4 March 2016 Xchanging plc Full year results for the twelve months ended 31 December 2015

Transcription

1 4 March 2016 Xchanging plc Full year results for the twelve months ended 31 December 2015 m (unless %) Net Revenue Adjusted Operating Profit Adjusted Operating Profit Margin 13.6% 13.7% Statutory Operating (Loss)/Profit (38.5) 36.6 Adjusted EPS - Basic Net Cash 3 (27.8) 13.7 Xchanging's share of Net Cash (61.8) (31.6) 1. Net revenue is total revenue less supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and recharged to the customer. 2. Adjusted operating profit excludes exceptional items (2015: 74.0 million expense 2014: 7.1 million expense), amortisation of intangible assets previously unrecognised by acquired entities (2015: 6.5 million 2014: 6.1 million) and acquisition-related expenses (2015: 12.6 million 2014: 6.0 million). 3. Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities and finance lease liabilities. Geoff Unwin, Chairman, commented: At the half year 2015 we commented that the outlook for the full year 2015 was for a trading performance in line with the prior year. The outcome for 2015 was broadly in line with this, with net revenue of million compared with million in 2014, and adjusted operating profit of 54.6 million compared with 55.8 million in During the year very disappointing events and performance occurred within the Procurement sector and a Split and Fix plan, announced at the half year, was implemented in the second half of the year. More positively, it was especially pleasing to see the proving of our insurance software business Xuber, with material contracts being signed as we turned into 2016, in addition to the continuing solid performance of the core BPS business. Whilst the operational developments and progress of the company are reviewed later in this report, strategically, a review of 2015 must be dominated by the takeover bid activity that took place in the second half of the year. Formal announcements have been made, as required by regulation, throughout the ongoing course of the bid process. Most significantly, following a formal bid made on 9 December 2015, which was supported by Xchanging s Board, on 18 January 2016, Computer Sciences Corporation ( CSC ) declared their bid unconditional as to shareholder acceptances having secured shareholder commitments in respect of, or direct ownership of, approximately 87.06% of Xchanging s existing issued share capital. Subsequently, an announcement by CSC on 8 February 2016 confirmed this level had risen to approximately 91.78%. On 15 February 2016, CSC announced that the US merger control condition set out in their offer document had been satisfied. There are further regulatory conditions to be satisfied before CSC s bid can become wholly unconditional and the process of obtaining these is underway by CSC. In order to accommodate this process, it was agreed with the Takeover Panel that the date by which the offer must become or be declared unconditional would be extended to 16 May Enquiries

2 Maitland Tel: +44 (0) Emma Burdett Dan Yea Linkedin/company/xchanging Cautionary Statement: This announcement contains forw ard-looking statements that are based on current expectations or beliefs, as w ell 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 w ords such as anticipate, target, expect, estimate, intend, plan, goal, believe, w ill, may, should, w ould, could, is confident, or other w ords of similar meaning. In particular, any statements regarding Xchanging's strategy, dividend policy and other future events or prospects are forward-looking statements. Undue reliance should not be placed on any such statements because they speak only as at the date of this announcement 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. These forward-looking statements are not guarantees of future performance and there are a number of factors (many of w hich are outside of Xchanging's control) which could cause actual results to differ materially from those expressed or implied in forwardlooking statements. Among these factors 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 law s, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the f ailure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects. Save for those forward-looking statements required by the Listing Rules, the Disclosure and Transparency Rules and/or the Prospectus Rules, Xchanging undertakes no obligation to update these forw ard-looking statements, and w ill not publicly release any revisions it may make to these forward-looking statements that may result from events or circumstances arising after the date of this announcements. Xchanging therefore w ill comply w ith its obligations to publish updated information as required by law or by any regulatory authority but assumes no further obligation to publish any additional information. Chairman s statement OVERVIEW OF THE YEAR Results for the twelve months ended 31 December 2015 At the half year 2015 we commented that the outlook for the full year 2015 was for a trading performance in line with the prior year. The outcome for 2015 was broadly in line with this, with net revenue of million compared with million in 2014, and adjusted operating profit of 54.6 million compared with 55.8 million in During the year very disappointing events and performance occurred within the Procurement sector and a Split and Fix plan, announced at the half year, was implemented in the second half of the year. More positively, it was especially pleasing to see the proving of our insurance software business Xuber, with material contracts being signed as we turned into 2016, in addition to the continuing solid performance of the core BPS business. STRATEGIC DEVELOPMENT Whilst the operational developments and progress of the company are reviewed later in this report, strategically, a review of 2015 must be dominated by the takeover bid activity that took place in the second half of the year. Formal announcements have been made, as required by

