Half Yearly Report

1 August 2012

Xchanging plc

Half Year Results for the six months ended 30 June 2012

This year, our objectives are centred on investing in and building the foundations for future growth. We have been very active and have made good progress.

Financial Highlights (continuing operations)

·; Revenue of £322.7 million (HY 2011: £322.0 million*)

·; Adjusted operating profit of £16.0 million (HY 2011: £13.8 million)

·; Operating cash flow of £26.6 million (HY 2011: £8.0 million*)

·; Return on invested capital of 23.6% (HY 2011: 21.6%)

·; Adjusted operating profit margin of 5.0% (HY 2011: 4.3%*)

·; Statutory operating profit of £14.0 million (HY 2011: £3.2 million)

·; Adjusted basic earnings per share (EPS) of 2.49 pence (HY 2011: 1.63 pence)

·; Net cash of £62.1 million (HY 2011: £37.8 million*)

Operational Highlights

·; Some benefits from previous cost savings invested in business development

·; Incremental flow of contract wins

·; Insurance Services delivered good performance

·; New global (re)insurance and accounting settlements service (Project Sorrento) progresses towards pilot launch in Q4

·; Financial Services and Corporate maintained cost savings from 2011

·; 2011 new Procurement contracts in implementation phase

·; Technology transformation underway; insurance software product, Xuber, launch due Q4

·; Improved South East Asia performance

·; Official inauguration of new centre at Shimoga, India

Financial Summary (continuing operations)

Notes:

* The comparative amounts have been restated to reflect changes in accounting policies. Further explanation of the restatements is included in note 1 (ii) on page 23.

1. Adjusted operating profit excludes exceptional items (HY 2012: £nil, HY 2011: £8.2 million), and amortisation of intangible assets previously unrecognised by acquired entities (HY 2012: £2.0 million, HY 2011: £2.4 million).

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

3. Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate for a rolling twelve month period, divided by invested capital at the period end date. Invested capital is calculated as the Group's net assets less net cash.

4. Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

5. Net cash is calculated as cash and cash equivalents less bank loans and overdrafts and finance lease liabilities.

Ken Lever, Chief Executive, commented:

"The results for the first half show encouraging progress. Behind these results there has been a considerable amount of activity building the foundations for renewed growth, and we can point to the first signs of the impact this has started to have. We have also continued to address the challenge of repositioning Xchanging in the business processing marketplace. We expect progress to continue as we move through the second half."

Enquiries

Xchanging plc Tel: +44 (0) 207 780 6999

David Bauernfeind, Chief Financial Officer

Alexandra Hockenhull, Head of Corporate Communications

and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Neil Bennett

Emma Burdett

Daniel Yea

A presentation for investors and analysts will be held at the City Presentation Centre, 4 Chiswell Street, London, EC1Y 4UP at 09:30 on 1 August 2012. For those unable to attend, a live webcast of the presentation will be available on the company website, www.xchanging.com.

For those not able to join in this way please dial +44 (0) 145 255 5566 and enter conference ID 11605427 to listen to the live audio or to the audio recording that will be available after the presentation.

About Xchanging 

What we are 

Xchanging provides business processing, technology and procurement services internationally for customers across multiple industries.

What we do

Xchanging brings innovation, thought leadership and passion to its customers' businesses so as to enhance performance and value. Our values are embedded into everything we do.

What we want to be

Xchanging wants to be regarded as the best provider in its chosen markets by delivering services that are recognised for outstanding quality, reliability and innovation.

www.xchanging.com 

Cautionary Statement: 

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

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

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

OVERVIEW

In March this year, when we reported on our full year results for 2011, we set out our objectives for 2012. These centred on building our ability to compete to win in our chosen markets, to increase revenue from existing customers, to achieve "One Xchanging" and to deliver year-on-year improvement in financial performance and generate the foundation for growth in revenue, profitability and cash flow in 2013 and beyond.

We have actively pursued these objectives and have made encouraging progress at the half year stage.

