XP Power Annual Report 2004

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FY2004 Annual Report · XP Power

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“

Year at a Glance

The business delivered a

90% increase

in diluted earnings per share

Larry Tracey, Executive Chairman

Diluted earnings per share adjusted for goodwill

amortisation and profit on sale of own

shares grew by 90% (basic earnings per share

grew by 238%, refer to note 8 on page 33)

Revenue growth of 12% (20% at constant US dollar

exchange rates)

Gross margins improved by a further 2.0% points

to 35.5% - the fifth year of successive improvement

- driven by a further increase in own brand

products in sales mix

Strong free cash flow (cash flow before acquisitions

and disposals, dividend payments and financing)

Dividend to be increased by 17% to 14p per share

”

Group Operating Profit

(£m)

11.6

5.3

4.1

2.4

1.0

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Chairman’s Statement

Earnings per Share (Adjusted for Goodwill Amortisation)

Pence per share

40.5

23.6

19.3

12.4

7.3

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Business Performance

disposals, dividend payments and financing), has enabled

XP is moving from strength to strength. The recovery

us to increase the dividend payable to shareholders.

evident in our key markets early in 2004 continued into

We will be proposing a final dividend of 8 pence per

the second half, producing a strong performance for the

share at the Annual General Meeting on 20 April 2005,

year as a whole, with sales, profits and gross margin all

making the total dividend for 2004 14 pence per share

advancing significantly ahead of the prior year. The

(2003: 12 pence per share), an increase of 17%.

resultant increase in the share price over the year

culminated in XP joining the FTSE All Share Index in

Strategy

December 2004.

As we move into 2005 we will continue to develop

the strategy we began to implement in 2000:

Overall, the business delivered a 90% increase in diluted

To have the largest and most technical sales force in

earnings per share, adjusted for goodwill amortisation,

the industry covering our target geographic markets

to 23.6p per share. Basic earnings per share increased

of Europe and North America

to 16.9p from 5.0p in the prior year, an increase of

To focus on our key customers in the

238% (refer to note 8 on page 33). This has been

communications, defence and avionics, industrial

achieved as a result of our geographic expansion over

and medical sectors

the last few years and the continued increase in the

To offer the largest array of power supply products

proportion of our own intellectual property contained

from any one source to our customers by offering

in the products we sell.

our own products alongside the products of our

key third party partners

Dividend

To expand the level of our own intellectual property

The continued increase in profitability, together with

in our product offering using our various design

strong cash flow (cash flow before acquisitions and

engineering teams across the world

(cid:3)
(cid:3)
(cid:3)
(cid:3)
“

We are expecting our market to continue its growth in

2005 and XP’s position is strong within our market.

Whilst revenue growth is forecast to be skewed towards

the second half of the year, improving margins and

firm control of costs should enable earnings

to improve throughout the year

Larry Tracey, Executive Chairman

” 03

People

Our success is a tribute to the professionalism of our

people. We believe that our sales force is the best

trained, most technical and the largest in our industry.

Our design teams across the globe are producing

world class products which are creating real excitement

Our gross margins are expected to continue to improve

as our own XP designed products grow as a proportion

of our overall business. The benefits of geographic

expansion in North America and Europe are also now

bearing fruit. These factors should mean that we will

grow earnings at a healthy rate in 2005 subject to any

within our customer base. Behind these two teams, our

external economic shocks.

operations people are delivering the backbone of the

systems and processes that enable us to deliver genuine

value to our customers.

Outlook

The improvement in capital equipment spending in

Larry Tracey – Executive Chairman

2004 is forecast by market analysts to continue through

2005, and since this capital equipment incorporates

our products, we can expect to benefit from this trend.

However, the weakness of the US Dollar could continue

to impact our revenues when translated to Sterling.

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Background to the Group and its Products and Markets

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The Group
The Group provides power supply solutions to the
electronics industry. Power supplies take the relatively
high voltage alternating current output from the mains
supply and convert it into various lower voltage, stable
direct current outputs that are required to drive most
electronic equipment. All electronic equipment requires
a power supply.

The Market
The market is highly
fragmented made up of
hundreds of thousands of
customers and thousands of

competitors. Our target geographic

coverage is Europe and North

American. We estimate that our available

market is $1.8 billion.

Our Customers and Industry Segmentation
Our customers are original equipment manufacturers
who can be characterised as having expertise in
their particular area, whether it be medical devices,
communications or industrial automation but generally
do not have in-house power supply expertise. XP
provides this expertise and assists our customers to
design in a suitable power supply from our extensive
range of products that meet the customer’s cost and
technical requirements. Technical requirements often
involve helping the customer meet the relevant
equipment safety standards that operate in their
particular industry such as Medical or Telecom standards
as well as Electro Magnetic Compatibility.

We segment our customer base into the
following industries:

(cid:3) Communications;
(cid:3) Defence and Avionics;

Industrial; and

(cid:3) Medical.

We have industry
specialists who are versed in
technical requirements and power
supply legislation applicable to each of
these different sectors. This way our people can add
genuine value to our customers during the design in
phase but can also use the knowledge they gain from
these customers to develop new products to meet the
needs of the market.

Products
The need for our customers to differentiate their
product from that of their competitors gives rise to a
vast number of power supply requirements to satisfy the
endlessly increasing combinations of voltages at different
power levels.

The Group has over 5,000 products at its disposal
plus access to custom manufacturing capability where
necessary. The products range from AC to DC power
supplies, DC to DC converters necessary for Distributed
Power Architectures, through to Power Protection
Products. The Group also provides ancillary products
such as filters and fans necessary for meeting Electro
Magnetic Compatibility (EMC) legislation and
thermal management.

(cid:3)
Competition
Our competition ranges from numerous small custom
manufacturers, mid tier manufacturers and distributors
of Asian manufacturers. Consolidation continues to occur
in the industry as scale, time to market, shorter product
life cycles, keeping pace with legislation and design
costs make it harder for the small custom manufacturers
to compete.

Our aim is to be the leading provider of power supplies
in our target market, the mid tier of the power supply
industry in North America and Europe.

Product Development
Our model is to design the power supply using one of
our design engineering groups around the world and
outsource the manufacture of the power supply to

one of our partners in the Far East.

Our product range is supplemented
by products from key third parties.
In the course of time we expect the mix
of our business to be approximately

75% our product and 25% third

party product.

We have design engineering teams in
Southern California, New England,
United Kingdom, Taiwan and China.

Engineering Services
Equipment design involves meeting the relevant safety
standards that apply to a particular industry
as well as EMC legislation and thermal
performance. Our customers may
also require non standard output
voltages or require the power
supply in a format that makes it
easier and therefore more cost
effective to integrate into their
equipment. This may involve
incorporating several power supplies into
one chassis, adding signals, special housings, thermal
and EMC management and specific cable harnesses
or connectors.

Our engineering services group has centres throughout
Europe and North America. They offer EMC pre-
compliance facilities, thermal management advice and
general pre and post application support. They also offer
next day delivery of customer specific AC-DC power
solutions with full safety agency approvals from our
range of configurable power supplies. For a fully
integrated solution the use of 3D computer generated
design allows us to quickly generate a proposal with
no commitment from the customer.

Our Mission
To inspire our people to be The Experts in Power
delivering genuine value to our customers.

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Chief Executive’s Review

Communications

Industrial

Medical

Defence & Avionics

Industry Split

Financial
In the year under review XP continued to develop and

in 2003. Product development expenditure increased

to £2.3 million, or 3.4% of revenue, from £1.9 million,

expand its portfolio of own brand products and increase

or 3.2% of revenue, in 2003.

its geographic coverage. As a result, we have achieved a

further substantial improvement in earnings and strong

Profit before tax increased to £5.1 million from

free cash flow.

Revenues increased 12% to £66.8 million

£2.1 million in the prior year. Profit before tax

and goodwill amortisation of £1.4 million

(2003: £1.5 million) was up 81% to £6.5 million

(2003: £59.4 million). This performance was achieved

compared to £3.6 million in 2003. This resulted in

against a backdrop of an average US Dollar to Sterling

diluted earnings per share adjusted for goodwill

exchange rate for 2004 of approximately 1.81 which is

amortisation (refer to note 8) of 23.6p compared with

some 12% weaker than the average rate in 2003. If the

12.4p in 2003, an increase of 90%.

same US Dollar to Sterling exchange rates had prevailed

in 2004 as they did in 2003, XP would have reported

Our strong margins allowed us to generate free

revenues approximately £4.7 million higher and

cash flow (cash flow before acquisitions and disposals,

underlying growth in revenues of 20%.

dividend payments and financing) of £3.4 million

during 2004. After returning £6.0 million

Of the product shipped in 2004, 55% was our own

(2003: £3.0 million) to shareholders in the form

XP brand, up from 49% in the same period a year ago.

of dividends and a share buy back, net debt at

This increase was the primary factor contributing to a

31 December 2004 was £10.1 million compared

further 2.0% increase in gross margins to 35.5%. This is

with £6.5 million at 31 December 2003.

our fifth successive year of gross margin improvement

and we expect to make further improvements in gross

margin as a higher proportion of our products contain

XP intellectual property.

Customers and Industry Segmentation
We segment our business into communications, defence

and avionics, industrial and medical end user markets.

Adjusted operating expenses (excluding goodwill

We have senior strategic teams driving these sectors

amortisation of £1.4 million; 2003: £1.5 million) were

in both North America and Europe, to identify the

£17.0 million in the year compared with £16.2 million

customers we should be targeting in each of these

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“ All industry segments
grewin 2004

Duncan Penny, Chief Executive”

service to our smaller customers through the catalogue

target customers whilst providing a higher level of

sectors, support the sales people

to penetrate these accounts and

work with the product development

sales channel.

organisation to determine what

products we should develop.

This structure has served us

well and should help to drive

further growth as we move

forward. As our business grows in terms

of scale and breadth of product offering, we are

increasingly able to add value to the larger customers

in the market sectors we serve. We are focusing more

resource on winning programs with larger customers

during 2005.

In December 2004 we were pleased to announce that

XP was the first power supply company to sign a

Quality
We remain committed to quality, from design of our

product, through to manufacturing and our customer

facing processes. Our North American sales organisation

gained ISO9001:2000 certification in the summer of

2004. This means all our key sites and activities are

now ISO9001:2000 certified.

The quality of our product and service was recognised by

Siemens Automation and Drives during 2004 when we

were awarded best performing supplier.

global supply agreement with Premier Farnell plc, the

global marketer and distributor of electronic and MRO

Partnerships
Partnerships are an important element of our business

(Maintenance Repair Operations) specialist products

model. XP focuses on its core competencies of market

and services.

knowledge, design engineering and technical sales. For

high volume, low cost manufacturing we partner with

The three-year agreement will see the Group’s power

a select number of Far Eastern manufacturers.

supply products listed exclusively in Premier Farnell’s

catalogues, expanding XP’s market presence significantly

Due to the diversity and scale of our customer base, we

and further improving brand awareness.

do not always have the internal capacity to develop all

the products our customers require. We therefore also

This partnership with Premier Farnell will allow XP to

partner with a small number of other organisations who

enhance its ability of focusing directly on its largest

design and manufacture products to our specification.

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Chief Executive’s Review
( c o n t i n u e d )

XP Product

Third Party

Gross Margin

Margin and Product Split

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In recent years the proportion of our sales derived from

into production. Our customers’ projects take on

our own products has increased dramatically in line with

average 14 months from identification to producing

our strategy of repositioning the business as a virtual

their first production revenues.

07 Target

manufacturer. We expect this trend to continue and

that by 2007 75% of our revenues will come from

products containing XP intellectual property. In order

to provide the broad array of products our customers

require, we will continue to partner with a number of

third party manufacturers for the remaining 25%.

Each of these partnerships is vital to the health of our

business and we invest much time and resource in

nurturing these relationships.

Geographic Markets
It is clear that there has been more life in the markets

for capital equipment, into which our products are

incorporated, during 2004 when compared to 2003.

This is particularly the case in North America. However,

as well as the improvements in the underlying markets,

we consider that we have taken additional market

share in 2004.

