Final Results

25 February 2008 XP Power Limited ("XP Power" or "the Group") Results for the Year Ended 31 December 2007 XP Power, one of the world's leading providers of power supply solutions to the mid-tier of the electronics industry, today announces results for the year ended 31 December 2007. FINANCIAL HIGHLIGHTS £ Millions Year Year ended ended 31 December 31 December 2007 2006 Income and expenditure Revenue 66.3 78.7 Gross profit 28.0 29.2 Gross profit % 42.2% 37.1% Profit before tax 5.0 8.0 Profit before tax, amortisation of intangibles associated with acquisitions £0.3 million (2006: £0.3 million) and 7.7 9.3 restructuring charges associated with moving to Singapore £2.4 million (2006: £1.0 million related to third party terminations) Basic earnings per share 17.9p 27.9p Diluted earnings per share 17.8p 27.5p Diluted earnings per share adjusted for the amortisation of intangibles associated with acquisitions and restructuring 31.4p 32.8p charges Proposed final dividend per share 11.0p 10.0p Total dividend per share (see note 6) 20.0p 18.0p HIGHLIGHTS - Gross margin improves by 5.1% to 42.2% (2006: 37.1%) resulting from an increased amount of XP Power intellectual property - Own brand sales now represent 73% of revenues (2006:66%) - Improved competitive position due to move to Asia - Transition of the Company to a manufacturer enables penetration of larger customers - Dividend to be increased by 11% to 20p per share Larry Tracey, Executive Chairman, commented: "Margin targets achieved, revenue growth is now the focus." Enquiries: XP Power Limited Larry Tracey, Executive Chairman 0118 984 5515 James Peters, Deputy Chairman Duncan Penny, Chief Executive Officer Weber Shandwick Financial 020 7067 0700 Terry Garrett, Nick Dibden, Hannah Marwood Notes to editors: XP provides power supply solutions to the electronics industry. All electronic equipment needs a power supply. Power supplies convert the incoming AC supply into various levels of DC voltages to drive electronic components and sub-assemblies within the end user's equipment. XP segments its business into Communications, Defence and Avionics, Industrial and Medical. By servicing these markets, XP provides investors with access to technology and industrial sectors of the worldwide electronics market. The market is highly fragmented and made up of a large number of Original Equipment Manufacturers who source standard and modified standard power supplies from several hundred power supply companies. The Investor Presentation covering XP's results will be available on the XP website at 9.30am on 25 February 2008. For further information, please visit www.xppower.com Chairman's statement XP Power Limited ("XP" or "the Group") Preliminary Results for the Year Ended 31 December 2007 Chairman's Statement Business Performance XP's revenues declined from £78.7 million in 2006 to £66.3 million in 2007. This reduction of 16% is disappointing. The discontinued third party business accounted for 12% of the reduction and the weakness of the dollar reduced revenues on translation by 4%. Our ongoing business was flat for the year with growth in the first half being offset by a decline in the second half. We continue to believe that our new product pipeline will result in revenue growth once the current macro economic climate for capital equipment improves. Adjusted earnings per share of 31.4 pence is down by 4% from 2006 (2006: 32.8 pence). Strategy In 2003 we set ourselves the goal of achieving gross margins in excess of 40% by 2007. This goal was achieved during the year. Further modest improvement is expected as we have now bought out our joint venture manufacturing partner in Kunshan, China. More of the Group's resources are now in Asia and the move of our headquarters to Singapore was completed in spring 2007. The change to producing our own I.P. products in our wholly owned manufacturing facility is attractive to our target customer base. This enhances the medium term revenue prospects for XP Power. Dividend Despite the reduction in earnings we are proposing a final dividend of 11 pence per share at the annual general meeting on 26 March 2008. The total dividend for 2007 of 20 pence represents an 11% increase on the 2006 payment (2006: 18 pence). Outlook Our customers produce capital equipment and any downturn in global demand for their products affects our potential revenue. We believe that our competitive position is strong and that should enable us to take market share and increase revenues when the economic climate improves. Larry Tracey - Executive Chairman Chief Executive's Review The Chief Executive's Review is prepared solely to provide additional information to shareholders to assess the Company's strategy and the potential for that strategy to succeed, and should not be relied on by any other party or for any other purpose. The Chief Executive's Review contains certain forward-looking statements and (a) these statements are made in good faith based on the information available up to the time of the approval of this report and (b) these statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward looking information. Landmark Year 2007 has been a landmark year in the Group's history. On 24 April 2007 the Company completed its Scheme of Arrangement to move the domicile of the parent company to Singapore. We are rapidly becoming a much more Asian centric organisation. In parallel with this fundamental change we also announced the buy out of our manufacturing joint venture with Fortron Source. From 1 January 2008 XP became a "fully fledged" Asian manufacturer. Since our London Stock Exchange Listing in 2000, XP has transformed itself from a specialist distributor to a successful designer, seller and now manufacturer of electronic power supplies. This strategy is