Full Year Results 2013

27 February 2014

Xchanging plc

Full Year Results for the twelve months ended 31 December 2013

Financial Highlights

· Group performed well achieving year-on-year increase in adjusted operating profit and margin.

· Year-on-year organic growth in net revenue + 2.7% (like-for-like).

· Exceptional profit from: disposal of Xchanging Transaction Bank ("XTB") of £12.5 million and forfeiture of the Leadenhall Street office lease £13.3 million.

· Refinanced and increased £125.0 million revolving credit facility signed 3 February 2014.

· Board recommends increase in dividend to 2.5p.

Operational Highlights

· Business Processing Services sector shows strong performance; successful Netsett pilot and X-presso mobile app launch; integration of AR Enterprise and Kedrios, forming Xchanging Italy; sale of shareholding in XTB effective 1 September 2013.

· Technology sector supported by Xuber revenues from Marsh contract; Xuber wins first US contract, with Everest Re, in November 2013 following April launch.

· Procurement had challenging year, but saw good stream of new contract wins in second half of year; September acquisition of e-Sourcing business MarketMaker4 enhances our technology offering, brings a new customer base, and strengthens Xchanging's position in US market.

· Going for Gold programme aimed at greater operating efficiencies and cost reduction through rationalisation and standardisation of functions including finance, HR and IT.

Ken Lever, Chief Executive, commented: "I am pleased to report that in 2013 we have made further progress in the transformation of the Xchanging business. We achieved our objective of year-on-year improvement in financial performance. We are in a much stronger financial position, with robust cash-flows and a newly refinanced bank facility. Across our businesses we have made good progress in our strategic development, notably in adding technology-enablement, for example, through the acquisition of the e-Sourcing business MarketMaker4. Accordingly we are proposing an increase in the dividend to 2.5p.

"We will press ahead with our transformation process in 2014. Our aim is to maintain our current level of operating profit despite the anticipated revenue reduction from areas of business where we have chosen not to operate going forward. This will position us well for a resumption of growth in 2015."

Notes

Enquiries

Xchanging plc Tel: +44 (0) 20 3604 6999

David Bauernfeind, Chief Financial Officer

Alexandra Hockenhull, Director of Corporate Communications

and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Brian Hudspith

Emma Burdett

Dan Yea

www.xchanging.com

@XchangingGroup

Linkedin/company/xchanging  

Executive Insight interview with CEO, Ken Lever

To see a short video interview with Ken Lever reviewing the 2013 results and outlook for 2014 click on the link on the home page at www.xchanging.com

A presentation for investors and analysts will be held at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED at 10:00am on 27 February 2014. For those unable to attend, there will be a live webcast of the presentation available on the company website www.xchanging.com

Cautionary Statement: 

This announcement contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Xchanging's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are; increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approval or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects.

RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2013

EXTRACTS FROM THE CHAIRMAN'S STATEMENT

Strategic development

It has been another year of progress at Xchanging. We are moving through our transformation process from Xchanging's founding business model based on a small number of very large contracts to a lower risk one based on a broader spread of customers. Having put in place the foundations for growth in 2012, we have spent 2013 further simplifying our business structure, defining and investing in our core offerings, developing momentum in our sales and marketing efforts, and in improving the efficiency of our overall business. You can read more about our progress in the Chief Executive's report.

We are now closer to our customers and our markets, and this understanding has fed into our deliberations on strategy. We have domain strengths in complex business processing and critical technology. In procurement we are among the global leaders. We hold a unique position in the way we serve the insurance market in London. We are concentrating our resources and efforts on these areas where we are most likely to compete successfully.

Staying close to our customers and providing them with an excellent service is paramount to our success. We are also clear that innovation and technology-enablement are critical to our future success and we have pursued these, with a number of developments in 2013.

Shareholder returns

As we make progress through our transformation programme, and the timing of our return to steady growth comes closer, shareholders have seen another year of good returns with the share price rising 23%.

Last year, the Board decided to reinstate the dividend, albeit at a modest level, to reflect the financial and strategic progress the company has made, and to demonstrate the Board's confidence in the Company's outlook. The Company's financial performance in 2013 has been very encouraging and we met our objective of achieving year-on-year improvement in financial performance.