Revenues from the US business increased by 20% to

$71 million in 2004 from $59 million in 2003. Our US

Our more mature UK business performed well;

revenues increased by 12% to £17.8 million in 2004

from £15.9 million in 2003 and operating profit

improved to £3.0 million from £2.6 million in the

same period. We consider that we have clearly outpaced

the growth in the overall market in the UK. We were

particularly successful in adding new customers in the

defence and avionics markets and have had success with

wireless infrastructure. The industrial sector, however,

remains the core of the UK business.

The investment in our sales channel in Continental

Europe is now paying off with European revenues

growing 30% to £9.4 million in 2004 from £7.2 million

in 2003. We believe we are taking market share

principally from the small custom manufacturers which

operate in these markets. We have considerable cost

advantages over these local suppliers and the added

advantage of being able to offer a standard or modified

standard product which is available much more quickly

than the custom designs we often compete with.

operations have been particularly successful in designing

in our new branded product and this should bear fruit

Share Buy Back
During May 2004 we purchased 910,000 of our own

over the next two years as many of these projects move

shares on market at an average price of 377.2 pence

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“

We remain on track to achieve our target

gross margin of

40% in 2007

Duncan Penny, Chief Executive ” 09

dedication of our people was recognised by the Investors

per share. (2003: 470,000 shares were purchased at an

average cost of 108.5p per share. These shares were

The competence of our management team and

cancelled.) These shares are held in treasury to use for

In People award in the UK. We will continue to invest in

funding the Company’s various share option schemes or

our people, in particular by providing technical and

for other appropriate purposes such as funding small

commercial training to continue to ensure they are

acquisitions. At the year end there were 888,750 shares

recognised as experts in power by our customers.

remaining in treasury.

People
We strive to inspire all of our people to become experts

In June this year we were pleased to announce the

appointment of Mickey Lynch as Finance Director.

Mickey joined XP in April 2001 as Vice President of

Finance in North America. Prior to joining the Group,

in power to fulfil our aim of delivering genuine value to

Mickey was Chief Financial Officer of Atari Games.

our customers. The role of our field sales engineers, who

interface directly with our customers’ engineering teams

to design our power supplies into their systems, is crucial

and we believe that we have not only the largest direct

Prospects
We remain on track to achieve our target gross margin

sales force in our industry sector, but also the best

of 40% in 2007 with a product mix of approximately

trained and the most technical. We rolled out an

75% XP intellectual property and 25% from our third

extensive technical training program for all sales people

party partners. We should also expect further

during 2004 to ensure we maintain and develop their

improvements in our operational gearing as our

technical skills.

investment in the geographic expansion of our sales

channel bears fruit.

The Group needs to attract and retain the best people

in the industry - people who will continue to drive the

business forward and who, above all, act in our customers’

interests. XP has a culture that rewards excellent

performance with profit sharing, sales commissions and

equity participation. Over 100 of our 290 employees

have some sort of equity interest in the Group.

Duncan Penny – Chief Executive

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Product Development

Expenditure (£ Millions)

% of revenue

Product Development Expenditure

2.5

2.0

1.5

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3.0

2.5

2.0

1.5

1.0

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Offering our customers the widest product range in the

same time, lower volume production runs and

marketplace is a key component of XP’s strategy and

modified standard product will continue to be

product development is vital to the long-term success of

manufactured in the UK.

our business. We continue to commit more resource to

this area in line with our strategy of expanding our own

XP's Anaheim design team was recognised by

brand product portfolio. Our design engineering team

Electronic Engineering Times in North America in their

was strengthened in February 2004 by the acquisition

Best Development Teams special feature in November

of the remaining 80% of the issued share capital of XP

2004 for their development of the ECM40 and ECM60

Electronics that we did not already own. Acquisition of

product families which

this business has enabled XP to expand its proprietary

were launched in 2004.

product range, added new low volume manufacturing

We believe that this

capability to our European operation and expanded our

award demonstrates our

capability to develop new leading edge products.

ability to lead the field

in design.

The XP Electronics design team is now an integrated

part of our worldwide product development effort and is

focused on designing new standard products that will be

manufactured at low cost in the Far East by XP’s existing

manufacturing partners for volume applications. At the

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“

Our design teams across the globe are creating

world class products

which are creating real excitement
within our customer base.

Frank Rene

President - Worldwide Product Development

” 11

We are working ever closer with our manufacturing

partners in the Far East. Our design engineers interface

with our manufacturing partners throughout the product

development cycle to ensure that cost is optimised

at every stage of the design process. Furthermore,

because we designed these products ourselves, it is

straightforward for us to modify them to meet our

customers’ requirements.

Our product offering to our customers covers the whole

range of options from standard product, to modified

XP's award winning Anaheim design team

standard, through configurable to complete custom

build if required. In addition, we continue to partner

New products allow us to win more of the available

with other manufacturers who we consider to be the

business in our sector of the market and to make

best in their specific areas of expertise. We will continue

significantly higher gross margins as we own more of

to sell other manufacturers’ products where it makes

the intellectual property in the product. At the same

sense for our customers.

time as delivering higher gross margins, and therefore

earnings to our shareholders, we are delivering cost

We expect to spend approximately 3.5% of revenues

savings to our customers.

on product development in 2005.

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40.0

35.0

30.0

25.0

20.0

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Financial Review

Gross Margin

Operating Expenses

Operating Profit

Profit and loss metrics

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Cashflow
As a result of our “Virtual Manufacturing” model the
Group is not burdened with the high capital cost and
fixed overhead costs associated with manufacturing
facilities. This benefits the Group by increased free
cash flow (cash flow before acquisitions and disposals,
dividend payments and financing) that can fund business
growth and minimize borrowings.

Our strong operating profit allowed us to generate free
cash flow of £3.4 million during 2004 (2003: £4.3 million).
Refer to page 28. After returning £6.0 million
(2003: £3.0 million) to shareholders in the form
of dividends and a share buy back, net debt at
31 December 2004 was £10.1 million compared
with £6.5 million at 31 December 2003.

Profit & Loss Account
Revenues increased 12% to £66.8 million from
£59.4 million in 2003. During 2004 there has been a
significant decline in the value of the US Dollar versus
Sterling. Had the 2004 exchange rates been maintained
at 2003 levels the Group would have reported additional
2004 revenues of £4.7 million.

