25287.04 13 March 2017 5:07 PM Proof 525287.04 13 March 2017 5:07 PM Proof 5XPPOWER ANNUAL REPORT & ACCOUNTS for the year ended 31 December 2016XP POWERANNUAL REPORT & ACCOUNTS for the year ended 31 December 2016stock code: XPPXP POWERANNUAL REPORT & ACCOUNTSfor the year ended 31 December 2016 stock code: XPPXP AR2016 - Proof 6.indd 313/03/2017 17:56:06 OUR VISION25287.04 13 March 2017 5:07 PM Proof 5HEADINGOUR VISIONTHE FIRST CHOICE POWER SOLUTIONS PROVIDER DELIVERING THE ULTIMATE EXPERIENCE FOR OUR CUSTOMERS AND OUR PEOPLEXP AR2016 - Proof 6.indd 413/03/2017 17:56:11 2016 has been another excellent year for XP Power as we have achieved record order intake, revenues and earnings against a backdrop of economic and political uncertainty. In an environment of relatively subdued market growth for industrial electronics, we continue to grow and capture market share. We achieve this by being customer focused and ensuring we remain an attractive power partner to our customers through the products and innovation we offer.Our people, across the three continents where we have a presence, lie at the heart of our success. Our lean, flat, fast and flexible structure, allow delivery of excellent service and support and these are the key ingredients for our continued growth.As part of our continued drive for improvement, we have rolled out some high quality employee training designed around our Core Values of INTEGRITY, KNOWLEDGE, FLEXIBILITY, SPEED and CUSTOMER FOCUS. These values are our DNA and fundamental to our continued success.We look forward to further success in 2017.Duncan PennyChief ExecutiveCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDSTRATEGIC REPORT2 Financial and Operational Highlights in 20163 Our Investment Proposition4 Chairman’s Statement 6 XP Power at a Glance8 Our Marketplace9 Our Growth Drivers 10 Our Strategy12 Our Key Performance Indicators14 Our Business Model16 Case Study - Internet of Things Smart Metering 17 Our Manufacturing Progress18 Operating and Financial Review22 Employee Engagement24 Our Commitments to Sustainability26 Our Customers 27 Our People and Their Health and Safety28 Our Suppliers29 Our Communities30 Our Environment32 Managing Our RisksGOVERNANCE REPORT36 Chairman’s Introduction to Governance38 Directors and Officers40 Corporate Governance Report44 Audit Committee Report48 Remuneration Committee Report49 Remuneration Policy54 Remuneration Report – Annual Report61 Other Governance and Statutory Disclosures62 Statement by DirectorsFINANCIALS63 Independent Auditor’s Report69 Consolidated Statement of Comprehensive Income70 Consolidated Balance Sheet71 Consolidated Statement of Changes in Equity72 Consolidated Statement of Cash Flows73 Notes to the Consolidated Financial Statements107 Company Balance Sheet108 Notes to the Company Balance Sheet118 Five Year Review119 Advisers120 Shareholder Noteswww.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 20161STRATEGIC REPORTXP AR2016 - Proof 6.indd 113/03/2017 17:56:24 Order Intake(£ millions)+21%(+9% in constant currency)Revenue(£ millions)+18%(+7% in constant currency)Earnings per Share (pence)+11%(after adjusting for one-off costs and intangibles amortisation)Dividend per Share (pence) +8%Employee Cultural Survey (score)2016133.52015110.52014105.12013103.7201296.62016712015662014612013552012502016129.8 2015109.72014101.12013101.1201293.92016115.32015104.32014101.1201395.1201281.3201559.2201662.963.02017OPERATIONAL HIGHLIGHTS }Record revenues and earnings achieved in 2016 despite challenging economic conditions and political uncertainties }Improvement in trading conditions during the second half of 2016, with positive momentum in order intake and revenues }Full year revenues increased by 18% (7% in constant currency) to £129.8 million (2015: £109.7 million) }Revenues from XP Power’s own-designed products increased by 28% (15% in constant currency) to £95.3 million (2015: £74.6 million) to reach a record 73% of total revenue (2015: 68%) }Sales of high efficiency XP “Green” Power products grew by 28% in 2016 to £30.2 million (2015: £23.6 million) }Order intake of £133.5 million (2015: £110.5 million) – an increase of 21% (9% in constant currency) }Balance sheet remains robust, with net cash of £3.7 million at year end (2015: net debt of £3.7 million) }Accelerated transfer of lower power/lower complexity product from China manufacturing plant to Vietnam factory to enhance competitiveness and free up capacity in China }Power converter production at the Vietnam facility increased by 119% to 377,700 units, strengthening the Group’s cost advantage over many of its competitors }Expect to break ground on construction of second manufacturing facility at Vietnam site in the fourth quarter of 2017Earnings per Share (pence)+8%2016112.02015103.72014102.1201395.8201281.7HEADING2FINANCIAL AND OPERATIONAL HIGHLIGHTS IN 2016In order to provide readers with a more comprehensive view of our business and performance, we have presented a number of alternative performance measures. We use constant currency to provide comparison using the current year information translated at prior year exchange rates.XP AR2016 - Proof 6.indd 213/03/2017 17:56:27 OUR INVESTMENT PROPOSITION T R O P E R C G E T A R T S I Exposure to a broad cross section of end markets – Industrial, Healthcare and Technology – but with no direct exposure to consumer electronics. Read more on page 8 A diverse customer base of over 3,500 active customers, with no one customer accounting for more than 7% of revenue. Read more on page 8 A growing penetration of a global, blue-chip customer base. Read more on page 9 Powerful customer relationship management tools which allow the efficient management of our customer base and identification of pricing and product trends that enable the development of appropriate, innovative new products. Read more on page 20 An established pipeline of new class leading “Green” products which operate at high efficiency. Read more on pages 15 and 24 Revenue annuity – although design cycles are often long, once our power converters are approved for use in our customer’s end equipment, XP Power enjoys a revenue annuity for the lifetime of the customer’s equipment, which is typically seven years. Read more on page 15 Attractive margins and lower capital investment requirements when compared to many manufacturing industries, resulting in strong free cash flow and margins that are amongst the highest in the industry. Read more on page 20 Progressive Dividend – the business model allows for a progressive dividend which is paid quarterly. Read more on page 15 XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 3 3 13/03/2017 17:56:36 CHAIRMAN’S STATEMENT HEADING “2016 WAS ANOTHER YEAR OF SIGNIFICANT PROGRESS; DESPITE CHALLENGING ECONOMIC CONDITIONS AND POLITICAL UNCERTAINTIES, WE ACHIEVED RECORD REVENUES AND EARNINGS”. JAMES PETERS CHAIRMAN Our Progress in 2016 2016 was another year of significant progress; despite challenging economic conditions and political uncertainties, we achieved record revenues and earnings. In addition, we have enhanced our manufacturing capability by reducing our lead times and introducing lean manufacturing principles. We have also continued to ramp-up power converter production in our Vietnam facility, giving us a cost advantage over many of our competitors. Finally, we strengthened our Board, and set the stage for the next phase of our development. Results Our financial performance for the year was again strong. Revenues were a record £129.8 million (2015: £109.7 million), an increase of 7% in constant currency. Order intake was £133.5 million (2015: £110.5 million) representing an increase of 9% in constant currency. Gross margin showed a slight decline to 47.8% (2015: 49.8%) due to product mix and the weakening of Sterling against the US Dollar following the United Kingdom’s vote to leave the European Union, reflecting the fact that the majority of our underlying product costs are denominated in US Dollars. Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) and amortisation of intangible assets of £0.4 million (2015: nil), adjusted profit before tax was £28.6 million (2015: £25.7 million), an increase of 11% over that reported in 2015. Basic earnings per share increased 8% to 112.0 pence (2015:103.7 pence). Diluted adjusted earnings per share increased 11% to 115.3 pence (2015: 104.3 pence). Strategy Review The Company’s strategy, which it has executed successfully over many years, has generated good results. The Executive Management team conducted a review of the strategy during 2016 with input and review by the Board, to ensure it remained appropriate and up-to-date. This review concluded that the essence of the strategy – to continue to move up the value chain and win a growing proportion of our customers’ available business – should be unchanged but that a number of refinements be adopted to further improve upon our success to date. In particular, we now identify expansion of our product range by targeted acquisitions and achieving operational excellence as additional specific strategic goals. Further detail on our updated strategy is provided in the Operating and Financial Review. For more information on strategy please see pages 10 and 11 Strengthening Our Board We were pleased to welcome Polly Williams, who joined our Board from 1 January 2016 as a Non-Executive Director, bringing with her a wealth of public company experience. Polly chairs XP Power’s Remuneration Committee and is a member of the Audit Committee. With this latest appointment, we consider that the Board now has the appropriate experience and capabilities to take our Company to the next level of its development. Dividend Our continued strong financial performance, strong cash flows and confidence in the Group’s long term prospects have enabled us to increase dividends consistently over a sustained period. In line with our progressive dividend policy, the Board is recommending a final dividend of 26 pence per share for the fourth quarter of 2016. This dividend will be payable to members on the register on 17 March 2017 and will be paid on 21 April 2017. When combined with the interim dividends for the previous quarters, the total dividend for the year will be 71 pence per share (2015: 66 pence); an increase of 8%. The compound average growth rate of our dividend has been 10% over the last five years. 4 XP AR2016 - Proof 6.indd 4 13/03/2017 17:56:41 T R O P E R C G E T A R T S I Outlook We are encouraged by the strong finish we had to 2016. The Group entered 2017 with a strong order backlog and, despite the mixed global economic picture, we have established positive momentum in the new financial year. In addition, the Group has a strong balance sheet and a robust business that provides excellent cash generation to help fund targeted acquisitions that will broaden our product offering and engineering capabilities. James Peters Chairman Sustainability Sustainability is extremely important to our people and our customers. We punch well above our weight in this regard and set ourselves the aspirational goal of leading our industry regarding environmental and sustainability matters. This is reflected in the work we have done to produce a portfolio of ultra-high efficiency products which consume less energy, use less material and do not contain substances which are harmful to the environment. These XP “Green” Power products grew at an impressive rate of 28% in 2016. Our Vietnam factory is the most environmentally friendly in the industry with an efficient building envelope, ultra-efficient air conditioning, low-energy lighting, water capture and recycling and solar panel array. This is not only important to our customers but resonates with our employees. For more information on sustainability please see pages 24 to 25 Our People and Our Values The success of an organisation is dependent on the people and talent within it. We have significant strength and depth within our Company, with the majority of our Executives boasting long tenures with XP Power. We have conducted annual employee engagement surveys since 2015 and I am pleased that we have shown consecutive strong and improving scores each time we repeat the survey having taken actions to address any issues arising from the results of the prior survey. One of the main findings from these employee surveys was that our employees are proud to be part of our Company, highlighting the significant engagement we have between the business and our people. Our cultural survey score is one of our non-financial key performance indicators. For more information on key performance indicators and our cultural survey please see pages 13 and 22 During 2016 we rolled out a number of training programs built around our core values of integrity, knowledge, flexibility, speed and customer focus. These core values are part of our DNA and have been responsible for driving our performance and customer service commitment over the long term. Training programs were delivered across the world and were extremely well-received. For more information our training programs and employee engagement please see pages 22 to 23 XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 5 5 13/03/2017 17:56:45 ASIA5 Sales Offices9%OF REVENUEEUROPE9 Sales Offices38%OF REVENUENORTH AMERICA17 Sales Offices53%OF REVENUEHEADING6XP POWER AT A GLANCEXP Power’s portfolio of leading edge, ultra-high efficient products are helping the world’s leading manufacturers to create new technologies and products.Our power converters live inside the world’s critical systems, taking the electrical mains supply from the grid and converting it into the correct form of electricity to power our customers’ equipment in critical applications in the industrial, healthcare and technology industries.Our long term investment in research and development has resulted in the broadest, most up-to-date product portfolio in the industry and has positioned XP Power as a key partner for the world’s leading manufacturers of critical capital equipment.Our global reach, helping insulate us from market volatilityNORTH AMERICAThe North American network consists of 17 sales offices and an extensive engineering services function based in Northern California. This network allows XP Power to provide its major customers with local, face to face support and rapid response times.EUROPEIn Europe, the XP Power network consists of 9 sales offices and a further 9 distributor offices. In addition, XP Power has engineering services centres in Germany and the UK. A direct sales office was added in Israel early in 2015.ASIAWe have 5 direct sales offices in Asia run from Singapore, where we also manage a network of 7 distributors serving the region. We are in the process of setting up engineering services in Asia to complement our offering to customers in the region.XP AR2016 - Proof 6.indd 613/03/2017 17:56:54 2015 revenue GB£45.1 million2016 revenue GB£49.4 million2015 revenue US$13.7 million2016 revenue US$16.1 million2015 revenue US$85.5 million2016 revenue US$93.7millionUP 9.6%UP 9.5%UP 17.5%ASIAEUROPENORTHAMERICAASIA5 Sales Offices9%OF REVENUEEUROPE9 Sales Offices38%OF REVENUENORTH AMERICA17 Sales Offices53%OF REVENUEwww.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 20167Power of our Global ReachOur customers manufacture capital equipment and we target the healthcare, industrial and technology markets. We do not have any direct exposure to consumer electronics or high volume low margin business seen in the computing and data centre industries. The equipment our products power is often mission critical so quality and reliability are paramount.Increasingly, the design and manufacturing process of major international OEMs takes place across different continents, with these blue-chip companies demanding global support. In response, XP Power has established an international network of offices which offers the necessary customer support across technical sales, design engineering, logistics and operations. This network gives XP Power a strong competitive advantage over both its smaller competitors, who do not have the scale and geographic reach to serve global customers, and its larger competitors, who often lack the operational flexibility to provide excellent service and speed. We believe that this balance is key to our success in winning new contracts and offers XP Power the opportunity to further increase its market share. Meeting our customers’ requirements with our powerful offeringBroad, leading-edge product line with ultra-high efficiency Class leading manufacturing ensuring excellent quality, reliability and competitive costClass leading customer service and support through highly knowledgeable and experienced sales team (the largest in the industry) and power systems engineersEngineering on three continents providing excellent design support during design in to reduce time to market STRATEGIC REPORTXP AR2016 - Proof 6.indd 713/03/2017 17:57:04 We continue to expand our product portfolio to further penetrate our key customers where we are already approved or preferred.We have a broad exposure to the Healthcare, Industrial and Technology Markets. We therefore have a diverse customer base of over 3,500 customers and approximately a further 5,000 customers serviced through our distribution channels. We deal with the following proportions of the Standard & Poor’s 500 Equipment Manufacturers: }Healthcare 95% }Industrial 73% }Technology 69%The diversity of our business is a significant strength with no one customer exceeding more than 7% of revenue. Further, there is no one dominant player in the markets we address due to the diversity of customer requirements. IndustrialIndustrial Revenue (£ millions)201220132014201643.847.549.159.848.62015Industrial remains our most diverse end market. North America showed a cyclical weakness in this sector from the third quarter of 2015 but we have seen recovery in 2016. HealthcareHealthcare Revenue (£ millions)26.030.231.037.934.320122013201420162015Gains from corporate approvals at the major blue-chip customers. TechnologyTechnology Revenue (£ millions)2012201320142016201524.123.421.032.126.8Technology continues to be the most cyclical sector but has swung back in 2015 and 2016 with the semiconductor manufacturers contributing strongly. North AmericaEuropeAsiaNorth AmericaNorth America Revenue (US$ millions)71.878.484.985.593.720122013201420162015The North American market shows steady momentum driven by larger opportunities in blue-chip accounts then aided in 2016 by the acquisition of EMCO.EuropeEurope Revenue (£ millions)40.843.742.249.445.120122013201420162015The market in Europe has been mixed. It has been more difficult to grow in the markets such as the UK where the Group already has a strong share and the programmes are more project based. However, the strategy of targeting the larger customers is now paying off and resulting in the third successive year of growth in challenging markets. AsiaAsia Revenue (US$ millions)12.211.512.616.113.720122013201420162015In prior years, the Asia business had benefitted from one usually large account which peaked in 2011 and reduced to zero in 2013 when the programme went end of life. The Asian business is now showing steady growth from customers that place value on XP Power’s value proposition.Share£760MILLION£68.6 millionTotal Market ValueXP Power Revenue9.0%£49.4 millionTotal Market ValueXP Power Revenue£470MILLION10.5%Share£11.8 millionTotal Market ValueXP Power Revenue£870MILLION1.4%ShareREVENUE TRENDS THE MARKETS WE SERVE Revenue trends by sector are set out below.Revenue by geography is set out as follows expressed in US Dollars to highlight the underlying trends in North America and Asia.MARKET SIZE AND OPPORTUNITY We estimate that XP Power has a 6% share of the available global market.HEADING8OUR MARKETPLACESource: MicroTech Consultants 2016 ReportXP AR2016 - Proof 6.indd 813/03/2017 17:57:07 OUR GROWTH DRIVERS T R O P E R C G E T A R T S I Driver ENERGY EFFICIENCY AND RELIABILITY The requirement from customers and legislation for products to consume and waste less energy is driving demand for more efficient power converters. This goes hand in hand with reliability for critical applications as ultra-high efficiency products do not require relatively unreliable fans to cool them, and cooler systems mean key components such as electrolytic capacitors have longer lifetimes. INNOVATION Our customers possess a competitive need to launch new products offering increased productivity and functionality whilst reducing harmful environment impacts. In addition, our customers are trying to differentiate their products from their competitors which frequently results in different or new power conversion requirements. NEW PRODUCTS The diverse product requirements of XP Power’s target market provide opportunities to enter new niches and provide flexible solutions. PENETRATION Our blue-chip customer base provides good opportunities to win additional new product programmes from multiple engineering teams across the globe. We have gained corporate approval at many blue chip companies over the past few years. We now need to capitalise on these approvals and win a larger share of the business that is available. HEALTHCARE A global population that is both increasing and ageing, coupled with increased legislation, is driving the deployment of more healthcare devices, particularly in the home. This in combination with new technologies and treatments becoming available makes healthcare an excellent sector for XP Power. The customers in this area demand the ultimate quality and reliability and appreciate and value XP Power’s value proposition. How we’re responding We have developed a portfolio of XP “Green” Power products with class leading efficiencies. With the acquisition of EMCO in November 2015 we now have four design centres around the globe. We have the broadest range of standard products in our industry which are designed to be easy to modify to power the customer’s specific application. High voltage modules from the acquisition of EMCO in November 2015 increase our available market and potential penetration of our existing accounts. We have the broadest, most up-to-date range of medically approved power converters in our industry. PROLIFERATION OF ELECTRONIC DEVICES Electronic devices are becoming more and more pervasive in our lives as new technologies and innovation emerges. These devices require power converters to operate, expanding XP Power’s potential markets. We have the broadest range of standard products in our industry which are designed to be easy to modify to power the customer’s specific application. LEGISLATION Our industry continues to be the subject of an increasing raft of legislation from numerous countries and standard setters relating to areas such as environmental impacts, safety requirements, and above all energy efficiency. The compliance costs of keeping up with this legislation favour a company the size of XP Power where we are large enough to be able to devote resources to this, yet agile enough to respond quickly with new products or documentation as required. CAPITAL EQUIPMENT Our products are designed into and power capital equipment and as such are subject to the capital equipment cycles. While industrial company investment in capital has been subdued over recent history due to global economic conditions, new capital investment does generally lead to greater productivity and we consider that the medium and long term opportunities remain positive for capital equipment. This is particularly the case as we see labour costs rising significantly in emerging markets. We have dedicated resources devoted to safety legislation. We have the largest direct sales force in our industry together with the broadest product portfolio so are well positioned to take advantage of any recovery in the capital equipment markets. EXPANSION OF “GREEN” PRODUCTS Climate change and emission of greenhouse gases is becoming a more significant issue as emerging countries develop and urbanise. XP Power has taken a leading role in developing ultra-efficient products which consume and waste less energy and that are suitable for use in healthcare and industrial applications. We have developed a portfolio of XP “Green” Power products with class leading efficiencies and have the most environmentally friendly manufacturing facility in our industry. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 9 9 13/03/2017 17:57:09 We estimate that XP Power has a 6% share of the available global market. XP Power has followed a clear and consistent strategy of moving up the value chain using its internally developed products to target key accounts where we can add genuine value.We need a broad product range due to the fragmented nature of the markets we serve which have a multitude of product requirements. The broader and more up-to-date our product range the more chance we will have something that will work effectively in our target customers’ applications.XP Power prides itself in the level of service and support it offers its customers; particularly during the design in stage. We have a compelling proposition where customers demand excellent quality and reliability to power their mission critical equipment, but in particular where they face a power problem due to either heat dissipation or electrical noise. These are the type of customers that we target.We have spent the last few years gaining approved or preferred supplier status at the key customers in the industrial, healthcare and technology sectors. We still have a relatively small share of the available business in these accounts. We are continuing to expand our product portfolio so we can address more of the opportunities that are available in these accounts to grow our revenues.RationaleRefinementsOver the past few years we have produced a number of leading edge products. Emphasis has now shifted towards products which still have leading efficiencies but which are more mainstream and attractive from a cost perspective.We are prioritising our resource on the customers that fit our value proposition. We are de-emphasising customers that may have significant revenue potential but where cost is a more critical factor than quality and reliability or engineering support during the design phase.We are focused on our existing customer base in order to grow our revenues.During 2016 we have invested time to critically review the detail of our strategy with both the Executive Management team and Board of Directors. This has resulted in refinements and enhancements to our strategy rather than radical change. The key elements of our strategy are as follows and are derived from our vision:DEVELOP A BROAD RANGE OF COMPETITIVE PRODUCTSTARGET ACCOUNTS WHERE WE CAN ADD VALUEVERTICAL PENETRATION OF FOCUS ACCOUNTSHEADING10EXECUTING OUR STRATEGY – REFINEMENTS AND ENHANCEMENTSXP AR2016 - Proof 6.indd 1013/03/2017 17:57:18 We are still a relatively new player in the industry. We have the advantage of a broad and up-to-date product portfolio and excellent service and support. Awareness of our brand in the market is important if we are to achieve our vision of being the first choice power solutions provider in the market.It is challenging to grow in industrial markets which have intrinsically low growth rates. To do this we need an excellent product range and we need to deliver the customer the ultimate experience in service and support. We need operational excellence in order to deliver this and to transform incremental revenues into strong profit and cash flow streams.Strong corporate social responsibility is not only important to our key customers but also to our employees and the communities in which we operate. This incorporates not only environmental performance but also health and safety, treatment of our people and business ethics. All these areas are addressed in the Electronic Industry Citizenship Coalition’s (EICC) Code of Conduct which, as a full member of this organisation, we strongly endorse.Our strong balance sheet and cash generative business model allow us the capacity to pursue business acquisitions. This is another avenue to expand our product offering and therefore addressable market.We are able to further enhance our brand awareness through expansion of distribution channels and use of our digital marketing tools.The achievement of operational excellence has been added as a strategy point in 2016.We continue to lead our industry on environmental matters.We continue to look for acquisitions to expand our product offering and other capabilities.ENHANCE BRAND AWARENESSACHIEVE OPERATIONAL EXCELLENCELEAD OUR INDUSTRY ON ENVIRONMENTAL MATTERSACQUIRE BUSINESSES TO EXPAND OUR OFFERINGTHE FIRST CHOICE POWER SOLUTIONS PROVIDER DELIVERING THE ULTIMATE EXPERIENCE FOR OUR CUSTOMERS AND OUR PEOPLEwww.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201611STRATEGIC REPORTOUR VISIONXP AR2016 - Proof 6.indd 1113/03/2017 17:57:30 HEADING12OUR KEY PERFORMANCE INDICATORSThe Group has defined a number of Key Performance Indicators (KPIs) which are closely aligned with its strategy, which demonstrates significant and consistent progress over the years. In order to provide readers with a more comprehensive view of our business performance we have presented a number of alternative performance measures.Not all products are equal in terms of their complexity to develop or their revenue potential. In assessing new product opportunities, we consider the potential revenue from a new product family as well as the absolute number of new product introductions. We target revenue growth of 10% per annum. Whether we achieve this or not can depend on market cyclicality and exchange rates.We expect the revenue from our top 30 customers to increase as we pursue our strategy. ¼We released 47 new product families in 2016 (2015: 22 new product families). ¼New releases included Nanoflex which is a digitally controlled 1U configurable range and the ALM65 range of low power medical desk top power converters. ¼New product releases were also boosted by the addition of a new labelled product supplier to enhance our DC-DC offering. ¼We continue to concentrate our resources on the accounts where we can add value by having a direct sales engagement. ¼In 2016 we expanded our distribution channels with the addition of Electrocomponents (RS components and Allied) to make our products more readily available to the smaller accounts. ¼Revenue from the top 30 customers represented 43.9% of revenue (2015: 43.6%).Develop a broad range of competitive productsTarget accounts where we can add valueVertical penetration of focus accountsNew product families releasedRevenue (£ millions)Revenue from top 30 customers (%)Target AchievedOur Progress in 2016Linkage to Strategy & Core ValuesOur Plans for 20172011201020122013201431381931264722201520162011201020122013201491.8103.693.9101.1101.1129.8109.720152016201120102012201320143838404040444420152016 ¼Further product releases to expand our addressable market ¼New product releases will be more mainstream rather than niche in 2017 with 46 targeted ¼Search for further suitable bolt-on acquisitions to expand our product portfolio ¼Continued expansion and support for our distribution channels to allow further focus on our key direct accounts ¼Continue to grow our share of customers’ business where we are preferred or approved suppliers ¼Expansion of our product portfolio to increase our addressable market in our existing customer baseN/AYESYESCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDXP AR2016 - Proof 6.indd 1213/03/2017 17:57:34 See page 22 and 23 for more information on our cultural survey for more information.See pages 24 and 25 for more information.www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201613STRATEGIC REPORTDevelop a broad range of competitive productsAchieve operational excellenceAchieve operational excellenceLeading our industry on environmental mattersProportion of own designed revenue (%)Earnings per share (pence) (after adjusting for one-offcosts and intangibles amortisation)Cultural survey scoreLifetime CO2 Emission savings from “Green” products (tonnes)2012622013642014666820157320162016115.32015104.32014101.1201395.1201281.3201559.2201662.963.020172014201384,000102,200133,000158,00020152016We have now achieved 73% which is close to the 75% target we set ourselves.Given the acquisition of EMCO in November 2015 and the continued progression of the business we are raising this target to 80%.The Group targets to grow this metric by a double digit percentage each year.The Group targets to improve its score each year with the long term aim to achieve a score of 67 which will put us in the “clearly the best” category as defined by the external consultant assisting us with the survey. The Group has set a target to increase the lifetime CO2 emissions savings from XP “Green” Power products by at least 5% per annum. ¼In 2016 revenue from our own designed/own manufactured products grew 28% from £74.6 million in 2015 to £95.3 million in 2016 presenting 73% of revenue. ¼We have numerous initiatives in place to continuously improve our systems and processes. ¼In particular we have enhanced our manufacturing by reducing lead times and introducing lean principles (see page 17 to learn more). ¼In addition, we have targeted our internal communication tools and processes to increase efficiency and provide an enhanced customer experience. ¼Our people are the life blood of our business and we are reliant on them to come up with ideas to drive operational excellence. ¼Since 2015 we have undertaken an annual employee cultural survey to identify areas where we can improve. Using the results of this survey we have introduced some tailored training centred around our core values of INTEGRITY, KNOWLEDGE, SPEED, FLEXIBILITY and CUSTOMER FOCUS and set up a communication focus group (see pages 23 and 23 to learn more). ¼We also continued to launch a number of high efficiency products which bring high efficiency at lower cost points. Of the 47 product families released in 2016, 33 were high efficiency products. ¼We saw our revenues from XP “Green” Power products increase 21.5% to 23.3% of revenue. ¼Increased engineering resource added in 2015 and the acquisition of EMCO in November 2015 continues the expansion of our product portfolio which will drive this metric. ¼Continue the qualification of power converters in Vietnam. ¼Roll out lean principles to reduce manufacturing costs. ¼Deploy world class capital equipment. ¼Expand our internal training programs to target high operational efficiency. ¼We will continue to release products with class leading efficiency suitable for use in healthcare and industrial applications.YESYESYESNOOther than the above quantitative KPIs we have a number of important governance KPIs as follows: ¼No significant environmental issues ¼No serious health and safety events ¼No breaches of the Company’s ethics policyCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDCUSTOMER FOCUSKNOWLEDGEINTEGRITYFLEXIBILITYSPEEDXP AR2016 - Proof 6.indd 1313/03/2017 17:57:38 OUR BUSINESS MODEL HEADING Our model is to sell directly to our key customers, offering excellent service and support combined with a broad range of class leading products. HOW WE Manage our Relationships HOW WE Add Value through the Sales Cycle Our Customers are at the Heart of What We Do Our model is to sell directly to our key customers where we can add value, offering excellent service and support combined with class leading products. We have carved out a leading position in our industry. An up-to-date, high efficiency product offering, delivered to our customers by the largest and most technically competent sales engineering team in the industry, backed up by highly skilled power systems engineers, combined with the safety and reliability benefits of world class manufacturing provide a compelling value proposition to our customers. Having come from a sales and marketing background in our former incarnation as a distributor, then moved into design and then later into manufacturing, we have a unique understanding of our customers and the market compared to much of our competition. Managing Our Supply Chain Carefully The management of our supply chain is critical to our success. Quality and reliability are paramount to our customers who often provide critical healthcare or industrial systems. For that reason we need excellent suppliers with high quality standards. We have a rigorous approval process which looks at all aspects of a supplier before we engage with them. This not only includes a prospective supplier quality systems and standards, but also their financial viability and, of course, their environmental performance and treatment of their people. We are a full member of the Electronic Industry Citizen Coalition (EICC) and have adopted the EICC Code of Conduct throughout our organisation. This not only deals with environmental standards but also, treatment of people, health and safety and business ethics. Our customers demand excellent quality and security of supply and strong corporate social responsibility standards. 