Final Results

XCHANGING PLC

RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2010

Notes:

(1) Underlying operating profit excludes exceptional items (FY 2010: £112.5 million, FY 2009: £29.2 million), amortisation of intangible assets previously unrecognised by acquired entities (FY 2010: £9.2 million, FY 2009: £10.0 million) and costs of acquisitions (FY 2010: £1.2 million, FY 2009: £1.0 million).

(2) Adjusted operating profit also excludes specific non-recurring items in the income statement arising in the ordinary course of business but which, in the Directors' judgement, need to be disclosed by virtue of their size and incidence (FY 2010: £11.8 million, FY 2009: £8.0 million). These items are explained further in the Operating and financial review.

(3) Underlying earnings per share (EPS) - Xchanging share of underlying profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December

(4) Adjusted earnings per share (EPS) - Xchanging share of adjusted operating profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December

(5) Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre contract costs) and dividends to non controlling interests.

(6) Net cash is calculated as cash and cash equivalents less bank loans and overdrafts, liabilities and receivable purchase facilities. The above net cash number does not include finance leases.

(7) Equity free cash flow is calculated as operating cash flow less tax and interest.

Financial highlights:

·; Revenue growth of 4% - organic revenue declined 1.5% offset by acquisitions

·; Underlying operating profit increased 5.3%

·; Adjusted operating profit of £55.5 million, excluding one-off items

·; Statutory operating loss of (£55.6) million after exceptional items totalling £112.5 million

·; Goodwill impairment for Cambridge of £90.0 million

·; Other asset impairments of £20.0 million

·; Underlying EPS growth of 1.3%

·; Net cash increased slightly to £24.8 million; debt in centrally controlled entities of £55.9 million

·; No dividend recommended (FY 2009:2.75 pence)

Operational highlights:

·; Insurance Services:

o Strong performance in UK with improved margins benefitting from 2009 restructuring, tempered by weakness in US and Australia as volumes decline;

o Restructuring in these two markets underway and additional business will contribute in 2011.

·; Financial Services:

o Business in securities transactions remains subdued;

o Fund administration business performed well with additional new business;

o New EP with SIA-SSB in H2 makes first contribution, but integration of platform is challenging.

·; Technology:

o Strong growth, particularly in UK;

o US and Asia Pacific regions weaker, although outlook for Asia Pacific is more positive;

o Technology gained from Data Integration acquisition enabled new business wins;

o Additional services provided to existing customer LME.

·; Procurement and HR:

o Business affected by reduced volumes in procurement;

o New cross-border contract, but net new business was down.

·; Revenue visibility going into 2011 is £648 million.

·; Order book of £1.6 billion as at 1 January 2011. This represents the remaining contracted value of all existing customer relationships.

2011 Action Plan

We have completed a detailed strategic and intrinsic value review resulting in an action plan which is already underway to:

·; Address poor performing operations and potentially reshape the business;

·; Regenerate profitable revenue growth with a focus on strong business areas;

·; Reduce the structural cost base;

·; Prioritise cash flow and ensure adequate financing flexibility;

·; Embed focus on value creation.

Nigel Rich, Executive Chairman of Xchanging, commented:

"These results are consistent with our last trading statement made on 9 February, and provide a high level of transparency and a clear picture of how we operate. With clarity around our financial position, we will now focus attention on operational issues and regenerating shareholder value. We have already started tackling the problematic parts of the Cambridge acquisition as well as our structural costs. This is part of a wider action plan resulting from a root-and-branch review that sets our agenda for 2011. This will be a year of transition as we address and resolve clearly defined problems. We have completed a detailed strategic and intrinsic evaluation, and have a plan to address poor performance and potentially reshape our business, regenerate profitable revenue growth and cash flow, reduce our structural cost base, ensure we have adequate financial flexibility, and embed a focus on value creation. Implementation of the plan has begun and in 2011 will incur costs. We expect the benefits to start accruing during the year and to become more clearly visible in 2012."

1 March 2011

Enquiries:

A presentation for investors and analysts will be held at Xchanging's offices at 34 Leadenhall Street, London, EC3A 1AX at 09:15 on 1 March 2011. There will also be the option to dial into the presentation, please use this link to register http://emea.directeventreg.com/registration/event/47456450 or dial +44 (0) 1452 587 620, conference ID: 47456450. For individuals unable to listen to the presentation, a telephone replay will be available until 14 March 2011. Please telephone +44 (0) 1452 55 00 00 (conference ID: 47456450#).

About Xchanging:

Xchanging is a global business processer. We serve a wide range of multinational customers in 42 countries and employ over 8,000 people. Xchanging provides procurement, accounting, human resources and technology services across industries. These include banking, insurance, manufacturing, retail and real estate among others. We combine functional expertise with deep industry domain knowledge to provide specific outcomes for our customers. Our aim is simply to provide business processing services, performing them better, faster and more cheaply.

www.xchanging.com 

Chairman's statement

2010 was a difficult year, characterised by performance issues with parts of the Cambridge business and a weak economic background in our principal markets.

In 2010, revenue increased by 4%. Underlying operating profit was £67.3 million (FY 2009: £63.9 million), helped by contract settlements and consultancy income totalling £11.8 million (FY 2009 £8.0 million). In addition, exceptional items totalling £112.5 million have been recorded, including an impairment provision against goodwill arising from the Cambridge acquisition. The operating cash flow of the year was similar to 2009 and the net cash balance of £24.8 million at the year end was slightly higher than at the end of 2009 (£22.1 million).

Cambridge

Cambridge was purchased at the beginning of 2009 and the results to date, particularly in the American workers' compensation and ITO businesses have been very disappointing. The business in India is performing well. The results from the Australian and the other Asian businesses have been mixed but do provide a platform for the future. The acquisition has been costly in terms of profitability, cash flow and management distraction. A plan is underway to resolve the major issues as quickly as possible.

Board Changes

In October, Richard Houghton stood down from the Board and his role as Chief Financial Officer (CFO) and Ken Lever was appointed his successor.

On 9 February, we announced that David Andrews had decided to step down from the Board and his role as Chief Executive Officer (CEO) with immediate effect. As David was the founder and successful creator of Xchanging as a business, I am delighted he has agreed to take on a new role as Senior Adviser to me, to support Xchanging's business development initiatives.

We have begun the search for David's successor as CEO. Whilst this is ongoing, Ken Lever, will be acting CEO in addition to his responsibilities as CFO, and I will support him as Executive Chairman.

Our People

It is in difficult circumstances that we recognise the strength and resolve of our people, our most valuable resource. The last few weeks have been challenging but I am confident that our employees have the determination to meet these challenges and to put Xchanging back on the path to becoming the global business processor of choice.

Our Customers

Xchanging's strength is based on unrelenting attention to customer service. We have been reassured by the continued support of all of our customers and partners during 2010 and look forward to building on these relationships in 2011.

Liquidity

The group's liquidity and cash position remain sound and cash generation will be a primary focus in the coming year.

Dividend

Shareholders will be disappointed by our decision not to declare a dividend in respect of 2010. However, we want to conserve our cash resources in the business for the changes we are effecting in 2011 and to fund the growth opportunities we see. We will review this again at the end of the year.

Action Plan

We have developed a four part action plan to overhaul our entire business, seeking value creation through regenerated profitable revenue growth and cash flow improvement. Where value is best created through disposal, we will pursue this option. The first part of our plan, a fundamental value assessment of our entire business, is complete, and we have already started taking specific action. We will report on progress at the half year. There will be costs associated with any such restructuring but we believe this will put the company in a better position to resume growth in 2012.

