We continue to invest in our business and people, whilst still being able to deliver strong year on year profit growth
Chief Financial Officer
Review of our year
XP Power delivered another strong performance in 2018. The strong order and revenue growth coupled with clear investment priorities and effective control of operating expenditure, has delivered strong 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 Annual Report, 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 in Note 4 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 manufacturing sector, which grew 60% to £47.4 million (2017: £29.7 million) and the Technology sector, which grew 19% 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 grew strongly, 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 manufacturing sector. Europe delivered growth of 6% (6% in constant currency) to £61.1 million (2017: £57.5 million), driven by strong 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 as 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).
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 helped offset the impact of price increases on components and the increases as a result of 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 organisations. 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%).
In 2018 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 final six months of the year Sterling to US Dollar exchange rate was marginally lower than 2017.
Approximately 84% of our revenues (2017: 82%) are denominated in US Dollars and the translation of these revenues into Sterling 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).
Revenue growth has translated into earnings growth
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 the 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.
Adjusted EPS increases 18%
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. 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
The policy is to increase dividends progressively while 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).
Dividend per share increases 9%
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 arise following the United Kingdoms 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