In 2014, our headline performance is likely to be moderated, given the known reduction in revenue following the sale of our shareholding in Xchanging Transaction Bank in 2013, the close of the BAE Systems HR contract and the change to the London Metal Exchange's contract following their acquisition.

The Board remains confident in the Company's underlying performance, and its growth prospects beyond 2014. The Board is recommending increasing the dividend by 1.5p to 2.5p.

CHIEF EXECUTIVE'S REPORT

Major developments

During 2013 we have made further progress in the transformation of the Xchanging business. We are in pursuit of a business model that is less dependent on individual major customers; is built around technology as an enabler of business processes; and has a focus on differentiated products and service offerings driven through innovation.

Reduction of customer concentration and business simplification

During the year we continued to reduce the risk presented by high customer concentration and to simplify our business. We sold our shareholding in Xchanging Transaction Bank to our partner Deutsche Bank. As well as further simplifying the business and realising value in the form of cash for re-investment, importantly, the sale contributes to a reduction in customer concentration.

We also, at the year-end, concluded the HR Service contract provided to BAE Systems, Selex and others. This is not a service where we have a strong competitive position and it is not therefore a good fit with our strategy. Therefore we see little to be gained by further investment in this business area.

At the same time, we continued to focus on competing to win new business in order to build a much broader base of customers.

To support this effort, we have focused on cross-selling to maximise opportunities amongst our existing customers. Selling services is a complex sale. It requires insight into both the customer's business and industry. It requires thought leadership. At the start of the year we established an organisation design with greater customer and market focus to take all of our service offerings, in business processing, technology and procurement services, to each of our principal industry sectors.

Through insight into our customers' businesses and industry sectors, and with a customer facing organisation, we will generate growth with both existing and new customers.

Regrettably, we were advised in 2013 that, following the acquisition of the London Metal Exchange ("LME") by Hong Kong Exchanges and Clearing Limited ("HKEx"), a substantial part of the managed service provided to the LME would be taken in-house. This strategic decision by the HKEx was a disappointment. The current contract which started in 2005 (and was renegotiated in 2011) will end on the 1st May 2014. Following this, our continuing involvement will be the provision of technology hosting services for an initial 12 month period and, if requested by the LME, up to two further additional six month period extensions.

Technology-enablement

We have progressed the integration of our Kedrios business into AR Enterprises to establish a profitable business with a robust technology platform and stronger competitive position for our Business Processing Services business in the investment account and fund administration market.

In September we acquired MarketMaker4 which brings into Xchanging a strong e-sourcing capability to supplement the developing technology platform within our Procurement business. The MarketMaker4 offering is complementary to our existing Procurement business, and we have moved quickly to start developing the synergies between the two. We anticipate that the combination of technology investment, sales growth and cost reduction will improve the underlying profitability of our Procurement business following a poor year in 2013.

We continued to add technology-enablement to our offerings in other ways, for example developing the mobile application X-presso for the London insurance market.

Differentiation

We have further rationalised our service offerings to concentrate our resources on those with the most potential for the greatest growth, that are clearly differentiated, and that are in markets where we have particular domain strength. These include our Xuber range of insurance software, which we have continued to develop. It is growing a pipeline of opportunities and has secured some early sales.

World class organisation

We have continued our Going for Gold initiatives. These are aimed at establishing a world-class sales organisation, encouraging innovation to drive differentiation, and ensuring competitive edge and improvement of the overall efficiency of our business. To ensure competitive edge we have continued to pursue our One Xchanging agenda and focused on cost optimisation, standardisation and simplification and development of talent at all levels in our business.

These aims in turn support achievement of our long-term business objectives: year-on-year improvement in financial performance; increased sales to existing customers; and competing to win increased sales to new customers.

Stepping up the pace

Making progress through our transformation, we have moved from a business which was financially challenged to one which has financial strength. At the year-end, Xchanging's share of net cash available had increased to £52.8 million from £22.3 million in 2012 and our renewed banking facility is now in place. We have reduced our dependence on major contracts and customers; focused on value-added services supported by innovation and technology; improved the efficiency of our operations; and developed an improving sales and marketing capability.