OBJECTIVES FOR 2012

1. Compete to win

To compete actively in our chosen markets we have to differentiate Xchanging and demonstrate the superior value, quality and distinctive characteristics of our service offering.

We have continued to build our Sales and Marketing and Account Management infrastructure, and continued to develop our Third Party Adviser programme. Our new marketing collateral presents our business with a greater focus on technology, innovation and product and service development. We have expanded the resources in our 'Bid Factory' in India and this is now supporting all of our significant responses around our business.

We are seeing a higher level of "Requests For Proposals" and a number of contract wins. Whilst to date this year these have been modest in size, they are a reflection of our increasing activity in our markets.

Wins include: in Procurement Services, contracts with one of the world's largest security companies and with a leading provider of investment management products; in Technology Services, contracts with Imperial College London, University Hospitals Birmingham and Cranfield University; in Insurance Services, contracts with BMI and Brit as well as a new claims processing contract with the Bermuda-based insurance business of a major investment bank; and in Financial Services we have seen a number of retail distribution partners and institutional customers added to the Fondsdepot Bank platform. We have secured additional claims processing in Australia and have seen a number of domestic wins in Financial Services in India, which will be serviced in our newly inaugurated centre at Shimoga. We have also established a captive offshore services facility in Malaysia for a large international bank. 

We have scheduled two important new product launches for this autumn. In September, we plan to launch a pilot scheme for our new global (re)insurance and accounting settlement service (Project Sorrento), supported by bank clearing and foreign exchange services delivered by Deutsche Bank. A development out of the existing service we provide to the insurance market in London, it will form part of our international insurance rollout.

In October, our insurance software product will be re-launched under the brand name Xuber (pronounced: 'Zuber'). Xuber will form the cornerstone of our insurance business processing as a service offering (BPaaS) and the upgraded software will be offered to the customers in our existing installed base.

We have also developed a mobile software application (an 'app') for the London insurance market which provides mobile access to certain of our insurance processing services. Other innovative product and service offerings include Vault, a tracking tool to monitor achievement of procurement savings, and Torque, an independent, automated testing and validation service that reduces overall testing times by a minimum of 40%.

2. Increased revenue from existing customers

We are also growing our business with existing customers. Examples of this in the year to date include: in Insurance Services, the award of the broker interface contract and the volume claims contract, both with Lloyd's and, in Financial Services, we secured a business processing contract in Italy; in Technology Services, an extended contract with one of the largest global mobile operators and development of a new mobile application for Singapore Airlines; in Procurement Services, the renewal of our contracts with BAE Systems, the National Australia Group Europe, SELEX Galileo and United Biscuits. We have also seen some successful cross-selling initiatives which have resulted in additional business, an example being procurement work with Aon.

We have established a joint venture with YTL in Malaysia. This further develops our presence in the South East Asia technology market, providing a more visible base from which to attract new business.

3. Achieve One Xchanging

We have been busy with our 'Changing Xchanging' programme, a series of cross-company projects aimed at changing behaviour. Projects range from stimulating innovation, to themes based on leadership, to making Xchanging a great place for employees to work. A number of the projects have been completed with tangible benefits such as establishment of the Bid Factory, the launch of a new global incentive plan, and the introduction of a range of measures to promote collaborative working and knowledge sharing.

We have continued our work to embed the company values, sustaining awareness campaigns and promoting translation of the values into operational practices. This has included a revamp of our working environment.

We are placing particular emphasis on stimulating a culture of innovation. We have established an Innovation team, led from Singapore and with team members across the globe. In June, we moved our Ferguson Snell and Associates immigration services agency business into a new Innovation Incubator. In July, we held our first group-wide Innovation competition to identify ideas to take into development as new products or services.

4. Year-on-year improvement in financial performance

We are on track to deliver year-on-year improvement in profitability and in the first half we have seen a significant improvement in cash flow. More detail is set out in the Operating and Finance Review.

