2nd Aug 2010 07:00
XCHANGING PLC
RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2010
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Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
Change |
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Revenue
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£374.1m |
£367.1m |
1.9% |
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Underlying operating profit (EBIT)(1) |
£25.4m |
£25.3m |
0.3% |
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Xchanging's share of underlying operating profit (XEBIT) (1) |
£20.7m |
£20.3m |
2.1% |
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XEBIT margin
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5.5% |
5.5% |
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Xchanging's share of underlying profit for the period (2)
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£14.1m |
£14.6m |
-3.4% |
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Underlying EPS - basic(3) |
5.90p |
6.21p |
-5.0% |
Key points:
·; Revenue growth of 1.9%.
·; XEBIT growth of 2.1%, with margins maintained at H1 2009 level.
·; New Enterprise Partnership (EP) agreed with SIA-SSB for financial markets processing services in Italy.
·; Signed a procurement contract with CHEP Europe to manage £375 million of spend over five years.
·; 43 opportunities in the pipeline of >£20 million in annual value (up from 33 in February 2010).
·; Completed the migration of FondsServiceBank onto the investment account management platform and added volumes from SEB Bank.
·; Acquired Data Integration Ltd. (DI), a leading networking, security and communication technology provider.
·; Signed a contract to support the creation of an expanded servicing capability for Aon Australia.
·; Delivered £5.8 million in savings from our lean processor strategy.
·; Lower underlying profit for the period due to tax and interest charges
·; Underlying EPS-basic also impacted by increased number of shares in issue due to share options exercise.
·; Strong financial position with £52.5 million cash at the end of the period.
David Andrews, CEO of Xchanging, commented:
"Against the backdrop of a challenging international market, we have continued to exploit opportunities using our international footprint and leverage the investment in our regional sales teams. We are particularly pleased with our new EP with SIA-SSB in Italy. We have increased our pipeline of opportunities considerably in comparison to the beginning of the year. In the interim, lower procurement volumes and delays in contracting for new deals are likely to moderate short term growth rates. We are making strong underlying progress on all fronts in building our international BPO market presence and customer base."
Notes:
(1) Underlying operating profit excludes exceptional items (H1 2010: nil; H1 2009: £12.1 million),amortisation of intangible assets previously unrecognised by acquired entities (H1 2010: £4.2 million; H1 2009: £4.5 million) and acquisition-related expenses (H1 2010: £0.8 million; H1 2009: £0.5 million). Due to the minority interests in the Group, Xchanging reports underlying operating profits attributable to the Group (XEBIT).
(2) Underlying profit for the period excludes exceptional items, amortisation of intangible assets previously unrecognised by acquired entities, acquisition-related expenses, imputed interest on put options and the related tax thereon.
(3) Underlying basic 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 period ended 30 June.
2 August 2010
Enquiries:
Xchanging plc |
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Nicole Jones, Head of Investor Relations |
Tel: 020 7780 6999 |
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Cardew Group |
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Rupert Pittman |
Tel: 020 7930 0777 |
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David Roach |
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A presentation for investors and analysts will be held at Xchanging's offices at 34 Leadenhall Street, London, EC3A 1AX at 09:15 on 2 August 2010.
About Xchanging:
Xchanging is one of the largest and fastest growing business processors. With a wide range of multinational customers in 42 countries and employing over 8,000 people, we are a truly global company. We deliver mission-critical, high volume processing to our customers. Our aim is simply to provide business processing services better, cheaper and faster.
Xchanging provides procurement, accounting, human resources and technology services across industries. We combine this functional processing expertise with deep industry domain knowledge to provide industry-specific processing services across a broad range of industries. These industries include banking, insurance, manufacturing, retail and real estate among others.
Listed on the London Stock Exchange in 2007, the company is in the FTSE250, the index of mid-capitalised companies traded on the London Stock Exchange. Xchanging is also a member of the FTSE4Good index which measures the performance of companies that meet globally recognised corporate responsibility standards. www.xchanging.com
Half year results for the six months to 30 June 2010
Executive summary
Financial and business overview
In challenging business process outsourcing (BPO) market conditions, Xchanging has turned a credible performance in the first half of the year. Reported revenue for the six months ended 30 June 2010 was £374.1 million, an increase of 1.9% on the previous half year (H1 2009: £367.1 million). Underlying operating profit attributable to Xchanging shareholders (XEBIT) grew 2.1% to £20.7 million (H1 2009: £20.3 million), with operating margins maintained. Underlying basic earnings per share (EPS) declined by 5.0% to 5.90p from 6.21p. The acquisition of Data Integration Ltd and movements in our major trading currencies did not materially affect the overall results.
In the first half of 2010, we have continued to absorb the adverse impact of lower customer demand in certain parts of our business, notably in the IT business in the USA and Asia Pacific and in procurement in the UK. Growth was driven primarily by the increase in volumes in the funds administration business in Continental Europe and technology services within the UK region. This demonstrates the underlying robustness and diversity of our international business. As market conditions improve in the medium term we can look forward to higher levels of demand.
The benefits of the lean processor strategy, including the restructuring of our UK and Continental European businesses, are being generated in line with expectations. The restructuring programme is expected to be complete by year end. Savings of £5.8 million were generated in the first half of the year and we remain on track to deliver the expected benefits by the end of the year.
Underlying profit for the period attributable to Xchanging shareholders has slightly declined in the first half of the year. Half year on half year comparisons were impacted by a lower effective tax rate in 2009 (26.7% versus 27.2% in 2010) and increased interest charges in H1 2010 from the full period impact of the Cambridge acquisition. Profits for the year will be second half weighted due to the impact of the restructuring programme and the growth in revenues. In addition, interest charges will be more comparable in the second half of the year to the same period in 2009.
The Group held £52.5 million in cash at the end of the period and had drawn debt of £49.0 million. Cash conversion (pre cash exceptional items and acquisition-related expenses) remains strong at 122%.
Pipeline
We have a well stocked pipeline with 43 opportunities each having more than £20 million of annual value: 23 opportunities are in the Interest stage*, 18 opportunities in Shaping*, 2 opportunities in Validation* and there are currently no opportunities in Conclusion*, having contracted for the SIA-SSB Enterprise Partnership and the CHEP gainshare procurement outsourcing arrangement during the period. The pipeline is larger than it was when we announced our full year results in March 2010 (33 opportunities) and the movement of a large number of opportunities into the Shaping stage is very encouraging. Subject to economic activity continuing to increase across all major markets, we expect a return to historical growth levels in revenue and earnings across our global businesses over time.
* Note: Interest stage - establishing and developing initial interest by customer; Shaping - agreeing the size and scope of the deal with the customer. Concludes with Memorandum of Understanding; Validation - performing detailed due diligence. Concludes with Letter of Intent; Conclusion - Final preparation. Concludes with contract.
Outlook
Our customers remain cautious and we have seen further slippage in time scales for closing deals in the second half of the year. Therefore, the completion of further large new deals in 2010 will be challenging. As a consequence of this and the lower procurement volumes we are experiencing, our revenue growth for the full year will be slightly lower than we had previously anticipated. However, we remain focused on managing our cost base and, with the ongoing cost savings programmes, we anticipate delivering profits in line with expectations for the full year.
Our vision and strategy
We have the same vision as when we launched Xchanging over 10 years ago: to become the global business processor of choice.
To realise this vision, we continue to follow the simple three-pronged strategy, as outlined in our 2009 annual report, which is aimed at accelerating growth and creating shareholder value:
ـ growing existing platforms
ـ adding new platforms
ـ becoming the lean processor.
In our 2009 annual report, we explained the above strategy and outlined the Group's objectives for 2010 and beyond. Below are the key objectives for each of the three prongs of our strategy as well as the progress we have made in the first half of the year against these objectives. Further details on our progress are provided in the next section in the update on our regions.
Growing existing platforms
One of our key objectives is to increase the average revenue per customer and build the top 50 global customer relationships and range of offerings provided. During the second half of 2009 and the beginning of 2010, we re-aligned and strengthened our sales, service and relations leadership to expand our offerings to customers on a regional and global basis. Five new global offering heads have been appointed since the beginning of the year, who are marketing our offerings through our regional sales, service and relations teams, and dedicated global strategic account directors have been appointed to service our top seven customer accounts.
At the time of our 2009 annual results, we stated our intention to continue making small add-on acquisitions to increase the scale and international reach of our functional HR, procurement, accounting and hosting platforms and our industry-specific claims, investment accounts, securities and property management platforms. In June 2010, we acquired Data Integration Ltd. (DI), one of the UK's leading networking, security and communication technology providers. This acquisition strengthens Xchanging's technology capabilities in network managed services and establishes a reseller platform. DI also brings a strategic customer base in the UK through its existing network managed service contracts.
We have also grown our platforms organically through outsourcing contracts. In Germany, we continue to be a key player in the consolidation of the investment account processing market with a number of sales successes in the first half of 2010. We announced the addition of investment accounts from SEB Bank and SEB Asset Management as well as VERITAS onto the Fondsdepot Bank (FDB) platform. In July 2010, Xchanging added further accounts to its investment account administration platform through contracts with Gothaer Versicherung and OnVista. The addition of these customers onto our platform will make Xchanging the largest independent investment account processing platform in Germany with approximately 1.7 million investment accounts and €31 billion assets under administration by the end of 2010.
Adding new platforms
On 31 July 2010, we signed an EP with SIA-SSB to acquire 51% of Kedrios, the Italian subsidiary of SIA-SSB that specialises in securities processing and fund administration services for the Italian market. This EP combines Xchanging's European expertise in securities processing and investment account administration with Kedrios' strengths in fund administration and in the Italian market. This partnership is an important building block for the creation of a pan-European operator for securities processing, investment account administration and fund administration to blue-chip financial markets customers. This new deal is an integral part of our strategy seeking major new partnerships in Europe, the USA and Asia Pacific where we believe that the Enterprise Partnership offering is distinctive and appealing, given our track record of success in the UK and Germany.
In line with our strategy to add new platforms, we have continued to develop our electronic repository and claims handling platform in the London insurance market. We have continued to consolidate our position with our existing customers in claims in the USA, UK and Australia as a basis for a global initiative that takes advantage of our electronic repository and the 4G (fourth generation wireless) and cloud computing delivery channel opportunities. We have made significant progress during the period towards consolidating our US and Australian medical, healthcare and credit card retail claims Intellectual Property (IP) and expertise, which we believe positions us well to become the global electronically-enabled claims processor of choice across a range of industry sectors beyond insurance.
Becoming the lean processor
Throughout the first half of 2010, we have continued to drive the standardisation of our processing centres in accordance with our operating model. We have recently launched our new global capacity scheduling software platform managed from India. This has just been rolled out to more than 2,000 processing full time employees (FTEs).
We have continued with the successful implementation of the lean processor strategy, including the restructuring of the UK and Continental Europe business. We have already moved some roles offshore and removed a number of roles from our onshore processing centres in each of these regions. We are on track to complete the restructuring by the end of the year and to deliver the expected benefits from these initiatives in 2010.
We are pleased with the progress we have made to develop a lean processing centre in Shimoga, a tier 3 Indian town north-west of Bangalore. Tier 3 locations are centres that have the capacity to provide a workforce and a potential resource pool to an outsourcing company, but have yet to establish this. Typically, in these centres attrition rates and wages are lower than in cities such as Bangalore. We have signed an agreement with the State Government of Karnataka to lease and jointly develop a Special Economic Zone (SEZ) in Shimoga. Xchanging will be one of the first multinational companies to set up a centre in a tier 3 location in India. The new processing centre will initially house 1,000 staff and will be state of the art in terms of operational excellence and environmental features. It is anticipated that this centre will be operational during the third quarter of 2011.