As we increase in confidence so we have to step up the pace of change. We will focus on the products and services which offer the greatest potential for growth such as the Xuber range of insurance software, Netsett, and our newly combined Procurement and MarketMaker4 offerings, set greater ambitions for those services, and invest to ensure we have talent in depth to support them. We will increase the speed of our change programmes and growth initiatives.

Investment will be needed to achieve our growth ambitions. We will invest across our businesses to develop growth potential, with emphasis on technology-enablement. In particular, we will continue to invest in Xuber and in other technology supporting our insurance business such as X-presso and Netsett. As well as continuing to invest in the traditional London market we plan to invest in growing our insurance services business outside of this, with an initial focus on the US. We will also invest in the technology platform for our Procurement Services business.

It is unlikely that we will achieve our growth ambitions through organic means alone. So we will be seeking to make further bolt-on acquisitions with characteristics similar to those of AR Enterprises and MarketMaker4 to enhance the technology platforms of all our businesses.

We are starting to see the new Xchanging emerge. Our expectation is that in three years we will have a business with a higher quality of revenue, less dependent on any one customer. We will have a business capable of providing technology-enabled solutions; and we will have a business with differentiated service offerings, capable of growing in line with or slightly better than the market.

Outlook

2014 will be a challenging year. With the sale of our interest in Xchanging Transaction Bank to Deutsche Bank, the return in-house of the HR service to BAE Systems and the reduction in business with the London Metal Exchange, we have considerable ground to make up.

Although revenue will be lower overall in 2014, the additional sales secured in 2013 and new sales in 2014, at higher margins, together with profits from previous acquisitions and additional cost savings, will help offset the profits attributed to the business areas where we have chosen not to operate going forward.

We will press ahead with our transformation process in 2014. Our aim is to maintain our current level of operating profit despite the anticipated revenue reduction. This will position us well for a resumption of growth in 2015.

BUSINESS REVIEW

BUSINESS PROCESSING SERVICES

Financial highlights

Business Processing Services ("BPS") external adjusted net revenue decreased 1.5% to £370.0 million (2012: £375.6 million), including a positive foreign exchange impact of £7.0 million related to movements in the Euro. Adjusted operating profit increased 19.4% to £59.7 million (2012: £50.0 million), representing an adjusted operating profit margin of 16.1% (2012: 13.3%), including a positive foreign exchange impact of £0.3 million.

The UK insurance business delivered an improved profit performance with the increase in processing volumes offsetting the reduction in Broking Services and the continued investment in Netsett. The Australian business has benefitted from incremental revenues as the higher performance fees recognised have a direct impact on profitability. The improved performance in the Australian Workers' Compensation business has led to the release of the onerous contract provision (£2.2 million) that was initially recognised in 2010. This has been treated as an exceptional item.

Outside the Workers' Compensation business, the contract with Toyota Motor Corporation Australia Ltd has been extended until 2015. Our Italian operation has benefitted from the integration of the two businesses, Kedrios and AR Enterprises and a full year of revenues from AR Enterprises which was acquired in November 2012, while Fondsdepot Bank revenue has increased, benefiting from the strong performance of the underlying German stock market. These increases partially offset the year-on-year reduction in revenue from Xchanging Transaction Bank ("XTB") as a result of the disposal which became effective at the beginning of September 2013.

Adjusted operating profit performance increased due to a number of factors. Xchanging Italy has seen the business turn from a loss of £3.0 million in 2012 to a small profit in 2013. Despite the disposal of XTB, there has been an increase in adjusted operating profit for the global securities processing operations, which includes providing on-going services to Deutsche Bank on an arm's length basis from India. During December 2013 an agreement was reached with the vendors of AR Enterprises which fixes the amount and timing of the remaining deferred payment due to them. The amount (£5.3 million) is £5.0 million less than was recognised at the point of acquisition. In January 2014, SIA S.p.A. who held 1.3% of Xchanging Italy exercised their put option, requiring Xchanging to purchase these shares for £4.0 million (€4.8 million). This was paid in January 2014 and results in Xchanging having a 100% shareholding in Xchanging Italy.

Overall, the BPS sector has had a strong performance including the completion of a successful pilot of Netsett with RSA Insurance, the successful launch of the X-presso mobile app for insurance professionals, the launch of the Volume Claims Service, a high quality, fast and fair professional adjusting service for low value claims, and the integration of Kedrios into AR Enterprises.