Gross margins increased to 35.5% in 2004 from
33.5% in 2003 due to an increasing proportion of
own brand sales. Own brand product revenues were
£36.7 million or 55% of total revenue in 2004
versus £29.1 million or 49% of total revenue in 2003.

Operating expenses (total overheads less goodwill
amortisation of £1.4 million; 2003 £1.5 million) have
increased to £17.0 million from £16.2 million in 2003.

Product development expenditure increased to
£2.3 million or 3.4% of revenue from £1.9 million
or 3.2% of revenue in 2003.

Financial Control & Reporting
One of the many challenges when combining and
acquiring companies is providing accurate, relevant,
and timely financial reporting both externally to the
market and our shareholders and internally to manage
the business. We consider that we have efficient
processes and systems in place to allow us to monitor
the business on a continual basis and provide timely
information to our shareholders.

Derivatives & Other Financial Instruments
The Group’s financial instruments consist of cash, money
market deposits, overdrafts, and various other items such
as trade debtors and trade creditors that arise directly
from its business operations.

The Group has not entered into any derivative or
forward exchange transactions during the period under
review. It is the Group’s policy that no trading in financial
instruments shall be undertaken. The main risk from the
Group’s financial instruments is foreign currency risk,
which will be discussed in the next section.

During May 2004 we purchased 910,000 of our own
shares on market at an average price of 377.2 pence
per share. These shares are held in treasury to use for
funding the Company’s various share option schemes
or for other appropriate purposes such as funding small
acquisitions. At the end of the year there were 888,750
shares remaining in treasury.

This year’s increased profitability and continued favourable

free cashflow has enabled us to increase the dividend by

“
17% to 14p

Mickey Lynch, Finance Director

Foreign Exchange & Hedging Policy
As approximately 59% of the Group’s revenues originate
in the USA, our results when reported in Pounds Sterling
will fluctuate with movements in the US Dollar/Sterling
exchange rate. This effect is an inherent part of
operating in the USA and reporting in Sterling. Hedging
such fluctuations may alleviate variances in the short
term; however, our judgment is that in the long term
hedging our US Dollar earnings will reduce shareholder
value as we pay commissions and margins on financial
instruments. We have therefore decided not to hedge
this underlying economic risk.

Within our European business, we attempt, as far as
possible, to cover foreign exchange exposures by
matching the currencies in which we buy and sell
product and by managing our Euro and US Dollar
borrowings to match our Euro and US Dollar net assets.

If a significant one off transactions occurs, which gives
rise to a high element of foreign currency risk, we
consider hedging such transactions as they occur.

Financing Costs
In December 2003, the Group renewed a three-year
revolving credit facility for acquisitions of £10.0 million.
In December 2004 the Group renewed the annual
working capital facility of £10.0 million. Both of these
facilities are with the Bank of Scotland and are priced
at LIBOR plus 1.5%.

” 13

Taxation
The Group’s effective tax rate has remained
comparatively stable.

Dividends
Our dividend policy is to pay dividends to our
shareholders when commercially able to do so.
This year’s increased profitability and continued
favourable free cashflow has enabled us to increase
the dividend by 17% to 14p.

J. Mickey Lynch – Finance Director

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The Board of Directors

Executive Directors

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1 Larry Tracey
Executive Chairman (age 57)

3 Duncan Penny
Chief Executive (age 42)

Larry co-founded Powerline plc (“Powerline”) in 1979,
where he focused on the strategic direction of the business.

In March 1984, he was responsible for the flotation of
Powerline on the Unlisted Securities Market of the London
Stock Exchange and earnings grew 220 per cent in its
three years as a quoted company. Larry headed Powerline’s
expansion into Germany and the US. Powerline was
acquired by Chloride Group in September 1987. In May
1990, Larry joined the Board of XP as an Executive Director.
In April 2000 he was appointed as Chief Executive Officer of
XP Power plc, and in April 2002 he was appointed as
Executive Chairman. On 3 February 2003 he stepped down
from the role of Chief Executive and continued in the role
of Executive Chairman.

2 James Peters
Deputy Chairman (age 46)

James has over 25 years experience in the power supply
industry and trained with Marconi Space and Defence
Systems, prior to joining Coutant Lambda, one of the
UK’s major power supply companies, as an internal sales
engineer. He joined Powerline shortly after its formation
in 1980 and was involved in all aspects of the business.

In November 1988 he founded XP. In April 2000, he was
appointed as European Managing Director of XP Power plc
and was responsible for the overall management of the
Group’s European businesses. On 3 February 2003
James was appointed as Deputy Chairman.

Between October 1998 and March 2000, Duncan was
the controller for the European, Middle Eastern and
African regions for Dell Computer Corporation, prior to
which Duncan spent eight years working for LSI Logic
Corporation where he held senior financial positions in
both Europe and Silicon Valley. From 1985 to 1990,
Duncan spent five years at Coopers & Lybrand in general
practice and corporate finance. He joined XP in April 2000
as Group Finance Director. On 3 February 2003 he was
appointed as Chief Executive.

4 Mickey Lynch
Finance Director (age 52)

Mickey joined the Group in April 2001 as Vice President
of Finance for XP’s North America operations and since
February 2003 he has headed up the finance team for
the Group.

Prior to joining XP Mickey spent 10 years at Atari Games
Corporation; the last five of which were in the role of
Chief Financial Officer. Prior to that he spent 12 years with
ITT Corporation, holding various financial controllership
roles. In June 2004 he was appointed Finance Director.

5 Mike Laver
President North American (age 42)

Mike has 19 years experience in the power supply industry.
After completing his degree in Electrical Engineering at
UC Santa Barbara, Mike held sales and technical positions
with Power Systems Distributors, Compumech and
Delta Lu Research. Mike joined ForeSight Electronics
in 1991 and carried out various senior roles.

Mike is currently responsible for the US sales and
engineering services. Mike joined the Board on
20 August 2002.