Delivering on our strategy in each of the regions
At the beginning of the year, based on our Group objectives, we set clear goals for each of the regions for 2010 and beyond and we are pleased with the progress we have made.
UK
At the beginning of 2010, we set out to enhance the electronic London market insurance platform (which includes the Insurance Market Repository or IMR), reap the consolidation synergies from combining the UK businesses under a single management team and extend our HR and procurement platforms in the UK.
In 2009, we completed the electronification of the London insurance market platform. In 2010, we have continued with our objective by enhancing the IMR through adding innovative capabilities such as the upgrade to the electronic claims file (ECF2) and adding an e-Accounts capability. ECF2 provides faster access to easily searchable electronic files and a better approach to workflow management. The e-Accounts capability enhances the electronic submission of accounting entries to Xchanging by brokers and insurers. These innovations will deliver a number of benefits to insurers and brokers including earlier settlement of cash items through faster, standardised processes increasing the flow of business to the London insurance market.
New systems at the London Metal Exchange (LME) implemented by Xchanging Technology Services include new Trade Floor Surveillance and LMESword, the latter being a warehousing warrant system previously delivered by the London Clearing House. Examples of projects include Xchanging upgrading LMEselect (the electronic trading system) and implementing a new trading ring telephony system. In addition, Xchanging are delivering the OTC (over the counter) gold project which allows LME members to capture and manage OTC gold trade via the LMESmart (matching) application and to clear trades via the London Clearing House.
The acquisition of DI brings a strategic customer base in the UK through its existing network managed service contracts and is a further example of how we are developing our capabilities to address current as well as future technology trends. There is excitement in the IT market around cloud computing offerings and the associated pricing models. In the short term, demand is focussed on infrastructure to support development and testing environments. As confidence in the technology increases, we anticipate demand for a greater number of services and adoption by a broader customer base.
Chubb Managing Agent Limited, part of the Chubb group of companies, has signed up with Xchanging for IRIS (international insurance and reinsurance solution) and IRIS BI (business intelligence solution) as an end-to-end managed service. Xchanging Technology Services are responsible for installation, commissioning and ongoing support of the infrastructure including disaster recovery (DR).
In 2009, we announced the restructuring of the UK region to align the reporting with the way the business is managed and to accelerate the lean processor strategy. This included moving the Insurance and Business Lines segments under the same management as well as restructuring the workforce through moving some roles offshore and removing a number of roles from our onshore processing centres. We are on track to deliver the expected benefits from these initiatives in 2010.
Xchanging signed an agreement with BAE Systems Integrated Systems Technologies (Insyte), to renew its contract for continued delivery of HR Services. Under the contract Xchanging will provide HR services to BAE Systems Insyte's c.3,500 employees in four key areas; HR core services, international assignments, graduate and industrial placement recruitment and training administration. First agreed in 2005, the contract renewal takes advantage of improved services to enable a more flexible service aligned to meet Insyte's current and future needs.
There have also been encouraging developments in our procurement business. In April, we signed a five-year contract with CHEP Europe, the global leader in pallet and container pooling services, to manage £75 million of spend per annum (£375 million of spend over five years). As part of the contract we will help integrate and standardise procurement processes for CHEP's business across the UK, France, Germany and Spain for their non-core categories. In our existing customer base, we signed a three-year contract with SELEX Galileo, part of the Finmeccanica Group, and signed additional procurement deals with a number of BAE Systems subsidiaries to cover spend in the UK and other regions. The largest of these was with Surface Ships, the former joint venture with VT Group. The greatest challenge facing the business is lower spend volumes as our customers reduce their discretionary spend in the light of the challenging economic climate.
Americas
In our 2009 year end results statement, we outlined our intention to gain market share in the US claims market. Claims contract renewals in the Americas in the first half of 2010 will generate annual revenues of US$55.1 million (c. £36.1 million) for our Americas business. These renewals include a multi-year claims processing contract renewal with one of the largest rental car companies in North America. The range of claims services that Xchanging will provide under the contract renewal include management of loss fund accounts, customised loss reporting, claim adjudication, and subrogation and salvage recovery services. These services will be provided from Xchanging's processing centre in Solon, Ohio. This processing centre has managed well over 1,000,000 commercial vehicle related claims, making it a leading claims centre in the USA.
During the period, Xchanging signed an agreement with a leading healthcare services and technology company in the USA, to outsource mission-critical back-office processes. As part of the contract, Xchanging will provide intake and referral services for physical therapy, diagnostic imaging and respiratory therapy. Services will also include provider referencing and home health compliance. This new contract complements our existing healthcare services, including an important contract with another leading healthcare services customer where we provide a comprehensive solution to support back-office operations including obtaining medical documentation such as diagnostic reports and prescriptions and confirming delivery of durable medical equipment. These services will be provided with an extensive security infrastructure in place to shield all sensitive information. We also secured new sales in our Technology operations for new and existing customers including Novae Underwriting Limited and Chubb.
Continental Europe
Our focus on Continental Europe throughout 2010 has been to add new investment accounting customers to the FDB platform, add new securities processing customers to the XTB platform, and to open up insurance, HR and procurement opportunities. We are pleased to report significant progress in all three areas since our last update.
During the period we announced the addition of investment accounts from SEB Bank and SEB Asset Management as well as VERITAS onto the Fondsdepot Bank (FDB) platform. In July 2010, Xchanging added further accounts to its investment account administration platform through contracts with Gothaer Versicherung and OnVista. The addition of these customers onto our platform will make Xchanging the largest independent investment account processing platform in Germany with approximately 1.7 million investment accounts and €31 billion assets under administration by the end of 2010. In April 2010, the migration of the accounts from FondsServiceBank's platform onto FDB's platform was successfully completed on time and on budget.
In line with our strategy, we are paving our way into the Italian market by adding a new platform to the Xchanging business. On 2 August 2010, Xchanging announced that we had signed an Enterprise Partnership (EP) with SIA-SSB. As part of this EP, Xchanging takes over 51% of Kedrios S.p.A. (Kedrios), the Italian subsidiary of SIA-SSB that specialises in securities processing and fund administration services for the Italian market. Xchanging will assume operational control of Kedrios and its over 150 employees.
This EP combines Xchanging's European expertise in securities processing and investment account administration with Kedrios' strengths in fund administration and in the Italian market. This partnership will be an important building block for the creation of a pan-European operator for securities processing, investment account administration and fund administration to blue-chip financial markets customers. This partnership will allow Xchanging to serve its existing customers who have operations in the Italian market and to expand our international customer base. It also adds a new platform, which generates scale within Xchanging's financial markets operations.
In procurement, we have renewed our contract with United Biscuits in northern Europe. This and other deals in the UK are helping to expand our European procurement platform and further establish Xchanging as a leader in this market. Xchanging is currently in the top three procurement providers in Europe, according to Everest research.
Asia Pacific
In Australia, we closed our first general insurance opportunity in June 2010 with Aon Australia's Risk Solutions business. Xchanging will help to build an infrastructure to support the growth of Aon's business nation-wide. This project expands the scope of work we currently do for Aon across the world as their global processor of choice and complements the workers' compensation claims management business in the region. We are currently developing a pipeline of opportunities across insurance, funds administration, banking and procurement services in this important market.
In India, we are leveraging our SWIFT services bureau and anti-money laundering services relationships with over 90 banks to expand the services we provide. In particular, Indian banks are focusing on back-office and middle-office management as they grapple with exceptionally high growth rates. Competition with multinational banks and increased regulatory requirements have resulted in an increasing demand for technology and processes to match global banking practices. We are in the proposal cycles for a number of financial services BPO opportunities (domestic and global captives) and have signed new business with banks delivering SWIFT and anti-money laundering services in India. We recently extended our relationship with UCO Bank, a leading Indian bank, to implement a mission critical disaster recovery solution for its financial telecommunications infrastructure.
As a lean processor, we continue to standardise production and use technology to improve our internal operational efficiency and drive profitability across our business. We have recently completed building a new capacity scheduling software platform in India. This has just been rolled out to more than 2,000 processing FTEs.
In line with our strategy to increase our processing centre scale in India, we have signed an agreement with the regional government of the Indian state of Karnataka to build a low-cost processing centre in Shimoga. Xchanging will be one of the first multinational companies to set up a centre in a tier 3 location in India. Our decision to invest in Shimoga is not only about cost arbitrage. It is also about access to talent, improved business continuity and mitigation of higher attrition rates in tier 1/2 cities.
In South East Asia, both Singapore and Malaysia are positioning themselves as global knowledge centres across all major industries. Medium term, we expect this to open up partnering opportunities for Xchanging in the financial services, government, shipping and logistics and infrastructure industries. To support our growth in the region, we established our South East Asia headquarters in Singapore and have put in place a high quality management team. We are now better positioned to pursue opportunities in this growing region.
Financial Review
The Group's key performance indicators (4)
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Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
Change |
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Revenue
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£374.1m |
£367.1m |
1.9% |
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Underlying operating profit (EBIT)(1) |
£25.4m |
£25.3m |
0.3% |
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Xchanging's share of underlying operating profit (XEBIT)(1)
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£20.7m |
£20.3m |
2.1% |
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XEBIT margin
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5.5% |
5.5% |
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Xchanging's share of underlying profit for the year (2)
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£14.1m |
£14.6m |
-3.4% |
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Underlying EPS - basic (3)
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5.90p |
6.21p |
-5.0% |
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Cash generated from operations (pre cash exceptional items and acquisition-related expenses) |
£31.1m |
£33.0m |
-5.8% |
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Cash conversion (pre cash exceptional items and acquisition-related expenses)(5) |
122% |
130% |
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Free cash flow (pre cash exceptional items and acquisition-related expenses) (6) |
£14.8m |
£10.1m |
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Notes:
(4) The Group's KPIs have historically been calculated after 'adding back' a number of adjustments (amortisation of IFRS 3 intangibles previously unrecognised by an entity acquired by the Group and imputed interest on put options) and exceptional charges in order to present the underlying performance of the business.
During 2010, a new mandatory accounting standard in relation to Business Combinations has been adopted by the Group (IFRS 3 (revised)). This standard now requires acquisition-related expenses to be taken through the income statement. In previous years, acquisition-related expenses were included within the calculation of goodwill and therefore did not flow through the income statement. As these costs are not related to the underlying performance of the business, they are included within amounts 'added back' in calculating the Group KPIs. As required by the accounting standards, prior period comparatives have been restated in these financial statements.
(5) Cash conversion (pre cash exceptional items and acquisition-related expenses) is calculated as cash generated from operations (pre cash exceptional items and acquisition-related expenses) divided by the Group's underlying operating profit.
(6) Free cash flow (pre cash exceptional items and acquisition-related expenses) is calculated as cash generated from operations (pre cash exceptional items and acquisition-related expenses) less capital expenditure, interest and taxation.
Group performance
Revenue growth
Revenue for the six months ended 30 June 2010 was £374.1 million, an increase of 1.9% over the same period last year (H1 2009: £367.1 million). Movements in our major trading currencies did not materially impact the overall results, with favourable movements in the Australian dollar and Indian rupee offsetting unfavourable movements in the Euro and US dollar. Acquisitions made in the period did not make a material contribution to revenue. Revenue growth was 1.9% (£7.0 million) driven primarily by growth in the funds administration business from FondsServiceBank within the Continental Europe region and additional technology services revenues within the UK region. These offset a decline in the US BPO and ITO businesses, and UK Business Support businesses, which were impacted by adverse market conditions during the second half of 2009 and early 2010. Volumes in the UK region procurement business declined significantly in the second quarter of 2010 as a result of cuts in government spending impacting BAE Systems.
Revenue visibility
The Group uses a revenue visibility measure which represents revenue which can reasonably be expected to arise in the year from current customers where we have in place a contractual relationship.
Visible revenue for the year, at the half year is £711.6 million (H1 2009: £667.2 million).
Profit growth
Underlying operating profit has grown by 0.3% to £25.4 million (H1 2009: £25.3 million), representing an underlying operating margin of 6.8% (H1 2009: 6.9%). Statutory operating profit has grown by 146.8% to £20.5 million (H1 2009: £8.3 million). The Group recognised exceptional items of £12.1 million in H1 2009 in relation to the integration of Cambridge.
XEBIT has grown by 2.1% to £20.7 million (H1 2009: £20.3 million).
Xchanging's share of underlying profit for the period has declined by 3.4% to £14.1 million (H1 2009: £14.6 million). This represents a margin of 3.7% (H1 2009: 4.0%). Underlying profit for the period has declined even though there was an increase in underlying operating profit. This was due to a higher effective tax rate and higher finance costs as compared to the previous year.
Margins
XEBIT margins have been constant at 5.5% (H1 2009: 5.5%).
Operating margins were maintained in the first half of 2010. This was primarily due to pricing pressures from contract extension negotiations and an increase in guaranteed discount levels to existing EP customers. Margins improved within the Americas region, where the benefits of the Cambridge integration costs incurred in 2009 are starting to positively impact earnings.
Exceptional items
There were no exceptional costs incurred in the period (H1 2009: £12.1 million). The prior period costs were associated with the acquisition and integration of Cambridge, which was completed in 2009.
The table below details the adjustments made to operating profit in order to determine XEBIT.
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Six months ended 30 June 2010 |
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Restated Six months ended 30 June 2009 |
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£m |
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£m |
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XEBIT |
20.7 |
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20.3 |
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Underlying profit before taxation attributable to minority interests |
4.7 |
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5.0 |
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Underlying operating profit |
25.4 |
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25.3 |
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less: |
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- Exceptional items |
- |
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(12.1) |
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- Amortisation of IFRS 3 intangibles previously unrecognised by an entity acquired by the Group |
(4.1) |
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(4.5) |
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- Acquisition-related expenses |
(0.8) |
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(0.4) |
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Operating profit |
20.5 |
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8.3 |
Earnings per share (EPS)
In calculating earnings per share, the Group considers it appropriate to use Xchanging's share of underlying profit for the period as described above, as it represents the underlying performance of the business. Further, management believes that it is appropriate to focus on basic earnings per share so as not to double count the impact of share-based payment charges, which are included within the underlying profit for the period.
Basic earnings per share has declined by 5.0% to 5.90 pence per share (H1 2009: 6.21 pence). The decline in earnings per share has been driven by an increase in the underlying effective tax rate and a marginal increase in finance costs in H1 2010. At the basic EPS level, this decline has been further impacted by an increase in the weighted average number of shares in issue by 1.5% to 238.5 million shares (2009 H1: 234.9 million). The increase in the average number of shares is due to the exercise of options resulting in the issue of 2.3 million shares (1.4 million on a weighted average basis) during H1 2010.
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Basic / diluted earnings per share |
Six months ended 30 June 2010 |
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Six months ended 30 June 2009 |
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Xchanging share of underlying profit for the period (£m) |
14.1 |
|
14.6 |
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Weighted average number of shares in issue (m) |
238.5 |
|
234.9 |
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Underlying basic earnings per share (pence) |
5.90 |
|
6.21 |
|
|
|
|
|
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Xchanging share of underlying profit for the period (£m) |
14.1 |
|
14.6 |
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Weighted average diluted number of shares (m) |
239.8 |
|
240.0 |
|
Underlying diluted earnings per share (pence) |
5.87 |
|
6.08 |
Finance cost
Net finance cost (pre imputed interest on put options) increased to £1.8 million (H1 2009: £1.5 million). The finance charge includes the amortisation of facility fees, interest on drawn debt, interest charges and income relating to the Group's pension scheme, letter of credit fees and interest income generated from investments. The increase in net finance costs reflects the higher level of drawn debt in the Group and higher financing fees following the syndication of the Group's committed facility in July 2009.
Taxation
The Group's effective tax rate on Xchanging's share of underlying operating profit was 27.2% (H1 2009: 26.7%). The effective tax rate increased as a result of utilisation of tax losses in the central services entity in the prior period.
The Group's statutory effective tax rate was 27.5% for the period (H1 2009: 25.6%).
Balance sheet and liquidity
Cash held by the Group at the period end was £52.5 million (FY 2009: £60.1 million), of which £11.8 million (FY 2009: £28.6 million) was centrally controlled (excluding cash held by Enterprise Partnerships).
The Group maintains a £75 million revolving credit facility and a US$ term loan which has amortised from December 2009 and matures in 2012. As at 30 June 2010, the total amount drawn on these facilities was £59.4 million (FY 2009: £49.4 million), with £43.4 million available under the revolving credit facility (FY 2009: 57.0 million).
The cash balance held at the period end includes drawn debt of £49.0 million (FY 2009: £38.8 million) leaving a net cash position of £3.5 million (FY 2009: £22.1 million).
Operating cash flow
Net cash flows from operating activities decreased by 5.8% to £31.1 million (H1 2009: £33.0 million).
Cash performance is measured using a cash conversion ratio, calculated as cash generated from operations divided by the Group's underlying operating profit. Cash conversion (pre cash exceptional items and acquisition-related expenses) was 122% (H1 2009: 130%). Cash conversion has been calculated excluding the cash impact of the Group's lean processor restructuring programme (£5.8 million).
Capital expenditure
The Group invested £9.1 million (H1 2009: £16.2 million) in capital expenditure on tangible and intangible assets during the period, representing 2.4% (H1 2009: 4.4%) of revenue. Capital was invested across the Group, including in the US BPO claims business where the Group has continued to invest in developing products, technology and infrastructure. In Continental Europe capital expenditure has been incurred to ensure the successful migration of the FondsServiceBank and Xchanging Investmentservice GmbH businesses.
Depreciation and amortisation charges (excluding the amortisation of assets previously unrecognised by an acquired entity) increased by 5.1%, from £13.6 million in H1 2009 to £14.3 million in H1 2010. This is due to the full half year amortisation of technology and infrastructure investments made into the Cambridge group following its acquisition in January 2009.
The Group capitalised £0.6 million (H1 2009: £1.2 million) as pre-contract costs, which are disclosed as trade and other receivables in the half year financial statements. Costs directly attributable to winning a contract are capitalised when it is virtually certain that the contract will be awarded. These costs are amortised over the life of the contract; the amortisation charge for the period was £0.4 million (H1 2009: £0.7 million).
Free cash flow
Free cash flow, defined as operating cash flow (pre cash exceptional items and acquisition-related expenses) less capital expenditure, interest and taxation, was £14.8 million (H1 2009: £10.1 million). Free cash flow post cash exceptional items and acquisition-related expenses was £6.4 million (H1 2009: £3.1 million).
The overall cash movement for the Group was an outflow of £7.6 million after payment of the final cash consideration of £7.8 million in March 2010 for the FondsServiceBank (FSB) deal, the initial tranche of £2.5 million for the Data Integration Ltd. acquisition, financing activities and distributions to shareholders,.
Regulatory capital
Xchanging operates in a number of regulatory regimes. The key businesses affected by regulatory requirements are Xchanging Transaction Bank (XTB) and Fondsdepot Bank (FDB), which conduct securities processing and retail investment account management processing in Germany. They both maintain full banking licences (FDB maintained only a partial banking licence until the full licence was granted on 13 January 2010) and are regulated under the German Federal Financial Supervisory Authority (BaFin). Components of the insurance businesses are regulated in the United Kingdom by the Financial Services Authority (FSA).
There was no increase in regulatory capital requirements in the Group during 2009. In the first quarter of 2010, a total of £14.3 million was injected into the German banking group principally to finance the final cash consideration for FSB and to provide sufficient capital for FDB to secure a full banking licence.
Segmental performance
Xchanging has modified its segmental reporting structure in order to comply with accounting standards that were introduced in January 2009. These standards dictate that segmental reporting must replicate the organisation's managerial reporting structure.
In the full year 2009 accounts, the Americas region included the Group's IT outsourcing and insurance software businesses. These businesses consist of a number of entities located in various geographic locations, primarily the USA, India and the Far East. These are now being managed and reported within the respective geographic regions, resulting in the businesses in India and the Far East moving from the Americas region to the Asia Pacific region.
In addition, the Global Procurement segment, which previously included all of the Xchanging procurement businesses, has been regionalised. As a result, Global Procurement no longer exists as an operating segment with the respective businesses being managed and reported within the geographic regions (the UK, Continental Europe, Asia Pacific and Americas regions).
Segmental performance, based on the revised structure, is discussed below. Comparable figures have been restated accordingly.
UK
Revenue in the UK region has increased by 3.6% to £203.4 million (H1 2009: £196.4 million). Revenue growth was driven primarily by additional revenues from services provided to the London Metal Exchange and growth in the Xchanging Technology Services (XTS) business. This growth was muted by a sharp decline in procurement volumes from BAE Systems in the second quarter of 2010, resulting from lower levels of recruitment. This decline in volumes has been partially mitigated by increasing our footprint across BAE Systems with the addition of Surface Ships (formerly a joint venture with VT Group) and Learning and Development in Saudi Arabia.
XEBIT for the period has decreased by 6.0% to £17.1 million (H1 2009: £18.2 million). This decline reflects additional guaranteed discounts offered to EP partners in 2010 and the loss of margin from the revenue decline and pricing pressures in the procurement business. These offset margin from the additional revenue growth in XTS and the benefits from restructuring the cost base.
The XEBIT margin has therefore decreased to 8.4% (H1 2009: 9.3%).
Americas
Revenue in the Americas region has declined by 3.1% to £65.9 million (H1 2009: £68.0 million). This decline includes an adverse foreign exchange impact of £1.2 million due to the movement in the US dollar rate between the periods.
The underlying revenue decline is attributable to slightly lower revenues in the US BPO business as a result of run off work performed in the first half of 2009 on contracts terminated during 2008. In addition, revenues from the US IT outsourcing business declined as a result of general market conditions and reduced discretionary spend by customers. These factors offset growth in the insurance software business from implementation projects carried out in the period.
XEBIT has increased by 144.2% to £3.1 million (H1 2009: £1.3 million) despite the decline in revenues. The XEBIT margin improved from 1.9% in H1 2009 to 4.7% in H1 2010. This is driven by improved margins from productivity benefits arising from the consolidation of offices in the region and from a higher level of contracted consultancy revenues.
Continental Europe
Revenue in the Continental Europe region grew by 7.0% to £89.1 million (H1 2009: £83.3 million). This includes an adverse foreign exchange rate impact of £2.2 million caused by the movement in the Euro rate between the periods.
The underlying revenue growth is primarily as a result of additional fund administration revenues generated by FondsServiceBank. This has been offset by lower securities processing volumes from Sal. Oppenheim jr. & Cie. (acquired by Deutsche Bank in March 2010), lower revenues from the German withholding tax services (Abgeltungssteuer) and additional guaranteed discounts offered to our EP partner.
XEBIT for the period increased by 5.4% to £6.2 million (H1 2009: £5.9 million). Margin growth from the additional funds administration volumes and benefit from the lean processor restructuring programme in 2009, was offset by the loss of higher margin securities processing volumes and additional partner discounts. The XEBIT margin for the period was 7.0% (H1 2009: 7.1%).
Asia Pacific
Revenue in the Asia Pacific region declined by 6.1% to £36.6 million (H1 2009: £39.0 million). This includes favourable foreign exchange impacts of £3.5 million due primarily to movements in the Australian dollar rate between the periods.
The decline in underlying revenue is driven by a decline in Asia Pacific IT outsourcing revenues with a number of customer projects running at peak volumes in the first half of 2009 prior to a decline in the second half of 2009 and into 2010. In addition, underlying revenues in the Australian BPO business declined due to lower bonus payouts from workers' compensation 'return to work' scheme performance in New South Wales.
XEBIT for the region has decreased by 49.1% to £3.0 million (H1 2009: £5.8 million). This decline is driven by the impact of revenue losses described above, with the Australian bonus payout being the main driver. XEBIT margins decreased to 8.1% (H1 2009: 14.9%).
Corporate
Corporate costs have decreased for the period by 20.3% to £8.8 million (H1 2009: £11.0 million). This is primarily due to the lean processor restructuring programme. In addition, the integration of Cambridge resulted in an increase in central overhead cost in the first half of 2009. Furthermore, discretionary spend has been tightly controlled during the period. As a percentage of external revenues, corporate costs represent 2.3% (H1 2009: 3.0%).
Group risk factors
As with all businesses, the Group is exposed to certain risks, which could have a material impact on the Group's long term performance and could cause actual results to differ materially from forecast and historic results. The principal risks and uncertainties facing the Group have not changed from those set out in the 2009 annual report and accounts. These include the risks associated with attracting new customers, implementation of large contracts, continuation of efficient processing, exposure to complex and technical contractual terms, successful retention of key employees, continuity and security of IT systems, regulatory and legislative changes, and the general economic environment. For a full discussion of the risks to our future business performance, please refer to page 24 of our 2009 annual report and accounts, a copy of which can be found on www.xchanging.com.
Consolidated income statement
for the six months ended 30 June 2010
|
|
|
Unaudited |
|||||||
|
|
|
|
Restated |
|
|||||
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|||||
|
|
|
Underlying |
Adjustments to underlying 1 |
Total |
Underlying |
Adjustments to underlying 1 |
Total |
|
|
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
3 |
374,099 |
- |
374,099 |
367,065 |
- |
367,065 |
|
|
|
Cost of sales |
|
(340,206) |
(4,153) |
(344,359) |
(331,673) |
(16,591) |
(348,264) |
|
|
|
Gross profit |
|
33,893 |
(4,153) |
29,740 |
35,392 |
(16,591) |
18,801 |
|
|
|
Administrative expenses |
5 |
(8,497) |
(783) |
(9,280) |
(10,060) |
(451) |
(10,511) |
|
|
|
Operating profit |
3 |
25,396 |
(4,936) |
20,460 |
25,332 |
(17,042) |
8,290 |
|
|
|
Finance costs |
|
(6,535) |
(379) |
(6,914) |
(6,405) |
(632) |
(7,037) |
|
|
|
Finance income |
|
4,759 |
- |
4,759 |
4,897 |
- |
4,897 |
|
|
|
Profit before taxation |
|
23,620 |
(5,315) |
18,305 |
23,824 |
(17,674) |
6,150 |
|
|
|
Taxation |
|
(6,745) |
1,704 |
(5,041) |
(6,098) |
5,524 |
(574) |
|
|
|
Profit for the period |
3 |
16,875 |
(3,611) |
13,264 |
17,726 |
(12,150) |
5,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
|
|
|
|
- equity holders of the Company |
|
14,080 |
(3,277) |
10,803 |
14,582 |
(11,399) |
3,183 |
|
|
|
- non-controlling interests |
|
2,795 |
(334) |
2,461 |
3,144 |
(751) |
2,393 |
|
|
|
|
|
16,875 |
(3,611) |
13,264 |
17,726 |
(12,150) |
5,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (expressed in pence per share) |
|
|
|
|
|
|
|
|
|
|
- basic |
6 |
5.90 |
|
4.53 |
6.21 |
|
1.35 |
|
|
|
- diluted |
6 |
5.87 |
|
4.50 |
6.08 |
|
1.33 |
|
|
Notes 1 to 14 form an integral part of this condensed consolidated half year report.
1Adjustments to underlying in 2009 and 2010 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity, acquisition-related expenses and imputed interest on put options.
Consolidated statement of comprehensive income
for the six months ended 30 June 2010
|
|
|
Unaudited |
|
|
|
|
|
Restated |
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
Notes |
£'000 |
£'000 |
|
|
|
|
|
|
Actuarial losses arising from defined benefit pension schemes |
|
(7,060) |
(3,440) |
|
Movement on deferred tax relating to defined benefit pension schemes |
2,036 |
823 |
|
|
Revaluation of available-for-sale financial assets |
|
(562) |
(919) |
|
Deferred tax on revaluation of available-for-sale financial assets |
|
(273) |
9 |
|
Fair value movements on hedging instrument qualifying for hedge accounting |
|
(33) |
- |
|
Transfer of foreign exchange movement on hedged item to cost of acquisition |
|
- |
(3,208) |
|
Currency translation differences |
|
(795) |
(8,610) |
|
Other comprehensive loss, net of tax |
|
(6,687) |
(15,345) |
|
Profit for the period |
3 |
13,264 |
5,576 |
|
Total comprehensive income/(loss)for the period |
|
6,577 |
(9,769) |
|
Attributable to: |
|
|
|
|
- equity holders of the Company |
|
4,117 |
(10,463) |
|
- non-controlling interests |
|
2,460 |
694 |
|
|
|
6,577 |
(9,769) |
Notes 1 to 14 form an integral part of this condensed consolidated half year report.
Consolidated statement of changes in equity
for the six months ended 30 June 2010
|
|
|
||||||||
|
|
Attributable to equity holders of the Company |
|
|||||||
|
|
Share capital |
Share premium |
Merger reserve |
Reverse acquisition reserve |
Other reserves |
Retained earnings |
Total |
Non-controlling interests |
Total equity |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 1 January 2009 |
10,973 |
76,647 |
409,672 |
(312,238) |
16,492 |
41,042 |
242,588 |
15,792 |
258,380 |
|
Total comprehensive income for the period (restated) |
- |
- |
- |
- |
(13,646) |
3,183 |
(10,463) |
694 |
(9,769) |
|
Transactions with owners: |
|
|
|
|
|
|
|
|
|
|
Share-based payments |
|
|
|
|
|
|
|
|
|
|
- share options |
- |
- |
- |
- |
- |
1,137 |
1,137 |
- |
1,137 |
|
Deferred and current income tax on share options |
- |
- |
- |
- |
- |
(335) |
(335) |
- |
(335) |
|
Shares issued |
|
|
|
|
|
|
|
|
|
|
- in respect of Cambridge acquisition (net of issue costs) |
762 |
27,355 |
- |
- |
7,779 |
- |
35,896 |
- |
35,896 |
|
- employee share-based payments |
34 |
620 |
- |
- |
- |
(31) |
623 |
- |
623 |
|
Dividends payable |
- |
- |
- |
- |
- |
(5,487) |
(5,487) |
(4,296) |
(9,783) |
|
At 30 June 2009 (restated) |
11,769 |
104,622 |
409,672 |
(312,238) |
10,625 |
39,509 |
263,959 |
12,190 |
276,149 |
|
At 1 January 2010 (restated) |
11,856 |
105,805 |
409,672 |
(312,238) |
15,610 |
42,568 |
273,273 |
15,518 |
288,791 |
|
Total comprehensive income for the period |
- |
- |
- |
- |
(6,686) |
10,803 |
4,117 |
2,460 |
6,577 |
|
Transactions with owners: |
|
|
|
|
|
|
|
|
|
|
Share-based payments |
|
|
|
|
|
|
|
|
|
|
- share options |
- |
- |
- |
- |
- |
1,133 |
1,133 |
- |
1,133 |
|
Deferred and current income tax on share options |
- |
- |
- |
- |
- |
(183) |
(183) |
- |
(183) |
|
Shares issued |
|
|
|
|
|
|
|
|
|
|
- employee share-based payments |
113 |
1,910 |
- |
- |
- |
- |
2,023 |
- |
2,023 |
|
Disposal of shares in a subsidiary |
- |
- |
- |
- |
439 |
- |
439 |
- |
439 |
|
Dividends payable |
- |
- |
- |
- |
- |
- |
- |
(94) |
(94) |
|
Dividends paid |
- |
- |
- |
- |
- |
(6,573) |
(6,573) |
(6,419) |
(12,992) |
|
At 30 June 2010 |
11,969 |
107,715 |
409,672 |
(312,238) |
9,363 |
47,748 |
274,229 |
11,465 |
285,694 |
Movements in the period 1 January 2009 to 30 June 2009 and the period 1 January 2010 to 30 June 2010 are unaudited. Notes 1 to 14 form an integral part of this condensed consolidated half year report.
Consolidated balance sheet
as at 30 June 2010
|
|
|
|
Restated |
|
|
|
Unaudited |
Audited |
|
|
|
30 June 2010 |
31 December 2009 |
|
|
Notes |
£'000 |
£'000 |
|
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Goodwill |
8 |
287,603 |
259,613 |
|
Other intangible assets |
8 |
75,642 |
75,336 |
|
Property, plant and equipment |
8 |
28,952 |
30,707 |
|
Available-for-sale financial assets |
|
24,321 |
26,264 |
|
Trade and other receivables |
|
4,242 |
4,107 |
|
Retirement benefit assets |
|
347 |
396 |
|
Deferred income tax assets |
|
26,832 |
25,015 |
|
Total non-current assets |
|
447,939 |
421,438 |
|
Current assets |
|
|
|
|
Trade and other receivables |
|
172,714 |
152,676 |
|
Cash and cash equivalents |
|
52,470 |
60,115 |
|
Total current assets Total assets |
|
225,184 673,123 |
212,791 634,229 |
|
Liabilities |
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
|
(187,756) |
(160,429) |
|
Current income tax liabilities |
|
(16,729) |
(6,444) |
|
Financial liabilities |
|
|
|
|
- borrowings |
9 |
(21,179) |
(16,361) |
|
- other liabilities |
9 |
(818) |
(900) |
|
Provisions |
10 |
(21,878) |
(32,057) |
|
Total current liabilities |
|
(248,360) |
(216,191) |
|
Trade and other payables |
|
(19,556) |
(25,505) |
|
Financial liabilities |
|
|
|
|
- borrowings |
9 |
(36,700) |
(22,926) |
|
- other liabilities |
9 |
(20,767) |
(22,404) |
|
Deferred income tax liabilities |
|
(14,431) |
(11,714) |
|
Provisions |
10 |
(10,528) |
(16,394) |
|
Retirement benefit obligations |
11 |
(37,087) |
(30,304) |
|
Total non-current liabilities |
|
(139,069) |
(129,247) |
|
Total liabilities |
|
(387,429) |
(345,438) |
|
Net assets |
|
285,694 |
288,791 |
|
Shareholders' equity |
|
|
|
|
Ordinary shares |
|
11,969 |
11,856 |
|
Share premium |
|
107,715 |
105,805 |
|
Merger reserve |
|
409,672 |
409,672 |
|
Reverse acquisition reserve |
|
(312,238) |
(312,238) |
|
Other reserves |
|
9,363 |
15,610 |
|
Retained earnings |
|
47,748 |
42,568 |
|
Total shareholders' equity |
|
274,229 |
273,273 |
|
Non-controlling interest in equity |
|
11,465 |
15,518 |
|
Total equity |
|
285,694 |
288,791 |
Notes 1 to 14 form an integral part of this condensed consolidated half year report.
Consolidated cash flow statement
for the six months ended 30 June 2010
|
|
Unaudited |
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
Cash generated from operations |
22,759 |
26,038 |
|
Income tax paid |
(6,199) |
(5,791) |
|
Net cash from operating activities |
16,560 |
20,247 |
|
Cash flows from investing activities |
|
|
|
Acquisition-related expenses |
- |
(3,512) |
|
Acquisition cost of subsidiaries |
(11,737) |
(48,803) |
|
Cash and cash equivalents acquired with subsidiaries |
2,363 |
3,946 |
|
Proceeds from sale of shares in subsidiary |
439 |
- |
|
Interim payment of put option |
(870) |
(894) |
|
Purchase of available-for-sale financial assets |
(1,038) |
(454) |
|
Purchase of property, plant and equipment |
(4,329) |
(9,981) |
|
Purchase of intangible assets |
(4,312) |
(5,398) |
|
Pre-contract expenditure |
(585) |
(1,250) |
|
Proceeds from sale of property, plant and equipment |
58 |
73 |
|
Interest received |
558 |
1,014 |
|
Dividends received |
150 |
395 |
|
Net cash used in investing activities |
(19,303) |
(64,864) |
|
Cash flows from financing activities |
|
|
|
Proceeds from issue of shares |
2,025 |
655 |
|
Transaction costs of shares issued |
- |
(19) |
|
Proceeds from borrowings |
15,683 |
40,259 |
|
Repayment of borrowings |
(6,619) |
(30,961) |
|
Repayment of finance lease creditor |
(383) |
(654) |
|
Interest paid |
(1,599) |
(1,910) |
|
Dividends paid to non-controlling interests |
(6,419) |
(4,296) |
|
Dividends paid to equity shareholders |
(6,573) |
(5,487) |
|
Net cash used in financing activities |
(3,885) |
(2,413) |
|
Effects of exchange adjustments |
(1,017) |
(7,378) |
|
Net decrease in cash and cash equivalents |
(7,645) |
(54,408) |
|
Cash and cash equivalents at 1 January |
60,115 |
117,798 |
|
Cash and cash equivalents at 30 June |
52,470 |
63,390 |
Notes 1 to 14 form an integral part of this condensed consolidated half year report.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010
1 Basis of preparation
(i) General information
Xchanging plc is a limited liability company incorporated and domiciled in the UK. The address of its registered office is 13 Hanover Square, London, W1S 1HN. The Company's ordinary shares are traded on the London Stock Exchange.
The condensed consolidated half year report was approved for issue on 2 August 2010. This condensed consolidated half year report has been reviewed, but not audited.
(ii) Basis of preparation
This condensed consolidated half year report for the half year ended 30 June 2010 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority, and with IAS 34, "Interim financial reporting" as adopted by the European Union. This condensed consolidated half year financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2009, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.
The results as presented for the period ended 30 June 2009 and the position as at 31 December 2009 have been restated for the following:
·; The adoption of IFRS 3 (revised), "Business combinations", which came into effect for the Group from 1 January 2010. As a result, any external acquisition-related expenses, such as advisers' fees and stamp duty are to be charged to the income statement rather than capitalised as part of the costs of acquisition. Where acquisition-related expenses were being capitalised in 2009 in relation to business combinations that did not complete until 2010, these costs have been expensed through the income statement on transition to IFRS 3 (revised) through the restatement of the 2009 comparatives. The impact of this restatement is:
o to reduce the total operating profit, total profit for the period, and the total profit for the period attributable to equity holders of the Company as at 30 June 2009 by £451,000, and the related impact on earnings per share;
o to reduce the retained earnings and trade and other receivables as at 31 December 2009 by £1,023,000.
The Directors consider it appropriate to exclude such acquisition-related expenses when considering the underlying performance of the business. As a result of this change, at the 2010 half year, the adjustments to derive the underlying numbers in the income statement also include such acquisition-related expenses in order to allow shareholders to understand better the elements of financial performance.
·; A loss at a statutory level had been attributed to the non-controlling interests' share in the Cambridge group as at 30 June 2009. The results have subsequently been restated such that 100% of the loss made by the acquired group at a statutory level is attributable to the Xchanging Group in line with IAS 27, "Consolidated and separate financial statements". There is no effect on either XEBIT or underlying profit for the period as the Cambridge group was profitable on an underlying basis. No restatement is required at 31 December 2009.
The impact of this restatement is to reduce the amount of total profit for the period ended 30 June 2009 attributable to the equity holders of the Company by £1,600,000 and the related impact on earnings per share.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
·; As at 30 June 2009, net liabilities acquired with the Cambridge group were attributed to the non-controlling interest. The statement of changes in equity for the period ended 30 June 2009 has been restated to remove the £17,183,000 of net liabilities attributed to the non-controlling interest and increase the goodwill position reported at 30 June 2009 in line with IAS 27. No restatement is required at 31 December 2009.
(iii) Accounting policies
Except as described below, the accounting policies adopted in the preparation of this condensed consolidated half year financial information are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2009. The accounting policies are drawn up in accordance with International Accounting Standards (IAS) and IFRS as endorsed by the European Union.
·; Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.
The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning on 1 January 2010, and impact the consolidated half year financial information as described:
·; IFRS 3 (revised), "Business combinations", and consequential amendments to IAS 27, "Consolidated and separate financial statements", IAS 28, "Investments in associates", and IAS 31, "Interests in joint ventures", are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
IFRS 3 (revised) continues to apply the acquisition method to business combinations, but with some significant changes. For example, the change in the treatment of acquisition-related expenses discussed in the basis of preparation section, and any revisions to contingent cash consideration in the period following the acquisition will be recorded in the income statement.
As the Group has adopted IFRS 3 (revised), it is also required to adopt IAS 27 (revised), "Consolidated and separate financial statements". IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. Such transactions will no longer result in either goodwill or in a gain or a loss being recognised. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in the income statement.
The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning on 1 January 2010, but are not currently relevant to the Group or have not had a material impact on the Group:
·; Amendment to IFRS 2, "Share-based payments" - amendments relating to group cash-settled share-based payment transactions
·; IFRIC 17, "Distributions of non-cash assets to owners"
·; IFRIC 18, "Transfers of assets from customers"
·; Amendment to IFRS 1, "First-time adoption of IFRSs" - amendments relating to oil and gas assets and determining whether an arrangement contains a lease
·; Improvements to International Financial Reporting Standards 2009 were issued in April 2009. The effective dates vary standard by standard, but most are effective 1 January 2010.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
The following new standards, amendments to standards or interpretations have been issued, but are not effective for the financial year beginning 1 January 2010 and have not been early adopted:
·; IFRS 9, "Financial instruments"
·; IAS 24 (revised), "Related party disclosures"
·; Amendment to IFRIC 14, "Prepayment of a minimum funding requirement"
·; IFRIC 19, "Extinguishing financial liabilities with equity instruments"
·; Amendment to IAS 32, "Classification of rights issues"
·; Amendment to IFRS 1, "First-time adoption of IFRSs" - limited exemption from comparative IFRS 7 disclosures for first-time adopters
·; Improvements to International Financial Reporting Standards 2010 were issued in May 2010. The effective dates vary standard by standard, but most are effective 1 January 2011.
The Group is yet to assess the full impact of IFRS 9, and has not yet decided when to adopt this standard, which is not mandatory until January 2013. The Directors anticipate that the future adoption of all the other standards, interpretations and amendments listed above will not have a material impact on the Group's financial statements.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
2 Financial information
The financial information included in this condensed consolidated half year report does not constitute full financial statements within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2009 were approved by the Board for issue on 1 March 2010 and have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
3 Segmental reporting
Following the adoption of IFRS 8 with effect from 1 January 2009, the Group identified six reportable operating segments, based on the management organisational structure and which formed the basis of the segmental reporting notes in the financial statements for the period ended 30 June 2009 and the year ended 31 December 2009. These were the UK, the Americas, Continental Europe, Asia Pacific, Global Procurement and Central. As required by IFRS 8, the operating segments are reviewed regularly by the Xchanging Management Board (XMB), the chief operating decision-maker, to ensure that they are still appropriate as components of the Group, based on the allocation of resources and being the basis on which performance is assessed.
Since 1 January 2010, there have been a number of changes to the management organisational structure and monitoring of performance by the XMB. Global Procurement previously contained a number of entities which served different geographic locations. These procurement entities have subsequently been included within their respective geographic regions of the UK, the Americas, Asia Pacific and Continental Europe. Global Procurement as a separate operating segment therefore no longer exists. Further, the IT and Insurance Software divisions, previously included in their entirety within the Americas region, have been divided between those entities located in the USA (and which remain part of the Americas region) and those which are based in either India, Singapore, Malaysia or Australia (and now included within the Asia Pacific region). All comparatives have been restated to reflect these changes to the segmental reporting structure.
A brief description of each segment is as follows:
|
·; UK is a cross-industry sector providing insurance BPO services, procurement services to a range of customers within the UK, human resources, finance and accounting, and technology. |
|||
|
|
|
|
|
|
·; Services provided in the Americas segment comprise the provision of cross-industry IT products and services, procurement services, and both workers' compensation and other specialist insurance claims processing services for customers across the USA. |
|||
|
|
|
|
|
|
·; Continental Europe provides BPO services to Financial Markets customers and procurement services to a range of customers across industries. |
|||
|
|
|
|
|
|
·; Asia Pacific contains the Group's offshore business processing services function, which provides accounting, pension administration and broking services to a range of cross-industry customers. It also includes the Australian workers' compensation claims processing services business, procurement services to a range of customers, and services relating to the provision of cross-industry IT products and services. |
|||
|
|
|
|
|
|
·; Central provides the infrastructure, resources and investment to sustain and grow the Group, including sales and commercial, performance management, implementation and business management functions. |
|||
Management uses Xchanging's share of underlying operating profit (XEBIT) as a measure of segment result. XEBIT represents underlying operating profit attributable to equity holders of the Group. Underlying operating profit excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs and acquisition-related expenses following the adoption of IFRS 3 (revised) from 1 January 2010. The measure also excludes the amortisation of intangible assets previously unrecognised by an acquired entity, and imputed interest on put options issued to non-controlling interests. Interest income and expenditure are
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
not allocated to segments, as this type of activity is driven by the Group treasury function, which manages the cash position of the whole Group.