STRATEGIC DEVELOPMENT

To drive sustainable improvement in profitability we are building our capabilities around technology and intellectual property. We want increasingly to focus on technology-enabled services, which are repeatable and scalable. In our Insurance Services business, we are developing our BPaaS offering around our insurance software platform, Xuber. Investment in the final phase of the platform was accelerated in the first half, and we are preparing for initial testing in the US and Asia markets.

We are also working closely with Lloyd's, the Lloyd's Managing Agents and the International Underwriting Association of London to participate actively in the future development of technology. Our global claims net settlement service also moves closer to the pilot phase. Deutsche Bank will be working with us providing the supporting bank clearing and foreign exchange services.

In Financial Services, we are continuing our dialogue with Deutsche Bank on the future of Xchanging Transaction Bank as a service provider to Deutsche Bank. Such discussions are driven by the market changes for retail securities processing in the current economic climate. We are also holding a number of other discussions with Deutsche Bank around other business opportunities.

We have seen a number of small but interesting wins in insurance, banking and debt management processing services in the domestic market in India. The domestic business is increasingly serviced from our new facility located in Shimoga.

We have made steady progress towards transforming our Technology business, although this is yet to be evident in the financial performance. We have prioritised the completion of development work on our insurance software product, Xuber, and in Infrastructure Managed Services we continue to pursue ideas around offering cloud services to mid-sized enterprises through our links with the Frankfurt Cloud and with YTL in Malaysia. Our Application Management business is also identifying technology service offerings such as Torque.

In Procurement, the large new contracts won in 2011 are in their implementation phase. Both of these provide platforms in growing markets where there is significant potential for us in the future. We are also planning to take to market the new spend analytics tool, Vault.

CHANGES TO THE BOARD OF DIRECTORS

Earlier this year we announced that Pat O'Driscoll, for health reasons, would not be standing for re-election at the forthcoming Annual General Meeting on 16 May. Regrettably, shortly afterwards we learned that Pat had passed away. We were greatly saddened by this news and would like to record our appreciation of all that Pat did for Xchanging.

In July, we further strengthened our board with the appointment of Stephen Wilson. Stephen brings a strong background in Technology, having spent a considerable amount of his career with IBM.

OUTLOOK

The half year results show the company on track to deliver the incremental improvement in profitability for the year, as described in March. During the second half of 2012 we will continue to build our foundations for renewed growth and to pursue achievement of our four objectives for the year. 

OPERATING AND FINANCE REVIEW

Group key performance indicators

In the six months to 30 June 2012, the Group achieved improvement across all key performance indicators (KPIs) from continuing operations compared to the same period last year.

All numbers stated below are from continuing operations only.

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

Notes:

* The comparative amounts have been restated to reflect changes in accounting policies. Further explanation of the restatements is included in note 1 (ii) on page 23.

1 Adjusted operating profit excludes exceptional items (HY 2012: £nil, HY 2011: £8.2 million), and amortisation of intangible assets previously unrecognised by acquired entities (HY 2012: £2.0 million, HY 2011: £2.4 million).

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

3 Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate for a rolling twelve month period, divided by invested capital at the period end date. Invested capital is calculated as the Group's net assets, less net cash.

4 Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items and acquisition-related expenses, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

5 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

6 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts and finance lease liabilities.

Group performance

Revenue

Revenue from continuing operations for the six months ended 30 June 2012 was £322.7 million (HY 2011: £322.0 million).

Organic revenue growth was £8.9 million, an increase of 2.8% on a like-for-like basis. Organic revenue growth excludes adverse currency movements of £4.6 million, primarily related to the Euro. In addition, organic revenue growth excludes £0.1 million (HY 2011: £3.7 million) relating to the impact of the disposals in 2011 and 2012, which do not represent discontinued operations.

The increase in organic revenue was driven by higher UK and European procurement revenues, higher processing volumes in the UK insurance business and growth in our South East Asia technology business. These were partially offset by lower revenues in the UK technology business and Financial Services sector.