Outlook

We expect 2011 to be a year of transition for the company. We will continue to drive the successful and profitable parts of our business, focusing our sales efforts on our existing customer base and some potential new ones. I believe that the initiatives now underway will enable us to start rebuilding shareholder confidence and value.

Chief Executive Officer's statement

Overview

In 2010, Xchanging's revenue increased by 4.0% to £780.6 million, as new business of £73.7 million and acquisitions were partially offset by leakage from existing customers.

Our underlying operating profit rose by 5.3% to £67.3 million, helped by acquisitions and by contract settlements and consultancy income. Although it is in the nature of our business to see such items each year, in the interests of clarity we believe it is helpful at this time to identify them. Excluding these items, adjusted operating profit was 0.8% lower at £55.5 million. Net cash ended slightly up on the year at £24.8 million.

After amortisation of intangibles and a significant adjustment to goodwill related to the Cambridge business, it is disappointing to have to report a statutory loss for the year of £55.6 million.

Whilst the problematic parts of the Cambridge business have been the focus of discussion in 2010, we have also made positive progress in other parts of the group. We are now the largest independent investment account processor in Germany following further new customer wins. In Technology we have expanded our capabilities enabling us to compete successfully in additional business areas, for example, winning two important contracts from Gatwick Airport. An additional contract in Australia from our existing customer Aon supported our strategic aim to grow our portfolio of customers served in multiple regions. Service improvements and expansion helped us maintain and strengthen our leadership position in the UK insurance market.

 Cambridge

Cambridge gives us a strategically significant presence in India, additional technology expertise and some important international customers. However, it is clear that the cost of the acquisition in terms of profitability, cash flow and management distraction has been significant and it has set back Xchanging's development. The business, which in 2010 accounted for 17.9% of our revenue and 3.2% of adjusted operating profit, underperformed during 2010 and it is unlikely that the benefits we expected at the time of the acquisition will be fully realised. The recession had a part to play preventing customers placing new business due to pressures on discretionary spend.

The Cambridge business in India has performed well, both operationally and financially, and has given us a significant low-cost production base. This supports our strategic aim to increase offshoring and reduce our structural cost base. However, the Australian business has been less successful and the US has significantly underperformed, with the ITO and workers' compensation business lines, which are heavily dependent on the US economy, severely hit by volume reductions, price pressures and competition.

One of our critical actions for 2011 is therefore to stem Cambridge's losses and restrict its cash outflow. We have initiated a plan to address the issues around Cambridge, including the transfer of the profitable and cash generating businesses to Xchanging and an exit from those areas that do not fit into our strategy. We will report on our progress during 2011.

While these actions will lead to performance improvement in time, we believe it right to recognise a reduction in the value of goodwill which arose on the acquisition. The goodwill impairment reflects Cambridge's substantial deviation from the original business case. It is not generating sufficient cash flow to support the valuation nor, based on what we currently know, is it likely to do so in the foreseeable future.

We have set out more information on Cambridge and our plans for the business below.

Operational Performance

Our Business Structure

Since 2009 we have managed our business along regional lines, in part due to the expansion of our business following the Cambridge acquisition. We are now introducing to our structure an increasing focus on four global sectors: Insurance Services, Financial Services, Technology and Procurement and HR. In addition to presenting the financial information on a regional basis, we have also reported the information for each sector and set out our performance review by business sector.

In revenue terms, our Insurance services, Financial services and Procurement and HR sectors are relatively evenly balanced. Although smaller, our Technology business has been growing in both strategic importance and size and offers significant potential for the future.

Sector Performance

Insurance services

Overall revenue decreased by 2.2% to £258.0 million (FY 2009: £263.8 million) and adjusted operating profit rose by 12.8% to £33.0 million (FY 2009: £29.3 million). Adjusted operating profit margins improved to 12.8% (FY 2009: 11.1%).

The revenue decline was driven by the workers' compensation businesses in the US and Australia, which underperformed due to volume declines. In the highly competitive US market, this underperformance was accentuated by customer losses, including the California Insurance Guarantee Association (CIGA), and in Australia by lower bonus revenue amounts.

The majority of our insurance business is in the UK and this business performed strongly. Margins also improved, benefitting from the 2009 restructuring carried out in the UK, which generated productivity savings.

In Australia, the impact of a loss making contract was offset by strong performances elsewhere.

We won new business in the year, adding a further contract with Aon Australia's Risk Solutions business, initially for two years, and extending the length of the existing Enterprise Partnership with Aon.

We are restructuring the businesses in the US and Australia and will divert resources to those areas of the business where our competitive position is strongest. We will then build globally on the strengths of the UK business.

Financial services

Revenue from Financial services rose by 15.9% to £194.8 million (FY 2009: £168.0 million), and adjusted operating profit decreased by 25.5% to £11.3 million (FY 2009: £15.1 million). Adjusted operating margins fell to 5.8% (FY 2009: 9.0%).

The main drivers of the revenue growth in the year were twofold. We completed the migration of the FondsServiceBank accounts onto the Fondsdepot Bank (FDB) platform, driving additional volume through this Enterprise Partnership. We also added investment accounts from SEB Bank, SEB Asset Management, VERITAS INVESTMENT TRUST, Goethaer Versicherung and OnVista Bank. The second half of the year also saw a first contribution from the Kedrios Enterprise Partnership.

Transaction volumes in securities processing and fund administration remained low compared to previous years following the financial crisis. However, towards the end of the year the market saw some signs of revival with a higher number of Initial Public Offerings and corporate actions (such as rights issues).

There were two one-off contract settlement payments in the year. One was due to the acquisition of one customer by another. The second was due to modification of a customer's contract terms.

During the year we established a new Enterprise Partnership in Italy with the Kedrios subsidiary of SIA-SSB. This Enterprise Partnership combines our expertise in securities processing and investment account administration with the Kedrios strength in fund administration in the Italian market. This business has, however, underperformed and platform migration is proving challenging. We will address these issues in 2011 but there will continue to be an adverse effect on financial performance in 2011, with an anticipated loss in the order of €4 million to €5 million.

Technology

Technology sector revenues rose by 24.7% to £116.2 million (FY 2009: £93.2 million) and adjusted operating profit increased by 25.1% to £17.4 million (FY 2009: £13.9 million). Adjusted operating margins were maintained at 15.0% (FY 2009: 14.9%).

Our technology business overall performed well during the year with particularly strong growth in the UK. This was partly offset by a decline in discretionary IT spend in the US and AsiaPac markets affecting ITO revenues. The outlook for the Asia Pacific region looks improved.

In June we acquired Data Integration (DI), one of the UK's leading networking, security and communication technology providers. The acquisition has strengthened our technology capabilities and also brought an important UK customer base.

The new capabilities that came with DI were instrumental in securing two contracts with Gatwick Airport, launching a strong new strategic relationship.

We delivered new technology services and systems to the London Metal Exchange, deepening our existing relationship with this important customer.

Illustrating the market trend to seek outsourcing in order to meet regulatory requirements, we launched, in partnership with hardware and software providers, a data management service that meets Solvency II regulations.

In the US, our ITO business continued to suffer from competitive pressures and declining revenues and profitability. This Cambridge business will be included in the strategic review of our US operations.

Procurement and HR

Procurement and HR revenue fell by 6.1% to £211.6 million (FY 2009: £225.2 million) and adjusted operating profit fell by 34.4% to £11.1 million (FY 2009: £16.9 million). Adjusted operating margins fell to 5.2% (FY 2009: 7.5%).

