28239 COV 6/3/07 19:11 Page 3 XP Power plc Annual Report & Financial Statements for the year ended 31 December 2006 28239 COV 9/3/07 10:24 Page 4 Contents Year at a Glance 1 Chairman’s Statement 2 Background to the Group and its Products and Markets 5 Chief Executive’s Review 6 Financial Review 12 The Board of Directors 16 Directors’ Report 18 Corporate Governance Statement 20 Directors’ Remuneration Report 22 Statement of Directors’ Responsibilities (group) 26 Independent Auditors’ Report on the Group Financial Statements 27 Consolidated Income Statement 29 Consolidated Statement of Recognised Income and Expense 29 Consolidated Balance Sheet 30 Consolidated Cash Flow Statement 31 Notes to the Consolidated Financial Statements 32 Statement of Directors’ Responsibilities (company) 56 Independent Auditors’ Report on the Company Financial Statements 57 Company Balance Sheet 58 Notes to the Company Financial Statements 59 Five Year Review 62 Advisors 63 All electronic equipment needs a power supply. By meeting this demand XP Power provides its investors with access to technology and industrial markets through its global customer base. Electricity supply Power supply End-user equipment 28239 PRE 9/3/07 10:26 Page 1 Year at a Glance The EMA212 launched during 2006, the world’s smallest commercially available 212watt power supply. Highlights Revenue grows 13.2% to £78.7 million Diluted earnings per share (adjusted for restructuring and amortisation of intangibles associated with acquisitions) increases by 20.9% to 37.0 pence (2005: 30.6 pence). Basic earnings per share increases by 4.9% to 32.2 pence (2005: 30.7 pence) Manufacturing joint venture in China operational and profitable in the second half of the year Seventh successive year of gross margin improvements to 37.1% (2005: 35.7%) Dividend to be increased by 12.5% to 18p per share Revenue Earnings per share Dividend per share 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 UK GAAP IFRS UK GAAP (adjusted diluted) IFRS (adjusted diluted) A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 1 28239 PRE 9/3/07 10:26 Page 2 Chairman’s Statement “ We are embarking on a plan that will make our Company more Asia centric. Larry Tracey, Executive Chairman ” Business Performance XP Power has made significant increases in sales and dividends in 2006. Our competitive position continues to improve in our key medical, industrial of intangibles associated with acquisitions. Basic earnings per share was 32.2 pence (2005: 30.7 pence). This is the fourth successive year that we have grown adjusted diluted earnings per share and and communications markets. We are the average compound growth rate over making significant progress in developing this period has been 50%. commercial relationships with target customers through our own new Strategy products. As we move into 2007, XP Power is well placed to continue to grow its earnings The business delivered earnings per through the successful implementation share of 37.0 pence (2005: 30.6 pence) of our focused sales strategy. With the on a diluted basis after adjustment for discontinuation in 2006 of £12 million of restructuring charges and amortisation annualised sales of third party lines, the majority of our products are now our own IP and are enabling significant improvements in gross margins. In 2006 we opened our own joint venture manufacturing facility in Kunshan, China. The facility is fully operational and is expected to reduce our component material and running costs, thereby maintaining the increase in gross margins. Larry Tracey, XP Power Executive Chairman (left) and Jackson Wang, Fortron Source President (centre) along with local dignitaries at the opening of the Chinese manufacturing facility in May 2006. 2 X P P o w e r p l c 28239 PRE 9/3/07 10:26 Page 3 Earnings per Share (pence) UK GAAP (adjusted diluted) IFRS (adjusted diluted) UK GAAP IFRS ) e c n e p ( e r a h s r e p s g n i n r a E 40 35 30 25 20 15 10 5 0 02 03 04 05 06 We have purchased the remaining 50% Gross margin improvements, due to a of our successful Singapore joint venture. higher mix of our own IP product and the As we look forward to the next five years, impact of manufacturing in China, will growing business opportunities are likely mean that we should be able to report to come from Asia. For this reason we are improved gross margin again in 2007. Larry Tracey – Executive Chairman embarking on a plan that will make our Company more Asia centric. Dividend The continued increase in profitability has enabled us to once again increase the dividend. We will be proposing a final dividend of 10 pence per share at the Annual General Meeting on 18 April 2007, making the total dividend for 2006 18 pence per share (2005: 16 pence per share), an increase of 12.5% (see note 10). Outlook Actions we have taken in 2006 to focus on market leading customers with our own IP product should enable us to replace the revenues lost from discontinued product lines. Pictured during the opening ceremony, the Fortron XP Power joint venture manufacturing facility is located in Kunshan, approximately one hour north west of Shanghai. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 3 28239 PRE 6/3/07 19:52 Page 4 Industry Split % Communications 25% Industrial 48% Medical 18% Defence and Avionics 9% 4 X P P o w e r p l c 28239 PRE 7/3/07 23:12 Page 5 Background to the Group and its Products and Markets The Group The Group provides power supply solutions to the electronics industry. Power supplies take the relatively high voltage alternating current output from the electricity supply and convert it into various lower voltage, stable direct current outputs that are required to drive electronic equipment. All electronic equipment requires some form of power supply. The Market The market is highly fragmented and made up of hundreds of thousands of customers and thousands of competitors. Our target geographic coverage for design-in is North America, Europe and Asia; in addition we have a support group in Asia for our world- wide customers who manufacture there. We estimate that our available market is $2.6 billion. Our Customers and Industry Segmentation Our customers are original equipment manufacturers (OEMs) who can be characterised as having expertise in their particular vertical market, whether it be medical devices, communications or industrial automation but who 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 (EMC). We segment our customer base into the following industries: ■ Communications; ■ Industrial; ■ Medical; and ■ Defence and Avionics. 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 not only 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 future 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 and different mechanical formats. The Group offers standard and modified standard solutions along with custom supplies in exceptional circumstances. The products range from AC to DC power supplies, DC to DC converters necessary for Distributed Power Architectures, through to Power Protection Products. 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 modelling allows us to quickly generate a proposal with no commitment from the customer. Product Development Our model is to design the power supply using one of our design engineering groups around the world and to manufacture the power supply in Asia. Our product range is supplemented by products from key third parties. Going forward we expect the mix of our business to be approximately 75% own product and 25% third party product. We have design engineering teams in Europe, North America and Asia. Manufacturing All of our new product releases are manufactured in our joint venture factory in Kunshan, China. This low cost, high volume, ISO 9001 facility allows us to meet the price demands seen in the market whilst being able to manage the quality and component selection. 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. Our Mission To inspire our people to be The Experts in Power delivering genuine value to our customers. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 5 28239 PRE 6/3/07 19:52 Page 6 Chief Executive’s Review “ It is important that we make our business more Asia centric in order to take advantage of the changing dynamics in the world economy. ” The Chief Executive’s Review is prepared solely to provide additional information to shareholders to assess the Company’s strategy and the potential for those strategies to succeed, and should not be relied on by any other party or for any other purpose. the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking information. Financial Performance In the year to 31 December 2006, The Chief Executive’s Review contains revenues increased by 13.2% to certain forward looking statements and £78.7 million (2005: £69.5 million). (a) these statements are made in good Of the product shipped in 2006, 66% faith based on the information available was our own XP brand, up from 59% in up to the time of the approval of this the same period a year ago. This drove report and (b) these statements should an increase in gross margin to 37.1% be treated with caution due to (2005: 35.7%). This is our seventh successive year of gross margin improvement and we expect to make further improvements in gross margin as the proportion of our products containing XP intellectual property continues to grow. In April 2006, the Board decided to restructure certain parts of the business to focus the Group’s resources on its own product lines. A number of third party Sales to customers in the industrial sector accounted for 48% of revenues in 2006. product lines were terminated by 6 X P P o w e r p l c 28239 PRE 6/3/07 19:52 Page 7 Revenue 80 UK GAAP IFRS UK GAAP IFRS ) s n o i l l i M £ ( e u n e v e R 60 40 20 0 02 03 04 05 06 XP which had been expected to generate share for the year ended 31 December and Europe. These teams identify the annualised revenues of approximately 2006 was 31.8 pence (2005: 30.1 pence). customers we consider we should be £10.0 million. We stopped taking orders After adjusting for the amortisation of working with in each of these sectors, for these lines on 1 July 2006. Since that intangibles associated with acquisitions support the sales people to penetrate time two other third party lines made the and restructuring costs, the diluted these accounts and work with the product decision to terminate their relationship earnings per share was 37.0 pence development organisation to specify with XP. The expected annualised revenues (2005: 30.6 pence). future product requirements. from these lines were approximately £2.0 million. In conjunction with these changes, we closed our Benelux office and reduced the headcount in various parts of our business. There were also some inventory write-offs associated with the third party lines that were terminated. The total cost relating to this restructuring was £1.0 million. Profit before tax increased to £8.0 million from £7.6 million in the prior year. Profit before tax includes a charge of £0.3 million (2005: £0.1 million) for the Continued strong margins allowed us to generate free cash flow (see note 28 and as described in the financial review) of £1.9 million during 2006 (2005: £5.3 million) despite a significant build in our own product inventories. After returning £3.2 million to shareholders in the form of dividends, net debt (cash of £4.2 million less borrowings of £22.0 million, see note 23) at 31 December 2006 was £17.8 million compared with £15.1 million This structure has served us well and should help to drive future revenue growth. As our business grows in terms of scale and breadth of product offering, we are increasingly able to add value to the larger customers in the market sectors we serve. Accordingly, we will be focusing more resource on winning programmes with larger customers. at 31 December 2005. Partnerships Partnerships remain an important amortisation of intangibles resulting Customers and Industry element of our business model, allowing from the acquisition of Powersolve Segmentation XP to focus on its core skills of market Electronics Limited (Powersolve) and We target customers in the knowledge, design engineering and £1.0 million of restructuring charges. communications, defence and avionics, technical sales. For high volume, low The basic earnings per share for the year industrial and medical end user markets. cost manufacturing we will continue ended 31 December 2006 was 32.2p We have senior strategic teams driving to partner with a select number of (2005: 30.7p). The diluted earnings per these sectors in both North America Asian manufacturers. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 7 28239 PRE 6/3/07 19:52 Page 8 Chief Executive’s Review (continued) During 2007 we expect 75% of our revenue to come from products containing XP intellectual property. “ ” in 2006 to decrease the number of third party lines we sell, we shall continue to partner with a small number of key third party manufacturers for the remaining 25%, in order to provide the broad array of products our customers require. Due to the diversity and scale of our customer base, we do not always have the internal capacity to develop all the products our customers require. We therefore also partner with a small number of other organisations that design and manufacture products to our specification. May 2006 and was profitable during the second half of the year. Many of the larger customers we deal with have reacted favourably to XP’s move into manufacturing. We believe our joint venture will allow us to penetrate further In recent years, the proportion of our the health of our business and we invest and result in more efficient supply chain Each of these partnerships is vital to some of the key accounts we are targeting sales derived from our own products has much time and resource in nurturing management. increased dramatically in line with our these relationships. strategy of repositioning the business as a manufacturer. We expect this trend to continue and during 2007 we anticipate Manufacturing Joint Venture XP has invested £0.9 million in this joint venture (excluding set-up costs written off to cost of sales). The results of the joint 75% of our revenues will come from A year ago, we announced a 50:50 venture have not had a material effect on products containing XP intellectual manufacturing joint venture in association the Group’s margin during the year. property. Despite the changes we made with Fortron Source, a leading power supply manufacturer situated in the Shanghai area of China. Fortron Source has been an excellent contract manufacturing partner of XP for a number of years and operates a number of power supply manufacturing facilities in China. Fortron Source is renowned in the industry for excellent quality and value for money. We are pleased to announce that this manufacturing facility officially opened in 8 X P P o w e r p l c 28239 PRE 7/3/07 23:12 Page 9 Margin and Product Split % XP Product Third Party Gross Margin % t i l p S t c u d o r P 80 70 60 50 40 30 20 10 0 % n i g r a M s s o r G 45 40 35 30 25 0 02 03 04 05 06 07 Target Markets since July 2005 was £3.4 million and masked the added advantage of being able to offer a The momentum we saw in the capital goods markets in 2004 resumed in 2006 and this was particularly so in North America. the underlying performance of the UK. standard or modified standard product which Restructuring actions reducing the third is available more quickly than the custom party lines and implementing price increases built designs we often compete with. Revenues from our North American business took its toll on some sectors of the business, increased 19% to $81.0 million (£44.1 million) as did the implementation of new business in 2006 from $68.0 million (£37.7 million) in systems to position the Group for future Move to Asia 2005. Most sectors we service were buoyant growth. We believe these issues are now Of the total Group revenues in 2006, including the infamously cyclical semi- behind us. conductor manufacturing equipment sector. approximately $11.3 million (£6.1 million) or 7.8% of total revenue (2005: $2.0 million Revenues from Continental Europe were (£1.1 million) or 1.6% of total revenue) Our UK business suffered somewhat in 2006. £12.3 million in 2006, up 9.8% from was shipped into Asia. For some time, we Despite reported revenues of £22.3 million £11.2 million in 2005. We believe we are have seen a trend developing where our in 2006, up 8.3% from £20.6 million in taking market share principally from the customers’ design engineering work is 2005, the increased revenue contribution small custom manufacturers which operate performed in Europe or North America yet from Powersolve Electronics Limited in these markets. We have considerable cost the customer builds their product in Asia. (Powersolve) which has been consolidated advantages over these local suppliers and Therefore, a requirement exists for XP to A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 9 28239 PRE 6/3/07 19:52 Page 10 Chief Executive’s Review (continued) “ XP Power is now well positioned to support our customers as they move their manufacturing to Asia. ” accomplished by a Scheme of Arrangement which will need to be approved by the Courts and the Shareholders. We estimate that the one-off costs of making this move will be in the order of £2.0 million. Product Development provide logistical and technical support in Asia. It is clear this trend has accelerated. Further, we are now seeing greater emergence of Asian based design teams in our target customer base. On the supply side, the vast majority of Acquisitions XP Power (S) Pte. Limited In October 2006, the Group acquired the remaining 50% of the issued share capital it did not already own of XP Power (S) Pte. Limited for Singapore Dollars 3.0 million (£1.0 million) in cash. our product is sourced from Asia. Our Offering our target customers industry XP Power (S) Pte. Limited is the Group’s experience of Asian power supply leading products is a key component Asian sales company and was set up as companies is that they often have good of XP’s strategy, therefore product a joint venture in 2003. design engineering and manufacturing development is vital to the long-term capabilities but their lack of direct contact success of our business. We continue to MPI-XP Power AG with the customer base means they commit more resource to this area in line generally do not design appropriate with our strategy of expanding our own standard products to meet the market brand product portfolio. needs. This will undoubtedly change as Asia increasingly becomes a larger player in the In the last three years, the Group has world-wide economy. We believe our future placed great emphasis on the release of In February 2006, the Group paid the outstanding amount due on the acquisition of MPI-XP Power AG of £0.5 million. MPI-XP Power AG, our Swiss sales company, is now fully integrated into the Group as competition will come from Asia and so it is new products to expand its XP product XP Power AG. important that we make our business more line. These products have been specifically Asia centric in order to take advantage of developed to meet the needs of the target Powersolve Electronics Limited this changing world economy. customers the Group has identified. These (Powersolve) Against this background, we are embarking increasing proportion of our revenues and on establishing a new headquarters and driving the increase in our gross margins. new products are gradually making up an parent company in Singapore while retaining a listing on the London Stock We expect to release a number of exciting Exchange. We plan that this will be products to the market during 2007. In June 2005, we reached an agreement which committed the Group to acquire the remaining 60.6% of Powersolve Electronics Limited which it currently does 10 X P P o w e r p l c 28239 PRE 7/3/07 23:12 Page 11 North America Europe Asia % of revenue by destination % of revenue by destination % of revenue by destination 48% 44% 8% not own. The Group expects to make a Mieltec XP Power Srl payment of approximately £1.4 million to In March 2006, the Group paid the shareholders of Powersolve early in 2007 in respect of the next tranche of £0.1 million to acquire a further 45% interest in its Italian distributor Mieltec 30.3% of the equity. This payment is in XP Power Srl; the Group now owns addition to an advance of £1.0 million 80% of the equity. already paid to the Powersolve shareholders in respect of this tranche. From July 2005, the results of Powersolve have been consolidated into the Group results. Revenue of £5.8 million (2005: £2.4 million) and £1.4 million (2005: £0.5 million) of pre tax profits have been consolidated into the financial statements. Duncan Penny – Chief Executive A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 11 28239 PRE 7/3/07 23:12 Page 12 Financial Review “ We continue to return cash to our shareholders through our progressive dividend policy. ” Target (1) 75% 2005 41.0 59% Key performance indicators Own brand revenue (£ millions) (1) Proportion of own brand revenue (2) 2006 51.9 66% Gross margin (3) 37.1% 35.7% 40.0% Adjusted earnings per share (4) 37.0p 30.6p Free cash flow (£ millions) (5) 1.9 5.3 (4) (5) (1) Own brand revenue = revenue derived from sale of XP products The Group does not have an absolute long term target for this metric. However, the Group targets to grow this metric by 20% per annum. (2) Proportion of own brand revenue = revenue from sale of XP products as a percentage of total revenue Revenue as per the consolidated income statement in the financial statements. The target was set in 2002 to achieve 75% by the end of 2007. (3) Gross margin = Gross profit as a percentage of revenue Gross profit and revenue both per the consolidated income statement in the financial statements. The target was set in 2002 to achieve 40% by the end of 2007. (4) Adjusted earnings per share = earnings per share adjusted for amortisation of intangibles associated with acquisitions, exceptional charges or profits, and diluted for the effect of the outstanding share options Diluted earnings per share is per the consolidated financial statements. Adjustments to the earnings per share are set out in note 11. There is no absolute long term target set for this metric but the Group targets to grow this metric by 20% per annum. The compound growth rate for this metric over the last four years has been 50%. (5) Free cash flow = Net cash flow from operating activities plus dividends from associates; less net purchases of property, plant and equipment; less net capitalised development costs; less interest paid. All figures derived from the consolidated financial statements as set out in note 28. There is no long term target set for this metric but the Group considers it is important that the business model produces positive free cash flow. The MTC series of COTS (commercial off-the-shelf) dc-dc converters has been developed for 28volt dc input defence and avionics systems. 12 X P P o w e r p l c 28239 PRE 9/3/07 10:26 Page 13 Dividend ) e r a h s r e p e c n e p ( d n e d v D i i 18 15 12 9 6 3 0 02 03 04 05 06 We met our targets for three of our five the Group, which may have a material components. If there is a shortage, non performance indicators as set out above. effect on its business. At the lower end of availability or technical fault with any of Two objectives (proportion of own brand the Group’s target market the barriers to the key electronic components this may product and gross margin) are to be entry are low and there is, therefore, a risk impair the Group’s ability to operate its achieved by the end of 2007 so are ‘in that competition could quickly increase. business efficiently and lead to potential progress’. Each of our financial objectives disruption to its operations and revenues. is discussed in the Chief Executive’s Risks specific to the Group Review. Whilst other performance Dependence on key personnel Fluctuations of revenues, expenses measures are discussed in this Annual Report, it is the above five measures that the Directors use as the Group’s key performance indicators. Risks specific to the industry in which the Group operates The future success of the Group is and operating results substantially dependent on the continued The revenues, expenses and operating services and continuing contributions of its results of the Group could vary Directors, senior management and other significantly from period to period as a key personnel. The loss of the services of result of a variety of factors, some of any of their respective executive officers or which are outside its control. These factors other key employees could have a material include general economic conditions, Fluctuations in foreign currency adverse effect on their businesses. adverse movements in interest rates, The Group deals in many currencies for both its purchases and sales. In particular, Loss of key customers/suppliers trends in revenues, capital expenditure conditions specific to the market, seasonal North America represents an important The Group is dependent on retaining its and other costs, the introduction of new geographic market for the Group where key customers and suppliers. Should the products or services by the Group, or by virtually all the revenues are denominated Group lose a number of its key customers their competitors. In response to a in US dollars. The Group therefore has an or a key supplier this could have a material changing competitive environment, the exposure to foreign currency fluctuations, impact on the Group’s business financial Group may elect from time to time to most notably the US dollar. This could condition and results of operations. make certain pricing, service or marketing lead to material adverse movements in However, for the year ended 31 December reported earnings. Competition 2006, no one customer accounted for more than 5% of revenue. The power supply market is diverse and competitive in Europe, North America and Asia. The Directors believe that the Shortage, non-availability or technical fault with regard to key electronic components development of new technologies could The Group is reliant on the supply, give rise to significant new competition to availability and reliability of key electronic A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 13 28239 PRE 9/3/07 10:26 Page 14 Financial Review (continued) decisions or acquisitions that could have USA where the effective rate can be proportion of own brand sales. This was a material adverse effect on the Group's as high as 40%, the UK where the despite inventory write-offs of £0.6 million revenues, results of operations and corporation tax rate is 30% and a number or 0.8% of revenues relating to non RoHS financial condition. of European jurisdictions where the rates compliant material. Own brand product Management stretch addition, the Group has manufacturing total revenue in 2006 versus £41.0 million vary between 25.5% and 38.7%. In revenues were £51.9 million or 65.9% of The management team that runs the Group will be faced with changes in their business management methodology, as well as additional complexity in the business and increased travel following the successful conclusion of the proposed move of the headquarters to Asia. This additional management stretch could