TECHNOLOGY

Financial highlights

External adjusted net revenue for the Technology sector has increased 3.5% to £102.3 million (2012: £98.8 million), including a positive foreign exchange impact of £0.3 million. Adjusted operating profit decreased 4.2% to £9.2 million (2012: £9.6 million), representing an adjusted operating profit margin of 9.0% (2012: 9.7%).

Sector net revenue has increased whilst future revenues have been secured by winning contracts such as Everest Re, Society of Motor Manufacturers & Traders and the Malaysian Ministry of Education.

Like-for-like revenue growth in 2013 has been driven through growth in the existing customer base including Gatwick Airport while 2013 also includes a full year of Xuber (insurance software product) revenue from Marsh (signed in December 2012) and initial Xuber revenues from Everest Re in the US which was signed in November 2013.

Both the Application Engineering Services and Application Management Services businesses have performed well showing an increased level of profit. The results of Technology for the year reflect that 2013 was a year of increased investment, particularly in Xuber, while building the pipeline of opportunities.

It was announced in April 2013 that as a result of the change in ownership of the London Metal Exchange ("LME"), the provision of services under the current contract with the LME would end with effect from 1 May 2014. The decision to review the contract is due to strategic decisions by the LME's new owners and is not in any way due to dissatisfaction with the service Xchanging provides. Xchanging will provide the LME with residual services from 1 May 2014. As a result of this change, we have restructured our Infrastructure Managed Services business to mitigate the financial impact of this.

PROCUREMENT

Financial highlights

Procurement external adjusted net revenue increased to £54.1 million (2012: £53.5 million), including a positive foreign exchange impact of £0.1 million. Adjusted operating profit decreased 70.5% to £1.8 million (2012: £6.1 million), representing an adjusted operating profit margin of 3.3% (2012: 11.4%), including a negative foreign exchange impact of £0.2 million.

2013 was a difficult year in terms of financial performance with adjusted operating profit and margins lower than 2012. The European procurement business saw the renewed BAE Systems contract in the UK effective from 1 January 2013. The renewed contract was on a lower net revenue and margin basis than the previous agreement. This reduction in revenue was partially offset by an increase in work performed in the HR Services business as a result of BAE Systems exiting this contract on 31 December 2013.

Adjusted operating profit has fallen as a result of the reduced revenues in the European procurement business and also due to the run-off of the contract with BAE Systems in Australia. There have been a series of steps taken throughout 2013 to restructure the operations and reduce the cost base within the sector in Europe, Australia and the USA and the benefits of this restructuring are expected to start to improve the financial performance of the Procurement business in 2014, mitigating the impact of the exit of HR services from 2014.

2013 has seen further investment to build on our presence in North America leading to contract wins including Severn Trent and Diageo in this market, while in Europe there have been contract wins with Godiva and an extension with L'Oréal. These wins reflect the strong pipeline in place across Europe and North America.

The acquisition of MarketMaker4 ("MM4") was completed in September 2013, providing Xchanging with an enhanced technology offering and further intellectual property. MM4 brings a strong customer base which has increased by approximately 50% since the acquisition date.

Financial Review

Group financial performance summary

In 2013, the Group performed well achieving improvement across the majority of financial indicators:

Notes:

1. Income statement

Net Revenue

Net revenue decreased by £1.5 million. The increase in net revenues through organic growth (2.7%) and the full year impact of the combined Xchanging Italy business (£9.7 million) and MarketMaker4 acquisition (£1.1 million) were offset by the reduction in revenue from the disposal of XTB in September (£25.6 million).

Adjusted operating profit

Adjusted operating profit increased by 10.1% to £55.5 million, resulting in an adjusted operating profit margin of 10.5%. The increase was driven by a combination of the adjusted operating growth associated with the increased revenues, offsetting the adverse impact of revenue shrinkage. Overall adjusted operating profit increased due to lower depreciation and amortisation resulting from lower capital investment in recent years.

Sector performance

Margins

Adjusted operating profit margin improved by 100 bps to 10.5% in 2013. Further details on the adjusted operating profit performance of each sector can be found in the business review.

Corporate

Corporate costs for the year totalled £15.2 million (2012: £15.3 million). Corporate run costs in 2013 have benefitted from the restructuring activities undertaken in previous years, which led to a reduction in headcount and simpler, more streamlined processes. However, there was also an increase in costs due to the investment in change projects during the year as part of the Group transformation, and the investment in the creation of shared services.

Taxation

The Group's effective tax rate on adjusted profit before tax was 26.9% (2012: 31.5%). The decrease in the rate in 2013 is due to the recognition of the tax benefit of historic losses in Italy, additional tax amortisation in India and the lower UK corporate tax rate. The cash tax rate on adjusted profit before tax was 28.2% (2012: 33.9%). The effective rate for 2013 is lower than the 2013 cash tax rate largely due to the recognition of the tax benefit for the Italian losses.

Non-controlling interests

Non-controlling interests' share of adjusted profit/(loss) after tax

XTB contributed to non-controlling interests from the start of the year until the point of disposal. The movement in non-controlling interest amount relating to XTB is the result of pension scheme accounting.

2. Earnings per share (EPS)

Adjusted basic earnings per share were 10.30p, a decrease of 0.9% on 2012.

3. Significant events in the year

Acquisition and disposals

On 1 September 2013 the Group disposed of its 51% shareholding in XTB to Deutsche Bank for €40.5 million (£34.7 million). An exceptional gain on sale of £12.5 million was recognised on disposal. XTB provided securities processing services to Deutsche Bank and other financial institutions. Xchanging continues to provide securities processing services to Deutsche Bank on an arms-length basis through the offshore operations.

On 20 September 2013 the group acquired 100% of the share capital of SBB Services Inc., trading as MarketMaker4, an e-sourcing solutions software-as-a-service provider based in the US. Xchanging will pay a potential total consideration of $22.0 million, paid as $11.0 million initial consideration in cash with further payments totalling up to $11.0 million payable throughout 2015 and 2016. IFRS 3 Business Combinations requires the deferred payments to be recognised as post-acquisition related expenses, which will be presented as exceptional items.

Exceptional Items

Exceptional items have been recognised in the year, which have a net operating profit impact of £29.9 million.

The most significant items within this are:

· Profit on disposal of XTB: £12.5 million profit on disposal of the 51% shareholding in XTB which completed 1 September 2013.

· Accelerated exit of Leadenhall Street premises: £13.3 million has been recognised as being the net of the incentive received from the landlord for the early surrender of the leasehold, the release of an historic lease incentive and the associated costs of moving that have been incurred to date. There will be further income and costs recognised in 2014 in respect of this.

A full reconciliation and explanation of the exceptional items is included in note 2 to the accounts.

4. Cash position

Cash movements

Capital expenditure increased from £15.5 million in 2012 to £26.6 million in 2013. The Group increased expenditure on developing products such as Xuber and Netsett as well as investing in the technology infrastructure for the London insurance market. The Group also invested £3.0 million on internal change projects that will be expected to help drive cost savings in future periods.

Tax payments on trading profits for the year were higher than in 2012. Of the £17.0 million payments in 2013, £12.0 million were for normal operations in the year and an additional £5.0 million related to exceptional payments made in the year to cover the tax arising on the surrender of our lease on our London premises and settlement of taxes in respect of prior years.

Net cash

The total cash held on the Group consolidated balance sheet was £121.3 million on 31 December 2013, £83.3 million of which was held by Enterprise Partnerships. Xchanging receives cash from Enterprise Partnerships through contractual licence fees and dividends. In order to provide greater clarity on the amount of cash held on the balance sheet that is directly attributable to Xchanging we have shown the proportion of cash held by Enterprise Partnerships that is due to Xchanging either as licence fees or dividend distributions. This will be used to give a new measure, Xchanging Net Cash/(Debt), which is defined as follows:

Cash held in wholly owned entities plus Xchanging's share of cash held in Xchanging Solutions Limited plus accrued license fees and expected dividends from Enterprise Partnerships less Xchanging's share of bank and other debt = Xchanging net cash/(debt).

Xchanging's share of net cash provides a simple guide to the amount of cash that is freely available to deploy across the whole Group. It takes a prudent view as it makes no attempt to attribute Xchanging's share of working capital that is held in the Enterprise Partnerships.

The aggregate cash balance in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the shareholders and, in the case of Fondsdepot Bank, customer cash accounts. Payments to Xchanging for both the contractual licence fees and dividends are expected to be paid in the first half of 2014.

The majority of our wholly owned UK entities are included in a notional pooling arrangement to optimise liquidity management.

5. Retirement benefit obligations

The Group has three funded defined benefit schemes in the UK, the largest of which closed to future accrual at the end of 2013 and the other two are both closed to new members. In Continental Europe the Group operates various unfunded defined benefit plans in Germany and Italy.

As at 31 December 2013, the Group has net retirement benefit obligations of £52.4 million (2012: £62.0 million). The reduction in the Group's aggregate pension deficit is primarily as a result of the sale of XTB in Germany.

The final terms of the 2013 actuarial valuation exercise for the Group's largest UK scheme, the Rebus scheme, were agreed with the scheme's trustees in February 2014. As a result the assessed funding deficit is expected to increase from £21.5 million to approximately £36.0 million. Annual deficit recovery payments will be set at £3.0 million per annum increasing by 3.0% each year.

The triennial valuation for the LPC scheme, which is held in an Enterprise Partnership, is ongoing and is expected to be concluded with the trustees in 2014.

The Group works closely with the trustees of each of the pension plans to manage the risks associated with the provision of defined benefit pensions and reviews the investment strategy on all three UK schemes. The factors that most affect the value of the liabilities are interest rate and longevity, and the Group's sensitivity to these particular risks is shown in the notes to the accounts.

6. Capital structure

The Group manages its capital structure so as to safeguard its ability to continue as a going concern and to optimise returns to our shareholders. The amount of debt in the Group's capital structure is managed to ensure that the ratio of net debt to earnings before interest, tax, depreciation, and amortisation remains below 2.5 times. In order to achieve its desired capital structure, the Group may adjust the amount of dividends paid to shareholders, buy back its own shares or adjust asset holdings to reduce or increase debt.

Regulatory capital

Xchanging operates in a number of regulatory regimes. The key business affected by regulatory requirements is Fondsdepot Bank ("FdB"), which conducts retail investment account administration in Germany. FdB maintains a full banking licence and is regulated under the German Federal Financial Supervisory Authority (BaFin). Sufficient regulatory capital must be held in FdB to cover the operating and credit risks of the business. The 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.

No additional regulatory capital was contributed to the German banking group during 2013.

Components of the Insurance Services business are regulated in the United Kingdom by the Financial Conduct Authority (FCA).

7. Financing the business

Borrowing facilities

On 3 February 2014 the Group signed a new £125.0 million four and a half year revolving credit facility with four of its existing lenders. This facility replaces the £75.0 million revolving credit facility that was due to mature in August 2015. The margin on the new facility is lower than the existing facility and will be between 200 and 300 basis points depending on the ratio of consolidated borrowings to EBITDA. The facility is subject to leverage and interest cover financial covenants, and contains representations and warranties commonly associated with corporate bank debt.

As at 31 December 2013 the £75.0 million committed revolving credit facility was effective and therefore the statutory reporting will be shown using this facility. No cash borrowings were drawn under this facility at the balance sheet date (2012: £17.6 million) but €20.0 million (£16.7 million) (2012: £18.1 million) of the facility has been utilised to provide a letter of credit.

During the year £37.6 million was repaid under these facilities including the full repayment and cancellation of the term loan following the disposal of XTB in September 2013.

In addition to the committed revolving credit facility a working capital facility of INR 330.0 million (£3.2 million) has been provided to Xchanging Technology Services India Private Limited in India. No funds were drawn under this facility at the year-end (2012: £nil). The Group also has non-fund based facilities for the provision of bank guarantees. At 31 December 2013, £2.5 million of guarantees had been issued (2012: £2.6 million).

The Group has a £10.0 million (2012: £10.0 million) uncommitted overdraft facility linked to its UK notional cash pooling arrangement.

Headroom under committed and uncommitted credit facilities as at 31 December 2013 (previous facility)

At 31 December 2013, the Group had £58.4 million (2012: £39.3 million) of headroom under its committed debt facilities. The refinancing of the Group's debt facility on 3 February 2014 increased the level of committed headroom by £50.0 million.

Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its term loan and revolving credit facilities. During the year the debt service covenant was removed following the repayment of the term loan. As at 31 December 2013, the Group was compliant with all of its financial covenants.

Net finance cost

The Group's net finance cost for 2013 is £4.0 million (2012: £5.4 million). Net bank and other interest charges have decreased by £1.1 million to £1.8 million (2012: £2.9 million), reflecting the reduction in debt.

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.

8. Dividends

The Board is recommending a final dividend of 2.5 pence per share for 2013, compared to 1.0 pence per share for 2012. This reflects the growing confidence we have in the business and the cash generation capabilities of the Group. Dividend cover on this basis would be 4.1x.

David Bauernfeind

Chief Financial Officer

27 February 2014

Consolidated income statement for the year ended 31 December 2013

1 Adjustments to adjusted in 2013 and 2012 are presented in note 4.

2 The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy. A further explanation of the restatement is included in the notes.

3 Net revenue excludes principal spend on procurement contracts that arise from suppliers costs that are passed on to the customer.

Consolidated statement of comprehensive income for the year ended 31 December 2013

1 The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy. A further explanation of the restatement is included in the notes.

Consolidated cash flow statement for the year ended 31 December 2013

Consolidated balance sheet as at 31 December 2013

1 The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy.

 A further explanation of the restatement is included in the notes.

Consolidated statement of changes in equity for the year ended 31 December 2013

1 The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy. A further explanation of the restatement is included in the notes. 

Notes to the consolidated financial statements for the year ended 31 December 2013

The preliminary announcement for the full year ended 31 December 2013 has been prepared in accordance with the accounting policies as disclosed in Xchanging plc's 2012 Annual Report, as updated to take effect of any new accounting standards applicable for 2013 as set out in Xchanging plc's 2013 Half Year Report or below.

The annual financial information presented in this preliminary announcement for the year ended 31 December 2013 is based on, and is consistent with, that in the Group's audited financial statements for the year ended 31 December 2013, and those financial statements will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The independent auditors' report on those financial statements is unqualified and does not contain any statement under section 498 (2) or 498 (3) of the Companies Act 2006. The Group financial statements and this preliminary announcement were approved by the Board of Directors on 27 February 2014.  

Information in this preliminary announcement does not constitute statutory accounts of the Group within the meaning of section 434 of the Companies Act 2006. The full financial statements for the Group for the year ended 31 December 2012 have been delivered to the Registrar of Companies. The independent auditor's report on those financial statements was unqualified and did not contain a statement under section 498 (2) or 498 (3) of the Companies Act 2006.

The Group adopted the following standard for the first time for the financial year beginning on or after 1 January 2013:

· Amendments to IAS 19 'Employee benefits (revised)' regarding past services costs and determining the income or expenses related to defined benefit plans. The impact on the Group has been a change in policy to immediately recognise past service costs, to replace interest costs and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined retirement benefit asset/(liability). For the period ended 31 December 2012, this change in accounting policy has decreased the net interest income and decreased the actuarial loss arising from defined benefit pension schemes by £0.6 million after tax. This caused basic earnings per share to fall from 9.05 pence a share to 8.85 pence a share, and diluted earnings per share to fall from 8.88 pence a share to 8.74 pence a share. There was no change in the retirement benefit assets and liabilities.

1 Segmental analysis

Management has determined the operating segments based on the internal reporting and information presented to and reviewed by the Board (the chief operating decision-maker for the year) on which strategic decisions are based, resources are allocated and performance is assessed.

The Board considers the business as follows:

· Business Processing Services that has two distinct components, insurance services and financial services. Insurance services provides technology infrastructure and managed services for processing policies and premiums as well as handling claims, to the insurance market. It includes the workers' compensation claims processing services business in Australia. Financial services provides securities processing, investment account administration and fund administration in Germany, Italy and India for financial institutions.

· Technology Services provides technology infrastructure management services, insurance software and application management services to a range of customers.

· Procurement Services provides procurement and, until 31 December 2013, human resources services to a range of customers.

Corporate provides the infrastructure, resources and investment to sustain and grow the Group, including performance management, and business management functions. Corporate is not considered an operating segment but its numbers are presented in order to reconcile reportable segment numbers back to the consolidated financial statements.

