Construction Authority for non-residential buildings in tropical climates. We are proud that this is not only the most environmentally friendly facility in our industry but is the first BCA Green Mark certified industrial facility in Vietnam.
The biggest impact XP Power can have on the environment is to promote its high efficiency green products, which consume and waste less energy on an on-going basis. Revenues from these green products continue to increase. In 2012 we shipped £8.1 million of these green products or 9% of revenue, compared with £5.0 million or 5% of revenue in 2011.
Investing in Customer Support
In a competitive market place, excellent customer support and service is critical. XP Power has developed a network of relationship managers and sales engineers to manage long-term customer relationships across three continents. The Group has worked hard to build a sales culture that can successfully manage complicated relationships and has developed sophisticated proprietary customer relationship management tools to manage the sales process effectively. Management regards these tools and their method of utilisation as a significant source of competitive advantage over the Group's larger competitors.
Outlook
Design wins in 2012 have continued to be positive and we are pleased with the further headway that has been made in achieving approved or preferred supplier status at new key accounts. However, the continued poor macroeconomic backdrop is presenting a challenging environment for capital investment as we enter 2013 and our customers remain cautious in terms of placing orders.
As a supplier to manufacturers of capital goods, we cannot expect to be immune from the effects of weak global end-markets, nevertheless, XP's successful repositioning as a designer and manufacturer leaves the Group well positioned to respond to these more difficult markets and to continue to take market share while sustaining margins.
We remain confident in our strategy of our targeting customers with strong leadership positions in their respective markets. These blue chip customers find the Group's broad, up to date product offering, and manufacturing capabilities extremely attractive, especially since they are supported with very high service levels. We consider that these competitive strengths place XP Power in a strong position to capitalise on its medium term growth ambitions.
Duncan Penny
Chief Executive
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2012
| £ Millions | Note | 2012 | 2011 |
| Revenue | 2 | 93.9 | 103.6 |
| Cost of sales | (49.0) | (52.7) | |
| Gross profit | 44.9 | 50.9 | |
| Expenses | |||
| Distribution and marketing | (19.1) | (20.7) | |
| Administrative | (0.7) | (0.7) | |
| Research and development | (4.1) | (4.2) | |
| Operating profit | 21.0 | 25.3 | |
| Finance cost | (0.8) | (1.0) | |
| Profit before income tax | 2 | 20.2 | 24.3 |
| Income tax expense | 3 | (4.5) | (3.6) |
| Profit for the year | 15.7 | 20.7 | |
| Profit attributable to: | |||
| Owners of the parent | 15.5 | 20.3 | |
| Non-controlling interest | 0.2 | 0.4 | |
| Profit for the year | 15.7 | 20.7 | |
| Earnings per share attributable to owners of the parent (pence per share) | |||
| - Basic | 5 | 81.7 | 107.1 |
| - Diluted | 5 | 81.3 | 106.4 |
Consolidated Balance Sheet
For the year ended 31 December 2012
| £ Millions | Note | 2012 | 2011 |
| ASSETS | |||
| Current Assets | |||
| Cash and cash equivalents | 4.1 | 6.3 | |
| Inventories | 19.8 | 22.0 | |
| Trade receivables | 14.2 | 16.0 | |
| Other current assets | 1.2 | 2.6 | |
| Total current assets | 39.3 | 46.9 | |
| Non-current assets | |||
| Goodwill | 30.5 | 31.3 | |
| Intangible assets | 7.6 | 6.4 | |
| Property, plant and equipment | 13.2 | 12.9 | |
| Investment in associates | - | 0.1 | |
| Deferred income tax assets | 0.3 | 0.4 | |
| ESOP loan to employees | 1.2 | 1.6 | |
| Total non-current assets | 52.8 | 52.7 | |
| Total assets | 92.1 | 99.6 | |
| LIABILITIES | |||
| Current liabilities | |||
| Current income tax liabilities | 1.6 | 1.3 | |
| Trade and other payables | 11.1 | 11.4 | |
| Provision for deferred contingent consideration | 7 | - | 1.9 |
| Borrowings | 6 | 7.3 | 13.4 |
| Derivative financial instruments | 0.2 | 0.2 | |
| Total current liabilities | 20.2 | 28.2 | |
| Non-current liabilities | |||
| Provision for deferred contingent consideration | 7 | 1.5 | 2.1 |
| Borrowings | 6 | 7.4 | 11.5 |
| Deferred income tax liabilities | 1.7 | 2.0 | |
| Total non-current liabilities | 10.6 | 15.6 | |
| Total liabilities | 30.8 | 43.8 | |
| NET ASSETS | 61.3 | 55.8 | |
| EQUITY | |||
| Equity attributable to owners of the parent | |||
| Share capital | 27.2 | 27.2 | |
| Merger reserve | 0.2 | 0.2 | |
| Treasury shares | (1.2) | (1.0) | |
| Hedging reserve | (0.2) | - | |
| Translation reserve | (7.7) | (7.1) | |
| Retained earnings | 42.8 | 36.3 | |
| 61.1 | 55.6 | ||
| Non-controlling interests | 0.2 | 0.2 | |
| TOTAL EQUITY | 61.3 | 55.8 |
Consolidated Statement of Cash Flows
For the year ended 31 December 2012
| £ Millions | 2012 | 2011 |
| Cash flows from operating activities | ||
| Profit for the year | 15.7 | 20.7 |
| Adjustments for | ||
| - Income tax expense | 4.5 | 3.6 |
| - Amortisation and depreciation | 2.3 | 2.2 |
| - Finance cost | 0.8 | 1.0 |
| - (Gain)/Loss on fair valuation of derivative financial instruments | (0.1) | 0.1 |
| - Unrealised currency translation losses | 0.5 | 0.2 |
| Change in the working capital | ||
| - Inventories | 2.2 | (1.0) |
| - Trade and other receivables | 3.2 | (1.5) |
| - Trade and other payables | (0.3) | (4.1) |
| - Provision for liabilities and other charges | (0.9) | - |
| Income tax paid | (4.3) | (5.0) |
| Net cash generated from operating activities | 23.6 | 16.2 |
| Cash flows from investing activities | ||
| Acquisition of a subsidiary, net of cash acquired | (0.1) | (0.1) |
| Purchases and construction of property, plant and equipment | (2.5) | (5.7) |
| Research and development expenditure capitalised | (2.2) | (2.0) |
| Proceeds from disposal of property, plant and equipment | 0.4 | - |
| ESOP loans repaid | 0.5 | 0.8 |
| Payment of deferred consideration | (1.9) | - |
| Net cash used in investing activities | (5.8) | (7.0) |
| Cash flows from financing activities | ||
| Repayment of borrowings | (4.2) | (4.1) |
| Net purchase of treasury shares by ESOP | (0.5) | (0.8) |
| Interest paid | (0.5) | (0.8) |
| Dividend paid to equity holders of the Company | (8.9) | (7.4) |
| Dividend paid to non-controlling interests | (0.2) | (0.4) |
| Net cash used in financing activities | (14.3) | (13.5) |
| Net increase/(decrease) in cash and cash equivalents | 3.5 | (4.3) |
| Cash and cash equivalents at beginning of financial year | (3.3) | 1.0 |
| Effects of currency translation on cash and cash equivalents | 0.3 | - |
| Cash and cash equivalents at end of financial year | 0.5 | (3.3) |
Notes
The notes are available in the printable pdf of the results. To download it, please click here.