Non-executive Directors

6 Frank Rene
President Worldwide Product Development (age 41)

9 John Dyson
Non-Executive Director (age 56)

John was appointed Chief Executive of Pace Micro
Technology plc in May 2003, prior to which he had been
Finance Director since November 1997. Before Pace he
held senior positions in both Silicon Valley and Europe for
LSI Logic Corporation from June 1990 to November 1997.
From September 1988 to June 1990 John was co-founder
and Managing Director of Modacom Limited, prior to
which he was Finance Director of Norbain Electronics plc
(1986 -1988) and Case Group plc from 1977 to 1986.
He joined the Board of XP Power plc in June 2000.
He is the senior non-executive director and chairman
of the Remuneration Committee.

10 Rich Sakakeeny
Non-Executive Director (age 56)

Rich Sakakeeny has over 30 years experience in the
North American, European and Asian Electronics Industry.
Prior to founding International Power Sources, a 'virtual
manufacturer' of electronic power supplies, in 1985,
he held several senior positions at Intronics Inc., including
VP of International Sales and Senior VP, General Manager.
Since 1985, Rich has also founded and managed several
companies in North America related to power and power
measurement on behalf of European companies. He joined
the Board of XP Power plc in August 2001.

Frank has held several senior engineering positions with
Raytheon Corporation, a US defence contractor, as well as
Digital Equipment Corporation (now Compaq) a leading
supplier of computer products and services. He joined
International Power Sources in 1993 which was acquired
by the Group in July 2000.

Frank joined the board on 20 August 2002 and is
responsible for the Group’s worldwide product
development and manufacturing operations.

7 Steve Robinson
Managing Director Europe (age 41)

Steve has been involved in the power industry since his
graduation in 1984. Since joining XP in 1996, Steve has
held senior positions at XP including Divisional Director,
Joint Managing Director of the UK and since July 2003
Managing Director - Europe.

Steve has been involved in the development of e-business
strategy within XP since May 1999 and joined the Board of
XP Power plc in January 2001.

8 Roger Bartlett
Non-Executive Director (age 60)

Roger joined Touche Ross & Co. in 1967 and qualified in
1971 after which he specialised in corporate taxation and
became a partner in 1977. He was involved in all types of
UK and international corporate work, including UK
flotations, global acquisitions and disposals.

On retiring from Deloitte & Touche in 1997, Roger was
appointed Company Secretary of XP in April 1997. In
January 1998, he became a Non-Executive Director of XP.
He joined the Board of XP Power plc in June 2000.
He is chairman of the Audit Committee.

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Directors’ Report

The directors present their annual report and the

audited financial statements for the year ended 31 December 2004.

Principal Activities, Review of Business and Future Prospects

The principal activity of the Company is to act as the Group’s Holding Company. The Group provides power
supply solutions to the electronics industry. A review of the financial results, business and future prospects are
set out in the Chairman’s Statement and Chief Executive’s Review.
The Group continued to expand the resources it deploys on research and development during 2004.

Directors and Their Interests

The present membership of the Board and the interests of the Directors in the shares of XP Power plc are set out in
the Directors’ Remuneration Report.
In accordance with the Company’s Articles of Association Mike Laver, Duncan Penny and Frank Rene retire
by rotation. In addition to this Mickey Lynch retires following Board appointment. They offer themselves for
re-election at the Annual General Meeting.

Dividends

An interim dividend of 6p per share was paid on 6 October 2004. The Directors are proposing a final dividend
of 8p per share which would be payable to members on the register on 29 April 2005 and would be paid on
17 May 2005. This would make the total dividend for the year 14p (2003: 12p). Refer to note 7.

Substantial Interests

Other than the directors’ interests (refer to Remuneration Report), and excluding treasury shares, at 19 February
2005, the Company was aware of the following interests in three per cent or more of the issued ordinary share
capital of the Company:

Number of shares

Credit Suisse Asset Management
Fidelity Investment Limited
Standard Life
Aberforth UK Small Companies Fund

Environmental Policy

1,794,306
1,479,300
1,485,254
1,182,138

9.1
7.5
7.5
6.0

The Group endeavours to minimise harm to the environment by adopting energy efficient products and
re-cycling the waste it produces where possible. To this end, our UK business gained ISO 14001 accreditation
during the year.

Payment Terms

It is the Group’s policy to agree and clearly communicate the terms of payment as part of the commercial
arrangements negotiated with suppliers. Provided suppliers perform in accordance with agreed terms it is the
Group’s policy that payment should be made accordingly.
XP Power plc holds the investments in the Group companies, does not trade itself and does not have suppliers
within the meaning of the Companies Act 1985.

Employment of Disabled Persons

The Group has a policy regarding the employment of disabled persons. Full and fair consideration is given to
applications for employment made by disabled persons having regard to their particular aptitudes and abilities.
In the event of members of staff becoming disabled, every effort is made to ensure that their employment with
the Group continues and that appropriate training is arranged.

Employee Involvement

Regular communication meetings are held with employees to discuss the performance of the individual company
for which they work and Group matters where appropriate. Employees are given the opportunity to question
senior executives at these meetings.

Auditors

Deloitte & Touche LLP have expressed their willingness to continue in office as auditors and a resolution to
reappoint them will be proposed at the forthcoming Annual General Meeting.

Approved by the Board of Directors
And signed on behalf of the Board

Anne Honeyman – Company Secretary

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Corporate Governance

Managing Risk

The company is committed to the principles of corporate governance contained in the Combined Code on
Corporate Governance which is appended to the Listing Rules of the Financial Services Authority and for which
the Board is accountable to shareholders.

Compliance with the Combined Code

Throughout the year ended 31 December 2004 the company has been in compliance with the Code provisions set
out in Section 1 of the July 2003 FRC Combined Code on Corporate Governance except for the following matter:

Richard Sakakeeny was an executive and part owner of International Power Sources, Inc (now XPiQ, Inc.),
which was acquired by the Group in July 2000. Therefore he is not considered to be independent by the
Combined Code (B2.2).

Notwithstanding the above departure from the Combined Code, the directors consider that the current structure
and function of the Board is appropriate for the present size and composition of the Group.

Internal Control

The Board acknowledges that is it responsible for the Group’s internal control and for reviewing its effectiveness.

The Group’s internal controls are designed to manage rather than eliminate the risk of failure to meet business
objectives, and can only provide reasonable not absolute assurance against material misstatement or loss.

An ongoing process for identifying, evaluating and managing the significant risks faced by the Group was in
place during the entire financial year and has remained in place up to the approval date of the annual report and
accounts. That process is regularly reviewed by the Board and Audit Committee and accords with the Internal
Control guidance for directors on the Combined Code produced by the Turnbull working party.

The Board keeps its risk control procedures under constant review and deals with areas of improvement which
come to its attention.

As might be expected in a group of this size, a key control procedure is the day to day supervision of the
business by the executive directors supported by managers within the Group companies. The executive directors
are involved in the budget setting process, monitor key statistics on a weekly basis and review management
accounts on a monthly basis, noting and investigating major variances.

The Board has considered the need for an internal audit function, but has decided that, because of the size of
the Group and the systems and controls in place, it is not appropriate at present. The Board reviews this on a
regular basis.

Board Meetings

There were seven Board Meetings during the year.

One of the meetings was held to approve the transfer of 80% of the share capital of XP Electronics, and was
attended by James Peters and Duncan Penny.

The March Board Meeting was attended by all Directors except for Larry Tracey. The other five Board meetings
during the year were attended by all the Directors.

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(cid:2)
Corporate Governance (Continued)

Audit Committee

The Audit Committee consists of all three non-executive directors and is chaired by Roger Bartlett. All non-
executive directors are considered independent except for Richard Sakakeeny through his executive management
and ownership of International Power Sources Inc., which was acquired by the Group in July 2000. The Audit
Committee has met three times in 2004 and every meeting was attended by all the Audit Committee members.

The Committee is responsible for, amongst other things, ensuring that the financial performance of the Group
is properly reported and monitored focusing particularly on compliance with legal requirements, accounting
standards, and the requirements of the UK Listing Authority. The Committee also meets with the auditors and
reviews the reports from the auditors without executive board members present.

As part of its remit, the Audit Committee also keeps under review the nature and extent of audit and non-audit
services provided to the Group by the Auditors. During the year the Committee formalised its policy and approved
a set of procedures in relation to the appointment of external Auditors to undertake audit and non-audit work.
Under this policy:

the award of audit-related services to the Auditors in excess of £50,000 must first be approved by the
Chairman of the Audit Committee, who in his decision to approve will take into account the aggregate
of audit-related revenue already earned by the Group Auditor in that year. Audit related services include
formalities relating to borrowing, shareholder and other circulars, regulatory reports, work relating to
disposals and acquisitions, tax assurance work and advice on accounting policies;

the award of tax consulting services to the Auditors in excess of £100,000 must first be approved by the
Chairman of the Audit Committee;

the award of other non-audit related services to the Auditors in excess of £20,000 must first be approved
by the Chairman of the Audit Committee;

and the Auditors will be required to make a formal report to the Audit Committee annually on the
safeguards that are in place to maintain their independence and the internal safeguards in place to ensure
their objectivity.

Nomination Committee

The Nomination Committee consists of Larry Tracey, James Peters and the non-executive directors. It is chaired
by Larry Tracey and it reviews and considers the appointment of new directors. Any appointment of a new director
is voted on by the whole Board. All Nomination Committee meetings during the year were attended
by all the Nomination Committee members.

Relations with Shareholders

The Group engages in two-way communication with both its institutional and private investors and responds
quickly to all queries received. The Group uses its website www.xppower.com to give private investors access to
the same information that institutional investors receive. Interested parties are able to register for the Group’s email
alert service on this website to receive timely announcements and other information published from time to time.
The Annual General Meeting is also an opportunity to communicate with shareholders where Directors and
Committee chairs are available for questions.

Going Concern

The directors, after making enquiries, are of the view, as at the time of approving the accounts, that there is a
reasonable expectation that it will have adequate resources to continue operating for the foreseeable future and
therefore the going concern basis has been adopted in preparing these accounts.

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Directors’ Remuneration Report

Introduction

This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 which
introduced new statutory requirements for the disclosure of directors’ remuneration.

The Regulations require the auditors to report to the Company’s members on the “auditable part” of the directors’
remuneration report and to state whether in their opinion that part of the report has been properly prepared in
accordance with the Companies Act 1985 (as amended by the Regulations). The report has therefore been divided
into separate sections for audited and unaudited information.

Unaudited information

Remuneration Committee

The Remuneration Committee consists of the three non-executive directors, plus Larry Tracey and James Peters.
The non-executive directors are independent, except for Richard Sakakeeny through his executive management
and ownership of International Power Sources Inc., (now XPiQ, Inc.) which was acquired by the Group in July
2000. The committee is chaired by John Dyson. The committee met four times during 2004 to review the
performance of the executive directors and within agreed terms of reference sets the scale and structure of their
remuneration. The Committee sets the Group’s policy on compensation of executive directors and the basis of
their service agreements with due regard to the interests of shareholders. It also approves the allocation of share
options to employees.

The remuneration of the executive directors consists of annual salary, taxable benefits in kind and profit
related bonus.

Remuneration Policy

The objective of the Group’s remuneration policy is that executive directors should receive remuneration which is
appropriate to their position of responsibility, and which will attract, motivate and retain executives of the
necessary calibre.

There is an annual review at which the Committee approves the basic salary and profit sharing bonus scheme for
each director. The Committee receives input from the Executive Chairman regarding recommended packages for
the executive directors. No changes were made in 2004 to the packages recommended to the Committee by the
Executive Chairman.

Basic Salary

No changes to basic salaries were made in 2004.

Bonus Payments

Bonus payments are linked to achieving internal annual plans.

Bonuses were paid to all Executive Directors during 2004.

Bonuses of £32,335 were payable to Larry Tracey, James Peters and Duncan Penny. Their basic bonuses were
calculated on the Group achieving an adjusted operating profit of £7 million. At £7 million, they would have each
received £20,000 but as the actual adjusted profit was 112.3% of budget they received £32,335, an extra £12,335
or £1,000 per percentage point.