3 regulation, throughout the ongoing course of the bid process. Most significantly, following a formal bid made on 9 December 2015, which was supported by Xchanging s Board, on 18 January 2016, Computer Sciences Corporation ( CSC ) declared their bid unconditional as to shareholder acceptances having secured shareholder commitments in respect of, or direct ownership of, approximately 87.06% of Xchanging s existing issued share capital. Subsequently, an announcement by CSC on 8 February 2016 confirmed this level had risen to approximately 91.78%. On 15 February 2016, CSC announced that the US merger control condition set out in their offer document had been satisfied. There are further regulatory conditions to be satisfied before CSC s bid can become wholly unconditional and the process of obtaining these is underway by CSC. In order to accommodate this process, it was agreed with the Takeover Panel that the date by which the offer must become or be declared unconditional would be extended to 16 May BOARD There were two changes to the Board composition in Effective 31 December 2015 we saw the retirement of Ken Lever from the role of Chief Executive, with Craig Wilson succeeding him, effective 1 January 2016, having joined the Board as Chief Executive Designate on 5 October The Board would like to thank Ken for his outstanding contribution to Xchanging during five intensive years of transformation, and wish him well in his future endeavours. The Board also welcomes Craig to his new role. As announced at the half year 2015, effective 31 December 2015, Michel Paulin stood down from his role as Non-Executive Director. The Board would like to thank Michel also for his contribution over his six year tenure of office. PEOPLE Once again this year I would like to thank all our employees for their unstinting dedication and hard work. They have tackled the operational challenges of the year resolutely and pressed ahead with enthusiasm in developing our significant potential. In the latter part of the year, they have remained steadfast despite the inevitable uncertainties arising from the bid activity. Xchanging would not be the valuable asset it is without their contribution. DIVIDEND It is a condition of CSC s offer that no dividend is recommended or paid and so the Board is not proposing one to shareholders. ANNUAL REPORT Given the advanced stage of CSC s bid, although there remain regulatory conditions to be satisfied, our 2015 annual report has been written in a curtailed form against the backdrop of a likely change of control in the near future. However, at the time of writing, Xchanging remains an independent business, and the views in the annual report reflect this position. CEO report

4 INTRODUCTION I was appointed by the Board in September 2015 to succeed Ken Lever from 1 January I started as Chief Executive Designate on 5 October 2015 which has given me an opportunity to assess the business, the strategy, the events of 2015, and to ensure that we have a sound foundation for the future whether this is as an independent company or as part of another entity. At the half year 2015 we commented that the outlook for the full year 2015 was for a trading performance in line with the prior year. The outcome for 2015 was broadly in line with this, with net revenue of million (2014: million), adjusted operating profit ( AOP ) of 54.6 million (2014: 55.8 million) and operating cash flow ( OCF ) of negative 10.4 million down from the prior year (2014: 6.5 million), due largely to the working capital unwind of some 18.0 million from one contract exit in the UK. Coming into 2015, Xchanging had completed the turnaround from being a Business Process Outsourcing company characterised by a small number of large legacy contracts to being a technology-led business services company. The elements of the strategy for 2015 were clearly set out in the 2014 annual report. In summary: Simplify the structure around Business Processing Services ( BPS ), Technology (including the Xuber insurance software business) and the Procurement business; Invest in specific technology developments and acquisitions to further differentiate these businesses; and Complete the stabilisation or rundown of underperforming legacy BPO businesses and contracts. In Insurance BPS, the strategy was to build on the unique relationship we already have with Lloyd s and the International Underwriters Association our XIS and XCS joint ventures by offering an enhanced range of elective services and by being an effective technology provider to our partners as they respond to the competitive challenges of the global insurance market. In Financial Services BPS, the strategy was to build on the capital markets businesses in Italy and Germany which had been stabilised through In Technology, the strategy had two distinct elements: continue to invest in the Xuber business by integrating Total Objects and the businesses acquired from Agencyport into our existing business, and to grow the largely India-based Application Services business by providing clients with an agile alternative to the established tier-1 Indian pure play providers. In Procurement, the strategy was to build a differentiated, technology-led proposition based on the MM4 technology platform and enhanced by the Spikes Cavell spend-analytics solution (acquired in February 2015); reducing the reliance on a small number of legacy procurement BPO contracts. It is clear that some of the most important elements of this strategy in particular the investments in the Xuber business have worked well and are bearing fruit. It is equally clear that other elements have not worked well; the problems we had with the Procurement business, albeit a small part of the overall business, were set out in our half year update in July. I will cover the 2015 performance in each of the businesses below.