The decline in the year was mainly attributable to two factors. Procurement revenues fell as government spending reductions affected key customers leading to lower labour volumes. In HR services, revenues declined owing to contracts not being renewed in 2009 and 2010.

We won a five year multi-national contract with the pallet and container pooling services company CHEP Europe to manage £75 million of spend per annum. This contract demonstrates our ability to win cross-border business.

During the year we expanded our service relationship with BAE Systems, in a number of areas to deliver HR and procurement services.

Action Plan for 2011

We did not see the revenue growth we would have liked during 2010 and our profit was helped by a number of non-recurring items. We recognise the need to achieve greater revenue growth in 2011 and beyond, as well as to improve our operating margins through cost initiatives. Improving profitability will in turn increase our cash generation and value for our shareholders.

To achieve these improvements, we have developed a series of actions in four areas: strategic and intrinsic value review, operational improvements, revenue growth and cash flow and funding. A number of these actions are already under way.

Strategic and Intrinsic Value Review

As the first part of our plan, we have conducted a root and branch review of our entire business portfolio. From this we have identified our businesses with unsatisfactory returns, including the underperforming parts of Cambridge and Kedrios. We also examined the value creation and sharing models in each of our Enterprise Partnerships to assess their attractiveness.

This process has, in addition, enabled us to develop a clear view of the intrinsic value of each business and of the group overall.

We believe we can create value for shareholders by addressing our underperforming businesses, either through operational improvements or by changes in our portfolio of businesses which may result in some disposals.

We also need to inculcate a culture of value creation and a focus on economic returns. Our operational improvement plans are designed to reflect this.

Operational improvements

The second part of our plan tackles the need to be a low cost producer if we are to compete effectively and deliver profitability for shareholders. Our infrastructure has expanded faster than our rate of business growth. Without jeopardising our capabilities or potential for future growth, we must now prune out non-value-adding overheads and reduce our cost structure to a more proportionate size. To this end, we have embarked on a strategic cost management programme comprising a number of elements.

We will continue to transfer more of our production offshore to low cost areas. In pursuit of this strategic aim, the restructuring in Germany and the UK, which we started in 2009, was completed in 2010, delivering cost savings in the year of approximately £9.5 million. We expect to see further ongoing savings.

We can make further progress in this direction and are targeting to achieve an increase in our workforce located in low cost countries. There will be costs in 2011 to achieve this with the full benefits flowing in 2012. Typically the payback period for offshoring is on average around one year.

We will examine options to rationalise our space requirements in the UK and we will reorganise the way we run our business to achieve both synergies and economies of scale.

We are reducing our senior manager numbers by bringing together senior management teams, eliminating duplication and reducing the number of central function heads. This should lead to additional savings.

At the same time we want to develop a performance culture with a focus on economic returns. To do this we are creating greater responsibility and accountability for performance throughout the company. This will be supported by the introduction of a revised incentive plan for management based on value creation.

A more focused supplier management programme will contribute to improved competitiveness of cost inputs. This programme seeks annual savings of about £3-5 million from 2012.

Revenue Growth

The third part of our plan addresses our ability to generate revenue growth.

Current market trends are providing an environment offering the potential for us to grow. Chief amongst these are increasing demand for global sourcing; for value-added services and an innovative approach to methodologies and new processes; and for the increasing use of technology, especially cloud technology. Companies are looking to outsourcing as a means of managing risk, reducing costs and complying with increasingly rigorous regulatory demands. For outsourcers, industry-specific expertise and capabilities and technology are proving to be competitive differentiators.

To achieve profitable revenue growth, we have refocused our market strategy. Whilst establishing new Enterprise Partnerships offers the opportunity to gain step changes in levels of revenue generation, it is just one way to achieve growth. In recent years our new revenue has come primarily from straightforward outsourcing contracts, business support services and product sales. We will continue to pursue this approach and will also actively pursue partnering opportunities with other service providers.

Expanding our business with existing customers, either with additional services or by extending into other geographies, is a strong growth strategy. So we will continue to focus on our top 50 customers. There is also good scope to expand relatively small existing contracts with the very large companies in our top 300 customer list.

As part of our introduction of a greater focus on economic returns, we plan to improve the effectiveness of our sales force through greater accountability and closer links to targets.

Cash flow and funding structure

The fourth part of our plan is to improve our cash flow and to ensure our funding arrangements are both adequate and efficient.

We have now placed a keen focus on cash flow in all our businesses and need to improve conversion of operating profit into operating cash flow. Capital expenditure will now have clear limitations and we are seeking improvements in our working capital management.

We have started to discuss ways of reconfiguring our funding arrangements. In particular we are looking at cash in the Enterprise Partnerships and the financial structure of Cambridge to see how we can introduce more flexibility to the finances of these businesses. Such flexibility in our internal funding flows will facilitate both our immediate restructuring plans and our future growth.

Our current structure does not fully utilise the debt capacity of the group and, even at the lower levels of profitability expected for 2011, the group EBITDA should comfortably support debt service at a higher level.

Our bank facility is scheduled for renewal in October 2012. We are initiating renewal negotiations early to ensure we have the funding in place to support our plans and to provide comfort to shareholders. This process should be complete by the time of our half year results.

Outlook

There is no doubt that 2011 is going to be a challenging year. An action plan to capture the good parts of our business and to address the poor performing areas is underway.

We believe our base revenue is secure. Our basic business is sound and we have a strong customer base. Our experience and expertise, technology and global presence position us well to take advantage of the market trend towards greater outsourcing.

It will be a year of transition as we address and resolve some clearly defined problems. Based on the outcome of a detailed evaluation, we have a four-part plan to generate profitable revenue growth, to embed a focus on value creation, reduce cost and potentially reshape our business. Implementation of the plan has begun and in 2011 will incur costs. However we expect the benefits to start accruing during the year and to become more clearly visible in 2012.

Review of financial performance

Group key performance indicators

The Group's KPIs are calculated after adding back a number of non-cash and acquisition-related adjustments and exceptional charges, as noted below, in order to present the underlying performance of the business.

Notes:

(1) Underlying operating profit excludes exceptional items (FY 2010: £112.5 million, FY 2009: £29.2 million), amortisation of intangible assets previously unrecognised by acquired entities (FY 2010: £9.2 million, FY 2009: £10.0 million) and costs of acquisitions (FY 2010: £1.2 million, FY 2009: £1.0 million).

(2) Adjusted operating profit also excludes specific non-recurring items in the income statement arising in the ordinary course of business but which, in the Directors' judgement, need to be disclosed by virtue of their size and incidence (FY 2010: £11.8 million, FY 2009: £8.0 million). These items are explained further in the Operating and financial review.

(3) Underlying earnings per share (EPS) - Xchanging share of underlying profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December

(4) Adjusted earnings per share (EPS) - Xchanging share of adjusted operating profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December

(5) Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre contract costs) and dividends to non controlling interests.

(6) Net cash is calculated as cash and cash equivalents less bank loans and overdrafts, liabilities and receivable purchase facilities. The above net cash number does not include finance leases.

(7) Equity free cash flow is calculated as operating cash flow less tax and interest.

Group performance

Revenue growth

Revenue for the year ended 31 December 2010 was £780.6 million, an increase of 4.0% over the previous year (FY 2009: £750.4 million).

Organic revenue was £737.9 million, a decline of 1.5% on 2009 revenues. The organic revenue decline excludes the impact of foreign exchange rate movements and acquisitions, therefore showing a like-for-like revenue movement.

In 2010, organic revenues exclude revenues of £42.7 million from acquisitions made in the year including Data Integration and Kedrios and the FondsServiceBank (FSB) and SEB transactions. In addition, organic growth excludes adverse currency movements of 0.2%.

The organic decline was driven primarily by lower procurement revenues, lower revenues in the US and Australian workers compensation businesses, reduced demand in the ITO businesses and lower securities processing volumes in Continental Europe. These are partly offset by strong hosting technology services revenues and additional revenues in the UK insurance businesses in the UK.

Revenue visibility

Xchanging uses a revenue visibility measure, which represents revenue we can reasonably expect to arise in the year from current customers with which we have a contractual relationship. In light of the economic climate and our performance in 2010, we have undertaken a thorough review of our revenue visibility.

Our visible revenue going into 2010 was £684.0 million. Going into 2011, our revenue visibility is £648.0 million.  The Group's order book totals £1.6 billion. This represents the remaining contracted value of all existing customer relationships.

Whilst the Group has high visibility of revenue, these are to an extent volume dependent, with a number of our businesses generating revenue on a transactional or partially transactional basis.

In most cases, volumes are highly predictable and certain as is the case in our insurance claims and premium processing businesses and funds administration business. Additionally, the services to which these volumes relate are subject to exclusive contracts. In considering revenue visibility, fixed and highly predictable volume based revenue is treated as fixed revenue and constitutes 84% of our visible revenue.

In other cases, volumes are more sensitive to market conditions and competition. These are generally in our business support businesses such as global mobility services and recruitment. In these cases, when considering revenue visibility, highly volume dependent revenue is determined based on a conservative view of the businesses performance, capability, and competitive position. This revenue is treated as volume dependant and constitutes 16% of our visible revenue.

Operating Profit

Underlying operating profit (EBIT) increased 5.3% to £67.3 million (FY 2009: £63.9 million). On a like-for-like basis, underlying operating profit decreased 10.8%, excluding profit earned from acquisitions of Data Integration (£1.7 million) SEB (£5.0 million), FSB (£3.6 million), and the Kedrios Enterprise Partnership (loss of £0.9 million) and beneficial foreign exchange rate movements of 1.3%. The beneficial foreign exchange movements are driven by favourable movements in the Indian rupee and Australian dollar, offsetting negative movements in the Euro.

Statutory operating profit decreased to a loss of £55.6 million (FY 2009: profit £23.7 million (as restated following amendments to IFRS 3)). Statutory operating profit includes the following:

·; Net exceptional items totalling £112.5 million, primarily related to the impairment of goodwill, intangible and other assets and onerous contract provisions (FY 2009: £29.2m in relation to the integration of Cambridge, restructuring costs and a liability provision release);

·; Amortisation of acquired intangibles totalling £9.2 million (FY 2009: £10.0 million); and

·; Acquisition related expenses of £1.2 million in respect of Xchanging InvestmentServices GmbH (XISG), Data Integration (DI) and Kedrios (FY 2009: £1.0 million in respect of FSB).

Xchanging's share of underlying operating profit for the year increased by 2.8% to £37.3 million (FY 2009: £36.3 million). This represents a margin after excluding non-controlling interests of 4.8% (FY 2009: 4.8%).

Quality of profit

It is in the nature of our business that there are one-off items included each year in reported underlying operating profit. In this respect, our reported underlying operating profit for 2010 included £6.9 million relating to contract settlements arising in the second half of the year (FY 2009: £3.2 million).

In addition, as previously indicated, our reported underlying operating profit includes consulting income from the Compagnie Pour Assistance Technique et Investissements S.A. (CATISA) arrangement of £4.9 million (FY 2009: £4.8 million).

Adjusted operating profit

In order to improve the understanding of our accounts, going forward, the Group will move from reporting underlying operating profit to adjusted operating profit. Adjusted operating profit will adjust the statutory operating profit for both favourable and unfavourable one-off items which are received in the normal course of our business and add back costs of acquisition and amortisation of intangibles previously amortised by an acquired entity.

The table below details the adjustments that have been made by Xchanging historically to determine underlying operating profit. The table further reconciles underlying operating profit to the adjusted number disclosing material transactions in the year which have had an impact on the Group's results.

During 2010, there were two contract settlements which arose as a result of the renegotiation of the contract terms and reconfiguration of the contracts following the acquisition of one customer by another. This amounted to £6.9 million. Similarly, in 2009 two contract settlements arose as a result of a service exit and contract renegotiation (£3.2 million).

In addition, in 2009 and 2010 the Group benefitted from consulting income from the CATISA contract which will not recur in 2011. This was described in the 2009 Annual report and accounts.

Margins

Underlying EBIT margins for the Group increased by 11 basis points (bps) to 8.6% in 2010 (FY 2009: 8.5%). Adjusted operating profit margins (excluding one-off items, as noted above) decreased by 35 bps to 7.1% (FY 2009: 7.4%), driven by a decrease in adjusted operating profit margins in Continental Europe (due to financial services margin decline) and Asia Pacific (due to workers' compensation and technology businesses margin decline), offset by an increase in margin in the UK region which showed a strong performance (technology and Insurance services margins). In addition, a reduction in corporate costs, comprising unallocated central charges, also helped improve Group margins. Refer to the regional segmental and business sector analyses for further details.

Earnings per share

When considering earnings per share, the Group uses Xchanging's share of underlying and adjusted profit for the year, to represent the performance of the business.

Underlying basic earnings per share has grown by 1.3% to 15.60 pence (2009: 15.40 pence). The improvement in earnings per share is driven by growth of 2.8% in Xchanging's share of underlying profit after tax for the year. At a basic EPS level, this growth has been diluted by an increase in the average number of shares in issue by 1.5% to 239.0 million shares (2009: 235.4 million). The increase in average number of shares in issue is due to the exercise of options resulting in the issue of 2.4 million shares (1.8 million on weighted average basis).

Adjusted basic earnings per share has declined by 6.9% to 11.99 pence (2009: 12.88 pence). The decline in adjusted earnings per share, reflects a 5.6% decline in Xchanging's share of adjusted profit after tax for the year.

Exceptional items

The Group posted total exceptional items of £112.5 million during the year (FY 2009: £29.2 million). In 2010, these related to:

·; Impairment of goodwill, intangible and other assets totalling £110.0 million.

·; Provision for onerous contracts totalling £2.6 million, relating to an Australian workers compensation processing contract deemed to be onerous in the Asia Pacific region based on the loss of market share and likelihood of future revenues not being sufficient to cover the operating costs.

·; Gain on acquisition of £0.1 million relating to the Kedrios Enterprise Partnership business combination.

In 2009, exceptional charges totalling £29.2 million related to the integration of Cambridge (£16.7 million) and the restructuring of the existing Xchanging business (£17.4 million), offset by an exceptional gain of £5.0 million associated with the release of a liability provision in the Fondsdepot Bank (FDB) business.

Impairments

Following a review of goodwill and other intangible and asset balances, impairment charges totalling £110.0 million have been recorded. These relate to:

·; Impairment of Americas goodwill totalling £50.4 million, relating to the Cambridge US business acquired in 2009, reflecting the underperformance of the US workers' compensation business against the original business case expectations. £3.5 million of goodwill remains in relation to the Cambridge US Business Process Outsourcing (BPO) business.

·; Impairment of Asia Pacific goodwill totalling £39.6 million, relating to the Cambridge Australia business acquired in 2009, reflecting the decline in revenues from the Australian workers' compensation business during 2010, and uncertainty over future revenues. Revenues from this contract are reliant upon a number of factors outside of the managing agents' control including actuarial assessments of the performance of the State-wide injured workers' fund schemes. £5.3 million of goodwill remains in relation to the Australia BPO businesses.

·; Impairment of UK and Continental Europe goodwill totalling £9.4 million, relating to two smaller cash generating units (European procurement and UK advisory businesses) that have been affected by lower demand from difficult economic conditions specific to those businesses.

·; Impairment of other intangible assets totalling £7.4 million. These relate to specific intangible assets within the Americas, Asia Pacific and Continental Europe regions that have been impaired based on the likelihood of insufficient future revenues from those assets.

·; Impairment of an available for sale asset and investment totalling £3.2 million, relating to an investment in Big E Real Estate Inc. which is owned by a Cambridge group company.

Revenue and adjusted profit movement - like-for-like analysis

Table below shows the organic revenue and adjusted profit movements, by region, excluding the impact of foreign exchange movements and acquisitions

*Note: Acquisition revenues and operating profit relate to Data Integration, SEB, FSB and Kedrios. As FSB customer accounts have been fully integrated and subsumed onto the FDB platform, it is not possible to fully and separately identify costs directly relating to FSB for 2010. Therefore, an estimate of the profit impact from FSB has been made for the purposes of identifying the underlying growth rate for adjusted operating profit.

On a like-for-like basis, excluding the impact of foreign exchange and acquisitions, Group revenues declined by 1.5%, and adjusted operating profit declined by 19.2%.

Favourable movements in the Australian dollar, Indian rupee and US dollar exchange rates were offset by unfavourable movements in the Euro.

Excluding the impact of the contract settlements noted in the 'Quality of profit' section above, 2010 external revenue for the Group was £768.8 million, a 3.6% decline from 2009 (FY 2009: £742.5 million).

Segmental performance

In the full year 2009 financial accounts, the Americas region included our IT outsourcing and insurance software businesses. These businesses consist of a number of entities in various locations, primarily the USA, India and the Far East. During 2010, these businesses were managed and reported within the respective geographic regions, resulting in the businesses based in India and the Far East moving from the Americas region to the Asia Pacific region reporting segment.

In addition, the Global Procurement segment, which previously included all of our procurement businesses, was regionalised. As a result, Global Procurement no longer exists as an operating segment, with the respective businesses being managed and reported within the UK, Continental Europe, Asia Pacific and Americas regions.

Segmental performance, based on the 2010 reporting structure, is discussed below.

UK

External revenue for the UK region increased by 2.0% to £414.7 million, including the £9.0 million of revenue associated with the acquisition of Data Integration in 2010. On a like-for-like basis, excluding acquisitions, the UK region revenue decreased by 0.2%.

Revenues grew strongly within the Technology business, driven by services provided to the London Metal Exchange, and within the Insurance businesses from development revenues associated with electronic claims processing initiatives within the London Insurance market. Together these accounted for £14.4 million of growth. These are fully offset by a sharp decline in UK procurement revenues due to lower volumes resulting from government spending cuts affecting our key customers, and a decline in HR services revenues following terminated contracts in 2009 and 2010. These terminated contracts related to recruitment and pensions services, and accounted for £15.4 million of revenue decline. Procurement and HR revenue decline was partially mitigated by expanding our relationship with BAE Systems.

Adjusted operating profit increased by 14.0% to £53.9 million (FY 2009: £47.3 million), representing an adjusted operating profit margin of 12.8% (FY 2009: 11.4%). On a like-for-like basis, excluding £1.7 million of profit from Data Integration, adjusted operating profit increased by 10.4%.

Profit growth is driven by revenue increases in the higher-margin technology and insurance businesses combined with productivity improvements from the lean processor restructuring programme commenced in 2009. Overall £10.1 million of adjusted profit growth came from the UK technology and insurance businesses. These are offset by a £3.9 million decline in adjusted operating profit from lower revenues in the procurement business and a £1.3 million decline in adjusted operating profit from HR businesses.

Americas

External revenue for the Americas region decreased by 3.7% to £125.5 million (FY 2009: £130.3 million), including a favourable foreign exchange impact of £1.4 million. On a like-for-like basis revenues declined by 4.8%.

The decrease was driven by the workers' compensation business, which has been adversely affected by volume declines and the full-year impact of customers lost during 2009. This was partially offset by increased case management vendor revenues resulting in an overall revenue decline of £3.9 million on a like-for-like basis. In addition, revenues from the IT outsourcing business declined due to lower levels of renewal and new sales.

 Adjusted operating profit increased to £2.1 million (FY: 2009 £0.8 million), including £0.1m benefit from foreign exchange, representing an increase in adjusted operating profit margins to 1.7% (FY 2009: 0.6%). The profit impact of lower revenues in the workers' compensation business was partially offset by productivity savings from the 2009 Cambridge integration programme. In addition, profit benefited from releases of onerous contract provisions (totalling approximately £1.0 million) following sub-lease and termination agreements established during 2010. Furthermore, in 2010 the workers' compensation business received sales tax and other credits relating to prior years, totalling approximately £0.8 million. Profit from the technology businesses in the Americas region declined by £1.6 million, primarily due to licence sales in 2009 which were not renewed in 2010.

The Americas revenue and underlying operating profit for the year also included £4.9 million of revenue from the contract for services with Compagnie Pour Assistance Technique et Investissements S.A (CATISA), which we have excluded in deriving adjusted operating profit (FY 2009: £4.8 million).

Continental Europe

External revenue for the Continental Europe region increased by 15.9% to £194.6 million (FY 2009: £167.9 million), including unfavourable foreign exchange movements of £8.4 million and revenue from acquisitions in the year of £33.7 million. Acquisition revenues included Kedrios and the FSB and SEB transactions. On a like-for-like basis revenue for Continental Europe grew marginally by £1.4 million (0.8%).

This increase includes £3.6 million of revenue from contract settlements within Xchanging Transaction Bank (XTB). Underlying revenues in Continental Europe therefore declined, primarily due to lower securities processing volumes within XTB and lower revenues from the German withholding tax services (Abgeltungssteuer), resulting in £6.3 million lower revenues on a like-for-like basis. These were partly offset by additional funds administration volumes within FDB where new third party customers were added to the platform during 2010.

Continental Europe's underlying operating profit for the year also included £6.9 million of one-time contract settlements, which have been excluded in deriving adjusted operating profit.

Adjusted operating profit declined by 29.8% to £9.3 million (FY 2009: £13.2 million), representing an adjusted operating profit margin of 4.8% (FY 2009: 7.8%). This includes an unfavourable foreign exchange impact of £0.7 million, and an operating profit from acquisitions of £7.7 million.

On a like-for-like basis, therefore, Continental Europe adjusted operating profit declined by £10.9 million (82.7%). The decrease reflects significant cost pressures within the business and lower-margin funds administration processing revenues within FDB replacing higher-margin securities processing and German withholding tax services (Abgeltungssteuer) revenues within XTB. In addition, operating costs increased in FDB due to additional discounts to the EP partner and additional costs associated with the transition of FSB and SEB. This offsets benefits from productivity improvements from the lean processor restructuring programme commenced in 2009. Furthermore, the Kedrios Enterprise Partnership reported operating losses of £0.9 million in 2010. Underperformance in 2010 and a challenging integration are expected to continue to adversely impact 2011 performance.

Asia Pacific

External revenue for the Asia Pacific region increased by 1.2% to £45.8 million (FY 2009: £45.3 million). This includes favourable foreign exchange movements of £5.5 million due to the movement in the Australian dollar and Indian Rupee exchange rates year-on-year. Therefore, on a like-for-like basis, revenues decreased by £5.0 million (11.0%).

The underlying decrease is driven by poor performance in the workers' compensation businesses, which have been affected by lower bonus revenue amounts. These lower bonus revenues reflect the volatile nature of the performance bonus schemes on which managing agent remuneration is based. Australia BPO revenues declined by £3.6 million on a like-for-like basis. In addition, revenues from the IT outsourcing business in Asia Pacific declined by £1.6 million like-for-like, due to lower levels of spend on technology projects by key customers who operated at higher volumes in 2009. These impacts were partly mitigated by new advisory business won from Aon Australia's Risk Solutions business and through strong performance in our Indian off-shoring businesses.

Adjusted operating profit declined by 49.0% to £6.8 million (FY 2009: £13.2 million), representing an adjusted operating profit margin of 8.4% (FY 2009: 17.2%). Profit benefitted from favourable foreign exchange movements by £1.6 million (2.5%), therefore on a like-for-like basis profit declined by £8.0 million (60.8%). This reflects the lower revenue levels, and a large proportion of bonus revenues decline in the workers' compensation businesses dropping straight to the bottom line. Operating profit from the Australian workers' compensation businesses declined by £5.2 million year-on-year on a like-for-like basis.

Corporate

Central costs, which include unallocated Corporate costs, declined by 10.8% to £16.6 million (FY 2009: £18.6 million). Central costs as a percentage of revenue reduced from 2.5% in 2009 to 2.1% in 2010.

This decline includes a reduction in senior management costs from the lean processor restructuring programme, lower staff bonus levels as well as lower expatriate costs, partly offset by additional investment in business development costs during 2010.

Analysis by sectors

Going forward, as the Group will be focussing on global business sectors to make better use of our expertise and resources, the directors believe information by sector, as provided below, is also helpful to users of the financial statements in understanding the Group's performance.

The sectors represent the business lines operated by the Group, including profits generated from the Indian off shoring entities within each sector (within the segmental structure these profits are included solely within the Asia Pacific region).

Like-for-like analysis by sector

Insurance services

External revenue for the Insurance services sector decreased by 2.2% to £258.0 million (FY 2009: £263.8 million). This includes £5.1 million of foreign exchange benefit, primarily due to the movement of the Australian dollar. On a like-for-like basis, revenues declined by 4.1% (£10.9 million). The decrease is driven by the US workers' compensation businesses which have been adversely impacted by volume declines and the full year impact of customers lost during 2009 as well as lower bonus revenue amounts in Australia. Together the revenue decline on a like-for-like basis totalled £10.3 million. This has been partially offset by strong performance in the UK insurance businesses which delivered higher revenues within the London Insurance market from electronic claims processing initiatives and additional core claims processing.

Adjusted operating profit increased by 12.8% to £33.0 million (FY 2009: £29.3 million), representing an adjusted operating profit margin of 12.8% (FY 2009: 11.1%), including a foreign exchange benefit of £1.3 million. On a like-for-like basis, adjusted operating profit increased by 8.4% (£2.4 million) despite the revenue decrease. This is driven by profit improvement in the UK Insurance businesses of £3.1 million from productivity savings and additional development and core processing revenues. In addition, despite the revenue decline in the US workers' compensation business, profit was maintained partly through productivity savings from the Cambridge integration programme in 2009, and through releases of onerous contract provisions (totalling approximately £1.0 million) following sub lease agreements and lease terminations agreed during 2010. Furthermore, in 2010 the US workers' compensation business received sales tax and other credits totalling approximately £0.8 million. These were partly offset by operating profit from the Australian workers' compensation businesses declining by £4.8 million year-on-year on a like-for-like basis, largely reflecting the impact of lower bonus revenues in 2010.

Financial services

External revenue for the Financial services sector increased by 15.9% to £194.8 million (FY 2009: £168.0 million), including unfavourable foreign exchange movements of £7.8 million and revenue from acquisitions in the year of £33.7 million. On a like-for-like basis Financial services revenues grew marginally by £0.9 million (0.5%).

This increase has primarily been generated from additional funds administration volumes within FDB (representing growth of £31.1 million) including the FSB and SEB transactions completed during 2010 and new third party customers added to the platform during 2010. A further £5.3 million of growth was attributable to the Enterprise Partnership with SIA-SSB during the second half of the year. This is partially offset by a decline in securities processing volumes in 2010 within XTB and lower revenues from the German withholding tax services (Abgeltungssteuer), delivering £6.3 million lower revenues on a like-for-like basis.

Adjusted operating profit declined by 25.5% to £11.3 million (FY 2009: £15.1 million), representing an adjusted operating profit margin of 5.8% (FY 2009: 9.0%). This includes an unfavourable foreign exchange impact of £0.8 million, and profit from acquisitions of £7.7 million. On a like-for-like basis, adjusted operating profit declined by £10.7 million (70.9%).

The Financial services sector currently consists of businesses solely within the Continental Europe segmental region, but includes the associated offshore efforts within the Asia Pacific region. The drivers of Financial services sector performance during 2010, have been noted in the Continental Europe segmental commentary.

Technology

External revenue for the Technology business increased by 24.7% to £116.2 million (FY 2009: £93.2 million), including foreign exchange benefit of £1.0 million and revenues from the Data Integration acquisition of £9.0 million. On a like-for-like basis, revenues increased by £13.0 million (13.9%). This movement reflects strong growth within the UK Technology business of £16.2 million driven primarily by additional revenues from services provided to the London Metal Exchange. This growth is partly offset by a decline in IT outsourcing revenues within the US and Asia Pacific markets as a result of lower customer discretionary spend on IT projects during 2010 as compared to 2009.

Adjusted operating profit increased by 25.1% to £17.4 million (FY 2009: £13.9 million), representing an adjusted operating profit margin of 15.0% (FY 2009: 14.9%). This includes foreign exchange benefit of £0.4 million and profit from Data Integration of £1.7 million. On a like-for-like basis, adjusted operating profit increased by £1.4 million (10.0%). Profit growth in the UK Technology business of £3.7 million was offset by the impact of the revenue decline in the IT outsourcing businesses and a lower level of high margin licence sales in the Insurance Software business in 2010, together reducing profit by £2.8 million.

Procurement and HR

External revenue for the HR and procurement businesses decreased by 6.1% to £211.6 million (FY 2009: £225.2 million), with marginal impact from foreign exchange rates. This movement reflects decline in UK procurement revenues of £10.8 million year-on-year primarily due to the impact of lower labour volumes from government spending cuts in the UK impacting our key customers, as well as pricing pressures on existing business. In addition, HR services business revenues declined by £2.9 million following terminated contracts in 2009 (recruitment services) and 2010 (pension services). Revenue decline was partially mitigated by extending our service relationship with BAE Systems.

Adjusted operating profit declined by 34.4% to £11.1 million (FY 2009: £16.9 million), representing an adjusted operating profit margin of 5.2% (FY 2009: 7.5%). This decline reflects the reduced revenues within the sector and a resulting mix of a higher proportion of lower margin revenues, particularly within the procurement and advisory businesses.

Net finance cost

Net finance costs (pre exceptional items, imputed interest on put options and imputed interest on employee loans) decreased from £4.1 million in 2009 to £3.9 million in 2010. Although the aggregate balance of drawn debt increased during 2010, we benefited from a year-on-year reduction in the net finance cost attributable to the post-employment benefits liability to £1.3 million (FY 2009: £1.9 million).

The component of the finance charge relating to external debt facilities and finance leases within the Cambridge entities was £0.6 million (FY 2009: £2.3 million).

Cash flow

Operating cash flow in 2010 was £31.0 million (FY 2009: £26.0 million).

Dividend payments to minority interests were £8.5 million. Included in these payments was £2.0 million relating to a dividend declared by Xchanging Ins-sure Services (XIS) in 2009 but not paid until 2010, due to the high level of capital investment within the business in 2009.

Equity free cash flow for the year was £14.7 million (FY 2009: £10.7 million), and £6.6 million of ordinary dividends were declared and paid in relation to 2009 (FY 2009: £5.5 million in relation to 2008).

Expenditure on acquisitions in the year was £16.5 million (FY 2009: £63.8 million), excluding acquired cash of £9.8 million. There were no disposals.

.Cash generated from operations decreased by 1.8% to £61.8 million.

Overall, our net cash position improved by £2.3 million.

The poor trading performance and the impact of the onerous contracts and legacy lease liabilities has taken its toll on cash flow within Cambridge. Most of the cash outflow is funded by Xchanging as Cambridge has little access to external debt facilities. Cambridge is being funded by intra-group loans from Xchanging. In 2010 new loans to Cambridge from Xchanging totalled £12.7 million. The total amount Xchanging can extend by way of loans to Cambridge is capped at US$ 105 million and at the year end the balance was £56.0 million (US$ 86.6 million).

Capital expenditure

Our net capital expenditure was £22.4 million (FY 2009: £32.6 million), representing 2.9% of revenue (FY 2009: 4.3%). In 2010 Xchanging invested in developing technology to support its managed network services offering, migration of fund administration processing platforms for the European financial markets and continued to develop its insurance application platform.

Funding, distribution policy and dividends

Funding for sustaining investment and organic growth is met initially from cash flow. Our equity free cash flow and available debt finance determine the funding available for acquisitions and distributions.

To ensure that we have sufficient cash to fund future growth, the Board has decided not to pay a dividend for 2010. The Board will keep payment of future dividends under review.

Treasury management

All of our treasury activity takes place within a formal control framework, under policies approved by the Board. We monitor compliance with these policies and guidelines through regular reporting of treasury activities.

The treasury function's primary responsibilities are to procure our capital resources and manage our liquidity, foreign exchange and interest rate risks on a Group-wide basis.

Borrowing facilities

Our principal sources of debt finance are a £75 million multi-currency revolving credit facility and a $58 million term loan. We make regular repayments against the term loan and at the end of 2010 the balance outstanding was $34 million (FY 2009: $50 million). At the year end, $45 million (FY 2009: nil) had been drawn under the revolving credit facility. Both facilities mature in October 2012.

The Group also has a £10 million uncommitted overdraft facility. In addition, there are term loan and overdraft facilities provided to Cambridge in India. The total amount outstanding under the Cambridge Indian bank loan and working capital facilities at the year end was £5.1 million (FY 2009: £7.4 million).

At the year end, we had £28.8 million of headroom under our committed debt facilities.

We expect to be able to finance our current business plans from ongoing operations and our committed funding facilities.

Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its committed term loan and £75 million revolving credit facility.

There are three financial covenants within this facility:

·; the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre exceptional items) must not exceed 2.0 times. As at 31 December 2010, the ratio was 0.74 times.

·; the ratio of Xchanging's share of consolidated profit before depreciation and amortisation (pre exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 31 December 2010, the ratio was 35.4 times; and

·; total net worth must exceed £175 million plus an adjustment for retained earnings. As at 31 December 2010, the total net worth covenant headroom was £44.9 million.

As indicated above, we operated within these limits throughout 2010 and expect to do so in 2011 and 2012.

Levels of borrowing and seasonality

Xchanging operates in a wide range of markets and locations and as a result the seasonality of our borrowing requirements is relatively low. Underlying cyclicality before capital expenditure is driven principally by the timing of our ordinary dividends, collections of dividends and royalties from Enterprise Partnerships and scheduled repayments under the term loan facilities.

During 2010, the peak level of net debt was £7.0 million.

Cash balances

We invest surplus cash to maximise return, within liquidity and counterparty credit constraints that have been approved by the Board.

The majority of our 100%-owned UK entities are included in a pooling arrangement, to optimise liquidity management. We review the efficiency of our other cash balances on a monthly basis.

Enterprise Partnerships operate on a 100% distribution policy, so the net equity in each partnership is maintained at a stable level. Additional cash payments are made to the Group on an annual or quarterly basis, as contractual performance or licence fees. Approximately £14.8 million of the cash balance in Enterprise Partnerships at the year end represented accrued but unpaid licence fees due to Xchanging and a further £11.0 million is expected to be repatriated to Xchanging as dividends in 2011. The remaining cash balance in the Enterprise Partnerships represents dividends due to non-controlling interests and working capital.

Foreign currency translation exposure

We do not hedge foreign currency profit and loss translation exposures and our reported results may therefore be affected by currency fluctuations.

Foreign currency transaction exposures

We are subject to foreign exchange transaction exposure in our Indian operations, where revenues are generated in Sterling, US dollars and Euros and the cost base is primarily in Indian rupees. The principal transaction exposures arising during 2010 included Sterling revenue of £22.3 million and US dollar revenue of $22.7 million. Under our foreign exchange risk management policy, exposures may be hedged with forward foreign exchange contracts when the underlying cash flows are deemed certain. Typically, we will look to hedge revenue to protect operating cash flow and to support the planning cycle. No foreign exchange derivatives were outstanding at the year end but subsequently £3.6 million of Sterling revenue and $2.8 million of US dollar revenue have been hedged against the Indian rupee.

Interest rate risk management

We review our interest rate exposure against acceptable risk profiles on a periodic basis. At the year end, all of our drawn debt was subject to floating rate interest.

Pensions

The Group has three funded Defined Benefit Schemes in the UK, all of which are closed to new members. The Group works closely with the trustees of the schemes to manage risk in the schemes, and in 2009 completed investment strategy reviews on all three, resulting in improved diversification of the underlying assets. All currency exposure in the assets is hedged.

The cash contribution to the UK plans includes £1.4 million per year in respect of a recovery plan agreed with the Trustee on one UK Plan in 2008. Recovery plans are agreed on completion of the triennial actuarial valuations (which commenced in 2010) and therefore revised recovery plans for two UK schemes will be put in place during 2011 following discussions with trustees. It is expected that contributions in respect of the UK defined benefit schemes during 2011 will be £4.0 million (of which £1.6 million is expected to be funded from UK Enterprise Partnerships, and the remainder from wholly owned subsidiaries).

Around 70 UK employees are members of various BAE Systems defined benefit pension schemes; however, the contributions made by the Group to the BAE Systems schemes can only vary in respect of future service contributions and are therefore accounted for on a defined contribution basis. The Group has various indemnities in place with BAE Systems and therefore could only be exposed to deficits in the BAE Schemes in the event that BAE Systems were to become insolvent.

In Continental Europe, the Group operates various unfunded defined benefit plans, the largest of which is supported by a Contractual Trust Arrangement (CTA). The CTA investment strategy adopted by the Group seeks to match asset movements to changes in the value of the liabilities. It is expected that contributions in respect of the Continental Europe defined benefit schemes during 2011 will be £4.1 million (all of which is expected to be funded from Continental Europe Enterprise Partnerships).

The Group works closely with the trustees of all of the pension plans to manage the risks associated with the defined benefit pension provision. The factors that most affect the value of the liabilities are interest rate and mortality risk, and the Group's sensitivity to these particular risks is shown in notes to the accounts.

Capital structure

The Group seeks to maintain a strong credit profile to aid its ability to partner in business and will aim not to exceed consolidated borrowings of 2.0 times Xchanging's share of consolidated profit before depreciation and amortisation. In order to achieve its desired capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders and adjust asset holdings to reduce or increase debt.

As part of the normal course of business, refinancing of the Group's debt facility will get underway in quarter two of 2011. As part of this exercise we will look at ways of optimising the funding structure to make full use of the Group's cash resources in Enterprise Partnerships.

Regulatory capital

Xchanging operates in a number of regulatory regimes. The key businesses affected by regulatory requirements are XTB and FDB, which conduct securities processing and retail investment account management in Germany. They both maintain full banking licences and are regulated under the German Federal Financial Supervisory Authority (BaFin). Sufficient regulatory capital must be held in these entities to cover the operating and credit risks of the business. Regulatory capital requirement is based on market, operating and credit risk factors applied to asset classes. The regulatory capital in the business is calculated as total equity less total intangible assets. There is no obligation to set cash aside to meet regulatory capital requirements but funding may be required from the holding company if the required regulatory capital is less than the calculated regulatory capital.

During 2010, Xchanging contributed €17.5 million (£14.6 million) as capital to the German banking group to support regulatory capital adequacy requirements and to provide funding for the completion of the FSB acquisition.

Components of the insurance business are regulated in the United Kingdom by the Financial Services Authority (FSA).

Weighted average cost of capital

The Group uses a weighted average cost of capital of 10%

Taxation

The Group's underlying effective tax rate, before exceptional items, was 27.4% (FY 2009: 25.7%). The effective tax rate on adjusted operating profit is 29.8% (FY 2009: 28.0%).

The effective tax rate on Xchanging's share of underlying operating profit for the year was 27.3% (FY 2009: 26.4%). The effective tax rate on Xchanging's share of adjusted operating profit for the year was 29.4% (FY 2009: 28.6%).

The effective tax rates for 2009 benefited from the recognition of tax losses in the central services entity.

Non-controlling interests

In 2010, the profit after tax attributable to non-controlling interests totalled £5.5 million (FY 2009: £5.6 million), despite the statutory loss reported. This is reflective of goodwill impairment charges not being allocated to non-controlling interests.

Non-controlling interest calculations for the Group's Enterprise Partnerships are dependent upon the individual contractual terms. Some define adjustments in relation to certain items prior to calculating profit share based on the percentage share ownerships. These may include, for example, adjustments for differences between local and international accounting standards, adjustments for any discounts or fees payable between parties or adjustments for share-based payment charges for employees.

Major accounting judgements

Goodwill

At 31 December 2010, the Group has goodwill balances remaining of £190.3 million (FY 2009: £259.6 million), following impairments to goodwill of £99.4 million, primarily in relation to the US and Australia BPO businesses acquired with Cambridge.

Goodwill carrying values are supported by future cash flow projections for each cash generating unit, and therefore inherently involve estimations of future sales growth, operating costs and margin. In addition, consistent with consideration of strategic options, calculation of the recoverable amounts in relation to the US and Australia BPO goodwill impairment reviews include fair-value less cost-to-sell assumptions with regard to underperforming elements of the businesses. The Directors have reviewed and approved the estimations supporting the carrying value of all goodwill remaining at 31 December 2010.

However, it should be noted that calculation of recoverable amounts used to support certain goodwill balances are sensitive to material assumptions which may impact the future carrying values of goodwill. These assumptions include the timing of exits of underperforming businesses (potentially impacting £8.7 million of goodwill remaining). In addition, future contract renewals with long standing key customers are a material assumption in relation to goodwill values particularly in the Procurement and HR businesses.

Provisions

The Group holds provisions for future obligations where it is probable that there will be an outflow of economic benefit. Provisions by their nature may involve estimations of the expected outflows. The primary provisions held relate to onerous leases and contracts, restructuring, litigation and employee related provisions.

The table below shows total provision movements in 2010.

The material provisions created during the year relate primarily to an onerous contract in our workers' compensation business in Australia totalling £2.6 million and onerous leases (largely due contract losses in the US workers' compensation business) totalling £1.2 million. In addition, litigation provisions were created in the normal course of business totalling £0.8 million, primarily in the US.

The material releases during the year relate to onerous lease provisions largely in the US where sub-lease agreements and lease terminations have been secured on previously vacant properties totalling £1.2 million. The remaining £2.0 million of releases consist of a number of specific operational and employee related provisions where the potential liabilities are assessed as unlikely to crystallise.

The utilisation of provisions during 2010 increased significantly on 2009, as they relate primarily to amounts paid against the lean processor restructuring provision created in 2009 (£12.5 million), settlement of litigation cases in particular one specific US case in early 2010 (£4.2 million in total) and the cash outflows against onerous lease liabilities mainly acquired with the Cambridge business (totalling £5.1 million).

The remaining provision balances are considered sufficient to cover known and likely exposures and primarily consist of £12.0 million for onerous leases and contracts (including a £2.6 million onerous contract provision), £7.0 million for restructuring, £3.7 million for litigation and £8.4 million for employee related and other provisions.

Capitalised costs and Intangible assets

Intangible assets total £67.6 million at 31 December 2010 (FY 2009: £75.3 million). Intangible assets comprise development costs (£5.2 million), software costs (£40.5 million), customer relationships (£20.8 million) and assets in the course of development (£1.2 million).

Software costs include material technology assets developed and other software underpinning our processing operations. These include the Xchanging Insurance Application Platform (XIAP) a global insurance application platform developed during 2009 and 2010, the Insurance Market Repository used for data storage within the London Insurance market and securities and fund administration processing platforms in our Financial Services businesses in Continental Europe. These are described in further detail in Note 5 below.

Customer relationships primarily relate to business combinations, including FSB open architecture customers, Data Integration network managed services customers, funds administration customers and claims processing customers.

During 2010, additions to intangible assets totalled £15.2 million (FY 2009: £18.7 million), of which £8.9 million related to internal costs capitalised (FY 2009: £8.5 million). These primarily relate to the XIAP development during 2010 and FSB platform migration costs following the transition of the FSB business onto the FDB processing platform.

Deferred income

At 31 December 2010, deferred income totalled £36.4 million (FY 2009: £43.3 million). Deferred revenue balances largely relate to workers' compensation claims business (£20.6 million) primarily in the US where income is released in line with estimates of the cost to service claims over their lifecycle based on actuarial tables. Deferred revenue of £12.1 million is held in relation to one material contract lost towards the end of 2010, with £2.4 million of revenue recognised in 2010 at a margin of 6.7%. In addition, software maintenance and license fees received in advance are deferred and the income recognised in the period to which they relate (£5.6 million).

During 2010, £25.8 million of revenue was recognised in the year, and £15.1 million deferred at the end of the year. This reflects the decline in the workers' compensation business and lower revenue levels of revenue deferred in relation to insurance software product sales.

Ken Lever

Chief Financial Officer

1 March 2011

Consolidated income statement

for the year ended 31 December 2010

1 Adjustments to underlying in 2009 and 2010 include amortisation of intangible assets previously unrecognised by an acquired entity, exceptional items, acquisition-related expenses and imputed interest on put options.

2 The comparative amounts have been restated by £1,023,000 to take account of IFRS 3 (revised), "Business combinations", requiring acquisition-related expenses to be expensed to the income statement as incurred rather than capitalised as part of the cost of acquisition.

Consolidated statement of comprehensive income

for the year ended 31 December 2010

Consolidated cash flow statement

for the year ended 31 December 2010

Reconciliation of net cash flow to movement in net cash

for the year ended 31 December 2010

Movement in net cash

for the year ended 31 December 2010

Consolidated balance sheet

as at 31 December 2010