Management makes regular use of this measure to evaluate performance in the operating segments, both in absolute terms and comparatively from period to period, and to allocate resources among its operating segments. Management believes that this measure provides a better understanding, for both management and investors, of the operating results of its business segments for the period under review.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
The segment information for the period ended 30 June 2010 is as follows:
|
|
Unaudited |
|||||
|
|
UK |
Americas |
Continental Europe |
Asia Pacific |
Central |
Total |
|
Six months ended 30 June 2010 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
Revenue |
203,445 |
65,946 |
89,138 |
36,622 |
- |
395,151 |
|
- from external customers |
198,737 |
65,9462 |
89,138 |
20,278 |
- |
374,099 |
|
- inter segment |
4,708 |
- |
- |
16,344 |
- |
21,052 |
|
|
|
|
|
|
|
|
|
Xchanging's share of underlying operating profit/(loss) (XEBIT) |
17,141 |
3,097 |
6,246 |
2,961 |
(8,756) |
20,689 |
|
XEBIT margin |
8.4% |
4.7% |
7.0% |
8.1% |
|
5.5% |
|
|
|
|
|
|
|
|
|
Underlying operating profit/(loss) |
21,281 |
3,388 |
6,045 |
3,438 |
(8,756) |
25,396 |
|
Underlying operating profit margin |
10.5% |
5.1% |
6.8% |
9.4% |
|
6.8% |
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
- amortisation of intangible assets previously unrecognised by an acquired entity |
(122) |
(3,123) |
(201) |
(707) |
- |
(4,153) |
|
- acquisition-related expenses |
(139) |
- |
(306) |
- |
(338) |
(783) |
|
Operating profit/(loss) before allocation of central costs |
21,020 |
265 |
5,538 |
2,731 |
(9,094) |
20,460 |
|
|
|
|
|
|
|
|
|
Allocation of central costs: |
|
|
|
|
|
|
|
- depreciation and amortisation |
(541) |
(74) |
(264) |
- |
879 |
- |
|
- other |
(336) |
- |
- |
- |
336 |
- |
|
Operating profit/(loss) |
20,143 |
191 |
5,274 |
2,731 |
(7,879) |
20,460 |
|
Finance costs |
|
|
|
|
|
(6,914) |
|
Finance income |
|
|
|
|
|
4,759 |
|
Taxation |
|
|
|
|
|
(5,041) |
|
Profit for the period |
|
|
|
|
|
13,264 |
2 Americas external revenue for the period ended 30 June 2010 includes £3,701,000 (2009: £1,563,000) of revenue from a contract entered into during 2009 by Cambridge Integrated Services Group Inc., a subsidiary of the Group, to provide consulting, business development and procurement services over a two year period to 2010 to Campagnie Pour Assistance Technique et Investissements S.A. ('CATISA').
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
The restated segment information for the period ended 30 June 2009 is as follows:
|
|
Unaudited |
||||||
|
|
UK |
Americas |
Continental Europe |
Asia Pacific |
Central |
Total |
|
|
Six months ended 30 June 2009 (restated) |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
196,372 |
68,043 |
83,334 |
39,003 |
146 |
386,898 |
|
|
- from external customers |
192,923 |
68,043 |
83,334 |
22,619 |
146 |
367,065 |
|
|
- inter segment |
3,449 |
- |
- |
16,384 |
- |
19,833 |
|
|
|
|
|
|
|
|
|
|
|
Xchanging's share of underlying operating profit/(loss) (XEBIT) |
18,239 |
1,268 |
5,925 |
5,818 |
(10,980) |
20,270 |
|
|
XEBIT margin |
9.3% |
1.9% |
7.1% |
14.9% |
|
5.5% |
|
|
|
|
|
|
|
|
|
|
|
Underlying operating profit/(loss) |
22,156 |
901 |
6,073 |
7,182 |
(10,980) |
25,332 |
|
|
Underlying operating profit margin |
11.3% |
1.3% |
7.3% |
18.4% |
|
6.9% |
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
- amortisation of intangible assets previously unrecognised by an acquired entity |
(166) |
(3,389) |
(187) |
(769) |
(2) |
(4,513) |
|
|
- acquisition-related expenses |
- |
- |
(451) |
- |
- |
(451) |
|
|
Operating profit/(loss) before allocation of central costs and exceptional items |
21,990 |
(2,488) |
5,435 |
6,413 |
(10,982) |
20,368 |
|
|
|
|
|
|
|
|
|
|
|
Allocation of central costs: |
|
|
|
|
|
|
|
|
- investment in Enterprise Partnerships |
(12) |
- |
- |
- |
12 |
- |
|
|
- depreciation and amortisation |
(851) |
- |
(265) |
- |
1,116 |
- |
|
|
- other |
117 |
- |
(95) |
- |
(22) |
- |
|
|
Operating profit/(loss) before allocation of exceptional items |
21,244 |
(2,488) |
5,075 |
6,413 |
(9,876) |
20,368 |
|
|
|
|
|
|
|
|
|
|
|
Exceptional items |
- |
(10,214) |
- |
(474) |
(1,390) |
(12,078) |
|
|
Operating profit/(loss) |
21,244 |
(12,702) |
5,075 |
5,939 |
(11,266) |
8,290 |
|
|
Finance costs |
|
|
|
|
|
(7,037) |
|
|
Finance income |
|
|
|
|
|
4,897 |
|
|
Taxation |
|
|
|
|
|
(574) |
|
|
Profit for the period |
|
|
|
|
|
5,576 |
|
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
4 Exceptional items
|
|
Unaudited |
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
£'000 |
£'000 |
|
Exceptional items included in cost of sales comprise the following: |
|
|
|
Cambridge acquisition and integration costs |
- |
6,862 |
|
Onerous lease provision |
- |
4,406 |
|
Impairment of assets |
- |
810 |
|
Total exceptional items included in cost of sales |
- |
12,078 |
The exceptional items incurred during the period ended 30 June 2009 related to specific costs incurred as a consequence of the acquisition of Cambridge Solutions Limited and its subsidiaries (Cambridge). These costs were incurred as a result of the implementation of significant restructuring efforts to integrate Cambridge into the Xchanging business. Key aspects of the implementation programme included the major restructuring of the US BPO business (included in the Americas segment), with the significant consolidation of existing sites into a few key locations. The charge consisted of costs related to the restructuring of the US BPO business, including onerous lease provisions, asset impairments, severance pay and other costs associated with the management and implementation of the integration plan.
As part of the Cambridge acquisition and integration, the consolidation of existing US sites into a few key locations during 2009 resulted in a number of vacant properties from which the Group was unable to terminate its commitments. The onerous lease provision created represented the remaining costs, primarily rent, associated with these vacant properties. The impairment of assets represented the accelerated depreciation on those assets associated with the vacant properties.
5 Acquisition-related expenses
|
|
Unaudited |
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
£'000 |
£'000 |
|
Acquisition-related expenses incurred in respect of the following |
|
|
|
Legal fees |
529 |
419 |
|
Stamp duty |
45 |
- |
|
Other professional and advisers' fees |
209 |
32 |
|
Total acquisition-related expenses included in administrative expenses |
783 |
451 |
Acquisition-related expenses comprise those directly attributable costs of acquiring an entity which would have qualified for capitalisation under the principles of IFRS 3, "Business Combinations". With the adoption of IFRS 3 (revised) by the Group with effect from 1 January 2010, such costs are now required to be expensed as incurred. The £451,000 of acquisition-related expenses recognised at 30 June 2009 relate to those acquisitions which did not complete before IFRS 3 (revised) came into effect.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
6 Earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Company by the weighted average number of ordinary shares of Xchanging plc. For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include all dilutive potential ordinary shares. The Group has two types of potential dilutive ordinary shares: share options, and share awards under the Performance Share Plan to the extent that the performance criteria for vesting of the awards are expected to be met.
|
|
|
Unaudited |
||
|
|
|
Earnings |
Weighted average number of shares |
Earnings per share |
|
|
|
£'000 |
thousands |
pence |
|
Basic earnings per share: |
|
|
|
|
|
- 30 June 2010 |
|
10,803 |
238,469 |
4.53 |
|
- 30 June 2009 (restated) |
|
3,183 |
234,931 |
1.35 |
|
Diluted earnings per share: |
|
|
|
|
|
- 30 June 2010 |
|
10,803 |
239,822 |
4.50 |
|
- 30 June 2009 (restated) |
|
3,183 |
240,004 |
1.33 |
The following reflects the share data used in the basic and dilutive earnings per share calculations:
|
|
|
|
|
|
Unaudited |
||
|
|
|
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
|
|
|
|
|
thousands |
thousands |
|
|
Weighted average number of ordinary shares for basic and underlying earnings per share |
238,469 |
234,931 |
|||||
|
Dilutive potential ordinary shares: |
|
|
|
|
|||
|
- employee share options |
|
|
|
1,353 |
3,716 |
||
|
- awards under Performance Share Plan |
|
- |
1,357 |
||||
|
Weighted average number of ordinary shares for diluted earnings per share |
239,822 |
240,004 |
|||||
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
Underlying basic and diluted earnings per share
In addition to the above, underlying earnings per share value is disclosed to provide a better understanding of the underlying trading results of the Group. This underlying value is in line with the KPIs as used to measure the Group's performance.
|
|
|
|
|
Unaudited |
||
|
|
|
|
|
Earnings |
Weighted average number of shares |
Earnings per share |
|
|
|
|
|
£'000 |
thousands |
pence |
|
Underlying basic earnings per share: |
|
|
|
|||
|
- 30 June 2010 |
|
|
|
14,080 |
238,469 |
5.90 |
|
- 30 June 2009 |
|
|
|
14,582 |
234,931 |
6.21 |
|
Underlying diluted earnings per share: |
|
|
|
|||
|
- 30 June 2010 |
|
|
|
14,080 |
239,822 |
5.87 |
|
- 30 June 2009 |
|
|
|
14,582 |
240,004 |
6.08 |
The underlying earnings per share figures are calculated based on the Xchanging's share of underlying profit for the period, divided by the basic and diluted weighted average number of shares as stated above.
Xchanging's share of underlying profit for the period is calculated as follows:
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
Six months ended 30 June 2010 |
Six months ended 30 June 2009 |
|
|
|
|
|
|
£'000 |
£'000 |
|
Profit for the period attributable to Xchanging equity holders |
10,803 |
3,183 |
||||
|
Exceptional items (net of tax) |
|
|
- |
7,801 |
||
|
Amortisation of intangible assets previously unrecognised by an acquired entity (net of tax) |
2,563 |
3,380 |
||||
|
Acquisition-related expenses (net of tax) |
783 |
451 |
||||
|
Imputed interest and fair value adjustments on put options (net of tax) |
265 |
518 |
||||
|
Non-controlling interest share of adjustments (including tax impact) |
(334) |
(751) |
||||
|
Underlying profit for the period attributable to Xchanging plc equity holders |
14,080 |
14,582 |
||||
7 Dividends paid
An interim dividend of 2.75 pence per share relating to the year ended 31 December 2009, and amounting to £6,573,000 (2009: £5,487,000), was paid on 1 April 2010, to members registered at the close of business on 19 March 2010.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
8 Capital expenditure
(i) Intangible assets
|
|
|
Goodwill |
Other intangible assets |
Total |
|
|
Note |
£'000 |
£'000 |
£'000 |
|
Opening net book amount at 1 January 2009 |
|
95,558 |
58,478 |
154,036 |
|
Business combinations |
|
166,401 |
25,201 |
191,602 |
|
Additions |
|
- |
18,674 |
18,674 |
|
Revision of deferred contingent consideration on prior year business combinations |
|
1,812 |
- |
1,812 |
|
Disposals |
|
- |
(26) |
(26) |
|
Amortisation |
|
- |
(22,962) |
(22,962) |
|
Exchange adjustments |
|
(4,158) |
(4,029) |
(8,187) |
|
Closing net book amount at 31 December 2009 |
|
259,613 |
75,336 |
334,949 |
|
Business combinations |
12 |
20,910 |
10,074 |
30,984 |
|
Additions |
|
- |
4,802 |
4,802 |
|
Disposals |
|
- |
(1) |
(1) |
|
Amortisation |
|
- |
(12,130) |
(12,130) |
|
Exchange adjustments |
|
7,080 |
(2,439) |
4,641 |
|
Closing net book amount at 30 June 2010 |
|
287,603 |
75,642 |
363,245 |
Movements in the period 1 January 2010 to 30 June 2010 are unaudited; movements in the period 1 January 2009 to 31 December 2009 are audited.
Goodwill with an indefinite life is not subject to amortisation, but is tested annually for impairment at the year end, 31 December, or whenever there are indicators of impairment. At 30 June 2010, there were no such indicators of impairment for goodwill balances with indefinite lives.
(ii) Property, plant and equipment
|
|
Note |
£'000 |
|
Opening net book amount at 1 January 2009 |
|
24,486 |
|
Business combinations |
|
8,512 |
|
Additions |
|
13,640 |
|
Disposals |
|
(297) |
|
Depreciation |
|
(13,586) |
|
Exchange adjustments |
|
(2,048) |
|
Closing net book amount at 31 December 2009 |
|
30,707 |
|
Business combinations |
12 |
134 |
|
Additions |
|
4,329 |
|
Disposals |
|
(85) |
|
Depreciation |
|
(6,363) |
|
Exchange adjustments |
|
230 |
|
Closing net book amount at 30 June 2010 |
|
28,952 |
Movements in the period 1 January 2010 to 30 June 2010 are unaudited; movements in the period 1 January 2009 to 31 December 2009 are audited.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
9 Financial liabilities
|
|
Unaudited |
Audited |
|
|
30 June 2010 |
31 December 2009 |
|
|
£'000 |
£'000 |
|
Current borrowings |
|
|
|
Finance lease liabilities |
481 |
727 |
|
Bank loans and overdrafts |
15,971 |
15,634 |
|
Deferred consideration on acquisitions |
4,727 |
- |
|
Total current borrowings |
21,179 |
16,361 |
|
Non-current borrowings |
|
|
|
Finance lease liabilities |
275 |
394 |
|
Bank loan |
33,005 |
22,334 |
|
Receivable purchase facility |
276 |
198 |
|
Deferred consideration on acquisitions |
3,144 |
- |
|
Total non-current borrowings |
36,700 |
22,926 |
|
|
|
|
|
Current other financial liabilities Put options to acquire the non-controlling interest in Enterprise Partnerships |
818 |
900 |
|
Non-current other financial liabilities |
|
|
|
Put options to acquire the non-controlling interest in Enterprise Partnerships |
20,767 |
22,404 |
Movements in borrowings and other financial liabilities are analysed as follows:
|
|
|
Unaudited |
|
|
|
|
£'000 |
|
|
Opening balance as at 1 January |
|
62,591 |
|
|
Deferred consideration arising in respect of acquisition of subsidiaries |
|
7,992 |
|
|
Drawdown of borrowings |
|
15,683 |
|
|
Repayment of borrowings |
|
(6,619) |
|
|
Interim payment of put option |
|
(870) |
|
|
Repayment of finance lease liabilities |
|
(383) |
|
|
Net movement on receivable purchase facility |
|
104 |
|
|
Fair value adjustments and unwinding of discounts |
|
379 |
|
|
Amortisation of debt fees |
|
265 |
|
|
Exchange adjustments |
|
322 |
|
|
Closing balance as at 30 June |
|
79,464 |
|
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
10 Provisions
|
|
Phoenix |
Onerous lease |
Restruc-turing |
Operation-al risk |
Early and part-time retirement |
Long service |
Litigation |
Other |
Total |
|
||
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
||
|
At 1 January 2009 |
5,230 |
3,701 |
811 |
1,336 |
3,571 |
1,756 |
- |
2,900 |
19,305 |
|||
|
Acquired |
- |
14,739 |
482 |
- |
- |
299 |
7,397 |
3,003 |
25,920 |
|||
|
Reallocation of provisions |
- |
- |
- |
- |
(110) |
(798) |
- |
908 |
- |
|||
|
Charged/(credited) to the income statement: |
|
|
|
|
|
|
|
|
|
|||
|
- provided in the year |
- |
2,843 |
17,039 |
623 |
623 |
152 |
511 |
1,707 |
23,498 |
|||
|
- released in the year |
(4,967) |
(2,202) |
- |
(112) |
- |
- |
- |
(609) |
(7,890) |
|||
|
- unwinding of discount |
183 |
498 |
- |
- |
- |
- |
- |
7 |
688 |
|||
|
Used in the year |
- |
(4,838) |
(1,167) |
(82) |
(1,334) |
(92) |
(304) |
(1,884) |
(9,701) |
|||
|
Exchange adjustments |
(446) |
(1,480) |
45 |
(97) |
(269) |
(31) |
(670) |
(421) |
(3,369) |
|||
|
At 31 December 2009 |
- |
13,261 |
17,210 |
1,668 |
2,481 |
1,286 |
6,934 |
5,611 |
48,451 |
|||
|
Acquired (note 12) |
- |
4 |
- |
- |
- |
42 |
- |
204 |
250 |
|||
|
Charged/(credited) to the income statement: |
|
|
|
|
|
|
|
|
|
|||
|
- provided in the period |
- |
1 |
- |
168 |
47 |
461 |
542 |
127 |
1,346 |
|||
|
- released in the period |
- |
- |
(97) |
(279) |
- |
(31) |
(898) |
(794) |
(2,099) |
|||
|
- unwinding of discount |
- |
59 |
- |
- |
- |
- |
- |
- |
59 |
|||
|
Used in the period |
- |
(2,935) |
(7,553) |
(330) |
(480) |
(54) |
(3,672) |
(634) |
(15,658) |
|||
|
Exchange adjustments |
- |
667 |
(526) |
(125) |
(200) |
(80) |
343 |
(22) |
57 |
|||
|
At 30 June 2010 |
- |
11,057 |
9,034 |
1,102 |
1,848 |
1,624 |
3,249 |
4,492 |
32,406 |
|||
Movements in the period 1 January 2010 to 30 June 2010 are unaudited; movements in the period 1 January 2009 to 31 December 2009 are audited.
The nature of each provision remains consistent with the annual financial statements for the year ended 31 December 2009, as described on page 89 of the 2009 Annual Report.
Provisions have been analysed between current and non-current as follows:
|
|
|
Unaudited |
Audited |
|
|
|
30 June 2010 |
31 December 2009 |
|
|
|
£'000 |
£'000 |
|
Current |
|
21,878 |
32,057 |
|
Non-current |
|
10,528 |
16,394 |
|
|
|
32,406 |
48,451 |
11 Retirement benefit obligations
The only significant change in the pension assumptions from those presented in the annual financial statements for the year ended 31 December 2009 is the discount rates applied. The discount rate applied to the UK retirement benefit plans has been revised from 5.8% to 5.5% in line with market data. The discount rate applied to the German retirement benefit plans has been revised from 5.4% to 5.0% in line with market data. These changes have had the impact of increasing the Group retirement benefit obligation by £6,783,000 as at 30 June 2010.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
12 Business combinations
(a) FondsServiceBank
On 13 May 2009, Xchanging plc entered into an agreement with DAB bank AG to acquire the trade and assets of their FondsServiceBank (FSB) business unit, an investment funds administration business. As a result of this agreement, on 3 April 2010, Xchanging migrated all contracts with distribution partners and customers relating to the safekeeping and administration of investment fund shares. This transaction meets the definition of a business combination under the principles of IFRS 3 (revised), "Business Combinations" and has therefore been accounted for under the purchase method of accounting, in accordance with IFRS 3 (revised).
The total cash paid in consideration for the acquisition was €20.1 million (£17.9 million based on the exchange rate prevailing on the date of acquisition), of which €9.95 million was paid in 2009. A further €1.5 million is payable under the sale and purchase agreement by 31 December 2010 to reimburse DAB bank AG for restructuring costs incurred, up to a maximum of €1.5 million.
The contracts migrated from DAB bank AG were subsumed onto the existing Fondsdepot Bank (FDB) investment account processing platform from 3 April 2010. This is consistent with the Group's strategy to grow existing platforms and derive benefits from economies of scale, with overall performance being measured at the combined FDB business unit level. Consequently, revenues and profits or losses earned from investment account processing services in relation to the FSB contracts are not separately identifiable from the pre-existing FDB contracts. Therefore, it is impracticable to disclose the revenue and profit or loss in relation to FSB since the acquisition date included in the consolidated statement of comprehensive income for the period ended 30 June 2010 or for the current reporting period as though the acquisition date had been on 1 January 2010.
Due to the recent closure of the acquisition, the fair values of significant assets and liabilities are provisional and will be finalised during the period to 2 April 2011, as permissible under IFRS 3 (revised). The book and estimated fair values of those assets and liabilities as at 3 April 2010 are set out below:
|
|
Acquiree's carrying amount |
|
Adjustments |
|
Provisional fair value |
|
|
£'000 |
|
£'000 |
|
£'000 |
|
Intangible assets (excluding goodwill) |
- |
|
10,074 |
|
10,074 |
|
Deferred tax liabilities |
- |
|
(3,224) |
|
(3,224) |
|
Net assets acquired |
- |
|
6,850 |
|
6,850 |
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
The fair value adjustments in respect of intangible assets are due to the recognition of customer relationships.
Goodwill represents the value of both sales and cost synergies expected to arise from combining and integrating the operations of FSB onto the Xchanging Group's existing FDB banking platforms.
Details of net assets acquired and goodwill are as follows:
|
|
|
|
£'000 |
|
Purchase consideration |
|
|
|
|
- Cash |
|
|
17,889 |
|
- Deferred contingent consideration |
|
|
1,335 |
|
Total purchase consideration |
|
|
19,224 |
|
Fair value of net assets acquired |
(6,850) |
||
|
Goodwill |
|
|
12,374 |
(b) SEB Investmentservice (SEB ISG)
On 31 December 2009, the Group entered into an agreement with SEB Bank and SEB Asset Management to acquire 100% of the share capital of SEB Investmentservice (SEB ISG), a B2B investment accounts business. This transaction completed with effect from 12 March 2010. The results of SEB ISG have been consolidated by the Group from 1 March 2010.
The total consideration paid for the acquisition was €0.2 million (£0.2 million at the exchange rate prevailing at the date of control being assumed). €25,000 was paid on completion, with the remaining consideration payable over the period to 31 December 2010.
SEB ISG contributed revenue of £1.5 million, underlying profit of £0.3 million and statutory profit of £0.3 million to the Group for the period from acquisition to 30 June 2010.
Due to the recent completion of the acquisition, the fair values of significant assets and liabilities are provisional and will be finalised during the period to 28 February 2011, as permissible under IFRS 3 (revised). The book and estimated fair values of those assets and liabilities as at 1 March 2010 are set out below:
|
|
Acquiree's carrying amount |
|
Adjustments |
|
Provisional fair value |
|
|
£'000 |
|
£'000 |
|
£'000 |
|
Deferred income tax assets |
- |
|
68 |
|
68 |
|
Current income tax receivable |
14 |
|
- |
|
14 |
|
Trade and other receivables |
3,322 |
|
- |
|
3,322 |
|
Cash and cash equivalents |
749 |
|
- |
|
749 |
|
Trade and other payables |
(3,371) |
|
(212) |
|
(3,583) |
|
Pension liability |
(400) |
|
- |
|
(400) |
|
Provisions |
(250) |
|
- |
|
(250) |
|
Net assets/(liabilities) acquired |
64 |
|
(144) |
|
(80) |
The adjustments to provisions and deferred tax assets relate to valuation adjustments and are provisional, based on management's best estimates.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
Goodwill represents the value of both sales and cost synergies expected to arise from combining and integrating the operations of SEB onto the Xchanging Group's existing banking platforms.
Details of net assets acquired and goodwill are as follows:
|
|
|
|
£'000 |
|
Purchase consideration |
|
|
|
|
- Cash |
|
|
22 |
|
- Deferred guaranteed consideration |
|
|
157 |
|
Total purchase consideration |
|
|
179 |
|
Fair value of net liabilities acquired |
80 |
||
|
Goodwill |
|
|
259 |
(c) Data Integration Limited
On 15 June 2010, the Group acquired 100% of the share capital of Data Integration Limited, a UK based reseller business specialising in network security, application optimisation, mobility solutions, high performance networks, IP telephony and open access networks. The results of Data Integration have been consolidated by the Group from 1 June 2010.
Data Integration contributed revenue of £1.2 million, underlying profit of £0.2 million and statutory profit of £0.2 million to the Group for the period from acquisition to 30 June 2010.
Due to the recent completion of the acquisition, the fair values of significant assets and liabilities are provisional and will be finalised during the period to 31 May 2011, as permissible under IFRS 3 (revised). The book and estimated fair values of those assets and liabilities as at 1 June 2010 are set out below:
|
|
Acquiree's carrying amount |
|
Adjustments |
|
Provisional fair value |
|
|
£'000 |
|
£'000 |
|
£'000 |
|
Property, plant and equipment |
134 |
|
- |
|
134 |
|
Deferred income tax assets |
141 |
|
- |
|
141 |
|
Trade and other receivables |
2,732 |
|
- |
|
2,732 |
|
Cash and cash equivalents |
1,614 |
|
- |
|
1,614 |
|
Trade and other payables |
(3,433) |
|
(465) |
|
(3,898) |
|
Net assets acquired |
1,188 |
|
(465) |
|
723 |
Goodwill on acquisition represents the value of both sales and cost synergies expected to arise from combining and integrating Data Integration Limited into the Xchanging Group.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
Details of net assets acquired and goodwill are as follows:
|
|
|
|
£'000 |
|
Purchase consideration |
|
|
|
|
--- Cash |
|
|
2,500 |
|
- Deferred consideration - guaranteed |
|
|
4,000 |
|
- Deferred consideration - contingent |
|
|
2,500 |
|
Total purchase consideration |
|
|
9,000 |
|
Fair value of net assets acquired |
(723) |
||
|
Goodwill |
|
|
8,277 |
The purchase consideration is comprised of a guaranteed component of £6.5 million, of which £2.5 million was paid on completion, and an earn-out of £2.5 million contingent on the acquired business delivering operating profit targets for the remainder of the year ending 31 December 2010 and the full year ending 31 December 2011. The remaining consideration will be paid in cash over the next two years.
13 Related party transactions
The following companies are considered to be related parties of the Group as they hold non-controlling shareholdings in a number of the subsidiaries of Xchanging plc and hence can exert significant influence over those subsidiaries.
|
·; The Corporation of Lloyd's held a 25% interest in Ins-sure Holdings Limited and a 50% interest in Xchanging Claims Services Limited for the full six month period ended 30 June 2010. Some of the directors of Xchanging Claims Services Limited are employees of the Corporation of Lloyd's. The emoluments of these directors were borne by the Corporation of Lloyd's. |
|||
|
|
|
|
|
|
·; The International Underwriting Association held a 25% interest in Ins-sure Holdings Limited for the full six month period ended 30 June 2010. |
|||
|
|
|
|
|
|
·; Deutsche Bank AG held a 44% interest in Xchanging etb GmbH for the full six month period ended 30 June 2010. Some of the directors of Xchanging etb GmbH are employees of Deutsche Bank AG. The emoluments of these directors are borne by Deutsche Bank AG. |
|||
|
|
|
|
|
|
·; Aon Limited held a 50% interest in Xchanging Broking Services Limited for the full six month period ended 30 June 2010. Some of the directors of Xchanging Broking Services Limited are employees of Aon Limited. The emoluments of these directors are borne by Aon Limited. |
|||
|
|
|
|
|
|
·; Allianz Kapitalanlagegesellschaft mbH held a 49% interest in Fondsdepot Bank GmbH for the full six month period ended 30 June 2010. |
|||
|
|
|
|
|
In addition, during the prior period Cambridge Integrated Services Group Inc., a subsidiary of the Group, entered into a contract with Campagnie Pour Assistance Technique et Investissements S.A. ('CATISA') to provide consulting services, business development and procurement services. CATISA is no longer considered to be a related party of the Group; the information is included for comparative purposes only.
Scandent Holdings Mauritius Limited, the previous owner of Cambridge Solutions Limited, is considered to be a related party of the Group by virtue of the fact that its directors have representation on the board of Cambridge Solutions Limited.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
A description of the nature of the services provided to/from these companies by/to the Group and the amount receivable/(payable) in respect of each at 30 June are set out in the table below:
|
|
Sales/(purchases) |
Receivables/(payables) |
||
|
|
Unaudited |
Unaudited |
Audited |
|
|
|
30 June 2010 |
30 June 2009 |
30 June 2010 |
31 December 2009 |
|
Services provided by/to the Group |
£'000 |
£'000 |
£'000 |
£'000 |
|
Securities processing services |
53,718 |
55,855 |
2,057 |
6,074 |
|
Processing, expert and data services |
20,895 |
20,856 |
1,003 |
6,432 |
|
Legal and professional charges |
- |
43 |
- |
- |
|
Property charges |
324 |
524 |
- |
- |
|
Consulting, business development and procurement services |
3,744 |
1,563 |
(962) |
(1,570) |
|
IT costs, premises, divisional corporate charges and other services in support of operating activities |
(12,788) |
(14,117) |
(6,925) |
(8,907) |
|
Operating systems, development, premises and other services in support of operating activities |
(111) |
(131) |
228 |
141 |
|
Desktop, hosting, telecommunications, accommodation and processing services |
(2,103) |
(1,906) |
(1,582) |
(1,624) |
|
Current accounts |
- |
- |
15,695 |
4,679 |
Transactions with Directors and key management
The compensation below relates to the Xchanging plc Directors and other key senior managers within the Group, who constitute those people with authority and responsibility for planning, directing and controlling the Group's activities, being the Xchanging Management Board.
|
|
Unaudited |
|
|
|
30 June 2010 |
30 June 2009 |
|
Key management compensation (including Directors) |
£'000 |
£'000 |
|
Short-term employee benefits |
3,560 |
5,814 |
|
Post-employment benefits |
176 |
15 |
|
Share-based payments |
427 |
335 |
|
|
4,163 |
6,164 |
During 2007, loans were provided by the Xchanging BV Employee Benefit Trust to a number of employees including Directors and key management personnel to enable them to purchase shares in Xchanging BV (these shares were subsequently exchanged for shares in Xchanging plc). The loans are non-interest bearing and become repayable on the earlier of the cessation of employment, the transfer or disposal of shares, acceptance of another loan from the Group to refinance the shares and 31 December 2011. The Xchanging BV Employee Benefit Trust has a call option over the shares until the loans are repaid in full.
Notes to the consolidated half year financial information
for the six months ended 30 June 2010 (continued)
The balances due from the Directors and key management, and the carrying amounts in the consolidated financial statements are:
|
|
Unaudited |
Audited |
|||
|
|
Balance outstanding at 30 June 2010 |
Carrying amount at 30 June 2010 |
Balance outstanding at 31 December 2009 |
Carrying amount at 31 December 2009 |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
S Beard |
1,088 |
1,088 |
1,088 |
1,088 |
|
|
R Houghton |
663 |
663 |
663 |
663 |
|
|
T Runge |
176 |
176 |
176 |
176 |
|
|
|
1,927 |
1,927 |
1,927 |
1,927 |
|
14 Events after the balance sheet date
On 28 July 2010, Cambridge Builders Private Limited, a subsidiary of Cambridge Solutions Limited, a Group company, signed an agreement with the State of Karnataka to purchase the leasehold for, and jointly develop, land in a new Special Economic Zone in Shimoga, a Tier 3 (rural) town north-west of Bangalore, India. Cambridge Builders Private Limited will make an upfront payment of £0.2 million for the leasehold of the land, which will have a 99 year lease term. Construction of a state-of-the-art processing centre on this land is anticipated to begin within the next two months and is expected to complete in 18 months from commencement. The expected development costs of this project are £3.7 million, of which £0.3 million is committed in respect of the appointment of architects and a project management company.
On 30 July 2010, Xchanging Italy S.r.l, a newly formed Group company, signed an Enterprise Partnership (EP) with SIA-SSB, a European provider of financial and payment systems services. As part of this EP, Xchanging Italy S.r.l will acquire 51% of Kedrios S.p.A (Kedrios), the Italian subsidiary of SIA-SSB specialising in securities processing and fund administration services for the Italian market, and assume the operational control of Kedrios and its 152 employees. The impact on the Group's financials in 2010 is not expected to be material. Xchanging Italy S.r.l has granted SIA-SSB the option to sell its 49% shareholding to Xchanging Italy S.r.l after the third anniversary of change of control for a consideration based on the fair value of the 49% shareholding.
Statement of Directors' responsibilities
The Directors confirm that this set of condensed, consolidated financial statements has been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim management report herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
§ an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
§ material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.
By order of the Board
|
D W Andrews |
R A H Houghton |
|
Chief Executive Officer |
Chief Financial Officer |
|
2 August 2010 |
2 August 2010 |
Independent review report to Xchanging plc
|
Introduction |
|
|
|
We have been engaged by the Company to review the condensed consolidated half year financial information in the half year report for the six months ended 30 June 2010, which comprises the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated balance sheet, consolidated cash flow statement and related notes. We have read the other information contained in the half year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated half year financial information. |
|
|
|
Directors' responsibilities |
|
|
|
The half year report is the responsibility of, and has been approved by the Directors. The Directors are responsible for preparing the half year report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. |
|
|
|
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated half year financial information included in this half year report has been prepared in accordance with International Accounting Standard 34, "Interim financial reporting", as adopted by the European Union. |
|
|
|
Our responsibility |
|
Our responsibility is to express to the Company a conclusion on the condensed consolidated half year financial information in the half year report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. |
|
|
|
Scope of review |
|
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. |
|
|
|
Conclusion |
|
|
|
Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated half year financial information in the half year report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. |
|
|
|
|
|
PricewaterhouseCoopers LLP |
|
Chartered Accountants |
|
London |
|
2 August 2010 |
|
|
|
|
|
Notes: |
|
(a) The maintenance and integrity of the Xchanging plc web site is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site. |
|
|
|
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. |
Related Shares:
XCH.L