Interim Results for the six months ended 30 June 2019
01 August 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.
These Results are available in PDF format.
The slides of the Interim Results Presentation are available to view here.
|Six months ended||Six months ended|
|30 June 2019||30 June 2018|
|Interim dividend per share||35.0p||33.0p||+6%|
|Adjusted operating profit1||£18.2m||£20.7m||-12%|
|Adjusted profit before income tax1||£16.6m||£20.3m||-18%|
|Adjusted diluted earnings per share2||69.2p||83.7p||-17%|
|Cash generated from operations||£25.2m||£15.8m||+59%|
|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."
|Duncan Penny, Chief Executive Officer||+44 (0)118 976 5155|
|Gavin Griggs, Chief Financial Officer||+44 (0)118 984 5515|
|Citigate Dewe Rogerson||+44 (0)20 7638 9571|
|Kevin Smith/Jos Bieneman|
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.
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%.
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 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).
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 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%).
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 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).
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.
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.
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.
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.
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%.
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.
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.
Report on review of interim financial information
We have reviewed the accompanying condensed consolidated financial information of XP Power Limited ("the Company") and its subsidiaries ("the Group") set out on pages 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.
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.
Public Accountants and Chartered Accountants
1 August 2019
|£ Millions||Note||Six months ended|
30 June 2019
|Six months ended|
30 June 2018
|Cost of sales||(54.8)||(49.7)|
|Distribution and marketing||(20.3)||(18.3)|
|Research and development||(6.3)||(5.2)|
|Profit before income tax||12.9||18.5|
|Income tax expense||6||(2.5)||(3.8)|
|Profitafter 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|
|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|
|Total comprehensive income attributable to:|
|- Equity holders of the Company||10.1||16.3|
|- Non-controlling interests||0.1||0.2|
|Earnings per share attributable to equity holders of the Company||Pence per|
* Balance is less than £100,000.
The above condensed consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
|£ Millions||Note||At 30|
|Corporate tax recoverable||0.8||0.8|
|Cash and cash equivalents||10.8||11.5|
|Other current assets||3.5||3.3|
|Derivative financial instruments||0.1||*|
|Total current assets||99.6||105.1|
|Property, plant and equipment||31.4||30.7|
|Deferred income tax assets||1.0||0.6|
|ESOP loans to employees||0.1||0.2|
|Total non-current assets||138.6||129.2|
|Current income tax liabilities||3.6||4.2|
|Trade and other payables||22.4||22.4|
|Derivative financial instruments||0.1||0.2|
|Total current liabilities||28.0||26.8|
|Deferred income tax liabilities||5.4||4.7|
|Total non-current liabilities||71.9||70.1|
|Equity attributable to equity holders of the Company|
|Treasury shares and share option reserve||2.1||1.1|
* Balance is less than £100,000.
The above condensed consolidated balance sheet should be read in conjunction with the accompanying notes.
|Attributable to equity holders of the Company|
|Merger reserve||Hedging reserve||Translation reserve||Other|
|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|
|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|
|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|
|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|
The above condensed consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
|£ Millions||Six months ended|
30 June 2019
|Six months ended|
30 June 2018
|Cash flows from operating activities|
|Profit after income tax||10.4||14.7|
|- 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:|
|- 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|
|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.
The notes are available in the printable pdf of the results. To download it, please click here.