Adjusted operating profit

Adjusted operating profit from continuing operations for the six months ended 30 June 2012 was £16.0 million (HY 2011: £13.8 million). On a like-for-like basis, adjusted operating profit increased 21.5%, excluding £0.8 million of adverse foreign exchange movements and £0.2 million impact of a business disposal in 2012 (HY 2011: £nil).

The like-for-like increase in adjusted operating profit was primarily driven by the impact of cost savings in the Financial Services sector and at the corporate centre. These were partially offset by investment in the US Procurement business to deliver the BAE Systems North America contract, signed in August 2011.

Statutory operating profit from continuing operations increased to £14.0 million (HY 2011: £3.2 million). The reconciliation between statutory operating profit and adjusted operating profit is set out in the table below.

Adjusted operating profit margin

Adjusted operating profit margin for continuing operations improved from 4.3% for the six months ended 30 June 2011 to 5.0% for the six months ended 30 June 2012. This was driven by increases in adjusted operating profit margins in the Financial Services and Technology sectors, and a reduction in Corporate costs as a result of the cost saving initiatives implemented in 2011. Within the Insurance Services sector, additional margin gained in the UK was partially offset by both lower discretionary payments in the Australian workers' compensation businesses and investment in the development of a US insurance presence. Furthermore, the adjusted operating profit margin in the Procurement and Other BPO sector decreased, primarily due to the investment in implementing the BAE Systems North America contract.

Please refer to the sector analysis for further details.

Earnings per share

When considering earnings per share, the Group uses Xchanging's share of adjusted profit after tax from continuing operations to represent the performance of the business.

Adjusted basic / diluted earnings per share

Disposals

On 28 October 2011, the Group disposed of its investment in Cambridge Solutions SARL, which was part of the IT outsourcing business in the Technology sector, for no gain or loss.

On 16 January 2012, Xchanging Resourcing Services Limited, a wholly owned subsidiary of the Group, sold its business of sourcing and placing contingent labour for £0.4 million. The assets sold included the contracts of the business, the staff and the databases required to carry out the business. A £0.4 million gain on sale has been recognised in the six months ended 30 June 2012.

Sector performance

Analysis by sector

The adjusted operating profit margins presented for the sectors in the table above are based on total revenue, which includes inter-sector revenue. The adjusted operating profit margin for the Group is based on external revenue.

External revenue and adjusted operating profit like-for-like analysis

The table below shows external revenue and adjusted operating profit movements, by sector, excluding the impact of foreign exchange movements and the disposals in 2011 and 2012.

Insurance Services

Insurance Services external revenue increased 4.9% to £97.2 million (HY 2011: £92.7 million), including a positive foreign exchange impact of £0.2 million related to the Australian Dollar. Adjusted operating profit decreased 1.3% to £15.6 million (HY 2011: £15.8 million), representing an adjusted operating profit margin of 15.0% (HY 2011: 15.7%), including an adverse foreign exchange impact of £0.3 million.

Revenues for the sector increased as the UK insurance businesses benefited from an increase in the volume of insurance premiums and claims processed for the London market, while the Australian businesses were positively impacted by new insurance services contracts won in the second half of 2011 and increased market share for the Victoria workers' compensation contract. These benefits more than offset a decrease in performance fees and discretionary revenues from the New South Wales workers' compensation contract, and increased contractual discounts in our Broker Services business.

Adjusted operating profit performance for the period was flat compared to the six months ended 30 June 2011 due to a number of factors. The benefit of incremental revenue had a positive impact on adjusted operating profit, along with the impact of restructuring activities implemented in 2011. However, these were offset by salary inflation in the UK insurance businesses, investment in sales and marketing, the continued investment in developing a global insurance strategy, and in establishing a presence in the US insurance sector.

Financial Services

Financial Services external revenue decreased 9.1% to £81.9 million (HY 2011: £90.1 million), including an adverse foreign exchange impact of £4.7 million related to the Euro. Adjusted operating profit increased 100.0% to £5.2 million (HY 2011: £2.6 million), representing an adjusted operating profit margin of 6.2% (HY 2011: 2.8%), including adverse foreign exchange impact of £0.4 million.

Revenues for the sector decreased primarily due to lower project revenues in both our securities processing and investment account administration businesses, the impact of contracts terminated in 2011 in our securities processing business, and lower account and trailer fees in our investment account administration business due to a decline in volumes and market performance.

The impact of the decline in revenues on adjusted operating profit was mitigated by the restructuring and other management cost saving initiatives implemented in 2011 under the Four Part Action Plan, and by lower levels of depreciation and amortisation.

Profitability for the sector was impacted by the £1.0 million (HY 2011: £1.9 million) loss for Kedrios, the Italian Enterprise Partnership established with SIA-SSB in 2010. This business is expected to remain loss making for the year ending 31 December 2012.

Technology

External revenue for the Technology sector decreased 11.3% to £46.5 million (HY 2011: £52.4 million), including the £1.0 million impact of the sale of the Cambridge Solutions SARL business in October 2011, and favourable foreign exchange impact of £0.1 million. On a like-for-like basis external revenue decreased 9.7% to £46.5 million. Adjusted operating profit increased 4.3% to £2.4 million (HY 2011: £2.3 million), representing an adjusted operating profit margin of 4.2% (HY 2011: 3.0%).

Revenue for the sector declined primarily due to the decision to exit the IT reseller programme in our infrastructure management services business, which contributed £3.5 million of revenue in the first half of 2011, lower ad hoc project revenues from existing customers and the impact of customer contracts lost during 2011. These have been partially offset by increased revenues from our contract with YTL in Malaysia.

Adjusted operating profit for the Technology sector remained in line with the six months ended 30 June 2011, despite the adverse impact from the decline in revenue, due to the extensive restructuring of the business in the second half of 2011 and further cost saving initiatives implemented in 2012. The cost savings achieved also enabled us to invest further in sales and marketing, particularly in our software business in support of the launch of the Xuber product.

Procurement and Other BPO

External revenue for Procurement and Other BPO increased 11.9% to £97.1 million (HY 2011: £86.8 million) including the £2.7 million impact of the sale of the Xchanging Resourcing Services Limited business and adverse foreign exchange impact of £0.2 million. On a like-for-like basis external revenue increased 15.6% to £97.1 million. Adjusted operating profit decreased 92.5% to £0.3 million (HY 2011: £4.0 million). This represents an adjusted operating profit margin of 0.3% (HY 2011: 4.3%), including adverse foreign exchange movements of £0.1 million and £0.2 million operating loss from the Xchanging Resourcing Services Limited business disposed of in January 2012.

Revenue for the sector increased primarily due to higher contract labour volumes from a key procurement customer. The results for the six month period to 30 June 2011 were negatively impacted by lower labour volumes from government spending cuts in the UK impacting the same key customer. In addition, revenues from new procurement contracts, principally L'Oréal, signed in the second half of 2011 have more than offset the impact of contracts terminated during 2011.

Adjusted operating profit margin decreased due to a number of factors. The incremental revenue in the period had a limited impact on adjusted operating profit, and was more than offset by three factors: investment in the US procurement business, which is in the implementation phase of delivering the BAE Systems North America contract; increased investment in sales and marketing in the UK, European and Australian procurement businesses; and retention payments for employees of the human resources business following notification of the non-renewal of the BAE Systems human resources contract.

The restructuring of the UK procurement business, for which a provision of £2.2 million was recognised at 31 December 2011, is progressing as planned to deliver an optimal lower cost operating model for the future. The cost savings from this restructuring were minimal in the first half of 2012 as the implementation of this plan will happen mostly in the second half of 2012.

Corporate

Corporate costs for the six months ended 30 June 2012 totalled £7.5 million (HY 2011: £10.9 million). Included within the 2011 costs was £1.8 million of expenditure on specific new business opportunities in the US. Following the finalisation of the contract with BAE Systems North America in August 2011, these costs were included as part of the ongoing costs base of the new US procurement business. A further £0.8 million of costs in 2011 related to employees previously considered part of the US BPO operations, but retained by Xchanging following the business's sale to Sedgwick at the end of May 2011, and who transferred to form part of the Group's business development team. During the second half of 2011, these employees either exited the business, or were allocated to sectors (notably Insurance Services) and have formed part of the sector results for 2012.

Additionally, Corporate costs in the six months ended 30 June 2012 benefited from the restructuring undertaken in 2011, which lead to a reduction in headcount and simpler, more streamlined processes, and the exit of the West London Head Office premises in July 2011, resulting in lower rental costs and lower depreciation charges for associated assets.

Net finance costs

Net finance costs (pre-imputed interest on put options of £0.1 million (HY 2011: £0.4 million)) for the six months ended 30 June 2012 were £2.0 million (HY 2011: £1.9 million). Interest on the term loan and revolving credit facility decreased in the period driven by a reduction in the utilisation of this facility. This benefit was offset by £0.3 million of interest accruing on the final deferred consideration payment of £6.0 million payable to Aon Limited in September 2012 in relation to the acquisition of the Broker Services business.

Adjusted cash conversion

In the period, the Group delivered another strong performance for adjusted cash conversion, building on the momentum achieved in the second half of 2011. Adjusted cash conversion improved significantly to 186.7% (HY 2011: 91.3%) reflecting the continued focus on cash and cash management.

Cash flow

Operating cash flow from continuing operations was £26.6 million (HY 2011: £8.0 million), primarily driven by the £10.8 million increase in statutory operating profit, and by improvements in the management of working capital, from £2.8 million in the six months ended 30 June 2011 to £13.9 million in the current period. Dividend payments to non-controlling interests were £5.1 million (HY 2011: £5.4 million).

Equity free cash flow for the period was £19.4 million (HY 2011: £3.0 million). This was primarily driven by the improvements in operating cash flow offset by a £2.0 million increase in tax payments.

Expenditure on acquisitions net of disposals in the year was £2.0 million (HY 2011: £7.3 million cash inflow including proceeds from the sale of discontinued operations), of which £1.5 million was in respect of the final tranche of the deferred consideration for the acquisition of Data Integration Limited in 2010, £0.7 million in respect of an interim payment of the put option with Allianz Global Investors Kapitalanlagesellschaft mbH, and £0.2 million in respect of deferred consideration for the acquisition of Elumina Group Pty Limited in 2011. The Group received £0.4 million for the sale of the assets of Xchanging Resourcing Services Limited. Overall, the net cash position improved by £24.3 million compared with 30 June 2011.

1 The comparative amounts have been restated to reflect changes in accounting policies. Further explanation of the restatements is included in note 1 (ii) on page 23.

Capital expenditure

Net capital expenditure for the period was £7.3 million (HY 2011: £8.4 million), representing 2.2% of revenue (HY 2011: 2.6%). This included further spend on developing our insurance software product, Xuber, our new global (re)insurance and settlements service and construction of our new processing centre in Shimoga, India.

Funding, distribution policy and dividends

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

The Directors continue to keep dividend policy under review. At this time, the Directors believe it is not yet right to resume payment of a dividend, remaining of the view that cash should be conserved within the business. The Directors will reconsider the matter again at the end of the year.

Borrowing facilities

During the six months ended 30 June 2012, the Group repaid £18.9 million of debt.

Our principal sources of debt finance are a £75.0 million multi-currency revolving credit facility and a £20.0 million term loan. At 30 June 2012, £20.0 million (HY 2011: USD26.0 million) was drawn under the term loan and cash drawn under the revolving credit facility was £12.0 million (HY 2011: USD45.0 million).

The Group also has a £10.0 million uncommitted overdraft facility.

In addition to the above facilities, there is a working capital facility of INR330.0 million (£3.7 million) provided to Xchanging Technology Services Private Limited in India. At 30 June 2012, the amount drawn was £0.7 million (HY 2011: £nil).

At 30 June 2012, the Group had £45.2 million (HY 2011: £29.3 million) of headroom under its committed debt facilities.

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

Headroom under committed and uncommitted credit facilities as at 30 June 2012

1Committed facilities include the £75.0 million multi-currency revolving credit facility, the £20.0 million term loan and a £2.5 million non-cash guarantee facility for letters of credit issued in Australia.

2 Xchanging Solutions was previously referred to as Cambridge. In the period, Cambridge Solutions Limited was renamed Xchanging Solutions Limited.

Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its term loan and revolving credit facilities. As at 30 June 2012, the Group was compliant with all three of its financial covenants:

·; the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.0 times. As at 30 June 2012, the ratio was 0.8 times;

·; the ratio of Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 30 June 2012, the ratio was 16.6 times; and

·; the ratio of net cash flow to UK cash pool debt service must not be less than 1.0 times. As at 30 June 2012, the ratio was 2.8 times.

Cash balances

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

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

The aggregate cash balance in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the shareholders and, in the case of Fondsdepot Bank, customer cash deposits. Although subject to timing variances, as a general statement we would expect the aggregate cash balance to remain relatively stable, as a high proportion of Enterprise Partnerships' equity free cash flow is distributed to their shareholders.

Taxation

The Group's effective tax rate on adjusted profit before tax was 33.0% (HY 2011: 36.8%). The cash tax rate on adjusted profit before tax was 30.5% (HY 2011: 30.4%).

The 2012 rates are higher than the UK statutory tax rate of 24.5% (2011: 26.5%) due to losses in Italy where no tax benefit has been recognised, by profits arising in overseas jurisdictions with higher tax rates and by other non-deductible items.

The 2012 effective rate has additionally been adversely affected by the write-down of the closing UK deferred tax assets, in accordance with the reduction in the UK corporate tax rate.

Non-controlling interests

For the six months ended 30 June 2012, the adjusted profit after tax attributable to non-controlling interests was £3.4 million (HY 2011: £3.0 million).

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

Non-controlling interest calculations for other non-wholly owned companies are based on the non-controlling interests' proportionate share of profit, net assets and other comprehensive income.

Group risk factors

There have been no significant changes to the strategic, commercial, operational and financial risks facing the Group explained on pages 24-27 of the 2011 Annual Report, a copy of which can be found on www.xchanging.com.

Consolidated income statement

for the six months ended 30 June 2012

Notes 1 to 18 form an integral part of these condensed consolidated interim financial statements.

1 Adjustments to adjusted in 2011 and 2012 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity and imputed interest on put options.

 2 The comparative amounts have been restated to reflect changes in accounting policies. Further explanation of the restatement is included in note 1 (ii) on page 23.Consolidated statement of comprehensive income

for the six months ended 30 June 2012

Notes 1 to 18 form an integral part of these condensed consolidated interim financial statements.

Consolidated cash flow statement

for the six months ended 30 June 2012

Notes 1 to 18 form an integral part of these condensed consolidated interim financial statements.

1 The comparative amounts have been restated to reflect the gross up of customer accounts. Further explanation of the restatement is included in note 1 (ii) on page 23.Reconciliation of net cash flow to movement in net cash

for the six months ended 30 June 2012

Movement in net cash

for the six months ended 30 June 2012

Movement in net cash

for the six months ended 30 June 2011

1 The comparative amounts have been restated to reflect the gross up of customer accounts. Further explanation of the restatement is included in note 1 (ii) on page 23.

Consolidated balance sheet

as at 30 June 2012

Notes 1 to 18 form an integral part of these condensed consolidated interim financial statements.

Consolidated statement of changes in equity

for the six months ended 30 June 2012

For a description of the nature and purpose of each reserve within shareholders' equity refer to note 27 in the Annual Report for the year ended 31 December 2011.

Movements in the period 1 January 2011 to 30 June 2011 and the period 1 January 2012 to 30 June 2012 are unaudited.