A bonus of $48,502 was payable to Frank Rene. His basic bonus was calculated on the Group achieving an
adjusted budgeted operating profit of £7 million. At £7 million, he would have received $30,000 but as the actual
adjusted profit was 112.3% of budget he received $48,502. Using an average exchange rate of 1.8177 in the year,
this equals £26,683.

A bonus of $51,463 was payable to Mike Laver. His basic bonus was calculated on the US business exceeding an
adjusted operating profit of $8.9 million. For every percentage point that the adjusted operating profit exceeded
the budget he earned a $1,500 bonus. In addition, he also received a discretionary amount of $6,639 in lieu of
medical benefits. The total payable on this basis was $58,102. Using an average exchange rate of 1.8177 in the
year, this equals £31,965.

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Directors’ Remuneration Report (Continued)

A bonus of $26,708 was payable to Mickey Lynch. His basic bonus was calculated on the US business exceeding
an adjusted operating profit of $8.9 million. For every percentage point that the adjusted operating profit
exceeded the budget he earned a $1,192 bonus. Taking into account his appointment as Director on 11 June,
the total payable for the period from his appointment was $26,708. Using an average rate since the date of
appointment of 1.8232, this equals £14,649.

A bonus of £47,428 was payable to Steve Robinson. He received 5% of £948,565, being the amount by which the
European business exceeded its base for profit share.

Share Incentive Schemes

The Group operates a number of share incentive schemes. The IFX Power plc Share Option Plan as approved by
the shareholders in April 2001 allows the Company to grant options over up to 2,113,711 shares representing
10% of the issued share capital with or without performance conditions. To date 992,500 options have been
granted under this scheme with exercise prices ranging from £1.75 to £4.50.

The Group also operates an Employee Benefit Trust, which currently contains 415,751 unencumbered shares.
The Group has the ability to make option and share awards from this Trust.

As the majority of the Group’s business takes place in the US the various share incentive schemes have been
constructed with general practice in the US in mind.

Pension Arrangements

The Group operates a defined contribution “Stakeholder” pension scheme in the UK. In 2004 the Group
contributed 3% of base salary to this scheme on behalf of Duncan Penny, James Peters and Steve Robinson.

In the US the Group operates a defined contribution “401K Plan”. The Group does not contribute to this plan.

Directors’ Contracts

The UK executive directors’ contracts run for an indefinite term, with the company being able to terminate the
contracts without cause giving 12 months notice. When a director is terminated without cause the director is
entitled to a termination payment of 12 months basic pay.

The US-based executive directors’ contracts are automatically extended for a 12 month period. When a director
is terminated without cause the director is entitled to a termination payment of 12 months basic pay.

Non-executive directors’ contracts run for an initial 12 months period, renewable each year. They are not entitled
to any termination payments.

Non-executive Directors

All non-executive directors have specific terms of engagement and their remuneration is determined by the Board
within the limits set by the Articles of Association. Terms and conditions of appointment of non-executive directors
are available for inspection. The basic fee paid to each non-executive director was £10,000.

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Performance Graph

The following graph shows
the Company’s performance
measured by its share price
compared with the FTSE
Electronic and Electrical
Equipment Price Index, of
which XP Power is a constituent,
since its flotation in July 2000.

1200

1000

800

600

400

200

Share Performance to February 2005

XP Power
FTSE Electro. & Elec. Equip. - Price Index

2000

2001

2002

2003

2004

5000

4000

3000

2000

1000

Audited Information

Aggregate directors’ remuneration

The total amounts for directors’ remuneration were as follows:

Basic salaries
Benefits in kind
Bonus
Money purchase pension contributions
Non-executives fees
Total Remuneration

The bonus paid of £17,925 in 2003 relates to Steve Robinson.

Directors’ Emoluments

2004

2003

639,756
91,805
217,730
9,000
30,000
988,291

665,773
81,980
17,925
9,000
30,000
804,678

Name of Director

Executive
Larry Tracey
Paul Christiansen (a)
Mike Laver
Mickey Lynch (b)
Duncan Penny
James Peters
Frank Rene
Steve Robinson

Non-Executive
Roger Bartlett
John Dyson
Richard Sakakeeny

Salary and fees
£

Pension
£

Benefits
£

Bonus
£

2004 Total
£

2003 Total
£

88,000
41,256
82,522
45,456
100,000
100,000
82,522
100,000

10,000
10,000
10,000

–
–
–
–
3,000
3,000
–
3,000

–
–
–

1,448
4,346
8,692
4,788
20,521
18,325
13,974
19,711

–
–
–

32,335
–
31,965
14,649
32,335
32,335
26,683
47,428

–
–
–

121,783
45,602
123,179
64,893
155,856
153,660
123,179
170,139

10,000
10,000
10,000

89,234
99,506
99,506
–
121,326
121,328
105,319
138,469

10,000
10,000
10,000

(a)

Resigned 2 July 2004. Emoluments are up to the date of resignation

(b) Appointed 11 June 2004. Emoluments are from date of appointment

Directors’ Interests in Ordinary Shares of XP Power plc

Executive
Larry Tracey (a)
Mike Laver (a)
Mickey Lynch (b)
Duncan Penny
James Peters (a)
Frank Rene (a)
Steve Robinson (a)

Non-Executive
Roger Bartlett
John Dyson (a)
Richard Sakakeeny (a)

As at 31 December 2004

As at 1 January 2004

3,729,779
151,000
50,000
300,000
3,405,779
170,000
125,000

34,000
15,000
29,000

4,284,779
176,000
–
300,000
3,789,779
195,000
141,000

34,000
25,000
37,000

(a)

Larry Tracey sold 155,000 shares at a price of 280p per share on 10 February 2004 and sold 400,000 shares
at a price of 400p on 16 September 2004.

James Peters sold 100,000 shares at a price of 280p per share on 10 February 2004 and sold 280,000 shares
at a price of 400p on 16 August 2004. The James Peters Childrens Trust sold 4,000 shares at a price of
340p per share on 29 March 2004.

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Directors’ Remuneration Report (Continued)

Steve Robinson sold 16,000 shares at a price of 440p per share on 23 December 2004.

John Dyson sold 10,000 shares at a price of 400p on 17 August 2004.

Richard Sakakeeny sold 3,000 shares at a price of 420p on 9 November 2004 and 5,000 shares at a price of
440p per share on 22 December 2004.

Frank Rene sold 25,000 shares at a price of 440p per share on 8 December 2004.

Mike Laver sold 25,000 shares at a price of 330p on 16 March 2004.

Larry Tracey sold 600,000 shares at a price of 520p per share on 8 February 2005. James Peters sold 250,000
shares at a price of 520p per share on 8 February 2005.

The James Peters Childrens Trust sold 3,000 shares at a price of 520p per share on 17 February 2005.

Steve Robinson sold 25,000 shares at a price of 520p on 11 February 2005.

(b) Mickey Lynch purchased 50,000 shares from the Group’s ESOP Trust on 14 June 2004 at the market value of

367.5p per share.

The principal terms relating to this purchase are as follows:

The Trustees of the Group’s Employee Benefit Trust offered shares to the director named above on
14 June 2004 based on the average mid market closing prices in the three preceding working days.

The payment for the shares is deferred until the shares are sold.

The director is able to sell 50% of the shares after two years and the remaining 50% after a further two
years, unless there is a takeover, reconstruction or de-merger of the Group.

The director will be liable for the payment of the shares even if the market value falls below 367.5p.

The trustees have the right to repurchase the remaining shares from the director at the lower of market
value or 367.5p per share if the director leaves the Group within 4 years.

The Group considers that the above arrangement aligns the interests of the director with those of the shareholders
without diluting shareholders as option arrangements would.

In addition to the directors’ interests in ordinary shares of the Company the following directors have interests in
share options:

Executive

Mike Laver

Mickey Lynch

Duncan Penny

Frank Rene

Steve Robinson

Date
of grant

Exercise
price

Term
of option

Number
of shares

24 August 2001
21 August 2002

24 August 2001
24 August 2001

24 August 2001
21 August 2002

24 August 2001

£3.425
£1.75

£1.15
£3.425

£3.425
£1.75

£3.425

(a)
(c)

(a)
(a)

(b)
(a)

(a)
(c)

(a)

24,000
50,000

15,000
20,000

25,000
25,000

5,000
50,000

25,000

(a) Option exercisable over 4 years in equal annual instalments from the date of grant.

(b) Option exercisable after 2 years from the date of grant. Options subject to performance criteria which have

been met.

The highest and lowest mid market prices of the shares of XP Power plc during 2004 were 466p and 218p per
share respectively. The mid-market price on 31 December 2004 closed at 450p per share.

Steve Robinson exercised 15,000 options at 400p on 29 September 2004 and 10,000 options at 447p on
13 August 2004.

Duncan Penny exercised 25,000 options at 522p on 9 February 2005.

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(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Approval

This report was approved by the Board of Directors on 18 March 2005 and signed on its behalf by:

John Dyson – Remuneration Committee Chairman

Statement of Directors’ Responsibilities

United Kingdom company law requires the directors to prepare financial statements for each financial year which
give a true and fair view of the state of affairs of the Company and Group as at the end of the financial year and of
the profit or loss of the Company and Group for that period. In preparing those financial statements, the directors
are required to:

select suitable accounting policies and then apply them consistently;

make judgements and estimates that are reasonable and prudent;

state whether applicable accounting standards have been followed and;

prepare the financial statements on the going concern basis unless it is inappropriate to presume that
the Company and Group will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy
at any time the financial position of the Company and Group and to enable them to ensure that the financial
statements comply with the Companies Act. They are also responsible for the system of internal control, for
safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.

Approved by the Board of Directors
and signed on behalf of the Board

Anne Honeyman – Company Secretary

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Independent Auditors’ Report to the Members of XP Power plc

We have audited the financial statements of XP Power plc for the year ended 31 December 2004 which comprise
the consolidated profit and loss account, the balance sheets, the consolidated cash flow statement, the statement
of total recognised gains and losses, the combined reconciliation of movements in shareholders’ funds and
statement of movement on reserves, the statement of accounting policies and the related notes numbered 1-24.
These financial statements have been prepared under the accounting policies set out therein. We have also audited
the information in the part of the directors’ remuneration report that is described as having been audited.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies
Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters
we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the company and the company’s
members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As described in the statement of directors’ responsibilities, the company’s directors are responsible for the
preparation of the financial statements in accordance with applicable United Kingdom law and accounting
standards. They are also responsible for the preparation of the other information contained in the annual report
including the directors’ remuneration report. Our responsibility is to audit the financial statements and the part of
the directors’ remuneration report described as having been audited in accordance with relevant United Kingdom
legal and regulatory requirements and auditing standards.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the
financial statements and the part of the directors’ remuneration report described as having been audited have
been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the
directors’ report is not consistent with the financial statements, if the company has not kept proper accounting
records, if we have not received all the information and explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and transactions with the company and other members of
the group is not disclosed.

We review whether the corporate governance statement reflects the company’s compliance with the nine
provisions of the July 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial
Services Authority, and we report if it does not. We are not required to consider whether the board’s statements
on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate
governance procedures or its risk and control procedures.

We read the directors’ report and the other information contained in the annual report for the above year as
described in the contents section including the unaudited part of the directors’ remuneration report and consider
the implications for our report if we become aware of any apparent misstatements or material inconsistencies with
the financial statements.

Basis of audit opinion

We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements and the part of the directors’ remuneration report described as having been audited. It also
includes an assessment of the significant estimates and judgements made by the directors in the preparation of
the financial statements and of whether the accounting policies are appropriate to the circumstances of the
company and the group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered
necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements
and the part of the directors’ remuneration report described as having been audited are free from material
misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated
the overall adequacy of the presentation of information in the financial statements and the part of the directors’
remuneration report described as having been audited.

Opinion

In our opinion,the financial statements give a true and fair view of the state of affairs of the company and the
group as at 31 December 2004 and of the profit of the group for the year then ended; and the financial
statements and part of the directors’ remuneration report described as having been audited have been properly
prepared in accordance with the Companies Act 1985.

Deloitte and Touche LLP
Chartered Accountants and Registered Auditors

Cardiff, United Kingdom

18 March 2005

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