Annual Results for the year ended 31 December 2018
05 March 2019
XP Power, one of the world's leading developers and manufacturers of critical power control components for industrial, healthcare, semiconductor and technology markets, today announces its annual results for the year ended 31 December 2018.
These Results are available in PDF format.
The slides of the Annual Results Presentation are available to view here.
|Final dividend per share||33.0p||29.0p||+14%|
|Total dividend per share||85.0p||78.0p||+9%|
|Adjusted profit before tax1||£41.2m||£36.1m||+14%|
|Adjusted profit attributable to equity holders2||£33.9m||£28.8m||+18%|
|Adjusted diluted earnings per share2||172.8p||147.0p||+18%|
|Operating cash flow||£26.7m||£29.7m||-8%|
|Profit before tax||£37.6m||£32.2m||+17%|
|Profit attributable to equity holders||£30.2m||£28.3m||+7%|
|Diluted earnings per share||154.9p||146.0p||+6%|
1 Adjusted for acquisition costs, both completed and aborted, of £0.6 million (2017: £3.3 million), costs related to Enterprise Resource Planning (ERP) implementation of £0.2 million (2017: £nil) and amortisation of intangible assets due to business combination of £2.8 million (2017: £0.6 million)
2 Adjusted for acquisition costs, both completed and aborted of £0.6 million (2017: £3.3 million), costs related to ERP implementation of £0.2 million (2017: £nil) and amortisation of intangible assets due to business combination of £2.8 million (2017: £0.6 million) and non-recurring tax benefits of £0.1 million (2017: £3.7 million)
- Record order intake, revenues and earnings achieved in 2018
- Order intake of £198.4 million (2017: £184.3 million) - an increase of 8% (12% in constant currency or 5% on a like for like basis)
- Full year revenues increased by 17% (21% in constant currency and 11% on a like for like basis) to £195.1 million (2017: £166.8 million)
- Revenues from our own-designed products set a new record of £155.3 million in the year (2017: £127.4 million), representing 80% of revenue (2017: 76%).
- Acquisition of Glassman High Voltage expands product portfolio and addressable market
- Completed the construction of a second production facility in Vietnam to expand manufacturing capacity - new factory to commence production in Q2 2019
James Peters, Chairman, commented:
"2018 was another year of significant progress. We achieved a third successive year of record revenues and earnings per share, demonstrating the strength of our business model and successful execution of our strategy. The acquisition of Glassman High Voltage expands our addressable market by an estimated $500 million and gives us a foothold in an exciting new product segment. In addition, we completed construction of our second manufacturing facility in Vietnam which will start production in Q2 2019, increasing our Asia production capacity by approximately 75%."
"The new financial year has begun against a background of ongoing macroeconomic uncertainty. While we are not immune from the impact of external events, we are encouraged by our start to 2019 in terms of order intake and our healthy order book. On this basis, and with the benefit of the Glassman acquisition, we expect further revenue growth in 2019 but this will be weighted to the second half of the year."
|Duncan Penny, Chief Executive Officer||+44 (0)118 976 5155|
|Gavin Griggs, Chief Financial Officer|
|Citigate Dewe Rogerson||+44 (0)20 7638 9571|
|Kevin Smith/Jos Bieneman|
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 43% of sales), semiconductor manufacturing suppliers (circa 24% of sales), healthcare (circa 22% 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 27 locations in Europe, North America and Asia.
For further information, please visit xppower.com
Our Progress in 2018
2018 was another year of significant progress. We have achieved a third successive year of record revenues and earnings per share demonstrating the strength of our business model and successful execution of our strategy. Significantly, we completed the acquisition of Glassman High Voltage which expands our addressable market by an estimated $500 million and gives us a foothold in an exciting new product segment. In addition, we completed construction of our second manufacturing facility in Vietnam which will start production in Q2 2019.
Our financial performance in the year was good. Revenues were £195.1 million, exceeding the prior year total of £166.8 million. This was an increase of 21% in constant currency or an increase of 11% on a like for like basis, excluding the acquisitions of Comdel in September 2017 and Glassman in May 2018. Order intake also set a new record of £198.4 million, exceeding the £184.3 million achieved in 2017, and representing a 12% increase in constant currency. On a like for like basis after excluding the acquisitions of Comdel and Glassman, the increase in order intake was 5%. We grew across all our regions and sectors however we did see a slowdown in the semiconductor manufacturing sector in the fourth quarter in line with the wider market and as outlined in our January Trading Update.
Reported profit before tax was £37.6 million (2017: £32.2 million). After adding back acquisition costs, both completed and aborted, of £0.6 million (2017: £3.3 million), costs related to ERP implementation of £0.2 million (2017: £nil) and amortisation of intangible assets due to business combination of £2.8 million (2017: £0.6 million), adjusted profit before tax was £41.2 million (2017: £36.1 million), an increase of 14% over that reported in 2017. Basic earnings per share increased by 6% to 157.8 pence (2017:148.3 pence). Diluted adjusted earnings per share increased by 18% to 172.8 pence (2017: 147.0 pence).
The key essence of the Group's strategy has remained consistent for a significant period of time and is built on the development of a market leading range of competitive products, either organically or by acquisition, to enable further penetration of our existing target accounts where we still have relatively low market shares. This approach has served the Group well and our conclusion is that we can still continue to grow and take market share by executing this strategy.
During the year the Board completed a review of the Group's strategic progress. It was determined that strategy was working effectively to grow the Group's revenues, market share in our target sectors and customers and our brand strength as demonstrated by the 18% revenue growth compound annual growth rate performance from 2016 to 2018 whilst building the processes to operate a global supply chain which balances high efficiency with market leading customer responsiveness. We continue to drive improvements in engineering, the supply chain and manufacturing to support the sales growth we are generating. This includes a project to upgrade our ERP system to the latest version of SAP S/4 Hana across the Group.
Mike Laver, currently an executive director, will not be standing for re-election to the Board at this year's Annual General Meeting. On stepping down from the Board, Mike will retain his operational role as President, Corporate Development.
Peter Bucher, non-executive director, retired from the Board on 31 December 2018. I would like to thank Peter for his contribution to the development of the Group since joining the Board in 2014 and wish him a happy retirement.
Under the new UK Corporate Governance Code that came into effect in 2019, public companies are required to have at least an equal number of non-executive directors to executive directors, excluding the Chairman. To address this requirement, we are actively searching for a replacement for Peter.
Our People and Our Values
The success of an organisation is dependent on its culture and the people and talent within it. The DNA of our business is built around our core values of Integrity, Knowledge, Flexibility, Speed and Customer Focus. We have significant strength and depth within our Company, with the majority of our executives boasting long tenures with XP Power. We have conducted annual employee engagement surveys since 2015 and I am pleased that we have shown strong scores each time we repeat the survey, having taken actions to address any issues arising from the results of the prior year. One of the main findings from these employee surveys was that our employees are proud to be part of our Company, highlighting the significant engagement we have between the business and our people. Our cultural survey score is one of our non-financial key performance indicators.
As the Group has grown, we have consistently added more talent across the business to build even greater strength and depth and we hired more people in 2018 than in any year in our history. A key focus is engineering where we will continue to add talent to partner effectively with our customers and address all the opportunities we see before us.
Our continued financial performance and confidence in the Group's long-term prospects have enabled us to increase dividends consistently since listing in 2000. The Board is recommending a final dividend of 33 pence per share for the fourth quarter of 2018. This dividend will be payable to members on the register on 22 March 2019 and will be paid on 23 April 2019. When combined with the interim dividends for the previous quarters, the total dividend for the year will be 85 pence per share (2017: 78 pence), an increase of 9%.
The compound average growth rate of our dividend has been 15% over the last ten years, demonstrating the Board's commitment to our progressive dividend policy.
We are committed to the long-term sustainable success of XP Power in all its aspects. We have helped lead the industry in developing "green" products which consume less energy while powering the application or in standby mode. These products reduce CO22emissions year over year and are by far the biggest positive impact we can make on the environment.
Sustainability also resonates with our employees. We have adopted energy and water saving practices throughout the Group and have a network of passionate environmental representatives who promote best practice and raise awareness regarding sustainability across our global workforce.
The new financial year has begun against a background of ongoing macroeconomic uncertainty. While we are not immune from the impact of external events, we are encouraged by our start to 2019 in terms of order intake and our healthy order book. On this basis, and with the benefit of the Glassman acquisition, we expect further revenue growth in 2019 but this will be weighted to the second half of the year.
Review of our year
XP Power has enjoyed another excellent year, building our position in our chosen markets, expanding our product portfolio both through acquisition and organically and making significant progress towards the achievement of our vision of being the first choice power solutions provider, delivering the ultimate experience to our customers and our people.
The consistent execution of our strategy has led to another year of successive growth in order intake, revenue, adjusted operating profit and adjusted earnings per share. All market sectors showed revenue growth over 2017. The first half of 2018 saw extremely good growth from our semiconductor equipment manufacturing sector which then softened in the second half of the year in line with wider market performance, and in particular the fourth quarter as detailed in the Group's Trading Update on 14 January 2019. In contrast, the industrial, healthcare and technology sectors all showed growth in the second half of 2018 versus the first half and remained robust in the fourth quarter.
Our design win pipeline was strong in 2018, boding well for continued future market share and revenue growth. We also continued to move our product portfolio up to higher power and technically more complex applications, and to expand the number of design wins with higher engineering solutions content.
We announced the acquisition of Glassman High Voltage in May 2018. This business gives XP Power an entry into the high voltage, high power market. We are one of the few companies worldwide that can offer our customers a complete range of power solutions across voltage and power. This makes us an ideal partner to many of our target customers and greatly expands our value proposition.
All industry sectors and all geographies experienced revenue growth in 2018 over 2017 and, significantly, sequential growth in the second half of 2018 over the first half, with the exception of the semiconductor equipment manufacturing sector.
The order performance was also strong, with order intake up 8% on a reported basis to £198.4 million (2017: £184.3 million). In constant currency this growth was 12% and on a like for like basis, excluding the Comdel and Glassman acquisitions growth was 5%. The resulting book to bill ratio was 1.02.
Overall revenues grew 17% to £195.1 million (2017: £166.8 million) on a reported basis. In constant currency the growth was 21% or 11% on a like for like basis, excluding the Comdel and Glassman acquisitions.
The average exchange rate for US Dollar to Sterling was 1.34 in 2018 versus 1.28 in 2017, representing a 5% strengthening. We discuss the impact of foreign exchange volatility in more detail in our Financial Review.
Marketplace: Sector Dynamics
Revenues from industrial customers grew 7% to £83.7 million (2017: £78.1 million) as the recovery in that sector continued into 2018. Revenues from industrial customers represented 43% (2017: 47%) of overall revenues but very few of these customers make it into our top 30 customer list due to the highly fragmented nature of this market. The applications in this sector are very diverse and include test and measurement equipment, displays, factory automation, smart grid and industrial printing; the areas that drove the 2018 growth included distribution, analytical instrumentation, defence and industrial printing. All items of industrial equipment that are electrically powered will require a power converter.
The semiconductor manufacturing equipment sector has been an interesting area for XP Power. Revenues from these customers grew 60% to £47.4 million (2017: £29.7 million). Revenues from semiconductor manufacturing equipment sector customers represented 24% of overall revenues (2017: 18%). In the first half of 2018 we benefitted from a cyclical upswing in that sector which began in 2017, combined with strong market share gains and the revenues from the acquisition of Comdel and Glassman. Our expansion into high voltage and high power products, combined with our engineering services offering, has made us an attractive supplier to the industry. The new products we have allow us to service considerably more of the opportunities we see in this sector. The sector slowed significantly in the second half of 2018, as widely reported, and this impacted our fourth quarter order intake and revenues.
Despite the sector's cyclicality this market remains highly attractive due to its robust fundamentals, which are being driven by the proliferation of applications involving the internet of things (IoT), artificial intelligence (AI), autonomous vehicles and big data.
Revenues from healthcare customers grew by 4% to £43.6 million (2017: £41.8 million) representing 22% of overall revenues (2017: 25%). Healthcare remains another attractive market for XP Power given the breadth of our medical product range and high level of customer service. These are demanding customers in terms of quality and reliability, and this means our value proposition is attractive to these customers. We provide mission critical power solutions for numerous applications in the healthcare arena, from patient contact applications, to diagnostic equipment such as MRI and ultrasound, through to laboratory equipment. There are special requirements and regulatory approvals that a medical power solution has to meet. Healthcare tends to be much less cyclical than the other sectors we address which adds resilience to our diversified business model.
Revenues from technology customers grew 19% to £20.4 million (2017: £17.2 million) representing 11% of overall revenues (2017: 10%). Typical applications in technology include areas such as broadcast, high end communications such as satellite and telecom base stations, and high-end computing. These programmes are often quite large but generally have much shorter lifetimes than the seven to eight years which are typical in the other market sectors we serve.
Marketplace: North America
North America revenues were US$159.5 million in 2018 (2017: US$121.3 million), an increase of 31%. The increase was 13% after excluding the revenues from the acquisitions of Comdel of US$19.7 million (2017: US$5.4 million) and Glassman of US$8.8 million (2017: US$nil). North America represented 61% of overall revenues (2017: 57%).
The North America business particularly benefitted from the growth in the semiconductor equipment manufacturing sector, but all sectors grew year on year.
Order intake in North America was US$158.1 million (2017: US$139.2 million), an increase of 14% resulting in a book to bill ratio of 0.99. The increase was 2% after excluding the order intake from the Comdel acquisition of US$14.6 million (2017: US$7.7 million) and Glassman of US$9.4 million (2017: US$nil). Comdel had exceptionally strong order intake in the fourth quarter of 2017 as semiconductor manufacturing equipment makers placed orders for delivery throughout 2018.
Marketplace: Tariffs and Trade
The Section 301 tariffs which the USA government has imposed upon Chinese sourced products has a mixed impact on XP Power. From 24 September 2018 a 10% tariff has been imposed on power converters imported from China where XP Power has a manufacturing facility. There are proposals to increase this to 25% if there is not a satisfactory outcome to USA/China trade negotiations. Where possible we have been recovering some of these tariffs from customers where we are able. However, XP Power's facility in Vietnam has presented a notable opportunity over many of our competitors who largely manufacture in China as Vietnam is not caught by the new tariffs. We have been moving our lower power products from China to Vietnam and the Section 301 tariffs development has caused us to accelerate this process. We are fortunate to be bringing our second Vietnam facility on stream in the second quarter of 2019 which we expect will give us a competitive advantage in respect of the USA tariff situation.
Our European business grew by 6% to £61.1 million (2017: £57.5 million). All sectors grew year on year, but Healthcare showed the strongest growth due to a number of larger medical programmes entering production from some of our bigger customers. The semiconductor equipment manufacturing business in Europe is currently insignificant.
Europe represented 31% of overall revenues (2017: 34%).
Order intake in Europe was £64.6 million (2017: £61.5 million), an increase of 5%, resulting in a book to bill ratio of 1.06.
Asia revenues were US$19.9 million in 2018 (2017: US$19.0 million), an increase of 5%, with the strongest growth in industrial, and declines in healthcare and technology as programmes went end of life. Asia represented 8% of overall revenues (2017: 9%).
Order intake in Asia was US$21.4 million (2017: US$19.0 million), an increase of 13%, resulting in a book to bill ratio of 1.08.
As previously announced, during the first half of 2018 we started to see significant tightening of the supply chain for certain electronic components, which resulted in increased lead times and component cost inflation. In response, we went into the market to secure supplies of critical components, at prices beyond our standard costs, in order to ensure we could continue to meet our lead times to customers. Lead times for certain components increased dramatically, in some cases lead times moved from 12 to 52 weeks. The result of these lead time extensions has meant we have had to increase our safety inventories significantly. The higher prices we had to pay for components were a drag on gross margins in the second half of 2018 which were offset by other cost savings and favourable product mix.
Recently, the supply of certain components such as multi-layer ceramic capacitors and chip type resistors has started to improve but many of the active power semiconductor devices we use remain on long lead times. We will continue to proactively manage our inventory to ensure continuity of supply but expect the levels to reduce in 2019 and 2020 as lead times reduce.
Adapting to the market and the competition
Since listing on the London Stock Exchange in 2000, XP Power has evolved from a specialist distributor of power conversion products to a designer and then manufacturer of power solutions for the industrial, semiconductor manufacturing equipment, healthcare and technology markets.
We continue to perform well against our traditional established competition. Our broad range of standard products, now augmented by recent acquisitions, and excellent customer service delivered by the largest direct sales force in our industry, is an attractive customer proposition. We are now one of very few power solutions providers who can supply our target customers with a complete portfolio of products from low to high power and low to high voltage, including radio frequency (RF) power. This combined with our engineering services offering, where we take standard products and tailor them to provide complete plug and play power systems, makes us a compelling business partner.
We expect future competitors to emerge from Asia as companies with low cost manufacturing and engineering capabilities attempt to enter parts of the industrial and healthcare markets in Europe and North America. We will continue to adapt our product offering and services to respond to this threat.
Low cost Asian competitors continue to become more prevalent, particularly in the low power/low complexity end of the market. It is straightforward to source low cost/low power products directly from Asian manufacturers. Engineering solutions are not easily managed remotely and work most effectively when situated close to the customer, so design discussions and design reviews can take place face-to-face. We continue to add more and more value to our customers as we expand our engineering service groups across the globe.
In addition to providing a higher engineering solutions content, we have moved our product portfolio up in terms of power level and complexity to help protect our business from low cost Asian competition, which remains a significant threat. Specifically, we have expanded the capability within our product portfolio with the acquisition of Comdel, which gives us RF power at high power levels, and more recently, with Glassman which provides very high power at very high voltage.
We are building a broad and compelling product offering which will make us an increasingly attractive partner for leading companies in the industrial, healthcare, semiconductor manufacturing equipment and technology sectors to choose to power their mission-critical applications.
We have followed a consistent strategy which has enabled us to produce strong results over a sustained period of time. The fundamental essence of the strategy - targeting key accounts where we can add value and gaining more of the available business in those accounts - continues to remain appropriate and effective. We constantly challenge and refine our strategy, as we have done again in 2018.
Our strategy can be summarised as follows:
- Develop a market leading range of competitive products, organically and through selective acquisitions;
- Target accounts where we can add value;
- Increase vertical penetration of target accounts;
- Build a Global Supply Chain which balances high efficiency with market leading customer responsiveness;
- Lead our industry on environmental matters; and
- Make selective acquisitions in identified strategic markets or of complementary businesses to expand our product offering.
We continue to make significant progress against each of these strategic objectives. We believe we have the broadest, most up-to-date portfolio of products, many of which are class-leading in terms of efficiency and low stand-by power. We also continue to see revenues from our own-designed/ manufactured products grow at a faster rate than those from other products.
We consider that our transition from a specialist distribution company, through the addition of a design capability, to designer and manufacturer is now complete. We are now clearly recognised as both a designer and manufacturer by key customers in our target markets. Revenues from our own-designed products set a new record of £155.3 million in the year (2017: £127.4 million), representing 80% of revenue (2017: 76%).
We expect further improvement in the mix of own-designed products in 2019. We are now moving our business further up the value chain by providing our key customers with engineering solutions where we add value, enabling the customer to more easily integrate the power solution into their critical systems. These services range from providing simple voltage and connector changes, through to changes in mechanical format, the addition of thermal management, communication to the customer's end equipment utilising firmware and ultimately full custom designs. This is a much more engineering intense activity but does mean we work very closely with the customer's design engineers to provide them with a complete power solution in the shortest possible time, delivering genuine value.
Acquisition of Glassman HV
On 25 May 2018 XP Power acquired the business and assets of Glassman High Voltage, a designer and manufacturer of high voltage, high power, power converters. The acquisition also included the purchase of Glassman's small European sales business.
Total consideration of US$47.5 million (£35.7 million) was paid in cash on completion. The acquisition was on a debt and cash free basis and was funded with a US$45.0 million extension of the Group's existing revolving credit facility.
We share several customers with Glassman and while there is no direct overlap in product lines, the power supply solutions of the two companies are highly complementary. Glassman's products and engineering capabilities have enhanced the Group's ability to implement its strategy of winning a greater share of business from its largest customers by achieving wider vertical penetration of key accounts. The business is being integrated into the Group well, and we are already finding exciting new opportunities for these products in our existing and new customers. As well as a product offering suitable for an array of applications used by some of XP Power's existing customer base, Glassman has also brought a number of new customers to the Group.
We continue to review acquisition opportunities that will enhance our product or sector offering and meet our strict criteria.
In October 2017 we commenced construction of a second manufacturing facility in Vietnam on our existing site near Ho Chi Minh City. Construction of this second facility is now complete and we expect to begin production during the second quarter of 2019. In terms of end revenues, our existing manufacturing capacity in China and Vietnam I is $170 million. Vietnam II conservatively adds an additional $130 million of capacity bringing our total Asia manufacturing capacity up to $300 million.
This additional capacity is necessary to accommodate our growth trajectory. It also gives us the opportunity to transfer the production of more products from China to Vietnam, thereby saving the costs of the Section 301 Tariffs currently imposed on Chinese goods by the authorities in the USA. We believe this will give us a competitive cost advantage over many of our competitors with Chinese based manufacturing.
Our end objective is to have the flexibility to be able to build all products in either China or Vietnam to provide flexibility and robust business continuity planning.
As well as expanding our product offering, we have continued to expand our engineering solutions groups in Asia, Europe and North America. Our customers frequently require a high degree of customisation to allow the power conversion system to operate within their end equipment or simply to make it easier for them to integrate the power conversion solution into their application. Our engineering solutions groups work closely with the customer's engineering teams to provide these customised solutions. Speed and proximity to the customer are critical as the power solution is often one of the last parts of the system to be designed, so is invariably one of the gating items to get the end product to market. This is an area where XP Power adds significant value to the customer and we are seeing increasing demand for these services.
Research and Development
We have continued to invest in research and development to further expand our portfolio of products and the size of our addressable market opportunity. In particular, we increased our design engineering resource and capabilities during 2018. We released 27 new product families in 2018 (2017: 27) and 20 of these can be classified as "Green XP Power" products having ultra-high efficiency and/or low standby power (2017: 19).
One example is a high efficiency 4,500 watt product which has a variable, rather than fixed output voltage, that can be adjusted via a digital control. This is an example of moving up the power and complexity level, producing more sophisticated products which can communicate directly with the customer's system.
Chief Executive Officer
XP Power delivered another good performance in 2018. The order and revenue growth, coupled with clear investment priorities and effective control of operating expenditure, has delivered year-on-year growth in profits. We have also made further investment in capital projects in order to increase the production capacity and build the capabilities necessary to support our future sales growth. The business exited the year with a robust financial position.
On a statutory basis, revenue was £195.1 million (2017: £166.8 million), representing growth of 17%. Operating profit was £39.3 million (2017: £32.5 million), an increase of 21% over the prior year, with operating margin at 20.1% (2017: 19.6%). Net finance costs were £1.7 million (2017: £0.3 million) resulting in Profit before tax of £37.6 million (2017: £32.2 million) giving rise to an income tax expense of £7.2 million (2017: £3.6 million), equivalent to an effective tax rate of 19% (2017: 11%). Basic earnings per share were 157.8 pence (2017: 148.3 pence), an increase of 6%.
Throughout this Earnings Release, 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 particularly focus on adjusted results rather than statutory results. There are a number of items that are included in statutory results, but which are considered to be one-off in nature or not representative of the Group's performance and which are excluded from adjusted results. The tables on pages 19 and 20 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 2018 and 2017.
The Group generated revenue growth of 17% during the year on a reported basis, 21% in constant currency and 11% on a like for like constant currency basis, adjusting for the foreign exchange headwind and the impacts of the Comdel and Glassman acquisitions in 2017 and 2018. The Group's revenue performance was driven by growth in the Semiconductor equipment manufacturing sector, which grew 60% to £47.4 million (2017: £29.7 million) and the Technology sector, which grew 18% to £20.4 million (2017: £17.2 million). The Industrial sector grew 7% to £83.7 million (2017: £78.1 million) and the Healthcare sector grew 4% to £43.6 million (2017: £41.8 million).
All three of our regions delivered growth in 2018. North America was up 26% (31% in constant currency) due in part to the effect of the Glassman and Comdel acquisitions. On a like for like basis North America grew by 8% to £97.7 million (2017: £90.4 million), due to strong growth in the Semiconductor equipment manufacturing sector. Europe delivered growth of 6% (6% in constant currency) to £61.1 million (2017: £57.5 million), driven by a good performance in the Nordics, up 22% and Central Europe, up 9%. Asia revenues grew 6% in constant currency with reported revenue flat compared to 2017 at £14.9 million.
This revenue performance was a result of a good order backlog at the start of 2018 and order bookings of £198.4 million in 2018, an increase of 8% over 2017 on a reported basis, or 12% in constant currency. Orders and revenue for 2018 represent a full year book to bill ratio of 1.02 (2017: 1.11) and we ended the year with an equally good order backlog as at the start of the year.
Gross margin improved to 47.3% (2017: 46.5%), largely due to product mix, improving performance at Comdel and the effect of the appreciation of Sterling versus the US Dollar. This improvement helped offset the impact of price increases on components resulting from the scarce supply seen in the first half of 2018.
Adjusted Operating Expenses and Margins
The Group increased its investment in operating resources, excluding specific items, by 20% to £49.4 million (2017: £41.2 million). Investing in our people remains a focus and resulted in payroll and staff costs increasing by 25%. Headcount, excluding factories and acquisitions, increased by 10% compared to 2017 as we invested in our engineering and sales capabilities. Non-cash share-based payment charges amounted to £0.8 million (2017: £0.1 million) and related to a grant to senior management under the Long-Term Incentive Scheme during the year. Adjusted operating margins were in line with 2017 at 22.0% (2017: 21.8%).
The average Sterling to US Dollar exchange rate increased by 5%, from 1.28 to 1.34. The majority of this movement was seen in the first half of 2018, with a 10% strengthening in Sterling compared with 2017. For the second half of the year the Sterling to US Dollar exchange rate was marginally lower than 2017. Approximately 84% of our revenues (2017: 82%) are denominated in US Dollars and due to the stronger Sterling the translation of these revenues for reporting purposes has had a negative effect.
Net finance cost increased to £1.7 million (2017: £0.3 million) due to increased average borrowings following the acquisition of Glassman in May 2018 and additional requirement for inventory in the second half of 2018 as a result of the significant increases in component lead times.
Interest cover (EBITDA as a multiple of net interest expense as defined by our Revolving Credit Facility) was 32 times (2017: 199 times) which is well in excess of the four times minimum required in our banking covenants. Net debt to EBITDA at the year-end was comfortable at 1.07 (2017: 0.22).
Adjusted Profit Before Tax
The Group generated adjusted profit before tax and specific items of £41.2 million, up 14% compared to last year, lower than revenue growth due to increased investment in operating costs.
Specific items are excluded from management's assessment of profit because by either their size, their nature or are non-repetitive and therefore could distort the Group's underlying earnings. In 2018, the Group incurred £3.6 million (2017: £3.9 million) of specific items, predominantly related to costs associated with acquisitions, both completed and aborted, of £0.6 million, £2.8 million for amortisation of intangible assets due to business combination and £0.2 million costs related to ERP implementation.
The effective tax rate from continuing operations before specific items increased by 750bps to 17.5% (2017: 10.0%). The rate returned to more normal levels as the prior year benefitted from refunds of historic taxation paid predominantly in Singapore and the revaluation of the deferred tax credit in the United States following the 2017 Tax Cuts and Jobs Act. In 2018, the Group benefitted from the reduction in the corporate tax rate in the United States.
The effective tax rate from continuing operations after specific items increased by 790 bps to 19.1% (2017: 11.2%). Going forward, XP Power expects the effective tax rate to be approximately 17-19% depending predominantly on the regional mix of profits.
Adjusted Earnings Per Share
Basic and diluted adjusted earnings per share from continuing operations before specific items increased by 18% and 18% to 176.1 pence and 172.8 pence respectively (2017: 149.4 pence and 147.0 pence). This was driven by the increase in continuing profit before tax during the year.
Operating Cash Flow
The Group generated £26.7 million net cash from operations compared with £29.7 million in the previous year. The lower level of operating cash flows was largely a result of increased inventory, due to component shortages and longer lead times seen in 2018, which led to working capital outflows of £16.4 million.
We finished 2018 in a net debt position of £52.0 million (2017: £9.0 million), with the increase due to funding the acquisition of Glassman (£35.7 million) and higher working capital levels. The Group continued its progressive dividend policy which meant returning £15.3 million (2017: £14.0 million) to shareholders in the form of dividends.
Statement of Financial Position
The Group has a revolving credit facility of US$105 million (2017: US$40 million), which matures in September 2021. The Group funded the acquisition of Glassman through the credit facility and at the balance sheet date had drawn down on US$81 million (2017: US$33 million) of the facility. The Group continues to operate well within its banking covenants with significant headroom under each financial ratio.
We continue to invest in our business with the majority of spend on manufacturing and supporting our future sales growth. The majority of the manufacturing spend relates to our new Vietnam site located adjacent to our current facility. As expected, we plan to invest circa £10 million during the new financial year, a £5 million increase on 2018. This acceleration is principally due to the completion of our new Vietnam site and an investment in upgrading our ERP system.
The attractive cash flow generated by the XP Power business model has enabled the Company to pursue a progressive dividend policy over a sustained period of time.
The policy is to increase dividends progressively whilst maintaining an appropriate level of cover. This year's financial performance in terms of both profitability and cash flow has enabled us to recommend a final dividend of 33 pence per share which, together with the quarterly dividends already paid, gives a total dividend for the year of 85 pence per share (2017: 78 pence per share), an increase of 9%. Dividend cover for the year was 1.9 times (2017: 1.9 times).
The Group's financial instruments consist of cash, money market deposits, and various other items such as trade receivables and trade payables that arise directly from its business operations.
The Group uses forward currency contracts to hedge highly probable forecast transactions. The instruments purchased are denominated in the currencies of the Group's principal markets. The Group had £10.8 millions of forward currency contracts outstanding at 31 December 2018 (2017: £7.8 million).
In terms of the broader economic impacts of Brexit on our business, we do not consider that they will be material. Our products are made in Asia and are already imported into Europe where we have warehouses in both Germany and the United Kingdom and hence, we could ship our product destined for the European Union directly into Germany or another appropriate location. Plans are in place that will help minimise any logistical issues that may arise following the United Kingdom's exit from the European Union.
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 operate a global Customer Relationship Management system covering all three regions which allows us to collaborate, share information and provide efficient and effective customer service. The cornerstone of our supply chain is built on the SAP ERP System. In 2018, we started on a project to implement the latest version of SAP across our entire global supply chain with the first focus being on our existing operating regions and then the China and Vietnam manufacturing facilities. We expect this implementation to have significant benefits in terms of factory planning and will of course give us significant operational advantages with the factory systems running on the same platform as sales companies. Further gains will be realised when we migrate the most recent acquisitions of Comdel and Glassman likely to be in 2020.
This integrated approach ensures that we have the robust systems and reporting necessary to support our future growth.
Chief Financial Officer
|Cost of sales||(102.8)||(89.2)|
|Distribution and marketing||(38.7)||(31.7)|
|Research and development||(11.4)||(8.8)|
|Profit before income tax||37.6||32.2|
|Income tax expense||3||(7.2)||(3.6)|
|Profit after tax||30.4||28.6|
|Other comprehensive income:|
|Items that may be reclassified subsequently to profit or loss:|
|Cash flow hedges||0.3||(0.5)|
|Exchange differences on translation of foreign operations||4.4||(3.9)|
|Items that will not be reclassified subsequently to profit or loss:|
|Currency translation differences arising from consolidation||0.2||*|
|Other comprehensive income/(loss) for the year, net of tax||4.9||(4.4)|
|Total comprehensive income for the year||35.3||24.2|
|Profit attributable to:|
|Equity holders of the Company||30.2||28.3|
|Total comprehensive income attributable to:|
|Equity holders of the Company||34.9||23.9|
|Earnings per share attributable to equity holders of the Company (pence per share)|
|- Basic earnings per share||5||157.8||148.3|
|- Diluted earnings per share||5||154.9||146.0|
*Balances are less than £100,000.
The accompanying notes form an integral part of these financial statements.
|Corporate tax recoverable||0.8||2.9|
|Cash and cash equivalents||11.5||15.0|
|Other current assets||3.3||3.8|
|Derivative financial instruments||*||0.2|
|Total current assets||105.1||83.5|
|Property, plant and equipment||30.7||22.5|
|Deferred income tax assets||0.6||1.4|
|ESOP loan to employees||0.2||0.3|
|Total non-current assets||129.2||88.1|
|Current income tax liabilities||4.2||3.5|
|Trade and other payables||22.4||21.4|
|Derivative financial instruments||0.2||0.2|
|Total current liabilities||26.8||25.1|
|Deferred income tax liabilities||4.7||4.2|
|Total non-current liabilities||70.1||29.6|
|Equity attributable to equity holders of the Company|
|Treasury shares and share option reserve||1.1||0.4|
*Balances are less than £100,000.
The accompanying notes form an integral part of these financial statements.
|Attributable to equity holders of the Company|
1 January 2017
|Sale of treasury shares||-||1.0||-||-||-||-||(0.1)||0.9||-||0.9|
|Purchase of treasury shares||-||(1.6)||-||-||-||-||-||(1.6)||-||(1.6)|
|Employee share option plan expenses, net of tax||-||1.5||-||-||-||-||-||1.5||-||1.5|
|Future acquisition of non-controlling interest||-||-||-||-||-||(0.8)||-||(0.8)||-||(0.8)|
|Exchange difference arising from translation of financial statements of foreign operations||-||-||-||-||(3.9)||-||-||(3.9)||*||(3.9)|
|Net change in cash flow hedges||-||-||-||(0.5)||-||-||-||(0.5)||-||(0.5)|
|Profit for the year||-||-||-||-||-||-||28.3||28.3||0.3||28.6|
|Total comprehensive income for the year||-||-||-||(0.5)||(3.9)||-||28.3||23.9||0.3||24.2|
31 December 2017
|Changes in accounting policy||-||-||-||-||-||-||0.4||0.4||-||0.4|
|Restated total equity as at 1 January 2018||27.2||0.4||0.2||(0.2)||(0.4)||(0.8)||90.0||116.4||0.9||117.3|
|Sale of treasury shares||-||0.8||-||-||-||-||(0.3)||0.5||-||0.5|
|Employee share option plan expenses, net of tax||-||(0.1)||-||-||-||-||-||(0.1)||-||(0.1)|
|Exchange difference arising from translation of financial statements of foreign operations||-||-||-||-||4.4||-||-||4.4||0.2||4.6|
|Net change in cash flow hedges||-||-||-||0.3||-||-||-||0.3||-||0.3|
|Profit for the year||-||-||-||-||-||-||30.2||30.2||0.2||30.4|
|Total comprehensive income for the year||-||-||-||0.3||4.4||-||30.2||34.9||0.4||35.3|
31 December 2018
*Balances are less than £100,000.
The accompanying notes form an integral part of these financial statements.
|Cash flows from operating activities|
|Profit after tax||30.4||28.6|
|- Income tax expense||7.2||3.6|
|- Amortisation and depreciation||9.1||5.9|
|- Finance charge||1.7||0.3|
|- Equity award charges, net of tax||0.8||0.4|
|- Fair value loss/(gain) of derivative financial instruments||0.5||(0.5)|
|- Unrealised currency translation loss/(gain)||2.7||(2.9)|
|Change in working capital, net of effects from acquisitions:|
|- Trade and other receivables||(5.6)||(1.6)|
|- Trade and other payables||(0.1)||5.3|
|- Provision for liabilities and other charges||0.5||(0.8)|
|Cash generated from operations||30.8||35.8|
|Income tax paid, net of refund||(4.1)||(6.1)|
|Net cash provided by operating activities||26.7||29.7|
|Cash flows from investing activities|
|Acquisition of a business, net of cash acquired||(35.5)||(18.2)|
|Purchases and construction of property, plant and equipment||(7.9)||(4.9)|
|Capitalisation of research and development expenditure||(6.2)||(5.2)|
|Capitalisation of intangible software and software under development||(0.9)||-|
|Proceeds from disposal of property, plant and equipment||0.1||0.4|
|Repayment of ESOP loans||0.1||0.4|
|Payment of accrued consideration||-||(0.5)|
|Net cash used in investing activities||(50.3)||(28.0)|
|Cash flows from financing activities|
|Proceeds from borrowings||39.4||25.2|
|Repayment of borrowings||(3.4)||(5.4)|
|Sale of treasury shares||0.5||1.0|
|Purchase of treasury shares by ESOP||-||(1.6)|
|Dividend paid to equity holders of the Company||(15.3)||(14.0)|
|Dividend paid to non-controlling interests||(0.3)||(0.2)|
|Net cash provided by financing activities||19.4||4.8|
|Net (decrease)/increase in cash and cash equivalents||(4.2)||6.5|
|Cash and cash equivalents at beginning of financial year||15.0||9.2|
|Effects of currency translation on cash and cash equivalents||0.7||(0.7)|
|Cash and cash equivalents at end of financial year||11.5||15.0|
|Reconciliation of liabilities arising from financing activities:|
|At 1 January||24.0||5.5|
|Principal and interest payments||(4.9)||(5.6)|
|Proceeds from borrowings||39.4||25.2|
|Accrued interest expenses||1.5||0.2|
|Foreign exchange movement||3.5||(1.3)|
|At 31 December||63.5||24.0|
The accompanying notes form an integral part of these financial statements.
The notes are available in the printable pdf of the results. To download it, please click here.