5 Following the half year update, the second half of the year was overshadowed by the takeover bid activity. This is referenced in the Chairman s statement. Nonetheless, this report has been prepared as if the Company is to remain independent. BUSINESS PROCESSING SERVICES ( BPS ) BPS has performed strongly despite a number of anticipated challenges, including the decision by Aon to take back in-house on-shore claims processing; the decision by Lloyd s to change the responsibilities of the lead follower which reduced our claims processing volume (together these changes reduced net revenue by 18.9 million); and the weakening of the Euro and Australian dollar which adversely impacted net revenue by 2.8 million. Despite these and other challenges, net revenue for this business was million (2014: million). AOP was 61.0 million (2014: 64.6 million), representing an AOP margin of 23.3% (2014: 22.7%), largely reflecting the benefit of cost reduction initiatives taken last year. BPS has continued to pursue the technology-enabled processing strategy and we are seeing encouraging signs of growth from new offerings. Robotic Process Automation has been embedded in our operations and is now being taken to our customers as part of our enhanced service offering. We are now starting to exploit the software assets we have in Xuber with existing BPS clients in the London Market. We have combined our original Binder 360 offering with BinderCloud from the Total Objects acquisition. The new offering, BinderCloud 360, sits at the heart of our new menu of Delegated Underwriting Services. Launched in 2015, the service has been well received in the market, winning nine prestigious broker and carrier customers including Catlin and Argo. We are working closely with Lloyd s of London to provide support for the Central Services Refresh Programme ( CSRP ) part of the wider market modernisation. Within this, our current programme of new technology introductions, due to continue into 2016, is being well received. Our investment in 2015 of 8.1 million in developing this technology is key to ensuring that we remain at the heart of the London Market and contribute strongly to its competitiveness. In the later part of the year, Lloyd s appointed Xchanging as their technology and processing partner for the Singapore Shared Service hub and we have already enrolled a number of managing agents in this service. During the second half of the year we also made the decision to impair the Netsett asset by 2.9 million. Although we believe the long-term potential for this solution remains strong a net settlement requirement forms one element of the London Market Target Operating Model it is clear that in the short term, revenues from Netsett were too uncertain in terms of timing and quantum to justify the asset valuation. In Australia, Xchanging continues to be a top performing service provider to the State of Victoria for the WorkSafe workers compensation insurance service. This contract is being retendered and we think we are well-placed to maintain or grow our share of the transaction volume in the second half of We have also attracted a number of new customers in 2015 to the X-alt platform in which we have a 90% stake and launched in April. In 2015 we

6 renewed the Toyota workers compensation contract. Separately, the exit from the workers compensation contract in the State of New South Wales has been completed without incident. In our Financial Services BPS businesses we have made steady progress in Italy and Germany through In 2014 Xchanging took full control of Fondsdepot Bank in Germany from AGI and we have continued to invest in digitalisation to improve the productivity and competitiveness of this business. In Italy, we completed the stabilisation and integration of the two business (Kedrios and AR Enterprise). TECHNOLOGY (INCLUDING XUBER) The Technology business, including the Xuber insurance software business, has also performed well, despite the comparative effect of the exit from the London Metal Exchange ( LME ) contract in May 2014 (following the decision to in-source this service after the exchange was acquired by Hong Kong Exchanges and Clearing Limited), and the impact on AOP of a higher amortisation charge of 11.7 million (2014: 8.4 million) from the increased investments in Xuber and acquisitions. Net revenue was million (2014: 93.0 million). AOP was 14.5 million (2014: 6.8 million), representing an AOP margin of 12.8% (2014: 7.3%). The acquisition of the European insurance software businesses from Agencyport Software, announced on 4 July 2014, was finally cleared by the Competition and Markets Authority ( CMA ) on 29 April The process not only delayed our ability to integrate the business, but also put a material burden on management resource as well as incurring costs. In the meantime, this business continued to perform on a standalone basis in-line with our expectations and in-line with the acquisition business plan. Following CMA clearance, we have now completed the integration of the businesses acquired from Agencyport into our Xuber insurance software business, realising the synergies, product offering and new market opportunity benefits envisaged at the time of the acquisition. Similarly, the Total Objects acquisition, completed in December 2014, is contributing well in its first full year and has been successfully building its customer base. Our Xuber insurance software business continues to strengthen its profile in the market signing over 30 new customers in 2015 across all of Xuber s software solutions. Three contracts are particularly significant: the first, a multi-year contract with the health service and insurance group Cigna covering initial licence and maintenance services and also future services provision; the second, with Aon to provide Xuber software, implementation services, ongoing support and hosting for its wholesale broking operations platform for the London Market; the third, a contract with Ariel Re which highlights Xuber s multi-territory capability. A number of implementations including Everest Re are at an advanced stage of implementation. Building on our installed base of more than 200 customers, and with a strong pipeline, we remain confident in the growth potential of the Insurance Software business in 2016 and beyond. In our Application Services business, the strong growth momentum continues. We have won a significant number of new clients and substantially increased our portfolio of work with our existing customers. With nearly 2,000 software engineers, located across Bangalore, Gurgaon and Chennai and other centres, our Application Services business has seen steady growth

7 over the last 3 years, moving to a strong profit contributor in We provide a range of applications services to a broad range of small and medium sized customers (mostly in the US, Europe and Singapore) who prefer to work with Xchanging rather than a tier-1 global integrator because we can provide a service which is more agile and more tailored to their needs. Infrastructure Management Services ( IMS ) has been a significant contributor to the Technology business performance in The business largely runs out of our own facilities in the UK and utilises suppliers and partners to provide IT infrastructure, data centre and network services. Approximately 55% of IMS revenues underpin offerings delivered by Xuber and BPS and this allows Xchanging to offer clients solutions in any required mode of operation: on-premise licence only; off-premise, fully-managed service; managed (dedicated) cloud service; software as a service ( SaaS ); or hybrid. Complementing IMS, the Data Integration business continues to do well and allows Xchanging to offer clients an end-to-end service for their network needs, from design all the way through to systems installation and management. PROCUREMENT Although only a small part of the business (some 6% by revenue), as foreshadowed in our First Quarter 2015 Update published in April, and updated in the half year statement in July, the Procurement business has delivered extremely poor performance in This resulted in net revenue of 24.7 million (2014: 31.3 million), an AOP loss of 10.9 million (2014: 2.5 million loss) and 74.2 million of exceptional charges. Without the significant failure of the Procurement business, the Group would have exceeded the market expectations on AOP set at the start of At the core of the issues in Procurement was a weak performance in the traditional procurement BPO business, exacerbated by clients decisions to reduce volumes; gainsharing thresholds which were not achieved; failure to match the rate of cost reduction to revenue declines; contract exits and contract renegotiations. These circumstances persisted throughout the year. We also noted that in the first half of 2015 we would bear the costs of the implementation process for the new Tail-end Spend Management ( TSM ) business won in the second half of 2014, with significant benefits expected to start showing in the second half of the year. Whilst the costs of implementation were incurred in the first half as expected, the associated stream of new revenue was slow to gain momentum and significantly lagged our expectations, following the decision by our most significant client to sell the business that would have generated most of the volume. As a result, a mutual decision was made to exit the contract at the end of The combined effect of the traditional outsourcing and TSM businesses has significantly impacted the Procurement business result overall for In our First Quarter 2015 Update we commented that a recovery plan was underway to address the challenges facing the Procurement business, and in the first half, significant work had been undertaken to manage the cost base. However, despite reducing the cost base, anticipated new contracts in the second quarter did not materialise, resulting in a deterioration of the financial year forecast for Procurement overall. This resulted in the Split and Fix plan being announced at the half year. The elements of this plan were:

8 move the comparatively healthy UK BPO contracts into our BPS business; move MM4, Spikes Cavell and the few North American procurement BPO contracts into the Technology business; run-down the remaining procurement BPO contracts, including our business in France; materially reduce the overhead in the business in the second half of the year; and review the balance sheet judgements for Procurement in the light of the performance. Elsewhere in this report we have detailed the balance sheet judgements relating to the Procurement business: goodwill impairment of 59.3 million; asset impairments of 8.0 million, and restructuring and onerous contract provisions of 6.9 million. Also the exit of one of the UK procurement BPO contacts in 2015 resulted in a one-off working capital outflow of 18.0 million. The Split and Fix plan is now substantially complete. We will not have a discrete Procurement business going forward. In the light of the problems experienced in the Procurement business I have examined the controls regime across Xchanging to ensure that the issues experienced in the Procurement business are not repeated elsewhere whether or not Xchanging continues as an independent company. As a consequence of this review, certain additional controls have been or will be added to other parts of the business to prevent similar events occurring. CONCLUDING REMARKS AND OUTLOOK The strategic imperative for the business can now be summarised as follows: Simplify the business around its core value proposition to be the leading provider of technology-enabled business solutions to the global insurance industry; Continue to develop the relationship we have with the London Market by focusing on delivery performance, value for money and innovation; Bring the power of the Xuber portfolio to bear for existing clients and new clients in North America and Asia, helping them to compete in the digital, global marketplace for insurance; and Determinedly improve the contribution and predictability of all our businesses. The foundations of this plan are strong. The organisational simplifications that are underway, together with the recent successes in the Xuber business with Aon and Cigna, and the success we are starting to see in the BPS business as we better exploit the capabilities we have across the firm, especially in Xuber, provide added confidence in the 2016 plan. Despite the uncertainty about our future ownership, the management team and I feel confident that with our plan, our clients, our people and our capabilities we can look forward to a year of revenue and profit growth in 2016 and a successful year for all our stakeholders. Financial review Financial indicators for 2015 are as follows: m (unless %) Revenue

9 Net Revenue Adjusted Operating Profit Adjusted Operating Profit Margin 13.6% 13.7% Statutory Operating (Loss)/Profit (38.5) 36.6 Adjusted Operating Profit before Tax Adjusted EPS - Basic Statutory EPS - Basic (27.55) 6.62 Operating Cash Flow 3 (10.4) 6.5 Adjusted Cash Conversion 4 0.7% 17.2% Net Cash 5 (27.8) 13.7 Xchanging's share of Net Cash (61.8) (31.6) Equity Free Cash Flow 6 (19.0) (7.6) Return on Invested Capital % 21.0% Economic Profit Net revenue is total revenue less supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and r echarged to the customer. 2. Adjusted operating profit excludes exceptional items (2015: 74.0 million expense 2014: 7.1 million expense), amortisation of intangible assets previousl y unrecognised by acquired entities (2015: 6.5 million 2014: 6.1 million) and acquisition-related expenses (2015: 12.6 million 2014: 6.0 million). 3. Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) (2015: 36.0 million 2014: 43.4 million) and dividends to non-controlling interests (2015: 12.5 million 2014: 11.2 million). 4. Adjusted cash conversion is calculated as operating cash flow, after adding back the cash impact of exceptional items (2015: 7.2 million inflow 2014: 0.7 million outflow) acquisition-related expenses (2015: 3.1 million million) and the movement in customer cash accounts held by Fondsdepot Bank (2015: 0.5 million 2014: 0.7 million outflow) divided by adjusted operating profit. 5. Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities and finance lease liabili ties. 6. Equity free cash flow is calculated as operating cash flow less cash tax (2015: 4.7 million 2014: 12.4 million) and net interest paid including dividends received (2015: 3.9 million, 2014: 1.7 million). 7. Return on invested capital is adjusted operating profit (2015: 54.6 million 2014: 55.8 million) less a tax charge at the Group s effective tax rate (2015: 24.7% 2014:14.9%), divided by invested capital. Invested capital (2015: million 2014: million) is calculated as the Group s net assets (2015: million 2014: million), less net cash (2015: ( 27.8 million) 2014: 13.7 million). 8. Economic profit is adjusted operating profit (2015: 54.6 million 2014: 55.8 million) less a tax charge at the Group s effective tax rate (2015: 24.7% 2014: 14.9%), less a charge for invested capital. The charge for invested capital is calculated as the Group s invested capital (as defined above, (2015: million 2014: million)) multiplied by the Group s weighted average cost of capital, being 10.0% (2014: 10.0%). GROUP FINANCIAL PERFORMANCE The trading performance for the 2015 year, on an adjusted basis, was broadly in line with Net revenue was million (2014: million), adjusted operating profit ( AOP ) was 54.6 million ( million) and operating cash flow ( OCF ) was negative 10.4 million down from the prior year ( million), due largely to the working capital unwind of some 18.0 million from one contract exit in the UK. The sector performance is detailed in note 1, with the detail of the operational performance of each of our sectors outlined in the CEO report. EXCEPTIONAL ITEMS The statutory operating loss was 38.5 million (2014: 36.6 million profit), this includes 74.0 million (2014: 7.1 million) of exceptional items which are included in note 2. Of the net 74.0 million of exceptional items, 74.2 million related to the Procurement business. CASH FLOWS m m Adjusting operating profit Adjusting items (93.1) (19.2) Statutory operating (loss)/profit (38.5) 36.6 Depreciation and amortisation Non-cash items / non-cash exceptional items Share based payments

10 Statutory operating profit less non-cash items (Decrease)/increase in customer cash deposits 0.5 (0.7) Movement in working capital (23.7) (7.9) Movement in pensions (3.7) (6.2) Movement in provisions (6.5) 0.8 Cash generated from operations Dividends to NCI (12.5) (11.2) Capital expenditure (36.0) (43.4) Operating Cash flow (10.4) 6.5 Interest (3.9) (1.7) Tax (4.7) (12.4) Equity free cash flow from operations (19.0) (7.6) Acquisitions and disposals (including put options) (12.0) (85.6) Dividends paid to shareholders (6.8) (6.1) Other cash flows (0.3) (3.3) Foreign currency movements (3.4) (3.8) Movements in net cash in the period (41.5) (106.4) The decrease in the movement in working capital was due to the exit of a large Procurement contract during the year, resulting in an 18.0 million outflow of working capital. FY 2015 FY 2014 m m Cash Xchanging wholly owned entities Xchanging Solutions Enterprise Partnerships Xchanging's share of cash Xchanging wholly owned entities Xchanging Solutions Enterprise Partnerships Bank and other debt (155.3) (115.5) Xchanging's share of net cash (61.8) (31.6) 1. The aggregate cash balance in Enterprise Partnerships represents w orking capital and accumulated but unpaid distributions to the shareholders. Xchanging receives cash from Enterprise Partnerships through contractual licence fees and dividends. To provide greater transparency on the amount of cash that is attributable to the shareholders of Xchanging w e show Xchanging s share of net cash. It takes a prudent view as it makes no attempt to allocate Xchanging s share of w orking capital that is held in the Enterprise Partnerships. CAPITAL EXPENDITURE The Group reduced its capital expenditure to 36.0 million in 2015 (2014: 46.7 million). Our organic investment programme can be split into three areas: Product development;

11 Internal change programme; and Refresh. Material projects include CSRP ( 8.1 million), Insurance Market Repository ( IMR ) ( 6.1 million), Xuber Enterprise Suite ( 4.6 million), and a new SAP finance system ( 5.8 million). We are working closely with Lloyd s of London to provide support for the CSRP part of the wider market modernisation. Our investment in 2015 of 8.1 million in developing this technology is key to ensuring that we remain at the heart of the London market and contribute strongly to its competitiveness. ACQUISITIONS On 25 February 2015, the Group acquired 100% of the share capital of Spikes Cavell Analytic Limited ( Spikes Cavell ), a British company providing spend analytics technology and services mainly to public sector institutions in the UK and higher education authorities in the US, but also increasingly to the private sector. Xchanging paid an initial consideration of 3.8 million in cash with further payments of up to 3.1 million payable in 2015 and 2016, of which 0.4 million is recognised in the purchase price and 2.7 million is subject to certain performance targets being achieved. Goodwill was initially recognised on the acquisition, however it was impaired during the second half of the year as part of the broader Procurement sector goodwill impairment. This table shows the total cash outflow during 2015 and potential future payments for acquisitions. Note that in the cash flow statement these amounts are presented net of any cash acquired from the business on acquisition. Date of transaction Total to 31 Dec 2014 Gross pay ments in 2015 Pay ments in 2015 (net of cash acquired) Outstanding def erred consideration Outstanding related pay ments m m m m m m Acquisition of AR Enterprise October Acquisition of MM4 September Xchanging Italy put option exercise January Inv estment in MachineShop March Businesses acquired f rom Agency port July FdB put option exercise July Acquisition of Total Objects December Acquisition of Spikes Cav ell February Total Total BORROWING FACILITIES AND COVENANTS As at 31 December 2015, million (2014: million) was drawn as cash under the Group s credit facility and a further 0.8 million (2014: 0.8 million) was utilised through guarantees. Refer to note 9 for more information regarding the Group s borrowing facilities. As at 31 December the Group was compliant with both of its financial covenants: As at 31 December 2015 As at 31 December 2014 Metric Test Criteria Interest cover 11.5x 21.6x Ratio of Xchanging s share of EBITDA to net consolidated finance charges Minimum of 5.0x

12 Leverage 2.2x 1.8x Ratio of consolidated borrowings to Xchanging s share of EBITDA Maximum of 3.0x DIVIDENDS It is a condition of CSC s offer that no dividend is recommended or paid and so the Board is not proposing one to shareholders. Principal risks and uncertainties The below table gives examples of what we do to manage our principal risks. The Board considers these to be the most significant risks that could materially affect the Group s financial condition, performance, strategies and prospects. The risks listed do not comprise all risks faced by the Group and are not set out in any order of priority. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business. Risk Takeover implications Risk description and potential Impact On 9 December 2015, CSC announced a unanimously recommended cash offer for Xchanging at a price of 190 pence per share. The board of Xchanging recommended that Xchanging shareholders accept the offer from CSC for the reasons set out in CSC's offer document, including the significant premium it implies. The Directors believe that, as a standalone business, Xchanging has a good future. However there are certain benefits of being acquired by a significantly larger organisation with a greater scale of technology and a larger insurance client base. The Directors also view the proposed acquisition as being positive for shareholders and customers. There is a risk of uncertainty during the period between the announced bid and the pending change of control in terms of employee morale, senior management distraction and the perception of this transaction with clients and prospective clients. Mitigating Actions We have been transparent on all aspects of the offer process and are working closely with our employees and our clients. We have put mitigating actions in place where appropriate. The risks of the proposed acquisition not proceeding has also been identified and assessed. Delivering high quality services and delivery on our financial plans continue to be our top priorities.

13 Failure to secure new business from both new and existing customers Loss of our unique position in the London insurance market Further, should the proposed acquisition not proceed to a conclusion, there could be a further period of uncertainty. We operate in dynamic and competitive markets and, as such, failure to secure new business could result in the slowdown in the replacement of businesses exited during This risk materialised in the current period within the Procurement sector. The associated stream of new revenue was slow to gain momentum and significantly lagged behind our expectations. Over the last two years Software licences have become an increasingly important element of our offerings. The timing of signing of licences is difficult to foresee so our revenue may become less predictable than before. Given our unique position in the London insurance market, we must continue to ensure that we provide a high quality service and invest in the future development of this market. A reduction in our role in this market would have a significant impact on our profitability. Investing in innovative products and services for both new and existing customers. Ability to offer competitive low-cost offshore services. Market dynamics monitoring and service enhancement. We have implemented more rigorous sales review and contract governance processes which will help us to focus our resources on the highest quality opportunities. This improves controls over the scrutiny of commercial, legal and delivery risks. We have implemented more robust account management structures which will help us to increase client satisfaction, to retain clients, and to grow the existing revenue base through the cross selling of other products and services. We continue to utilise our significant domain expertise in this area in order to establish ourselves as the leading provider to the market. Through XIS, our joint venture with Lloyd's and IUA, Xchanging has invested in the Central Services Refresh Programme. This investment specifically provides for the processing of global standard re/insurance accounting and settlement and claims messages to make the London Market and the central services platform more attractive to brokers to place business. There has also been continued investment in the London Market Insurers Market Repository platform now storing over 50 million customer documents. The XIS joint-venture is actively engaging in the London Market Target Operating Model modernisation programme and was selected by Lloyd's to supply services to the Lloyd's businesses operating in Singapore

14 Failure to utilise and exploit technologyenablement for growth Failure to integrate new acquisitions successfully With the new generation of competitors and products coming on to the market and the onset of digital technology disrupting our chosen markets and our clients traditional business models there is a risk that if Xchanging fails to respond to embrace new technologies and deliver innovative products, it will lose relevance and market share. The Group may be unsuccessful in evaluating material risks involved in completed acquisitions and may be unsuccessful in integrating any acquired operations with its existing businesses. If material risks are not identified prior to acquisition or the Group experiences difficulties in integrating using Xchanging's Total Objects insurance software. A new generation of technology enabled insurance services has been launched with positive customer interest. These services are powered by Xchanging's Total Objects BinderCloud technology and directed at customers' delegated "binding" authority business. In the Director s view, following completion of the proposed takeover by CSC, the scale of CSC s insurance relationships would help to mitigate this risk further. Injecting technology-enablement into our products and services is core to our growth strategy and we have taken the following steps: o Making digital enablement an overt part of every group business IT strategy; o Tasking our Group IT & Change Committee with the role of Digital leadership across all group businesses; o Working to ensure that Xchanging is at the heart of market modernisation within the Insurance sector; o Continuing to Invest in Xuber to develop a market-leading technology offering; o Investing in developing new offerings and innovative valueadding customer solutions; and o Review our existing products and services to ensure that they meet our customers requirements. In the Directors view, the scale of CSC s IT capability would help to mitigate this risk further. Business, legal, tax and financial due diligence carried out prior to acquisition to seek to identify and evaluate material risks and plan the integration process. Warranties and indemnities included in purchase agreements.

15 Customer concentration in key markets Contract management (including contract execution and initial contracting process) Failure to attract, select, develop and retain key personnel an acquired business, it may not realise the expected benefits from such an acquisition and the Group s financial condition could be adversely affected. A concentration of material contracts can lead to a reliance on specific customers, which may result in increased variability and uncertainty in the Group s results if one of those contracts were to be lost. Partial or full termination of certain customer contracts could result in impairment of goodwill as well as impacting operational performance. Our reputation, and ultimately our profitability, is dependent upon the high level of service we deliver in implementing existing and new contracts for our customers. It is also dependent upon turning high quality opportunities into deliverable, profitable contracts. In the Xuber business, success in delivering Xuber licences and sales creates an additional level of risk in implementing the software in new clients. Failure to meet our customers expectations and contractual commitments would have a significant impact upon our reputation and profitability and could result in unexpected and costly litigation. This risk materialised in the current year within our Procurement sector. Clients decided to reduce contract volumes, gain-share thresholds were not met and there was a weak performance on the traditional BPO contracts. As a result, the Split and Fix plan was executed. The knowledge, skills and performance of our employees are central to our success. We must attract, develop and retain the talent required to fulfil our ambitions. Inability to retain key knowledge and Board oversight of material acquisitions and review of the integration and performance of recent and prior acquisitions. Our commercial risks continue to be well managed through legal review, delegated authorities and contract monitoring processes. We use dedicated management teams and executive involvement to ensure our performance with all large clients. We continue to invest in sales to grow our client base, decreasing client concentration and diversifying risk. Detailed implementation and delivery plans with strong management control and oversight. Use of experienced employees with strong project, change and people management skills. Key stakeholder Relations Plan. Customer Service Review Boards. The proposed takeover by CSC should give the Xuber business additional flexibility in the provision of resources to support the growing Xuber client base. Major programme and project reporting has been improved. Projects are monitored using consistent industry-standard reporting metrics, with oversight from the Group Change programme management office. We have implemented a more rigorous sales review and governance processes which will help us to focus our resources on the highest quality opportunities. This improves controls over the scrutiny of commercial, legal and delivery risks. Remuneration policies designed to attract, retain and reward appropriate employees. Talent strategy to provide opportunities for employees to develop careers.

16 Cyber Attack adequately plan for succession could have a negative impact on Company performance. Our success depends on the ability to attract and retain key talent and it relies on having good relations with colleagues. There is a risk that we are unable to attract and retain key talent, build future leadership capability and maintain the commitment and trust of our employees. If we face challenges in managing and maintaining our talent pipeline in order to deliver against our strategy, to drive competiveness and maximise on our operating performance, this could impact on our ability to future proof the Group and the associated potential for negative impact on shareholder confidence. The increasing digitalization of our business raises the importance of focus on strong information security controls. Information is an essential asset and is vitally important to Xchanging s business operations and long-term viability. Xchanging operates in a competitive market and any unauthorised disclosure of data would significantly impact customer confidence, incur financial costs and damage our competiveness. Formalised objective setting in place for employees. Bonus scheme in place for relevant employees based on business and individual objectives. Continuing to extend and embed our established talent management framework across the Group in order to engage and empower people whilst delivering results and managing performance. Assessing our current organisational competence and capability against that required to maximise current and future shareholder value. Ensuring succession plans are in place for all identified business critical roles, in particular emergency successors for all senior management roles and that these plans are reviewed every six months. Developed a structured and standard approach to be applied where necessary to key individuals during periods of uncertainty and/or organisational change in order to retain top talent in business critical roles. Implemented a process to identify and deliver programmes targeted at high potential talent in order to drive competiveness and maximise operating performance. Driving high performance and engagement through our performance review, development plans and career planning process. Commitment from the Board and the Executive Committee in support of key initiatives to ensure all existing and future IT systems are secure by design, that exposure to vulnerability is managed effectively and that user access is sufficiently controlled. Implementation and continual improvement of a group information security management system to provide assurance that appropriate controls are in place to detect and

17 Xchanging is committed to maintaining and protecting all of the information in accordance with its value, sensitivity and the risks to which it is exposed, in a manner consistent with all relevant legal, regulatory and contractual requirements. prevent cyber-attacks and data leakage. Financial risks Inadequate or inefficient security controls could result in the theft, disruption destruction of assets and services. This would have a negative impact on our key stakeholders, associated reputational damage and potential for financial implications. The Group s financial results may be subject to volatility arising from movements in interest and foreign exchange rates, pension asset and liability valuations, and changes in taxation legislation, policy or tax rates. The capital structure of the Group includes bank debt that is subject to leverage and interest cover financial covenants and other representations and warranties commonly associated with corporate bank debt. Without effective financial controls, we could be exposed to financial losses which may have a significant impact on the ability of the business to operate. We must safeguard business assets and ensure accuracy and reliability of records and financial reporting. Enhanced budgeting, forecasting and working capital and treasury controls. These controls are being enhanced by increasing the granularity, frequency and intensity of financial performance reviews. They are also being enhanced with the establishment of the new SAP finance system. A rolling 12 month FX hedging programme which aims to reduce the Group s in year exposure to FX transaction risk. Active management of the assets and liabilities in the Group s defined benefit pension schemes. Tax controls and processes to manage tax compliance and address changes in tax legislation and tax rates. Forward looking compliance against financial covenants and warranties is reviewed on a monthly basis for a forward period of at least 12 months. The capital structure of the Group is reviewed by the Board on a regular basis. Investment decisions are considered within the context of the impact they will have on the Group s current and forecast leverage ratio. The financial reporting process and control system is monitored and maintained through the use of internal control frameworks which address key

18 financial reporting risks, including risks arising from changes in the business or accounting standards. The delivery of a centrally co-ordinated assurance programme by the Internal Audit department that includes key business and finance risk areas. The findings and recommendations of each review are reported to both management and the Audit Committee. Consolidated income statement for the year ended 31 December 2015 Adjusted Adjustments 1 Total Adjusted Adjustments 1 Total Note m m m m m m Revenue Net revenue Gross profit 65.3 (32.6) (27.3) 42.0 Administrative expenses (10.7) (63.2) (73.9) (13.5) (2.2) (15.7) Other income Operating profit/(loss) (93.1) (38.5) 55.8 (19.2) 36.6 Finance costs (8.4) - (8.4) (5.6) - (5.6) Finance income Share of (loss)/profit from joint venture (0.2) - (0.2) Profit/(loss) before taxation 46.9 (93.1) (46.2) 51.1 (18.6) 32.5 Taxation 3 (11.6) 5.1 (6.5) (7.6) 4.5 (3.1) Profit/(loss) for the year 35.3 (88.0) (52.7) 43.5 (14.1) 29.4 Attributable to: Owners of the parent 21.0 (89.1) (68.1) 28.9 (12.8) 16.1 Non-controlling interests (1.3) (88.0) (52.7) 43.5 (14.1) 29.4 Earnings per share attributable to owners of the parent (expressed in pence per share) Basic earnings per share (27.55) Diluted earnings per share (27.55) Adjustments in 2015 and 2014 are presented in note Net revenue excludes principal spend on Procurement contracts that arise from suppliers costs that are passed on to the customer.