Notes 1 to 18 form an integral part of these condensed consolidated interim financial statements

Notes to the consolidated interim financial information

for the six months ended 30 June 2012

1 Basis of preparation

(i) General information

Xchanging plc is a public limited company incorporated and domiciled in the UK. The address of its registered office is 34 Leadenhall Street, London, EC3A 1AX. The Company's ordinary shares are traded on the London Stock Exchange.

The condensed consolidated interim financial statements were approved for issue on 1 August 2012.

(ii) Basis of preparation

The condensed consolidated interim financial statements for the half year ended 30 June 2012 have 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. The condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2011 in the 2011 Annual Report, 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 2011 have been restated for the following:

§ Following a strategic review in 2011 of the investment administration business of Fondsdepot Bank GmbH (FdB), part of our Financial Services sector, the revenue recognition accounting policy in respect of initial load fees was changed with effect from 1 January 2010. Initial load fees are received from customers on the acquisition of funds. These fees are then passed onto independent financial advisors as commission for placing the funds for the customer. Previously, the fees received from customers were recognised as revenue and the commission payable was recognised as an expense within cost of sales. It has been determined that the amounts collected on behalf of customers are not economic benefits which flow to the Group and do not result in an increase in the Group's equity. Consequently, the corresponding revenue recognition accounting policy has been changed so that neither the revenue nor the expense is recognised. The prior year comparatives have been restated as a result of this change in accounting policy. Revenue and cost of sales for the six months ending 30 June 2011 have been reduced by £7.5 million. There is no impact on the overall profitability, or equity of the Group.

§ On the acquisition of FondsServiceBank by FdB on 3 April 2010, it was identified that £8.9 million of cash accounts were transferred to FdB. These accounts held cash deposits paid in by customers. In the provisional acquisition accounting presented for the year ended 31 December 2010, these accounts were not included as part of the assets acquired as management believed that this cash was held on behalf of customers with no right of use by FdB. During 2011 it was determined that there is no set agreement between FdB and its customers on how the funds in the cash accounts are to be administered and that FdB has full legal rights to use the cash, earning interest income as a result. As FdB are liable to repay these funds on demand to its customers, an £8.9 million customer accounts current liability has also been recognised on acquisition. In addition, the comparatives for the six months ended 30 June 2011 for the cash flow statement, reconciliation of net cash flow to movement in net cash, movement in net cash, and the cash and cash equivalents disclosures have been restated to take into account the £12.7 million (€14.1 million) of cash held in the customer accounts at 30 June 2011.

The table below summarises the restatements to the 'adjusted' results for the half year ended 30 June 2011.

(iii) Going concern

The Directors have reviewed the liquidity position of the Group for the period to 31 December 2013. The cash flows of the Group have been assessed against the Group's available sources of finance on a monthly basis to determine the minimum and maximum expected levels of headroom. Based on this analysis, and an assessment of the potential cash risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its condensed consolidated interim financial statements.

(iv) Accounting policies

The accounting policies adopted in the preparation of these condensed consolidated interim financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2011. The accounting policies were drawn up in accordance with International Accounting Standards (IAS) and IFRS as endorsed by the European Union.

Taxes on income in the interim periods were accrued using the tax rate that would be applicable to expected total annual earnings.

2 Estimates

The preparation of condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 December 2011, with the exception of changes in estimates that are required in determining the provision for income taxes.

3 Financial information

The financial information included in this condensed consolidated interim financial statements 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 2011 were approved by the Board of Directors for issue on 1 March 2012 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.

4 Seasonality of operations

Our financial performance is expected to be weighted to the second half of the year at an adjusted operating profit from continuing operations level, in line with prior years. For the year ended 31 December 2011, 68% of adjusted operating profit accumulated in the second half of the year.

5 Segmental reporting

There have been no changes to the reportable segments as presented in the Annual Report for the year ended 31 December 2011. All figures reported are unaudited.

The segment information for continuing operations for the six months ended 30 June 2012 is as follows:

Reconciliation of Non-GAAP operating profit from continuing operations measures to IFRS statutory operating profit from continuing operations:

The restated segment information for continuing operations for the six months ended 30 June 2011 is as follows: