Results for the Year Ended 31 December 2007

XP Power, one of the world’s leading providers of power supply solutions to the mid-tier of the electronics industry, today announces results for the year ended 31 December 2007.

Presentation

To view the slides of the Results Presentation by XP Power please click here.

Financial Highlights

Highlights

1. Gross margin improves by 5.1% to 42.2% (2006: 37.1%) resulting from an increased amount of XP Power intellectual property
2. Own brand sales now represent 73% of revenues (2006:66%)
3. Improved competitive position due to move to Asia
4. Transition of the Company to a manufacturer enables penetration of larger customers
5. Dividend to be increased by 11% to 20p per share

 Larry Tracey, Executive Chairman, commented:

“Margin targets achieved, revenue growth is now the focus.”

Chairman's Statement

Business Performance

XP’s revenues declined from £78.7 million in 2006 to £66.3 million in 2007. This reduction of 16% is disappointing. The discontinued third party business accounted for 12% of the reduction and the weakness of the dollar reduced revenues on translation by 4%. Our ongoing business was flat for the year with growth in the first half being offset by a decline in the second half. We continue to believe that our new product pipeline will result in revenue growth once the current macro economic climate for capital equipment improves. Adjusted earnings per share of 31.4 pence is down by 4% from 2006 (2006: 32.8 pence).

Strategy

In 2003 we set ourselves the goal of achieving gross margins in excess of 40% by 2007. This goal was achieved during the year. Further modest improvement is expected as we have now bought out our joint venture manufacturing partner in Kunshan, China. More of the Group’s resources are now in Asia and the move of our headquarters to Singapore was completed in spring 2007.
The change to producing our own I.P. products in our wholly owned manufacturing facility is attractive to our target customer base. This enhances the medium term revenue prospects for XP Power.

Dividend
Despite the reduction in earnings we are proposing a final dividend of 11 pence per share at the annual general meeting on 26 March 2008. The total dividend for 2007 of 20 pence represents an 11% increase on the 2006 payment (2006: 18 pence).

Outlook
Our customers produce capital equipment and any downturn in global demand for their products affects our potential revenue. We believe that our competitive position is strong and that should enable us to take market share and increase revenues when the economic climate improves.

Larry Tracey - Executive Chairman

Chief Executive’s Review

The Chief Executive’s Review is prepared solely to provide additional information to shareholders to assess the Company’s strategy and the potential for that strategy to succeed, and should not be relied on by any other party or for any other purpose.

The Chief Executive’s Review contains certain forward-looking statements and (a) these statements are made in good faith based on the information available up to the time of the approval of this report and (b) these statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking information.

Landmark Year
2007 has been a landmark year in the Group’s history. On 24 April 2007 the Company completed its Scheme of Arrangement to move the domicile of the parent company to Singapore. We are rapidly becoming a much more Asian centric organisation. In parallel with this fundamental change we also announced the buy out of our manufacturing joint venture with Fortron Source. From 1 January 2008 XP became a “fully fledged” Asian manufacturer.

Since our London Stock Exchange Listing in 2000, XP has transformed itself from a specialist distributor to a successful designer, seller and now manufacturer of electronic power supplies. This strategy is enabling us to make inroads into much larger customers. We have also realised a steady and dramatic increase in our gross margins from 28.0% in 2000 to 42.2% in 2007 reflecting the resources we have deployed in product development to increase the proportion of revenues generated from our own intellectual property.

Our business model today has developed substantially since 2000 and we consider that we are excellently positioned for the time when greater confidence returns to our markets.

Asia

Asia is increasingly important to our industry and to our own internal operations. For some time we have seen a trend where our customers, who generally perform their product development and design work in Europe and North America, are increasingly manufacturing and selling their end products in Asia. It has been essential for us to put resource in place in Asia to support these customers technically and logistically. More companies, and in particular our larger customers, are now building product design teams in Asia. It is clear that Asia will no longer just be the place where electronic products are manufactured but also increasingly where they are designed and the intellectual property is created.

In conjunction with these changes we are observing that within our customers, our supply chain has become dominated by Asian manufacturers. The majority of the product we sell is manufactured in Asia and we have put in place various supply chain operations across Asia to support our manufacturing activities whether they be within our own facilities or outsourced. It is important that our purchasing people are in the same time zone and speak the same language as our component suppliers.

We also believe that our future competition will emerge from Asia rather than Europe or North America. In order to compete in this climate we will need to have the same low cost structure as these emerging companies and access to the plentiful and talented work force in Asia.
For the reasons set out above we concluded that we needed to not only build resource in Asia but locate our headquarters there so we could view the world from an Asian perspective to take advantage of the opportunities as they present themselves.

Asia is rapidly changing the shape of the world economy and we are determined to take advantage and be a part of this.

Manufacturing

At the end of 2005 we announced a 50:50 manufacturing joint venture in Kunshan, close to Shanghai in China, in association with Fortron Source, a leading power supply manufacturer. Fortron Source has been an excellent contract manufacturing partner of XP for many years and operates a number of power supply manufacturing facilities in China. Fortron Source is renowned in the industry for excellent quality and cost efficiency.

This manufacturing joint venture has been extremely beneficial to XP. By moving closer to the manufacturing end of the supply chain we have been able to transfer knowledge into our design centres to assist designing in components that are lower cost and/or easier to source in Asia. This has helped us drive down our product cost. More significantly the manufacturing joint venture has enabled us to target a whole new group of customers who will only do business directly with a manufacturer. As we engaged with this new group of customers it became clear that the quality standards they demand from their suppliers require us to have complete control of the manufacturing facilities and processes. For this reason we needed to become a “fully fledged” manufacturer. Consequently, in November 2007 we announced an agreement to buy out the joint venture for US$2.5 million (approximately £1.2 million) in cash and take complete control from 1 January 2008.

We expect that our new product families will be manufactured in our Kunshan facility.

Product Strategy

In April 2006 we made a decision to discontinue selling a number of third party product lines in order to focus on our own product lines. These lines were generally low margin and contributed little compared to the resource they consumed. We stopped taking orders for these third party product lines from 1 July 2006. Later in 2006 two other third party lines decided to terminate their relationship with XP as a result of our product strategy. Our 2006 revenues included approximately £9.0 million from the discontinued product lines, which is approximately £12.0 million on an annualised basis. Despite the resultant decline in revenue in 2007 we believe it was the right approach as it has allowed us to increase our emphasis on our larger target customers.

Approximately a quarter of our revenues are still generated from selling third party lines. The remaining partnerships are important to our success as they allow us to meet our customers’ needs in areas where we do not have suitable product of our own. We share product roadmaps with these partners to avoid conflict between our respective product lines.

Financial Performance

Our financial performance has been impacted by three main factors during 2007:

• The deliberate termination of certain third party lines during 2006 which is discussed above;
• Softer end markets in North America and the UK in the second half of 2007; and
• The marked weakening of the US Dollar versus Sterling resulting in significant translational effects when converting our US Dollar revenues and earnings to Sterling for reporting purposes.

The average exchange rate used to translate our US Dollar earnings in 2007 was approximately 2.00 US Dollars to Sterling compared with approximately 1.83 in 2006. If the average rate of 1.83 experienced in 2006 had continued in 2007 we would have reported additional revenues of £3.3 million in the year to 31 December 2007.

Overall revenues decreased by 15.8% to £66.3 million (2006: £78.7 million). As set out above £9.0 million of this decrease can be attributed to termination of the third party lines and £3.3 million to the translation effect of the weaker US dollar. Of the product shipped in 2007, 73% was our own XP brand, up from 66% in the same period a year ago. This helped drive a significant increase in gross margin to 42.2% (2006: 37.1%). This is our eighth successive year of gross margin improvement and justifies our strategy.

The Group made a profit before tax of £5.0 million compared to a profit before tax of £8.0 million in the prior year. The profit before tax includes a charge of £0.3 million (2006: £0.3 million) for the amortisation of intangibles resulting from the acquisition of Powersolve Electronics Limited (Powersolve) and £2.4 million of charges relating to the Scheme of Arrangement and costs associated with the move to Singapore (2006: £1.0 million relating to the termination of third party lines as discussed above). After adding back these items the adjusted profit before tax was therefore £7.7 million in 2007 compared with £9.3 million in 2006. The basic earnings per share for the year ended 31 December 2007 was 17.9p (2006: 27.9p). The diluted earnings per share for the year ended 31 December 2007 was 17.8p (2006: 27.5 p). After adjusting for the charges relating to the Scheme of Arrangement and costs associated with the move to Singapore and the amortisation of intangibles associated with acquisitions, the diluted earnings per share was 31.4 pence (2006: 32.8 pence). The 2006 earnings per share have been adjusted by £0.8 million, or 4.2 pence, relating to dividends paid to minority shareholders in 2006.

Continued strong margins allowed us to generate free cash flow of £5.7 million during 2007 (2006: £3.7 million). After returning £3.6 million to shareholders in the form of dividends, net debt (cash of £3.6 million less borrowings of £23.0 million) at 31 December 2007 was £19.4 million compared with £17.8 million at 31 December 2006. Free cash flow is defined as net cash flow from operating activities plus dividends from associates; less net purchases of property, plant and equipment; less capitalised development costs; plus exceptional charges; less interest paid.

Customers and Industry Segmentation

We target customers in the communications, defence and avionics, industrial and medical end user markets. We have senior strategic teams driving these sectors in both North America and Europe. These teams identify the customers with whom we consider we should be working in each of these sectors, support the sales people to penetrate these accounts and work with the product development organisation to specify future product requirements.

This structure has served us well and should help to drive future revenue growth. As our business grows in terms of scale and breadth of product offering, we are increasingly able to add value to the larger customers in the market sectors we serve. Accordingly, we will be focusing more resource on winning programmes with larger customers.

Markets

As reported in our interim statement for the six months to 30 June 2007 and reiterated in our trading update issued at the end of October 2007 the markets we serve have been soft in the second half of 2007 particularly in the UK and North America. As noted above, this was exacerbated by the weakening of the US Dollar. Although our program design-in base and program identification remains good it is difficult to predict what our customers’ demand is likely to be in 2008 given the widely reported macro economic concerns in North America. Despite the current economic uncertainty we have not, as yet, seen any change in pricing pressure in the market. We do see increased pressure on input costs due to the gradual increase in the strength of the Chinese currency which is expected to continue plus labour cost increases in China but these should be offset by improvements in component costing on our new products.

Product Development

Offering our target customers industry leading products is a key component of XP’s strategy, therefore product development is vital to the long-term success of our business. We continue to commit more resource to this area in line with our strategy of expanding our own brand product portfolio. We plan to open a new design centre in Singapore during 2008.

We expect to release a number of important products to the market during 2008.

Duncan Penny - Chief Executive

Consolidated Income Statement
for the financial year ended 31 December 2007

Consolidated Balance Sheet
for the financial year ended 31 December 2007

Consolidated Cash Flow Statement
Year ended 31 December 2007

Notes

The notes are available in the printable pdf of the results. To download it, please click here.