14 Our sales process is a technical sale, from XP Power sales engineer to customer design engineer. Our customers are typically experts in their field whether it is a drug delivery device, a piece of complex factory control machinery or a high end communications device operating in a harsh environment. They will come to a company such as ours to recommend and help them design in a power converter to power their end system. Generally with larger customers it is not possible to engage on a specific opportunity until we are on an approved or preferred vendor list. This will involve being qualified by the customer’s technical, quality and purchasing teams and may often involve a physical audit of our quality systems and a factory audit. OUR SALES CYCLE IN DEFINED STEPS AS FOLLOWS: IDENTIFICATION PRODUCTION QUOTATION SALES CYCLE APPROVAL SAMPLE 1 IDENTIFICATION A new design programme is identified at a customer where we are an approved or preferred vendor. This is typically quite late in the customer’s development cycle as they will not usually know the total power requirement until they have a working prototype system. 2 3 4 5 QUOTATION An XP Power sales person will work with the customer to understand the requirements including the power requirements at different voltages, communication required between the power converter and end system, any specific safety agency requirements and the physical specification. XP Power will then advocate a solution and provide a quotation to the customer. This solution could be a modification of one of our standard products. SAMPLE One or more samples are provided to the customer for them to evaluate in their system. This is a critical stage of the sale and we often find that the first company providing a sample that works in the equipment will win the design slot. Speed is therefore of the essence. APPROVAL The power converter is approved for use in the customer system following their technical evaluation and external safety agency approval. This is generally the longest part of the sales cycle as the technical and safety evaluation are very time consuming for the customer. XP Power will often add value by providing technical assistance during this stage and it is not unusual for us to have a technical power systems engineer working directly with the customer. PRODUCTION The customer commences production of their product and XP Power’s revenue stream starts. This is typically around seven years depending on the application and end market. XP AR2016 - Proof 6.indd 14 13/03/2017 17:57:44 www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201615STRATEGIC REPORTOur model is to sell directly to our key customers, offering excellent service and support combined with a broad range of class leading products.Our PeopleAs in any business the most important asset is our people. We have the largest, most technically trained sales force in the industry. Our customers deal directly with a sales engineer that can solve their power conversion problems. We do not put our key customers through distribution channels. We also provide global support.Our Executive Management team, located on three different continents, is not only talented but given a relatively young average age has an impressive average length of service. The 12 person Executive Management team have an average age of less than 48 and average length of service of over 17 years. The breadth and depth of experience and collective teamwork of our people deliver genuine value to our customers.Our ProductsWe have the broadest, most up-to-date product offering in the industry. Our products are specific to the requirements of the various industries we serve. Our philosophy is to provide highly flexible products which are easy to modify. This saves our customers the cost, time and risk of pursuing a fully customised solution. Our product portfolio has been enhanced with high voltage modules following the acquisition of EMCO in November 2015.Our Design EngineeringWe have design engineering teams on three continents – this allows us to release the high volume of innovative new products required by this highly diversified industry. These products often have class leading energy efficiency and small footprints to meet the ever higher demands of our key customers. Additional engineering service teams in Germany, North America and the UK are able to provide value added services close to our key customers. We are able to provide modified product solutions which allow the customer to more easily integrate the power converter into their equipment therefore delivering a cost saving.Our Green InnovationEnvironmental considerations are becoming increasingly important to our customers. There is strong demand for products that consume less material, including harmful chemicals, and power converters that consume less energy. Our product portfolio reflects this with many products having class leading efficiencies and low standby power consumption.Our ManufacturingOur Asian manufacturing bases in China and Vietnam are not only low cost but best in class. This capability is instrumental to winning new programmes with larger blue-chip customers that require the ultimate in quality and reliability. We also offer highly competitive lead times and flexible logistics arrangements.QualityOur stringent quality standards ensure the ultimate in quality and reliability. This is vital to our customers. This starts from the design phase right through to production and after sales support.Generating Revenue Streams Through Strong AnnuitiesAlthough the time from identification of a customer programme can be very long (typically 18 to 30 months) once the product is designed into our customers’ equipment we enjoy an on-going revenue annuity for a large number of years. Typically this is around 7 years but can be longer or shorter depending on the industry sector and particular application. Our pipeline of programme wins with significant customers continues to build.Revenue lifecycle from ECM40/60 product family 200920102011201220132014201520160.01.02.03.04.05.06.07.08.020082007200620052004Revenue Substantial revenue annuity Design in cycle typically 18 months 2009 and 2012 dips due to market downturn and not typical£ million“Green” Product Revenue (£ million]20102011201220132014201518.623.630.213.78.15.02.82016Progressive dividend policy Our business model and clear strategy, consistently applied, has resulted in long term growth and profitability and also strong free cash flow. This has enabled us to adopt a progressive approach to the dividend which is paid quarterly.10 year dividend history (pence per share)201020112012201320142015616671555045332220092120082020072016The compound average growth rate of the dividend per share has been 10% over the last 5 years and 15% over the last 10 years. Generating Long-Term Revenue Annuities and Shareholder ValueHOW WE Differentiate ourselvesXP AR2016 - Proof 6.indd 1513/03/2017 17:57:51 HEADING16CASE STUDY - INTERNET OF THINGS SMART METERINGTechnical ChallengesThere were a number of technical challenges to solve the customer’s power problem. These included: }A unique form factor with severe space restrictions to place components due to replacing an existing “in house design” in a released product. }A requirement for an extremely low profile. }Full power at extreme temperatures of –40˚C to +85˚C; }Designed to withstand AC surges from a potential of a lightning strike.XP Power Technical ApproachXP Power’s engineering services development team used in house 3D printing, mechanical 3D model simulation software and thermal simulation software to rapidly predetermine design feasibility and approach. This quickly gave the customer confidence that we could meet their requirements.We could demonstrate XP Power’s expertise to design and manufacture a uniquely low profile custom transformer from previous designs. In addition, we leveraged off existing XP Power proprietary surge protection circuits designed specific for previous Smart Grid applications.ResultWe designed and delivered first article units in just seven weeks. The pilot product units are already in the field and we expect the program to go into product in the first quarter of 2018.The customer recognised the genuine value we were able to provide and we received a significant engineering fee for our design work. The design resulted in a five year contract to support field upgrades and fulfil new orders.A global leader in smart grid technology and preferred customer approached XP Power to provide technical design/logistical expertise to solve a challenge. The customer needed to release a new firmware update to their latest residential smart meter. Their product was deployed in the field to provide wireless communication capability for real time data management to utility companies and end users. The firmware update required increased power in the existing product for field retrofits and new orders.XP Power was asked to rapidly develop and deliver an environmentally ruggedized 40W AC/DC power supply. The specification called for a unique mechanical form factor, communication feedback to report remote power supply health status and capability to withstand extreme temperatures as well as lightning surge protection features.OPPORTUNITYXP AR2016 - Proof 6.indd 1613/03/2017 17:57:59 In 2006, XP Power responded to customer feedback and realised the benefits of vertically integrating and became a manufacturer. This demonstrated complete control of the manufacturing process to ensure the safety and reliability of our products which power our customers’ critical systems. Since 2006 our own designed and manufactured product has grown to represent more than 70% of our total revenue in 2016. The product requirements for the markets we serve result in a low volume/high mix product portfolio, this produces significant challenges to manufacturing. In July 2015, we embarked on an improvement strategy that challenged our working methodologies to radically improve our responsiveness and agility to these challenges. This journey is focussed on developing a strong lean culture across all manufacturing locations. The Lean strategy is divided into two key phases: }Phase I - Lead Time Reduction }Phase II - Operational ExcellencePhase I – Lead Time ReductionThis phase of the journey is focussed on implementing good lean principles within our new product introduction (NPI) and manufacturing operations. In July 2015, a process re-engineering exercise was initiated specifically to assess, review and improve the key ‘external’ elements of manufacturing operations such as demand forecasting, capacity planning and supply chain management. This six-month project has resulted in a reduction of lead times by up to 50% within our core standard product range. In June 2016, we started to work on our core ‘internal’ manufacturing processes in Vietnam and China. This was initiated by creating a lean team from each site. Each team was represented by members from within quality assurance, manufacturing engineering, production and planning. Both teams undertook a joint 5 day intense training course by our specialist lean training partner in Vietnam. The teams were then set free to focus on the identification and elimination of waste within our assembly processes and within the material logistics processes. The results from this initial stage are very encouraging. The logistics team have already re-engineered the internal material handling processes and implemented internal Kanbans between the warehouse and surface mount and assembly line. This resulted in a reduction of lead times of up to 20%. These new lean systems allow production to commence almost immediately upon order receipt. Material now arrives at point of use locations throughout strategic locations within each plant.The process teams have identified significant opportunities for improvement. The traditional straight assembly lines are now in the process of being redesigned into flexible manufacturing cells. These cells will significantly reduce process changeover, movement waste, cycle time reduction, floor space utilisation, while at the same time improve line balancing, responsiveness and flexibility to volume and product mix variations. The first wave of the new flexible cells came on line in November 2016. These lean improvements will allow production to increase capacity by up to 40% without any increase in direct costs. Change over between product variants will minimise, allowing batch sizes to reduce significantly and therefore improving our ability to rapidly change to customer demands. New dynamic profile wave solder equipment will allow different products to be manufactured simultaneously without any need to stop and change product machine settings.A core part of the lean journey will be to develop the visual factory. This exercise will focus on the principles of 5S and the development of smart electronic displays throughout the plant. Production teams will be able to visualise, in real time, data that represents key quality and productivity performance indicators. Phase II – Operational ExcellenceThe past 10 years has seen significant investment into our manufacturing capability. This has included the construction of a new 11,000m2 manufacturing facility in Vietnam. This facility is now producing all magnetic components for power converter demand in Asia, at a volume of approximately 500,000 parts per month. Power converter manufacture in Vietnam increased to over 50,000 units per month in the fourth quarter of 2016 and this is anticipated to ramp to over 70,000 units per month by end of the first quarter of 2017.This phase of the improvement cycle will focus on defining and implementing further capital investment required to achieve world class status within core areas of the manufacturing process. To achieve this, approximately $1.5 million of capital spend has been allocated within the 2017 capital budget.This investment will include further development of the surface mount lines in China and Vietnam with the inclusion of in-line Automated Optical Inspection (AOI) systems for the verification of solder paste and glue dot displacement, automated in-line glue dot displacement systems and additional state of the art wave solder machines.Our ability to constantly reduce and maintain lead times will be a key factor for future success delivering genuine value to our customers. To help achieve this we must ensure a leading capacity strategy and flexibility within our material supply chain. A further $4.0 million expansion plan for our Vietnam facility is planned to commence in the fourth quarter of 2017. We anticipate approximately $1.5 million of this capital will be spent in 2017 with the remainder in 2018. This investment will add a further 9,000m2 to our manufacturing capacity which will come on stream in early 2019.www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201617OUR MANUFACTURING PROGRESSSTRATEGIC REPORTADRIAN IRWIN EXECUTIVE VP GLOBAL MANUFACTURINGXP AR2016 - Proof 6.indd 1713/03/2017 17:58:04 Review of our yearWhile, overall, the market for industrial electronics remained challenging in 2016, trading conditions improved during the second half and we had some positive momentum in order intake and revenues. We continued to make progress with the execution of our strategy and reported record revenues, as well as delivering our highest ever level of own designed/own manufactured product revenues which now represent 73% of the total.We also undertook a review of our well-established strategy during the year, to ensure it remains appropriate and up-to-date. The results of this review are discussed in more detail below. We have been actively transferring more of the lower power/lower complexity product from our China facility to our Vietnam facility to maintain cost competitiveness and to free up capacity in China. We have also implemented a number of lean manufacturing principles which have allowed us to reduce lead times. We would also expect to see cost benefits from these initiatives as we trade through 2017. We remain excited about the future prospects for our business. Strategic progressDuring 2016, the Executive Management team critically reviewed the strategy we have been successfully executing and which has produced good results over a sustained period. The review concluded that the fundamental essence of the strategy – targeting key accounts where we can add value and gaining more of the available business in those accounts – remains appropriate and effective. However, a number of refinements were made to the strategy, including a greater emphasis on acquisitions to further expand our product offering and making the pursuit of operational excellence a specific strategic goal.Our refined strategy can be summarised as follows: }Develop a broad range of competitive products; }Target accounts where we can add value; }Increase vertical penetration of target accounts; }Enhance brand awareness; }Achieve operational excellence; }Lead our industry on environmental matters; and }Selective acquisitions of complementary businesses to expand our product offering.We continue to make significant progress against each of these objectives. We believe we have the broadest, most up-to-date portfolio of products, many of which are class leading in terms of efficiency and low stand-by power. Our portfolio of XP “Green” Power products grew by 28% in 2016 to £30.2 million (2015: £23.6 million) demonstrating how well these products have been adopted by our customers. We also continue to see revenues from our own designed/own manufactured products grow at a faster rate than those from other products. We consider that our transition from a sales distribution company, through the addition of a design capability, to designer and manufacturer is now complete. We are now clearly recognised as both a designer and manufacturer by key customers in the industrial, healthcare and technology markets. Revenues from our own-designed products set a new record of £95.3 million in the year, representing 73% of revenue (2015: 68%). We expect further growth in this area in 2017.As we gain preferred or approved supplier status with our blue-chip customers we are gaining exposure to new opportunities in additional product areas. Our broad range of products, excellent customer service, low cost Asian manufacturing capability and engineering support on three continents makes us an ideal strategic partner to these larger blue-chip customers. We have established this position with our standard product offering but now we see attractive opportunities in these larger customers to engage on custom designs. We have already deployed more of our engineering services resource into these areas but also see opportunities for further acquisitions where our customer relationships and supplier approvals at key customers can be combined with acquired custom engineering expertise. As we look forward, we see further opportunities to capitalise on our customer relationships and large direct sales channel by further expanding our product offering. Our acquisition of EMCO in November 2015 was an excellent example of this initiative and we have been actively seeking further opportunities to expand our product capability into complementary areas in which we do not currently operate or where we are under-represented. Productivity will be a key area of future focus. We deliver excellent customer service and operating margins demonstrating that we have an efficient and effective business model. As our organisation grows geographically and in complexity we will ensure that we retain and build on the core values of knowledge, flexibility and speed that have served us well to date. In particular, we have continued to upgrade our systems and have brought new talent with experience in complex operations and lean process techniques into the organisation. We will be placing greater emphasis on operational excellence in 2017 to further enhance our productivity.HEADING18OPERATING AND FINANCIAL REVIEWXP AR2016 - Proof 6.indd 1813/03/2017 17:58:08 MarketplaceAll industry sectors and all geographies experienced revenue growth in 2016 over 2015 and, significantly, sequential growth in the second half of 2016 over the first half. We therefore entered 2017 with good momentum and a healthy order book.North America revenues in 2016 were $93.7 million but they did benefit from incremental revenues from the acquisition of EMCO in November 2015. Without the benefit of the EMCO revenues, North America revenues would have been flat year-on-year. However, order intake in North America was strong in the second half of 2016 – with $51.6 million booked compared with $47.0 million in the first half. North America now has the benefit of good momentum going into 2017, with some promising new programs where we expect volumes to ramp-up significantly during the year.Technology represented 31% of revenues in North America in 2016 compared to 30% in 2015. The industrial sector rebounded and represented 35% of revenues in 2016 compared to 31% in 2015. Healthcare also performed well in North America in absolute terms, with revenues ahead by 10% as a number of new programs ramped-up, but its share of revenues declined to 34% (2015: 39%) as it did not match the pace of the recovery we saw in the industrial sector. Our Asia business continued to grow despite the widely reported slow-down in China. Asia revenues grew 18% in 2016 to $16.1 million (2015: $13.7 million). The customers driving this increase generally sell their end products outside of the emerging markets. Industrial and technology sectors showed good growth in Asia whilst healthcare remained flat year-on-year.Our European business grew by 10% to £49.4 million (2015: £45.1 million) which is the third successive year of growth in challenging market conditions. The industrial, healthcare and technology sectors all saw growth in Europe and we gained increased traction with some of the bigger blue-chip clients, which we expect to drive further European growth in 2017.The geographic split of reported revenue was broadly maintained year-on-year. Overall North America represented 53% of revenue (2015: 51%), Asia represented 9% of revenue (2015: 8%) and Europe represented 38% of revenue (2015: 41%). The average exchange rate for the US Dollar compared to Sterling was 1.38 in 2016 versus 1.54 in 2015 representing a 10% weakening of Sterling following the Brexit vote. This caused North America and Asia revenues to be inflated, due to translation, and all of our costs reported in Sterling to be inflated as our product costs are predominately denominated in US Dollars. We discuss the potential impact of the Brexit vote and foreign exchange volatility in more detail below.The overall picture by sector reflects the narrative above. Industrial represented 46% of revenue (2015: 44%), healthcare represented 29% of revenue (2015: 31%) and technology represented 25% of revenue (2015: 25%). All our products are designed into capital equipment so our revenues will always be affected by capital equipment cycles, however, our exposure to a large number of end markets helps mitigate the cyclicality in any particular sector, producing an underlying resilience in our diversified business model. We continue to perform well against our traditional established competition. Our broad range of standard products and excellent customer service delivered by the largest direct sales force in our industry is a compelling proposition. We expect future competitors to emerge from Asia as companies with low cost manufacturing and engineering attempt to enter parts of the industrial and healthcare markets in Europe and North America. We need to ensure we continue to drive down our manufacturing costs and maintain our reputation as the experts in power to mitigate this threat.Research and DevelopmentWe have continued to invest in research and development to further expand our portfolio of products and the size of our addressable market opportunity. We increased our design engineering resource and capabilities during 2016 in both our North America and United Kingdom design centres, including the introduction of a firmware capability for which we are seeing increasing demand. We released 47 new product families in 2016 (2015: 22) and 33 of these can be classified as ultra-high efficiency.The high level of new product introductions was driven by the addition of a new third party supplier to enhance our DC-DC product offering.www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201619STRATEGIC REPORTXP AR2016 - Proof 6.indd 1913/03/2017 17:58:11 OPERATING AND FINANCIAL REVIEW HEADING Manufacturing The addition of a manufacturing site in Vietnam in 2012 added much needed capacity and also enhanced our cost competitiveness as production costs in Vietnam are significantly lower than those of our existing Chinese facility. Production volumes of magnetics windings at our Vietnam facility have continued to ramp-up and in 2016 we produced 4.9 million windings compared to 4.3 million in 2015. We have been actively transferring the lower power/lower complexity products from China to Vietnam in 2016 to improve our cost position and free up capacity in China. In 2016 we manufactured 377,700 power supplies in our Vietnam facility compared to 172,500 in 2015. We continue to make process improvements in our manufacturing facilities, where we are applying more lean process principles. Our internal yields continue to improve and we have redesigned some of our processes to reduce product lead times to provide improved customer service and reduced freight costs. We expect to derive cost benefits from our lean manufacturing initiatives as we trade through 2017. Our longer term planning indicates we will need additional manufacturing capacity in the first half of 2019. We have therefore allocated US$1.5 million of our capital budget in Q4 of 2017 to break ground on a second factory at the Vietnam site, as envisaged at the time of our original investment. Enhancing our digital presence In December 2015 we launched our completely revamped website at xppower. com. The new mobile-optimised site was specifically designed to improve interaction and the overall user experience and has been well-received by customers. Distribution In the first quarter of 2014 we signed a distribution agreement with global electronic components distributor Digi-key, to complement our existing distribution partnership with Premier Farnell, incorporating Farnell in Europe, element14 in Asia and Newark in America. In the summer of 2016 we engaged with another global electronic components distributor, Electrocomponents plc, incorporating trading brands RS Components in Europe & Asia, and Allied Electronics in America. With this appointment, we now have a presence with three leading global high service level/online distribution channels, making our product more readily available to a larger number of small and medium- sized customers and enhancing our brand recognition. We are experiencing excellent growth through these channels, allowing our direct sales teams to concentrate on our larger blue-chip accounts. Systems Development Efficient and robust systems are essential in order for us to manage an international business with a highly diverse customer base. In 2014 we upgraded our Customer Relationship Management systems across all three regions. This has allowed us to collaborate and share information much more effectively and provide even better customer service. From the beginning of January 2015 we replaced our North America business systems with SAP and are now running the same Enterprise Resource Management System across all three geographies which further enhances the speed and capability of our internal reporting. This integrated approach ensures that we have the robust systems and reporting necessary to support our future growth. Revenue and order intake Revenues set a new record and grew 18% over the prior year (7% in constant currency) to £129.8 million (2015: £109.7 million). Order intake grew by 21% (9% in constant currency) to £133.5 million (2015: £110.5 million). Revenues from our own designed product – a key indicator of our strategic progress – grew by 28% (or approximately 15% in constant currency) to £95.3 million (2015: £74.6 million) representing 73% of revenue (2015: 68%) and setting another new record. Margins Gross margin declined slightly to 47.8% (2015: 49.8%), largely due to product mix and the effect of the depreciation of Sterling versus the US Dollar. The majority of our product costs are denominated in US Dollars so while the weakening of Sterling helps our revenue line, product costs increase more than the revenues as a result of the weakness of Sterling. Operating margins declined from 23.3% in 2015 to 21.6%. This was partly due to the weakness of Sterling but also due to the operating margins of EMCO being lower than those of XP Power as a whole. Profit before tax was £27.8 million (2015: £25.4 million). After adding back costs associated with aborted acquisitions of £0.4 million (2015: £0.3 million) adjusted profit before tax was £28.2 million, an increase of 10% over that reported in 2015. Taxation The tax charge for the year was £6.3 million (2015: £5.5 million) which represents an effective tax rate of 22.7% (2015: 21.7%). The effective rate is primarily determined by how our profits are distributed geographically. We expect a slight increase in the effective tax rate again in 2017. Earnings per share Basic earnings per share increased 8% to 112.0 pence compared to 103.7 pence in 2015. Diluted earnings per share increased by 8% to 111.2 pence compared with 102.8 pence in 2015. After adding back costs associated with aborted acquisitions of £0.4 million (acquisition costs in 2015: £0.3 million) and intangible assets amortisation of £0.4 million (2015: nil) adjusted diluted earnings per share was 115.3 pence (2015: 104.3 pence) an increase of 11%. 20 XP AR2016 - Proof 6.indd 20 13/03/2017 17:58:13 T R O P E R C G E T A R T S I of sales and a large proportion of our operating expenses are also denominated in US Dollars. While a stronger US Dollar helps our overall gross margin in absolute terms (albeit to a limited degree) it also has the effect of reducing the gross margin percentage as costs rise disproportionately to the revenues. We estimate that our reported gross margin percentage could be approximately 130 basis points lower as a result. For our United Kingdom business invoiced in Sterling, which represents approximately 13% of our worldwide revenues, margins were reduced in the second half of 2016 as the associated product cost is denominated in US Dollars. We have therefore been raising prices as customers place new orders to compensate for this effect. Although no customer is ever happy with a price increase, our reasons for doing so are well understood. We therefore expect to recover a significant portion of our margin losses in the United Kingdom in 2017. In terms of the broader economic impacts of Brexit on our business, we do not consider that they will be material. The evidence to date is that some of our United Kingdom customers are benefiting from the weakening of Sterling as they are frequently net exporters. Our products are made in Asia and are already imported into Europe where we have warehouses in both Germany and the United Kingdom. In the event that the United Kingdom leaves the single market, we would simply ship more of our product destined for the EU directly into Germany or another appropriate location. Outlook for 2017 Although there continue to be a number of economic and political uncertainties which could potentially affect our business in 2017, we consider that we are well positioned in our marketplace. We have good momentum as our design pipeline continues to grow. Our order intake in the fourth quarter of 2016 was strong at £37.1 million and we entered 2017 with a healthy order book. We also continue to work to identify acquisition opportunities that would be complementary to our product portfolio. We remain excited and confident regarding the long term prospects for our Group. Duncan Penny Chief Executive Jonathan Rhodes Finance Director Cash flow, funding and net cash Our high margin business model, with modest capital requirements, continues to produce excellent free cash flows. We finished 2016 in a net cash position of £3.7 million compared with a net debt position of £3.7 million at the end of 2015. This position was achieved after returning £12.9 million to Shareholders in the form of dividends. In order to finance the acquisition of EMCO in November 2015 the Group took out a US$12.0 million term debt facility with Bank of Scotland PLC. The facility is repayable in equal quarterly instalments of US$1.7 million from June 2016 and ending in December 2017. The facility is priced at LIBOR plus a margin of 0.95%. In September 2016 the Group renewed its annual working capital facility at a level of US$7.5 million (2015: US$12.5 million). The facility is priced at the Bank of England base rate plus a margin of 1.5%. Bank of Scotland PLC provides the facility. At 31 December 2016, no working capital facility was drawn down. Dividends The attractive cash flow aspect of our business model has enabled us to pursue a progressive dividend policy over a sustained period of time. Our policy is to increase dividends progressively whilst maintaining an appropriate level of cover. This year’s financial performance in terms of both profitability and cash flow has enabled us to recommend a final dividend of 26 pence per share which together with the quarterly dividends already paid gives a total dividend for the year of 71 pence per share (2015: 66 pence per share) an increase of 8%. Dividend cover for the year was 1.6 times. Derivatives The Group’s financial instruments consist of cash, money market deposits, overdrafts, and various other items such as trade receivables and trade payables that arise directly from its business operations. The Group uses forward currency contracts to hedge highly probable forecast transactions. The instruments purchased are denominated in the currencies of the Group’s principal markets. The Group had £11.5 million of forward currency contracts outstanding at 31 December 2016 (2015: £11.3 million). Substantial interests Other than the Directors’ interests, at 31 December 2016 the Company was aware of the following interests in three per cent or more of the issued ordinary share capital of the Company: Number of shares Percentage of shares in issue Hargreave Hale 2,105,890 10.9% Aberdeen Asset Management Limited Standard Life Investments Mawer Investment Management 1,842,747 9.6% 1,769,691 9.2% 1,717,046 Capital Group 1,140,000 8.9% 5.9% Henderson Global Investors 678,265 3.5% As at 27 February 2017, the following information had been received in accordance with the Disclosure and Transparency Rules: Number of shares Percentage of shares in issue Hargreave Hale 2,109,725 11.0% 1,769,691 9.2% 1,746,521 9.1% Standard Life Investments Aberdeen Asset Management Limited Mawer Investment Management 1,711,206 Capital Group 1,140,000 8.9% 5.9% Henderson Global Investors 653,265 3.4% Brexit The weakening of Sterling versus the US Dollar in the period following the United Kingdom Referendum on EU membership on 23 June 2016 has obviously had a material effect on the presentation of our financial results in 2016. Approximately 75% of our revenues are denominated in US Dollars and the translation of these revenues into Sterling for reporting purposes has had a beneficial effect. However, the majority of our cost XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 21 21 13/03/2017 17:58:14 In 2015 we undertook an Employee Engagement Survey which we repeat every year to monitor our progress. The anonymous online survey allows us to evaluate our organisation’s culture and benchmark it against other companies so we can make continuous improvements. It also provides narrative feedback regarding what our people enjoy about working at XP Power and where we need to improve. I am pleased to report that we have shown steady progress towards our target score of 67 which represents cultures deemed to be in the “clearly the best” category, as defined by the external consultant.201559.2201662.963.02017The top five scoring questions from the survey in 2016 were: }I am proud to be part of XP Power; }XP Power shows a passion to deliver high quality products to all our chosen customers; }I would recommend XP Power as a great place to work; }XP Power takes health and safety seriously; and }I feel capable of delivering to high standards of customer expectation.We are reassured by very high scores against these questions as they support our vision and our Core Values of: }Integrity; }Knowledge; }Flexibility; }Speed; and }Customer Focus.The survey also revealed to us that our employees want more opportunity for professional development and we need to improve our internal communication and collaboration. We are committed to not only listening to our employees, but also to implementing their ideas when they are in alignment with our culture and Core Values. In 2016 we launched training courses based on our assessment of key competencies that will help us continue to grow our global culture and drive operational excellence. We customised the training to focus on how we as individuals and teams impact our Core Values, and how they impact us. Our goal was to bring the Core Values to life with relevancy and intentionality. We believe the Core Values are key to our long term success. The course offering included a number of two hour interactive sessions as follows: }Effective Communication; }Effective Conflict Resolution; }Effective Cooperation and Collaboration; }Effective Critical Thinking for Strategic Results; and }Effective Time Management.These courses were taught globally, up and down the organisation, to sessions filled with people cross functionally. Every participant was asked to assess each of the sessions at its completion, and the results were extremely positive. These courses created a larger pool of shared knowledge and understanding of our Core Values, increased employee engagement and gave our employees practical tools to use in their day-to-day jobs. We will continue to develop and offer courses that will support the immediate and long term goals of XP Power and our employees.In addition we set up a cross functional, global, focus group of 26 employees to share best communication practices and come up with new ideas and focus awareness on rapid and effective communication and sharing of knowledge. The ideas and increased awareness created by this group has had a pleasing affect on the organisation’s ability to live its Core Values and attain our vision of being the first choice power solutions provider deliver the ultimate experience for our customers and our people.