adversely affect the Group if the management team is not able successfully to cope with the changes. activities in Hong Kong where the or 59.0% of total revenue in 2005. corporation tax rate is 17.5% and sales companies in Singapore and Switzerland Operating expenses were £19.0 million where the corporation tax rate is 20%. in the year before restructuring costs The effective tax rate of the Group is affected by where its profits fall of £1.0 million as compared with £16.7 million in 2005. In accordance with the requirements of IAS 38, during geographically. The Group effective tax 2006 £0.9 million of product development rate could therefore fluctuate over time. This could have an impact on earnings and potentially its share price. expenditure was capitalised (2005: £1.0 million) and £0.2 million was amortised (2005: nil). Gross expenditure on product development was £2.8 million, or 3.6% of revenue, compared to £2.6 million, or 3.7% of revenue, in 2005. Information Technology Systems Cash flow The business of the Group relies to a Our strong operating profit allowed us significant extent on IT systems used to generate free cash flow (see note 28) in the daily operations of its operating of £1.9 million during 2006 (2005: Financial Control and Reporting subsidiaries. Any failure or impairment of £5.3 million) despite a significant those systems or any inability to transfer inventory build of our own product. We data onto any new systems introduced returned £3.2 million (2005: £2.8 million) could cause a loss of business and/or to shareholders in the form of dividends. damage to the reputation of the Group together with significant remedial costs. Income and Expenditure Account 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. Risks relating to taxation of the Group Revenues increased 13.2% to We consider that we have efficient £78.7 million from £69.5 million in 2005. processes and systems in place to allow us to monitor the business on a continual The Group is exposed to corporation tax Gross margins increased to 37.1% in 2006 basis by the review of monthly accounts payable in many jurisdictions including the from 35.7% in 2005 due to a greater at monthly management meetings, and 14 X P P o w e r p l c 28239 PRE 7/3/07 23:12 Page 15 ensure that we provide timely information US Dollar assets. As described above, due In February 2007 the Group reduced to our shareholders. to the rapid weakening of the US Dollar we the £10.0 million working capital Derivatives and Other Financial Dollar short position for 2007 at what we to £4.0 million at the same time as it decided to lock in our entire expected US facility with Halifax Bank of Scotland saw as favourable foreign exchange rates. increased the committed term loan from Instruments The Group’s financial instruments consist of cash, money market deposits, At 31 December 2006 the fair value of overdrafts, and various other items such as the forward exchange asset was £0.1m trade receivables and trade payables that (see notes 8 and 24). £10.0 million to £16.0 million, with the additional £6.0 million to be repaid in year 5, making the total amount of the year 5 repayment £11.0 million. The £5.0 million revolving credit facility If a significant one off transaction occurs, remained unchanged. which gives rise to a high element of foreign currency risk, we will consider Dividends additional hedging of such transactions Our dividend policy is to pay dividends arise directly from its business operations. Due to the rapid weakening of the US Dollar versus Sterling and the Euro, in December 2006 the Group took the decision to hedge its expected US Dollar short position in Europe for all of 2007 of approximately $17.6 million via forward currency exchange contracts. as they occur. Financing Costs Foreign Exchange and Hedging Policy its annual working capital facility of In September 2006 the Group renewed As approximately 55% of the Group’s revenues originate in the USA, our results when reported in 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. £10.0 million. At that time the Group also replaced its £15.0 million multicurrency revolving credit facility with a £10.0 million term loan repayable over 5 years and a £5.0 million revolving credit facility committed for 3 years. Both of these facilities are with Halifax Bank of Scotland and are priced at LIBOR plus a margin Within our European business, we attempt, linked to certain covenants, which ranges as far as possible, to cover foreign from 1.0% to 1.5%. exchange exposures by matching the currencies in which we buy and sell The £10.0 million term loan is repayable product and by managing our Euro and US £2.5 million in year 3, £2.5 million in year Dollar borrowings to match our Euro and 4 and £5.0 million in year 5. to our shareholders when legally and commercially able to do so. This year’s increased profitability and continued free cash flow has enabled us to increase the 2006 dividend (including final proposed) by 12.5% to 18p per share. J. Mickey Lynch – Finance Director A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 15 28239 PRE 7/3/07 23:12 Page 16 The Board of Directors Executive Directors 1 2 3 Non-executive Directors 1 Larry Tracey Executive Chairman (age 59) 2 James Peters Deputy Chairman (age 48) 3 Duncan Penny Chief Executive (age 44) 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 plc 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. 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 he 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. 16 X P P o w e r p l c 28239 PRE 6/3/07 19:52 Page 17 4 6 5 7 4 Mickey Lynch Finance Director (age 54) 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 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. 7 John Dyson Non-Executive Director (age 58) John was appointed Chief Executive of Pace Micro Technology plc in May 2003, prior to which he had been Finance Director since November 1997. John retired from Pace Micro Technology plc during 2006 and has co-founded a new business called Telehealth Solutions Ltd which has developed communications technology to remotely monitor medical devices. 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. 5 Mike Laver President North America (age 44) 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. He joined ForeSight Electronics in 1991 and carried out various senior roles. Mike is currently responsible for the US sales and value added engineering organisations. He joined the Board on 20 August 2002. 8 Paul Dolan Non-Executive Director (age 54) Paul joined Touche Ross as a chartered accountant in 1979, becoming a partner in 1980. He retired from the partnership in 2004. Paul specialised in audit and assurance often acting as lead advisor to clients and acted as the lead partner on the XP account until his retirement in 2004. Paul worked for over 20 years with listed and large private companies in the technology, distribution and manufacturing sectors. He was involved in advising on stock exchange listings, acquisitions, disposals, reconstructions and corporate governance matters. Paul is chairman of the Audit Committee. 8 6 Roger Bartlett Non-Executive Director (age 62) 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. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 17 28239 PRE 6/3/07 19:52 Page 18 Directors’ Report The Directors present their annual report and the audited financial statements for the year ended 31 December 2006. XP Power plc is a company incorporated in the United Kingdom under the Companies Act 1985. Principal Activities and Review of the Business 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 the Chief Executive’s Review. The subsidiary, joint venture and associated undertakings principally affecting the profits or net assets of the Group in the year are listed in notes 15 to 17 to the financial statements. The Group is required by the Companies Act to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2006 and of the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group (‘business review’). The information that fulfils the requirements of the business review can be found within the Financial review on page 12. The Financial review also includes details of expected future developments in the business of the Group, an indication of its activities in the field of research and development and details of the key performance indicators that management use. 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 John Dyson, Duncan Penny and Mike Laver retire by rotation and, being eligible, offer themselves for re-election at the Annual General Meeting. Dividends An interim dividend of 8p per share was paid on 5 October 2006 (2005: 7p). We are proposing a final dividend of 10p per share (2005: 9p) which would be payable to members on the register on 20 April 2007 and will be paid on 17 May 2007. This would make the total dividend for the year 18p (2005: 16p). Substantial Interests Other than the Directors’ interests (see Directors’ Remuneration Report), at 31 December 2006 the Company was aware of the following interests in three per cent or more of the issued ordinary share capital of the Company: Lion Trust Asset Management Old Mutual Asset Management Credit Suisse Asset Management Edinburgh Fund Managers Acquisition of the Company’s Own Shares Number of shares 1,457,745 1,178,781 804,678 695,091 % 7.6 6.2 4.2 3.6 At the end of the year, the Directors had authority, under the shareholders’ resolutions of 19 April 2006 to purchase through the market 435,437 of the Company’s ordinary shares at a maximum price equal to 105% of the average of the middle market price for the five business days immediately preceding the day on which the Ordinary Shares are contracted to be purchased. This authority expires on 18 April 2007. Environmental Policy 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, XP Power has gained ISO 14001 accreditation in the UK. 18 X P P o w e r p l c 28239 PRE 9/3/07 10:26 Page 19 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 investments in 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 Each of the persons who is a Director at the date of approval of this annual report confirms that: ■ so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and ■ the Director has taken all steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985. 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 on 20 February 2007 And signed on behalf of the Board Anne Honeyman – Company Secretary A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 19 28239 PRE 6/3/07 19:52 Page 20 Corporate Governance Statement The Company is committed to the principles of corporate governance contained in the Combined Code on Corporate Governance that was issued in 2003 by the Financial Reporting Council (‘the Code’) for which the Board is accountable to shareholders. Statement of Compliance with the Code of Best Practice Throughout the year ended 31 December 2006 the Company has been in compliance with the Code provisions set out in Section 1 of the Code except for the following matters: ■ Larry Tracey and James Peters, Executive Directors, are members of the Remuneration Committee and the Nomination Committee, in contravention with A4.1 and B2.1 of the Combined Code. They are the two main shareholders and consider that any decisions they make will be aligned to the interests of the shareholders; ■ There has been no formal evaluation of the performance of the Board, its Committees and the Directors during the year, as required by the Combined Code (A6.1). Notwithstanding the above departures from the code, the Directors consider that the current structure and function of the Board is appropriate for the present size and composition of the Group. Board Responsibilities The Board is responsible for the proper management of the Group and for its system of corporate governance. It receives information on at least a monthly basis to enable it to review trading performance, forecasts and strategy. The following matters are specifically reserved for its decision: ■ changes to the structure, size and composition of the Board ■ consideration of the independence of Non-Executive Directors ■ review of management structure and senior management responsibilities ■ with the assistance of the Remuneration Committee, approval of remuneration policies across the Group ■ approval of strategic plans and budgets and any material changes to them ■ oversight of the Group’s operations, ensuring competent and prudent management, sound planning, an adequate system of internal control and adequate accounting and other records ■ final approval of annual financial statements and accounting policies ■ approval of the dividend policy ■ approval of the acquisition or disposal of subsidiaries and major investments and capital projects ■ delegation of the Board’s powers and authorities including the division of responsibilities between the Chairman, Chief Executive and the other Executive Directors. Internal Control The Board acknowledges that it is 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 financial statements. 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 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. 20 X P P o w e r p l c 28239 PRE 6/3/07 19:52 Page 21 Board Meetings There were 8 Board Meetings during the year, the attendees being as follows. Date 6 February 2006 22 March 2006 19 April 2006 8 June 2006 31 July 2006 1 September 2006 11 October 2006 12 December 2006 Audit Committee Attendees All All All except Mickey Lynch All All except Roger Bartlett and John Dyson All except Paul Dolan and John Dyson All All The Audit Committee consists of the Non-Executive Directors and is chaired by Paul Dolan. The Audit Committee met three times during 2006 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. 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. The procedures in relation to the appointment of external auditors to undertake audit and non-audit work are as follows: ■ 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. The Nomination Committee met once during the year, on 19 April 2006. All members attended. 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. The Senior Non-Executive Director, John Dyson, will be available at the AGM. Going Concern The Directors, after making enquiries, are of the view, as at the time of approving the financial statements, 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 financial statements. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 21 28239 PRE 6/3/07 19:52 Page 22 Directors’ Remuneration Report Introduction This report has been prepared in accordance with Schedule 7A to the Companies Act 1985. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to Directors’ remuneration. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved. The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 1985. The report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration Committee The members of the Remuneration Committee during 2006 were John Dyson and Roger Bartlett (Non-Executive Directors) and James Peters and Larry Tracey. The committee is chaired by John Dyson. The Group considers it appropriate that Larry Tracey and James Peters are members of the Remuneration Committee although this is recognised as a breach of the Combined Code on Corporate Governance (see page 20). The Committee makes recommendations to the Board. No Director plays a part in any discussion about his own remuneration. There were 4 Remuneration Committee Meetings during the year, the attendees being as follows: Date 6 February 2006 10 March 2006 19 April 2006 27 September 2006 Attendees All All All All Remuneration Policy for the Executive Directors Executive remuneration packages are prudently designed to attract, motivate and retain Directors of the high calibre needed to maintain the Group’s position and to reward them for enhancing value to shareholders. The performance measurement of the Executive Directors and key members of senior management and the determination of their annual remuneration package are undertaken by the Committee. There are five main elements of the remuneration package for Executive Directors and senior management: ■ basic annual salary; ■ benefits-in-kind; ■ annual profit share payments; ■ share incentives; and ■ pension arrangements. The Company’s policy is that a proportion of the remuneration of the Executive Directors should be performance-related. As described below, Executive Directors may earn annual profit shares together with the benefits of participation in share option schemes. Basic Salary An Executive Director’s basic salary is reviewed by the Committee prior to the beginning of each year and when an individual changes position or responsibility. Basic salaries for Executive Directors were reviewed in December 2005 with increases taking effect from 1 February 2006. Executive Directors’ contracts of service which include details of remuneration will be available for inspection at the Annual General Meeting. Benefits-in-kind The Executive Directors receive certain benefits-in-kind, principally car allowance. 22 X P P o w e r p l c 28239 PRE 6/3/07 19:52 Page 23 Annual Bonus Payments The Committee establishes the profit thresholds that must be met for each financial year if a cash bonus is to be paid. The Committee believes that any incentive compensation awarded should be tied to the interests of the Company’s shareholders and that the principal measure of those interests is growth in operating profit. Account is also taken of the relative success of the different parts of the business for which the Executive Directors are responsible. The profit share that an Executive Director can be paid is uncapped. The profit share pool for the year ended 31 December 2006 was £133,840. This reflects performance of various parts of the business against budget. Share Options 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. No options under this scheme have been awarded to Executive Directors since 2002. Pension Arrangements The Group operates a defined contribution Stakeholder pension scheme in the UK. In 2006, the Group contributed 3% of base salary to this scheme on behalf of Duncan Penny and James Peters. In the USA, the Group operates a defined contribution “401K Plan”. The Group matches the Director’s contribution to this plan up to a maximum of 2% of salary. Performance Graph The following graph shows the Company’s performance, compared with the performance of the FTSE 350 Electronic and Electrical Equipment Price Index. 0 0 1 o t d e s a b e r e c i r p e r a h S 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Feb 2002 Aug 2002 Feb 2003 Aug 2003 Feb 2004 Aug 2004 Feb 2005 Aug 2005 Feb 2006 Aug 2006 Feb 2007 XP POWER FTSE 350 ELTRO/ELEC EQ £ - PRICE INDEX Source: DATASTREAM Directors’ Contracts The UK Executive Directors’ contracts run for an indefinite period, 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-month 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 Non-Executive Directors’ contracts run for an initial 12-month period, renewable each year. They are not entitled to any termination payments. Non-Executive Directors are not entitled to share options or pensions. 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. Under the terms and conditions of appointment of Non-Executive Directors, the basic fee paid to each Non-Executive Director was £15,000. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 23 28239 PRE 6/3/07 19:52 Page 24 Directors’ Remuneration Report (continued) Audited information Aggregate Directors’ Remuneration The total amounts for Directors’ remuneration were as follows: 2006 2005 517,968 72,720 133,840 60,000 8,411 40,000 334,769 742,606 74,455 – 35,000 10,500 30,000 – 1,167,708 892,561 Salary and fees 68,952 114,244 99,126 138,333 110,000 23,621 23,692 15,000 15,000 10,000 – Contracted Severance Payments Pension Benefits Profit share 2006 Total 2005 Total 193,552 141,217 – – – 4,100 3,600 – 711 – – – – 18,596 4,348 5,718 20,434 18,250 1,191 4,183 – – – – 24,592 36,802 23,262 24,592 24,592 – – – – – – 112,140 155,394 128,106 187,459 156,442 218,364 169,803 15,000 15,000 10,000 – 106,794 116,484 102,747 144,490 131,550 116,484 144,012 12,000 12,000 – 6,000 £ Basic salaries Benefits in kind Profit share Fees to third parties Money purchase pension contributions Non-executive fees Contractual severance payments Total remuneration Directors’ Emoluments Name of Director £ Executive Larry Tracey (v) Mike Laver Mickey Lynch Duncan Penny James Peters Frank Rene (i) Steve Robinson (ii) Non-Executive Roger Bartlett John Dyson Paul Dolan (iii) Richard Sakakeeny (iv) (i) Resigned 10 March 2006. (ii) Resigned 10 March 2006. (iii) Appointed 19 March 2006. (iv) Resigned 9 June 2005. (v) Larry Tracey’s salary and fees includes £60,000 paid to Corryann Limited, a company 100% owned by Larry Tracey, under an agreement to provide the Group with the services of Larry Tracey. 24 X P P o w e r p l c 28239 PRE 6/3/07 19:52 Page 25 Directors’ interests in ordinary shares of XP Power plc £ Executive Larry Tracey (a) Mike Laver (b) Mickey Lynch Duncan Penny (c) James Peters (d) Non-executive Roger Bartlett John Dyson Paul Dolan (e) As at 31 December 2006 As at 1 January 2006 2,829,779 154,750 50,000 300,000 3,149,779 34,000 15,000 12,000 2,929,779 151,000 50,000 304,000 3,152,779 34,000 15,000 – (a) Larry Tracey sold 100,000 shares at a price of 426p on 7 December 2006. (b) Mike Laver acquired 3,750 shares at a price of 373p on 16 June 2006. (c) Duncan Penny sold 4,000 shares at a price of 452p on 3 March 2006. (d) The James Peters Children’s Trust sold 3,000 shares at a price of 442p on 16 March 2006. (e) Paul Dolan acquired 12,000 shares at a price of 386p on 15 August 2006. In addition to the Directors’ interests in the ordinary shares of the Company, the following Directors have interests in share options: Executive Mike Laver Mickey Lynch Duncan Penny Date of grant 24 August 2001 * 21 August 2002 * 24 August 2001 * 21 August 2002 * 24 August 2001 * As at 31 December 2006 Number of shares As at 1 January 2006 Number of shares 24,000 50,000 15,000 20,000 25,000 24,000 50,000 15,000 20,000 25,000 Exercise price £3.425 £1.75 £3.425 £1.75 £3.425 * Options become exercisable over 4 years in equal annual instalments from the date of grant. All options expire 10 years after the date of grant. The highest and lowest mid market prices of the shares of XP Power plc during 2006 were 486.5p and 327p per share respectively. The mid-market price on 31 December 2006 closed at 407.5p per share. Approval This report was approved by the Board of Directors on 20 February 2007 and signed on its behalf by: John Dyson – Remuneration Committee Chairman A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 25 28239 PRE 9/3/07 10:26 Page 26 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements. The Directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS) and have elected to prepare the financial statements for the Company in accordance with UK GAAP. Company law requires the Directors to prepare such financial statements in accordance with IFRS, the Companies Act and Article 4 of the IAS Regulation. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standard Board’s ‘Framework for the Presentation of Financial Statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to: ■ properly select and apply accounting policies; ■ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and ■ provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impacts of particular transactions, other events and conditions on the entity’s financial position and financial performance. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets of the Company, for taking reasonable steps for the prevention and detection of fraud and other irregularities, and for the preparation of a Directors’ Report and the Directors’ Remuneration Report which comply with the requirements of the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Anne Honeyman – Company Secretary 26 X P P o w e r p l c 28239 PRE 9/3/07 10:57 Page 27 Independent Auditors’ Report to the members of XP Power plc We have audited the Group financial statements of XP Power plc for the year ended 31 December 2006 which comprise the Consolidated Income Statement, the Consolidated Statement of Recognised Income and Expense, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement and the related notes 1 to 33. These Group financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. We have reported separately on the parent Company financial statements of XP Power plc for the year ended 31 December 2006. 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 The Directors’ responsibilities for preparing the Report and financial statements, the Directors’ Remuneration Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view, whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the Directors’ Remuneration Report described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the Group financial statements. The information given in the Directors’ Report includes that specific information presented in the Financial Review that is cross referred from the Principal activities and review of the business section of the Directors’ Report. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Director’s remuneration and other transactions is not disclosed. We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 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 other information contained in the Report and financial statements as described in the contents section and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Directors’ Report, the year at a glance, the Chairman’s Statement, the unaudited part of the Directors’ Remuneration Report, the Background to the Group and its products and markets, the Chief Executive’s Review and the Financial review and the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the Annual Report. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, 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 Group financial statements and the part of the Directors’ Remuneration Report to be 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 Group financial statements and the part of the Directors’ Remuneration Report to be audited. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 27 28239 PRE 9/3/07 10:26 Page 28 Independent Auditors’ Report (continued) Opinion In our opinion: ■ the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2006 and of its profit for the year then ended; ■ the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; ■ the part of the Directors’ remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985; and ■ the information given in the Directors’ Report is consistent with the Group financial statements. As explained in Note 2 to the Group financial statements, the Group in addition to complying with its legal obligation to comply with IFRSs as adopted by the European Union, has also complied with the IFRSs as issued by the International Accounting Standards Board. In our opinion the Group financial statements give a true and fair view, in accordance with IFRSs, of the state of the Group’s affairs as at 31 December 2006 and of its profit for the year then ended. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Cardiff, United Kingdom 20 February 2007 28 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 29 Consolidated Income Statement Year ended 31 December 2006 £ Millions Revenue – continuing operations Cost of sales Gross profit Selling and distribution costs Administrative expenses Restructuring costs Share of results of associates (net of tax) Other operating income Operating profit – continuing operations Finance costs Profit before tax Tax Profit for the year from continuing operations attributable to equity shareholders of the parent Earnings per share from continuing operations Basic Diluted Note 4 5 7 4, 8 9 4 11 11 2006 2005 78.7 (49.5) 29.2 (14.3) (4.7) (1.0) – 0.1 9.3 (1.3) 8.0 (2.0) 6.0 69.5 (44.7) 24.8 (12.3) (4.4) – 0.2 0.1 8.4 (0.8) 7.6 (1.7) 5.9 32.2p 31.8p 30.7p 30.1p Consolidated Statement of Recognised Income and Expense Year ended 31 December 2006 £ Millions Exchange differences on translation of foreign operations Tax on items taken directly to equity Net (expense)/income recognised directly in equity Profit for the year Total recognised income and expense for the period attributable to equity shareholders of the parent 2006 (1.2) 0.1 (1.1) 6.0 4.9 2005 1.7 (0.2) 1.5 5.9 7.4 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 29 28239 ACC / NOTES 6/3/07 20:05 Page 30 Consolidated Balance Sheet 31 December 2006 £ Millions Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in associates Deferred tax asset Total non-current assets Current assets Inventories Trade and other receivables Cash Derivative financial instruments Total current assets Current liabilities Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Bank loans Deferred tax liabilities Deferred contingent consideration Net assets Equity Share capital Share premium account Merger reserve Own shares Translation reserve Retained earnings Equity attributable to equity shareholders of the parent These financial statements were approved by the Board of Directors on 20 February 2007 Signed on behalf of the Board of Directors Larry Tracey – Chairman Duncan Penny – Chief Executive 30 X P P o w e r p l c Note 2006 2005 12 13 14 17 25 18 19 24 20 21 26 26 26 26 26 26 30.1 2.6 3.2 0.1 0.6 36.6 11.1 17.2 4.2 0.1 32.6 28.0 2.2 3.0 0.1 0.3 33.6 8.1 17.2 4.8 – 30.1 (21.5) (32.0) 11.1 47.7 (14.4) (1.4) (2.5) 29.4 0.2 27.0 0.2 (5.9) 0.4 7.5 29.4 (1.9) 31.7 – (1.2) (3.3) 27.2 0.2 27.0 0.2 (6.7) 1.5 5.0 27.2 28239 ACC / NOTES 6/3/07 20:05 Page 31 Consolidated Cash Flow Statement Year ended 31 December 2006 £ Millions Net cash inflow from operating activities Investing activities Dividends received from associates Purchases of property plant and equipment Acquisition of investment in associate Expenditure on product development Payment of deferred consideration Note 28 Acquisition of investment in subsidiary (net of cash/(overdraft) acquired) 32 Net cash used in investing activities Financing activities Interest paid Equity dividends paid to XP Power shareholders Payments for share buy-back Proceeds from sale of own shares Increase in bank loans Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2006 5.3 – (1.2) – (0.9) (1.0) (0.8) (3.9) (1.3) (3.2) – 0.4 3.2 (0.9) 2005 7.3 0.6 (0.8) (0.3) (1.0) – (3.9) (5.4) (0.8) (2.8) (3.5) 0.2 3.1 (3.8) 0.5 (1.9) (3.9) (2.0) (3.4) (3.9) A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 31 28239 ACC / NOTES 6/3/07 20:05 Page 32 Notes to the Consolidated Financial Statements Year ended 31 December 2006 1. General information XP Power plc is a company incorporated in the United Kingdom under the Companies Act 1985. The nature of the Group’s operations and its principal activities are set out in the Background to the Group and its Products and Markets on page 5. These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in note 2. At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Right to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of embedded derivatives IFRIC 10 Interim reporting and impairments IFRIC 11 IFRS 2 – Group and Treasury Share Transactions The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group except for additional disclosures on capital and financial instruments when the relevant standards come into effect for periods commencing on or after 1 January 2007. 2. Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation. The financial statements have been prepared on the historical cost basis. The principal accounting policies are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination (see below) and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. The results of subsidiaries acquired or disposed of in the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal as appropriate. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5 Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. 32 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 33 2. Basis of accounting (continued) Goodwill arising on acquisition is recognised as an asset and initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Investment in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting except when classified as held for sale (see below). Investments in associates are carried in the balance sheet at cost as adjusted by post- acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of the associates in excess of the Group’s interest in those associates are not recognised. Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition (i.e. discount on acquisition) is credited in profit and loss in the period of acquisition. Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment. Joint ventures A joint venture is an entity over which the Group has joint control, through the ability to govern financial and operating policy decisions of the economic activity so as to obtain benefits from it. The results and assets and liabilities of joint ventures are incorporated in these financial statements using the proportionate consolidation method. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. On disposal of a subsidiary, associate or joint venture, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are shipped and title has passed. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 33 28239 ACC / NOTES 6/3/07 20:05 Page 34 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 2. Basis of accounting (continued) Foreign currencies Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in net profit and loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised directly in equity. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRS as sterling denominated assets and liabilities. Derivative financial instruments and hedge accounting The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange forward contracts and interest rate swap contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value, with gains or losses reported in the income statement. Borrowing costs All borrowing costs are recognised in profit or loss in the period in which they are incurred. Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. 34 X P P o w e r p l c 28239 ACC / NOTES 9/3/07 10:26 Page 35 2. Basis of accounting (continued) Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment Property, plant and equipment, including land and buildings, are stated at cost less accumulated depreciation and any recognised impairment losses. Depreciation is charged so as to write off the cost or valuation of the assets over their estimated useful lives, using the straight-line method, on the following bases: Plant and machinery Motor vehicles Office equipment Leasehold improvements Long leasehold buildings Long leasehold land is not depreciated – – – – – 25 – 33% 25% 25 – 33% 10% or over the life of the lease if shorter 2% The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset, and is recognised in income. Internally generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s product development is recognised only if all of the following conditions are met: ■ ■ ■ An asset is created that can be separately identified; It is probable that the asset created will generate future economic benefits; and The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives, which vary between 4 and 7 years depending on the exact nature of the project undertaken. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate of 11.2% that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 35 28239 ACC / NOTES 6/3/07 20:05 Page 36 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 2. Basis of accounting (continued) Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of the impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution and reductions for estimated irrecoverable amounts. Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis to the income statement and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Equity instruments Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Share based payments The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Using the Black Scholes valuation model, the charge to the income statement and the affect on net assets is immaterial, therefore no charge is disclosed. 3. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, as described in note 2, management has made the following judgements and estimations that have the most significant effect on the amounts recognised in the financial statements. Recoverability of Capitalised R&D During the year £0.9 million of development costs were capitalised bringing the total amount of development cost capitalised as intangible assets as of 31 December 2006 to £1.9 million. The cost has been reduced by the amortisation charges for the year of £0.2 million giving the carrying value at 31 December 2006 of £1.7 million. Management has reviewed the balances by project, compared the carrying amount to expected future revenues and profits and is satisfied that no impairment exists and that the costs capitalised will be fully recovered as the products are launched to market. New product projects are monitored regularly and should the technical or market feasibility of a new product be in question, the project would be cancelled and capitalised costs to date removed from the balance sheet and charged to the income statement. 36 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 37 3. Critical accounting judgements and key sources of estimation uncertainty (continued) Impairment of Goodwill The Group tests annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount of the goodwill is determined from value in use calculations. The key assumptions and estimates for the value in use calculations are those regarding the discount rates, growth rates and expected changes to sales and overheads during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management (which take into account past experience and industry growth forecasts) for the next five years and extrapolates cash flows for the following five years assuming no growth from that date. The carrying amount of goodwill as at 31 December 2006 is £30.1 million with no impairment adjustment required for 2006. Estimation of future deferred consideration payments As of the 31 December 2006 balance sheet date the Group has recorded estimated future payments to the shareholders of Powersolve related to the payment for the remaining 60.6% of Powersolve. When discounted to present value the total of these payments are estimated at £3.9 million and that amount is reflected on the balance sheet as of 2006 year end. Since the final payments will be dependent on the actual future financial performance of the business an estimate is required to approximate future business conditions. 4. Segmental reporting For management purposes, the Group is organised on a geographic basis by location of where the sales originated. This is the basis on which the Group reports its primary segment information. The Group’s products are essentially a single class of business; however, from a sales and marketing perspective, the Group’s sales activities are organised by class of customer. The same geographic assets deliver the same class of products to the different classes of customer. The sales information by class of customer has been provided to assist the user of the accounts; however, since the assets are not separated by classes of business further information on net assets and capital additions by class of customers has not been provided. Geographic segment The geographical segmentation is as follows: £ Millions Revenue Europe North America Total revenue Profit on ordinary activities before taxation Europe North America Interest, corporate operating costs and associates Profit before tax Tax Profit after tax 2006 2005 34.6 44.1 78.7 3.3 6.6 (1.9) 8.0 (2.0) 6.0 31.8 37.7 69.5 4.2 5.3 (1.9) 7.6 (1.7) 5.9 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 37 28239 ACC / NOTES 9/3/07 11:03 Page 38 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 4. Segmental reporting (continued) £ Millions Other information Capital additions Depreciation Intangible additions Amortisation Balance sheet Goodwill Other non-current assets Inventories Trade and other receivables Cash Segment assets Unallocated deferred tax Consolidated total assets Trade and other payables Deferred consideration Segment liabilities Unallocated corporate liabilities Unallocated deferred and current tax Consolidated total liabilities Analysis by customer The revenue by class of customer was as follows: £ Millions Communications Industrial Medical Defence and avionics Total All revenue was derived from the sale of goods. 5. Restructuring costs Year to 31 December 2006 Year to 31 December 2005 Europe North America Total Europe North America 0.6 0.4 1.6 0.3 8.6 5.4 5.9 9.8 3.0 32.7 (4.6) (3.9) (8.5) 0.6 0.3 1.5 0.2 21.5 0.5 5.2 7.5 1.2 35.9 (5.0) – (5.0) 1.2 0.7 3.1 0.5 30.1 5.9 11.1 17.3 4.2 68.6 0.6 69.2 (9.6) (3.9) (13.5) (22.0) 4.3 (39.8) 0.8 0.3 1.3 0.1 7.1 5.1 3.6 10.2 2.8 28.8 (5.3) (3.7) (9.0) 0.3 0.3 1.0 – 20.7 0.4 4.5 7.0 2.0 34.6 (3.2) – (3.2) Year to 31 December 2006 Year to 31 December 2005 Europe 7.9 15.4 4.7 6.6 34.6 North America 11.5 23.4 8.3 0.9 44.1 Total 19.4 38.8 13.0 7.5 78.7 Europe 6.8 16.8 3.2 5.0 31.8 North America 11.0 16.3 9.3 1.1 37.7 Total 1.1 0.6 2.3 0.1 28.0 5.3 8.1 17.2 4.8 63.4 0.3 63.7 (8.5) (3.7) (12.2) (19.9) 4.4 (36.5) Total 17.8 33.1 12.5 6.1 69.5 In April 2006 the Board decided to restructure certain parts of the business to focus the Company’s resources on its own product lines. A number of third party suppliers were terminated which had expected annualised revenues of approximately £10 million. We stopped taking orders for these lines on 1 July 2006. Since that time two other third parties made the decision to terminate their relationship with XP. The expected annualised revenues from these lines were approximately £2 million. In conjunction with these changes we closed our Benelux office and reduced the headcount in various parts of our business. There were also some inventory write-offs associated with the third party lines that were terminated. The total costs relating to this restructuring were £1.0 million. £ Millions Redundancy costs Inventory write-offs 38 X P P o w e r p l c 2006 0.7 0.3 1.0 28239 ACC / NOTES 6/3/07 20:05 Page 39 6. Information regarding employees (including Directors) £ Millions Employee costs during the year: Wages and salaries Social security Pension Restructuring costs Total 2006 2005 11.8 1.1 0.3 0.7 13.9 10.8 1.1 0.1 – 12.0 For further information regarding Directors’ remuneration, refer to the audited section of the Directors’ Remuneration Report. Average number of persons employed: Sales Administration Manufacturing Engineering Total 7. Finance costs £ Millions Bank loans and overdraft Unwinding of discount on deferred consideration No interest was received during the current or prior year. 8. Profit for the year £ Millions Profit for the year is after charging: Research and development costs Amortisation of intangible assets Depreciation of property, plant and equipment Staff costs (see note 6) Foreign exchange gains Gain on foreign exchange forward Cost of inventories recognised as expense * Charge for doubtful debts Fees paid to auditors: Audit Other services – tax * This includes write-downs of inventories of £0.6 million (2005: £0.1 million). Number Number 103 63 142 69 377 107 76 64 63 310 2006 2005 1.1 0.2 1.3 0.8 – 0.8 2006 2005 1.9 0.5 0.7 13.1 0.2 (0.1) 49.5 0.2 0.2 0.1 1.6 0.1 0.6 12.0 – – 44.7 0.2 0.2 0.1 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 39 28239 ACC / NOTES 6/3/07 20:05 Page 40 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 8. Profit for the year (continued) A more detailed analysis of auditors’ remuneration on a worldwide basis is provided below: Audit services: Statutory audit Further assurance services Tax services: Compliance services Advisory services 2006 £’000 149 17 166 41 65 106 % 90 10 100 39 61 100 2005 £’000 141 27 168 – 68 68 % 84 16 100 – 100 100 A description of the work of the Audit Committee is set out in the corporate governance statement on pages 20 and 21 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. 9. Tax on profit on ordinary activities £ Millions United Kingdom corporation tax – current year – adjustment in respect of prior year Double tax relief Overseas corporation tax Total current tax Deferred tax Tax charge for the year – current year – adjustment in respect of prior year 2006 0.9 0.2 (0.1) 1.4 (0.3) 2.1 (0.1) 2.0 Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The differences between the total tax shown above and the amount calculated by applying the standard rate of United Kingdom corporation tax to the profit before tax are as follows: £ Millions Profit on ordinary activities before tax Tax on profit on ordinary activities at standard United Kingdom tax rate of 30% (2005: 30%) Higher rates of overseas corporation tax Utilisation of overseas losses Non-deductible expenditure Non-taxable income Prior year adjustments Total tax charge for the year 2006 8.0 2.4 0.3 (0.3) 0.1 (0.3) (0.2) 2.0 2005 3.2 (0.3) (2.1) 1.3 (0.8) 1.3 0.4 1.7 2005 7.6 2.2 0.2 – 0.5 (0.1) (1.1) 1.7 Subject to the mix of the Group’s profits in the various territories in which it operates, the Group is not currently aware of any factors, other than the above, which may have a material impact on the future tax charges. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. As these earnings are continually reinvested by the Group, no tax is expected to be payable on them in the foreseeable future. 40 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 41 10. Dividends Amounts recognised as distributions to equity holders in the period Prior year final dividend paid Interim paid Total Proposed final dividend for the year ended 31 December 2006 of 10p per share * Dividends in respect of 2005 (16.0p) ^ Dividends in respect of 2006 (18.0p) 2006 2005 Pence per share 9.0p* 8.0p^ 17.0p 10.0p^ £ Millions 1.7 1.5 3.2 1.9 Pence per share 8.0p 7.0p* 15.0p £ Millions 1.5 1.3 2.8 The interim dividend was waived on 315,631 shares. All the shares on which dividends were waived were held in the Group’s ESOP. The proposed final dividend for 2006 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 11. Earnings per share Continuing operations The calculations of the basic and diluted earnings per share attributable to the ordinary equity holders of the parent are based on the following data Earnings Earnings for the purposes of basic and diluted earnings per share (profit for the year attributable to equity shareholders of the parent) Amortisation of intangibles associated with acquisitions Restructuring costs Tax effect of restructuring Earnings for adjusted earnings per share Number of shares Weighted average number of shares for the purposes of basic earnings per share (thousands) Effect of potentially dilutive share options (thousands) 2006 £ Millions 2005 £ Millions 6.0 0.3 1.0 (0.3) 7.0 5.9 0.1 – – 6.0 18,627 19,240 270 377 Weighted average number of shares for the purposes of dilutive earnings per share (thousands) 18,897 19,617 Earnings per share from continuing operations Basic Diluted Diluted adjusted 32.2p 31.8p 37.0p 30.7p 30.1p 30.6p A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 41 28239 ACC / NOTES 6/3/07 20:05 Page 42 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 12. Goodwill Cost and net book value At 1 January 2005 Transferred from investment in associates Recognised on acquisition of subsidiaries At 1 January 2006 Recognised on acquisition of subsidiaries At 31 December 2006 Accumulated impairment losses At 1 January 2005, 1 January 2006 and 31 December 2006 Carrying amount At 31 December 2006 At 31 December 2005 £ Millions 23.1 1.3 3.6 28.0 2.1 30.1 – 30.1 28.0 Goodwill arises on the consolidation of subsidiary undertakings. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. The increase in goodwill comprises £0.6 million for the acquisition of XP Power (S) Pte. Limited, £0.1 million for the acquisition of Mieltec XP Power Srl and £1.4 million for the estimated additional consideration payable for the acquisition of Powersolve. The Group tests annually for impairment or more frequently if there are indications that goodwill might be impaired. The Cash Generating Units used equate to the business segments as set out in note 4. The recoverable amount of the goodwill is determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to sales and overheads during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units (a rate of 11.2% was used for 2006). The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management (which take into account past experience and industry growth forecasts) for the next five years and extrapolates cash flows for the following five years assuming no growth from that date. 42 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 43 13. Other intangible assets Other intangible assets comprise development expenditure capitalised when it meets the criteria laid out in IAS 38, plus the separately identifiable intangible assets acquired with the Powersolve business. £ Millions Cost At 1 January 2005 Additions At 1 January 2006 Additions At 31 December 2006 Amortisation At 1 January 2005 Charge in the year At 1 January 2006 Charge in the year At 31 December 2006 Carrying amount At 31 December 2006 At 31 December 2005 Development costs Non-contractual customer relationships Trade marks – 1.0 1.0 0.9 1.9 – – – 0.2 0.2 1.7 1.0 – 1.0 1.0 – 1.0 – 0.1 0.1 0.2 0.3 0.7 0.9 – 0.3 0.3 – 0.3 – – – 0.1 0.1 0.2 0.3 Total – 2.3 2.3 0.9 3.2 – 0.1 0.1 0.5 0.6 2.6 2.2 The amortisation period for development costs incurred on the Group’s developments varies between four and seven years according to the expected useful life of the products being developed. The separately identifiable intangible assets acquired with the Powersolve business have an expected useful life of five years and amortisation of £0.3 million has been incurred during the period. Amortisation commences when the asset is available for use. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 43 28239 ACC / NOTES 9/3/07 10:26 Page 44 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 14. Property, plant and equipment £ Millions Cost At 1 January 2005 Additions Acquired with subsidiaries Disposals At 1 January 2006 Additions Disposals Foreign exchange At 31 December 2006 Depreciation At 1 January 2005 Charge for the year At 1 January 2006 Charge for the year Disposals Foreign exchange At 31 December 2006 Carrying amount At 31 December 2006 At 31 December 2005 Plant and machinery Motor vehicles Office equipment Long leasehold land and buildings 2.4 0.8 0.1 (0.1) 3.2 0.5 (0.1) (0.5) 3.1 1.7 0.2 1.9 0.4 (0.1) (0.2) 2.0 1.1 1.3 0.4 0.2 – – 0.6 0.1 (0.2) – 0.5 0.2 0.2 0.4 0.1 (0.2) – 0.3 0.2 0.2 1.6 0.1 – – 1.7 0.4 (0.7) – 1.4 1.3 0.1 1.4 0.1 (0.7) – 0.8 0.6 0.3 1.7 – – – 1.7 0.2 – – 1.9 0.4 0.1 0.5 0.1 – – 0.6 1.3 1.2 Total 6.1 1.1 0.1 0.1 7.2 1.2 (1.0) (0.5) 6.9 3.6 0.6 4.2 0.7 (1.0) (0.2) 3.7 3.2 3.0 The Group has pledged land and buildings having a carrying amount of approximately £1.3 million (2005: £1.2 million) to secure banking facilities granted to the Group. 44 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 45 15. Subsidiaries Details of subsidiaries at 31 December 2006, all of which are equity accounted are as follows: Name of subsidiary Forx Inc XP Power AG XP Electronics Limited XP Power, Inc (California) XP Power, Inc (Massachusetts) XP Plc XP Power ApS XP Power BV XP Power GmbH XP Power Holdings Ltd XP Power Norway AS XP Power SA XP Power Sweden AB XP Engineering Services Limited XP Power International Limited Powersolve Electronics Limited XP Power (Shanghai) Co Ltd Mieltec XP Power Srl XP Power (S) Pte. Limited XP Energy Systems Limited Place of incorporation ownership (or registration) and operation Proportion of voting power held % Proportion of ownership % USA Switzerland UK USA USA UK Denmark Netherlands Germany UK Norway France Sweden UK UK UK China Italy Singapore UK 100 95 100 100 100 100 100 100 100 100 100 100 100 100 100 39.4 100 80 100 100 100 95 100 100 100 100 100 100 100 100 100 100 100 100 100 100* 100 80 100 100 * The Group held 39.4% of the voting power of Powersolve at 31 December 2006, and has committed to purchasing the remaining 60.6% of the shares (see notes 20 and 21). The voting rights will transfer when the deferred consideration is paid. IAS 27 states that control can exist, even if the parent owns less than 50% of the voting power of the entity, when (inter alia) there is power to govern the financial and operating policies of the entity under a statute or agreement (IAS 27 13 (b)). The board believes that, with effect from 1 July 2005, XP had the power to control the financial and operating policies of Powersolve under the shareholders’ agreements and so Powersolve was treated as a subsidiary and its results consolidated in the Group financial statements with effect from that date. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 45 28239 ACC / NOTES 6/3/07 20:05 Page 46 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 16. Interest in joint ventures The Group has a 50% shareholding in Fortron XP Power (Hong Kong) Limited, a company incorporated in Hong Kong. The Group accounts for its jointly controlled entities on a proportional consolidation basis. The Group’s share of the joint ventures’ assets and liabilities and of income and expenses is shown below. Aggregated amounts relating to joint ventures: £ Millions Current assets Non-current assets Current liabilities Non-current liabilities Total Income Expenses Profit before tax 2006 0.6 0.4 (0.2) – 0.8 0.8 (0.8) – 2005 1.1 – (0.2) – 0.9 1.0 (1.0) – XP Power (S) Pte. Limited has been treated as a subsidiary from October 2006 (see note 32). The share of net assets and associated goodwill at 31 December 2005 was £0.3 million and the share of profit for the nine months to October 2006 was £0.3 million. £0.6 million was transferred to goodwill on XP Power (S) Pte. Limited becoming a subsidiary. Mieltec XP Power Srl has been treated as a subsidiary from March 2006 (see note 32). The share of net assets and associated goodwill at 31 December 2005 was £nil and the share of profit for the two months to March 2006 was £nil. £0.1 million was transferred to goodwill on Mieltec XP Power Srl becoming a subsidiary. 17. Interests in associates The Group has a 20% stake in Safety Power, a company incorporated in the United Kingdom. Aggregated amounts relating to associates: £ Millions Total assets Total liabilities Total Income Expenses Profit before tax 2006 2005 0.1 – 0.1 0.1 (0.1) – 0.1 – 0.1 1.0 (0.7) 0.3 Total assets of £0.1 million relate to goodwill on acquisition of the 20% stake in Safety Power during 2005. There are no movements in interests in associates. 18. Inventories £ Millions Goods for resale 46 X P P o w e r p l c 2006 11.1 2005 8.1 28239 ACC / NOTES 6/3/07 20:05 Page 47 19. Other financial assets Trade and other receivables £ Millions Trade receivables Prepayments and other receivables Total 2006 13.6 3.6 17.2 2005 13.7 3.5 17.2 The average credit period taken on sales of goods is 63 days. No interest is charged on the outstanding receivable balance. An allowance has been made for estimated irrecoverable amounts from the sale of goods of £0.3 million (2005: £0.3 million). This allowance has been determined by reference to past default experience. The Directors consider that the carrying amount of trade and other receivables approximates their fair value. Prepayments and other receivables includes the fair value of the forward exchange asset of £0.1 million (see notes 8 and 24). Cash Cash comprised cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables, which represent its maximum exposure to credit risk in relation to financial assets. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 20. Current liabilities £ Millions Bank loans and overdrafts (see note 23) Trade and other payables Corporation tax Other taxation Provisions – Deferred contingent consideration Total 2006 7.6 9.6 2.4 0.5 1.4 21.5 2005 19.9 8.5 2.8 0.4 0.4 32.0 £11.2 million of the bank loans and overdrafts in 2005 relates to the three year revolving credit facility which was renewed in 2006 (see note 23). The bank loans and overdrafts are secured on the assets of the Group. Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of trade and other payables approximates their fair value. The deferred consideration in 2005 related to the acquisition of 25% of the shares of MPI-XP Power AG. The deferred consideration in 2006 relates to the payment due in 2007 for a further 30.3% of the share capital of Powersolve Electronics Limited. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 47 28239 ACC / NOTES 6/3/07 20:05 Page 48 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 21. Non-current liabilities £ Millions Bank loans Provisions – Deferred contingent consideration Deferred tax (see note 25) Total 2006 14.4 2.5 1.4 18.3 2005 – 3.3 1.2 4.5 The deferred consideration is the discounted net present value of expected payments related to the acquisition of the remaining 30.3% of the share capital of Powersolve Electronics Limited which the Group will pay between 2008 and 2012. 22. Provisions – Deferred contingent consideration £ Millions XP Power AG Powersolve Electronics Limited At 1 January 2006 Additional provision in the year Payment Adjustment for unwinding of discount rate At 31 December 2006 23. Bank loans and overdrafts £ Millions The borrowings are repayable as follows: On demand or within one year In the second year In the third year In the fourth and fifth year Less: amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 0.4 0.1 (0.5) – – 3.3 0.9 (0.5) 0.2 3.9 2006 7.6 – 6.9 7.5 22.0 (7.6) 14.4 Total 3.7 1.0 (1.0) 0.2 3.9 2005 19.9 – – – 19.9 (19.9) – 48 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 49 23. Bank loans and overdrafts (continued) The carrying amounts of the Group’s borrowings are denominated in the following currencies: December 2006 £ Millions Bank overdrafts Bank loans Total December 2005 £ Millions Bank overdrafts Bank loans Total GBP 1.0 10.0 11.0 GBP – 8.3 8.3 USD 2.4 2.6 5.0 USD 3.4 2.9 6.3 EUR 1.3 – 1.3 EUR 1.7 – 1.7 NOK 0.1 – 0.1 NOK 0.3 – 0.3 JPY 0.9 – 0.9 JPY 0.4 – 0.4 CHF 1.9 0.8 2.7 CHF 2.9 – 2.9 The average interest rates paid were as follows: Bank overdrafts Bank loans SGD – 1.0 1.0 SGD – – – 2006 5.2% 6.1% Total 7.6 14.4 22.0 Total 8.7 11.2 19.9 2005 4.1% 5.9% The fair value of the Group’s loans and overdrafts is the same as the book value. The other principal features of the Group’s borrowings are as follows: 1. 2. Bank overdrafts are repayable on demand. The bank overdrafts are secured on the assets of the Group. At 31 December 2006, the Group had an overdraft of £7.6 million. The overall working capital facility is £10.0 million. The overdraft interest rate ranges from 1.0% to 1.5% above LIBOR depending on covenant performance. The bank loan at 31 December 2006 of £14.4 million represents the amount drawn down under the multi-currency revolving credit facility from Halifax Bank of Scotland. In September 2006 the Group renewed this £15.0 million multi-currency revolving credit facility with Halifax Bank of Scotland and is committed until September 2009 at an interest rate which ranges from 1.0% to 1.5% above LIBOR depending on covenant performance. The non-utilisation fee on this facility of 0.50% is calculated on a daily basis and payable quarterly in arrears. In February 2007 the Group reduced the £10.0 million working capital facility with Halifax Bank of Scotland to £4.0 million. Correspondingly the Group increased the committed term loan from £10.0 million to £16.0 million, with the additional £6.0 million to be repaid in year 5, making the total amount of the year 5 repayment £11.0 million. The £5.0 million revolving credit facility remained unchanged. 24. Derivative financial instruments The Group utilised currency derivatives for the first time in 2006 to hedge significant future transactions and cash flows. The instruments purchased are denominated in the currencies of the Group’s principal markets. At the balance sheet date, total notional amount of outstanding forward foreign exchange contracts that the Group has committed are as below. Forward foreign exchange contracts 2006 8.9 2005 – These contracts are to hedge against exchange losses on future purchases of goods. The forward exchange contracts do not qualify for hedge accounting. Therefore, changes in the fair value of currency derivatives amounting to £0.1 million have been credited to income in the year (2005: £nil) (see note 8). The fair value of the forward exchange asset at 31 December 2006 was £0.1 million (2005: £nil). This is included within Prepayments and other receivables (see note 19). The Group does not use interest rate swaps to manage exposure to interest rate movements. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 49 28239 ACC / NOTES 9/3/07 10:26 Page 50 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 25. Deferred tax The following are the major deferred tax assets and (liabilities) recognised by the Group and movements thereon during the current and prior reporting period. £ Millions At 1 January 2005 Charge to income Charge to equity Acquisition of Subsidiary At 1 January 2006 Charge to income At 31 December 2006 Accelerated tax depreciation Goodwill amortisation Share based payment Capitalised development costs Other intangible assets Other timing differences 0.1 – – – 0.1 0.1 0.2 (0.4) – – – (0.4) – (0.4) 0.4 – (0.2) – 0.2 0.1 0.3 – (0.4) – – (0.4) (0.3) (0.7) – – – (0.4) (0.4) 0.1 (0.3) – – – – – 0.1 0.1 Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: £ Millions Deferred tax liabilities Deferred tax assets 2006 (1.4) 0.6 (0.8) Total 0.1 (0.4) (0.2) (0.4) (0.9) 0.1 (0.8) 2005 (1.2) 0.3 (0.9) At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was £nil (2005: £0.1 million). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the future. 26. Share capital and reserves Called up share capital £ Millions Authorised 35,000,000 ordinary shares of £1 each Allotted and fully paid 20,704,621 ordinary shares of 1p each (2005: 20,704,621) The Company has one class of ordinary shares which carry no right to fixed income. Share premium account £ Millions Balance at 1 January and 31 December Merger reserve £ Millions Balance at 1 January and 31 December Own shares £ Millions Balance at 1 January Purchase of own shares Sale of shares Balance at 31 December 50 X P P o w e r p l c 2006 0.4 0.2 2006 27.0 2006 0.2 2006 (6.7) – 0.8 (5.9) 2005 0.4 0.2 2005 27.0 2005 0.2 2005 (3.4) (3.5) 0.2 (6.7) 28239 ACC / NOTES 6/3/07 20:05 Page 51 26. Share capital and reserves (continued) As at 31 December 2006, the Group’s Employee Share Ownership Plan (ESOP) held 393,051 (2005: 318,581) shares carrying a value of £387,940 (2005: £106,600). The movement in the year relates to lapsed options. Own shares also include 1,632,525 treasury shares (2005: 1,849,325), carrying value £5,860,797 (2005: £6,682,474). The movement in the year relates to treasury options exercised. Proceeds from sales of shares were £0.4 million (2005: £0.2 million), and a loss of £0.4 million (2005: £nil). Translation reserve £ Millions Balance at 1 January Exchange differences on translation of foreign operations Balance at 31 December Retained earnings £ Millions Balance at 1 January Dividends paid Profit for the year Tax on items taken directly to equity Charge to equity for equity-settled share-based payments Balance at 31 December 2006 1.5 (1.1) 0.4 2006 5.0 (3.2) 6.0 0.1 (0.4) 7.5 27. Disposal of Subsidiary On 30 August 2006 the Group disposed of its interest in Specialist Power Systems Limited. The net assets of Specialist Power Systems Limited at the date of disposal and at 31 December 2005 were as follows: £ Millions Trade receivables Bank balances and cash Current tax liability Trade payables Inter-company creditors Loss on disposal Total consideration 30 August 2006 0.1 – – – – 0.1 (0.1) – 2005 (0.2) 1.7 1.5 2005 2.1 (2.8) 5.9 (0.2) – 5.0 2005 0.2 – – – (0.3) (0.1) A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 51 28239 ACC / NOTES 6/3/07 20:05 Page 52 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 28. Notes to the cash flow statement £ Millions Operating profit (excluding associates) Adjustments for: Amortisation of intangible fixed assets Depreciation of property, plant and equipment Foreign currency differences Operating cash flows before movements in working capital Increase in inventories Decrease/(increase) in receivables Increase in payables Cash generated by operations Corporation tax paid Net cash inflow from operating activities 2006 9.3 0.5 0.7 (0.3) 10.2 (2.9) 0.1 0.4 7.8 (2.5) 5.3 2005 8.2 0.1 0.6 1.2 10.1 (0.2) (2.7) 0.8 8.0 (0.7) 7.3 Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less and bank overdrafts repayable on demand. Reconciliation to free cash flow £ Millions Net cash inflow from operating activities Dividends from associates Purchase of property, plant and equipment Development expenses capitalised Interest paid Free cash flow 29. Operating leases and other commitments £ Millions Minimum lease payments under operating leases recognised as an expense in the year 2006 5.3 – (1.2) (0.9) (1.3) 1.9 2005 7.3 0.6 (0.8) (1.0) (0.8) 5.3 2006 1.1 2005 1.0 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year In the second to fifth years inclusive After five years 2006 2005 1.1 2.5 0.5 4.1 1.0 1.5 0.2 2.7 Operating lease payments represent rentals payable by the Group for certain of its office properties and warehouses. 52 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 53 30. Pensions The Group operates a defined contribution pension scheme for its employees in the United Kingdom. Contributions are charged to the profit and loss account as they become payable. The total cost charged to income of £0.2 million (2005: £0.1 million) represents contributions payable to these schemes by the Group at a rate of 3% of salary of all members. As at 31 December 2006, all contributions for the year had been made. In the USA the Group operates a defined contribution “401K Plan”. The Group contributes an amount matching the employees contribution up to a maximum of 2% of the employees total earnings. The total cost charged to income of £0.1 million (2005: £nil) represents the Group’s “matching” contribution which will be in paid in 2007. There are no defined benefit schemes. 31. Related party transactions The ultimate controlling party of the Group is XP Power plc. Transactions between the Company and its subsidiaries, which are related parties of the Company have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. The Group has bought goods to the value of £nil (2005: £nil) from, and sold goods to the value of £nil (2005: £nil) to associated undertakings. The Group has sold goods to the value of £506,000 (2005: £103,000) to and purchased £802,000 (2005: £nil) from joint ventures. Purchases and sales were made at market price. The amount payable to associates at 31 December 2006 is £nil (2005: £nil) and the amount receivable is £nil (2005: £nil). The amount receivable from joint ventures is £170,000 (2005: £103,000) and payable is £3,000 (2005: £nil). All transactions are conducted on an arm’s length basis. The Group has paid rent of £5,000 (2005: £nil) to Corryann Limited, a company of whom Larry Tracey is a director and 100% shareholder. The amount outstanding is unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties. The remuneration of the Directors, who are the key management personnel of the Group is set out below for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of the individual Directors is provided in the audited part of the Directors’ Remuneration Report on pages 20 to 25. Short-term employee benefits Post employment benefits Total 2006 £ 2005 £ 1,159,297 8,411 882,361 10,500 1,167,708 892,861 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 53 28239 ACC / NOTES 6/3/07 20:05 Page 54 Notes to the Consolidated Financial Statements (continued) Year ended 31 December 2006 32. Acquisitions In February 2006 the Group made a payment of Swiss Francs 1.0 million (£0.5 million), representing outstanding deferred consideration on the acquisition of MPI-XP Power AG (now renamed to XP Power AG). In March 2006 the Group acquired an additional 45% of the outstanding share capital of Mieltec-XP Power Srl for £0.1 million bringing the Group’s total holding in this company to 80%. There were no differences between the book value and the fair value of the assets acquired. Goodwill of £0.1 million was generated on the transaction. Goodwill is attributable to cost and revenue synergies which will enable the Group to generate enhanced profitability from Mieltec-XP Power Srl in the future. In October 2006 the Group acquired the remaining 50% of the outstanding share capital of XP Power (S) Pte. Limited, its sales joint venture in Singapore, for a cash consideration of £1.0 million. There were no differences between the book value and the fair value of the assets acquired. Goodwill of £0.6 million was generated on the transaction. Goodwill is attributable to cost and revenue synergies which will enable the Group to generate enhanced profitability from XP Power (S) Pte. Limited in the future. Proportion of balance sheets at acquisition £ Millions Inventories Trade and other receivables Cash and overdrafts Trade and other payables Net assets acquired Fair value adjustments: Separable intangibles acquired Associated deferred tax liability Fair value of net assets acquired Goodwill Purchase consideration satisfied by cash Net cash outflow Mieltec-XP XP Power (S) Power Srl Pte. Limited – 0.1 – (0.1) – – – – 0.1 0.1 0.1 0.1 0.2 0.3 (0.2) 0.4 – – 0.4 0.6 1.0 0.7 Mieltec-XP Power Srl contributed £0.6 million revenue and £nil to the Group’s profit before tax for the period between the date of acquisition and the balance sheet date. XP Power (S) Pte. Limited contributed £0.6 million revenue and £0.4 million to the Group’s profit before tax for the period between the date of acquisition and the balance sheet date. 54 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 55 33. Share based payments Options have been granted under the Company’s Unapproved and Approved Share Option Schemes. The numbers outstanding, subscription prices and exercise periods are as follows: Number of shares Exercise Price Exercisable from Expiry date 46,900 10,000 71,250 41,500 66,250 44,000 259,100 30,000 5,000 20,000 4,500 48,000 646,500 £1.15 £1.15 £3.425 £3.20 £2.925 £1.15 £1.75 £2.675 £4.50 £4.11 £3.20 £3.90 22 December 2000 21 August 2003 21 August 2001* 31 January 2002* 1 May 2002* 24 August 2004 24 August 2002* 2 February 2004* 16 February 2005* 21 April 2005* 14 December 2005* 28 September 2006* 22 December 2010 21 August 2011 21 August 2011 31 January 2012 1 May 2012 24 August 2012 24 August 2012 2 February 2014 16 February 2015 21 April 2015 14 December 2015 28 September 2016 * Approved option schemes, vesting in four equal annual instalments from the exercisable date. Outstanding at beginning of the year Granted during the year Forfeited during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year 2006 2005 Weighted average exercise price (pence) 225 390 150 235 236 216 Number of share options 966,450 29,500 (26,265) (121,935) 847,750 657,650 Weighted average exercise price (pence) 216 419 242 193 225 218 Number of share options 847,750 48,000 (16,000) (233,250) 646,500 561,375 The weighted average share price at the date of exercise for share options exercised during the period was 431p. The options outstanding at 31 December 2006 had a weighted average exercise price of 236p, and a weighted average remaining contractual life of six years. Consideration has been given by the Directors of the implications of IFRS 2 Share based payment transactions. In the four years since the standard was introduced, the Group has issued a total of 122,500 options at a weighted average cost of 348p (of which 107,500 are currently outstanding) with a vesting period of four years. The Directors have concluded that any potential charge to the income statement is immaterial and have consequently decided not to undertake a full valuation exercise. A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 55 28239 ACC / NOTES 6/3/07 20:05 Page 56 Statement of Directors’ Responsibilities The Directors are responsible for preparing the annual report including the financial statements. The Directors have chosen to prepare the financial statements for the Company in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP). United Kingdom company law requires the Directors to prepare such financial statements for each financial year which give a true and fair view, in accordance with UK GAAP, of the state of affairs of the company and of the profit or loss of the Company for that period. The financial statements should also comply with UK GAAP and the Companies Act 1985. In preparing those financial statements, the Directors are required to: (a) select suitable accounting policies and then apply them consistently; (b) make judgements and estimates that are reasonable and prudent; (c) (d) 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 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 to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for the system of internal control, for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Anne Honeyman – Company Secretary 56 X P P o w e r p l c 28239 ACC / NOTES 9/3/07 10:26 Page 57 Independent Auditors’ Report to the members of XP Power plc We have audited the parent Company financial statements of XP Power plc for the year ended 31 December 2006 which comprise the Balance Sheet and the related notes 1 to 8. These parent Company financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group financial statements of XP Power plc for the year ended 31 December 2006 and on the information in 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 The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent Company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent Company financial statements give a true and fair view and whether the parent Company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the Directors’ Report is consistent with the parent Company financial statements. The information given in the Directors’ Report includes that specific information presented in the Financial Review that is cross referred from the Principal Activities and Review of the Business section of the Directors’ Report. In addition we report to you if, in our opinion, 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 other transactions is not disclosed. We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited parent Company financial statements. The other information comprises only the Directors’ Report, the Chairman’s Statement the Background to the Group and its products and markets, the Chief Executive’s Review and the Financial Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent Company financial statements. Our responsibilities do not extend to any further information outside the Annual Report. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, 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 parent Company financial statements 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 parent Company financial statements. Opinion In our opinion: ■ the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2006; ■ the parent Company financial statements have been properly prepared in accordance with the Companies Act 1985; and ■ the information given in the Directors’ Report is consistent with the parent Company financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Cardiff, United Kingdom 20 February 2007 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 57 28239 ACC / NOTES 6/3/07 20:05 Page 58 Company Balance Sheet Year ended 31 December 2006 £ Millions Non-current assets Investment in subsidiaries Current assets Debtors Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after one year Net assets Capital and reserves Share capital Share premium account Retained earnings Own shares Shareholders’ funds Note 2006 2005 3 4 5 5 6 7 7 7 7.0 6.0 34.0 30.9 (1.1) 32.9 39.9 (11.8) 28.1 0.2 27.0 6.8 (5.9) 28.1 (8.6) 22.3 28.3 – 28.3 0.2 27.0 7.8 (6.7) 28.3 These financial statements were approved by the Board of Directors on 20 February 2007 Signed on behalf of the Board of Directors Larry Tracey – Chairman Duncan Penny – Chief Executive 58 X P P o w e r p l c 28239 ACC / NOTES 7/3/07 23:10 Page 59 Notes to the Company Financial Statements Year ended 31 December 2006 1. Significant accounting policies The principal accounting polices are summarised below. They have all been applied consistently throughout the year and the preceding year with the exception of new accounting standards which have been introduced since the preceding year and are applicable to the current year; details of which are as follows: Basis of accounting The financial statements are prepared under the historical cost convention and in accordance with applicable United Kingdom accounting standards. Investments Investments held as fixed assets are stated at cost less provision for impairment. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Pension costs The Company operates a defined contribution pension scheme for its employees. Contributions are charged to the income statement as they become payable. 2. Profit for the year As permitted by Section 230 of the Companies Act 1985, the Company has elected not to present its own income statement for the year. XP Power plc reported a profit for the financial year ended 31 December 2006 of £2.2 million (2005: £6.2 million). The auditors’ remuneration for services to the Company was £0.1 million (2005: £0.1 million). The average monthly number of employees (including Executive Directors) employed by the Company was five (2005: six). All employees were employed in a management capacity. The cost of these employees was £0.6 million (2005: £0.5 million). A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 59 28239 ACC / NOTES 6/3/07 20:05 Page 60 Notes to the Company Financial Statements (continued) Year ended 31 December 2006 3. Investment in subsidiaries Details of the Company’s direct subsidiaries at 31 December 2006 are as follows: £ Millions Cost and carrying value At 1 January 2006 Additions Disposals At 31 December 2006 Name of subsidiary Forx Inc XP Plc XP Power International Limited XP Power (Shanghai) Co Limited XP Power (S) Pte. Limited Place of incorporation ownership (or registration) and operation USA UK UK China Singapore Details of Group subsidiaries, joint ventures and associates are given in notes 15 to 17 in the Group financial statements. Shares in subsidiaries 6.0 1.0 – 7.0 Proportion of voting power held % Proportion of ownership % 100 100 100 100 100 2006 34.0 – 34.0 100 100 100 100 100 2005 30.3 0.6 30.9 2006 2005 0.6 0.5 1.1 11.8 8.6 – 8.6 – 4. Debtors £ Millions Amounts receivable from Group companies Prepayments and other debtors Total 5. Creditors £ Millions Amounts falling due within one year Bank loans and overdrafts Other creditors and accruals Total Amounts falling due after one year Bank loans and overdrafts The bank loans and overdrafts are secured on the assets of the Group. 60 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 61 6. Called up share capital £ Millions Authorised 35,000,000 shares at 1p each Allotted and fully paid 20,704,621 ordinary shares of 1p each (2005: 20,704,621) 7. Combined reconciliation of movements in shareholders’ funds and statement of movements on reserves £ Millions At the beginning of the year Purchase of own shares Sale of own shares Profit for the year Dividends paid At the end of the year Called up share capital Share premium Retained earnings 0.2 – – – – 0.2 27.0 – – – – 27.0 7.8 – – 2.2 (3.2) 6.8 Own shares (6.7) – 0.8 – – (5.9) 8. Post balance sheet event Subsequent to the year end, the Directors have proposed a dividend of 10p per share. 2006 0.4 0.2 2006 Total 28.3 – 0.8 2.2 (3.2) 28.1 2005 0.4 0.2 2005 Total 28.2 (3.5) 0.2 6.2 (2.8) 28.3 A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 61 28239 ACC / NOTES 6/3/07 20:05 Page 62 Five Year Review Results Revenue Profit from operations Profit before tax Assets employed Non-current assets Current assets Current liabilities Non-current liabilities Net assets Financed by Equity Minority interests Key statistics Earnings per share Diluted earnings per share Share price in the year High Low 2006 £ Millions IFRS 2005 £ Millions UK GAAP 2004 £ Millions 2003 £ Millions 2002 £ Millions 78.7 9.3 8.0 36.0 32.6 (21.5) (18.3) 28.8 28.8 – 28.8 32.2p 31.8p 69.5 8.4 7.6 33.6 30.1 (32.0) (4.5) 27.2 27.2 – 27.2 30.7p 30.1p 66.8 7.0 6.4 27.9 23.3 (16.8) (8.5) 25.9 25.9 – 25.9 23.1p 22.6p 59.4 2.7 2.1 26.4 22.6 (12.0) (10.6) 26.4 26.3 0.1 26.4 5.0p 4.9p 64.0 1.1 0.7 27.6 22.9 (12.6) (8.2) 29.7 29.1 0.6 29.7 0.0p 0.0p 486.5p 327.0p 526.0p 279.0p 466.0p 218.0p 250.0p 73.5p 352.5p 82.5p The amounts disclosed for 2003 and earlier periods are stated on the basis of UK GAAP because it is not practicable to restate amounts for periods prior to the date of transition to IFRSs. 62 X P P o w e r p l c 28239 ACC / NOTES 6/3/07 20:05 Page 63 Advisors Company Brokers Investec 2 Gresham Street London EC2V 7QP Principal Bankers Bank of Scotland Uberior House 61 Grassmarket Edinburgh EH1 2JF Solicitors Osborne Clarke 2 Temple Back East Temple Quay Bristol BS1 6EG Registrars Capita IRG Plc Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0LA Auditors Deloitte & Touche LLP Cardiff A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 0 6 63 28239 ACC / NOTES 6/3/07 20:05 Page 64 Shareholders Notes 64 X P P o w e r p l c 28239 COV 6/3/07 19:11 Page 2 XP Power plc T H E X P E R T S I N P O W E R XP Power plc, 16 Horseshoe Park, Pangbourne, Berkshire RG8 7JW. Tel:+ 44 (0) 118 984 5515 Website: www.xppower.com