enabling us to make inroads into much larger customers. We have also realised a steady and dramatic increase in our gross margins from 28.0% in 2000 to 42.2% in 2007 reflecting the resources we have deployed in product development to increase the proportion of revenues generated from our own intellectual property. Our business model today has developed substantially since 2000 and we consider that we are excellently positioned for the time when greater confidence returns to our markets. Asia Asia is increasingly important to our industry and to our own internal operations. For some time we have seen a trend where our customers, who generally perform their product development and design work in Europe and North America, are increasingly manufacturing and selling their end products in Asia. It has been essential for us to put resource in place in Asia to support these customers technically and logistically. More companies, and in particular our larger customers, are now building product design teams in Asia. It is clear that Asia will no longer just be the place where electronic products are manufactured but also increasingly where they are designed and the intellectual property is created. In conjunction with these changes we are observing that within our customers, our supply chain has become dominated by Asian manufacturers. The majority of the product we sell is manufactured in Asia and we have put in place various supply chain operations across Asia to support our manufacturing activities whether they be within our own facilities or outsourced. It is important that our purchasing people are in the same time zone and speak the same language as our component suppliers. We also believe that our future competition will emerge from Asia rather than Europe or North America. In order to compete in this climate we will need to have the same low cost structure as these emerging companies and access to the plentiful and talented work force in Asia. For the reasons set out above we concluded that we needed to not only build resource in Asia but locate our headquarters there so we could view the world from an Asian perspective to take advantage of the opportunities as they present themselves. Asia is rapidly changing the shape of the world economy and we are determined to take advantage and be a part of this. Manufacturing At the end of 2005 we announced a 50:50 manufacturing joint venture in Kunshan, close to Shanghai in China, in association with Fortron Source, a leading power supply manufacturer. Fortron Source has been an excellent contract manufacturing partner of XP for many years and operates a number of power supply manufacturing facilities in China. Fortron Source is renowned in the industry for excellent quality and cost efficiency. This manufacturing joint venture has been extremely beneficial to XP. By moving closer to the manufacturing end of the supply chain we have been able to transfer knowledge into our design centres to assist designing in components that are lower cost and/or easier to source in Asia. This has helped us drive down our product cost. More significantly the manufacturing joint venture has enabled us to target a whole new group of customers who will only do business directly with a manufacturer. As we engaged with this new group of customers it became clear that the quality standards they demand from their suppliers require us to have complete control of the manufacturing facilities and processes. For this reason we needed to become a "fully fledged" manufacturer. Consequently, in November 2007 we announced an agreement to buy out the joint venture for US$2.5 million (approximately £1.2 million) in cash and take complete control from 1 January 2008. We expect that our new product families will be manufactured in our Kunshan facility. Product Strategy In April 2006 we made a decision to discontinue selling a number of third party product lines in order to focus on our own product lines. These lines were generally low margin and contributed little compared to the resource they consumed. We stopped taking orders for these third party product lines from 1 July 2006. Later in 2006 two other third party lines decided to terminate their relationship with XP as a result of our product strategy. Our 2006 revenues included approximately £9.0 million from the discontinued product lines, which is approximately £12.0 million on an annualised basis. Despite the resultant decline in revenue in 2007 we believe it was the right approach as it has allowed us to increase our emphasis on our larger target customers. Approximately a quarter of our revenues are still generated from selling third party lines. The remaining partnerships are important to our success as they allow us to meet our customers' needs in areas where we do not have suitable product of our own. We share product roadmaps with these partners to avoid conflict between our respective product lines. Financial Performance Our financial performance has been impacted by three main factors during 2007: The deliberate termination of certain third party lines during 2006 which is discussed above; Softer end markets in North America and the UK in the second half of 2007; and The marked weakening of the US Dollar versus Sterling resulting in significant translational effects when converting our US Dollar revenues and earnings to Sterling for reporting purposes. The average exchange rate used to translate our US Dollar earnings in 2007 was approximately 2.00 US Dollars to Sterling compared with approximately 1.83 in 2006. If the average rate of 1.83 experienced in 2006 had continued in 2007 we would have reported additional revenues of £3.3 million in the year to 31 December 2007. Overall revenues decreased by 15.8% to £66.3 million (2006: £78.7 million). As set out above £9.0 million of this decrease can be attributed to termination of the third party lines and £3.3 million to the translation effect of the weaker US dollar. Of the product shipped in 2007, 73% was our own XP brand, up from 66% in the same period a year ago. This helped drive a significant increase in gross margin to 42.2% (2006: 37.1%). This is our eighth successive year of gross margin improvement and justifies our strategy. The Group made a profit before tax of £5.0 million compared to a profit before tax of £8.0 million in the prior year. The profit before tax includes a charge of £0.3 million (2006: £0.3 million) for the amortisation of intangibles resulting from the acquisition of Powersolve Electronics Limited (Powersolve) and £2.4 million of charges relating to the Scheme of Arrangement and costs associated with the move to Singapore (2006: £1.0 million relating to the termination of third party lines as discussed above). After adding back these items the adjusted profit before tax was therefore £7.7 million in 2007 compared with £9.3 million in 2006. The basic earnings per share for the year ended 31 December 2007 was 17.9p (2006: 27.9p). The diluted earnings per share for the year ended 31 December 2007 was 17.8p (2006: 27.5 p). After adjusting for the charges relating to the Scheme of Arrangement and costs associated with the move to Singapore and the amortisation of intangibles associated with acquisitions, the diluted earnings per share was 31.4 pence (2006: 32.8 pence). The 2006 earnings per share have been adjusted by £0.8 million, or 4.2 pence, relating to dividends paid to minority shareholders in 2006. Continued strong margins allowed us to generate free cash flow of £5.7 million during 2007 (2006: £3.7 million). After returning £3.6 million to shareholders in the form of dividends, net debt (cash of £3.6 million less borrowings of £ 23.0 million) at 31 December 2007 was £19.4 million compared with £17.8 million at 31 December 2006. Free cash flow is defined as net cash flow from operating activities plus dividends from associates; less net purchases of property, plant and equipment; less capitalised development costs; plus exceptional charges; less interest paid. Customers and Industry Segmentation We target customers in the communications, defence and avionics, industrial and medical end user markets. We have senior strategic teams driving these sectors in both North America and Europe. These teams identify the customers with whom we consider we should be working in each of these sectors, support the sales people to penetrate these accounts and work with the product development organisation to specify future product requirements. This structure has served us well and should help to drive future revenue growth. As our business grows in terms of scale and breadth of product offering, we are increasingly able to add value to the larger customers in the market sectors we serve. Accordingly, we will be focusing more resource on winning programmes with larger customers. Markets As reported in our interim statement for the six months to 30 June 2007 and reiterated in our trading update issued at the end of October 2007 the markets we serve have been soft in the second half of 2007 particularly in the UK and North America. As noted above, this was exacerbated by the weakening of the US Dollar. Although our program design-in base and program identification remains good it is difficult to predict what our customers' demand is likely to be in 2008 given the widely reported macro economic concerns in North America. Despite the current economic uncertainty we have not, as yet, seen any change in pricing pressure in the market. We do see increased pressure on input costs due to the gradual increase in the strength of the Chinese currency which is expected to continue plus labour cost increases in China but these should be offset by improvements in component costing on our new products. Product Development Offering our target customers industry leading products is a key component of XP's strategy, therefore product development is vital to the long-term success of our business. We continue to commit more resource to this area in line with our strategy of expanding our own brand product portfolio. We plan to open a new design centre in Singapore during 2008. We expect to release a number of important products to the market during 2008. Duncan Penny - Chief Executive Consolidated Income Statement for the financial year ended 31 December 2007 £ Millions Note 2007 2006 Restated Sales 4 66.3 78.7 Cost of sales (38.3) (49.5) Gross profit 28.0 29.2 Expenses Distribution and marketing costs (16.4) (16.4) Administrative costs (0.8) (0.7) Research and development costs (1.8) (1.9) Reorganisation costs 5 (2.4) (1.0) Other operating income 0.1 0.1 Operating profit 6.7 9.3 Finance cost (1.7) (1.3) Profit before tax 4 5.0 8.0 Income tax expense (1.4) (2.0) Total profit/(loss) 3.6 6.0 Attributable to: Equity holders of the Company 3.4 5.2 Minority interests (2006 restated) 7 0.2 0.8 Total profit 3.6 6.0 Earnings per share for profit from continuing operations attributable to equity holders of the Company (pence per share) - Basic 7 17.9 27.9 - Diluted 7 17.8 27.5 - Diluted adjusted 7 31.4 32.8 Consolidated Balance Sheet for the financial year ended 31 December 2007 £ Millions Note 2007 2006 Restated ASSETS Current Assets Cash and cash equivalents 3.6 4.2 Derivative financial instruments - 0.1 Trade and other receivables 13.2 14.6 Inventories 10.5 11.1 Total current assets 27.3 30.0 Non-current assets Interest in associates 0.1 0.1 Property, plant and equipment 3.4 3.2 Goodwill 29.6 30.1 Intangible assets 3.2 2.6 ESOP loans to employees 3.0 2.6 Deferred income tax assets 0.4 0.6 Total non-current assets 39.7 39.2 Total assets 67.0 69.2 LIABILITIES Current liabilities Trade and other payables 8.0 9.6 Current income tax liabilities 2.4 2.4 Bank loans and overdraft 2.7 7.6 Provisions for other liabilities and charges 0.1 1.9 Total curent liabilities 13.2 21.5 Non-current liabilities Borrowings 20.3 14.4 Deferred income tax liabilities 1.4 1.4 Provision for other liabilities and charges 2.3 2.5 Total non-current liabilities 24.0 18.3 Total liabilities 37.2 39.8 NET ASSETS 29.8 29.4 EQUITY Share capital 8 27.2 0.2 Share premium account 8 - 27.0 Merger reserve 0.2 0.2 Own shares 8 - (5.9) Translation reserve (as restated) 8 (2.5) (2.3) Retained earnings (as restated) 8 4.7 10.2 29.6 29.4 Minority interest 7 0.2 0.0 TOTAL EQUITY 29.8 29.4 Consolidated Cash Flow Statement Year ended 31 December 2007 £ Millions 2007 2006 Restated Cash flows from operating activities Total profit 3.6 6.0 Adjustments for - Income tax expense 1.4 2.0 - Amortisation, depreciation and impairment 1.1 1.2 - Finance expenses 1.7 1.3 - Unrealised translation (gains)/losses 0.6 0.5 Change in the working capital - Inventories 0.6 (2.9) - Trade and other receivables 1.3 0.1 - Trade and other payables (2.0) 0.4 Income tax paid (1.4) (2.5) Net cash provided by operating activities 6.9 6.1 Cash flows from investing activities Acquisition of a subsidiary, net of cash acquired - (0.8) Purchases and construction of the property, plant and equipment (0.9) (1.2) Purchases of intangible assets (R&D) (1.0) (0.9) Payment of deferred consideration (1.4) (1.0) Net cash used in investing activities (3.3) (3.9) Cash flows from financing activities Proceeds from borrowings 5.9 3.2 Sale of treasury shares 0.4 0.4 Interest paid (1.7) (1.3) Dividends paid to equity holders of the Company (3.6) (3.2) Dividends paid to minority shareholders (0.2) (0.8) Net cash provided by financing activities 0.8 (1.7) Net increase/(decrease) in cash and cash equivalents 4.4 0.5 Cash and cash equivalents at beginning of financial year (3.4) (3.9) Effects of currency translation on cash and cash equivalents (0.1) - Cash and cash equivalents at end of financial year 0.9 (3.4) £ Millions 2007 2006 Net cash inflow from operating activities 6.9 6.1 Purchase of property, plant and equipment (0.9) (1.2) Development expenses capitalised (1.0) (0.9) Restructuring cost 2.4 1.0 Interest expense (1.7) (1.3) Free cash flow 5.7 3.7 XP Power Limited Notes to the Results for the year ended 31 December 2007 General information XP Power Limited (the "Company") is listed on the London Stock Exchange and incorporated and domiciled in Singapore. These financial statements are presented in Pounds Sterling. Reverse acquisition The Company' was incorporated on 12 February 2007. On 24 April 2007 the Company became the holding company of XP Power plc pursuant to a scheme of arrangement under section 425 of the Companies Act 1985 of the United Kingdom ('the Scheme of Arrangement'). Under International Financial Reporting Standard ("IFRS") 3, Business Combinations, this Group reconstruction effected by the Scheme of Arrangement has been accounted for as a reverse acquisition of the Company by XP Power plc. This consolidated financial information issued in the name of the legal parent, the Company, accordingly has been prepared and presented in substance as a continuation of the financial information of the legal subsidiary, XP Power plc. The following accounting treatment has been applied in respect of the reverse acquisition: the assets and liabilities of the legal subsidiary, XP Power plc, are recognized and measured in the consolidated financial information at the pre-combination carrying amounts, without restatement to fair values; the retained earnings and other equity balances recognized in the consolidated financial information reflect the retained earnings and other equity balances of XP Power plc immediately before the business combination. The results of the period from 1 January 2007 to the date of the business combination are those of XP Power plc, as the Company did not trade prior to the transaction. However, the equity structure appearing in the consolidated financial statements (i.e. the number and type of equity issued) reflect the equity structure of the Company, being the legal parent to effect the combination; and The comparative figures of the Group have not been audited. However they were prepared based on the audited financial statements of the legal subsidiary, XP Power plc, for the year ended 31 December 2006. Basis of accounting policies 2.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and therefore the Group's financial statements comply with Article 4 of the EU IAS Regulations. The financial statements have been prepared on the historical cost basis. The principal accounting policies are set out below. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and 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 form the basis of making the judgements about carrying amounts of assets and liabilities that are not readily apparent from other sources. On 1 January 2007, the Group adopted the new standards, amendments and interpretations that are mandatory for application from that date. Changes to the Group's accounting policies have been made as required, in accordance with the transitional provisions in the respective standards, amendments and interpretations. The following are the new or amended IFRS and interpretations that are relevant to the Group: Amendments to IFRS 1 Presentation of Financial Statements - Capital Disclosures IFRS 7 Financial Instruments: Disclosures IFRIC 8 Scope of IFRS 2 IFRIC 10 Interim Financial Reporting and Impairment The adoption of the above IFRS interpretations did not result in any substantial changes to the Group's accounting policies or any significant impact on the disclosures in this Earnings' Release. IFRS 7 and the complementary amended IFRS 1 introduce new disclosures relating to financial instruments and capital respectively which will be reflected in the audited financial statements. The Group has not applied early adoption of any new Standards or interpretations. Foreign currencies 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 financial statements are presented in Pounds Sterling. The financial statements are being 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. Foreign currency transactions and balances Transactions in foreign currencies are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. 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 recognized in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. (c) Group companies The assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred into the Group's translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on the acquisitions before the date of transition to IFRS as Pound Sterling denominated assets and liabilities converted using the exchange rates at the dates of acquisition. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, Value Added Tax/Goods and Services Tax and other sales related taxes. 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. Group accounting (a) Subsidiaries The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5 Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. In preparing the consolidated financial statements, transactions, balances and unrealised gains on transactions between group entities are eliminated. Unrealised losses are also eliminated but are considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Minority interests are that part of net results of operations and of net assets of a subsidiary attributable to the interests, which are not owned directly, or indirectly by the Group. They are measured at the minorities' share of fair value of the subsidiaries' identifiable assets and liabilities at the date of acquisition by the Group and the minorities' share of changes in equity since the date of acquisition, except when the minorities' share of losses in a subsidiary exceeds its interests in the equity of that subsidiary. In such cases, the excess and further losses applicable to the minorities are attributed to the equity holders of the Company, unless the minorities have a binding obligation to, and are able to, make good the losses. When that subsidiary subsequently reports profits, the profits applicable to the minority interests are attributed to the equity holders of the Company until the minorities' share of losses previously absorbed by the equity holders of the Company are fully recovered. The results of subsidiaries acquired or disposed of in the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal as appropriate. (b) Transactions with minority interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recognised in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the Group's incremental share of the carrying value of identifiable net assets of the subsidiary. (c) Associated companies Associated companies are entities over which the Group has significant influence, but not control, generally accompanied by a shareholding giving rise to between and including 20% and 50% of the voting rights. Investments in associated companies are accounted for in the consolidated financial statements using the equity method of accounting. Investments in associated companies in the consolidated balance sheet include goodwill (net of any accumulated impairment losses) identified on acquisition. Investments in associated companies are initially recognised at cost. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. In applying the equity method of accounting, the Group's share of its associated companies' post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in equity directly. These post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associated company equals or exceeds its interest in the associated company, including any other unsecured non-current receivables, the Group does not recognise further losses, unless it has obligations or has made payments on behalf of the associated company. Unrealised gains on transactions between the Group and its associated companies are eliminated to the extent of the Group's interest in the associated companies. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associated companies have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. (d) Joint ventures The Group's joint ventures are entities over which the Group has contractual arrangements to jointly share the control over the economic activity of the entities with one or more parties. The Group's interest in joint ventures is accounted for in the consolidated financial statements using proportionate consolidation. Proportionate consolidation involves combining the Group's share of the joint venture's income and expenses, assets and liabilities and cash flows of the jointly controlled entities on a line-by-line basis with similar items in the Group's financial statements. When the Group sells assets to a joint venture, the Group recognises only the portion of unrealised gains or losses on the sale of assets that is attributable to the interest of the other ventures. The Group recognises the full amount of any loss when the sale provides evidence of a reduction in the net realisable value of current assets or an impairment loss. When the Group purchases assets from a joint venture, it does not recognise its share of the profits of the joint ventures arising from the Group's purchase of assets until it resells the assets to an independently party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets or an impairment loss. The Group has changed accounting policies of joint ventures where necessary to ensure consistency with the accounting policies adopted. Property, plant and equipment Items of property, plant and equipment, including land and buildings, are stated at cost less accumulated depreciation and any recognised impairment losses. The 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 Depreciation is charged so as to write off the cost or valuation of the assets over their estimated useful lives, using the straight-line method, on the following bases: Plant and machinery - 25 - 33% Motor vehicles - 25% Office equipment - 25 - 33% Leasehold improvements - 10% or over the life of the lease if shorter Long leasehold buildings - 2% Long leasehold land is not depreciated. Long leasehold land relates to 99 year renewable land rent agreements in the UK. 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. Subsequent expenditure relating to property, plant and equipment that has already been recognised is added to the carrying amount of the asset 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 repair and maintenance expense is recognised in the income statement when incurred. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset, and is recognised in the income statement. Intangible assets Goodwill on acquisitions Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating-units ("CGU") expected to benefit from synergies arising from the business combination. An impairment loss is recognised when the carrying amount of a CGU, including the goodwill, exceeds the recoverable amount of the CGU. Recoverable amount of a CGU is the higher of the CGU's fair value less cost to sell and value-in-use. The total impairment loss of a CGU is allocated first to reduce the carrying amount of goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. On disposal of a subsidiary, associate or joint venture, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Internally generated intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group's product development is recognised only if all of the following conditions are met: An asset is created that can be separately identified; It is probable that the asset created will generate future economic benefits; and The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives, which vary between 4 and 7 years depending on the exact nature of the project undertaken. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment - non-financial assets At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Borrowing costs All borrowing costs are recognised in profit or loss using the effective interest method Financial assets Classification The Group classifies its financial assets depending on 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 and other receivables" and "cash and cash equivalents" on the balance sheet. Recognition/derecognition 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. Any amount in the fair value reserve relating to that asset is transferred to the income statement. Measurement Loans and receivables are initially recognised at fair value plus transaction costs and subsequently at amortised cost using the effective interest method. Impairment The Group assesses at each balance sheet date whether there is objective evidence that a loan or receivable is impaired and recognises an allowance for impairment when such evidence exists. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default or significant delay in payments are objective evidence that these financial assets are impaired. The carrying amount of these assets is reduced through the use of an impairment allowance account, which is calculated as the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. When the asset becomes uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are recognised against the same line item in the income statement. The allowance for impairment loss account is reduced through the income statement in a subsequent period when the amount of impairment loss decreases and the related decrease can be objectively measured. The carrying amount of the asset previously impaired is increased to the extent that the new carrying amount does not exceed the amortised cost had no impairment been recognised in prior periods Leases Leases where substantially all risks and rewards incidental to 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 recognised in the income statement on a straight-line basis over the period of the lease. Derivative financial instruments and hedging activities 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. The Group does not use derivative financial instruments for speculative purposes. The fair value changes of the currency forward contracts are recognized in the income statement directly. The Group does not apply hedge accounting. Fair value estimation of financial assets and liabilities The fair values of financial instruments that are not traded in an active market are 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. Where appropriate, quoted market prices or dealer quotes for similar instruments are used. Valuation techniques, such as discounted cash flow analyses, are also used to determine the fair values of the financial instruments. The Group does not have any financial instruments traded in an active market. 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. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution and reductions for estimated irrecoverable amounts. Income taxes 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. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the group intends to settle its current tax assets and liabilities on a net basis. Share based payments The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. 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. When the options are exercised, the proceeds received (net of transaction costs) and the related balance previously recognised in the share option reserve are credited to share capital account, when new ordinary shares are issued, or to the "treasury shares" account, when treasury shares are re-issued to employees. Retirement benefit costs The Group operates several defined contribution plans. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. The Group has no further payment obligations once the contributions have been paid. Employee leave entitlements Employee entitlements to annual leave are recognised 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. Share capital and treasury shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new ordinary shares are deducted against the share capital account. When any entity within the Group purchases the Company's ordinary shares ('treasury share'), the consideration paid including any directly attributable incremental cost is presented as a component within equity attributable to the Company's equity holders, until they are cancelled, sold or reissued. 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 reissued 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 reissue, net of any directly attributable incremental transaction costs and related income tax, is recognised in the capital reserve of the Company. Dividends to Company's shareholders Dividends to the Company's shareholders are recognised when the dividends are approved for payment. Segment reporting A business segment is a distinguishable component of the Group engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group's accounting policies, as described in note 2, management has made the following judgements and estimations that have the most significant effect on the amounts recognised in the financial statements. Recoverability of Capitalised R&D During the year £ 0.9 million of development costs were capitalised bringing the total amount of development cost capitalised as intangible assets as of 31 December 2007 to £2.6 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 removed from the balance sheet and charged to the income statement. (b) Impairment of Goodwill The Group tests annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount of the goodwill is determined from value in use calculations. The key assumptions and estimates for the value in use calculations are those regarding the discount rates, growth rates and expected changes to sales and overheads during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management (which take into account past experience and industry growth forecasts) for the next five years and extrapolates cash flows for the following five years assuming no growth from that date. The carrying amount of goodwill as at 31 December 2007 is £ 29.6 million with no impairment adjustment required for 2007. (c) Estimation of future deferred consideration payments As of the 31 December 2007 balance sheet date the Group has recorded estimated future payments related to the payment for the remaining of 30.3% of Powersolve. When discounted to present value the total of these payments are estimated at £ 2.3 million and that amount is reflected on the balance sheet as of 2007 year end. Since the final payments will be dependent on the actual future financial performance of the business an estimate is required to approximate future business conditions. 4. Segmental reporting For management purposes, the Group is organised on a geographic basis by location of where the sales originated. This is the basis on which the Group reports its primary segment information. The Group's products are essentially a single class of business; however, from a sales and marketing perspective, the Group's sales activities are organised by class of customer. The same geographic assets deliver the same class of products to the different class of customer. The sales information by class of customer has been provided to assist the user of the accounts; however, since the assets are not separated by class of business further information on net assets and capital additions by class of customers has not been provided. Geographical segmentation The geographical segmentation is as follows: £ Millions 2007 2006 Revenue Europe 34.2 36.3 North America 35.6 45.7 Asia 9.4 0.6 Intercompany elimination (12.9) (3.9) Total Revenue 66.3 78.7 Profit on ordinary activities before taxation Europe 4.7 3.3 North America 5.4 6.2 Asia 1.1 0.4 Interest, corporate operating costs and associates (6.2) (1.9) Profit on ordinary activities before taxation 5.0 8.0 Tax (1.4) (2.0) Profit after tax 3.6 6.0 Analysis by customer The revenue by class of customer is as follows: Year to 31 December 2007 Year to 31 December 2006 North North £ Millions Europe America Asia Total Europe America Asia Total Communications 7.4 5.4 0.2 13.0 7.9 11.5 - 19.4 Industrial 14.6 17.9 2.5 35.0 15.4 22.8 0.6 38.8 Medical 5.1 8.9 - 14.0 4.7 8.3 - 13.0 Defence & avionics 3.5 0.8 - 4.3 6.6 0.9 - 7.5 Total 30.6 33.0 2.7 66.3 34.6 43.5 0.6 78.7 Reorganisation costs The reorganisation costs associated with the Scheme of Arrangement and move of the parent company and headquarters to Singapore are analysed as follows: £ Millions 2007 Relocation 1.0 Legal fees 0.4 Financial advice 0.3 Broker fees 0.3 Reporting accountants 0.2 Stock Exchange, Registrars, printing and other costs 0.1 Systems configuration and set up 0.1 Total 2.4 In 2006, there was a total restructuring cost of £1.0 million. This was comprised of inventory write-offs of £0.3 million associated with the termination of third party lines and £0.7 million redundancy costs for the closure of Benelux and reduction of headcount in various parts of our business. 6. Dividends Amounts recognised as distributions to equity holders in the period 2007 2006 Pence per £ Pence per £ share Millions share Millions Prior year final dividend paid 10.0 p* 1.9 9.0 p 1.7 Interim paid 9.0 p^ 1.7 8.0 p* 1.5 Total 19.0 p 3.6 17.0 p 3.2 * Dividends in respect of 2006 (18.0p) ^ Dividends in respect of 2007 (20.0p) The proposed final dividend for 2007 is subject to approval by shareholders at the Annual General Meeting scheduled for 26 March 2008 and has not been included as a liability in these financial statements. It is proposed that the final dividend be paid on 4 April 2008 to members on the register as at 28 March 2008. 7. Earnings per share The calculations of the basic and diluted earnings per share attributable to the ordinary equity holders of the parent Company are based on the following data: 2007 2006 Restated Earnings £ Millions £ Millions Earnings for the purposes of basic and diluted earnings per share (profit for the year attributable to equity shareholders of the parent) 3.4 5.2 Amortisation of intangibles associated with acquisitions 0.3 0.3 Reorganisation costs (note 5) 2.4 1.0 Tax effect of restructuring (0.1) (0.3) Earnings for adjusted earnings per share 6.0 6.2 Number of shares No. No. Weighted average number of shares for the purposes of basic 18,946 18,627 earnings per share (thousands) Effect of potentially dilutive share options (thousands) 184 270 Weighted average number of shares for the purposes of Dilutive earnings per share (thousands) 19,130 18,897 Earnings per share from operations Basic 17.9 p 27.9 p Diluted 17.8 p 27.5 p Diluted adjusted 31.4 p 32.8 p The minority shareholders are entitled to their share of any dividend declared by Powersolve. The dividend payable to minority shareholders in for 2007 was £ 0.2 million. This amount has been charged to the income statement in 2007. In 2006 the dividend paid to minority shareholders was £0.8 million. This amount was not reflected in the 2006 income statement but has now been adjusted as a prior year adjustment. The 2006 restatement resulted in the basic earnings per share changing from 32.2p to 27.9p and the adjusted diluted earnings per share changing from 37.0p to 32.8p. 8. Share capital and reserves Called up share capital £ Millions 2007 2006 Authorised 35,000,000 ordinary shares 0.4 0.4 Allotted and fully paid 19,242,296 (2006: 20,704,621) 27.2 0.2 Under the Singapore Companies Act Chapter 50, share premium is part of the share capital. Own shares £ Millions 2007 2006 Balance at 1 January (5.9) (6.7) Cancellation of Treasury Shares 5.2 0.0 Sale of shares 0.7 0.8 Balance at 31 December 0.0 (5.9) Prior to the Company's Scheme of Arrangement becoming effective on 24 April 2007 the Company held 1,462,325 shares in treasury. It was not possible for these shares to participate in the Scheme of Arrangement. Therefore all 1,462,325 treasury shares were cancelled on 19 April 2007. The Company does not currently hold any treasury shares. Translation reserve £ Millions 2007 2006 Restated Restated balance at 1 January (2.3) (2.1) Exchange differences on translation of foreign operations (0.2) (0.2) Balance at 31 December (2.5) (2.3) Retained earnings £ Millions 2007 2006 Restated Restated balance at 1 January 10.2 8.6 Dividends paid (3.6) (3.2) Profit for the year 3.4 5.2 Cancellation of treasury shares (5.2) - Sale of treasury shares (0.3) - Tax on items taken directly to equity 0.2 0.1 Charge to equity for equity-settled share-based payments - (0.5) Balance at 31 December 4.8 10.2 In the 2006 Annual Report and Accounts, the opening balances for the translation reserve and retained earnings were £1.5 million and £5.0 million respectively. A transfer of £3.6 million has been made from the translation reserve to the retained earnings. This amount relates to the misclassification between these two reserve accounts on the implementation of IFRS in 2005. Prior to the implementation of IFRS there was no requirement to disclose the translation reserve separately to the retained earnings figure. Included in this £3.6 million is £0.5 million of exchange difference which should have been charged to the income statement, but which was charged to the translation reserve in 2004 in error. The minority shareholders are entitled to their share of any dividend declared. The dividend payable to Powersolve minority shareholders in 2007 is £0.2 million. This amount has been charged to the income statement in 2007. In 2006 the dividend paid to minority shareholders of Powersolve was £0.5 million and MPI was £0.3. These amounts were not reflected in the 2006 income statement but have now been charged as a prior year adjustment. 9. Subsequent events On 6 February 2008 following the decrease in US dollar interest rates the Group entered into a three year interest rate swap agreement to swap its variable US$ LIBOR interest rate on US$31.9 million for a fixed rate of interest of 3.23% in order to manage exposure to interest rate movements. The Group pays a borrowing margin of 1.0% to 1.5% depending on covenant performance on top of the fixed rate of 3.23%. 10. Other information The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2007 or 2006. The financial information for the year ended 31 December 2006 is derived from the XP Power plc statutory accounts for the year ended 31 December 2006, which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s237 (2) or (3) Companies Act 1985. The statutory accounts for the year ended 31 December 2007 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Accounting and Corporate Regulatory Authority in Singapore following the Company's Annual General Meeting. Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in March 2008. This announcement was approved by the directors on 22 February 2008.

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