“I AM PLEASED TO REPORT THAT WE HAVE SHOWN STEADY PROGRESS TOWARDS OUR TARGET SCORE OF 67 WHICH REPRESENTS CULTURES DEEMED TO BE IN THE “CLEARLY THE BEST” CATEGORY.”HEATHER MURDOCK HEAD OF GLOBAL HUMAN RESOURCESCULTURAL SURVEY SCOREHEADING22EMPLOYEE ENGAGEMENT – OUR CORE VALUES IN ACTIONKNOWLEDGEFLEXIBILITYSPEEDINTEGRITYCUSTOMER FOCUSXP AR2016 - Proof 6.indd 2213/03/2017 17:58:26 www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201623KNOWLEDGEFLEXIBILITYSPEEDINTEGRITYCUSTOMER FOCUSKNOWLEDGEFLEXIBILITYSPEEDINTEGRITYCUSTOMER FOCUSOUR CORE VALUESAlways considering our customer’s experience in everything we doNever forgetting that without our customer we do not have a businessResponding to our customers and colleagues with impressive speedConstantly looking at faster and more efficient ways of delivering value in everything we doHonest in all our interactions with our colleagues, customers and suppliersAlways doing the right thingTaking care of our people ensuring XP Power is a great place to work where we trust the people we work with, have pride in what we do and gain enjoyment from our workDelivering genuine value to our customers through our knowledge and experienceContinually developing our skills and capabilities as individuals and as an organisationReceptive to the needs of our customers to provide outstanding customer serviceWilling to challenge the way we do things and adapt to constantly improve and innovateCollaborating with our colleagues and customers for better resultsKNOWLEDGEFLEXIBILITYSPEEDINTEGRITYCUSTOMER FOCUSSTRATEGIC REPORTXP AR2016 - Proof 6.indd 2313/03/2017 17:58:32 OUR COMMITMENTS TO SUSTAINABILITY HEADING What We Stand For We are fully committed to leading our industry on Corporate Social Responsibility matters. We believe we play a pivotal role in the world of industrial and healthcare electronics where our ultra-high efficiency products can save energy and reduce greenhouse gas emissions year after year. A global Environmental Committee has been established which helps us achieve our vision of leading our industry on environmental matters. This group meets periodically to help share best practices, ideas for future engagement within the community and ensuring that we as an organisation are encouraging responsible environmental behaviour. There is representation at all of our core locations throughout Asia, Europe and North America. We are able to promote and communicate our program to the organisation through periodic electronic newsletters with the latest updates and activities planned within the community and how to get involved. “WE CONTINUE TO HAVE AN ORGANISATION THAT IS COMMITTED TO BEING THE LEADER IN THE INDUSTRY ON ENVIRONMENTAL PRACTICES. THIS HAS BEEN DEMONSTRATED BY ANOTHER STRONG YEAR IN WHICH WE HAD A 28% INCREASE IN “XP GREEN PRODUCT” REVENUES. SEAN ROSS ENVIRONMENTAL COMMITTEE CHAIRMAN AND VICE PRESIDENT OF QUALITY ASSURANCE Managing our Impacts We performed our own internal risk assessment of the most significant impact that we as an organisation have on the environment. The review is consistent with our past conclusions that the greatest environmental contributor is the efficiency of the power converter products we provide to our customers. As part of our design and development process we have further expanded on our ultra-high efficiency products within our product portfolio. These “Green XP Power” products require less energy, consume less material and are void of hazardous substances. We continue to promote the adoption of this product offering and the benefits these “Green XP Power” products can provide to the end users of the equipment. These products help with maximising energy savings during the entire lifetime of the customer’s end equipment. In addition, we also continue to ensure we are adopting the best practices in all of our facilities and continually promoting awareness of environmental issues amongst our employees. Our Sustainability Strategy XP Power’s strategy is to focus on those power converters with technology that is used to provide industry leading efficiencies. This helps reduce the amount of wastage and heat loss during operation within a customer’s end application. In some instances the power converters we have designed are upwards of 95% efficient which is a significant improvement over other modern power supply converters which can average around 80% efficiency. To further expand on the significance and the impact of a 15% delta difference in efficiency, the following example is provided: Utilising Power Supply “A’ would require input power of 125 watts to provide 100 Watts of output power as there is waste of 25 Watts. Utilising XP Power Supply would require input power of 105 watts to provide 100 Watts of output power as there is waste of 5 Watts. Power Supply “A” XP Power Supply The waste heat as highlighted below is calculated in Watts. There is a significant difference considering there is a five-fold improvement in energy wastage and the overall potential for savings will be throughout the entire lifetime of electronic equipment. To achieve these efficiency gains requires a greater number of higher cost components and more complex circuits. The return on investment of a higher efficiency product can be captured in terms of the consumption of electricity. The full payback on electricity costs is usually within the first year of use. Therefore, we continue to promote and encourage the use of these high efficiency products. XP Power believes that the ongoing market trend through both demand and legislation for higher efficiency products will continue in the electronics industry. It is anticipated that these legislation requirements will be extended from consumer equipment to the industrial and healthcare markets that we serve. Efficiency 80% 95% Power Wastage Power Requirement 25% 5% 100 Watts 100 Watts 24 XP AR2016 - Proof 6.indd 24 13/03/2017 17:58:35 Our Key Achievements in 2016We continue to have an increase in revenues for those products that met our “Green XP Power” criteria. In 2016 we shipped a record £30.2 million of these high efficiency products. This represents an increase of 28% over the prior year and now represents 23.3% of our overall revenue. Of the 47 new product families we launched during the year, 33 meet our “Green XP Power” criteria.The annual savings in CO2 emissions from these products compared to a standard 80% efficient converter are quite significant. Based on our calculations we estimate that the annual emission savings from the “Green XP Power” converters we sold in 2016 is 22,500 tonnes.The annual savings will recur each year for the lifetime of the product, which we estimate conservatively as seven years. This would result in lifetime savings of 158,000 tonnes of CO2. This helps demonstrate the environmental impact that we can make by providing these types of products. Considering this is only one year of shipments the potential cumulative effect of year after year shipments is extremely compelling.Earth Day 2016On April 22nd we celebrated Earth day at many of our key sites. We wanted to promote sound environmental practices, not just on the day, but throughout the entire year. Therefore, many activities were planned for the entire week. Some of the events planned by our local environmental representatives included: }Planting of vegetation near the local offices. This included our facilities in Sunnyvale and Sutter Creek in California and in Singapore. }Providing reusable XP Power burlap bags that can be used for shopping and promoting the elimination of plastic one use bags. }Encouraging using other means of commuting, such as cycling, public transport or ride sharing. Our Plans for the Year AheadThe group will continue with the strategy of adding high efficiency products to our portfolio in the coming year. There currently are products in development that we anticipate will be launched in 2017 that will be industry leading “Green XP Power” products. READ MORE:www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201625STRATEGIC REPORTOUR COMMUNITIESSee page 29OUR SUPPLIERSSee page 28OUR PEOPLE AND THEIR HEALTH AND SAFETYSee page 27OUR CUSTOMERSSee page 26XP AR2016 - Proof 6.indd 2513/03/2017 17:58:44 OUR CUSTOMERS HEADING Customer Focus Customers have helped drive our growth with our “Green XP Power” offering. This is demonstrated by the increase in revenues year over year since 2010 of these product offerings. This aligns with one of our organisations core values, customer focus. Customers clearly see the benefit of ultra-high efficiency power converters and this has allowed us to be more focused on delivering these products to meet the customer expectations. The feedback we have also received is that customers are willing to pay a premium for these “Green” products due to the higher performance. One of the underlying benefits of a high efficiency product is that the product is inherently more reliable. Once the power converter gets to a level of efficiency that we are achieving, there is very little waste energy as heat, and there is no longer a need for a mechanical fan for cooling (which also consumes power). If the system engineer can design in a power converter without a mechanical fan they have now removed the most unreliable part of the power system. Furthermore, as the power converter runs cooler the electronic components which are sensitive to heat, such as electrolytic capacitors, have longer lifetimes. The result is that not only is the power system consuming and wasting less energy it has also become significantly more reliable. This is of particular benefit when we consider that many of our products are designed into critical applications in the healthcare and high end industrial sectors where product failure and downtime are not acceptable. It is with this understanding of the customer’s expectation for an ultra- high efficiency, extremely reliable power supply that we have been able to focus on providing the best solution for the customers’ requirements. Key Achievements We have added 33 additional product series to our portfolio of “Green XP Power” during 2016. One example is a 65 Watt desktop product that has the IP32 Environmental rating in addition to Energy Efficiency Level VI. This is the first product family that was introduced to be manufactured directly out of our environmentally friendly manufacturing facility located in Vietnam. Our Plans Ahead Our plan is to continue to invest in products we can bring to market that provide the most benefit to customers in terms of the high efficiency, and low stand-by power that meet our customers’ cost expectations. 26 XP AR2016 - Proof 6.indd 26 13/03/2017 17:58:47 DiversityWe operate in a global market and recognise the benefits of a diverse and talented workforce and consider this as a key competitive advantage. Our business success is a reflection of the quality and skill of our people and the Group is committed to seeking out and retaining the finest talent.XP Power believes in treating all people with respect and dignity. We strive to create and foster a supportive and understanding environment in which all individuals realise their maximum potential within the Company regardless of their differences. We believe our diversity benefits all our stakeholders and our Company as a whole. We recognise that each employee brings their own unique capabilities, experiences and characteristics to their work and we value diversity at all levels of the Company.Modern Slavery Act 2015The United Kingdom has enacted legislation to address abhorrent abuse of human rights. XP Power does not engage in any slavery or human trafficking activities and is strongly against any offenses of slavery, servitude forced labour and/or human trafficking. XP Power has also adopted a corporate policy which has been communicated to all employees. The policy is as follows:Modern Slavery PolicyXP Power is committed to a work environment that is free from modern slavery. This is achieved by: }Communicating that as an organisation we do not engage and are strongly against any offenses of slavery, servitude forced labour and/or human trafficking. }Performing due diligence on our supply chain. We would immediately disengage with any supplier that does not have the same vision on forced labour as XP Power. }Complying with all relevant legislation including the Modern Slavery Act 2015. }Adopting this policy within our Corporate Sustainability and Code of Ethics program.This policy is supported by all levels of the XP Power organisation. Any abuse of human rights would be acted upon immediately and appropriate action taken.It is critical that we continue to convey to our staff that any ideas or areas of concern should be brought to the attention of our management team. XP Power has a “whistle blowing” policy that has been communicated to the entire organisation and encourages individuals to come forward with any suspicious activity, without fear of repercussion.Asia6Europe25North AmericaHEALTH AND SAFETY(Number of incidents)www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201627OUR PEOPLE AND THEIR HEALTH AND SAFETYSTRATEGIC REPORTOur PeopleOur People are our most important asset and we make great efforts to ensure we have policies in place to provide a safe working environment to protect our employees. As an organisation it is important that XP Power promotes work force diversity, integrity and a safe and healthy work environment. IntegrityIt is imperative that all of our employees are ethical. This is one of our corporate core values and is communicated throughout the organisation. We have also posted the core values throughout our facilities and embedded them into our performance appraisal process as a reminder of the importance of these values throughout our day to day activities. The expectation for integrity is as follows: }Honest in all our interactions with our colleagues, customers and suppliers. }Always doing the right thing. }Taking care of our people ensuring XP Power is a great place to work where we trust the people we work with, have pride in what we do and gain enjoyment from our workHealth and SafetyAs an organisation, XP Power seriously considers the suitability of our Health and Safety program. The program we have in place focuses on preventive action to ensure that we are being proactive and therefore reducing the risk of incidents from occurring. In addition to meeting the requirements set out in the Electronic Industry Citizenship Industry Coalition Code of Conduct, there are local requirements that we continuously set out to comply with and keep abreast of any changes. There are Committee members at each of our key sites that ensure any accidents are reported, acted upon and analysed for management review. The accidents and the severity are periodically reported to the Board of Directors to ensure visibility throughout all levels of the organisation. MaleNon-Executive BoardExecutiveManagementAll OtherTotalAsia–223437462Europe351193112North America–32695124Total Male31060625698FemaleNon-Executive BoardExecutiveManagementAll OtherTotalAsia––6704710Europe1143137North America–195161Total Female1219786808XP AR2016 - Proof 6.indd 2713/03/2017 17:58:49 HEADING28OUR SUPPLIERSElectronic Industry Citizenship Coalition (EICC)Since 2010, XP Power has been a member of the EICC. We continue to promote the benefits of being a member to all of our stakeholders and encourage active participation from our supplier base. We visit and audit our suppliers to ensure they share the same vision consistent with the EICC Code of Conduct. We would disengage our business relationship with those suppliers that are not committed to continuously work towards compliance to the Code of Conduct. Supply Chain EthicsOne of the key elements of XP Power’s core values is integrity. We work towards ensuring our supply chain partners have the same approach towards ethical business practices as XP Power. This is done by a stringent on-site qualification process of potential new suppliers. It includes an assessment regarding environmental performance, treatment of labour, health and safety and business ethics standards. As the suppliers we engage with are considered long term partners it is imperative that these suppliers have our vision. The XP Power ethics policy is included within our Corporate Sustainability Manual and includes the following requirements as it pertains to suppliers: }We will uphold high levels of business ethics in dealing with our suppliers; and }We will not at anytime take or give, bribes or other means of inducement to obtain improper advantage. These requirements have been actively communicated and the policy is readily available to our supply chain employees.Supply Chain Due DiligenceAs part of our due diligence process within our supply chain, we have updated our qualification process to include an evaluation to ensure our suppliers do not engage or support any slavery, human trafficking, servitude or forced labour. XP Power would immediately disengage with any suppliers that it was determined did not share our same vision.In 2010 the US Dodd-Frank Wall Street Reform and Consumer Protection Action was passed concerning “conflict minerals” originating from the Democratic Republic of the Congo or adjoining countries. XP Power has worked with our suppliers to try and eliminate using those sources that have originated from those countries in question. We have adopted the reporting template issued by the Global e-Sustainability Initiative (GeSI) and Electronic Industry Citizenship Coalition which we provide to our customers so they gain the necessary assurance we are not using conflict minerals in our products.Our Plans for the Year AheadThe supply chain program we have in place has been extremely effective in promoting industry leading sustainable programs with our suppliers. We will continue to expand this program as we determine additional ethical requirements that are in alignment with our core values. The new legislation such as the Modern Slavery Act of 2015 will also be a focus for the coming year to ensure proper due diligence.XP AR2016 - Proof 6.indd 2813/03/2017 17:58:54 www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201629OUR COMMUNITIESStra-tegic Re-portSTRATEGIC REPORTCommunity PolicyThis year we implemented a new policy for community service. The organisation allows for paid time off to support local community activities. This shows a level of commitment by the organisation to allow our employees to give back to the local communities in which we operate. This has been a successful program and we have seen lots of enthusiasm for this new policy. Some of the activities that took place in 2016 included: }In collaboration with the Canal and River Trust Foundation, supporting the upkeep and maintenance of water passageways in the United Kingdom. }Collection of used clothing and shoes from our employees to provide to local charities or for repurposing. This event took place at our Singapore, United Kingdom and Southern California locations. }Supporting a Rescue Mission Center by donating time to stock shelves and serve food for those in unfortunate situations. This is the second year in a row supporting this organisation. }Clean up of local beaches in the United Kingdom area in preparation of Queen Elizabeth II’s 90th birthday celebration. Second Harvest Food BankVolunteers from the XP Power Orange County, California office helped pick cabbage from a local farm. There were 3,600 pounds of cabbage collected that will go to help feed 6,000 people. Our Plans for the Year AheadThe local representatives that coordinate activities continue to be fully engaged within the community. These include opportunities for volunteering, raising funds to support local charities or providing resources for educational purposes. This is an ongoing agenda item as part of our local environmental teams periodic meetings to see how we can make a difference within the communities in which we operate.XP AR2016 - Proof 6.indd 2913/03/2017 17:59:02 HEADING30OUR ENVIRONMENTCO2 EmissionsIn 2009 we set ourselves a target of reducing CO2 emissions per unit of revenue by 5% per annum over the next five years. This aligns us with the Chinese Government’s target of reducing carbon emissions per unit of GDP by 40% to 45% between 2005 and 2020. We measure our CO2 emissions in accordance with the internationally recognised Green House Gas (GHG) Protocol and our metrics include scope 1 and scope 2 emissions. The CO2 emissions data shows the three-month moving average of CO2 emission per unit of revenue at our Kunshan facility. Our total Green House Gas emissions for 2016 were 3,581 tonnes of CO2 compared to 3,361 tonnes in 2015. This increase is lower than our revenue increase, demonstrating some efficiency gains. CO2 emissions per unit of revenue increased in China and declined in Vietnam as we transferred production from China to Vietnam.WaterThrough our risk assessment process, we have determined that our operations are considered a low-level water user. We do not use water within the manufacturing processes. With that said, we are conscious to ensure we do have consideration of our water usage and look to maximise use of alternative sources of water such as rainwater. XP Power’s facility in Vietnam leads the way with an on-site water capture and recycling system supplying “grey water” to the buildings plumbing systems and for irrigation. Our water policy is to: }Employ best practices to maximise the efficient use of water and minimise pollution and waste. }Regularly review and report on the water use of our facilities and activities. }Commit to continuous improvement in responsible water management through identifying objectives and setting measurable goals. }Involve and educate employees, contractors and customers in our water use programmes. }Engage with suppliers to encourage their participation in responsible water management best practices. }Disengage with any suppliers who may be found to be negligent or noncompliant with responsible water management and who do not aggressively implement corrective actions.CO2 Emissions Data20162015201420132012CO2 Emissions (tonnes) – China and Vietnam facility3,5813,3613,0682,5982,188CO2 Emissions per unit of factory revenue (kg/$1,000) – China facility 5647 464643CO2 Emissions per unit of factory revenue (kg/$1,000) – Vietnam facility82141110––Water Data20162015201420132012Average number of employees1,5061,4481,1601,081895Water consumed (thousand litres)32,58232,22025,30021,20017,500Water consumed per employee (thousand litres)21.622.321.819.619.5XP AR2016 - Proof 6.indd 3013/03/2017 17:59:16 www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201631STRATEGIC REPORTCarbon Disclosure ProjectXP Power is pleased to participate and disclose its environmental data to the Carbon Disclosure Project. The full data set provided is publically available on the Carbon Disclosure Project website at www.cdproject.net.Harmful SubstancesEuropean legislation on the Reduction of Hazardous Substances (RoHS) came into effect in 2005. The legislation limited the levels of certain hazardous substances, including lead, in manufacturing products. Although the legislation is applicable only to products sold in Europe, and at the time its introduction was not applicable to medical products, XP Power took the decision to make all of the products it designs and manufactures compliant. This decision was not only good for the environment but also good for our business. The RoHS directive was recast with additional requirements which came into effect July 2011. We are pleased to report that we are compliant with the latest RoHS directive as of July 2014.Our Plans for the Year Ahead We continue to look at all facets of our business and the changes we can do to make a positive impact on the environment. This will include: }New products that are classified as “Green XP Power” products }Enhancements to our facilities }Various conservation methodologies }Recycling programs XP AR2016 - Proof 6.indd 3113/03/2017 17:59:34 ImpactLikelihoodSevereMinorLowHigh13465710892Our Risk AssessmentThe Group has well-established annual and ongoing risk management processes to identify and assess risks. Nonetheless, renewed emphasis, encouraged by the more recently appointed Non-Executive Directors, coupled with the introduction of internal audit reviews has strengthened these processes. The Group’s principal risks have been mapped onto a detailed risk universe from which key areas for business focus can be identified. This helps facilitate further discussions on risk appetite and draws out the risks that require a greater level of attention in terms of audit or assessment. A robust risk assessment has been carried out at Board level and where possible actions set to mitigate and/or reduce the identified risk.The key risks that have been identified and the mitigating actions are summarised on the following pages classified according to: }The assessment of their level of impact to the viability of the business if they occurred – ranging from severe to minor; }The likelihood of a risk occurring – ranging from high to low; and }The direction in which they are trending – risks are classified according to whether they are assessed as becoming more likely to occur, less likely to occur or whether the risk of occurrence remains unchanged.Although the attributes assigned to the identified risks are judgemental and qualitative in nature, the Board regards the methodology as useful in determining the focus that should be given to each risk.This is not an exhaustive list of risks that the Board has identified and considered but does include all risks which are assessed as having a severe or moderate impact to the business if they occurred.Heat map of the identified risks indicating the likelihood and level of impact.1An event causes a disruption to our manufacturing facilities.3Competition from new market entrants and new technologies.4Fluctuations of revenues, expenses and operating results due to an economic shock.5Dependence on key suppliers/customers.6Cyber security/information systems failure.7Risks relating to regulation, compliance and taxation.8Strategic risk associated with valuing or integrating new acquisitions.9Loss of key personnel or failure to attract new personnel.10Exposure to exchange rate fluctuations.2Product recall.HEADING32MANAGING OUR RISKSXP AR2016 - Proof 6.indd 3213/03/2017 17:59:38 Risks that could have a severe impact on the Company’s business and possibly on the viability of the Company’s businessRiskMitigationAssessed Trend1An event that causes a disruption to one of our manufacturing facilitiesAn event that results in the temporary or permanent loss of a manufacturing facility would be a serious issue. As the Group manufactures 73% of revenues, this would undoubtedly cause at least a short term loss of revenues and profits and disruption to our customers and therefore damage to reputation. ¼We now have two facilities (China and Vietnam) where we are able to produce power supplies. However, not all power converter series can be produced in both facilities. ¼We have disaster recovery plans in place for both facilities. ¼We have undertaken a risk review with the manufacturing management to identify and assess risks which could cause a serious disruption to manufacturing, and then identified and implemented actions to reduce or mitigate these risks where possible.Unchanged2Product recallA product recall due to a quality or safety issue would have serious repercussions to the business in terms of potential cost and reputational damage as a supplier to critical systems. ¼We perform 100% functional testing on all own manufactured products and 100% hi-pot testing, which determines the adequacy of electrical insulation, on own manufactured products. This ensures the integrity of the isolation barrier between the mains supply and the end user of the equipment. We also test all the medical products we manufacture to ensure the leakage current is within the medical specifications. ¼Where we have contracts with customers, we limit our contractual liability regarding recall costs. UnchangedRisks that could have a moderate impact on the Company’s businessRiskMitigationAssessed Trend3Competition from new market entrants and new technologiesThe power supply market is diverse and competitive. The Directors believe that the development of new technologies could give rise to significant new competition to the Group, which may have a material effect on its business. At the lower end of the Group’s target market, in terms of both power range and programme size, the barriers to entry are lower and there is, therefore, a risk that competition could quickly increase particularly from emerging low cost manufacturers in Asia. ¼The Group reviews activities of its competition, in particular product releases, and stays up-to-date with new technological advances in our industry, especially those relating to new components and materials. The Group also tries to keep its cost base competitive by operating in low cost geographies where appropriate. ¼The general direction of our product roadmap is to move away from lower complexity products and to increase our engineering services capabilities.More likelywww.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 201633STRATEGIC REPORTXP AR2016 - Proof 6.indd 3313/03/2017 17:59:40 MANAGING OUR RISKS HEADING Risks that could have a moderate impact on the Company’s business Risk 4 Fluctuations of revenues, expenses and operating results due to an economic shock The revenues, expenses and operating results of the Group could vary significantly from period to period as a result of a variety of factors, some of which are outside its control. These factors include general economic conditions; adverse movements in interest rates; conditions specific to the market; seasonal trends in revenues, capital expenditure and other costs; and the introduction of new products or services by the Group, or by their competitors. In response to a changing competitive environment, the Group may elect from time to time to make certain pricing, service, marketing decisions or acquisitions that could have a short term material adverse effect on the Group’s revenues, results of operations and financial condition. 5 Dependence on key customers/suppliers The Group is dependent on retaining its key customers and suppliers. Should the Group lose a number of its key customers or key suppliers, this could have a material impact on the Group’s financial condition and results of operations. However, for the year ended 31 December 2016, no one customer accounted for more than 7% of revenue. 6 Cyber security/Information systems failure The Group is reliant on information technology in multiple aspects of the business from communications to data storage. Assets accessible online are potentially vulnerable to theft and customer channels are vulnerable to disruption. Any failure or downtime of these systems or any data theft could have a significant adverse impact on the Group’s reputation or on the results of operations. 7 Risks relating to regulation, compliance and taxation The Group operates in multiple jurisdictions with applicable trade and tax regulations that vary. Failing to comply with local regulations or a change in legislation could impact the profits of the Group. In addition, the effective tax rate of the Group is affected by where its profits fall geographically. The Group’s effective tax rate could therefore fluctuate over time and have an impact on earnings and potentially its share price. Assessed Trend Unchanged Mitigation ¼ Although not immune from an economic shock or the cyclicality of the capital equipment markets, the Group’s diverse customer base, geographic spread and revenue annuities reduce exposure to this risk. ¼ The Group’s business model is not capital intensive and the strong profit margins lead to healthy cash generation which also helps mitigate risks from these external factors. ¼ The Group mitigates this risk by providing Unchanged excellent service. Customer complaints and non- conformances are reviewed monthly by members of the Executive Management team. ¼ As the proportion of our own manufactured products has increased, the reliance on suppliers for third party product has been mitigated proportionally. There has been a shift from a finished goods risk to a raw materials risk. ¼ We conduct regular audits of our key suppliers and in addition keep large amounts of safety inventory of key components. ¼ The Group has a defined Business Impact Unchanged Assessment which identifies the key information assets; replication of data on different systems or in the Cloud; an established backup process in place as well as a robust anti-malware solution on our networks. ¼ Internally produced training materials are used to educate users regarding good IT security practice and to promote the Group’s IT policy. ¼ A cyber assessment carried out by the outsourced internal auditor resulted in recommendations that are being implemented to further mitigate cyber risk and safeguard the Group’s assets. ¼ An outsourced internal audit function has been introduced to provide risk assurance in targeted areas of the business and recommendations for improvement. The scope of these reviews includes behavior, culture and ethics. ¼ The Group hires employees with relevant skills and uses external advisers to keep up-to-date with changes in regulations and to remain compliant. ¼ The Group also employs a treasurer, who keeps our taxation position under continual review. More likely 34 XP AR2016 - Proof 6.indd 34 13/03/2017 17:59:40 T R O P E R C G E T A R T S I Risks that could have a moderate impact on the Company’s business Risk Mitigation Assessed Trend 8 Strategic risk associated with valuing or integrating new acquisitions The Group may elect from time to time to make strategic acquisitions. A degree of uncertainty exists in valuation and in particular in evaluating potential synergies. Post-acquisition risks arise in the form of change of control and integration challenges. Any of these could have an effect on the Group’s revenues, results of operations and financial condition. 9 Loss of key personnel or failure to attract new personnel The future success of the Group is substantially dependent on the continued services and continuing contributions of its Directors, senior management and other key personnel. The loss of the services of key employees could have a material adverse effect on own business. 10 Exposure to exchange rate fluctuations The Group deals in many currencies for both its purchases and sales including US Dollars, Euros and its reporting currency Pounds Sterling. In particular, North America represents an important geographic market for the Group where virtually all the revenues are denominated in US Dollars. The Group also sources components in US Dollars and the Chinese Yuan. The Group therefore has an exposure to foreign currency fluctuations. This could lead to material adverse movements in reported earnings. ¼ Preparation of robust business plans and cash Unchanged projections with sensitivity analysis and the help of professional advisers if appropriate. ¼ Post-acquisition reviews are performed to extract ‘lessons learned’. ¼ The Group undertakes performance evaluations Unchanged and reviews to help it stay close to its key personnel as well as annual employee engagement surveys. Where considered appropriate the Group also makes use of financial retention tools such as equity awards. ¼ The Group reviews balance sheet and cash More likely flow currency exposures and where considered appropriate uses forward exchange contracts to hedge these exposures. Any forward contract requires the approval of both the Chief Executive and Finance Director. ¼ The Group does not hedge any translation of its subsidiaries’ results to Sterling for reporting purposes. Viability Statement In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Directors are required to assess the prospects of the Company over a period longer than the 12 months required by the “Going Concern” provision. Various options were considered taking into account the Group’s identified risks set out on pages 32 to 35, and after consideration the Directors are of the opinion that the Company is viable for at least a period of three years to 31 December 2019. This timeframe is within the Group’s strategic financial planning period used to evaluate performance and liquidity and aligns with the design in cycle for which the Group has visibility. The Company has a business model where the Company’s product is designed into numerous applications, with numerous customers, in numerous geographies. The Company’s products are all designed into capital equipment which is generally in production for a number of consecutive years resulting in a revenue annuity. Nonetheless, the Directors’ obligation is to assess the Company’s viability in conjunction with the principal risks that could cause a severe but plausible threat, both in isolation and if more than one risk occurred at the same time. Each risk was modelled in a ‘worst case’ scenario to help determine the potential effect, primarily to cash flow. Certain subjective assumptions were made to achieve this. It was determined that a temporary or permanent disruption at one of our manufacturing facilities presents the most significant risk which could, in isolation, if mitigating actions are unsuccessful, compromise the viability of the Company. In determining the viability term, the Board also considered the current net cash position of the Group and its capacity to extend borrowing in relation to the hypothetical and deliberately austere scenarios presented. Furthermore, the scenarios were assessed against the controls in place to prevent or mitigate these risks occurring. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 35 35 13/03/2017 17:59:41 THE BOARD REMAINS MINDFUL OF ITS ROLE IN DEALING WITH CHALLENGES AND ISSUES RELATING TO CORPORATE GOVERNANCE, CORPORATE SOCIAL RESPONSIBILITY AND ETHICS. THE GROUP’S CULTURE EMANATES FROM THE TOP WHICH IS WHY THE BOARD GIVES CONTINUED PROMINENCE TO THIS AREA.JAMES PETERS NON-EXECUTIVE CHAIRMANIn addition to directing the Group’s strategy and effectiveness, the Board remains mindful of its role in dealing with challenges and issues relating to corporate governance, corporate social responsibility and ethics. The Group’s culture emanates from the top which is why the Board gives continued prominence to this area. The experience and injection of fresh ideas from the newer members of the Board has been instrumental in driving further progress in corporate governance.In the following pages we set out our approach to corporate governance. Under the Singapore Companies Act, Chapter 50, the Company is not required to follow the Singapore Corporate Governance Code. The Company has voluntarily agreed to the principles of corporate governance contained in the UK Corporate Governance Code (the “Code”) as required under the Listing Rules of the Financial Services Authority of the United Kingdom.We have tried to clearly lay out how we meet the five sections of the Code, namely leadership, effectiveness, accountability, remuneration and relations with Shareholders. For the benefit of Shareholders who are not familiar with the Code we have set out the main principles of the Code in detail and have stated how we have addressed them in this report.I am pleased to report that throughout the year ended 31 December 2016 the Company has made every effort to be in full compliance with the provisions of the Code. James Peters Non-Executive Chairman36CHAIRMAN’S INTRODUCTION TO GOVERNANCEXP AR2016 - Proof 6.indd 3613/03/2017 17:59:47 IN THIS SECTION... 38 Directors and Officers40 Corporate Governance Report44 Audit Committee Report48 Remuneration Committee Report49 Remuneration Policy54 Remuneration Report – Annual Report61 Other Governance and Statutory Disclosures62 Statement by Directors37www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 3713/03/2017 17:59:49 Jonathan joined the finance team of XP Power in July 2008 as European Controller. Prior to joining the Group, Jonathan spent 9 years with JCDecaux in various senior financial positions including Head of Financial Reporting and worked in both its UK and North American operations. Prior to that, he spent 3 years with Mills & Allen.Jonathan was appointed Finance Director in December 2011.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 8 years working for LSI Logic Corporation where he held senior financial positions in both Europe and Silicon Valley. From 1985 to 1990, Duncan spent 5 years at Coopers & Lybrand in general practice and corporate finance.He joined XP Power in April 2000 as Group Finance Director. On 3 February 2003, he was appointed as Chief Executive.James PetersNon-Executive Chairman58Duncan PennyChief Executive 54Mike has 28 years’ experience in the power converter 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 held various senior roles prior to their acquisition of XP Power in 2000.Mike is currently responsible for global sales and marketing. He joined the Board on 20 August 2002.Mike Laver President, World Wide Sales and Marketing54Jonathan Rhodes Finance Director45James has over 35 years’ experience in the power converter industry, originally training as an electronics engineer with Marconi Space and Defence Systems, prior to joining TDK-Lambda, a global power converter company. He joined Powerline Electronics shortly after its formation in 1980 and was involved in all aspects of their power business. In November 1988, he founded XP Power. In April 2000, he was appointed European Managing Director and was responsible for the development of the Group’s European business. In February 2003, James was appointed as Deputy Chairman and having moved to a non-executive role in May 2012 became Non-Executive Chairman on 30 June 2014. James is Chairman of the Nomination Committee.38DIRECTORS AND OFFICERSXP AR2016 - Proof 6.indd 3813/03/2017 18:00:07 E C N A N R E V O G Andy Sng Executive Vice President, Asia Terry Twigger Senior Non- Executive Director 46 67 Andy joined the Group in July 2005 as General Manager for Asia to start and head up our Shanghai operations. He joined the Board in April 2007. Prior to joining XP Power, Andy has worked in the power supply industry for 8 years in various technical and commercial roles with companies such as Silicon Systems (Singapore) and Advanced Micro Devices (Singapore). Terry joined the Board on 1 January 2015 and has a wealth of public company experience. Terry joined Meggitt PLC, the FTSE100 global engineering group specialising in extreme environment components and smart sub-systems for aerospace, defence and energy markets, in July 1993 and spent 20 years with the group, the last 12 as Chief Executive. During his tenure as Chief Executive, Meggitt grew its revenues from £0.4bn to £1.6bn through a combination of organic growth and numerous successful acquisitions. He retired from Meggitt in May 2013 and is currently a Non-Executive Director of Essentra plc, the supplier of specialist plastic, fibre, foam and packaging products. Terry is the Senior Non-Executive Director and Chairman of the Audit Committee. Terry is also a member of the Nomination Committee and the Remuneration Committee. Peter Bucher Non-Executive Director Polly Williams Non-Executive Director 73 51 Peter joined the Board on 1 January 2014, he is well known within the power converter industry and spent his entire career at Traco Electronic AG (“Traco”) in Zurich, Switzerland. Peter joined Traco in 1967 and in 1985 was appointed Managing Director, a position he held until his retirement in 2009. Under Peter’s leadership Traco was built into a highly respected company with revenues in excess of US$100m. Peter is a member of the Remuneration Committee and the Audit Committee. Polly joined the Board on 1 January 2016. Polly is a chartered accountant and a former Partner at KPMG LLP. She resigned from her partnership in 2003 and since then has held a number of Non-Executive Directorship roles, including at APS Financial Limited, Z Group plc, National Counties Building Society (as Chairman) and Scotiabank Ireland Limited. She is currently a Non-Executive Director at Jupiter Fund Management plc, TSB Group plc and Daiwa Capital Markets Europe Ltd. She is also a Trustee of the Guide Dogs for the Blind Association. Polly is Chair of the Remuneration Committee and a member of the Audit Committee and Nomination Committee. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 39 39 13/03/2017 18:00:13 LeadershipA.1 The Role of the BoardMain Principle:Every Company should be headed by an effective Board which is collectively responsible for the long-term success of the Company.The Directors have considered the composition and structure of the Board and have concluded that it is appropriate for a Company of the size and complexity of XP Power. Despite not being considered independent by the Corporate Governance guidelines, the involvement of James Peters (Non-Executive Chairman) as a founder with a substantial shareholding is considered of benefits to Shareholders, aligning the interests of Shareholders with the Board. The following matters are specifically reserved for the Board’s decision: }Opinion of the Group’s viability and going concern }Approval of strategic plans, financial 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 }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 }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 DirectorsA.2 Division of ResponsibilitiesMain Principle:There should be a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for the running of the Company’s business. No one individual should have unfettered power of decision.The roles of Non-Executive Chairman (James Peters) and Chief Executive (Duncan Penny) are separate and clearly defined. The Chairman is responsible for the running of Board Meetings as well as taking the lead on strategy. The Chief Executive is responsible for the day-to-day running of the Company and the execution of the strategy.A.3 The ChairmanMain Principle:The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role.The Chairman sets the calendar and agenda of the Board and facilitates the discussions. The Chairman also initiates and coordinates processes defined below which evaluate effectiveness of the Board and of the individual Directors.NOMINATION COMMITTEEAUDIT COMMITTEEChair Terry Twigger Financial ReportingComplianceExternal auditInternal controlsChair James Peters Board CompositionBoard AppointmentsChair Polly Williams (appointed 1 January 2016)Directors’ PayExecutive Management Team Incentive PlansShare Incentive PlansChair Sean Ross VP Quality AssuranceCorporate social responsibilitySustainability initiativesSUSTAINABILITY COMMITTEEREMUNERATION COMMITTEE12 persons Responsible for executing the Board’s strategyDay-to-day running of the businessActing on whistle blowingEXECUTIVE MANAGEMENT TEAMThe full team meet face to face at least three times a year.A sub-set of the team conducts a monthly business review by teleconference. THE BOARD OF DIRECTORSNon-Executive Chairman James Peters 40CORPORATE GOVERNANCE REPORTXP AR2016 - Proof 6.indd 4013/03/2017 18:00:15 E C N A N R E V O G Effectiveness B.1 The Composition of the Board Main Principle: The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively. B.3 Commitment Main Principle: All Directors should be able to allocate sufficient time to the Company to discharge their responsibilities effectively. There were five Board Meetings during the year attended by all Board members. These meetings took place on: The Directors consider that the Board and Committees have the appropriate balance of skills, experience, independence and knowledge to discharge their duties effectively. 19 February 2016 8 April 2016 21 July 2016 6 October 2016 13 December 2016 B.4 Development Main Principle: All Directors should receive induction on joining the Board and should regularly update and refresh their knowledge and skills. Directors receive an induction on joining the Board. Non-Executive Directors are exposed to senior managers below Board level. They are also able to meet with managers on an informal basis to help them gain a deeper understanding of the business and contribute ideas. During the year, the Directors received presentations from the three regional Vice-Presidents of Sales; North America, Europe and Asia and from the Head of Product Development. As well as providing the latest business overview, these presentations focussed on the challenges and opportunities over the next three years in these key areas. The Board considers Peter Bucher, Terry Twigger and Polly Williams to be independent. The Corporate Governance guidelines do not consider James Peters to be independent by virtue of his previous executive roles. However, as a founder and substantial shareholder his membership of the Board is considered beneficial to Shareholders as a whole. B.2 Appointments to the Board Main Principle: There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board. Nomination Committee Polly Williams was appointed to the Nomination Committee during the year following John Dyson’s decision not to stand for re-election at the last Annual General Meeting. The majority of the Nomination Committee is now independent comprising James Peters (Chair), Terry Twigger and Polly Williams (appointed 21 July 2016). The Committee reviews and considers the appointment of new Directors. All Non-Executive Directors are given the opportunity to interview any proposed candidates. Any appointment of a new Director is voted on by the whole Board. The Nomination Committee met once during the year on 21 July 2016. All Committee members were present. The Terms of Reference of the Nomination Committee are available in the Corporate Governance section of the Company’s website xppower.com. A.4 Non-Executive Directors Main Principle: As part of their role as members of a unitary board, Non-Executive Directors should constructively challenge and help develop proposals on strategy. Other than their normal attendance and participation in discussions at Board meetings the Non-Executive Directors actively participate in the Company’s strategy meetings and are able to question, challenge and coach the managers attending these meetings. During the year the Non-Executive Directors convened to assess: — The refinements to the long term strategy of the Group that the Executive Management team had proposed; and — Succession planning for the Executive Directors and senior management team. Going forward there will be more frequent interaction and presentations from the senior management team to the Non- Executive Directors in order to further challenge and develop the next layer and generation of management. Terry Twigger is the Senior Independent Non-Executive Director. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 41 41 13/03/2017 18:00:17 B.5 Information and SupportMain Principle:The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.The Board receives “flash” reports, detailed management accounts and detailed financial forecasts prepared on a monthly basis to enable it to review trading performance, forecasts and strategy implementation. Board meeting materials are provided in advance of Board meetings to allow Directors sufficient time to prepare adequately. The Board also received specific presentations and information from management during the year covering areas such as cyber security, internal audit and risk assurance reviews, the results of an external audit by the Electronics Industry Citizenship Coalition, the Executive Management’s three-year strategic review, and actions arising from an employee survey. B.6 EvaluationMain Principle:The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.The Board’s evaluation of its own performance and that of its Committees is conducted annually using a Board effectiveness questionnaire.The questionnaire was revamped and updated during the year with the help of an independent external consultant. The Board approved the questionnaire to ensure that it covered all aspects of effectiveness; capabilities and communication, culture and practice, process and organisation and meeting rigour and relationships. With respect to continually improving Board effectiveness; the questionnaire also asked Directors to comment on what it should stop doing, start doing and continue doing.The independent consultant circulated the questionnaire to each Board Director collating each response into an anonymous report for the Board to consider and discuss at a Board meeting. There were no significant issues of concern raised in the report.B.7 Re-election Main Principle:All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.All Directors voluntarily offer themselves for re-election annually. This is in spite of the Company’s Articles of Association which require Directors to retire and offer themselves for re-election on a rotation basis and at least every three years. AccountabilityC.1 Financial and Business ReportingMain Principle:The Board should present a balanced and understandable assessment of the Company’s position and prospects.The Board considers that both the Interim Report and Annual Report and Accounts, supported by quarterly trading updates which are timetabled at the beginning of each year, comprehensively fulfil this requirement. The Annual Report includes a detailed description of the Group’s strategy and business model which has enabled it to generate significant value over a prolonged period of time. It also details the significant risks that the Group faces and how these are mitigated and includes the Board’s assessment of the longer term viability of the Group. The Company also makes available a number of videos on its investor relations website at the time of its interim and annual reporting as well as investor videos describing products, markets, strategy, business model, growth drivers and its investment proposition.Going ConcernThe Directors, after making enquiries, are of the view, as at the time of approving the accounts, that there is a reasonable expectation that the Company will have adequate resources to continue operating for the foreseeable future and therefore the going concern basis has been adopted in preparing these accounts. In addition, in accordance with C.2.2 of the revision of the Code, the Directors have considered the prospects of the Company over the longer term and provided a viability statement on page 35.C.2 Risk Management and Internal ControlMain Principle:The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.The Board acknowledges that it is responsible for the Group’s internal controls and for reviewing their 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 on-going 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. The identified risks and the processes by which these are addressed are documented, reviewed and updated at Board meetings. The Directors confirm that an assessment of the principal risks facing the Group was reviewed, further details of which are included in the Managing Our Risks and Viability Statement sections within the strategic report on pages 32 to 35.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. Examples of key controls with respect to ongoing processes include: }Authority matrices are in place to clearly define who is able to authorise particular transactions, transfer funds, commit Company resources and enter into particular agreements. }Monthly reporting of management accounts and key metrics to senior management with performance measured to budget and material variances reported to the Board. }Quality control checks throughout our manufacturing process, burn in, electrical testing to detect early failures, 100% functional testing, and quality inspection. }Disaster recovery and business continuity plans are in place at all facilities, documented and communicated to key personnel to help cope with unexpected events.42CORPORATE GOVERNANCE REPORTXP AR2016 - Proof 6.indd 4213/03/2017 18:00:18 }The Audit Committee reviews the effectiveness of internal controls. }Internal audit function has been set up.C.3 Audit Committee and AuditorMain Principle:The Board should establish formal and transparent arrangements for considering how it should apply the corporate reporting and risk management and internal control principles, and for maintaining an appropriate relationship with the Company’s auditor.The Audit Committee report on pages 44 to 47 sets out in detail the Group’s arrangements to ensure corporate reporting complies with legal and accounting standards together with effective risk management and internal control processes and appropriate supervision and performance of the external auditor.The Terms of Reference of the Audit Committee are available in the Corporate Governance section of the Company’s website www.xppower.com.RemunerationD.1 The Level and Components of RemunerationMain Principle:Levels of remuneration should be sufficient to attract, retain and motivate Directors of the quality required to run the Company successfully, but a Company should avoid paying more than is necessary for this purpose. A significant proportion of Executive Directors’ remuneration should be structured so as to link rewards to corporate and individual performance.The Remuneration Committee report on pages 48 to 60 sets out in detail the Group’s approach to remuneration. D.2 ProcedureMain Principle:There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.The Remuneration Committee Report on pages 48 to 60 sets out in detail the Group’s policy on remuneration and the remuneration packages for the Board. No Director participates in the deciding of their own remuneration. Polly Williams is Chair of the Remuneration Committee.The Terms of Reference of the Remuneration Committee are available in the Corporate Governance section of the Company’s website xppower.com.Relations with ShareholdersE.1 Dialogue with ShareholdersMain Principle:There should be a dialogue with Shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with Shareholders takes place.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 xppower.com to give private investors access to the same information that institutional investors receive in terms of investor presentations. This includes video interviews with the Chief Executive and Finance Director available on the morning of the day the interim and annual results are published. The Company also makes available a number of informational videos on its investor relations website which cover products, markets, strategy, business model, growth drivers and its investment proposition.Interested parties are also 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 Chairman and Senior Independent Director are available to meet Shareholders if required.The Board members receive any feedback prepared by brokers or our financial PR company following meetings with Shareholders in order to keep in touch with Shareholders’ opinion.E.2 Constructive Use of the Annual General MeetingMain Principle:The Board should use the Annual General Meeting to communicate with investors and to encourage their participation.The Annual General Meeting is an opportunity to communicate with Shareholders and certain Directors are available to answer any questions.43www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 4313/03/2017 18:00:19 THE AUDIT COMMITTEE IS SATISFIED THAT THE COMPANY HAS MAINTAINED SOUND RISK MANAGEMENT AND INTERNAL CONTROLS THROUGHOUT THE YEAR.TERRY TWIGGER AUDIT COMMITTEE CHAIRAs Chairman of the XP Power Audit Committee, I am pleased to present the 2016 Audit Committee Report to Shareholders and to be able to confirm, on behalf of the Board, that the Annual Report is fair, balanced and understandable. The Audit Committee is satisfied that the Company has maintained sound risk management and internal controls throughout the year, and that the internal audit programme is appropriately formulated and sufficiently resourced to confirm that these controls are effective. The Audit Committee has made good progress during the year to increase the Group’s emphasis on risk management and to enhance the control environment. An independent internal audit function has been introduced to provide greater operational assurance. Areas reviewed included procurement, business continuity, cyber risk and contractual obligations. Risk assurance and ensuring robust controls are in place will be an on-going theme for the Committee to support the Board in the stewardship of good governance. The report aims to provide the following information: }The Audit Committee’s principal responsibilities and its governance. }The key activities which were reviewed by the Audit Committee, including those items of regular annual review and other current areas of focus. }The discussions and actions undertaken, in conjunction with the external auditor, on any significant judgements and/or issues. }Details of the ongoing review of the external auditor and the amount of non-audit work undertaken.The Audit Committee has reported to the Board that the re-appointment of PricewaterhouseCoopers LLP should be proposed at the forthcoming Annual General Meeting, and I hope that you will support me in this resolution.Responsibilities of the Audit CommitteeThe Committee is responsible for, amongst other things: }Ensuring that the financial performance of the Group is properly reported and monitored; }Advising the Board on whether it believes the annual report and accounts, taken as a whole, is fair, balanced and understandable; }Compliance with legal requirements; }Adoption and correct implementation of accounting standards; }Meeting the requirements of the UK Listing Authority; }Assessing the Group’s internal control processes and assurance framework; }Supervising the relationship and performance of the external auditor; and }Reviewing the nature and extent of audit and non-audit services provided to the Group by the external auditors. The Terms of Reference of the Audit Committee are available in the Corporate Governance section of the Company’s website xppower.com.44AUDIT COMMITTEE REPORTXP AR2016 - Proof 6.indd 4413/03/2017 18:00:25 Members of the Audit CommitteeTerry Twigger (Chair), Independent Non-Executive DirectorPeter Bucher, Independent Non-Executive DirectorPolly Williams, Independent Non-Executive Director (appointed 1 January 2016)John Dyson is no longer a member of the Committee following his decision not to stand for re-election at the last Annual General Meeting.GovernanceThe current Audit Committee members are all independent Non-Executive Directors and have financial and/or related business experience gained in senior positions in other diverse organisations. Terry Twigger has been the Audit Committee Chair since 2015 and the Board is satisfied that Terry has recent and relevant financial experience.Performance Evaluation of the Audit CommitteeDuring the year, the Audit Committee reviewed its performance as part of the Board’s updated evaluation process. The Committee considered it had adequate qualifications and skills to perform its responsibilities, particularly through Terry Twigger’s financial and management background and Polly Williams’ financial and audit experience.Meetings of the Audit CommitteeThe Audit Committee met three times during 2016 on 18 February 2016, 21 July 2016 and 20 October 2016. Peter Bucher was the only Committee member not to attend the July and October meetings due to prior commitments.The external auditor, PricewaterhouseCoopers LLP, the Finance Director and Group Financial Controller were involved at each of the meetings. The Committee also discussed matters with the external auditor without the Group’s management being present.During the year the members of the Committee also met with the newly appointed internal auditor, Deloitte LLP, and received a presentation from the Group’s Tax and Treasury Manager.The Audit Committee supports the Board and reports to it on a regular basis, certainly no less frequently than at every Board meeting following a meeting of the Audit Committee.There is an annual cycle of items that are to be considered by the Audit Committee. The timetable of these items is scheduled in accordance with the requirement of the annual audit cycle and any other requirements of the Audit Committee.Activities of the Audit Committee }Examined the 31 December 2015 Annual Report and the 30 June 2016 Half Year Report. This involved reviewing, challenging and recommending for approval the going concern basis of preparation, the accounting policies and disclosures, the financial reporting issues and the assumptions and adjustments made. Particular consideration was given to assessing whether the reports, taken as a whole, were fair, balanced and understandable prior to recommending these to the Board for approval. }Reviewed the responsibilities of the Directors particularly in relation to the new market abuse regulations and the EU regulations on non-audit fees. }Reviewed in detail the key judgements of the Financial Statements and levels of disclosure. Some of these are described in the ‘Significant risks and judgements in the financial reporting’ below. }Provided guidance to the newly appointed outsourced internal audit function in developing a risk framework to target areas for reviews.HEADING45www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 4513/03/2017 18:00:32 AUDIT COMMITTEE REPORT Significant Risks and Judgements in the Financial Reporting In relation to the 31 December 2016 Annual Financial Statements included in this report on pages 69 to 106, the Audit Committee considered the following topics: Goodwill The carrying value of goodwill remains a significant item within the Group’s balance sheet. Impairment assessments, performed annually, require judgements in relation to discount rates and future growth forecasts to generate discounted cash flows for the cash generating units. The Committee ascertains that appropriate sensitivity analysis is conducted by the external auditor on the Company’s impairment calculations. For the most recent business combination a post-acquisition review document was examined to help assess the accuracy of previous growth forecasts. After consideration, the Committee were satisfied that there was no indication of impairment. Capitalised Product Development The Group’s product development activity leads to direct costs relating to new standard products being capitalised and amortised over the useful life of the products. The carrying value of the product development costs is rising and the useful lives of these products requires significant judgement. The Committee assesses the revenue streams of the capitalised products against their carrying value. The Committee also reviews a projection of the estimated future carrying values. The Committee were satisfied with the judgements used. Deferred Tax on Unremitted Earnings The Group does not currently record deferred tax on the unremitted earnings held in Group subsidiaries. The Board recognises that where there is no intention to repatriate these earnings back to the parent company, deferred tax should not be provided. The Committee received a presentation of the Group’s tax and treasury arrangements during the year in which the unremitted earnings were assessed in detail. The Committee determined that there is no specific requirement to move earnings currently held in subsidiaries. Inventory The carrying value level of the Group’s inventory is substantial and remains an area of focus for the Committee. The high product mix is a recognised factor in the level of inventory as is the effect of certain service level agreements with customers. Exposure to the risk of obsolescence of finished goods inventory is an area of ongoing review. The Company’s peer to peer balance sheet reviews, which are reviewed by the Committee, includes testing of the provision. The Committee were satisfied with the provision. Business Combination Following the acquisition of the assets and business of EMCO High Voltage Corporation (EMCO) on 24 November 2015, the Company has completed its assessment of identifying and valuing the intangible assets; a process that includes significant judgment. The final valuation was greater than the provisional values applied in the 2015 financial statements. The Committee verified that the external auditor had independently assessed the Company’s calculations and were satisfied with the values attributed to the intangible assets. Internal Control The Board is ultimately responsible for the Group’s system of internal controls and the on-going assessment of these, further details of which are included in C.2 Risk Management and Internal Control of the Corporate Governance section on page 42. Internal Audit As a result of the Group’s increasing scale and complexity, the Board approved the introduction of an independent internal audit during the year. After reviewing management’s selection process feedback, the Committee agreed with the appointment of Deloitte LLP. A risk framework has been established, in conjunction with the Board’s on-going processes for monitoring risks, from which key areas for business focus can be identified. From this, an audit plan has been developed to carry out risk assurance work. Areas covered during 2016 included a cyber security review, assurance over procurement and business continuity and a review of contractual obligations. Themes such as behaviour, ethics and culture were incorporated into the reviews. Findings and control observations from these reviews are rated and presented to the Committee for comment or further action. } Reviewed the work scopes of the risk assurance reviews carried out by the internal audit function. } Reviewed the effectiveness of the Group’s internal controls and disclosures made in the Annual Report and Financial Statements. } Reviewed the findings of the internal audit work conducted during the year. } Reviewed analysis and evaluation reports produced by management in relation to the Group’s viability statement. } Reviewed the results of the finance functions’ peer to peer balance sheet reviews. } Reviewed the Group’s tax and treasury functions. } Considered the accounting principles to be adopted and the preparation of the 2016 accounts. The Audit Committee is satisfied that the Company has maintained appropriate risk management and internal controls throughout the year. 46 XP AR2016 - Proof 6.indd 46 13/03/2017 18:00:34 E C N A N R E V O G A number of recommendations were made by the internal auditors relating to cyber security and supply chain management which are in the process of being addressed. The Group’s Financial Controllers continue to conduct regular peer to peer balance sheet reviews, the results of which are reported to the Audit Committee, Finance Director and Chief Executive. The Audit Committee reviews and approves the scope and schedule for these reviews and maintains that this review process provides a secondary level of comfort over the financial controls. External Audit The current external auditor, PricewaterhouseCoopers LLP, was appointed in 2007. The current audit engagement partner’s term began in 2014 with a maximum term of five years. In line with best practice, as recommended by the Financial Reporting Guideline, the external audit is anticipated to be re-tendered between 2017 and 2019 at the latest. The Committee has reported to the Board that the re-appointment of PricewaterhouseCoopers LLP should be proposed at the forthcoming Annual General Meeting. The Audit Committee keeps under review the role and independence of the external auditor. A formal statement of independence is received each year together with a report on the safeguards that are in place to maintain their independence and the internal measures to ensure their objectivity. The Committee is satisfied that this independence has been maintained. The Committee has formalised its policy and approved a set of procedures in relation to the appointment of external auditors to undertake audit and non-audit work. Under this policy: } The award of audit-related services to the auditors in excess of £50,000 must first be approved by the Chairman of the Audit Committee, who in his decision to approve will take into account the aggregate of audit-related revenue already earned by the 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 £50,000, subject to compliance with the EU member state restrictions, 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. During the year, £25,000 (2015: nil) was paid to the auditor in non-audit fees for UK GAAP conversion. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 47 47 13/03/2017 18:00:37 REMUNERATION COMMITTEE REPORT THE COMMITTEE HAS MADE FURTHER PROGRESS ON ENHANCING THE ARRANGEMENTS FOR THE LONG TERM INCENTIVE PLAN IN ORDER TO CONTINUE TO INCENTIVISE AND RETAIN KEY MANAGEMENT PERSONNEL. POLLY WILLIAMS REMUNERATION COMMITTEE CHAIR As Chair of the XP Power Remuneration Committee, I am pleased to present the 2016 Remuneration Committee Report on behalf of the Board. It was pleasing to observe that the changes proposed in the 2016 remuneration policy secured strong Shareholder support at the 2016 AGM. During the year, the Committee has made further progress on enhancing the arrangements for the Director’s long term incentive plan in order to continue to incentivise and retain key management personnel and Executive Directors whilst aligning rewards with the long term nature of the Group’s design in cycles and revenue annuities. An independent benchmarking study was carried out by remuneration consultants to assist the Committee with this. As a result, and following further consideration by the Committee, the remuneration policy has been updated not only to add clarity and provide greater detail in all areas within the policy but, more notably, to include a proposal at the 2017 Annual General Meeting for a Long Term Incentive Plan (LTIP) to replace the existing Share Option Plan which are now less commonly used by public companies. The Committee believes that the new plan will enable the Company to put in place more effective and efficient long term incentives to support the objectives of the Company. If approved, these LTIP awards would be in the form of conditional share awards, nil or nominal cost options or deferred cash and would be structured to be suitable in overseas jurisdictions. Further details are in the Remuneration Policy on pages 49 to 53. In conjunction with the work on the LTIP proposal, the Committee also sanctioned the revision of certain legal aspects within the existing Share Option Plan to comply with latest legislation and the Singapore domicile of the Company. We seek your support for the amended policy and annual report on remuneration and the Committee welcomes any further comments from Shareholders with respect to our approach to remuneration. Introduction This report is on the activities of the Remuneration Committee for the period to 31 December 2016. It sets out the Remuneration Policy and remuneration details for the Executive and Non-Executive Directors of the Company. It has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The report is split into two areas: } The annual report on remuneration; and } The policy report. The policy report will be subject to a binding Shareholder vote at the 2017 Annual General Meeting and the policy will take effect from the date on which the resolution is passed. The policy report is not subject to audit. The annual report on remuneration provides details on remuneration in the period and some other information required by the Regulations. It will be subject to an advisory Shareholder vote at the 2017 Annual General Meeting. The auditors have reviewed certain parts of the Directors’ Remuneration Report and are required to report if the information is materially inconsistent with the financial statements. 48 XP AR2016 - Proof 6.indd 48 13/03/2017 18:00:41 REMUNERATION POLICY E C N A N R E V O G The information in this section of the Directors’ Remuneration Report is not subject to audit. The objectives of the remuneration policy are as follows: } To reward employees and Executives appropriately for the work they do (base salary); } To provide market competitive remuneration packages to enable retention or recruitment (base salary plus benefits); } To incentivise the employees and Executives to perform at their best consistently (bonus/long term incentive plan); } To align Shareholder and senior management’s interests (bonus in shares, long term incentive plan and shareholding guidelines); and } To retain key staff (long-term structures with delayed vesting) The Remuneration Committee will be requesting Shareholders’ approval of the following Remuneration Policy at the AGM on 19 April 2017 to cover a period of three years. The policy shall apply from the date approval is obtained. The following table provides a summary of the key components of the remuneration package for: Executive Directors Component Purpose Operation Opportunity Base salary To help recruit, retain and motivate high performing Executives. Reflects the individual experience, role and importance of the Executive Director to the business. Benefits To help recruit, retain and motivate high performing Executives. To provide market competitive benefits. Base salaries are set by the Remuneration Committee and reviewed annually and increases are effective from 1 January, although increases may be awarded at other times if the Remuneration Committee considers it appropriate. A market benchmarking exercise will be undertaken periodically as determined by the Remuneration Committee to ensure that base salary remains around the median of the market level for roles of a similar nature and to reflect the individual’s skills, experience, and performance. Benefits are set by the Remuneration Committee and reviewed annually. Benefits currently received by the Directors include: } Paid holidays } Life insurance } Private medical cover } Housing allowance Base salaries are reviewed annually. Increases will not normally exceed the range of increases awarded to other employees within the group. The Remuneration Committee may also increase a Director’s salary should there be a change in the scope of their role, the scale or complexity of the business or significant changes to market practice arise, which the Remuneration Committee believes justifies a further increase in base salary. The Company provides a range of market benchmarked benefits. The costs of these benefits may change year-on-year due to external costs. The Remuneration Committee has flexibility to provide benefits which would typically have been available to an Executive Director in an overseas jurisdiction when recruiting from outside of the UK. Applicable performance measures n/a Recovery n/a n/a n/a XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 49 49 13/03/2017 18:00:44 ComponentPurposeOperationOpportunityApplicable performance measuresRecoveryAnnual bonusesAlign interests of Executive Directors and Shareholders in the short and medium term.The annual bonus scheme participation levels (including maximum opportunities) are determined by the Remuneration Committee following the end of the year end, based on performance achieved against the performance metrics set. Awards are split equally between (i) cash and (ii) shares vesting over two years, subject to continued employment.Up to 100% of base salary.Specific targets and weightings may vary according to strategic priorities and may include: }Financial performance }Attainment of personal objectivesWeighting will focus on Group financial performance.The Remuneration Committee has the power to reduce unpaid annual bonuses and claw back bonuses already paid on a net basis in circumstances of material financial misstatement, a major environmental event, a breach of the Company’s code of ethics or a serious health and safety issue. Long term share incentive plan(LTIP)Align the interests of Executive Directors and Shareholders in the long-term.Incentivises long-term value creation.The XP Power Long Term Incentive Plan will be proposed to Shareholders at the 2017 Annual General Meeting will replace the Company’s current share option scheme for future awards to Executive Directors.LTIP awards may be made in the form of conditional share awards, nil or nominal cost options or deferred cash. The LTIP will also provide for awards to be structured as stock appreciation or phantom rights, which may be suitable for awards granted in overseas jurisdictions.Performance will typically be measured over three financial years starting with the year or date of grant, or any longer period as the Remuneration Committee may decide.50% of a vested award will be distributed at that time, with the remaining 50% distributed after a period of one year. Amounts equivalent to any dividends or Shareholder distributions made in respect of awards at vesting, in the discretion of the Remuneration Committee. The maximum award level under the LTIP is 100% of base salary or such higher amount at the Committee in its absolute discretion may determine, up to a maximum of 200% of base salary.It is the Committee’s intention to set relative TSR targets for 50% of the award and absolute EPS growth targets for the other 50% although the Committee will set appropriate performance conditions and weightings each year prior to awards being made. The Remuneration Committee has the discretion to claw back some or all of awards granted under the LTIP by reducing unvested awards or requiring the return of the net value of vested awards to the Company in circumstances of material financial misstatement, a major environmental event, a breach of the Company’s code of ethics or a serious health and safety issue.50REMUNERATION POLICYXP AR2016 - Proof 6.indd 5013/03/2017 18:00:46 ComponentPurposeOperationOpportunityApplicable performance measuresRecoveryShare option planAlign the interests of Executive Directors and Shareholders in the long-term.Incentivises long-term value creation.Prior to the proposed adoption of the XP Power Long Term Incentive Plan, market value share options were granted with 50% options vesting after three years from date of grant and 50% options vesting after four years.No further options are intended to be granted to Executive Directors following approval of the LTIP.Vesting of outstanding options is based on total Shareholder return relative to the FTSE350 Electronic and Electrical Equipment Sector. Top 20th percentile: 100% vest. Between median and top 20th percentile: vest on a straight line basis between 25% and 100%. Below median: zero vests.The Remuneration Committee has discretion to claw back unvested options or require the return of the net value of vested options in circumstances of material financial misstatement, a major environmental event or a breach of the Company’s code of ethics or a serious health and safety issue. PensionsProvide a basic pension benefit that would be expected for the position.Percentage of base salary between 2 to 3% depending on geography paid into a defined contribution scheme.2 to 3% depending on geography.n/aThere are no provisions for recovery of pension payments contributions.Shareholding (minimum)Align the interests of Executive Directors and Shareholders in the long-term.To build a minimum shareholding equivalent to two years’ salary. Directors have a period of five years from 1 April 2016 (the date of approval) to achieve this.Restricted shares awarded under the annual bonus plan can be included in this measure.n/an/an/aThe performance targets above were chosen as they are considered suitable for aligning the interests of the Executives with those of Shareholders.Use of DiscretionThe Company’s incentive plans including the annual bonus scheme, share option scheme and LTIP will be operated within the rules of the relevant scheme, together with all applicable laws and regulations. The Remuneration Committee may operate the discretion contained in the relevant plan in order to facilitate its administration and operation. Discretion includes (but is not limited to) who is invited to participate or receive awards, the size and timing of awards or payments, the setting of appropriate performance measures and targets for annual bonuses and incentive schemes from year-to-year and any adjustment of those to take account of market conditions, the annual review of performance against targets for the determination of bonuses and awards, the determination of vesting and performance periods and the treatment of leavers, and discretion when dealing with adjustments in respect of corporate events (such as changes in control, rights issues, de-mergers etc.).Non-Executive DirectorsComponentPurposeOperationOpportunityApplicable performance measuresRecoveryFeesFees are set at a level which is sufficient to attract, motivate and retain quality Non-Executive Directors.Fees are reviewed periodically. The Board (excluding the Non-Executive Directors) are responsible for setting Non-Executive Directors’ fees.Non-Executive Directors are not entitled to participate in the Group’s incentive plans.Currently up to £300,000 for all Non-Executive Directors.n/an/a51www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 5113/03/2017 18:00:46 Approach to Executive RecruitmentIn the event of the recruitment of a new Executive Director the Committee would take into consideration the structure and levels of the remuneration for existing Directors and prevailing market together with the skills and value it believed the new Director would bring to the Company. It is therefore expected that a new Director’s package would include the same elements as existing Directors and the maximum level of variable remuneration for annual bonus and LTIP would also be capped as it is for existing Executive Directors. In addition, the Committee will have discretion to make payments or awards to buy out incentive arrangements forfeited on leaving a previous employer, i.e. over and above the approach outlined in the table above and may exercise the discretion available under Listing Rule 9.4.2R if necessary to do so. In doing so, the Committee will seek, to the best possible extent, to do no more than match the fair value of the awards forfeited, taking account of the applicable performance conditions, the likelihood of those conditions being met and the proportion of the applicable vesting period remaining. Where an Executive Director appointment is an internal candidate, the Committee will honour any pre-existing remuneration obligations or outstanding variable pay arrangements that relate to the individual’s previous role.The Committee retains the discretion to offer appropriate remuneration outside the standard policy where an interim appointment is made to fill an Executive role on a short term basis or where exceptional circumstances require that the Chairman or a Non-Executive Director takes on an Executive function. Executive Directors’ ContractsThe 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 months of basic pay. Directors’ service contracts are available for inspection at the Annual General Meeting of the Company.£146,340£146,340£65,000£146,340£140,000£270,755£270,755£120,000£270,755£260,000£156,909£156,909£32,000£156,909£127,840£257,537£257,537£95,000£257,537£254,000MinimumIn line withexpectationMaximumMinimumIn line withexpectationMaximumMinimumIn line withexpectationMaximumMinimumIn line withexpectationMaximumDuncan PennyJonathan RhodesMike LaverAndy SngChief Executive Officer Finance Director Executive Vice President – AsiaPresident – Worldwide Sales and Marketing Fixed (£) Annual variable (£) LTIP100%52%23%£130,00025%34%33%£260,00033%100%52%23%£70,00025%34%33%£140,00033%100%55%20%£119,74625%34%34%£239,49132%100%63%13%£59,38224%39%32%£118,76429%52REMUNERATION POLICYXP AR2016 - Proof 6.indd 5213/03/2017 18:00:48 Non-Executive Directors’ ContractsThe Non-Executive Directors’ contracts run for an indefinite period, with the Company being able to terminate the contracts without cause giving 12 months’ notice. If the Shareholders do not re-elect a Non-Executive Director, or they are retired from office under the Articles, their appointment terminates automatically, with immediate effect and without compensation. Non-Executive Directors are not entitled to share option awards, long term incentive plans or pensions.Shareholder ConsultationThe Committee’s policy is to consult with major Shareholders in respect of significant decisions on Executive remuneration. The Company has consulted with Shareholders representing 57% of its register in respect of the new LTIP.Statement of Consideration of Employment Conditions Elsewhere in the Company Pay and conditions throughout the Group are taken into consideration when setting remuneration policy. The Committee does not consult other employees when setting Executive Directors’ remuneration.Illustration of the Application of the Remuneration PolicyThe charts above give an indication of the level of remuneration that would be received by each Executive Director in accordance with the Directors’ remuneration policy (excluding share price appreciation).The charts provide estimates of the potential future reward opportunities for each Executive Director, and the potential split between the different elements of remuneration under three different performance scenarios; “Minimum”, “In line with expectation” and “Maximum”.The “In line with expectation” scenario has been calculated based on the 2017 approved budget and threshold vesting of normal LTIP awards under the new plan.The “Maximum” scenario has been calculated assuming that the Directors achieve the maximum allowed variable bonus which is capped at 100% of their respective base salaries and maximum vesting of normal LTIP awards under the new plan. In order for all Directors to achieve the maximum bonus, profit before tax would have to reach £36 million in 2017.The fixed element of remuneration includes base salary, benefits-in-kind and pension contributions. The benefits-in-kind are measured according to their taxable value as follows:PositionNameBase salaryBenefitsPensionTotal fixed payChief ExecutiveDuncan Penny£260,000£2,955£7,800£270,755Finance DirectorJonathan Rhodes£140,000£2,178£4,200£146,378President Worldwide Sales and MarketingMike LaverUS$330,000US$16,916US$7,950US$354,866Executive Vice President, AsiaAndy SngS$225,000S$55,710S$17,167S$297,877The Company provides share options as a long term incentive to Executive Directors, some of which have not vested 100%. The share options granted in February 2016 vest 50% after three years and 50% after four years. It is not possible to predict the value of these awards as it is dependent on the share price at the time the options vest and is also contingent on meeting the performance criteria of total Shareholder return versus the FTSE350 Electronic and Electrical Equipment Sector. The table below shows the number of unvested share options and their maximum potential value after fully vesting assuming the share price was £17.36 which was the closing price on 31 December 2016:No. of unvested share optionsTotal Shareholder return above the20th percentileDuncan Penny50,000£96,750Mike Laver25,000£48,375Jonathan Rhodes20,000£38,700Andy Sng10,000£19,350HEADING53www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 5313/03/2017 18:00:50 REMUNERATION REPORT – ANNUAL REPORT Responsibilities of the Remuneration Committee 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 Shareholder value. It is the responsibility of the Committee to consider the experience and value the individual Directors contribute to the Group; measure the performance of the Executive Directors and key members of senior management, and determine their annual remuneration package. Members of the Remuneration Committee Polly Williams (Chair), Independent Non-Executive Director (appointed 1 January 2016) Peter Bucher, Independent Non-Executive Director Terry Twigger, Independent Non-Executive Director John Dyson is no longer a member of the Committee following his decision not to stand for re-election at the last Annual General Meeting. Meetings of the Remuneration Committee The Remuneration Committee met three times during 2016. All Committee members attended the meetings which took place on 18 February 2016, 31 October 2016 and 25 November 2016. Performance Evaluation of the Remuneration Committee During the year, the Remuneration Committee reviewed its performance as part of the Board’s updated evaluation process. The Committee considered it had adequate skills and experience to perform its responsibilities. Remuneration for the Executive Directors There are five main elements of the remuneration package for Executive Directors and senior management: } Basic annual salary; } Benefits-in-kind; } Pension arrangements; } Annual bonus; and } Long term share incentives. 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 an annual bonus together with the long term benefits of participation in share option schemes. The Committee makes recommendations to the Board. No Director plays a part in any discussion regarding his or her own remuneration. Basic Salary Directors’ basic salaries are reviewed by the Committee each year and when an individual changes position or responsibility. Basic salaries for all Directors were reviewed as follows and were not changed, and do not reflect the outcome of the benchmarking exercise that was conducted during the year. Executive Mike Laver Duncan Penny Jonathan Rhodes Andy Sng Base salary Date of last review Effective date of last increase US$330,000 25 November 2016 1 January 2012 £260,000 25 November 2016 1 January 2012 £140,000 25 November 2016 1 July 2014 S$225,000 25 November 2016 1 January 2008 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 and Non-Executive Directors receive certain benefits-in-kind, principally life assurance and private medical insurance. In addition, Andy Sng receives a housing allowance relating to his relocation to Shanghai where he spends approximately half his time. 54 XP AR2016 - Proof 6.indd 54 13/03/2017 18:00:50 E C N A N R E V O G Pension Arrangements In the UK the Group operates a “Stakeholder Pension Scheme” and contributes 3% of base salary into this scheme on behalf of the participants including Executive Directors. In the USA, the Group operates a defined contribution “401K Plan”. The Group matches the participants’ contribution to this plan, including Executive Directors, up to 3% of salary and bonus. Annual Bonuses The Committee establishes the profit thresholds that must be met for each financial year before a cash or share bonus is to be paid. The Committee believes that any incentive compensation awarded should be tied to the interests of the Company’s Shareholders. Account is also taken of the relative success of the different parts of the business for which the Executive Directors are responsible. Malus and clawback provisions are in place with respect to the Directors’ bonus arrangements since approval at the AGM on 1 April 2016. An amount of £192,149 (19% of Executive Directors’ total remuneration) will be awarded in bonuses to the Directors in respect of 2016. In line with the remuneration policy, 50% will be paid out and the remaining 50% will be awarded in shares vesting over two years from 31 December 2016. For Duncan Penny and Jonathan Rhodes the bonus relates to achieving growth of 11% in the Group’s adjusted profit before tax over 2015 while for Mike Laver, the bonus relates to achieving growth in the Group’s gross margin of 13% over 2015. Andy Sng’s bonus relates to the growth in the gross margin of the business in Asia only. For the Chief Executive, Finance Director and President North America bonuses for 2016 are based on adjusted profit before tax. For the General Manager, Asia, bonus is based on growth in the gross margin of the business in Asia. Long Term Share Incentives Long Term Incentive Plan The Group is proposing a Long Term Incentive Plan (LTIP) to Shareholders at the 2017 Annual General Meeting which will replace the Company’s current Share Option Plan for future awards to Executive Directors. LTIP awards may be made in the form of conditional share awards, nil or nominal cost options or deferred cash. The LTIP will also provide for awards to be structured as stock appreciation or phantom rights, which may be suitable for awards granted in overseas jurisdictions. Subject to receiving approval for the new LTIP at the 2017 AGM, the Company intends to make LTIP awards up to 100% base salary to the Executive Directors shortly following the Annual General Meeting with 50% subject to relative TSR targets and 50% subject to EPS growth targets. Share Option Plans The Group operated The XP Power Share Option Plan (the “Plan”) as approved by the Shareholders on 2 April 2012. This Plan allowed the Company to grant options up to 1,924,229 shares representing 10% of the issued share capital at the time the Plan was set up. On 23 February 2016, 418,000 share options were awarded under this Plan. Vesting of these share options are subject to the term and performance criteria shown in the remuneration policy on page 51. Following approval of the LTIP, no further options are intended to be granted to Executive Directors under this Plan. On 10 October 2016, the four year vesting term was reached for 345,000 market value options awarded under the 2012 Plan. The performance conditions associated with the vesting of these options were to measure the Total Shareholder Return (TSR) of XP Power versus that of the FTSE350 Electronic and Electrical Equipment Manufacturer’s index. The vesting criteria for TSR performance versus the FTSE350 Electronic and Electrical Equipment Manufacturer’s index were as follows: TSR Performance Top 20th percentile Median Below the median Vesting 100% vesting 25% vesting No vesting XP Power achieved 113.6% TSR over the performance period. The median Total Shareholder Return (TSR) of the companies in the FTSE 350 Electronic and Electrical Equipment Manufacturer’s index from 12 October 2012 to 12 October 2016 were as follows: 71.2% with 20 percentile at 127.9%. The Committee applied a straight line from the 20 percentile to the median and on that basis determined that 81% of the award should vest. At 31 December 2016, the total number of unvested share options in this scheme was 395,000. Their potential value assuming 100% of the awards vest using the closing share price of £17.36 on 31 December 2016 was £764,325. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 55 55 13/03/2017 18:00:50 Deferred Payment Share PlanThe Group had operated a deferred payment share plan which gave participants the opportunity to purchase shares in the Company at market value with payment deferred until the shares are sold. This arrangement strongly aligns the interest of the participant directly with those of the Shareholders with the participant exposed to any increase or decrease in the market value of the shares concerned. Shares purchased under this arrangement could not be sold for four years from the date of the award. Dividends accruing on the shares are paid to the participants.Performance Graph The following graph shows the Company’s performance compared with the performance of the FTSE 350 Electronic and Electrical Equipment Price Index, and the FTSE All Share Electronic and Electrical Equipment Price Index.The compound average growth rate total shareholder return from 1 January 2012 until 31 December 2016 was 17%.Chief Executive RemunerationThe table below sets out the details of the Director undertaking the role of Chief Executive Officer.£ ThousandsBase salaryPensionRelocation expensesBenefitsAnnual bonusTotal CEO remuneration2012254884–27420132608–3–27120142608–3–27120152608–33931020162608–371342Relocation expenses relate to Duncan Penny’s relocation from the UK to Singapore in 2012.200250300350400450500550600650700Total Return rebased to XP PowerXP PowerFTSE All Share Electronic and Electrical Equipment FTSE 350 Electronic and Electrical Equipment Jan-12Jan-13Jan-14Jan-15Jan-16Jan-1756REMUNERATION REPORT – ANNUAL REPORTXP AR2016 - Proof 6.indd 5613/03/2017 18:00:51 The table below shows the percentage change in remuneration of the Director undertaking the role of Chief Executive Officer and the Company’s employees as a whole in 2016.Percentage increase in remuneration in 2016 compared with 2015CEOChosen employee group Note 1Base salary0%3%All taxable benefits0%3%Annual bonus82%2%Total10%3%Note 1 – The chosen employee group for this comparison excludes Chinese employees where there has been significant salary inflationAll 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. The annual fee for each Non-Executive Director is set out below:Non-ExecutiveFeeDate of last reviewEffective dateof last changeJames Peters£50,00025 November 201625 July 2014Peter Bucher£40,00025 November 20161 January 2015Terry Twigger£45,00025 November 20161 March 2016Polly Williams£40,00025 November 20161 January 2016James Peters is the Chairman of the board. Terry Twigger is the Senior Independent Non-Executive Director.Total pay for manufacturing(£ millions)11%2014201520169.18.26.1Operating income(£ millions)9%20142015201628.025.624.5Total pay for sales, administration and R&D(£ millions)21%20142015201623.919.718.5Dividends(£ millions)8%20142015201612.912.011.0Total employee pay(£ millions)18%20142015201633.027.924.657www.xppower.com stock code: XPPXP Power Annual Report & Accounts for the year ended 31 December 2016GOVERNANCEXP AR2016 - Proof 6.indd 573/14/2017 7:36:43 AM REMUNERATION REPORT – ANNUAL REPORT Aggregate Directors’ Remuneration The total amounts for Directors’ remuneration were as follows: £ Basic salaries Benefits-in-kind Annual bonus Money purchase pension contributions Non-Executive Director fees Total remuneration Directors’ Remuneration for 2016 2016 758,255 46,285 192,149 26,678 186,155 2015 721,937 61,084 90,240 22,320 170,000 1,209,522 1,065,581 Name of Director £ Executive Duncan Penny Mike Laver Jonathan Rhodes Andy Sng Non-Executive James Peters Peter Bucher John Dyson (chose not to stand for re-election at last AGM) Terry Twigger Polly Williams (appointed 1 January 2016) Salary and fees Annual bonus Pension Benefits 2016 Subtotal Share options* 2016 Total 260,000 239,491 140,000 118,764 50,000 40,000 10,000 44,167 40,000 71,601 48,122 51,677 20,749 7,800 5,770 4,200 8,908 – – – – – – – – – – 2,594 12,276 2,178 29,237 1,988 – – – – 341,995 305,659 198,055 177,658 51,988 40,000 10,000 44,167 40,000 597,078 546,703 172,654 152,504 – – – – – 939,073 852,362 370,709 330,162 51,988 40,000 10,000 44,167 40,000 *The value of options vesting in 2016 has been estimated based on the three-month average share price from October 2016 to December 2016, less the amount required to be paid to acquire the shares, multiplied by the number of shares expected to be vested. Directors’ Remuneration for 2015 Name of Director £ Executive Duncan Penny Mike Laver Jonathan Rhodes Andy Sng Non-Executive James Peters Peter Bucher John Dyson (chose not to stand for re-election at last AGM) Terry Twigger Salary and fees Annual bonus Pension Benefits 2015 Subtotal Share options* 2015 Total 260,000 214,945 140,000 106,992 50,000 40,000 40,000 40,000 38,995 26,976 10,499 13,770 – – – – 7,800 3,387 4,200 6,933 – – – – 3,308 12,189 2,097 41,633 1,857 – – – 310,103 257,497 156,796 169,328 51,857 40,000 40,000 40,000 391,500 391,500 104,400 392,640 – – – – 701,603 648,997 261,196 561,968 51,857 40,000 40,000 40,000 * The value of options vesting in 2015 has been restated to reflect the actual value of the share price at the time of vesting, less the amount required to be paid to acquire the shares, multiplied by the number of shares vested. In the year under review, there were no increases to the base salaries for the Executive Directors. For all other staff (excluding Chinese manufacturing staff) the average increase was approximately 3%. 58 XP AR2016 - Proof 6.indd 58 13/03/2017 18:00:55 Directors’ Interests in Ordinary Shares of XP Power Limited Executive Duncan Penny Mike Laver (a) Andy Sng (b) Non-Executive James Peters (c) E C N A N R E V O G At 31 December 2016 At 1 January 2016 326,990 119,969 41,000 326,990 119,969 21,000 1,929,279 2,049,279 Executive Directors have a period of five years from 1 April 2016 (the date of approval) to build a minimum shareholding equivalent to two years’ salary. Restricted shares awarded under the annual bonus plan can be included in this measure. (a) Mike Laver participated in the deferred payment share scheme. As at 31 December 2016, the outstanding balance owed on the deferred payment share scheme remains at £137,056. (b) Andy Sng acquired 20,000 shares at a price of £17.00 on 20 September 2016 after exercising options. (c) James Peters sold 120,000 shares at a price of £17.00 on 26 September 2016. In addition to the Directors’ interests in the ordinary shares of the Company, the following Directors have interests in share options: Executive Duncan Penny Mike Laver Jonathan Rhodes Andy Sng Date of grant Exercise price 10 October 2012 23 February 2016 10 October 2012 23 February 2016 10 October 2012 23 February 2016 26 April 2007 10 October 2012 23 February 2016 £9.46 £15.425 £9.46 £15.425 £9.46 £15.425 £5.07 £9.46 £15.425 At 31 December 2016 Number of shares At 1 January 2016 Number of shares 60,750 50,000 60,750 25,000 16,200 20,000 – 16,200 10,000 75,000* – 75,000* – 20,000* – 30,000 20,000* – * The options granted on 10 October 2012 vested on the fourth anniversary from the date of grant. These options were subject to performance conditions which resulted in 81% vesting as described in detail on page 55 of the annual report. On 20 September 2016 Andy Sng exercised 30,000 options granted on 26 April 2007 at a price of £5.07. The share options granted on 23 February 2016 vest 50% after three years and 50% after four years and are subject to the performance criteria outlined in the remuneration policy on page 55. The highest and lowest closing mid-market prices of the shares of XP Power Limited during 2016 were £17.80 and £14.22 per share respectively. The closing mid-market price on 31 December 2016 was £17.36 per share. Relative Importance of Spend on Pay £ Millions Distribution to Shareholders Dividends1 Share buyback2 Group employment costs3 1 Refer to Financial Statements – Note 9 for more details. 2 Refer to Financial Statements – Note 24 for more details. 3 Group employment costs include Directors’ remuneration. Refer to Financial Statements – Note 5 for more details. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 59 2016 2015 12.9 0.1 33.0 12.0 0.3 27.9 Change % 8% (67%) 18% 59 13/03/2017 18:00:55 REMUNERATION REPORT – ANNUAL REPORT Advice on Remuneration During the year, h2glenfern Remuneration Advisory provided a benchmarking report to the Company. Its charges for this report were £6,250. h2glenfern Remuneration Advisory has no other connection with the Company. Statement of Voting at the Annual General Meeting The Group is committed to on-going Shareholders dialogue and takes an active interest in voting outcomes. Where there are substantial votes against resolutions in relation to Directors’ remuneration, the reasons for any such vote will be sought, and any actions in response will be detailed here. The following table sets out actual voting in respect of the approval of the 2016 remuneration policy and remuneration report: Number of votes cast for Percentage of votes cast for Number of votes cast against Percentage of votes cast against Total votes cast Number of votes withheld Approval of remuneration policy 14,083,584 Approval of remuneration report 14,092,693 99.7% 99.3% 48,774 101,004 0.3% 0.7% 14,132,358 14,193,697 64,377 2,966 Statement of Consideration of Employment Conditions Elsewhere in the Company The Remuneration Committee takes account of the pay and employment conditions of employees elsewhere in the Company when setting the remuneration of Executive Directors. However, it does not consult other employees when setting Executive Directors’ remuneration. The Remuneration Committee has employed remuneration consultants during 2016 to advise on the proposed new Long Term Incentive Scheme and to conduct a Directors’ remuneration benchmarking exercise. Statement of Shareholder Views The Company has received views from Shareholders that James Peters was not considered independent by virtue of him previously holding an executive position within the Company. James Peters is a major Shareholder and the Board considers that his interests would therefore be strongly aligned with all Shareholders. Approval This report was approved by the Board of Directors on 8 March 2017 and signed on its behalf by: Polly Williams Remuneration Committee Chair 60 XP AR2016 - Proof 6.indd 60 13/03/2017 18:00:55 OTHER GOVERNANCE AND STATUTORY DISCLOSURES E C N A N R E V O G Directors The Directors of the Company in office at the date of this report are as follows: Peter Bucher Duncan Penny Jonathan Rhodes Terry Twigger Mike Laver James Peters Andy Sng Polly Williams (appointed 1 January 2016) All Directors will retire and being eligible offer themselves for re-election at the forthcoming Annual General Meeting on 19 April 2017. Directors’ Interests in Shares or Share Options The present membership of the Board and the interests of the Directors in the shares of XP Power Limited are set out in the Directors’ Remuneration Report. Dividends Interim dividends were paid and are proposed as follows: Period First Quarter Second Quarter Third Quarter Fourth Quarter (proposed) Total Payment date 8 July 2016 13 October 2016 12 January 2017 21 April 2017 Amount 2015 Comparative 14.0 pence 15.0 pence 16.0 pence 26.0 pence 13.0 pence 14.0 pence 15.0 pence 24.0 pence 71.0 pence 66.0 pence We are proposing a final dividend of 26.0 pence per share which would be payable to members on the register on 17 March 2017 and will be paid on 21 April 2017. This would make the total dividend for the year 71.0 pence (2015: 66.0 pence) which is an increase of 8%. Audit Committee The members of the Audit Committee at the end of the financial year were as follows: Terry Twigger (Chair) Peter Bucher Polly Williams (appointed 1 January 2016) All members of the Audit Committee were Non-Executive Directors. The Audit Committee carried out its functions in accordance with Section 201B(5) of the Singapore Companies Act. In performing those functions, the Committee reviewed: } The audit plan of the Company’s independent auditor and its report on internal accounting controls arising from the statutory audit; } The assistance given by the Company’s management to the independent auditor; and } The balance sheet of the Company and the consolidated financial statements of the Group for the financial year ended 31 December 2016 before their submission to the Board of Directors, as well as the independent auditor’s report on the balance sheet of the Company and the consolidated financial statements of the Group. The Audit Committee has recommended to the Board that the independent auditor, PricewaterhouseCoopers LLP, be nominated for re-appointment at the forthcoming Annual General Meeting of the Company. Independent Auditor The independent auditor, PricewaterhouseCoopers LLP, has expressed its willingness to accept re-appointment. On behalf of the Directors James Peters Non-Executive Chairman 8 March 2017 Duncan Penny Chief Executive XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 61 61 13/03/2017 18:00:56 HEADING HEADING STATEMENT BY DIRECTORS strapline In the opinion of the Directors, (a) the balance sheet of the Company and the consolidated financial statements of the Group as set out on pages 69 to 117 are drawn up so as to give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2016 and of the results of the business, changes in equity and cash flows of the Group for the financial year then ended; and (b) at the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due. On behalf of the Directors James Peters Non-Executive Chairman 8 March 2017 Duncan Penny Chief Executive 62 XP AR2016 - Proof 6.indd 62 13/03/2017 18:00:56 INDEPENDENT AUDITOR’S REPORT STATEMENT BY DIRECTORS FINANCIAL DIVIDER STATEMENT BY DIRECTORS To the members of XP Power Limited I S L A C N A N I F Report on the Financial Statements Our Opinion In our opinion, the consolidated financial statements of XP Power Limited (the “Company”) and its subsidiary corporations (“the Group”) and the balance sheet of the Company are properly drawn up in accordance with the provisions of the Singapore Companies Act (the “Act”) and International Financial Reporting Standards (“IFRS”) as adopted by the European Union, so as to give a true and fair view of the financial position and performance of the Group and of the Company as at 31 December 2016, and of the results, changes in equity and cash flows of the Group for the financial year ended on that date. What we have audited We have audited the accompanying consolidated financial statements of the Group set out on pages 69 to 117, which comprise the consolidated balance sheet of the Group and balance sheet of the Company as at 31 December 2016, the consolidated statement of comprehensive income, statement of changes in equity and statement of cash flows of the Group for the financial year then ended, and a summary of significant accounting policies and other explanatory information. The basis for our opinion We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the What are we responsible for section of our report. We are independent of the Group in accordance with the Accounting and Corporate Regulatory Authority’s Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities (“ACRA Code”) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Singapore, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ACRA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach – overview Materiality Materiality The overall materiality which we have used to plan our work amounted to £1.3 million, which represented 5% of profit before taxation. Audit Scope We performed an audit of the complete financial information of 23 reporting units which included significant operations based in North America, Europe and Asia. This accounted for approximately 99% of Group revenues. Audit Scope We performed analytical procedures over 7 reporting units that are not considered significant components of the Group. Key Audit Matters Key Audit Matters We identified the following key audit matters: } Goodwill; } Capitalised product development; } Deferred tax on unremitted earnings; and } Business combination. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 63 63 13/03/2017 18:00:56 HEADING HEADING INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT To the members of XP Power Limited strapline How we determined materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined that the benchmark of profit before taxation is appropriate as it reflects the Group’s growth and investment plans. We believe this is a key measure used by shareholders in assessing the performance of the Group. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £125,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. How we tailored the audit scope The Group operates across North America, Europe and Asia. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the local operations by us, as the Group engagement team, or component auditors from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those local operations to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. In the current year, the Group engagement team visited the Group’s office in North America. We designed our audit of the Group by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where management made subjective judgements, for example in respect of significant accounting estimates, that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the management that represented a risk of material misstatement due to fraud. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. Having obtained sufficient appropriate audit evidence of the local operations, we performed audit procedures at the Group level over the consolidation process, goodwill, capitalised product development, taxation and the completion of the valuation of intangible assets arising from last year’s business combination. What are the key audit matters The matters that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “Key Audit Matters” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters How did our audit address these Goodwill Refer to page 46 (Report from the Chair of the Audit Committee), page 81 (Critical accounting judgements and key sources of estimation uncertainty – Impairment of Goodwill) and page 87 (Note 11 – Goodwill). The Group has goodwill of £37.7 million at 31 December 2016 contained within 3 cash-generating units (“CGUs”) defined by its geographical split – North America, Europe and Asia. We focused on this area due to the relative size of the carrying amount of goodwill, which represented 27% of total assets, and because management’s assessment of the ‘value-in-use’ of the Group’s CGUs involves significant judgements about the future results of the business and the discount rates applied to future cash flow forecasts. Key judgements about the future results of the business include: revenue and profit growth rates, expected changes to overhead costs as well as risks specific to the 3 geographical areas. We assessed the appropriateness of management’s identification of the Group’s CGUs and the process in which indicators of impairment were identified. There were no significant issues noted. We evaluated the suitability and appropriateness of the impairment model as prepared by management and noted no significant exceptions. We also focused on understanding and challenging management’s plans for future growth for each of the 3 CGUs. Forecasted growth in revenue and profits are driven by constant innovation in the development of new product families as well as the broadening of the customer base in the 3 geographical areas. We benchmarked key market-related assumptions in management’s forecasts such as revenue and profit growth rates and changes in the overhead costs with relevant economic and industry indicators and considered that such targets as set by management were achievable. We agreed with management that no indicators of impairment were noted. 64 XP AR2016 - Proof 6.indd 64 13/03/2017 18:00:57 HEADING strapline I S L A C N A N I F Key audit matters How did our audit address these Capitalised product development Refer to page 46 (Report from the Chair of the Audit Committee), page 81 (Critical accounting judgements and key sources of estimation uncertainty – Recoverability of Capitalised R&D) and page 88 (Note 12 – Intangible assets). Part of the Group’s strategy is to invest in research and development to create new products. As at 31 December 2016, the carrying value of product development costs capitalised as an intangible asset is £14.2 million of which £4.2 million was capitalised in the current financial year. We focused on the appropriateness of capitalisation of product development costs due to the relative size of the carrying amount of this intangible asset, which represented 10% of total assets, and because significant judgement is involved in determining whether the criteria to capitalise such product development costs, as set out in IAS 38, have been fulfilled. We also identified the useful lives of the capitalised product development costs as an area involving significant judgement. The carrying value of the capitalised product development costs each year is heavily dependent on the useful lives of the developed products. Management determined the useful lives of the developed products based on the expected life cycle of these products, taking into consideration expected customer demand and technological innovation. Deferred tax on unremitted earnings Refer to page 46 (Report from the Chair of the Audit Committee) and page 85 (Note 8 – Income taxes). The Group has exposure to income taxes in a number of different jurisdictions. The Group’s tax position includes judgement about past and future events and relies on estimates and assumptions. As at 31 December 2016, the Group has deferred tax assets of £0.4 million and deferred tax liabilities of £4.7 million. We focused on the potential tax exposure of £11.6 million on the unremitted earnings held in the Group’s overseas subsidiaries as the amount is significant. We assessed the appropriateness of capitalisation of product development costs by ensuring compliance with the criteria to capitalise product development costs as set out in IAS 38, and challenged management through discussions and qualitative reviews of the projects’ feasibility. We also tested the accuracy and allocation of capitalised material costs and labour costs. Management was able to support the capitalisation of product development costs. In the assessment of the useful lives of the capitalised product development costs, we performed a benchmarking exercise to compare the useful lives of the capitalised product development costs against other companies within the same industry. For selected samples of developed products, we reviewed the actual sales during the year to ensure that the capitalised development costs are supported by demand. For products in development, we noted the existence of customer demand for selected samples, by perusing sales quotations and/or correspondences between the customers and the Group. The useful lives as determined by management are in line with that of the industry and consistent with our understanding of the life cycle of the products. Through inquiry, we ascertained that management has no intention to repatriate such earnings to Singapore. We also assessed that there is no requirement for management to repatriate the earnings held with the Group’s overseas subsidiaries to the Company, as the Company is able to meet its short-term liabilities and does not have significant external debt obligations. Management has appropriately determined that a deferred tax liability does not have to be recorded in accordance with the provisions of IAS 12. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 65 65 13/03/2017 18:00:57 HEADING INDEPENDENT AUDITOR’S REPORT HEADING To the members of XP Power Limited Key audit matters How did our audit address these Business combination Refer to page 46 (Report from the Chair of the Audit Committee), page 88 (Note 12 – Intangible assets) and page 105 (Note 31 – Business combination) On 25 November 2015, the Group announced the acquisition of the assets and business of EMCO High Voltage Corporation (“EMCO”). The final purchase consideration was US$11.7 million (£7.7 million). Management assessed that the acquisition of EMCO qualifies as a business combination by applying the definition in IFRS 3. For the year ended 31 December 2015, the carrying values of the intangible assets – technology, customer relationships and customer contracts, were provisionally determined in accordance with IFRS 3. For the year ended 31 December 2016, management completed the valuation of the intangible assets within the measurement period, as defined by IFRS 3. The fair value of the intangible assets that arose from the business combination was determined to be US$2.0 million (£1.3 million) up from the provisional fair value of US$1.4 million (£0.9 million). This resulted in a corresponding decrease in goodwill arising from the acquisition by US$0.6 million (£0.4 million) to US$7.4 million (£4.9 million). This was taken up as a retrospective adjustment to the year ended 31 December 2015 in accordance with IFRS 3. We focused on the intangible assets arising from the business combination as a significant area of judgement. The valuation methodology, as well as the inputs and assumptions in the model, will affect the fair value of the intangible assets. We reviewed the appropriateness of recognition of the identified intangible assets in accordance with IAS 38. We agreed with management’s assessment that the intangible assets are separately identifiable and the Group has control over the future economic benefits flowing from the intangible assets. The valuation methodologies used for determining the fair values of the identified intangible assets were also assessed to be appropriate. We focused on understanding and challenging management’s inputs into the valuation models, which will have an impact on the fair value of the intangible assets. We have assessed the projected future revenue growth and margins based not only on the historical performance of EMCO, but also relevant economic and industry indicators and considered such projections, as set by management, to be reasonable. We agreed with management that the adjustment to the provisional value of the identified intangible assets within 1 year after the acquisition is in accordance with IFRS 3. Information other than the Financial Statements and Auditors’ Report thereon Going concern Under the UK Listing Rules (“Listing Rules”) we are required to review the Directors’ Statement, set out on page 62, in relation to going concern. We have nothing to report having performed our review. The Directors’ assessment of the prospects of the Group Under the Listing Rules we are required to review the Directors’ Statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors’ Statement in relation to the longer-term viability of the Group, set out on page 35. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to eleven further provisions of the UK Corporate Governance Code, set out in the “Accountability” section on pages 42 to 43. We have nothing to report having performed our review. 66 XP AR2016 - Proof 6.indd 66 13/03/2017 18:00:58 HEADING strapline I S L A C N A N I F Other information Management is responsible for the other information. The other information comprises the “Strategic Report” set out on pages 2 to 17, “Our Performance” section on pages 18 to 35, “Our Governance” section on pages 36 to 61 and the “Financials” section on page 118 of the Annual Report. Other information, as defined in this section, does not include matters that we are required to review and report on under the Listing Rules, as described above. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities for the financial statements and the audit What are Management and Directors responsible for Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the provisions of the Act and IFRS as adopted by the European Union, and for devising and maintaining a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorised use or disposition; and transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair income statement accounts and balance sheets and to maintain accountability of assets. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Directors are responsible for overseeing the Group’s financial reporting process. What are we responsible for Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: } Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. } Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. } Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. } Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. } Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. } Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 67 67 13/03/2017 18:00:58 HEADINGHEADING68We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.Report on other legal and regulatory requirementsIn our opinion, the accounting and other records required by the Act to be kept by the Company and by those subsidiaries incorporated in Singapore of which we are the auditors, have been properly kept in accordance with the provisions of the Act. The engagement partner on the audit resulting in this independent auditor’s report is Hans Koopmans. PricewaterhouseCoopers LLP Public Accountants and Chartered Accountants Singapore 8 March 2017INDEPENDENT AUDITOR’S REPORTTo the members of XP Power LimitedXP AR2016 - Proof 6.indd 6813/03/2017 18:00:58 69XP Power Annual Report & Accounts for the year ended 31 December 2016www.xppower.com stock code: XPPFor the financial year ended 31 December 2016FINANCIALSCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME£ MillionsNote 20162015Revenue4129.8109.7Cost of sales(67.8)(55.1)Gross profit62.054.6ExpensesDistribution and marketing(26.6)(22.0)Administrative(1.5)(1.2)Research and development7(5.9)(5.8)Operating profit28.025.6Finance charge6(0.2)(0.2)Profit before income tax27.825.4Income tax expense8(6.3)(5.5)Profit for the year21.519.9Other comprehensive income:Item that may be subsequently reclassified to profit and loss:Cash flow hedges240.2(0.5)Exchange differences on translation of foreign operations248.81.0Other comprehensive income for the year, net of tax9.00.5Total comprehensive income for the year30.520.4Profit attributable to:Equity holders of the Company2421.319.7Non-controlling interests240.20.221.519.9Total comprehensive income attributable to:Equity holders of the Company30.320.2Non-controlling interests0.20.230.520.4Earnings per share attributable to equity holders of the Company (pence per share)– Basic10112.0103.7– Diluted10111.2102.8XP AR2016 - Proof 6.indd 6913/03/2017 18:00:59 HEADING CONSOLIDATED BALANCE SHEET As at 31 December 2016 £ Millions ASSETS Current Assets Cash and cash equivalents Inventories Trade receivables Other current assets Derivative financial instruments Total current assets Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred income tax assets ESOP loan to employees Total non-current assets Total assets LIABILITIES Current liabilities Current income tax liabilities Trade and other payables Provision for deferred contingent consideration Borrowings Derivative financial instruments Total current liabilities Non-current liabilities Provision for deferred contingent consideration Borrowings Deferred income tax liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Equity attributable to equity holders of the Company Share capital Merger reserve Treasury shares Hedging reserve Translation reserve Retained earnings Non-controlling interests TOTAL EQUITY 70 Note 2016 2015 (restated) 15 16 17 18 22 11 12 13 23 26 8 19 20 21 22 20 21 23 24 24 24 24 24 24 9.2 32.2 21.5 2.4 0.4 65.7 37.7 15.3 19.1 0.4 0.7 73.2 138.9 3.3 16.1 0.5 5.5 0.4 25.8 1.5 – 4.7 6.2 32.0 106.9 27.2 0.2 (0.5) 0.3 3.5 75.4 106.1 0.8 106.9 4.9 28.7 17.5 2.4 – 53.5 35.9 12.3 16.1 0.4 0.7 65.4 118.9 1.2 14.6 – 4.0 – 19.8 1.5 4.6 3.9 10.0 29.8 89.1 27.2 0.2 (1.0) 0.1 (5.3) 67.1 88.3 0.8 89.1 XP AR2016 - Proof 6.indd 70 13/03/2017 18:00:59 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the financial year ended 31 December 2016 I S L A C N A N I F Attributable to equity holders of the Company Share capital Treasury shares Merger reserve Hedging reserve Translation reserve Retained earnings Note Total Non- controlling interests Total equity 24 24 9 15 24 24 24 9 24 27.2 – – – – – – (1.1) 0.3 (0.3) 0.1 – – – 0.2 0.6 (6.3) 59.6 80.2 0.1 80.3 – – – – – – – – – – – – – – – – (0.2) – – 0.1 (0.3) 0.1 (12.0) (12.0) – – – – – (0.2) 0.7 0.1 (0.3) 0.1 (12.2) 0.7 (0.5) 1.0 19.7 20.2 0.2 20.4 27.2 (1.0) 0.2 0.1 (5.3) 67.1 88.3 0.8 89.1 0.3 (0.1) 0.3 – – – – – – – – – – – 27.2 (0.5) 0.2 – – – – 0.2 0.3 – – – – 8.8 3.5 (0.1) – – 0.2 (0.1) 0.3 – – – 0.2 (0.1) 0.3 (12.9) (12.9) (0.2) (13.1) 21.3 30.3 0.2 30.5 75.4 106.1 0.8 106.9 £ Millions Balance at 1 January 2015 Sale of treasury shares Purchase of treasury shares Employee share option plan expenses Dividends paid Acquisition of subsidiary Total comprehensive income for the year Balance at 31 December 2015 Sale of treasury shares Purchase of treasury shares Employee share option plan expenses Dividends paid Total comprehensive income for the year Balance at 31 December 2016 XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 71 71 13/03/2017 18:00:59 HEADING CONSOLIDATED STATEMENT OF CASH FLOWS For the financial year ended 31 December 2016 £ Millions Cash flows from operating activities Profit for the year Adjustments for: – Income tax expense – Amortisation and depreciation – Finance charge – ESOP expenses – Loss/(gain) on fair valuation of derivative financial instruments – Unrealised currency translation loss Change in working capital, net of effects from acquisitions: – Inventories – Trade and other receivables – Trade and other payables – Provision for liabilities and other charges Cash generated from operations Income tax paid Net cash generated from operating activities Cash flows from investing activities Acquisition of a subsidiary, net of cash acquired Acquisition of a business, net of cash acquired Purchases and construction of property, plant and equipment Research and development expenditure capitalised Proceeds from disposal of property, plant and equipment ESOP loans repaid Net cash used in investing activities Cash flows from financing activities (Repayment of borrowings)/proceeds from borrowings Sale of treasury shares Purchase of treasury shares by ESOP Interest paid Dividend paid to equity holders of the Company Dividend paid to non-controlling interests Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of financial year Effects of currency translation on cash and cash equivalents Cash and cash equivalents at end of financial year Note 2016 21.5 6.3 4.6 0.2 0.3 0.2 5.0 (3.5) (4.0) 1.5 (0.1) 32.0 (4.1) 27.9 – – (2.6) (4.2) 0.1 – (6.7) (3.7) 0.3 (0.1) (0.2) (12.9) (0.2) (16.8) 4.4 4.3 0.5 9.2 8 7 6 8 15 31 13 12 9 24 15 2015 19.9 5.5 3.8 0.2 0.1 (0.2) 1.0 (2.8) (1.5) (0.2) (0.1) 25.7 (4.7) 21.0 (0.6) (7.7) (2.5) (2.9) – 0.2 (13.5) 8.0 0.3 (0.3) (0.1) (12.0) (0.2) (4.3) 3.2 1.3 (0.2) 4.3 72 XP AR2016 - Proof 6.indd 72 13/03/2017 18:00:59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the financial year ended 31 December 2016 I S L A C N A N I F 1 General Information XP Power Limited (the “Company”) is listed on the London Stock Exchange and incorporated and domiciled in Singapore. The address of its registered office is 401 Commonwealth Drive, Lobby B, #02-02, Haw Par Technocentre, Singapore 149598. The nature of XP Power Limited and its subsidiaries’ operations and its principal activities are set out in the Markets and Products sections of the Annual Report on pages 8 to 9. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of XP Power Limited and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (IFRS as adopted by the EU). The consolidated financial statements have been prepared on the historical cost convention except as disclosed in the accounting policies below. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of these accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which forms the basis of making the judgements about carrying amounts of assets and liabilities that are not readily apparent from other sources. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3. (a) Going concern After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements. (b) Changes in accounting policy and disclosures i. New and amended standards adopted by the Group There are no IFRS or International Financial Reporting Interpretations Committee (“IFRIC”) interpretations that are effective for the first time for the financial year beginning on 1 January 2016 that have a material impact on the Group. ii. New standards and interpretations issued not yet adopted IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018) IFRS 9 replaces most of the guidance in IFRS 39. IFRS 9 retains the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through Other Comprehensive Income (OCI) and fair value through Profit or Loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. While the Group has yet to undertake a detailed assessment, it would appear that the Group’s current hedge relationships would qualify as continuing hedges upon the adoption of IFRS 9. Accordingly, the Group does not expect a significant impact on the accounting for its hedge relationships. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 73 73 13/03/2017 18:00:59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued) (b) Changes in accounting policy and disclosures (continued) ii. New standards and interpretations issued not yet adopted (continued) IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018) IFRS 15 is the converged standard on revenue recognition. It replaces IFRS 11 Construction contracts, IFRS 18 Revenue, and related interpretations. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: } Step 1: Identify the contract(s) with a customer } Step 2: Identify the performance obligations in the contract } Step 3: Determine the transaction price } Step 4: Allocate the transaction price to the performance obligations in the contract } Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. A review of the impact of adopting this standard has been carried out and the standard is not expected to have a material impact on the Group’s reported position or performance. 2.2 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each entity in the Group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in Pounds Sterling, which is different from the Company’s functional currency. The Company’s functional currency is the United States Dollar. The financial statements are presented in Pounds Sterling, as the majority of the Company’s Shareholders are based in the UK and the Company is listed on the London Stock Exchange. It is the currency that the Directors of the Group use when controlling and monitoring the performance and financial position of the Group. (b) Transactions and balances Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Non-monetary items measured at fair value in foreign currencies are translated using exchange rates at the date when the fair values are determined. Currency translation differences on these items are included in other comprehensive income. (c) Translation of Group entities’ financial statements The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: i. assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date; ii. income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly and the average rate is not considered a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates in which case income and expenses are translated using the exchange rates at the dates of the transactions; iii. exchange differences arising, if any, are recognised in other comprehensive income and accumulated in the currency translation reserve. These currency translation differences are reclassified to profit or loss on disposal or partial disposal of the entity giving rise to such reserve; and 74 XP AR2016 - Proof 6.indd 74 13/03/2017 18:01:00 I S L A C N A N I F 2. Summary of significant accounting policies (continued) 2.2 Foreign currency translation (continued) (c) Translation of Group entities’ financial statements (continued) iv. 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 at the date of the balance sheet. 2.3 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for goods provided in the ordinary course of the Group’s business, net of discounts, Value Added Tax/Goods and Services Tax, returns and rebates, and after eliminating sales within the Group. (a) Sales of goods are recognised when a Group entity has shipped the goods to locations specified by its customers in accordance with the sales contract and the collectability of the related receivable is reasonably assured. (b) Interest income is recognised using the effective interest method. 2.4 Group accounting (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary comprises the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previously-held equity interest in the acquiree over the fair value of the identifiable net assets acquired, is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost less impairment in the separate financial statements. This cost of investment is subsequently adjusted to reflect changes in contingent consideration, if any. In the separate financial statements, cost of investment in subsidiaries also includes directly-attributable acquisition costs. (b) Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases of shares from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary, is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. When the Group ceases to have control or significant influence, any retained interest in the entity is re-measured to its fair value, with the change in carrying amount recognised in the income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to the income statement. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 75 75 13/03/2017 18:01:00 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 2. Summary of significant accounting policies (continued) 2.5 Property, plant and equipment Items of property, plant and equipment, including land and buildings, are stated at historical cost less accumulated depreciation and any recognised impairment losses. The historical cost of an item of property, plant and equipment initially recognised includes its purchase price and any cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Subsequent costs are included in the asset’s carrying amount, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Freehold land and property under development are not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight-line method to allocate their cost over their estimated useful lives as follows: Plant and equipment Motor vehicles Building improvements Buildings Leasehold land and buildings – 10 – 33% – 20 – 25% – 10 – 33% – 2 – 5% – 2 – 5% The residual values, estimated useful lives and depreciation method of property, plant and equipment are reviewed, and adjusted as appropriate, at each balance sheet date. The effects of any revision are recognised in the income statement when the changes arise. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains or losses arising on the disposal or retirement of an asset are determined as the difference between the sale proceeds less cost to sell and the carrying amount of the asset, and are recognised in the income statement. Intangible assets 2.6 (a) Goodwill The excess of the consideration transferred, the amount of non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of identifiable net assets acquired, is recorded as goodwill. Goodwill is tested annually for impairment and whenever there is an indication that the goodwill may be impaired. Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. (b) Internally generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense as incurred. An internally generated intangible asset arising from the Group’s product development is recognised only if all of the following criteria are met: } There is an ability to use or sell the asset; } Management intends to complete the asset and use or sell it; } It can be demonstrated the asset will generate probable future economic benefits; } It is technically feasible to complete the asset so that it will be available for use; } Adequate technical, financial and other resources to complete the development and to use or sell the asset are available; and } The expenditure attributable to the asset during its development can be reliably measured. 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. Amortisation commences when the product is ready and available for use. 76 XP AR2016 - Proof 6.indd 76 13/03/2017 18:01:00 I S L A C N A N I F 2. Summary of significant accounting policies (continued) Intangible assets (continued) 2.6 (c) Other intangible assets Other intangible assets that are acquired by the Group are initially recognised at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation. Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives, which vary between 2 and 5 years, of the intangible assets. Impairment of non-financial assets 2.7 Intangible assets Investments in subsidiaries Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.8 Fair value estimation of financial assets and liabilities The fair values of financial instruments traded in active markets (such as exchange-traded and over-the-counter securities and derivatives) are based on quoted market prices at the balance sheet date. The quoted market prices used for financial assets are the current bid prices; the appropriate quoted market prices used for financial liabilities are the current asking prices. The fair values of currency forwards are determined using actively quoted forward exchange rates. The fair values of current financial assets and liabilities carried at amortised cost approximate their carrying amounts. 2.9 Financial assets (a) Classification The Group classifies its financial assets depending on the nature of the asset and the purpose for which the assets were acquired. Management determines the classification of its financial assets at initial recognition. The Group’s financial assets comprise loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are presented as current assets, except for those maturing later than 12 months after the balance sheet date, which are presented as non-current assets. Loans and receivables are presented as “trade receivables”, “other current assets”, “cash and cash equivalents” and “ESOP loans to employees” in the balance sheet. (b) Recognition/derecognition Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. On disposal of a financial asset, the difference between the carrying amount and the sale proceeds is recognised in the income statement. Loans and receivables are initially recognised at fair value plus transaction costs and subsequently carried at amortised cost using the effective interest method. (c) Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 77 77 13/03/2017 18:01:00 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 2. Summary of significant accounting policies (continued) 2.9 Financial assets (continued) (c) Impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the income statement. (d) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset and there is an intention to settle on a net basis or realise the asset and the liability simultaneously. 2.10 Trade and other payables Trade payables are obligations to pay for goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are initially recognised at fair value, and subsequently carried at amortised cost using the effective interest method. 2.11 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as a finance expense. Changes in the estimated timing or amount of the expenditure or discount rate are recognised in the income statement when the changes arise. 2.12 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are presented as current liabilities unless the Group has an unconditional right to defer settlement for at least 12 months after the balance sheet date, in which case they are presented as non-current liabilities. 2.13 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessors) are charged to the income statement on a straight-line basis over the period of the lease. 2.14 Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date the contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). The Group documents at the inception of the transaction the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategies for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, on whether the derivatives designated as hedging instruments are highly effective in offsetting changes in fair value or cash flows of the hedged items. 78 XP AR2016 - Proof 6.indd 78 13/03/2017 18:01:00 I S L A C N A N I F 2. Summary of significant accounting policies (continued) 2.14 Derivative financial instruments and hedging activities (continued) The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group periodically uses foreign exchange forward contracts to hedge the foreign currency exposures. Cash flow hedge i. Currency forwards The Group has entered into currency forwards that qualify as cash flow hedges against highly probable forecasted transactions in foreign currencies. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time is recognised when the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gains and losses that were previously recognised in equity are transferred to the income statement immediately. Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of these derivative instruments are recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss. The fair values of various derivative instruments used for hedging purposes are disclosed in Note 22. Movements on the hedging reserve in other comprehensive income are shown in Note 24. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining expected life/or maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Inventories 2.15 Inventories are stated at the lower of cost and net realisable value. The cost of finished goods and work-in-progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. 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. 2.16 Current and deferred income tax 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. 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. 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. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 79 79 13/03/2017 18:01:00 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 2. Summary of significant accounting policies (continued) 2.17 Cash and cash equivalents For the purpose of presentation in the consolidated cash flow statement, cash and cash equivalents include cash on hand, deposits with financial institutions and bank overdrafts. Bank overdrafts are presented as current liabilities on the balance sheet. 2.18 Share-based payments 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. The vesting conditions are service conditions and performance conditions only. At each balance sheet date, the Group revises its estimates of the number of shares under options that are expected to become exercisable on the vesting date and recognises the impact of the revision of the estimates in the income statement, with a corresponding adjustment to the share option reserve over the remaining vesting period. 2.19 Retirement benefit costs The Group operates several defined contribution plans. Defined contribution plans are post-employment benefit plans under which the Group pays fixed contributions into separate entities on a mandatory, contracted or voluntary basis. The Group has no further payment obligations once the contributions have been paid. 2.20 Employee leave entitlements Employee entitlements to annual leave are recognised in the income statement when they accrue to employees. A provision is made for the estimated liability for leave as a result of services rendered by employees up to the balance sheet date. 2.21 Share capital and treasury shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity, net of tax, from the proceeds. When any entity within the Group purchases the Company’s ordinary shares (“treasury shares”), the consideration paid, including any directly attributable incremental cost (net of income taxes), is deducted from equity attributable to the Company’s equity holders, until they are cancelled, sold or re-issued. When treasury shares are subsequently cancelled, the cost of treasury shares are deducted against the share capital account if the shares are purchased out of capital of the Company, or against the retained earnings of the Company if the shares are purchased out of earnings of the Company. When treasury shares are subsequently sold or re-issued pursuant to the employee share option scheme, the cost of treasury shares is reversed from the treasury share account and the realised gain or loss on sale or re-issue, net of any directly attributable incremental transaction costs and related income tax, is recognised in the retained earnings of the Company. 2.22 Dividend distribution Dividend distributions to the Company’s Shareholders are recognised when the dividends are approved for payment or, in the case of interim dividends, when paid. 2.23 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Makers who are responsible for allocating resources and assessing performance of the operating segments. Segment reporting is disclosed in Note 4. 80 XP AR2016 - Proof 6.indd 80 13/03/2017 18:01:00 I S L A C N A N I F 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. (a) Recoverability of Capitalised R&D During the year £4.2 million (2015: £2.9 million) of development costs were capitalised, bringing the total amount of development cost capitalised as intangible assets as at 31 December 2016 to £14.2 million (2015: £11.0 million), net of amortisation. 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 will be removed from the balance sheet and charged to the income statement. (b) Impairment of Goodwill The Group tests annually for impairment of goodwill, 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 results and takes into account 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 2016 was £37.7 million (2015: £35.9 million) with no impairment adjustment required for 2016. Management assessed that there are no realistic foreseeable changes that will result in impairment loss on the goodwill allocated to the North America, Europe and Asia operating segments. (c) Estimation of future deferred contingent consideration payments As at the balance sheet date, the Group has recorded estimated future payments related to the acquisition of the final 16.0% of Powersolve Electronics Limited. The Group will acquire 5.9% of Powersolve Electronics Limited in early 2017 and the remaining 10.1% in early 2022. When discounted to present value, the total of these payments is estimated at £1.21 million and that amount is reflected on the balance sheet. Since the final payment will be dependent on the actual financial performance of the business, an estimate is required to approximate future business conditions. Refer to Note 20 for more details. As at the balance sheet date, the Group has recorded estimated future payment related to the acquisition of additional 30.0% of Hanpower Co., Ltd. The Group will acquire 15.0% of Hanpower Co., Ltd in early 2020 and the remaining 15.0% in early 2025. When discounted to present value, the total of these payments is estimated at £0.79 million and that amount is reflected on the balance sheet. Since the final payment will be dependent on the actual financial performance of the business, an estimate is required to approximate future business conditions. Refer to Note 20 for more details. 4. Segmental reporting Management has determined the operating segments based on the reports reviewed by the Chief Operating Decision Makers (CODM) that are used to make strategic decisions. The Chief Operating Decision Makers are the Executive Board of Directors who will review the operating results and forecasts to make decisions about resources to be allocated to the segments and assess their performance. The Executive Board of Directors considers and manages the business on a geographic basis. Management manages and monitors the business based on the three primary geographic areas: North America, Europe and Asia. All geographic locations market the same class of products to their respective customer base. The Executive Board of Directors assesses the performance of the operating segments based on net sales and operating income. Net sales for geographic segments are based on the location of the design win rather than where the end sale is made. The operating income for each segment includes net sales to third parties, related cost of sales, operating expenses directly attributable to the segment, and a portion of corporate expenses. Costs excluded from segment operating income include stock-based compensation expense, income taxes, various non-operating charges, and other separately managed general and administrative costs. Segment assets consist primarily of property, plant and equipment, goodwill, intangible assets, inventories, receivables, cash and cash equivalents, derivative financial instruments and exclude tax assets. Segment liabilities comprise trade and other current liabilities, derivative financial instruments, borrowings, deferred contingent consideration and exclude tax liabilities. Capital expenditure comprises additions to property, plant and equipment. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 81 81 13/03/2017 18:01:00 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 4. Segmental reporting (continued) The segment information provided to the CODM for the reportable segments for the year ended 31 December 2016 and prior year comparatives is as follows: £ Millions Revenue Europe North America Asia Total revenue The Group operates in the following regions and countries: £ Millions North America United Kingdom Singapore Germany Switzerland Other countries Total revenue The majority of North America’s revenue is generated from the United States of America. Reconciliation of segment results to profit for the year: £ Millions Europe North America Asia Segment results Research and development Finance charge Corporate (cost)/recovery from operating segment Profit before income tax Income tax expense Profit for the year 2016 2015 49.4 68.6 11.8 129.8 2016 68.6 25.4 10.1 11.1 3.7 10.9 45.1 55.7 8.9 109.7 2015 55.7 23.8 7.9 9.7 3.6 9.0 129.8 109.7 2016 11.6 21.6 3.5 36.7 (5.9) (0.2) (2.8) 27.8 (6.3) 21.5 2015 6.7 14.6 1.4 22.7 (5.8) (0.2) 8.7 25.4 (5.5) 19.9 82 XP AR2016 - Proof 6.indd 82 13/03/2017 18:01:00 I S L A C N A N I F 4. Segmental reporting (continued) £ Millions Other Information Capital additions Depreciation Intangible assets additions Amortisation Balance sheet Goodwill Other non-current assets Inventories Trade receivables Cash Other current assets Derivative financial instruments Year to 31 December 2016 Year to 31 December 2015 (restated)* Europe North America Asia Total Europe North America Asia Total 1.0 0.4 0.4 – 9.9 3.5 1.6 7.9 3.3 0.8 – 0.4 0.5 1.5 1.5 25.6 11.6 9.9 9.2 1.2 0.6 – 1.2 1.3 2.3 0.9 2.2 20.0 20.7 4.4 4.7 1.0 0.4 2.6 2.2 4.2 2.4 37.7 35.1 32.2 21.5 9.2 2.4 0.4 0.5 0.4 – 0.2 10.4 2.7 1.4 6.2 2.1 0.5 – 0.7 0.3 1.8 0.8 24.2 14.1 10.8 8.4 0.6 0.5 – 1.3 1.3 1.5 0.8 1.3 12.3 16.5 2.9 2.2 1.4 – 2.5 2.0 3.3 1.8 35.9 29.1 28.7 17.5 4.9 2.4 – Segment assets 27.0 58.1 53.4 138.5 23.3 58.6 36.6 118.5 Unallocated deferred income tax – – – Consolidated total assets Trade and other payables Borrowings Derivative financial instruments Deferred contingent consideration Segment liabilities Unallocated corporate liabilities Unallocated deferred and current income tax Consolidated total liabilities (2.1) – – (1.2) (3.3) – – 0.4 138.9 – – – 0.4 118.9 (10.9) (16.1) (1.8) (3.1) (5.5) – – – (0.4) (0.8) (5.5) (0.4) (2.0) (8.6) (12.1) (24.0) – – – – – (8.0) (32.0) – – (1.5) (3.3) – – (2.3) (8.0) – – (10.5) (14.6) – – – (8.0) – (1.5) (10.3) (10.5) (24.1) – – – – (0.6) (5.1) (29.8) * Following the completion of the final purchase price allocation for the EMCO acquisition in 2016, the Group made adjustments to the provisional fair value of the intangibles assets originally recorded in the prior year. Intangible assets additions, goodwill and other non-current assets have been restated to reflect the adjustments. Refer to Note 31 and Note 32 for more details. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 83 83 13/03/2017 18:01:01 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 4. Segmental reporting (continued) Analysis by class of customer The revenue by class of customer is as follows: £ Millions Technology Industrial Healthcare Total Year to 31 December 2016 Year to 31 December 2015 Europe North America 7.1 29.6 12.7 49.4 21.4 23.7 23.5 68.6 Asia Total Europe 3.6 6.5 1.7 32.1 59.8 37.9 11.8 129.8 6.7 27.1 11.3 45.1 North America 16.8 17.6 21.3 55.7 Asia 3.3 3.9 1.7 8.9 Total 26.8 48.6 34.3 109.7 There is no individual external customer that represents 7% or more of the Group’s total revenue. Non-current assets, other than deferred income tax assets, by countries: £ Millions North America United Kingdom Singapore Germany Switzerland Other countries Total non-current assets 5. Employee compensation (including Directors) £ Millions Wages and salaries Pensions Total For further information regarding Directors’ remuneration, refer to the Directors’ Remuneration Report. 6. Finance charge £ Millions Interest expense on bank loans and overdrafts Unwinding of discount on deferred consideration (Note 20) Total 2016 37.2 4.6 10.5 0.3 3.6 16.6 72.8 2016 28.2 4.8 33.0 2016 0.1 0.1 0.2 2015 38.7 3.7 3.7 0.3 3.5 15.1 65.0 2015 23.8 4.1 27.9 2015 0.1 0.1 0.2 84 XP AR2016 - Proof 6.indd 84 13/03/2017 18:01:01 I S L A C N A N I F 2016 2015 2.4 2.2 33.0 (0.1) (0.5) 62.2 (3.5) 0.3 – 0.1 1.5 0.2 4.2 1.8 2.0 27.9 – (0.2) 50.2 (3.5) 0.3 0.1 0.1 1.3 0.2 4.1 102.0 84.3 2016 8.1 (4.2) 2.0 5.9 2015 6.9 (2.9) 1.8 5.8 2016 2015 2.6 (0.1) 3.5 (0.2) 5.8 0.6 (0.1) 6.3 1.6 – 2.8 (0.2) 4.2 0.8 0.5 5.5 7. Expenses by nature £ Millions Profit for the year is after charging: Amortisation of intangibles Depreciation of property, plant and equipment Employee compensation (Note 5) Foreign exchange gain Gain on foreign exchange forward Purchases of inventories Changes in inventories Fees payable to the Group’s auditor for the audit of the Group’s accounts Fees payable to other audit firms for audit related services Tax fees payable to other firms for services provided to the Group Rent/lease expense Finance charge Other charges Total Fees payable to the Group’s auditor for non-audit services is 8.1% (2015: nil) of their total audit fees. Included in the above is net research and development expenditure as follows: £ Millions Gross research and development expenditure Development expenditure capitalised Amortisation of development expenditure capitalised Net research and development expenditure 8. Income taxes £ Millions Singapore corporation tax – current year – over–provision in prior financial year Overseas corporation tax – current year – over–provision in prior financial year Current income tax Deferred income tax – current year – (over)/under–provision in prior financial years Income tax expense Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 85 85 13/03/2017 18:01:01 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 8. Income taxes (continued) The differences between the total income tax expense shown above and the amount calculated by applying the standard rate of Singapore income tax rate to the profit before income tax are as follows: £ Millions Profit before income tax Tax on profit at standard Singapore tax rate of 17% Tax incentives Higher rates of overseas corporation tax Deduction for gain on employee share options Adjustment in respect of prior year Income tax expense 2016 27.8 4.7 (0.4) 2.4 – (0.4) 6.3 2015 25.4 4.3 (0.7) 1.7 (0.1) 0.3 5.5 Deferred tax liabilities of £11.6 million (2015: £9.7 million) have not been 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. Movement in current income tax liabilities: £ Millions At 1 January Currency translation differences Income tax paid Income tax payable – current year – prior year At 31 December 2016 (1.2) (0.4) 4.1 (6.1) 0.3 (3.3) 2015 (1.7) – 4.7 (4.4) 0.2 (1.2) There is no (2015: nil) tax (charge)/credit relating to components of other comprehensive income. 9. Dividends Amounts recognised as distributions to equity holders in the period: £ Millions Prior year third quarter dividend paid Prior year final dividend paid First quarter dividend paid Second quarter dividend paid Total * Dividends in respect of 2015 (66.0p) ^ Dividends in respect of 2016 (71.0p) 2016 Pence per share £ Millions 2015 Pence per share £ Millions 15.0* 24.0* 14.0^ 15.0^ 68.0 2.8 4.6 2.6 2.9 12.9 14.0 22.0 13.0* 14.0* 63.0 2.7 4.2 2.4 2.7 12.0 The third quarter dividend of 16.0 pence per share was paid on 12 January 2017. The proposed final dividend of 26.0 pence per share for the year ended 31 December 2016 is subject to approval by Shareholders at the Annual General Meeting scheduled for 19 April 2017 and has not been included as a liability in these financial statements. It is proposed that the final dividend be paid on 21 April 2017 to members on the register as at 17 March 2017. 86 XP AR2016 - Proof 6.indd 86 13/03/2017 18:01:01 I S L A C N A N I F 10. Earnings per share The calculations of the basic and diluted earnings per share attributable to the ordinary equity holders of the Company are based on the following data: £ Millions Earnings Earnings for the purposes of basic and diluted earnings per share (profit for the year attributable to equity holders of the Company) Earnings for 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) Weighted average number of shares for the purposes of dilutive earnings per share (thousands) Earnings per share from operations Basic Diluted Diluted adjusted* 2016 2015 21.3 21.3 19,015 147 19.7 19.7 18,997 175 19,162 19,172 112.0p 111.2p 115.3p 103.7p 102.8p 104.3p * Adjusted for one-off costs associated with acquisitions of £0.4 million (2015: £0.3 million) and intangibles amortisation of £0.4 million (2015: nil). 11. Goodwill £ Millions Cost At 1 January Provision for deferred contingent consideration (Note 20) Recognised on acquisition of subsidiaries Foreign currency translation At 31 December Accumulated impairment loss At 31 December Carrying amount At 31 December 2016 2015 (restated) 35.9 0.5 – 1.3 37.7 – 30.6 (0.2) 5.6 (0.1) 35.9 – 37.7 35.9 Goodwill arises on the consolidation of subsidiary undertakings. As at the balance sheet date, the Group has recorded estimated future payments related to the acquisition of the final 16.0% of Powersolve Electronics Limited. The Group will acquire 5.9% of Powersolve Electronics Limited in early 2017 and the remaining 10.1% in early 2022. When discounted to present value, the total of these payments is estimated at £1.21 million and that amount is reflected on the balance sheet. Since the final payment will be dependent on the actual financial performance of the business, an estimate is required to approximate future business conditions. A change in deferred consideration of £0.3 million in 2016 was due to a decrease in the forecasted earnings. As at the balance sheet date, the Group has recorded estimated future payment related to the acquisition of additional 30.0% of Hanpower Co., Ltd. The Group will acquire 15.0% of Hanpower Co., Ltd in early 2020 and the remaining 15.0% in early 2025. When discounted to present value, the total of these payments is estimated at £0.79 million and that amount is reflected on the balance sheet. Since the final payment will be dependent on the actual future financial performance of the business, an estimate is required to approximate future business conditions. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 87 87 13/03/2017 18:01:01 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 11. Goodwill (continued) For the purpose of impairment testing, goodwill has been allocated to the operating segments identified in Note 4. 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 (a rate of 5.7% was used for 2016 and for 2015, the rate was 8.0%). The Group prepares cash flow forecasts derived from the most recent financial results and takes into account industry growth forecasts for five years and estimates cash flows based on these forecasts assuming no growth after five years. Management has forecast year-on-year increases in sales and overheads averages of 5.0% and 3.0% respectively. The carrying amount of goodwill as at 31 December 2016 was £37.7 million (2015: £35.9 million) with no impairment adjustment required for 2016. For the purpose of the impairment test, the Group has adopted what it believes to be reasonable Earnings Before Interest, Tax, Depreciation, Amortisation assumptions for the period from 1 January 2017 to 31 December 2021. Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount of goodwill to exceed its recoverable amount. In accordance with IFRS 3 Business Combinations, the management has assessed the fair value of the identified intangible assets. Accordingly, goodwill recognised last year has now been adjusted to reflect the revised fair value of the intangible assets. The previously reported goodwill as at 31 December 2015 is £36.3 million. The restated goodwill as at 31 December 2015 is £35.9 million, reflecting an adjustment of (£0.4) million. Refer to Note 31 and Note 32 for more details. 12. Intangible assets £ Millions Cost At 1 January 2015 Additions Acquisition of business At 1 January 2016 Additions Foreign currency translation At 31 December 2016 Amortisation At 1 January 2015 Charge for the year At 1 January 2016 Charge for the year Foreign currency translation At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 Development costs Trade marks Technology Customer relationships (restated) Customer contracts Total (restated) 16.4 2.9 – 19.3 4.2 1.5 25.0 6.5 1.8 8.3 2.0 0.5 10.8 14.2 11.0 1.0 – – 1.0 – – 1.0 1.0 – 1.0 – – 1.0 – – – – 0.6 0.6 – 0.1 0.7 – – – 0.1 – 0.1 0.6 0.6 – – 0.6 0.6 – 0.1 0.7 – – – 0.2 – 0.2 0.5 0.6 – – 0.1 0.1 – – 0.1 – – – 0.1 – 0.1 – 0.1 17.4 2.9 1.3 21.6 4.2 1.7 27.5 7.5 1.8 9.3 2.4 0.5 12.2 15.3 12.3 The amortisation period for development costs incurred on the Group’s products varies between four and seven years according to the expected useful life of the products being developed. Amortisation commences when the product is ready and available for use. 88 XP AR2016 - Proof 6.indd 88 13/03/2017 18:01:01 I S L A C N A N I F 12. Intangible assets (continued) In accordance with IFRS 3 Business Combinations, the management has assessed the fair value of the identified intangible assets. Accordingly, provisional intangible assets recognised last year have now been adjusted to reflect their fair values. The previously reported intangible assets as at 31 December 2015 is £11.9 million. The restated intangible assets as at 31 December 2015 is £12.3 million, reflecting an adjustment of £0.4 million in customer relationships. Refer to Note 31 and Note 32 for more details. 13. Property, plant and equipment £ Millions Cost At 1 January 2015 Acquisition of subsidiary Acquisition of business Additions Disposals Transfer Foreign currency translation At 1 January 2016 Additions Disposals Transfer Foreign currency translation At 31 December 2016 Depreciation At 1 January 2015 Charge for the year Foreign currency translation At 1 January 2016 Charge for the year Disposals Foreign currency translation At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 Freehold land Leasehold land and buildings Buildings Plant and equipment Motor vehicles Building improvements Projects under development Total 0.2 0.1 0.2 – – – – 0.5 – – – 0.1 0.6 – – – – – – – – 0.6 0.5 8.6 – – – – – 0.2 8.8 0.2 – – 1.5 10.5 0.9 0.3 – 1.2 0.2 – 0.3 1.7 8.8 7.6 1.5 0.2 0.1 – – – – 1.8 – – – 0.4 2.2 0.2 – – 0.2 0.1 – 0.1 0.4 1.8 1.6 12.9 – 0.3 1.4 – 0.6 0.2 15.4 1.4 (0.3) 0.6 2.6 19.7 8.5 1.4 0.1 10.0 1.6 (0.3) 1.6 12.9 6.8 5.4 0.6 0.1 – 0.2 (0.1) – – 0.8 0.2 (0.4) – – 0.6 0.3 0.1 – 0.4 0.1 (0.3) – 0.2 0.4 0.4 2.0 – – 0.2 – – – 2.2 0.2 – – 0.3 2.7 1.5 0.2 – 1.7 0.2 – 0.2 2.1 0.6 0.5 – – – 0.7 25.8 0.4 0.6 2.5 – (0.1) (0.6) – – 0.4 0.1 0.6 29.6 2.6 – (0.7) (0.6) – – 4.9 0.1 36.4 – – – – – – – – 11.4 2.0 0.1 13.5 2.2 (0.6) 2.2 17.3 0.1 0.1 19.1 16.1 The Group has entered into agreements to lease land and buildings ranging from 36 years to 999 years. The Group has pledged all property, plant and equipment as collateral to secure banking facilities granted to the Group. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 89 89 13/03/2017 18:01:02 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 14. Subsidiaries Details of principal subsidiaries as at 31 December 2016, all of which are consolidated, are as follows: Place of incorporation/ ownership (or registration) and operation Switzerland USA UK Denmark Germany Norway France Sweden UK China Italy HK Name of Subsidiary XP Power AG XP Power LLC XP PLC XP Power ApS XP Power GmbH XP Power Norway AS XP Power SA XP Power Sweden AB Powersolve Electronics Limited* XP Power (Shanghai) Co., Limited XP Power Srl XP Power (Hong Kong) Limited XP Power Singapore Holdings Pte Limited Singapore XP Power (Vietnam) Co., Limited XP Power Singapore Manufacturing Pte Ltd Vietnam Singapore XP Power (Israel) Ltd Israel Proportion of Ownership 2016 (%) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Proportion of Ownership 2015 (%) Statutory Auditor of subsidiaries 100 Karpf Treuhand & Revisions AG 100 Exempted to be audited by local statutory law 100 PricewaterhouseCoopers LLP 100 Bierholm 100 Exempted to be audited by local statutory law 100 BDO AS 100 Deloitte 100 Rodl & Partner Nordic AB 100 PricewaterhouseCoopers LLP 100 Shanghai Jahwa CPAs 100 Exempted to be audited by local statutory law 100 PricewaterhouseCoopers Limited 100 PricewaterhouseCoopers LLP 100 PricewaterhouseCoopers (Vietnam) Limited 100 PricewaterhouseCoopers LLP 100 Ernst and Young Solutions LLP * The legal shareholding and the proportion of voting power held is 84% (2015: 84%). Refer to Note 20. 15. Cash and cash equivalents £ Millions Cash at bank and on hand Short-term bank deposits Total 2016 8.4 0.8 9.2 2015 4.3 0.6 4.9 90 XP AR2016 - Proof 6.indd 90 13/03/2017 18:01:02 I S L A C N A N I F 15. Cash and cash equivalents (continued) For the purpose of presenting the consolidated cash flow statement, the consolidated cash and cash equivalents comprise the following: £ Millions Cash at bank and on hand (as above) Less: Bank overdrafts (Note 21) Cash and cash equivalents per consolidated cash flow statement Reconciliation of changes in cash and cash equivalents to movements in net cash/(debt) £ Millions Net increase in cash and cash equivalents Repayment of borrowings/(proceeds from borrowings) Effects of currency translation Movement in net debt Net (debt)/cash at start of year Net cash/(debt) at end of year Reconciliation to free cash flow £ Millions Net cash inflow from operating activities Research and development expenditure capitalised Net interest paid Free cash flow Reconciliation of cash and cash equivalents to balance sheet £ Millions Cash and bank balances in the balance sheet Less: Bank overdraft (Note 21) Cash and cash equivalents per consolidated cash flow statement Less: Bank loan – current (Note 21) – non-current (Note 21) Net cash/(debt) at end of year 2016 9.2 – 9.2 2015 4.9 (0.6) 4.3 2016 2015 4.4 3.7 (0.7) 7.4 (3.7) 3.7 2016 27.9 (4.2) (0.2) 23.5 2016 9.2 – 9.2 (5.5) – 3.7 3.2 (8.0) (0.2) (5.0) 1.3 (3.7) 2015 21.0 (2.9) (0.1) 18.0 2015 4.9 (0.6) 4.3 (3.4) (4.6) (3.7) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 91 91 13/03/2017 18:01:02 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 15. Cash and cash equivalents (continued) Acquisition of subsidiary On 20 May 2015, the Group acquired a 51% equity interest in Hanpower Co., Ltd. The principal activity of Hanpower Co., Ltd is that of providing power supply solutions to the healthcare, industrial and technology industries in Korea. Details of the consideration paid, the assets acquired and liabilities assumed and the effects on the cash flows of the Group, at the acquisition date, are as follows: (a) Purchase consideration Cash paid Consideration payable Contingent consideration payable Total purchase consideration Consideration transferred for the subsidiary (b) Effect on cash flows of the Group Cash paid (as above) Less: cash and cash equivalents in subsidiary acquired Cash outflow on acquisition (c) Assets acquired and liabilities assumed Cash and cash equivalents Property, plant and equipment Inventories Trade and other receivables Total assets Trade and other payables Total liabilities Total net assets Less: Non-controlling interest Add: Goodwill Consideration transferred for the subsidiary Please refer to Note 31 for the effects of business combination on the cash flows of the Group. £ Millions 1.3 0.1 0.8 2.2 2.2 1.3 (0.7) 0.6 0.7 0.4 0.2 0.3 1.6 (0.2) (0.2) 1.4 (0.7) 1.5 2.2 92 XP AR2016 - Proof 6.indd 92 13/03/2017 18:01:02 16. Inventories £ Millions Goods for resale Raw materials Work-in-progress Total I S L A C N A N I F 2016 19.0 12.1 1.1 32.2 2015 18.9 9.5 0.3 28.7 The cost of inventories recognised as an expense and included in “cost of sales” amounts to £67.8 million (2015: £55.1 million). 17. Trade receivables £ Millions Trade receivables Total 2016 21.5 21.5 2015 17.5 17.5 The average credit period taken on sales of goods is 60 days (2015: 58 days). No interest is charged on the outstanding receivables balance. The carrying amounts of trade receivables approximate their fair values. 18. Other current assets £ Millions Other receivables and prepayments Total 19. Total current liabilities £ Millions Trade and other payables Current income tax liabilities Bank loans and overdrafts (Note 21) Current portion of deferred consideration (Note 20) Derivative financial instruments Total 2016 2.4 2.4 2016 16.1 3.3 5.5 0.5 0.4 25.8 2015 2.4 2.4 2015 14.6 1.2 4.0 – – 19.8 Trade creditors and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The carrying amounts of trade and other payables approximate their fair values. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 93 93 13/03/2017 18:01:02 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 20. Provision for deferred contingent consideration £ Millions At 1 January Movement in provision during the year Adjustment for unwinding of discount rate At 31 December Current portion of provision for deferred contingent consideration Non-current portion of provision for deferred contingent consideration Total 2016 1.5 0.4 0.1 2.0 0.5 1.5 2.0 2015 1.7 (0.3) 0.1 1.5 - 1.5 1.5 The Group owns 84.0% (2015: 84.0%) of the shares of Powersolve Electronics Limited (“Powersolve”) and entered into an amended agreement on 29 October 2016 to purchase the remaining 16.0% of the shares in 2017 and 2022. The Group will acquire 5.9% of Powersolve’s shares in early 2017 and the remaining 10.1% in early 2022. The Group owns 51% (2015: 51%) of the shares of Hanpower Co. Ltd (“Hanpower”) and entered into an agreement on 20 May 2015 to purchase an additional 15.0% of the shares in 2020 and another 15.0% of the shares in 2025. The commitment to purchase the remaining ownership interests has been accounted for as deferred consideration and is calculated based on the expected future payment which will be based on a predefined multiple of the earnings for 3 years. The future payment is discounted to the present value, with the discount amortised to interest expense each period as the payment draws nearer. At each reporting period, the anticipated future payment is recalculated and an adjustment made accordingly, with a corresponding adjustment to goodwill. As a result of the purchase commitment and the amount of control XP Power Limited exerts over both subsidiaries, their results are fully consolidated in the Group. Dividends are attributed to the non-controlling interests based on their respective interests in the subsidiaries. 21. Borrowings The borrowings are repayable as follows: £ Millions On demand or within one year In the second year Total The carrying amounts of the Group’s borrowings are denominated in the following currencies: December 2016 £ Millions Bank loans Total December 2015 £ Millions Bank overdrafts Bank loans Total GBP – – GBP 0.6 – 0.6 USD 5.5 5.5 USD – 8.0 8.0 The average interest rates paid were as follows: Bank overdrafts Bank loans The fair value of the Group’s bank loans and overdrafts are the same as their book value. 2016 5.5 – 5.5 2015 4.0 4.6 8.6 EUR TOTAL – – 5.5 5.5 EUR TOTAL – – – 2016 1.9% 1.6% 0.6 8.0 8.6 2015 2.1% 1.5% 94 XP AR2016 - Proof 6.indd 94 13/03/2017 18:01:02 I S L A C N A N I F 21. Borrowings (continued) The other principal features of the Group’s borrowings are as follows: (1) Bank overdrafts are repayable on demand. The bank overdrafts are secured on the assets of the Group. At 31 December 2016, the Group had an overdraft of £Nil million (2015: £0.6 million). In December 2016, the Group renewed its annual working capital facility to US$7.5 million (2015: US$12.5 million). The facility is priced at the Bank of Scotland (BOS) base rate plus a margin of 1.5%. (2) The Group has a term loan facility of US$12.0 million (£8.0 million) with BOS on 20 November 2015. The facility is repayable in equal quarterly instalments of US$1.7 million commenced in June 2016 and ending in December 2017. The term loan is priced at LIBOR plus a margin of 0.95% (2015: priced at LIBOR plus a margin of 0.95%). (3) The Group has pledged all assets as collateral to secure banking facilities granted to the Group by BOS. (4) Management assessed financial loan covenants have been complied with as at 31 December 2016. 22. Derivative financial instruments Forward foreign exchange contracts The Group utilises currency derivatives to hedge highly probable forecast transactions. The instruments purchased are denominated in the currencies of the Group’s principal markets. (a) Qualify for hedge accounting In 2016, the total notional amount of outstanding currency forward contracts that the Group has committed is £5.8 million (2015: £4.8 million). These contracts are to hedge against exchange rate movements on future sales and qualify for hedge accounting. December 2016 £ Millions Forward foreign exchange contracts Current portion Total December 2015 £ Millions Forward foreign exchange contracts Current portion Total Contract notional amount 5.8 5.8 5.8 Contract notional amount 4.8 4.8 4.8 Fair value asset 0.4 0.4 0.4 Fair value asset 0.2 0.2 0.2 (b) Do not qualify for hedge accounting Certain currency forward contracts were taken up to protect against exchange rate movements on future purchases of goods. These contracts do not qualify for hedge accounting. The total notional amount and fair value asset/(liability) of these forward contracts are as follows: December 2016 £ Millions Forward foreign exchange contracts Current portion Total Assets Liabilities Contract notional amount 0.4 0.4 0.4 Fair value asset – – – Contract notional amount 5.3 5.3 5.3 Fair value (liability) (0.4) (0.4) (0.4) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 95 95 13/03/2017 18:01:02 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 22. Derivative financial instruments (continued) December 2015 £ Millions Forward foreign exchange contracts Current portion Total 23. Deferred income taxes Assets Liabilities Contract notional amount Fair value asset – – – – – – Contract notional amount 6.5 6.5 6.5 Fair value (liability) (0.2) (0.2) (0.2) The following are the major deferred tax assets and (liabilities) recognised by the Group and movements thereon during the current and prior reporting period. Accelerated tax depreciation Goodwill amortisation Share based payment Capitalised development costs Other temporary differences (0.4) (0.3) (0.7) 0.1 (0.1) (0.7) (0.9) (0.4) (1.3) – (0.2) (1.5) 0.3 0.1 0.4 – – 0.4 (2.1) (0.8) (2.9) (0.6) (0.2) (3.7) 0.9 0.1 1.0 – 0.2 1.2 Total (2.2) (1.3) (3.5) (0.5) (0.3) (4.3) £ Millions At 1 January 2015 Charge to income statement At 1 January 2016 Charge to income statement Foreign currency translation At 31 December 2016 £ Millions Deferred tax assets – To be recovered after more than 12 months Deferred tax liabilities – To be settled after more than 12 months Deferred tax liabilities (net) 2016 2015 0.4 0.4 (4.7) (4.7) (4.3) 0.4 0.4 (3.9) (3.9) (3.5) 96 XP AR2016 - Proof 6.indd 96 13/03/2017 18:01:03 I S L A C N A N I F 24. Share capital and reserves Called up share capital £ Millions Allotted and fully paid 19,242,296 ordinary shares (2015: 19,242,296) 2016 27.2 2015 27.2 As at 31 December 2016, the Group’s Employee Share Ownership Plan (ESOP) held 193,720 (2015: 235,870) shares carrying a value of £1,211,696 (2015: £1,399,433) owned by the Trust. Merger reserve £ Millions Balance at 31 December Treasury shares £ Millions Balance at 1 January Sale of treasury shares Purchase of treasury shares Employee share option plan expenses Balance at 31 December Hedging reserve £ Millions Balance at 1 January Fair value gain/(loss) Balance at 31 December 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 Dividend paid Profit for the year Loss on treasury shares Balance at 31 December 2016 0.2 2015 0.2 2016 2015 (1.0) 0.3 (0.1) 0.3 (0.5) 2016 0.1 0.2 0.3 2016 (5.3) 8.8 3.5 2016 67.1 (12.9) 21.3 (0.1) 75.4 (1.1) 0.3 (0.3) 0.1 (1.0) 2015 0.6 (0.5) 0.1 2015 (6.3) 1.0 (5.3) 2015 59.6 (12.0) 19.7 (0.2) 67.1 Non-controlling interests The non-controlling Shareholders are entitled to their share of any dividend declared. £0.2 million was paid to Powersolve and Hanpower non-controlling Shareholders in 2016. The balance payable for 2016 was £0.1 million (2015: £0.1 million). XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 97 97 13/03/2017 18:01:03 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 25. Operating leases and other commitments At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under operating leases which fall due as follows: £ Millions Within one year In the second to fifth years inclusive After five years Total 2016 2015 1.6 3.7 0.5 5.8 1.3 2.5 0.7 4.5 2015 0.7 0.7 Operating lease payments represent rentals payable by the Group for certain of its office properties and warehouses. 26. ESOP loan to employees £ Millions ESOP loan to employees Total 2016 0.7 0.7 The Group offers interest free loans to employees to purchase company shares under a deferred payment scheme managed through the XP Employees’ Share Ownership Plan Trust (ESOP). Under this scheme, payment is deferred until the shares are sold. The shares cannot be sold until four years from the date of acquisition. However, the loan becomes interest bearing after ten years. The Group does not classify a portion of this loan under current assets as the Company cannot predict when the employees will repay their loans. 27. Pensions The total pensions cost recognised is £4.8 million (2015: £4.1 million) for the Group. In the USA, the Group operates a defined contribution “401K Plan”. The Group must contribute an amount matching the employees’ contribution of up to 3% of the employees’ total earnings. The total cost charged to the income statement of £2.5 million (2015: £1.8 million) represents the Group’s “matching” contribution. In the United Kingdom and Europe, the Group operates defined contribution pension schemes for its employees with contributions amounting to £1.3 million (2015: £1.2 million). In Asia, the Group contributes to the defined contribution plans regulated and managed by the governments of the countries in which the Group operates. The Group’s contribution to the defined contribution plans is charged to the income statement in the period to which the contributions relate. The total cost charged to the income statement was £1.0 million (2015: £1.1 million). 28. Related party transactions 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. As at 31 December 2016, the Company’s Employee Share Ownership Plan has provided interest-free loans totalling £137,056 (2015: £137,056) to 1 Director (2015: 1 Director) for the deferred payment share scheme. The detailed information is provided for in the Directors’ Remuneration Report on pages 54 to 60. The remuneration of the Directors 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 Directors’ Remuneration Report on pages 54 to 60. Short-term employee benefits Post-employment benefits Total Directors’ remuneration 2016 £ 2015 £ 1,182,844 1,043,261 26,678 22,320 1,209,522 1,065,581 98 XP AR2016 - Proof 6.indd 98 13/03/2017 18:01:03 I S L A C N A N I F 29. Share-based payments Options have been granted under the Company’s Approved Share Option Schemes. The number of shares outstanding, subscription prices and exercise periods are as follows: Number of shares Exercise Price Grant Date Expiry Date 17,250 275,400 395,000 687,650 * Approved option schemes, vesting in four equal annual instalments from the exercisable date. £5.073 £9.46 26 April 2007* 26 April 2017 10 October 2012* 10 October 2022 £15.425 23 February 2016* 23 February 2026 £ Millions 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 2016 2015 Number of share options Weighted average exercise price (pence) 408,850 418,000 (88,550) (50,650) 687,650 292,650 877 1,543 1,101 535 1,278 920 Number of share options 431,750 – – (22,900) 408,850 63,850 Weighted average exercise price (pence) 852 – – 419 877 502 The weighted average share price at the date of exercise for the share options exercised during the period was £16.83 (2015: £16.17). The options outstanding at 31 December 2016 had a weighted average exercise price of £12.78 (2015: £8.77), and a weighted average remaining contractual life of 7.6 years. For options granted in 2016, the Group has taken a charge of £0.2 million (2015: £nil million). The fair value of options was determined using the Black Scholes Model with a share price of £15.425 and a weighted average exercise price of £15.425, standard deviation of expected share returns of 0.0292, and an annual risk free interest rate of 0.28%. For options granted in 2012, which vested in the current financial year, the Group has taken a charge of £0.1 million (2015: £0.1 million). The fair value of options was determined using the Black Scholes Model with a share price of £10.09 and a weighted average exercise price of £9.46, standard deviation of expected share returns of 0.0171, and an annual risk free interest rate of 0.33%. The volatility measured as the standard deviation of expected share price returns was based on statistical analysis of the Company’s share price over the last year. 30. Financial risk management The Group’s activities expose it to capital risk, currency risk (including both transactional and translational currency risk), interest rate risk, credit risk and liquidity risk. The Group seeks to minimise adverse effects from the unpredictability of financial markets on the Group’s financial performance. (a) Capital risk The Group manages its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity. The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 21, cash and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in Note 24. The Board reviews the capital structure of the business and considers the cost of capital and risks associated with each class of capital. The Group aims to balance its overall capital structure through the payment of dividends, new share issues and share buyback as well as the issue of new debt or the redemption of existing debt. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 99 99 13/03/2017 18:01:03 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 30. Financial risk management (continued) (b) Currency risk The Group operates in North America, Europe and Asia and its activities expose it to transactional risks resulting from changes in foreign currency exchange rates. The Group monitors and manages these transactional foreign exchange risks relating to the operations of the Group through internal reports analysing major currency exposures. Where possible, the Group seeks to offset exposures by matching monetary asset and liability exposures in like currencies against each other, often using its bank facilities to square off or reduce exposures. To manage the currency risk, the Group manages the overall currency exposure mainly through currency forwards. The Group’s risk management policy is to hedge a portion of highly probable forecast purchase transactions by our customers. In addition the Group is exposed to translation risk when the results of its various operations are translated from their local functional currencies to Sterling, the Group’s reporting currency. In particular a significant proportion of the Group’s revenues and earnings are derived in US Dollars. The Group is therefore exposed to risk when these US Dollar revenue streams are translated into Sterling for Group reporting purposes. The Group regards this as a fundamental consequence of operating in markets which are dominated by US Dollar transactions. The Group does not hedge this translational risk as there is no underlying mismatch of foreign currencies as the translation is merely performed for reporting the Group’s results in Sterling. The Group’s transactional currency exposure based on the information provided to key management is as follows: £ Millions At 31 December 2016 Financial assets Cash and cash equivalents Trade receivables Other current assets ESOP loan to employees Sub-total Financial liabilities Borrowings Trade and other payables Other financial liabilities Sub-total Net financial assets Add: Firm commitments and highly probable forecast transactions in foreign currency Currency forwards Currency profile excluding non- financial assets and liabilities Less: Financial assets/(liabilities) denominated in the respective entities’ functional currencies Currency exposure of financial assets/(liabilities) GBP EUR USD Others TOTAL 1.1 1.8 0.9 0.7 4.5 – (1.3) (1.2) (2.5) 2.0 – 5.3 7.3 1.8 5.5 0.5 2.0 – – 2.5 – (0.6) – (0.6) 1.9 8.7 (6.2) 4.4 1.7 2.7 5.6 17.2 1.3 – 24.1 (5.5) (13.7) – (19.2) 4.9 – – 4.9 (0.5) 5.4 2.0 0.5 0.2 – 2.7 – (0.5) (0.8) (1.3) 1.4 – – 1.4 1.9 (0.5) 9.2 21.5 2.4 0.7 33.8 (5.5) (16.1) (2.0) (23.6) 10.2 8.7 (0.9) 18.0 4.9 13.1 100 XP AR2016 - Proof 6.indd 100 13/03/2017 18:01:03 I S L A C N A N I F 30. Financial risk management (continued) b) Currency risk (continued) £ Millions At 31 December 2015 Financial assets Cash and cash equivalents Trade receivables Other current assets ESOP loan to employees Sub-total Financial liabilities Borrowings Trade and other payables Other financial liabilities Sub-total Net financial assets Add: Firm commitments and highly probable forecast transactions in foreign currency Currency forwards Currency profile excluding non- financial assets and liabilities Less: Financial assets/(liabilities) denominated in the respective entities’ functional currencies Currency exposure of financial assets GBP EUR USD Others TOTAL 0.8 1.8 0.8 0.7 4.1 (0.6) (1.0) (1.5) (3.1) 1.0 – 5.6 6.6 0.4 6.2 0.7 1.6 – – 2.3 – (0.5) – (0.5) 1.8 7.5 (5.7) 3.6 1.3 2.3 1.9 13.8 1.3 – 17.0 (8.0) (12.7) – (20.7) (3.7) – – (3.7) (7.4) 3.7 1.5 0.3 0.3 – 2.1 – (0.4) – (0.4) 1.7 – 1.7 1.1 0.6 4.9 17.5 2.4 0.7 25.5 (8.6) (14.6) (1.5) (24.7) 0.8 7.5 (0.1) 8.2 (4.6) 12.8 If the US Dollar and Euro change against Sterling by 10% and 10% respectively (2015: US Dollar 7%, Euro 11%) with all other variables, including tax rates, being held constant, the effects arising from the net financial asset/(liability) position will be as follows: £ Millions Group EUR against GBP – strengthened – weakened USD against GBP – strengthened – weakened 2016 Profit after tax 2015 Profit after tax 0.2 (0.2) 0.4 (0.4) 0.2 (0.2) 0.2 (0.2) The impact of the currency risk on the other comprehensive income is not significant. (c) Interest rate risk The Group’s borrowings are at variable interest rates and are denominated in a number of currencies including Euros, Sterling, Swiss Francs and US Dollars. If the average interest rates on these borrowings increased/decreased by 0.5% (2015: 0.5%) with all other variables, including tax rates, being held constant, the profit after tax will be lower/higher by £30,000 (2015: £28,000) as a result of higher/lower interest expense on these borrowings. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 101 101 13/03/2017 18:01:03 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 30. Financial risk management (continued) (d) Credit risk Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in a financial loss to the Group. For trade receivables the Group adopts a policy of only dealing with customers of appropriate credit history or rating. For other financial assets, the Group adopts the policy of only dealing with high credit quality counterparties. The Group’s business is highly fragmented, reducing the credit exposure to any one customer. At the balance sheet date no individual trade receivable represented more than 7% (2015: 7%) of the total trade receivables balance. The credit risk for trade receivables, which are all with non-related parties, by geographic area is as follows: £ Millions By geographical areas Europe North America Asia The age analysis of trade receivables past due and/or impaired is as follows: £ Millions Past due 0–2 months Past due 3–4 months Past due over 4 months 2016 2015 7.9 9.2 4.4 21.5 6.2 8.4 2.9 17.5 2016 2015 5.7 0.5 0.3 6.5 4.4 0.3 0.5 5.2 The carrying amount of trade receivables individually determined to be impaired and the movement in the related allowance for impairment are as follows: £ Millions Gross amount Less: Allowance for impairment Beginning of financial year Allowance made Allowance utilised Foreign currency translation End of the financial year 2016 0.7 (0.4) 0.3 (0.3) (0.1) 0.1 (0.1) (0.4) 2015 0.4 (0.3) 0.1 (0.3) – – – (0.3) 102 XP AR2016 - Proof 6.indd 102 13/03/2017 18:01:04 I S L A C N A N I F 30. Financial risk management (continued) (e) Liquidity risk The table below analyses the maturity profile of the Group’s non-derivative financial liabilities at the balance sheet date based on contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant. £ Millions Group At 31 December 2016 Trade and other payables Provision for deferred contingent consideration Derivative financial instruments Borrowings Total £ Millions Group At 31 December 2015 Trade and other payables Provision for deferred contingent consideration Borrowings Total Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 Years 16.0 – 0.4 5.5 21.9 0.1 0.5 – – 0.6 – 1.2 – – 1.2 – 0.3 – – 0.3 Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 Years 14.6 – 4.0 18.6 – 1.5 4.6 6.1 – – – – – – – – Total 16.1 2.0 0.4 5.5 24.0 Total 14.6 1.5 8.6 24.7 The Group manages the liquidity risk by maintaining sufficient cash and bank facilities to enable it to meet its normal operating commitments. (f) Fair value measurements The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: (i) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (ii) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (iii) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The following table presents the assets and liabilities measured at fair value at 31 December 2016. 2016 £ Millions Assets Derivative financial instruments Liabilities Derivative financial instruments Level 1 Level 2 Level 3 Total – – 0.4 (0.4) – – 0.4 (0.4) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 103 103 13/03/2017 18:01:04 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 30. Financial risk management (continued) (f) Fair value measurements (continued) 2015 £ Millions Assets Derivative financial instruments Liabilities Derivative financial instruments * Balances are less than £100,000. Level 1 Level 2 Level 3 Total – – * – – – – – The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. These derivative financial instruments are included in Level 2. (g) Offsetting financial assets and financial liabilities (i) Financial assets Related amounts set off in the balance sheet Related amounts not set off in the balance sheet Gross amounts- financial assets Gross amounts- financial liabilities Net amounts- financial assets presented in the balance sheet Financial assets/ liabilities Financial collateral received Net amount – – 0.2 0.2 – – (0.2) (0.2) – – – – – – – – – – – – – – – Related amounts set off in the balance sheet Related amounts not set off in the balance sheet Gross amounts- financial liabilities Gross amounts- financial assets Net amounts- financial assets presented in the balance sheet Financial assets/ liabilities Financial collateral received Net amount – – (0.2) (0.2) – – 0.2 0.2 – – – – – – – – – – – – – – – – £ Millions At 31 December 2016 Derivative financial assets At 31 December 2015 Derivative financial assets (ii) Financial liabilities £ Millions At 31 December 2016 Derivative financial liabilities At 31 December 2015 Derivative financial liabilities 104 XP AR2016 - Proof 6.indd 104 13/03/2017 18:01:04 I S L A C N A N I F 31. Business combination On 24 November 2015, the Group acquired the assets and business of EMCO High Voltage Corporation (now known as XP-EMCO (“EMCO”)). The principal activity of XP-EMCO is that of a high voltage power supply designer and manufacturer in North America. Following the completion of the final purchase price allocation in 2016, the Group made adjustments to the provisional fair value originally recorded in the prior year. Refer to Note 32 for more details. Details of the consideration paid, the assets acquired and liabilities assumed, the non-controlling interest recognised and the effects on the cash flows of the Group, at the acquisition date, are as follows: (a) Purchase consideration Cash paid Total purchase consideration Consideration transferred for the business (b) Effect on cash flows of the Group Cash paid (as above) Less: cash and cash equivalents in subsidiary acquired Cash outflow on acquisition (c) Identifiable assets acquired and liabilities assumed £ Millions Property, plant and equipment (Note 13) Technology, Customers’ Relationships and Contracts (included in intangibles – Note 12) Inventories Trade receivables Total assets Trade and other payables Total liabilities Total identifiable net assets Add: Goodwill (Note 11) Consideration transferred for the business (d) Acquisition-related costs £ Millions 7.7 7.7 7.7 7.7 – 7.7 Fair values recognised on acquisition (provisional) 2015 Adjustments during window period 2016 Fair value recognised on acquisition (final) 2016 0.6 0.9 0.5 0.5 2.5 (0.1) (0.1) 2.4 5.3 7.7 – 0.4 – – 0.4 – – 0.4 (0.4) – 0.6 1.3 0.5 0.5 2.9 (0.1) (0.1) 2.8 4.9 7.7 Acquisition-related costs of £268,000 are included in “administrative expenses” in the consolidated statement of comprehensive income and in operating cash flows in the consolidated statement of cash flows for the year ended 31 December 2015. (e) Acquired receivables The fair value of trade receivables is £0.5 million. The gross contractual amount for trade receivables due is £0.5 million, of which none is uncollectible. (f) Provisional fair values The fair value of the acquired identifiable intangible assets of £0.9 million (brand, technology, customers’ relationships and contracts) was adjusted to £1.3 million upon the final completion of the valuation exercise. These have been recorded with effect from the date of acquisition by revising the reported balance sheet as at 31 December 2015. There is no impact on the income statement for the year ended 31 December 2015 due to the above fair value adjustment. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 105 105 13/03/2017 18:01:04 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HEADING For the financial year ended 31 December 2016 31. Business combination (continued) (g) Goodwill The goodwill of £4.9 million arising from the acquisition is attributable to the distribution network in America and the synergies expected to arise from the economies of scale in combining the operations of the Group with those of EMCO. (h) Revenue and profit contribution The acquired business contributed revenue of £0.5 million and net profit of £0.1 million to the Group from the period from 24 November 2015 to 31 December 2015. Had EMCO been consolidated from 1 January 2015, consolidated revenue and consolidated profit before tax for the year ended 31 December 2015 would have been £115.2 million and £26.1 million respectively. 32. Prior year comparatives As disclosed in Note 31, following the completion of the final purchase price allocation in 2016, the Group made adjustments to the provisional fair value of the intangible assets originally recorded in the prior year. The effects of the adjustment on the prior year’s consolidated balance sheet are as follows: £ Millions Consolidated Balance Sheet Goodwill Intangible assets As previously reported Adjustments As restated 36.3 11.9 (0.4) 0.4 35.9 12.3 Related notes for the consolidated balance sheet which have been restated are presented in Note 4, Note 11 and Note 12. The restatement has no impact on the net assets, profit after tax and total comprehensive income of the Group for the current and previous financial years. 33. Other information These financial statements were authorised for issue in accordance with a resolution of the Board of Directors of XP Power Limited on 8 March 2017. 106 XP AR2016 - Proof 6.indd 106 13/03/2017 18:01:04 COMPANY BALANCE SHEET As at 31 December 2016 I S L A C N A N I F £’000 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other current assets Derivative financial instruments Inventories Total current assets Non–current assets Investments in subsidiaries Property, plant and equipment Intangible assets Long term receivable Total non–current assets Total assets LIABILITIES Current liabilities Trade and other payables Current income tax liabilities Derivative financial instruments Bank overdraft Total current liabilities Non–current liabilities Deferred income tax liabilities Total non–current liabilities Total liabilities NET ASSETS EQUITY Share capital Hedging reserve Translation reserve Retained earnings TOTAL EQUITY Note 2016 2015 4 5 6 7 8 3 9 10 13 12 14 7 15 11 16 16 16 16 3,211 20,885 549 362 10,564 35,571 1,026 20,192 707 20 7,743 29,688 29,786 29,786 2,072 5,946 7,273 45,077 80,648 19,357 3,060 414 – 1,778 3,294 5,999 40,857 70,545 17,336 1,857 – 576 22,831 19,769 1,136 1,136 23,967 56,681 29,786 332 5,442 21,121 56,681 666 666 20,435 50,110 29,786 157 1,513 18,654 50,110 XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 107 107 13/03/2017 18:01:04 HEADING NOTES TO THE COMPANY BALANCE SHEET For the financial year ended 31 December 2016 1. General information XP Power Limited (the “Company”) is listed on the London Stock Exchange and incorporated and domiciled in Singapore. The address of its registered office is 401 Commonwealth Drive, Lobby B, #02-02, Haw Par Technocentre, Singapore 149598. The nature of the Company’s operations and its principal activities are manufacturing, providing power supply solutions and acting as an investment holding company. 2. Basis of accounting policies The principal accounting policies are set out in Note 2 under the Group Consolidated Financial Statements. 3. Investment in subsidiaries £’000 Cost at carrying value At 1 January At 31 December Name of Subsidiary XP Power Plc XP Power Singapore Holdings Pte Limited Place of incorporation/ ownership (or registration) and operation UK Singapore Proportion of Ownership 2016 (%) Proportion of Ownership 2015 (%) 100 100 100 100 4. Cash and cash equivalents £’000 Cash at bank Total The Company’s cash at bank is denominated in the following currencies: 2016 2015 29,786 29,786 29,786 29,786 Statutory Auditor of subsidiaries PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP 2016 3,211 3,211 2015 1,026 1,026 £’000 GBP USD EUR SGD JPY SEK DKK NOK TOTAL At 31 December 2016 Cash at bank 138 2,753 122 115 3 – – 80 3,211 £’ 000 GBP USD EUR SGD JPY SEK DKK NOK TOTAL At 31 December 2015 Cash at bank 35 501 227 172 3 7 31 50 1,026 The Group has pledged all assets as collateral to secure banking facilities granted to the Group. 108 XP AR2016 - Proof 6.indd 108 13/03/2017 18:01:04 I S L A C N A N I F 5. Trade and other receivables £’000 Trade receivables Trade receivables from Group companies Total 2016 3,996 16,889 20,885 2015 2,736 17,456 20,192 The average credit period taken on sales of goods is 67 days (2015: 64 days). No interest is charged on the outstanding receivables balance. The Directors consider that the carrying amount of trade and other receivables approximates their fair value. The Group has pledged all assets as collateral to secure banking facilities granted to the Group. 6. Other current assets £’000 Deposit Other receivables and prepayments Total 2016 68 481 549 2015 59 648 707 The Group has pledged all assets as collateral to secure banking facilities granted to the Group. 7. Derivative financial instruments The total notional amount of outstanding currency forward contracts that the Company has committed is £5.8 million (2015: £4.8 million). These contracts are to hedge against exchange movements on future sales and qualify for hedge accounting. As at 31 December 2016, the fair value asset of the currency forward contracts recognised under a hedging reserve is £332,000 (2015: £157,000) (Note 16). December 2016 £’000 Current portion Total December 2015 £’000 Current portion Total Contract notional amount 5,818 5,818 Contract notional amount 4,814 4,814 Fair value asset 332 332 Fair value asset 157 157 Certain currency forward contracts were taken up to protect against exchange movements on future sales. These contracts did not qualify for hedge accounting. December 2016 £ ‘000 Current portion Total Assets Liabilities Contract notional amount 422 422 Fair Value asset 30 30 Contract notional amount 5,300 5,300 Fair Value (liability) (414) (414) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 109 109 13/03/2017 18:01:05 HEADING NOTES TO THE COMPANY BALANCE SHEET For the financial year ended 31 December 2016 7. Derivative financial instruments (continued) December 2015 £’000 Current portion Total 8. Inventories £’000 Goods for resale Assets Liabilities Contract notional amount – – Fair Value asset – – Contract notional amount 6,548 6,548 Fair Value (liability) (137) (137) 2016 10,564 2015 7,743 The Group has pledged all assets as collateral to secure banking facilities granted to the Group. 9. Property, plant and equipment £’000 Cost Freehold land Building Plant and equipment Motor vehicles Building improvements At 1 January 2015 188 1,502 1,316 Additions Foreign currency translation – 7 37 19 26 62 At 1 January 2016 195 1,558 1,404 Additions Disposals Foreign currency translation At 31 December 2016 Depreciation At 1 January 2015 Additions Foreign currency translation At 1 January 2016 Additions Disposals Foreign currency translation At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 – – 41 236 – – – – – – – – – – 331 1,889 277 46 11 334 51 – 77 462 236 195 1,427 1,224 52 (215) 281 1,522 884 125 36 1,045 127 (215) 212 1,169 353 359 10 – – 10 40 – 7 57 10 – – 10 1 – 2 13 44 – The Group has pledged all assets as collateral to secure banking facilities granted to the Group. 352 – 12 364 12 – 78 454 338 13 13 364 1 – 77 442 12 – Total 3,368 63 100 3,531 104 (215) 738 4,158 1,509 184 60 1,753 180 (215) 368 2,086 2,072 1,778 110 XP AR2016 - Proof 6.indd 110 13/03/2017 18:01:05 10. Intangible assets £’000 Cost Balance at 1 January Additions Foreign currency translation Balance at 31 December Amortisation Balance at 1 January Additions Foreign currency translation Balance at 31 December Carrying amount Balance at 31 December I S L A C N A N I F 2016 2015 5,059 2,697 1,383 9,139 1,765 930 498 3,193 3,605 1,454 – 5,059 1,009 756 – 1,765 5,946 3,294 Intangible assets arise from development costs incurred on the Group’s products. The amortisation period for development costs incurred varies between four and seven years according to the expected useful life of the products being developed. Amortisation commences when the products are ready for sale. 11. Deferred income taxes The following are the major deferred tax liabilities recognised by the Company and movements thereon during the current and prior reporting period. £’000 At 1 January 2015 Charge to income statement Exchange difference At 1 January 2016 Charge to income statement Exchange difference At 31 December 2016 £’000 Deferred tax liabilities – to be settled after more than 12 months Total Accelerated tax depreciation Capitalised development costs Other temporary differences (50) (23) (1) (74) 14 (15) (75) (267) (270) (13) (550) (296) (150) (996) (15) (26) (1) (42) (13) (10) (65) 2016 (1,136) (1,136) Total (332) (319) (15) (666) (295) (175) (1,136) 2015 (666) (666) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 111 111 13/03/2017 18:01:05 HEADING NOTES TO THE COMPANY BALANCE SHEET For the financial year ended 31 December 2016 12. Trade and other payables £’000 Trade payables and other creditors Amount payable to Group companies Total 2016 4,843 14,514 19,357 2015 4,940 12,396 17,336 Trade payables and other creditors 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 Company borrows from subsidiaries at an interest rate of 1.5% - 2.0% above LIBOR. The borrowing is repayable upon demand. 13. Long term receivable £’000 Loans to related parties Total Loan to XP Power Vietnam bears interest at LIBOR plus 1.5% - 2.0% per annum. Loan to XP Power (Israel) Ltd bears interest at LIBOR plus 1.5% per annum. 14. Current income tax liabilities £’000 At 1 January Currency translation differences Income tax paid Current year tax expense Over-provision in prior financial year At 31 December 15. Bank overdraft £’000 Bank overdraft Total 2016 7,273 7,273 2015 5,999 5,999 2016 1,857 483 (1,796) 2,592 (76) 3,060 2016 – – 2015 1,416 (11) (1,183) 1,635 – 1,857 2015 576 576 The Company’s bank overdraft is denominated in the following currencies: £’000 At 31 December 2016 Bank overdraft At 31 December 2015 Bank overdraft GBP USD TOTAL – 576 – – – 576 112 XP AR2016 - Proof 6.indd 112 13/03/2017 18:01:05 16. Share capital and reserves Share capital £’000 Allotted and fully paid 19,242,296 ordinary shares Retained earnings £’000 Balance at 1 January Dividends paid Profit for the year Balance at 31 December Translation reserve £’000 Balance at 1 January Exchange differences on translation Balance at 31 December Hedging reserve £’000 Balance at 1 January Fair value gain/(loss) Balance at 31 December I S L A C N A N I F 2016 29,786 2015 29,786 2016 18,654 (12,919) 15,386 21,121 2016 1,513 3,929 5,442 2016 157 175 332 2015 17,135 (11,974) 13,493 18,654 2015 648 865 1,513 2015 617 (460) 157 17. Financial risk management The Company’s activities expose it to capital risk, currency risk (including both transactional and translational currency risk), interest rate risk, credit risk and liquidity risk. The Company seeks to minimise adverse effects from the unpredictability of financial markets on the Company’s financial performance. (a) Capital risk The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance. The capital structure of the Company consists of debt, cash and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in Note 16. (b) Currency risk The Company operates in North America, Europe and Asia and its activities expose it to transactional risks resulting from changes in foreign currency exchange rates. The Company monitors and manages these transactional foreign exchange risks relating to the operations of the Company through internal reports analysing major currency exposures. Where possible the Company seeks to offset exposures by matching monetary asset and liability exposures in like currencies against each other often using its bank facilities to square off or reduce exposures. To manage the currency risk, the Company manages the overall currency exposure mainly through currency forwards. The Company’s risk management policy is to hedge a portion of highly probable forecast sales transactions. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 113 113 13/03/2017 18:01:05 HEADING NOTES TO THE COMPANY BALANCE SHEET For the financial year ended 31 December 2016 17. Financial risk management (continued) (b) Currency risk (continued) In addition the Company is exposed to translation risk when the results of its operations and balance sheet are converted from its functional currency to Sterling, the Group’s reporting currency. In particular a significant proportion of the Company’s revenues and earnings are derived in US Dollars. The Company regards this as a fundamental consequence of operating in markets which are dominated by US Dollar transactions. The Company does not hedge this translational risk as there is no underlying mismatch of foreign currencies as the translation is merely performed for reporting the Company’s results in Sterling. The Company’s currency exposure based on the information provided to key management is as follows: £’000 At 31 December 2016 Financial assets Cash and cash equivalents Trade and other receivables Other current assets Long term receivables Subtotal Financial liabilities Trade and other payables Subtotal Net financial (liabilities)/assets Add: Firm commitments and highly probable forecast transactions in foreign currency Currency forwards Currency profile excluding non- financial assets and liabilities Less: Financial assets denominated in the entity’s functional currencies Currency exposure of financial assets GBP EUR USD Others Total 138 1,812 314 – 2,264 (4,716) (4,716) (2,452) – 5,300 2,848 – 2,848 122 1,234 (87) – 1,269 93 93 1,362 8,687 (6,240) 2,753 17,556 206 7,273 27,788 (14,593) (14,593) 13,195 – – 3,809 13,195 – 3,809 13,195 – 198 283 116 – 597 (141) (141) 456 – – 456 – 456 3,211 20,885 549 7,273 31,918 (19,357) (19,357) 12,561 8,687 (940) 20,308 13,195 7,113 114 XP AR2016 - Proof 6.indd 114 13/03/2017 18:01:05 I S L A C N A N I F 17. Financial risk management (continued) £’000 At 31 December 2015 Financial assets Cash and cash equivalents Trade and other receivables Other current assets Long term receivables Subtotal Financial liabilities Borrowings Trade and other payables Subtotal Net financial (liabilities)/assets Add: Firm commitments and highly probable forecast transactions in foreign currency Currency forwards Currency profile excluding non- financial assets and liabilities Less: Financial assets denominated in the entity’s functional currencies Currency exposure of financial assets GBP EUR USD Others Total 35 1,806 421 – 2,262 (576) (6,724) (7,300) (5,038) – 5,600 562 – 562 227 1,032 (45) – 1,214 – 42 42 1,256 7,500 (5,762) 501 17,135 177 5,999 23,812 – (10,553) (10,553) 13,259 – – 2,994 13,259 – 2,994 13,259 – 263 219 154 – 636 – (101) (101) 535 – – 535 – 535 1,026 20,192 707 5,999 27,924 (576) (17,336) (17,912) 10,012 7,500 (162) 17,350 13,259 4,091 (c) Interest rate risk The Company borrows from subsidiaries at an interest rate of 1.5% - 2.0% above LIBOR. If the average interest rates on these borrowings increased/decreased by 0.5% (2015: 0.5%) with all other variables, including tax rates, being held constant, the profit before tax will be lower/higher by £21,372 (2015: £24,815) as a result of higher/lower interest expense on these borrowings. (d) Credit risk Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in a financial loss to the Company. For trade receivables the Company adopts a policy of only dealing with customers of appropriate credit history or rating. For other financial assets, the Company adopts the policy of only dealing with high credit quality counterparties. The Company is not exposed to significant credit risk as a majority of the sales are made to the subsidiaries. The Company does not hold any collateral and the maximum exposure to credit risk for each class of financial instruments is the carrying amount of that class of financial instruments on the balance sheet. XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 115 115 13/03/2017 18:01:06 HEADING NOTES TO THE COMPANY BALANCE SHEET For the financial year ended 31 December 2016 17. Financial risk management (continued) (e) Liquidity risk The table below analyses the maturity profile of the Company’s financial liabilities at the balance sheet date based on contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant. £’000 At 31 December 2016 Trade and other payables Total £’000 At 31 December 2015 Trade and other payables Bank overdraft Total Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years 19,357 19,357 – – – – – – Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years 17,336 576 17,912 – – – – – – – – – Total 19,357 19,357 Total 17,336 576 17,912 The Company manages the liquidity risk by maintaining sufficient cash and bank facilities to enable it to meet its normal operating commitments. (f) Fair value measurements The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: (i) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (ii) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (iii) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The following table presents the assets measured at fair value at 31 December 2016: 2016 £’000 Assets Derivative financial instruments Liabilities Derivative financial instruments 2015 £’000 Assets Level 1 Level 2 Level 3 Total – – 362 (414) – – 362 (414) Level 1 Level 2 Level 3 Total Derivative financial instruments – 20 – 20 116116 XP AR2016 - Proof 6.indd 116 13/03/2017 18:01:06 HEADING strapline I S L A C N A N I F 17. Financial risk management (continued) (g) Offsetting financial assets and financial liabilities (i) Financial assets The Company has the following financial instruments subject to enforceable master netting arrangements or similar agreements as follows: Related amounts set off in the balance sheet Related amounts not set off in the balance sheet Gross amounts- financial assets Gross amounts- financial liabilities Net amounts- financial assets presented in the balance sheet Financial assets/ liabilities Financial collateral received Net amount 152 152 167 1,083 1,250 (9) (9) (147) (130) (277) 143 143 20 953 973 16,746 16,746 – 16,503 16,503 – – – – – 16,889 16,889 20 17,456 17,476 £’000 At 31 December 2016 Trade receivables Total At 31 December 2015 Derivative financial assets Trade receivables Total (ii) Financial liabilities The Company has the following financial instruments subject to enforceable master netting arrangements or similar agreements as follows: Related amounts set off in the balance sheet Related amounts not set off in the balance sheet Gross amounts- financial liabilities Gross amounts- financial assets Net amounts- financial assets presented in the balance sheet Financial assets/ liabilities Financial collateral received Net amount (9) (9) (147) (130) (277) 9 9 147 130 277 – – – – – (14,514) (14,514) – 12,396 12,396 – – – – – (14,514) (14,514) – 12,396 12,396 £’000 At 31 December 2016 Trade payables Total At 31 December 2015 Derivative financial liabilities Trade payables Total XP Power Annual Report & Accounts XP Power Annual Report & Accounts for the year ended 31 December 2016 for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 117 117 3/14/2017 7:36:43 AM FIVE YEAR REVIEW HEADING FIVE YEAR REVIEW HEADING Consolidated Information £ Millions 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 Non-controlling interests Key statistics (pence) Earnings per share Diluted earnings per share Diluted adjusted earnings per share Share price in the year (pence) High Low Dividends per share (pence) 2016 2015 2014 2013 2012 129.8 28.0 27.8 73.2 65.7 (25.8) (6.2) 106.9 106.1 0.8 106.9 112.0 111.2 115.3 109.7 25.6 25.4 65.4 53.5 (19.8) (10.0) 89.1 88.3 0.8 89.1 103.7 102.8 104.3 101.1 24.5 24.3 56.1 47.0 (18.6) (4.2) 80.3 80.2 0.1 80.3 102.1 101.1 101.1 101.1 23.3 22.9 53.3 42.2 (22.4) (3.7) 69.4 69.2 0.2 69.4 95.8 95.1 95.1 93.9 21.0 20.2 52.8 39.3 (20.2) (10.6) 61.3 61.1 0.2 61.3 81.7 81.3 81.3 1,845.0 1,410.0 71.0 1,750.0 1,375.0 66.0 1,798.0 1,340.0 61.0 1,630.0 1,283.0 972.0 55.0 805.0 50.0 118 XP AR2016 - Proof 6.indd 118 13/03/2017 18:01:06 I S L A C N A N I F XP POWER LIMITED ADVISERS HEADING strapline Company Brokers Investec 2 Gresham Street London EC2V 7QP United Kingdom Principal Bankers Bank of Scotland Plc The Mound Edinburgh EH1 1YZ United Kingdom Solicitors Osborne Clarke 2 Temple Back East Temple Quay Bristol BS1 6EG United Kingdom Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU United Kingdom Company Secretary M & C Services Private Limited 112 Robinson Road #05-01 The Corporate Office Singapore 068902 Auditors PricewaterhouseCoopers LLP 8 Cross Street, PWC Building, #17-00 Singapore 048424 Printed on Cocoon Silk 50. A recycled paper containing 50% recycled waste and 50% virgin fibre and manufactured at a mill certified with ISO 14001 environmental management standard. The pulp used in this product is bleached using an Elemental Chlorine Free process. (ECF) XP Power Annual Report & Accounts for the year ended 31 December 2016 www.xppower.com stock code: XPP XP AR2016 - Proof 6.indd 119 119 13/03/2017 18:01:07 SHAREHOLDER NOTES HEADING HEADING 120 XP AR2016 - Proof 6.indd 120 13/03/2017 18:01:07 25287.04 13 March 2017 5:07 PM Proof 525287.04 13 March 2017 5:07 PM Proof 5XP AR2016 - Proof 6.indd 613/03/2017 17:56:21 25287.04 13 March 2017 5:07 PM Proof 525287.04 13 March 2017 5:07 PM Proof 5XPPOWER ANNUAL REPORT & ACCOUNTS for the year ended 31 December 2016XP POWER LIMITED401 COMMONWEALTH DRIVEHAW PAR TECHNOCENTRELOBBY B #02-02SINGAPORE 149598T: +65 6411 6900F: +65 6479 6305XP AR2016 - Proof 6.indd 113/03/2017 17:55:53