Management uses net revenue and adjusted operating profit as measures of segment performance. Interest income and expenses are not allocated to sectors, as this type of activity is driven by the Group treasury function, which manages the cash position of the whole Group. Corporate costs reallocated to operating segments include depreciation and amortisation of centrally recognised other intangible assets, lease payments and other costs incurred centrally on behalf of other operating segments.

The Group's reportable segments account for inter segment sales, and transfers, as if the sales or transfers were to third parties, i.e. at current market prices.

In 2013 other BPO is included in the financial services segment. Comparative numbers have been presented on the same basis.

The segment information for the year ended 31 December 2013 is as follows:

The segment information for the year ended 31 December 2012 is as follows:

The depreciation and amortisation included in adjusted operating profit is as follows:

Reconciliation of Non-GAAP adjusted operating profit to IFRS statutory operating profit:

1The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy.

The tables below present revenue from continuing operations by the geographical location of customers and by category:

The table below presents total assets by geographical location (excluding those assets listed in the following table as reconciling items):

Total assets by geographical location reconciled to total assets presented in the Consolidated balance sheet as follows:

Material customers

One customer accounted for greater than ten per cent of the Group's gross revenues. Revenues of £181.2 million, attributable to the Procurement segment, have been derived from this customer for the year ended 31 December 2013 (2012: £162.5 million).

2 Exceptional items

Exceptional items are those items that in the Directors' view are required to be separately disclosed by virtue of their size or incidence and in order to improve a reader's understanding of the financial statements. These may include items relating to the restructuring of a significant part of the Group, impairment expenses, items relating to acquisitions and disposals and other one-off events or transactions. The tax rate for exceptional items, is lower than the statutory rate of tax, due to a number of non-taxable exceptional items, such as the profit on disposal of subsidiary.

For 2013, exceptional items are:

· The lease surrender receipt net of related items of £13.3 million. This item includes an initial payment for the early surrender for the lease on the Leadenhall Street premises and the associated costs of moving incurred to date. The cash receipt was recognised as other income, and is being spread from the contract date to the expected date of exit in 2014. This was considered exceptional as it was a significant amount.

· The XTB disposal in September 2013, resulting in profit on disposal of £12.5 million. This was considered exceptional as a significant disposal.

· Restructuring costs of £6.2 million incurred across the Group. This was considered exceptional as a significant Group wide restructuring plan.

· A £5.0 million reduction in the expected amount of deferred consideration payable for the acquisition of AR Enterprise S.r.l.. This was considered exceptional as an acquisition related item.

· The Cambridge Integrated Services Group Inc. ("CISGI") insolvency trustee distributions of £4.5 million to the Group (2012: £nil), recognised as exceptional other income to be consistent with the initial impairment of the CISGI group being presented as exceptional.

· A £2.2 million release of the onerous contract provision relating to the Australian workers' compensation business, presented as exceptional to be consistent with the original provision being presented as exceptional.

· £2.0 million non-cash curtailment expense incurred as a result of closing the Rebus defined benefit pension scheme to future benefit accrual. This expense is presented as exceptional due to its size and being one-off in nature.

· £0.6 million release of employee related provision relating to the former employees of the US BPO operations that were sold in 2011. This was presented as exceptional to be consistent with the original provision being presented as exceptional.

3 Finance costs and income

Finance costs and income are recognised in the income statement using the effective interest rate method.

1 The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy.

4 Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares of the Company.

For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include all potential dilutive ordinary shares. The Group has three types of potential dilutive ordinary shares: share options, share awards under the Performance Share Plan and other share awards.

 1The comparative amounts have been restated to reflect the changes in the retirement benefits accounting policy.

The following reflects the share data used in the basic and diluted earnings per share calculations:

Adjusted basic and diluted earnings per share

Adjusted earnings per share values are disclosed to provide a better understanding of the underlying trading performance of the Group. The adjusted value is in line with the KPIs as used to measure the Group's performance in 2013.

The adjusted earnings per share figures are calculated based on the Company's share of adjusted profit for the year, divided by the basic and diluted weighted average number of shares as stated above.

The owners of the parent's share of adjusted profit for the year is calculated as follows: