Annual Report • Dec 31, 2014
Annual Report
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| Strategic Report | |
|---|---|
| Highlights | 1 |
| Our business at a glance | 2 |
| Chairman's statement | 4 |
| Market overview | 6 |
| Chief Executive's statement | 8 |
| Business model | 10 |
| Our strategy | 11 |
| – Developing new products and new technology | 12 |
| – Building the eco-system | 13 |
| – Converting multiple markets | 14 |
| – Enhancing our capability | 15 |
| Key performance indicators | 16 |
| Risk management | 18 |
| Finance Director's report | 20 |
| Corporate social responsibility | 22 |
| Board approval of the Strategic and Annual Reports | 25 |
| Governance | |
| Board of Directors | 26 |
| Directors' report | 28 |
| Governance | 32 |
| – Corporate governance statement | 32 |
| – Directors' Remuneration report | 39 |
| – Directors' Responsibilities statement | 65 |
| Financial Statements | |
| Independent auditor's report | 66 |
| Consolidated income statement | 71 |
| Consolidated statement of comprehensive income | 71 |
| Consolidated statement of financial position | 72 |
| Consolidated statement of changes in equity | 73 |
| Consolidated cash flow statement | 74 |
| Notes to the consolidated financial statements | 75 |
| Company balance sheet (UK GAAP) | 106 |
| Notes to the (UK GAAP) Company balance sheet | 107 |
| Five year record | 112 |
| Notice of the Annual General Meeting Notes |
113 116 |
| Advisors | IBC |
Xaar is a world leader in the development of inkjet technology and manufacture of piezoelectric drop-on-demand industrial inkjet printheads.
| 2014 | 109.2 | ||||
|---|---|---|---|---|---|
| 2013 | 134.1 | ||||
| 2012 | 86.3 | ||||
| 2011 | 68.7 | ||||
| 2010 | 54.7 |
| 2014 | 22.2 | |||
|---|---|---|---|---|
| 2013 | 30.4 | |||
| 2012 | 21.1 | |||
| 2011 | 15.3 | |||
| 2010 | 10.3 |
| 2014 | 24.6 | ||||
|---|---|---|---|---|---|
| 2013 | 41.1 | ||||
| 2012 | 18.4 | ||||
| 2011 | 10.6 | ||||
| 2010 | 5.6 |
| 2014 | 47.0 | |||
|---|---|---|---|---|
| 2013 | 53.5 | |||
| 2012 | 28.9 | |||
| 2011 | 17.4 | |||
| 2010 | 22.0 |
Adjusted measures exclude items from the IFRS results, such as share-based payment charges, exchange differences relating to Swedish operations, unrealised gains/losses on derivative financial instruments, non-recurring royalty income, R&D expenditure credit, impairment on trade investments, commercial agreement costs, and restructuring costs, per the reconciliation of adjusted financial measures on page 82. Net cash includes cash and cash equivalents, treasury deposits, less obligations under loan and finance lease liabilities.
Xaar is a world leader in the development of inkjet technology and a manufacturer of piezoelectric drop-on-demand industrial inkjet printheads, the key component in a digital printing system. Unlike analogue printing, digital printing requires no physical master image to copy from, and hence enables economic short run, variable data, printing. The printhead is the device which converts the electronic image data into the physical image on the substrate. To achieve this, Xaar technology is a combination of high speed mixed signal electronics, micro-mechanics, and fluid dynamics.
Our flagship printhead is the Xaar 1002, but our full range includes numerous other printheads. A typical industrial inkjet machine could be firing up to 300 million drops of ink per second – that's over 1 trillion drops per hour, all controlled within the picolitre range of volume and the micron range of placement accuracy (a picolitre is a millionth of a millionth of a litre, and a micron is a millionth of a metre).
Xaar sells its technology in component form (the printhead) to Original Equipment Manufacturers (OEMs) who produce and sell the complete digital printing solution to the end market. In addition to our close engagement with OEMs we also actively partner and co-develop with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a robust and attractive total solution to the end user.
Our technology is used all over the world in a wide range of manufacturing applications.
We design and manufacture our printheads in the UK and Sweden, exporting over 95% of our production to customers around the world. We also develop and sell ink systems, electronics, and fluid optimisation services to accelerate inkjet system development and adoption.
printing.
Xaar regional locations
Authorised resellers
95% 3%
We export over 95% of our production to customers around the world.
To date, only 3% of the commercial and industrial print market has converted to digital
The Industrial sector presently includes ceramic tile decoration, decorative laminate, and advanced/additive manufacturing processes.
Ceramics is a 10.5 billion m² market currently and digital conversion was estimated to be over 50% at the end of 2014. There are c.10,000 production lines around the world, with almost half of these in China. The creative design is the key feature which sells a tile. Xaar's digital inkjet solution provides an end result which is superior in terms of image quality, at a lower cost, plus with the advantages of flexibility, inventory reduction, and larger tile size capability. Tile manufacturing operates in a harsh industrial environment with high reliability/duty cycle requirements; hence any technology deployed needs to be appropriately robust. The market has been moving to digital inkjet decoration over the last ten years with the pace of change accelerating after the launch of the Xaar 1001 which achieved volume sales from 2009 onwards. Today the Xaar 1002 family of printheads with TF Technology™ continue to deliver both quality and cost advantages over traditional analogue methods within a robust architecture suitable to this harsh environment, giving rise to maximum production uptime.
Decorative laminates is estimated to be at 7.9 billion m² of annual output with c.1,600 production lines around the world supplying simulated wood materials to the furniture and building industries. Realistic wood finishes or creative design are the key features which sell the board/plank/finished item and the digital quality that is now being demonstrated with Xaar printheads matches the analogue process, thereby offering the opportunity for more economic short run work to be undertaken whilst reducing inventories and improving time to market. Inkjet is the only digital solution which meets the high reliability and high duty cycle requirements needed within this industry.
Digital adoption is still at the very early stages in this application, and the rate of adoption is expected to grow over the next few years.
Applications include demand for the fine coating, patterning and printing of functional fluids onto numerous substrates in numerous industries. Applications are challenging and push inkjet to its known limits and beyond in fields such as nano imprinting, solar cell manufacturing and display screen production. Xaar has been working with multiple partners in laboratories all over the world exploring what may be possible in the future. Technical progress is promising but the commercial implementation of many of these applications is still believed to be some years into the future.
The Packaging sector presently includes primary labels, secondary labels, coding and marking, and Direct-to-Shape printing.
Coding and marking is an application of printing predominantly monochrome bar codes and logos on outer case/secondary packaging of consumer goods. This is an established and stable business based on bulk piezo technology which competes with alternative technologies including laser and thermal inkjet.
Primary label printing is estimated to be a market producing over 55 billion m² annually, with only 9% of this market converted to digital printing to date. The change driver is the delivery of lower cost per copy on run lengths up to 100,000 impressions (versus only 50,000 impressions 3 years ago). There is a large range of substrates and inks in this application which adds complication to the conversion process. In 2014 the launch of high definition mode label printers using the Xaar 1002 delivered an observable step change in print quality.
Direct-to-Shape is a new application where bottles and containers have the image printed directly onto their surface without the need for a label. This emerging sector underwent its first field trials during 2014. The solution is aimed at shortening time to market whilst simultaneously reducing inventory and unit costs versus existing methods. This approach also enables mass customised marketing and event targeting.
The Graphic Arts sector presently includes Grand/Wide-format graphics.
Grand/Wide-format graphics (GWFG) includes both internal and external signage and advertising, including billboards, posters and point of sale advertising. It is the most mature industrial inkjet market, active for over 15 years. Xaar's growth to date has been based on its original set of bulk piezo products, which delivered annual growth from 2003 to 2007. To stimulate further material growth for Xaar in this end market new product developments are required to enhance the portfolio.
| Industrial revenue £78.0m |
(2013: £98.2m) |
|---|---|
| Packaging revenue £13.4m |
(2013: £15.7m) |
| Graphic Arts revenue £11.4m |
(2013: £13.3m) |
| Royalties revenue £6.4m |
(2013: £6.9m) |
The importance of diversification by market, product and geography has been underlined by the events of 2014.
Phil Lawler Chairman
19 March 2015
I report on a year of some significant challenges for the Company following our exceptional results for 2013. Despite anticipating a relatively flat year in terms of revenues we were unable to achieve the targets that we had set ourselves. For the first half of the year results were as expected, however, we did not foresee the significant step down in orders during the second half of 2014.
Following very strong growth from the ceramics decoration market over the last four years, our reliance on this segment was highlighted by the 2014 slow-down in the Chinese property and construction industries (approaching half of the world's ceramic tiles are manufactured and sold in China). This is a volatile market, serviced by a small number of OEMs, that has proved extremely difficult to predict and consequently forward visibility continues to be limited.
We have managed to retain global market leadership, in this competitive market segment. Nevertheless competitor activity brought pricing pressure that inevitably affected margins. Slower than expected progress in the development of other applications heightened the impact of our exposure to the slow-down in the ceramics market.
Once it became clear that the demand would not recover quickly, we took decisive action to match our costs, and reduce our output, in line with projected revenue. Unfortunately this resulted in 160 redundancies which equated to 20% of the global work force. All of the cost saving measures were implemented prior to the end of 2014.
We remain cautious about the short term and believe we have restructured appropriately to achieve reasonable profitability, through reduced manufacturing and operating costs, even at the current lower level of business. The increases in our manufacturing capacity over the last few years provide us with the infrastructure to accommodate future growth. However this capacity will be under-utilised in the short term with a corresponding negative effect on operating margins.
Despite the workforce reduction we have been careful to maintain our recently expanded R&D capability so that our longer term product
development strategy is unaffected. In this regard, progress on our future Platform 4 (P4) technology continues to meet the milestones as planned. Gross R&D spend represented 18% of revenue in 2014, and is expected to represent around 20% of revenue in 2015, underlining our commitment to maximise the potential of the Company via technology and product development.
Total revenue for the year was down 19% versus the exceptional results of 2013, but sales were 26% higher than 2012. In 2014 sales into Asia fell heavily (by 29%) due to the reasons already stated, with Europe affected but to a lesser extent (11%). European ceramic OEM partners tend to have more regionally diverse businesses, although China is also a significant market for them.
We continue to deploy our disruptive technology into other markets, and generating material revenues from a wider and more balanced set of markets remains a key objective of the Company. I look forward to reporting on our progress against this objective in the future.
Whilst the downturn in the second half of the year is clearly disappointing, the Company still achieved an adjusted operating margin of 22% for 2014, and generated adjusted diluted earnings per share of 26.4 pence. The Company continues to manage its cash resources prudently with net cash (cash, cash equivalents and treasury deposits) at the end of the year of £47.0 million.
As announced in 2014 the Company has formally implemented a progressive and sustainable dividend policy, and I am pleased to confirm that the Board is recommending a final dividend of 6 pence per share. This together with the 3 pence interim dividend paid during the year equals 9 pence for the full year, a 12.5% increase over 2013 (2013: 8 pence).
In March 2014 our long serving CEO Ian Dinwoodie announced his decision to retire in 2015 and we began an international search for his successor. That search was successful and Dr. Doug Edwards joined us at the beginning of January 2015. Doug joined Xaar from Kodak (Eastman Kodak Company) where most recently he was President, Digital Printing and Enterprise and has been a member of the Executive Board since 2006.
During printhead manufacture, which is a highly complex process, thousands of measurements are taken to ensure specification is met very precisely.
The Xaar 1002 is the market-leading printhead in the ceramics sector.
On behalf of the Board I want to thank Ian for his tireless devotion to Xaar over his 14 years with the Company including 12 years as CEO. His leadership has helped transform the Company to its current market leading position.
Additionally, as noted in February 2015, David Cheesman, one of our Non-Executive Directors, has indicated his intention to retire from the Board, and he has therefore decided not to stand for re-election at the Company AGM on 13 May 2015. A search is underway for David's replacement. I would like to thank David for his contribution over the last four years.
Finally, on 2 March 2015 Jim Brault joined the Xaar Board in the role of Chief Human Resources Officer. Jim joined Xaar from Kodak (Eastman Kodak Company) and has held a variety of global HR roles in the graphics and digital print industry. I am pleased to welcome Jim to the Board, who brings a wealth of invaluable experience to Xaar in this new Board position.
The Group continues to follow the 2012 UK Corporate Governance Code. Board meetings are supported by detailed papers and timely minutes. Attendance by all members remains excellent and I take this opportunity to thank them for their continuing commitment and professionalism. The Board continues to take dedicated days to consider and review the Group's strategy. Detailed market and competitive analysis is undertaken in advance and the future direction and capabilities of the Group are debated in detail. All members of the Board are evaluated annually against specific and relevant performance criteria.
2014 has been a challenging period for the Company, but our ambition remains undiminished. We are focussed on re-starting growth following this sharp step down in the Chinese market. The importance of diversification by market, product and geography has been underlined by the events of 2014.
Most things we come into contact with on a daily basis are patterned, decorated, printed or finished in some way. In fact, even after excluding printing in the office or the home, over 3 trillion m² of material is printed, patterned, decorated or finished each year – that's a monthly output equivalent to the surface area of the United Kingdom.
These items can be broadly split into four areas: products, packaging, promotion and publishing. Products include things like ceramic tiles and laminate flooring. Packaging includes labels on bottles and bar codes on boxes. Promotion includes advertising banners and posters. Publishing includes books and newspapers.
Perhaps surprisingly around 97% of production processes used in the manufacture of these items still use traditional analogue technology. Analogue (sometimes referred to as 'fixed image') solutions can be very effective when the same image is replicated many, many times. However, where frequent changes are required or run lengths are shorter, then digital (also known as 'variable image') processes can provide significant cost and inventory reductions whilst improving time-to-market versus analogue techniques.
Over the last 20 years digital imaging technologies, including digital inkjet, have emerged for applying images, patterns or finishes in more efficient, flexible and costeffective ways. Because of its ability to work with a variety of jetting fluids and substrates, and in difficult environments, inkjet has the unique ability to potentially replace all current printing techniques.
The pace of inkjet's adoption and the rate it displaces existing technologies is driven by some key factors, including cost, speed and image quality, which must be met in order for the adoption to take place. Because of these characteristics the adoption of inkjet has typically occurred through 'waves of conversion' in distinct market segments, as the developing technology meets the individual conversion requirements of particular applications.
Xaar, a world leader in industrial inkjet, has successfully developed digital technology and manufactured and sold inkjet products, predominantly printheads, into a number of sectors. The printhead is the heart of the digital process, depositing fluids, including inks and coatings, in precisely the right quantity and in the right place on the substrate, without even touching the surface.
To date Xaar has driven, and benefited from, 'waves of conversion' in two particular applications: outdoor advertising (including billboards, posters and banners) and ceramic tile decoration, which have both adopted digital inkjet technology. These two applications presently use inkjet to annually produce over 7 billion m², but represent only 0.2% of the 3 trillion m² entire global print production.
Xaar's challenge is to expand its existing digital inkjet printhead technology into new markets and to develop new technology to maximise the opportunity that exists from the conversion of much larger applications to digital inkjet.
Looking forward, the opportunities for digital print continue to accelerate. Industry forecasts project the digital print market to double over the next ten years.
The Xaar 1002, with marketleading patented technology, has transformed the ceramics market.
Xaar, a world leader in inkjet, has successfully developed digital technology and manufactured and sold inkjet products, predominantly printheads, into a number of sectors. To date, only 3% of the commercial and industrial print market has converted to digital printing, including 1% to digital inkjet.
The printhead is the heart of the digital print process.
Xaar's challenge is to expand its existing digital inkjet printhead technology into new markets and to develop new technology to maximise the opportunity that exists from the conversion of much larger applications to digital inkjet.
Over the last 20 years digital imaging technologies, including digital inkjet, have emerged for applying images, patterns or finishes in more efficient, flexible and cost-effective ways.
97% of industrial and commercial printing still uses traditional analogue processes.
97%
Over 3 trillion m² of material is printed, patterned, decorated or finished each year – that's a monthly output equivalent to the surface area of the United Kingdom.
Industry forecasts project that the conversion to digital over the next 10 years is expected to be twice that seen over the last 20 years.
Xaar has great people, products and technology.
Doug Edwards Chief Executive
19 March 2015
Following four years of substantial progress, including an exceptional year of growth and profitability in 2013, the Company experienced a step down in demand in the third quarter of 2014 which led to a disappointing final six months of the year, with second half revenues being 19% lower than those recorded in the first half.
This step change occurred in our largest application, ceramic tile decoration, and in the largest geographic market for this application, China, which produces almost half of the world's ceramic tiles. A significant slowdown in construction activity in China has led directly to reduced capital investments in ceramic tile production plants compared to 2013 and hence a significantly lower level of demand for Xaar's products. The scale of the conversion opportunity over the long term remains unchanged as does Xaar's strong market share. European based demand in this application has fared better.
The events in China, coupled with slower progress than anticipated in other applications, have resulted in a full year result below where we expected it to be at the start of the year. In the short term we have quickly cut costs to bring our cost base in line with the new lower level of sales, whilst protecting our key investments in both product and technology development which are focussed on generating substantial future growth primarily through market and application diversification. Following a period of substantial growth that has seen revenue more than treble between 2009 and 2013, the performance in 2014 is clearly disappointing, but we believe should be seen as a step change correction against an overshoot in 2013.
Our strategy is to drive the development of Xaar technology into selected multiple applications and industries, delivering sustainable profitable growth. Our tactics are to become the primary enabler of change in our target markets, leading the initial wave of conversion, and then to protect our position through replacement product sales enabled by continuous product development. The size of the conversion opportunity, the rate of change, and the key characteristics enabling that change will vary
from market to market. OEMs are mostly market specific which means we work with a number of OEM customers in developing their inkjet solutions for a discrete market.
Our substantial investments, in both manufacturing capacity and R&D capacity, position the Company well to execute its strategic objectives and these remain unaffected by this downturn in demand. In fact the events of 2014 highlight the need for Xaar to become a more diverse business, by product, by application, and by geography. To achieve this objective the Company continues to invest in technology and product development.
Further detail on our strategy and progress made in 2014 is set out in the 'Our strategy' section.
Revenues from Industrial applications fell 21% versus 2013, packaging and graphics applications each fell 15%. Within Industrial applications, the ceramic tile business fell due to the reasons noted above with non-ceramic industrial applications registering a modest 3% growth over 2013.
Within the Packaging market, sales into the primary label application were lower than 2013 as a number of OEM customers took the opportunity to re-engineer and enhance their offerings in an attempt to accelerate market conversion. The resulting improvements in image quality bode well for a return to growth for Xaar in this application. Our mature coding and marking application revenues were again stable. Further technical progress was made in the 'Direct-to-Shape' application with positive feedback being received from the on-going field trials.
In the Graphics segment, sales declined mainly due to the planned end-of-life of some older generation products. The Company is proposing to close its Swedish manufacturing facility in 2016 as the lower sales volumes of products which are manufactured in this plant no longer justify the cost of a standalone operation.
Xaar technology is used in range of packaging applications, including for producing labels and printing Direct-to-Shape.
During 2014 the Xaar 1002 was very successfully introduced and has fully replaced the Xaar 1001 as the world's market-leading printhead in a number of applications. The Xaar 1002 is now shipping in four variants: GS6, GS12, GS40, and AMp, offering industry-leading performance based on TF Technology™ across a drop size range from below 1pL to above 100pL.
Our gigabit ethernet based electronics subsystem, XPM, commenced shipments in 2014, and has been well received by customers, offering substantially faster data transfer rates and larger memory capability for very large image applications.
Following field trials in 2014 of the Xaar 501 we identified technical improvement opportunities to optimise the performance of the printhead. We are engineering those improvements now in order to finalise the product design and move to commercial shipments.
The Xaar 001 (which is based on third party technology brought into Xaar during 2013 and 2014), has proven to be less developed than originally anticipated, hence an extended period of debugging and optimisation has been required before the scheduled market test of this technology can progress.
Work on the Xaar 1002 SBX is on-going within Xaar, and at our partners, to develop both the printhead and the ink system parameters required for reliable printing and low printer maintenance.
All of these products are aimed at broadening our offering to existing markets.
Further substantial progress has been achieved on our Thin Film technology (P4) development during the year, and we are now entering the phase of early product demonstrations with potential partners. The architecture of the first product, the Xaar 5400 is now defined. We anticipate starting to sample this first product to partners at the end of 2015 with first commercial revenues still planned for late 2016. The Thin Film programme is aimed at
converting new markets and accelerating the conversion of others through a portfolio of new products.
Whilst 2014 has been a difficult year for the Company, I would like to thank all of our staff for their efforts during the period, and would reflect that despite the short term reduction in revenue our ambitions remain undiminished; Xaar has great people, products and technology, remains strongly profitable, retains a robust balance sheet and has substantial growth opportunities ahead.
Xaar is the world's leading supplier of industrial printheads. Our core business is the design, manufacture, marketing and sale of printheads and associated products. Xaar also receives licensee royalty income from its legacy licensing model.
Xaar invests a substantial proportion of sales (17% in 2014) in Research and Development (R&D) to remain a world leader in inkjet technology.
Xaar's innovative products are used in a range of print applications including wide-format graphics, ceramics, labels, packaging, coding and marking, and decorative laminates.
Xaar has more than 250 patents and patent applications and continues to add to its Intellectual Property (IP) portfolio.
Our headquarters and R&D activities are based on the prestigious Cambridge Science Park, Cambridge, UK. At 31 December 2014 R&D staff totalled 152, representing 24% of the total workforce.
Xaar manufactures its printheads in Huntingdon, UK and Järfälla, Sweden. The Huntingdon plant produces the Xaar 1002 product range whilst the plant in Sweden produces the popular Xaar 128 printhead for the wide-format graphics market. The Sweden plant is proposed to be closed in 2016.
Xaar's manufacturing is relatively capital intensive; the Group has invested £60 million in assets and production facilities in Huntingdon since the plant opened in 2007.
Xaar sells direct to OEMs around the world through its global sales team. Xaar's highly skilled application engineers offer the highest level of technical support to assist OEMs in the successful design, build, commissioning, and ongoing maintenance of printing systems. Europe and Asia are currently the primary location of our OEM partners.
Xaar offers a wide range of industrial inkjet printheads which are designed and produced to meet the customer-driven requirements of a range of manufacturing applications. Primary markets include graphics, labels, packaging, outer case coding, ceramics, and décor.
Our strategy
Developing new products and new technology
We manage our product development programmes across three horizons: short term by delivering updates and improvements; medium term by developing new products or derivatives using existing technologies; and longer term through research and development of novel technologies.
To penetrate any market successfully, an eco-system of technical and commercial partnerships must be formed to drive and support market conversion.
See page 12 See page 13
See page 15
The markets and applications that use Xaar's printheads can be diverse but can be grouped to have similar characteristics and general imaging requirements.
See page 14
In order to develop new products and new technology successfully, and to sustain or grow sales into multiple end markets, we must constantly develop our capability in terms of our human and other resources, specifically both our R&D and manufacturing capacity and capability, and the structure of our organisation.
We manage our product development programmes across three horizons: short term by delivering updates and improvements; medium term by developing new products or derivatives using existing technologies; and longer term through research and development of novel technologies.
To create and maintain competitive advantage over the short to medium term, it is critical that we continue to improve existing products as well as developing new products. Over the medium to long term, in order to access a greater proportion of the enormous industrial print market we must continue to develop new technology which can open up opportunities for the application of digital inkjet in established analogue markets.
We develop and maintain the different sets of skills and processes needed to execute the programmes in each of the three horizons successfully, and we balance our portfolio to achieve our short, medium and long term objectives targeted at achieving sustained profitable growth.
Products developed to date use our patented Xaar bulk piezo technology. Our Thin Film piezo technology programme will enable us to target an even wider range of applications in the future, which will significantly increase Xaar's addressable market.
Inkjet is a heavily patented area and managing our intellectual property (IP) is critical to our success, both in terms of protecting our position and avoiding infringing other parties' IP. Our technology is protected by over 250 patents to date.
We allocate significant resources to research and development to enable the successful completion of programmes which will generate future sales.
Our Thin Film programme aims to open up more of the analogue market to Xaar through the development of a solution which offers a generational shift in performance.
Edmund Creutzmann Chief Technical Officer
In March 2014 the Group announced the launch of the Xaar 1002 building on the success of the world leading Xaar 1001 through improvements in image quality and ease of use. The Xaar 1002 ships into multiple applications and has replaced the Xaar 1001 as market-leader.
In May 2014 three new printheads were announced: the Xaar 1002 GS40; the Xaar 1002 SBX; and the Xaar 001, targeting ceramic tile decoration and glaze processes.
The Xaar 1002 GS40 is now shipping worldwide into ceramic tile factories through our OEM partners. The main application for the product is the manufacture of tiles with higher levels of colour intensity achieved through the larger drop size delivered by the printhead compared to the GS12. A number of OEMs are also exploring the potential to use this product for particular varnish, glaze and finishing processes. The Xaar 1002 SBX aims to produce even greater laydown than the Xaar 1002 GS40. We expect the SBX will jet the same special effect fluids in development for the GS40, plus some new fluids specifically developed for the SBX.
The Xaar 001 aims to bring the benefits of digital inkjet to the glaze, special effects and structure processes within ceramic tile manufacture. The product is integrated into printers that are at a prototype stage and we are working with key OEMs on market testing through the middle of 2015. Target markets for the Xaar 001 remain an exciting opportunity that Xaar and our partner OEMs anticipate will progress to digital solutions.
The Xaar 501 aims to provide higher levels of performance in graphics and packaging. Following field trials in 2014 we identified technical improvement opportunities to optimise printhead performance which we are engineering now to finalise product design and move to commercial shipments.
Our Thin Film programme aims to open up more of the analogue market to Xaar through a solution which offers a generational shift in performance. Successful print testing was achieved during 2014 using early prototypes. Discussions with OEM partners are ongoing. Although there is a long way to go, progress is encouraging and remains on track.
To penetrate any market successfully, an eco-system of technical and commercial partnerships must be formed to drive and support market conversion.
Xaar's direct customers are OEMs, who manufacture equipment for patterning, decorating, finishing or printing products in a number of different market sectors. We provide our OEM partners with the know-how and ability to incorporate our innovative range of printheads, systems components, and electronics into their equipment to increase the value and functionality of their own products, and minimise the time required to bring products to market.
In addition to our close engagement with OEMs we also actively partner and co-develop with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a robust and attractive total solution to the end user. We operate an open ink policy so that our customers can choose the ink supplier that best suits them and their application. In addition, we work in partnership with the world's leading ink manufacturers to develop and approve a wide range of inks which are optimised for our printheads and the end application.
Given the complexity of the final integrated solution, it is typical that our partners' development cycles are measured in years rather than months, with successful solutions then benefiting from long commercial lifecycles. To support these developments we deploy sales and technical support staff globally ensuring a local presence in each of the key geographical regions.
We continue to work with the leading OEMs in our target sectors as well as the appropriate fluid suppliers, hardware and software integrators, and substrate suppliers in order to deliver a robust and attractive total solution to the end user.
The on-going developments by multiple OEMs in Direct-to-Shape packaging using Xaar technology is a strong indication of our position as market leader in new applications.
We are working with multiple OEM partners through the Thin Film technology programme.
Across all markets and applications Xaar now has approaching 250 active eco-system partners.
We continue to work closely with multiple OEM partners to deliver robust and innovative inkjet solutions, transforming new markets and applications.
Richard Barham Sales and Marketing Director
Printheads are the key technology in the total digital solution, which also requires electronics, software, fluids and fluid systems.
The markets and applications that use Xaar's printheads can be diverse but can be grouped to have similar characteristics and general imaging requirements.
Xaar's products are designed to provide benefits across multiple applications. This strategy means we can offer solutions across multiple applications through efficiency in development and implementation. We also continuously enhance product performance which allows our OEMs to take advantage of upgrades with minimal changes at the system level.
The Xaar 1002, with its high resolution greyscale (variable drop size) and TF Technology™ (fluid recirculation), ensures an exceptional quality of print in one single pass of the substrate under the printhead, which maximises productivity and delivers significant quality and cost advantages over traditional analogue methods in ceramics and other industrial applications. Although the Xaar 1002 is the market-leading printhead in the ceramics sector, it is also used for printing primary labels, decorative laminates and packaging.
To date we have focussed on three main sectors: Industrial, which covers ceramics, decorative laminates and advanced/additive manufacturing; Packaging, which includes product labelling, Directto-Shape (printing directly onto bottles and containers) and coding and marking (printing bar codes and data); and Graphic Arts, which includes wide-format graphics (typically outdoor advertising, posters and banners), commercial print, and varnishing. The wide-format graphics sector was the first to adopt industrial inkjet and is, therefore, the most mature. The ceramics market has been moving into digital inkjet decoration over the last ten years. However, the pace of change accelerated significantly in 2009 following the launch of the Xaar 1001 in 2007.
Our overall progress in the conversion of multiple markets was disappointing in 2014.
During 2013, following the success of the product in European ceramic tile manufacturing from 2010 onwards, the Xaar 1001 was rapidly adopted as the solution of choice for ceramic tile decoration in China, the largest producer and consumer of ceramic tiles with around half of the world's volume. In the third quarter of 2014 the challenges in the construction industry in China resulted in a step-down in demand from ceramic tile production. The ceramic tile sector remains the most significant in terms of current and short term revenue. Xaar's market leading position has been achieved through the success of Xaar 1001/2 product family. Xaar's current product portfolio, future roadmap and sector expertise provide a strong position for continuing leadership in the sector, including the development of inkjet into processes beyond the current decoration step such as glaze, structure, and finishing effects.
In markets outside ceramics progress was generally disappointing in 2014. Future success is expected, but the sectors remain challenging in terms of technical requirements and end user acceptance.
Progress in Direct-to-Shape remains encouraging but revenue contribution in 2014 was relatively modest.
Future success is expected in multiple markets outside of ceramics, but the challenge is always to meet the application requirements and win wide customer acceptance.
Richard Barham Sales and Marketing Director
68%
Ceramics continues to provide a substantial share of total sales.
In order to develop new products and new technology 2014 Update successfully, and to sustain or grow sales into multiple end markets, we must constantly develop our capability in terms of our human and other resources, specifically both our R&D and manufacturing capacity and capability, and the structure of our organisation.
The success of our business depends on our people so we recruit only the best. We offer competitive salary and benefits packages as well as share incentive plans and our employees benefit from extensive training and development opportunities. We aim to build long term relationships with all our employees by helping them grow and develop and by making Xaar a great place to work and a great Company to be involved with.
Our state-of-the-art manufacturing facilities are located in Huntingdon, UK (5,000 m²) and Järfälla, Sweden (7,000 m²). Manufacturing is cleanroom based with 24/7 demands for complex facilities requirements including climate control, gases and chemicals. The cleanrooms contain islands of processing automation, with custom-made or specially modified processing and test equipment. Operation is multi-shift and runs with small processing windows and micron scale tolerances. Production involves multiple non-reworkable processing steps, resulting in a highly sensitive cumulative yield; unit cost and throughput are in turn highly dependent upon yield.
Our state-of-the-art manufacturing facility in Huntingdon positions the Company well to execute its strategic objectives.
Ted Wiggans Operations and Quality Director
We continue to invest in our people, focussing on developing their talent and skills in order to fulfill the potential of the Company.
Jim Brault Chief Human Resources Officer
In 2014 we completed the latest capacity expansion programme at our Huntingdon site. Xaar has now invested £60 million in assets and production facilities in Huntingdon since the plant opened in 2007.
In October 2014, following the step-down in demand from the ceramics sector, action was taken to reduce the cost base of the Company in order to protect financial performance in 2015 and beyond. Unfortunately this resulted in 160 roles across the business being made redundant, around 20% of the total workforce.
Production related roles accounted for 120 of the reduction. Our substantial investment in people over the last few years, in terms of both capacity and capability across the business, position the Company well to execute its strategic objectives.
On 2 March 2015 Jim Brault joined the Xaar Board in the role of Chief Human Resources Officer. Jim brings a wealth of invaluable HR experience to Xaar in this new Board position. The creation of this role reflects the strategic importance of the talent and skill of our people in the next phase of the Company's development.
The success of our business depends on our highly skilled workforce.
We measure our performance through key performance indicators (KPIs) that are closely aligned to our strategy.
| £m | ||||||
|---|---|---|---|---|---|---|
| 2014 | 60.1 | 42.6 6.5 | ||||
| 2013 | 67.4 | 59.8 6.9 | ||||
| 2012 | 50.0 | 30.0 6.3 | ||||
| 2011 | 42.0 | 19.3 7.4 | ||||
| 2010 | 24.9 | 22.3 7.5 | ||||
| EMEA | Asia Americas |
| £m | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2014 | 78.0 | 11.4 | 13.4 6.4 | ||||||
| 2013 | 98.2 | 13.3 | 15.7 6.9 | ||||||
| 2012 | 55.0 | 13.1 | 12.0 6.2 | ||||||
| 2011 | 31.7 | 18.1 | 11.7 7.2 | ||||||
| 2010 | 14.5 21.4 |
11.8 7.0 | |||||||
| Industrial | Graphic Arts | Packaging | Royalties |
A step-down in Chinese demand for ceramic tiles in 2014 reduced sales to both Asian and European OEMs.
Financial Statements
• Sales order book
Measures not published:
family
| % | ||||
|---|---|---|---|---|
| 2014 | 22.2 | |||
| 2013 | ||||
| 2012 | 21.1 | |||
| 2011 | 15.3 | |||
| 2010 | 10.3 |
Despite a difficult year, our operating margin was still over 20%.
Adjusted profit before tax reduced 40% versus the exceptional result in 2013.
| £m | |||
|---|---|---|---|
| 2014 | 19.2 | 2014 | 17.5 | ||
|---|---|---|---|---|---|
| 2013 | 16.4 | 2013 | 12.2 | ||
| 2012 | 8.0 | 2012 | 9.3 | ||
| 2011 | 6.5 | 2011 | 9.5 | ||
| 2010 | 5.0 | 2010 | 9.1 |
R&D investment % of adjusted revenue
30.4
The increase in R&D investment is key to our development strategy.
| £m | ||||
|---|---|---|---|---|
| 2014 | 47.0 | |||
| 2013 | 53.5 | |||
| 2012 | 28.9 | |||
| 2011 | 17.4 | |||
| 2010 | 22.0 | |||
We have consistently maintained a strong cash position.
Effective risk management is key to our success against the dynamics of the industry that we operate in and the characteristics of our chosen business model. The printing industry in which we operate, is, in general, declining in terms of total output, tends to be capital intensive, is slow to react to change and is resistant to the adoption of new technology. Product lifecycles tend to be long. Our business model is reliant on us first driving the conversion of wellestablished processes to our technology, then maintaining our market position to maximise sales through both the initial conversion and replacement cycles in order to generate profits to enable us to invest in new technology and open up new applications.
Our risks are set out in more detail in a table on page 19 but the key risk areas can be identified as being associated with the following:
The first approach to managing these risks is to have high quality individuals within the necessary functions that these risks tend to fall into. Other examples of the effective day to day management of these risks include operating multi-functional teams to share knowledge across the business, having regular stage gates in the management of development programmes, and the regular assessment of manufacturing capacity against future potential needs. In addition to day to day processes the Group's risk register is formally reviewed twice per year at senior management and Board level, including the assessment of the performance of risk management during the preceding period.
The Board has applied principle C.2 of the UK Corporate Governance Code by establishing a continuous process for identifying, evaluating, and managing the significant risks the Group faces which has operated throughout the year and up to the date of this report. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance with respect to the preparation of financial information and the safeguarding of assets and against material misstatement or loss.
In compliance with provision C.2.1 of the UK Corporate Governance Code, the Board regularly reviews the effectiveness of the Group's system of internal control. The Board's monitoring covers all controls, including financial, operational and compliance controls and risk management systems. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The Board has also performed a specific assessment for the purpose of this Annual Report. This assessment considers all significant aspects of internal control arising during the period covered by the report. The Audit Committee assists the Board in discharging its review responsibilities.
During the course of its review of the risk management and internal control systems, the Board raised concerns regarding sales forecasting, following the rapid and unexpected reduction in sales into the Chinese ceramic tile market experienced in the third quarter of the year. Actions have been taken to improve the monitoring of macro-economic indicators and data, and the collection, consolidation and review of information from customers, partners, market reports and other sources. Despite these actions the Board anticipates that forecasting sales into ceramics will remain challenging, and notes that the impact of the risks around this area for the Group are exacerbated by the high proportion of revenue generated by the ceramics sector.
Financial Statements
| Principal risk and uncertainty | Impact | Mitigation | |
|---|---|---|---|
| Product sales into established applications fail to deliver sustained revenue growth due to competitor activity (market share loss and/or price reductions), macro-economic factors, market maturity or other changes. |
Lower than anticipated revenues are achieved resulting in excess production capacity and lower levels of profit. |
Competitive pricing policies are employed. The product portfolios and pricing of competitors are constantly monitored. Manufacturing cost reduction programmes are established to ensure that products remain competitive. Close customer relationships are maintained with supply agreements in place where appropriate. New product variants are developed to constantly improve the product portfolio on offer. Macro-economic indicators and data is regularly reviewed to improve forecasting. Information from customers, partners, market reports and other sources is collected, consolidated and reviewed to improve forecasting. |
|
| Product sales into new applications fail to achieve their targets. |
Lower than anticipated revenues are achieved resulting in excess production capacity and lower levels of profit. |
Regular reviews of OEM partners are held to ensure that appropriate and extensive market coverage is achieved together with a focus on new equipment manufacture. New products and product variants are developed to meet market requirements. Competitive pricing policies are employed. Manufacturing cost reduction programmes are established to ensure that products remain competitive. Information from customers, partners, market reports and other sources is collected, consolidated and reviewed to improve forecasting. |
|
| New products fail to achieve their targets through either a failure to identify the appropriate products to meet future market requirements, or the products are identified but are not successfully developed in time or to the required specification. |
Longer term revenue and profit is impacted. |
Regular, specific and detailed reviews are held to assess current and anticipated market requirements. These reviews include input from customers and other external sources. Product developments are selected on appropriate criteria. Product development activity is properly managed with regular reviews of progress against project plans, and gated milestone reviews. Appropriate resource is applied to product development activity. |
|
| Manufacturing output fails to meet demand due to supplier issues, an event at one of the manufacturing facilities, delays or problems associated with production equipment, a lack of manufacturing capacity, or for other reasons. |
Demand is not satisfied resulting in lower levels of revenue and profit. Customers may start purchasing (or increase their level of purchasing) with Xaar's competitors, leading to a longer term reduction in market share, revenue and profit. |
Detailed sales forecasts are prepared and reviewed regularly to minimise unexpected changes in short term demand. Suppliers are managed carefully. Appropriate sourcing, inspection and inventory holding policies are applied to ensure continuity and consistency of product supply. Appropriate contingency factors are applied to capacity planning. Manufacturing facilities are fitted with the appropriate safety and security systems. Staff are properly trained. |
|
| Significant and sustained quality problems are identified with products which have been sold or which are held in inventory. |
Lower levels of revenue in the short term whilst the issues are resolved. Unexpected costs associated with resolving the issues, which may include product scrap, warranty costs and/or customer compensation. Potentially longer term revenue loss if customers start purchasing (or increase their level of purchasing) from Xaar's competitors. |
Standard operating procedures are in place for all products. Staff are properly trained. The quality of supplies is constantly monitored. Quality performance is regularly reviewed by senior management who apply appropriate resources to systematically address recurrent problems. New products are thoroughly tested before launch. Xaar's Swedish and UK manufacturing facilities are ISO 9001 accredited. Customer returns are reviewed quickly using a consistent and thorough investigation process. |
Alex Bevis Finance Director and Company Secretary
19 March 2015
| 2014 | 2013 | 2012 | |
|---|---|---|---|
| Adjusted revenue £m | £109.2m | £134.1m | £86.3m |
| Adjusted gross margin % | 44.5% | 52.9% | 47.4% |
| Research and development expenses £m | £19.2m | £16.4m | £8.0m |
| Research and development % of adjusted revenue | 17.5% | 12.2% | 9.3% |
| Adjusted operating profit £m | £24.2m | £40.7m | £18.2m |
| Adjusted operating margin % | 22.2% | 30.4% | 21.1% |
| Adjusted profit before tax £m | £24.6m | £41.1m | £18.4m |
| Adjusted diluted earnings per share | 26.4p | 43.2p | 20.1p |
| Net cash balance £m | £47.0m | £53.5m | £28.9m |
| Net cash flow £m | (£6.5m) | £24.6m | £11.5m |
Adjusted measures exclude items from the IFRS results, such as share-based payment charges, exchange differences relating to Swedish operations, unrealised gains/losses on derivative financial instruments, non-recurring royalty income, R&D expenditure credit, impairment on trade investments, commercial agreement costs, and restructuring costs, per the reconciliation of adjusted financial measures on page 82. Net cash includes cash and cash equivalents, treasury deposits, less obligations under loan and finance lease liabilities.
The majority of Xaar's revenue is generated by product sales, commissions and fees (£102.8 million or 94% of total sales in 2014), with 6% of revenue in 2014 derived from licensee royalty income.
Following the exceptional 55% annual sales growth achieved in 2013, revenue for 2014 reduced by 19% to £109.2 million (2013: £134.1 million). A step-down in demand from the ceramics sector in the third quarter of the year resulted in a 19% reduction in total Group sales in the second half of 2014 compared to the first six months of the year.
Industrial markets (i.e. associated with the production of physical end products) continue to be the largest end application for Xaar's technology, despite the step-down in demand from the ceramics sector. Sales into industrial markets represented 71% of Group revenue in 2014 at £78.0 million (2013: £98.2 million).
The conversion of ceramic tile decoration from analogue to digital processes continued in the first half of 2014 at rates similar to those experienced in 2013. Equipment sales for OEMs, and therefore sales of Xaar's printheads, continued to be driven by China, which remains the world's largest market for the production and consumption of ceramic tiles. The slowdown in the property market in China during 2014 resulted in a reduction in demand for ceramic tiles, which in turn resulted in lower levels of tile production and decreases in capital investment by ceramic tile manufacturers, including investment in digital decoration equipment. This slow-down in tile demand in China resulted in a step-down in demand for Xaar's printheads during the third quarter of the year. Sales rates into ceramics stabilised in the final quarter of 2014.
Despite increasing competition in ceramic tile decoration from well-established competitors, including some of Xaar's licensees, the Group's market leadership was maintained in 2014. In March 2014 we launched the Xaar 1002, a re-design of the world-beating Xaar 1001 product, which provides benefits to OEMs and end users in terms of image quality and ease of use. In May 2014 three new printheads were announced to target applications beyond the current digital decoration process, including digital secondary glaze and special effects, and digital deposition for base glaze and structure.
Ceramics accounted for 95% of sales in the Industrial sector in 2014. Progress in other industrial applications, including advanced manufacturing and decorative laminates (artificial wood), continues to be encouraging, with annual growth of 3% being recorded in 2014 for these other applications in total.
Sales into the packaging market accounted for 12% of revenue in 2014 at £13.4 million (2013: £15.7 million). The well-established coding and marking application, serviced by Xaar's original product portfolio, represented around 60% of sales in the total packaging segment.
(21.5% and 22.0% respectively) reduced by the impact of the patent box scheme and R&D tax credits. The tax charge on IFRS profit before tax was
The tax charge on adjusted profit before tax was £4.4 million (2013: £8.0 million), representing an effective tax rate of 17.8% (2013: 19.5%). This tax charge is the product of the UK and Sweden corporation tax rates
£4.4 million (2013: £8.2 million) representing an effective tax rate of 19.1% (2013: 20.5%).
Adjusted profit after tax for 2014 was £20.2 million (2013: £33.1 million).
Adjusted diluted earnings per share was 26.4 pence in 2014 (2013: 43.2 pence).
The Group maintains a strong balance sheet, with £47.0 million of cash and treasury deposits at 31 December 2014. Net cash reduced by £6.5 million in 2014, as outflows from capital expenditures, an increase in working capital and dividend and tax payments exceeded cash inflows from operating profits. The operating cash inflow, before working capital movements, was £33.3 million. The cash impact of the increase in working capital represented a cash outflow of £9.3 million during 2014, with inventory increasing £4.7 million, receivables decreasing £2.0 million and payables reducing £6.6 million (excluding the impact of asset related items). Total cash outflow relating to intangible and tangible assets was £20.1 million in the year, including the £7.4 million of capitalised development expenditure. Dividends accounted for £6.4 million and tax payments in the year totalled £5.6 million.
The Board will recommend a final dividend of 6 pence for 2014 at the forthcoming Annual General Meeting (AGM), giving a total dividend for the year of 9 pence (2013: 8 pence). An interim dividend of 3 pence was paid during the year (2013: 2.5 pence). Subject to approval by shareholders at the AGM the final dividend will be paid on 19 June 2015, with an ex-dividend date of 21 May 2015, to shareholders on the register at close of business on 22 May 2015.
Other packaging applications, including primary labels and 'Direct-to-Shape', continue to show potential, but their overall revenue contribution reduced in 2014 from 2013.
Sales into Xaar's initial end market application, Graphic Arts, reduced to £11.4 million for the year (2013: £13.3 million), representing 10% of total sales. The reduction year on year reflected the planned end-of-life of some older generation products, and the slower than planned contribution from the Xaar 501 product.
As a supplier of technology to OEM partners, our geographic sales split reflects where our products are integrated into the manufacturing equipment, which is not necessarily the enduser location.
In 2014, Europe, Middle East and Africa (EMEA) remained the Company's largest sales region at £60.1 million (2013: £67.5 million), representing 55% of Group sales. The reduction in year on year revenue is mainly the result of falling European OEM sales into the Chinese ceramic market. We continue to see European OEMs innovate with digital inkjet technology in a wide range of applications.
The slow-down of the conversion in the Chinese ceramic tile market resulted in a significant reduction in Xaar's annual sales into Asia in 2014. Sales into Asia reduced 29% to £42.6 million (2013: £59.8 million) representing 39% of total revenues.
Total sales to the Americas remained the lowest sector, driven by the low number and size of Xaar's OEMs in that region. Sales in 2014 were £6.5 million (2013: £6.8 million).
The sales contraction from the ceramics sector in the second half of 2014 had a significant impact on Group profitability. Xaar's operating costs are largely independent of sales levels and manufacturing is relatively capital intensive. These two factors resulted in reductions in gross margin and operating margin as sales decreased. Adjusted gross margin reduced from 47.2% in the first half of the year to 41.2% in the second half. Adjusted operating margin decreased from 26.1% to 17.3% in the same time period.
During the final quarter of 2014 the Group took swift action to reduce costs in anticipation of total Group revenue for 2015 being below £100 million. Direct production costs, factory overheads and operating costs were all reduced in order to achieve a reasonable level of financial performance in 2015, whilst ensuring that Xaar can fulfil its key strategic objectives. The cost reduction programme included a reduction in headcount of 160 (20% of the global workforce of 800). The programme achieved a total reduction in annual cost base of around £9 million. Headcount related restructuring costs of £0.9 million were incurred.
The proposed closure of the Swedish manufacturing facility in 2016 is the result of lower sales volumes of older generation products which are manufactured in this plant, which no longer justify the cost of a standalone operation. Total costs associated with the proposed closure are projected to be around £5 million, with half of this cost being non-cash charges related to tangible assets and goodwill.
Gross profit margin for 2014 reduced to 44.5% (2013: 52.9%). Adjusted operating margin fell to 22.2% (2013: 30.4%). As reported in March 2014, the performance margins recorded in 2013 were exceptional, reflecting the rapid growth of sales in 2013 and unsustainably high asset utilisation.
Adjusted profit before tax of £24.6 million was recorded for 2014, following the exceptional performance of the previous year (2013: £41.1 million). Profit before tax as reported under IFRS was £23.1 million (2013: £40.1 million). In 2014 the main reconciling item between the adjusted and IFRS measures was £0.9 million of restructuring charges related to the headcount reduction in the final quarter of the year.
Gross expenditure on research and development increased from £16.4 million in 2013 to £19.2 million in 2014, reflecting investment in headcount, facilities and engineering costs. Development expenditure on the Thin Film programme of £7.4 million was capitalised in 2014 as required under International Financial Reporting Standards (specifically IAS 38). Sales, marketing and general administrative costs reduced from £13.9 million in 2013 to £12.6 million in 2014 on an adjusted basis.
The Group strongly believes that corporate responsibility is integral to business success. The Group is compliant with all relevant regulation and legislation whilst enhancing the working environment for our employees and minimising the environmental impact of our manufacturing processes. There is internal reporting of key metrics throughout the business, and each member of staff is expected to take individual responsibility for their performance and to work together to achieve shared goals.
The Group respects all human rights and in conducting its business the Group regards those rights relating to non-discrimination, fair treatment and respect for privacy to be the most relevant and to have the greatest potential impact on its key stakeholder groups of customers, employees and suppliers.
The Board has overall responsibility for ensuring that the Group upholds and promotes respect for human rights. The Group seeks to anticipate, prevent and mitigate any potential negative human rights impacts as well as enhance positive impacts through its policies and procedures and, in particular, through its policies regarding employment, equality and diversity, treating customers fairly and information security. Group policies seek both to ensure that employees comply with the relevant legislation and regulations in place in the UK and other operating locations and to promote good practice. The Group's policies are formulated and kept up to date by the relevant business area, authorised by the Board and communicated to all employees.
The Group undertakes extensive monitoring of the implementation of all of its policies and has not been made aware of any incident in which the organisation's activities have resulted in an abuse of human rights.
The Group is committed to providing a working environment in which employees feel valued and respected and are able to contribute to the success of the business. Employees are requested to co-operate with the Group's efforts to ensure that the policy is fully implemented.
The Group's aim is that its employees should be able to work in an environment free from discrimination, harassment and bullying, and that employees, job applicants, customers, retailers, business introducers and suppliers should be treated fairly regardless of:
and that they should not be disadvantaged by unjust or unfair conditions or requirements.
Imagineering Foundation club visits the Xaar manufacturing facility at Huntingdon, UK.
The Group aims to ensure that applications for employment from people with disabilities, and other under-represented groups, are given full and fair consideration and that such people are given the same training, development and job opportunities as other employees. Every effort is also made to retrain and support employees who suffer from disabilities during their employment, including the provision of flexible working to assist their re-entry into the workplace.
Human Resources policies are reviewed regularly to ensure that they are non-discriminatory and promote equality of opportunity. In particular, recruitment, selection, promotion, training and development policies and practices are monitored to ensure that all employees have the opportunity to train and develop according to their abilities.
The Group places considerable value on the involvement of its employees and has continued to keep them informed of the various factors affecting the performance of the Group. This is achieved through written communications shared through the Company intranet and email, and formal and informal meetings. All employees participate in a bonus scheme based on individual performance and Group business targets and, in the UK, have the opportunity to participate in an HMRC approved Share Save Scheme and Share Incentive Plan.
The Group undertakes R&D and manufactures products in both UK and Sweden. The Group complies with all local and European legislation relevant to the respective territories. The Group's manufacturing facilities in Huntingdon
and Järfälla are both ISO 9001 and ISO 14001 certified. It is the Group's policy to maintain this level of certification for its manufacturing facilities and to comply at all times with all relevant environmental and other legislation in the territories in which the Group operates. The Group is compliant with REACH (Registration, Evaluation, Authorisation and restriction of Chemicals), WEEE (Waste Electrical and Electronic Equipment) and RoHS (Restriction of the Use of Certain Hazardous Substances) directives, as required under European legislation.
The Group has a proactive Health and Safety System modelled on OHSAS 18001 in Cambridge, Huntingdon and Sweden.
Xaar has manufacturing sites in Huntingdon, UK and Järfälla, Sweden, along with R&D and head office functions in Cambridge, UK, plus sales offices worldwide.
It is always Xaar's intention to conduct business in a manner that protects the public, the environment, and employee safety. Xaar's Environmental and Health & Safety policies provide a framework for setting and reviewing of Occupational Health, Safety and Environmental Objectives. This demonstrates Xaar's commitment to the prevention of injury and ill health and also the continual improvement in Environmental and Occupational Health & Safety Performance. Xaar recognises that the combination of a safe place of work and safe working practices, together with a productive and innovative environment, are critical to the continued success of the Company.
The management of Xaar is committed to achieving and maintaining full compliance with environmental, health and safety legislation. Although certain responsibilities under this policy can be attributed to specific roles within the organisation, and in particular with different levels of management, each and every Xaar employee shares the core basic duty to understand their responsibilities to observe instructions put in place and, where necessary, to draw these to the attention of others.
To achieve our Environmental and Health & Safety policy, Xaar will ensure that the organisation is led by example; systems are in place to engage, train, develop and maintain competent, informed personnel; resources are allocated to enable safety standards to be maintained; employee involvement and open communication are actively encouraged; plant, equipment and facilities are safe and without risk to the health and welfare of all persons who could be affected by their use or maintenance; substances required and used in the workplace are handled and disposed of safely; a comprehensive risk assessment programme is maintained covering all activities and processes, with control measures implemented to minimise risk where applicable; adequate welfare facilities are provided; where accidents or 'near misses' occur, they are reported, investigated and treated as the source of learning for on-going working practices; and that best practice is shared across the Group.
The Group is committed to minimising its impact on the environment through the reduction and recycling of waste and by operating its facilities as efficiently as is practicable. Our printhead technology improves process efficiency and reduces wastage in our end user markets.
Based on the closing headcount at 31 December the split of staff by gender was as follows:
| 31 December 2014 male/female |
31 December 2013 male/female |
|
|---|---|---|
| All employees | 509/134 | 625/170 |
| Directors | 8/0 | 8/0 |
| Senior Managers | 78/20 | 59/14 |
| Employees excluding Directors and Senior Managers | 423/114 | 558/156 |
Xaar plc has calculated its global greenhouse gas (GHG) emissions statement using an operational control consolidation approach as described in the Greenhouse Gas: Protocol: A Corporate Accounting and Reporting Standard (Revised Edition, 2004), which reflects the Defra Environmental Reporting Guidelines (Revised October 2013).
Scope 1 emissions occur from sources that are owned or where Xaar plc has operational control. This includes direct emissions from gas combustion in our buildings and fuel used in leased company vehicles. Actual and estimated gas consumption data has been collected from each of the leased properties under the control of the Xaar Group, from data sources including direct meter readings, meter readings from suppliers included on invoices and estimations where required based on available information from property management suppliers and other sources. Actual and estimated mileage data has been collected from the leased company vehicle fleet.
Scope 2 refers to indirect emissions from the consumption of purchased electricity (also including any purchased heat, steam or cooling) from facilities owned or under the operational control of Xaar plc. Actual and estimated data has been collected from each of the leased properties under the control of the Xaar Group, from data sources including direct meter readings, meter readings from suppliers included on invoices and estimations where required based on available information from property management suppliers and other sources.
| Baseline year | 1 January 2013 to 31 December 2013 |
|---|---|
| Consolidation approach | Operational control |
| Boundary summary | All entities and all facilities under operational control included subject to the materiality threshold applied |
| Consistency with the financial statements | The only variation is that leased properties deemed to be under operational control have been included in scope 1 and 2 emissions |
| Materiality threshold | Materiality has been set at Group level at 5%* |
| Assessment methodology | Greenhouse Gas Protocol and ISO 14064-1 (2006) |
| Intensity ratio | Emissions per £m turnover excluding royalties |
* The total of any excluded emission sources are estimated to be less than 5% of Xaar plc's total reported emissions.
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| GHG emission source | (tCO2 e) |
(tCO2 e/£m) |
(tCO2 e) |
(tCO2 e/£m) |
|
| Scope 1 | 162 | 2 | 97 | 1 | |
| Scope 2 | 6,263 | 61 | 5,882 | 46 | |
| Statutory total (scope 1 and 2) | 6,425 | 63 | 5,979 | 47 |
The GHG emissions statement includes emissions data from leased assets that are not included in the rest of the consolidated financial statements, other than in note 32 Operating lease arrangements.
Board approval of the Strategic and Annual Reports
The Strategic Report, Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
Phil Lawler Chairman
Doug Edwards Chief Executive
Ian Dinwoodie Retiring Chief Executive
Alex Bevis Finance Director and Company Secretary
Edmund Creutzmann Chief Technical Officer
David Cheesman Non-Executive Director
Ted Wiggans Operations and Quality Director
Senior Independent Director
Robin Williams
Richard Barham Sales and Marketing Director
Jim Brault Chief Human Resources Officer
Financial Statements
Phil Lawler Chairman Age 66
Doug Edwards Chief Executive Age 54
Ian Dinwoodie Chief Executive (retiring 2015) Age 54
Alex Bevis Finance Director and Company Secretary Age 39
Edmund Creutzmann Chief Technical Officer Age 60
Phil has extensive experience of high technology industries. He started with cofounding a software business and subsequently spent 18 years until 2002 at Hewlett Packard in various senior positions, most recently as Chairman and Managing Director of Hewlett Packard, UK and Ireland. Since leaving Hewlett Packard, he has held non-executive Chairman roles in a number of IT companies including listed, private equity and venture capital backed. He is currently Non-Executive Chairman of Kalibrate plc, is a Chartered Director and a Fellow of the Institute of Directors.
Doug joined the Company as Chief Executive in January 2015 from Kodak (Eastman Kodak Company) where most recently he was President, Digital Printing and Enterprise and had been a member of the Executive Board since 2006. He started his career in the UK in a variety of technical roles with Ilford Limited, ICI, Zeneca and International Paper before moving to the US 14 years ago with Kodak Polychrome Graphics (a joint venture company between Sun Chemical Corporation and Kodak). Doug holds a BSc in Chemistry and a PhD in Conducting Organic Materials from London University.
Ian joined Xaar in September 2001 as Group Operations Director and was appointed Chief Executive in July 2003. With over 30 years' experience in high technology industries, he has held a variety of roles in engineering, quality assurance and operations within the semiconductor, electronics and electronic imaging sectors. Previous companies include Ferranti Electronics, Digital Equipment Corporation, and Crosfield Electronics. Immediately prior to joining Xaar, he held the position of Director of Manufacturing for Fujifilm Electronic Imaging Ltd. As announced in March 2014, Ian is retiring in 2015 following 12 years as Chief Executive.
Alex joined Xaar in February 2011 after ten years at CSR plc (Cambridge Silicon Radio). He held a variety of key finance roles at CSR, supporting the growth of the business including the IPO in 2004 and multiple acquisitions. He was most recently employed as Vice President of Finance. He qualified as a Chartered Accountant with Deloitte prior to joining CSR in 2000.
Edmund joined Xaar in April 2014. He has over 30 years' digital printing R&D experience spanning laser, LED, electrophotographic and inkjet imaging technologies. He received his degree in physics and engineering from the University of Applied Sciences, Munich, and started 1979 in the laser printing business of the Siemens AG. Since 1989 he has held various R&D management roles at Siemens, Siemens-Nixdorf and Océ. He was responsible for the development of digital components and industrial print systems including basic technology, print processes, engineering and product development. Since 2006 he realised market leading solutions in the arena of high performance inkjet printing. Most recently he was Vice President, Printer Technology at Océ Printing Systems GmbH (Canon Group) in Germany.
Financial Statements
Ted joined Xaar in January 2011, with over 30 years' experience in high technology operations. Immediately prior to joining Xaar he was Chief Operating Officer at Cambridge Semiconductor Ltd (CamSemi). Before joining CamSemi in 2006, he was Operations Director at Zetex Semiconductors with overall responsibility for its multi-site, multinational manufacturing activities and a global team of 500. In addition, he has held senior-level manufacturing, engineering and quality roles with Motorola and Philips. He is a Chartered Engineer and is Chair of the Manufacturing Industries Division Board of the IMechE.
Ted Wiggans Operations and Quality Director
Age 59
of Inkjet at Agfa Graphics N.V. He brings over 25 years of international sales and marketing expertise across many sectors of the imaging and printing
industries and has held senior management positions at Agfa, including VP Research & Development, VP Global Marketing and Product Development and VP Commercial Printing.
Jim joined Xaar on 2 March 2015 from Kodak (Eastman Kodak Company) where most recently he was Chief Human Resources Officer. He started his career in Human Resources with Analog Devices Semiconductor and has held a variety of global HR roles since 1996. He has worked in the graphics and digital print industry since 2003 when he was with NexPress (a joint venture between Heidelberg and Kodak). Jim holds a BA in Psychology from SUNY Binghamton and a Masters in Industrial and Labor Relations from Cornell University.
Robin Williams Senior Independent Director Age 57
Robin joined Xaar in March 2010. He obtained an Engineering Science degree from Oxford before qualifying as a Chartered Accountant with Peat Marwick Mitchell. He spent ten years as a corporate advisor before co-founding Britton Group plc in 1992. As CEO of Britton, he grew the business to £250 million revenues within six years, before selling to a competitor. He was then an Executive Director of Hepworth plc, with a leading role in the rationalisation and subsequent sale of the group. He has subsequently held various public and private company directorships across a range of industries including business services, healthcare, outsourcing, contracting, and manufacturing. Robin is currently Chairman of NHS Professionals Ltd and NHS Property Services Ltd, and a Non-Executive Director of Nanoco Group plc, and Baronsmead VCT 4 plc.
Richard joined Xaar in March 2012, and was previously Vice President
Jim Brault Chief Human Resources Officer Age 52
David Cheesman Non-Executive Director (retiring 2015) Age 72
David joined Xaar in July
The Directors present their Annual Report on the affairs of the Group together with the financial statements and auditor's report for the year ended 31 December 2014. The Corporate governance statement set out on pages 32 to 38 forms part of this report.
An indication of likely future developments in the business of the Company and details of research and development activities are included in the Strategic Report. The Group's policies relating to equality, diversity and employee consultation can be found in the 'Corporate social responsibility' section of the Strategic Report on pages 22 and 23.
The Greenhouse gas emissions statement can be found on page 24.
Details of the issued share capital, together with details of the movements in the Company's issued share capital during the year, are shown in note 26. The Company has one class of ordinary shares which carries no right to fixed income. Each share carries the right to one vote at general meetings of the Company.
There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company's shares that may result in restrictions on the transfer of securities or on voting rights.
Details of employee share schemes are set out in note 33.
No person has any special rights of control over the Company's share capital and all issued shares are fully paid.
With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Act and related legislation. The Articles themselves may be amended by Special Resolution of the shareholders. The powers of Directors are described in the Main Board terms of reference, copies of which are available on request, and the Corporate governance statement on page 37.
The Group's policy enables it to use financial instruments to hedge foreign currency exposures. The main trading currency of the Group is UK pounds. The Group's use of financial instruments and the related risks are discussed further in notes 20, 21 and 24.
At the 2014 AGM held on 14 May 2014, the Company's shareholders granted the Company authority to make one or more market purchases (within the meaning of section 693(4) of the Companies Act 2006) of ordinary shares of 10p each in the capital of the Company.
The Company did not purchase any shares for cancellation or to be held as treasury in 2014 or 2013.
The Directors who served during the year, and subsequent to the year-end, unless otherwise stated, were as follows:
Ian Dinwoodie – Chief Executive (retiring 27 March 2015) Doug Edwards – Chief Executive (appointed 5 January 2015) Alex Bevis – Finance Director and Company Secretary Richard Barham – Sales and Marketing Director Ted Wiggans – Operations and Quality Director Ramon Borrell – Research and Development Director (resigned from the Board 1 April 2014) Edmund Creutzmann – Chief Technical Officer (appointed 1 April 2014) Jim Brault – Chief Human Resources Officer (appointed 2 March 2015) Phil Lawler – Chairman Robin Williams – Senior Independent Director David Cheesman – Non-Executive Director (retiring 13 May 2015)
Brief biographical descriptions of the Directors are set out on pages 26 and 27. Full details of their interests in shares of the Company and its subsidiary undertakings are included in the Directors' Remuneration report on pages 39 to 64.
Financial Statements
The interests of the Directors in the shares of the Company and its subsidiaries (all of which are beneficial) as at 31 December 2014 are as follows:
| Number of ordinary shares of 10p each 31 December 2014 |
Number of ordinary shares of 10p each 31 December 2013 |
|
|---|---|---|
| Ian Dinwoodie | 77,449 | 57,449 |
| Alex Bevis | 53,577 | 41,661 |
| Richard Barham | 6,980 | 6,634 |
| Ted Wiggans | 9,680 | 4,634 |
| Edmund Creutzmann | – | – |
| Phil Lawler | 99,930 | 101,430 |
| Robin Williams | 1,500 | – |
| David Cheesman | – | – |
There have been no changes in the Directors' interests in shares of the Company between 31 December 2014 and 19 March 2015. Directors' interests in options over shares in the Company are shown in the Directors' Remuneration report.
The Company has granted an indemnity to all of its Directors against liability in respect of any potential proceedings that may be brought by third parties, subject to the conditions set out in the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of approving the Directors' Report.
As at 31 December 2014 the Company had been notified in accordance with Chapter 5 of the Financial Conduct Authority's (FCA's) Disclosure and Transparency Rules of the following material interests in its share capital:
| Number of ordinary shares held |
Percentage of issued share capital |
|
|---|---|---|
| AXA Framlington Investment Managers | 9,124,238 | 11.9% |
| M&G Investment Management | 7,549,431 | 9.9% |
| Legal & General Investment Management | 7,165,290 | 9.4% |
| Schroder Investment Management | 6,471,230 | 8.4% |
| BlackRock | 5,361,095 | 7.0% |
| Baillie Gifford | 3,542,815 | 4.6% |
| Jupiter Asset Management | 2,580,000 | 3.4% |
During the period 31 December 2014 and 19 March 2015, the Company did not receive any notifications pursuant to chapter five of the FCA's Disclosure and Transparency Rules.
The notice convening the Annual General Meeting is set out on pages 113 to 115. Resolutions 1 to 13 set out in the notice of the meeting deal with the ordinary business to be transacted at the meeting. The special business to be transacted at the meeting is set out in Resolutions 14 to 17.
The Company's Articles of Association require the Directors to retire by rotation at least once every three years, with the number to retire by rotation at each Annual General Meeting being the number nearest to but not exceeding one third of the Board. However, the UK Corporate Governance Code provides that all Directors of FTSE 350 companies should be subject to re-election by their shareholders every year. In accordance with this provision of the UK Corporate Governance Code and in keeping with the Board's aim of following best corporate governance practice, the Board has decided that, as at the previous Annual General Meeting of the Company in 2014, all Directors should retire at each Annual General Meeting and, with the exception of Ian Dinwoodie and David Cheesman, offer themselves for re-election.
This Resolution seeks shareholder approval for the Directors' Remuneration report. The Directors' Remuneration report can be found on pages 39 to 64 (inclusive) of the Annual Report and Accounts.
As at the previous Annual General Meeting of the Company in 2014, in accordance with regulations which came into force on 1 October 2013 in this area, the Company is offering shareholders an annual advisory vote on the implementation of the Company's existing remuneration policy, which is set out in the Directors' Remuneration report.
Resolution 13 contains the advisory resolution relating to the Directors' Remuneration report.
Following changes to accounting standards in the UK, the Company is seeking the approval of shareholders to prepare the Company's individual financial statements in accordance with FRS 101. FRS 101 will allow the Company to apply the same accounting principles in the preparation of its individual financial statements as in the consolidated financial statements of the Xaar Group, but will require fewer disclosures.
It is proposed by Resolution 15, by Special Resolution, to authorise the Company generally and unconditionally to purchase its own shares at a price of not less than the par value of the shares and not more than the higher of:
The authority will be for a maximum of 14.9% of the Company's issued share capital and will expire at the earlier of the next Annual General Meeting of the Company or within 15 months from the date of the passing of this resolution. The Directors currently have no intention to exercise the authority and will only purchase shares if it is in the best interests of shareholders as a whole.
The total number of options to subscribe for ordinary shares outstanding at 31 December 2014 (including options awarded under LTIP which may be satisfied by subscription of new shares) was 3,136,455. This represents 4% of the issued ordinary share capital at that date. If Xaar plc was to buy back the maximum number of ordinary shares permitted pursuant to the passing of this resolution, then the total number of options to subscribe for ordinary shares outstanding at 31 December 2014 would represent 5% of the reduced issued ordinary share capital.
Under the Companies Act 2006 the Directors of the Company may only allot shares (whether for cash or otherwise) with the authority of shareholders given at a general meeting of the Company. In accordance with institutional guidelines, under Resolution 16, to be proposed as an Ordinary Resolution, authority is sought to allot shares:
The Directors do not currently have an intention to exercise the authority.
This resolution, to be proposed as a Special Resolution, will give the Directors power to allot shares:
The Directors do not currently have an intention to exercise any power given to them by shareholders to allot shares for cash on a non pre-emptive basis and, in any event, the Directors do not intend to allot any shares for cash on a non pre-emptive basis if such allotment would exceed the limits established by the guidance published by the investment committees of the ABI and the NAPF.
17 will expire no later than 15 months after the passing of those resolutions.
The following provides the additional information required for shareholders as a result of the implementation of the Takeovers Directive into UK law.
The structure of the Company's issued share capital is shown in note 26.
The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights.
The Directors are authorised to issue and allot shares and to undertake purchases of the Company's shares. Appropriate resolutions to renew these authorities are proposed to be passed at the AGM as detailed above and notice of which is on pages 113 to 115.
On a show of hands at a general meeting of the Company every holder of ordinary shares present in person and entitled to vote shall have one vote for every ordinary share held and, on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the AGM on pages 113 to 115 specifies deadlines for exercising voting rights either by proxy notice or present in person or by proxy in relation to resolutions to be passed at the AGM. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are made available at the AGM and are published on the Company's website after the meeting. No person holds securities carrying special rights with regard to control of the Company.
There are no restrictions on the transfer of ordinary shares in the Company other than:
The Company's Articles of Association may only be amended by a Special Resolution at a general meeting of the shareholders. Directors are reappointed by Ordinary Resolution at a general meeting of the shareholders.
The Board can appoint a Director but anyone so appointed must be elected by an Ordinary Resolution at the next general meeting. All Directors are required to submit themselves for reappointment every year at the AGM.
Directors' interests in the share capital of the Company are shown in the table on page 29. Major interests (i.e. those greater than 3%) of which the Company has been notified are shown on page 29.
The Xaar plc ESOP Trust holds 1.8% of the issued share capital of the Company in trust for the benefit of employees of the Group and their dependants. The voting rights in relation to these shares are exercised by the Trustees.
The Company is not party to any agreements which take effect, alter or terminate upon a change of control of the Company following a takeover bid. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Depending on the achievement of performance conditions, share-based payment arrangements may vest on change of control but this is subject to the approval and exercise of the discretion of the Remuneration Committee.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 8 to 15. Notes 20, 21 and 24 include a description of the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources and through a diverse customer base is exposed not only to the Western economies but also to China, India and Latin America. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, based on the Group's forecasts and projections for the next four years, taking account of reasonably possible changes in trading performance. For this reason, we continue to adopt the going concern basis in preparing the financial statements.
Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming AGM.
The Directors who were members of the Board at the time of approving the Directors' Report are listed on page 28.
Having made enquiries of fellow Directors, each of these Directors confirm that:
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
The Company is committed to the principles of corporate governance contained in the 2012 UK Corporate Governance Code which was issued in 2010 by the Financial Reporting Council ('the Code') for which the Board is accountable to shareholders.
Throughout the year ended 31 December 2014 the Company has followed the provisions set out in the Code.
The Company does not comply with provision B.1.2 of the Code relating to the composition of the Board. Following the recruitment of a replacement for Dave Cheesman, and the retirement of Ian Dinwoodie, the Board will be comprised of six executive roles and three nonexecutive roles, including the Chairman. The weighting towards executive roles reflects the need for operational focus at the most senior level in the Company to achieve success in Xaar's highly demanding end markets.
The Board confirms that the 2014 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the performance, strategy, and business model of the Company, in accordance with C.1.1 of the Code.
The Company has applied the principles of the Code, including both the Main Principles and the supporting principles, by complying with the Code as reported above. Further explanation of how the Main Principles have been applied is set out below and, in connection with Directors' remuneration, in the Directors' Remuneration report.
Following the retirement of Ian Dinwoodie on 27 March 2015, the Board of Directors comprises the Chairman, six Executive Directors and two Non-Executive Directors. Brief biographical details of all members of the Board are set out on pages 26 and 27.
The Board considers Robin Williams and David Cheesman to be independent within the meaning of the Code, in compliance with Code provision B.1.1. To be considered as independent each Non-Executive Director is sufficiently separate to management and free from any business or other relationships which could affect their judgement, impartiality or objectivity.
The Board is responsible for the formulation of strategy; the monitoring of financial and non-financial performance and the approval of major transactions; financial statements; other formal communications with shareholders; and operating and capital expenditure budgets. Comprehensive Board papers, dealing with all aspects of the business, are distributed by the Company Secretary typically one week in advance of each Board meeting. The Board met ten times during 2014.
The Non-Executive Directors attend the Board meetings, and form the Audit, Remuneration and Nomination Committees. They are responsible for scrutinising the performance of management and determining appropriate levels of remuneration of Executive Directors, and have a key role in appointing and, where required, removing Executive Directors.
There exists a clear division of responsibilities between the Chairman and the Chief Executive. The Chairman's primary role includes ensuring that the Board functions properly, that it meets its obligations and responsibilities, and that its organisation and mechanisms are in place and are working effectively. The Chief Executive's primary role is to provide overall leadership and vision in developing, with the Board, the strategic direction of the Company. Additionally, the Chief Executive is responsible for the management of the overall business to ensure that strategic and business plans are effectively implemented, the results are monitored and reported to the Board, and financial and operational objectives are attained.
The Board delegates management of the business to the Executive Committee, headed by the Chief Executive. The Executive Committee meets weekly and is responsible for implementing Group strategy, monitoring business performance, preparing the operating and capital expenditure budgets for recommendation to the Board, and ensuring efficient management of the Group.
The committee has formally identified Ted Wiggans as Director responsible for health and safety and Alex Bevis as Director responsible for risk assessment.
Ten Board meetings were held in 2014.
| Name | Meetings attended |
|---|---|
| Phil Lawler | 10 (10) |
| Robin Williams | 10 (10) |
| David Cheesman | 9 (10) |
| Ian Dinwoodie | 9 (10) |
| Alex Bevis | 10 (10) |
| Richard Barham | 9 (10) |
| Ted Wiggans | 10 (10) |
| Edmund Creutzmann | 8 (8) |
| Ramon Borrell | 2 (2) |
Figures in brackets denote the maximum number of meetings that could have been attended.
Summary of committee membership:
| Name | Audit Committee |
Remuneration Committee |
Nomination Committee |
|---|---|---|---|
| Phil Lawler | Yes | Yes | Chairman |
| Robin Williams | Chairman | Yes | Yes |
| David Cheesman | Yes | Chairman | Yes |
| Ian Dinwoodie | No | No | Yes |
Summary of committee meeting attendance in 2014:
| Name | Audit Committee |
Remuneration Committee |
Nomination Committee |
|---|---|---|---|
| Number of meetings held | 4 | 8 | 4 |
| Phil Lawler | 4 (4) | 8 (8) | 4 (4) |
| Robin Williams | 4 (4) | 8 (8) | 4 (4) |
| David Cheesman | 4 (4) | 7 (8) | 3 (4) |
| Ian Dinwoodie | N/A | N/A | 4 (4) |
Figures in brackets denote the maximum number of meetings that could have been attended.
Following the changes made to the Company's Articles of Association to incorporate the provisions of section 175 of the Companies Act 2006 which gave Boards the statutory power to authorise conflicts of interest, any potential conflict of interest is approved by the Board in advance of any action or appointment that could result in a conflict of interest arising. Each member of the Board is familiar with the procedure to follow in relation to conflicts of interest and the process is operated efficiently.
The Board's policy for individual Executive Director performance reviews is for a formal and rigorous appraisal process based on performance by the individual Director against specific targets. Individual Director performance is reviewed at least annually. The Senior Independent Director, in consultation with the other Non-Executive Directors and taking into account the views of the other Directors, appraises the performance of the Chairman. The Executive Directors, in consultation with the Chairman, appraise the performance of the Non-Executive Directors.
When new Directors are appointed, they receive a complete and specifically bespoke induction and training, aimed at introducing and familiarising them to the management team, the Group's activities and processes, and to give them the knowledge required to effectively execute their role.
The Board reviewed both its own performance and the performance of the Board committees once during the year through a questionnaire issued to all members of the Board. The results were reviewed by the Board as a whole and it was concluded that individual Board members are satisfied that the Board works well and operates effectively in an environment where there is constructive challenge from the Non-Executive Directors. They are also satisfied with the contribution made by their colleagues and that Board committees operate properly and effectively. It is the Board's intention to review its own performance, and that of its committees, at least once a year.
The Group has three main locations. The head office functions, R&D, Western sales, marketing function and business support functions are based in Cambridge, UK. The Group also has two manufacturing facilities: one in Huntingdon, UK and the other in Järfälla, Sweden. The Group also has representatives in other global locations including India, Hong Kong and the USA.
Refer to page 10 for the Xaar business model.
The Directors seek to build on a mutual understanding of objectives between the Group and its institutional shareholders by meeting at least twice per year, following interim and annual results, to provide an update on trading and obtain feedback. Additionally, the Group has hosted institutional investors at its Huntingdon facility during the year.
The Group's financial public relations advisors give all investors and potential investors, who have met with the Group's investor relations team, the opportunity to provide feedback on the meetings. The feedback is coordinated by the financial PR advisors into a single document which is circulated to all members of the Board. Additionally, the Chief Executive and Finance Director provide feedback to the Board at the meeting following shareholder meetings to ensure that the Board, and in particular the Non-Executive Directors, possess an understanding of the views of the Company's major shareholders. Both the Chairman and the Senior Independent Director are available to meet with shareholders as required.
Shareholders can access up-to-date Company information from the Investor Relations section of the Xaar website at www.xaar.com.
The Board uses the AGM to communicate with investors and to encourage their participation.
The Group's policies relating to risk management and internal control can be found in the 'Risk management' section of the Strategic Report on pages 18 and 19.
The Company conducts its business with the highest standards of integrity and honesty at all times and expects its employees to maintain the same standards in everything they do. Employees are therefore required to report any wrongdoing by Xaar or its members of staff that falls short of these principles. The whistle-blowing, and anti-bribery and corruption policies are available and communicated to all employees via the Company intranet, and all employees confirm in writing that they have read and comply with the whistle-blowing and anti-bribery and corruption policies. All reported incidences of actual or suspected bribery or corruption will be promptly and thoroughly investigated and dealt with appropriately. The purpose of the anti-bribery and corruption policy is to protect Xaar and its employees from breaches of anti-bribery and corruption laws. Xaar does not tolerate any employee or third party being involved in any level of bribery or corruption. Xaar is committed to complying with applicable anti-bribery and corruption laws in all countries in which it conducts business.
Cost reduction programme
Process and system audits
restructuring costs.
The Audit Committee oversaw the cost reduction programme which was initiated and completed in Q4 2014, including reviewing the
KPMG were engaged to perform process
The Audit Committee considered the impact of the changing UK accounting framework on the UK subsidiaries and the plan to adopt FRS 101 effective 1 January 2015.
The Audit Committee considered the tax related areas and projects that impact the Group, including capital allowances, transfer pricing, patent box and R&D expenditure credit. Updates and progress in these areas were discussed by the Audit Committee. The requirements of each area were reviewed, planned and actions agreed and taken.
Significant issues that have been considered by the Audit Committee include revenue recognition, provisions, inventory valuation, in particular since the step down in demand experienced in H2 2014, and capitalisation of development costs following the substantial progress achieved on Thin Film technology development, and therefore the requirements of IAS 38. These are also areas of focus for the external auditor, who report on these matters to the Audit Committee.
Robin Williams Chairman of the Audit Committee
The Audit Committee is appointed by the Board from the Non-Executive Directors of the Company. The Chairman of the committee, Robin Williams, is deemed by the Board to have recent and relevant financial experience as he is a qualified Chartered Accountant, and has ten years' experience of advising public companies followed by a further ten years as CEO or Executive Director at the centre of substantial public companies either overseeing or working closely with CFOs and Financial Controllers.
The Audit Committee's terms of reference include all matters indicated by Disclosure and Transparency Rule 7.1 and the UK Corporate Governance Code. The written terms of reference of the committee are available on request from the Company Secretary.
Please see the tables on page 33 for details of the Audit Committee members in the year and the number of Audit Committee meetings attended. The committee meetings are also attended, by invitation, by the Group CEO, the Finance Director and other senior financial management as appropriate, as well as by the external auditor for specific parts of the meeting.
The Audit Committee's primary responsibilities are:
The Audit Committee is not responsible for the identification of key risks and review the adequacy of arrangements to mitigate those risks, which remains the responsibility of the main Board. The Audit Committee is required to report its findings to the Board at least annually, identifying any matters on which it considers that action or improvement is needed, to make recommendations on the steps to be taken, and to ensure that the required actions are taken.
The Audit Committee has a set agenda for each of its regular meetings, which is then augmented by specific matters concerning the Company and in assessing the appropriateness of the financial statements. Key areas of focus during the year included:
The results of completed royalty audits in the year were discussed by the Audit Committee. The actions relating to the outcomes of completed audits and the on-going royalty audits were agreed.
As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its terms of reference. The Audit Committee terms of reference were last updated in 2013. The Chairman of the Audit Committee will be available at the AGM to answer any questions about the work of the committee. The Audit Committee has performed actions to discharge its responsibilities during 2014, and its effectiveness was reviewed as part of the overall annual Board effectiveness review. The committee has carried out the activities described as follows:
• Reviewed fraud detection and the systems and controls for the prevention of bribery.
• Reviewed audit work performed on significant risk areas, including those areas identified and discussed by the external auditor in their report, and ensured the independence and objectivity of the external auditor and was introduced to the new Audit Engagement Partner.
Deloitte LLP have been the Company's auditor since 2009 and there has been no tender held for audit services during that time. The committee considers that the auditor's knowledge of the Group's business and systems gained through experience has contributed to the effectiveness of the audit process. The committee intends the Company to continue to comply fully with the FRC Audit Committees Guidance regarding the frequency of audit tender. Under the standard rotation process, a new audit engagement partner was appointed for 2014.
The Audit Committee has noted that there are no contractual obligations to restrict the choice of external auditor and has considered the likelihood of a withdrawal of the auditor from the market. The committee meets with the Company's auditor at least twice a year. The Chief Executive and Finance Director, and other relevant managers as required, attend by invitation, except for a period of each meeting where the committee members may meet with the auditor without any member of the Group management present.
The committee is required to assess the qualifications, expertise, resources, and independence of the external auditor, and the objectivity and effectiveness of the audit process. The committee reviews the type of work, effectiveness of, and level of fees charged by the auditor on an annual basis and recommends to the Board the appointment, reappointment, term, remuneration, and terms of engagement of the external auditor. Auditor objectivity and independence is safeguarded by the committee monitoring fees paid to the auditor in respect of both audit and nonaudit work, and approving all additional work performed by the external auditor. Non-audit services include remuneration services, tax and audit advisory.
Note 7 to the consolidated financial statements includes disclosures of the auditor's remuneration for the year, including an analysis of audit services, audit related services, and other non-audit services under those headings prescribed by law. The committee monitors the level of non-audit fees in relation to the audit fee for its bearing on external auditor independence.
The independence and objectivity of the auditor is regularly considered by the committee taking into consideration relevant UK professional and regulatory requirements. The committee receives an annual statement from the auditor detailing their independence policies and safeguards and confirming their independence, taking into account relevant ethical guidance regarding the provision of non-audit services by the external auditor. Under the standard rotation process, a new audit engagement partner was appointed for 2014.
The committee considers the effectiveness of the external audit and the Group's relationship with the external auditor, Deloitte LLP, on an on-going basis, and have conducted a review of the effectiveness of the annual audit. This review consisted of considering a number of key points together with the senior financial management of the Group, without the external auditor present, and then discussing the evaluation with the auditor. The committee was able to conclude, on the basis of this exercise and its experience over the year, that the external audit process remained effective. A further review will be carried out following the completion of audit procedures on all Group companies and reported on in next year's Annual Report.
Phil Lawler Chairman of the Nomination Committee
The Nomination Committee is appointed by the Board from the Non-Executive Directors of the Company and the Chief Executive. The Chairman of the committee is Phil Lawler. The committee meets as required. The written terms of reference of the committee are available on request from the Company Secretary.
The Nomination Committee's primary responsibilities are:
The process adopted by the committee to identify a candidate for a specific vacancy is, in the first instance, to determine whether any individuals known to the committee would be suitable for the role. If no candidates can be identified through this process then an external search consultancy will be approached.
Shortlisted candidates are interviewed by members of the committee and other Executive and Non-Executive Directors as the committee deems appropriate. Once a suitable candidate has been identified, the Chairman of the committee will recommend to the Board that the Company make a formal offer of employment to the candidate.
During the year, the Nominations Committee has been engaged in planning the succession of the Chief Executive following the announced retirement of Ian Dinwoodie, resulting in the appointment of the new Chief Executive in January 2015, Doug Edwards.
All Directors are required to submit themselves for reappointment every year and Directors appointed during the year are required to seek reappointment at the first AGM following their appointment.
David Cheesman Chairman of the Remuneration Committee
The Remuneration Committee is appointed by the Board from the Non-Executive Directors of the Company. The Chairman of the committee is David Cheesman. The Chief Executive and Finance Director attend meetings by invitation, except when their own remuneration package is being discussed. The written terms of reference of the committee are available on request from the Company Secretary.
The Remuneration Committee's primary responsibilities are:
The committee has access to professional advice, both inside and outside the Company, in the furtherance of its duties. The committee has received guidance on best practice for Directors' remuneration from Deloitte LLP and PwC LLP during the year, and has reviewed and approved executive remuneration, equity budgets, share incentive schemes and grants, and bonus schemes.
In 2014 the Remuneration Committee undertook a review of the operation of the current performance targets for the Long Term Incentive Plan (LTIP). The main principle applied by the Committee in its review was that the LTIP should be aligned with Company strategy, and that the incentive targets should be challenging but achievable.
As a result of the review the Committee has proposed changes to the LTIP which are intended to apply to awards from 2015 onwards. The changes are summarised in the Directors' Remuneration report. The proposed changes will not affect the outstanding LTIP grants which are due to vest in 2015, 2016 and 2017.
The Directors' Remuneration report sets out in more detail the committee's policies and practices on executive remuneration.
This report has been prepared in accordance with the regulations on Directors' remuneration disclosure. The report also meets the relevant requirements of the Listing Rules of the Financial Conduct Authority and describes how the Board has applied the Principles relating to Directors' remuneration in the UK Corporate Governance Code.
This report is presented in two sections: the annual report on remuneration and the Directors' remuneration policy. The annual report on remuneration provides details of the amounts earned in respect of the year ended 31 December 2014 and how the Directors' remuneration policy, which sets out the forward-looking remuneration policy, will be operated for the year commencing 1 January 2015. The annual report on remuneration is subject to an advisory vote at the 2015 AGM. The Directors' remuneration policy was approved in May 2014 and in the normal course of events will not be subject to a further shareholder approval until May 2017.
I am pleased to present the 2014 Remuneration report. This covers our policy on pay, benefits and incentives for the Directors and the amounts earned for the year ended 31 December 2014.
The Committee's goal is to attract and retain management of the highest capability and to achieve this we offer competitive packages comparable to those offered by companies similar to Xaar in terms of size and complexity. We aim to provide incentives that reward near and longer term performance, are considerate to the current climate for salary restraint and take into account the views of our shareholders.
For the 2013 Annual Report, in line with the new reporting regulations, the committee approved a number of changes to the Group's remuneration policies. The changes included the introduction of malus provisions in our Long Term Incentive Plan (LTIP), the introduction of minimum shareholding requirement for all executives of 1 X salary and a three-year plan to incrementally increase the salary scales for senior executives to bring them into line with equivalent businesses.
The Committee are aware that 2014 has been a very challenging year for Xaar with the step-down in demand in the Chinese ceramics market. The result of this, as highlighted elsewhere in this Annual Report, has been significant reduction in revenue and profit compared to the exceptional performance of 2013. This has meant that for 2014 no awards were earned in terms of annual bonuses or opportunities to invest in bonus matching LTIP shares. No salary increases have been paid to any of the Directors for 2015. Annualised compounded EPS growth above RPI growth over the three year performance period ending 31 December 2014 was 32% and as a result 100% of the LTIPs awarded on 2 April 2012 and 1 May 2012, will vest on 2 April 2015 and 1 May 2015 respectively.
The previous plan to incrementally increase salary scales over a three-year period has been deferred and will be reviewed by the committee for 2016 based on 2015 performance.
The Remuneration Committee has undertaken a review of the operation of the current performance targets for the LTIP, in light of concerns that these are not achieving the policy objective; of providing retentive arrangements for Executive Directors which drive and reward the achievement of longer term objectives, and are closely aligned to shareholder interests.
The main principle applied by the Committee in its review was that the LTIP should be aligned with Company strategy, and that the incentive targets should be challenging but achievable.
As noted earlier, Xaar has suffered a step-down in sales and profitability in 2014, which has resulted in a material change in outlook for the Company. Based on current outlook the probability of LTIPs vesting in 2016 and 2017 is very low. The Committee, therefore, felt that in order to motivate and retain the Executive Directors to deliver the Company's strategy over the next period, changes would be required to the way the LTIP performance measures are structured.
The proposed changes to the LTIP which are intended to apply to awards from 2015 onwards are summarised below. The proposed changes will not affect the outstanding LTIP grants which are due to vest in 2015, 2016 and 2017.
| Feature | Proposal |
|---|---|
| LTIP – Maximum Award Level | • Unchanged at 100% of base salary p.a. |
| LTIP – Performance Measures | • Retain the existing EPS measure • Introduce a relative TSR measure |
| LTIP – Weighting of Performance Measures | • Two thirds cumulative adjusted EPS • One third TSR relative to FTSE TechMARK All Share Index |
| LTIP – EPS Performance Period | • Unchanged three-year performance period • Absolute cumulative EPS performance over the performance period rather than average annual growth rates derived from performance in year 3 versus the base year |
| LTIP – EPS Targets for 2015 Award | • Maximum 74 pence • Threshold 38 pence |
| LTIP – EPS Vesting | • Maximum – 100% • Threshold – reduce current level of vesting from 35% to 25% • Straight line vesting between threshold and maximum |
| LTIP – EPS Calculation | • Adjust to exclude the capitalisation or amortisation of development costs under IAS 38 |
| LTIP - Relative TSR Vesting | • Upper quartile – 100% • Median – 25% • Below Median – 0% • Straight line vesting between median and upper quartile |
Financial Statements
The Company's historic EPS has been relatively volatile year on year, which produces potentially unintended results when using an annual average growth measure. Vesting can be dependent on timing and volatility rather than consistent performance. By measuring EPS as a cumulative amount delivered over the threeyear performance period, the Committee is able to reward consistent sustainable performance by measuring the absolute EPS delivered over this period, rather than rewarding the change of EPS in year 3 versus the base year, which may not reflect consistent performance but may reward volatility in earnings.
This issue is evidenced when the Company's historic LTIP vesting is analysed with only one year in the past ten years, resulting in vesting at a level other than 0% or 100%. The introduction of a cumulative target for EPS will smooth the vesting outcomes, and ensure that only strong cumulative performance over the period is rewarded.
The calculation of EPS will exclude amounts accounted for under International Accounting Standard 38, specifically capitalisation or amortisation of development expenditure. It is considered that excluding these costs results in a fairer measure of the Company's profitability.
The LTIP performance metrics proposed are a blend of EPS and relative TSR (weighted two thirds and one third respectively). The reintroduction of the relative TSR measure ensures that the Company's performance is in part measured by performance relative to the market.
The Committee has also considered the latest guidance in relation to the introduction of malus and clawback into incentive arrangements, minimum shareholding requirements, and holding periods in light of the new UK Corporate Governance Code. Malus provisions are already in place, and clawback will be introduced for the 2015 grants onwards. The Committee is happy that the minimum shareholding requirements are appropriate for a company of the size of Xaar. In addition, the Committee had decided that additional holding periods post vesting would not be appropriate given the current issues set out above with the LTIP; but will review this at the point of determining each grant.
The Remuneration Committee has consulted with the Company's major shareholders regarding these changes.
Chairman of the Remuneration Committee
19 March 2015
This part of the report sets out the actual payments made by the Company to its Directors with respect to the year ended 31 December 2014.
The Remuneration Committee's policy is to attract and retain individuals of the highest calibre by offering remuneration competitive with comparable publicly listed companies, and to drive Company performance by providing arrangements which fairly and responsibly reward individuals for their contribution to the success of the Group. Performance related bonuses and equity-based remuneration represent a substantial proportion of Executive Directors' potential remuneration.
The aggregate remuneration provided to Directors who have served as Directors in the year ended 31 December 2014 is set out below, along with the aggregate remuneration provided to such Directors for the financial year ended 31 December 2013.
| Salary/fees(a) | Benefits(b) | Bonus(c) | Long term incentives(d) |
Pension(e) | Total remuneration |
|
|---|---|---|---|---|---|---|
| Director | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Year ended 31 December 2014 | ||||||
| Executive | ||||||
| Ian Dinwoodie | 260 | 34 | – | 239 | 29 | 562 |
| Alex Bevis | 169 | 20 | – | 296 | 17 | 502 |
| Ted Wiggans | 183 | 21 | – | 181 | 18 | 403 |
| Richard Barham | 183 | 21 | – | 186 | 18 | 408 |
| Edmund Creutzmann1 | 131 | 15 | – | – | 13 | 159 |
| Ramon Borrell2 | 37 | 5 | – | n/a2 | 4 | 46 |
| Non-Executive | ||||||
| Phil Lawler (Chairman) | 90 | – | – | – | – | 90 |
| David Cheesman | 39 | – | – | – | – | 39 |
| Robin Williams | 42 | – | – | – | – | 42 |
| Year ended 31 December 2013 | ||||||
| Executive | ||||||
| Ian Dinwoodie | 232 | 38 | 255 | 829 | 25 | 1,379 |
| Alex Bevis | 151 | 20 | 151 | 408 | 15 | 745 |
| Ted Wiggans | 162 | 20 | 178 | 408 | 16 | 784 |
| Richard Barham | 166 | 21 | 166 | 1 | 17 | 371 |
| Ramon Borrell2 | 145 | 20 | 123 | 942 | 15 | 1,245 |
| Non-Executive | ||||||
| Phil Lawler (Chairman) | 80 | – | – | – | – | 80 |
| David Cheesman | 35 | – | – | – | – | 35 |
| Robin Williams | 38 | – | – | – | – | 38 |
1 Edmund Creutzmann joined the Board on 1 April 2014.
2 Ramon Borrell stepped down from the Board on 1 April 2014.
The figures in the single figure table on the left are derived from the following:
| (a) Salary/fees | The amount of base salary/fees received in the year. |
|---|---|
| (b) Benefits | This is the taxable value of benefits and the flexible benefits allowance received in the year. |
| (c) Bonus | The value of the bonus earned in respect of the year, including any part of the bonus invested into bonus investment shares for a period of three years. Performance against the targets which applied for the financial year is provided on page 45. |
| (d) Long term incentives | The value of performance related incentives vesting in respect of the financial year (including any Matching Share Awards granted under the LTIP) and the value of SAYE options and Matching Shares under the HMRC approved Share Incentive Plan (SIP) granted based on the fair value of the options/shares at grant. |
| The performance condition for the Performance Share Awards and Matching Share Awards granted under the LTIP on 2 April 2012 was EPS growth against RPI over the three-year performance period ending 31 December 2014. |
|
| For the year ended 31 December 2014, the Company's annualised, compounded EPS growth above RPI growth over the three year performance period commencing 1 January 2012 and ending 31 December 2014 was 32% which exceeded the 10% threshold required for full vesting, and therefore 100% of the Performance Share Awards and Matching Share Awards in respect of the year ending 31 December 2014 will vest. The estimated face value of the vested shares is based on a share price of 277p being the average market value of Xaar's shares for the last quarter of year ended 31 December 2014 (932p for comparative calculation in 2013 analysis). |
|
| For the year ended 31 December 2013 comparative figures, 100% of the Performance Share plan Awards and Matching Share Awards in respect of the performance period commencing 1 January 2011 and ending 31 December 2013 vested. |
|
| Also included in the long term incentives figure are: | |
| SAYE options granted in the year, valued at the accounting value on date of grant. Matching Share Awards granted under the SIP scheme during the year, again valued at the accounting value on date of grant. |
|
| (e) Pension | The value of the employer contribution to the defined contribution pension plan (or the value of a salary supplement paid in lieu of a contribution to this pension plan). |
Base salaries for Executive Directors are reviewed by the Remuneration Committee prior to the beginning of each year and when an individual changes position or responsibility. In deciding appropriate levels, the Remuneration Committee considers the role, responsibility, and experience of the individual, corporate and individual performance, market conditions, and the range of salary increases awarded across the Group.
Base salary increases for Executive Directors were in the range 10%-13% from 1 January 2014 for Ian Dinwoodie, Alex Bevis, Ted Wiggans, and Richard Barham.
The remuneration policy for the Non-Executive Directors is reviewed periodically. The fees for the Non-Executive Directors were increased during 2014, in the range 11%-13% from 1 January 2014.
For the reasons stated in the Annual Statement of the Chairman there will be no base salary rise for the Directors for 2015.
Benefits principally comprise a company car or car allowance, private medical insurance and basic levels of other insurances (such as critical illness cover). In addition, Executive Directors are provided with an allowance of 5% of base salary which they can apply to a range of benefits such as life insurance, critical illness insurance etc.
The Company operates a self-administered, defined contribution, HMRC approved pension scheme. All current Executive Directors participate in this scheme. In appropriate circumstances, Executive Directors may take a salary supplement instead of contributions into a pension plan. This salary supplement does not form part of salary for the purposes of calculating any other entitlement under the policy. Non-Executive Directors do not receive pension contributions.
For the year ended 31 December 2014 there was no annual bonus, as this was based on performance against a Group profit target, which was not achieved for 2014.
Group profit is defined as Group adjusted profit before tax, which for 2014 was £24.6 million.
The Board considers the Group profit target to be a matter that is commercially sensitive and should therefore remain confidential to the Company. The Board believes that disclosure of this commercially sensitive information could negatively impact the Company's competitive position by providing our competitors with insight into our business plans, expectations and, in the case of individual performance, our strategic actions resulting in significant risk to future profitability and shareholder value. However, the Remuneration Committee will review this annually, and may disclose some details on a retrospective basis where it considers it appropriate to do so.
The LTIP was approved by shareholders in April 2007 and comprises two elements: Matching Share Awards and Performance Share Awards.
Performance Share Awards and Matching Share Awards granted to Executive Directors on 2 April 2012 and 1 May 2012 were based on growth in EPS against RPI as shown below:
| Annualised, compounded growth in EPS: |
% of LTIP awards vesting |
|---|---|
| RPI + 4% p.a. | 35% vests |
| RPI + 10% p.a. | 100% vests |
Straight-line vesting applies for performance between these levels.
Annualised compounded EPS growth above RPI growth over the three year performance period commencing 1 January 2012 and ending 31 December 2014 32% % of 2012 LTIP award due to vest in April and May 2015 100%
The table below outlines awards made under the LTIP to Executive Directors in 2014:
| Award basis | Number of shares |
Face value of the award £'000 |
Vesting at threshold |
Performance period |
Vesting date |
|
|---|---|---|---|---|---|---|
| Ian Dinwoodie | 28,921 | 261 | 2 April 2017 | |||
| Alex Bevis | 18,798 | 169 | 2 April 2017 | |||
| Ted Wiggans | 20,355 | 184 | 35% of award | 1 January 2014 to | 2 April 2017 | |
| Richard Barham | 20,355 | 184 | 31 December 2016 | 2 April 2017 | ||
| Edmund Creutzmann | 19,466 | 175 | 2 April 2017 | |||
| Alex Bevis | Bonus Matching | 8,698 | 66 | 35% of award | 1 January 2014 to | 12 May 2017 12 May 2017 |
| Ted Wiggans | Performance Share plan Awards: 100% of base salary Share plan Award |
8,800 | 67 | 31 December 2016 |
The share price used to calculate the face value of the award was £9.02 for the 2 April 2014 award and £7.65 for the 12 May 2014 award, being the mid-market price on the day prior to award date.
The performance conditions for these LTIP awards are the same as those applying to the 2013 LTIP awards and are described in full on page 104.
With effect from 14 May 2014, the date of the AGM, the Remuneration Committee have introduced a shareholding guideline of 1 x salary. Executive Directors will have until the later of the fifth anniversary of appointment or the fifth anniversary of introduction of the policy to build this level of shareholding. The extent to which each Executive Director has met the shareholding guideline is shown in the table below:
| Unvested | |||||||
|---|---|---|---|---|---|---|---|
| Shareholding guidelines |
Current shareholdings (% of salary) |
Type | Owned outright |
Subject to performance conditions |
Not subject to performance conditions |
Total as at 31 December 2014 |
|
| Executive Directors | |||||||
| Ian Dinwoodie | 100% of salary | 77,449 (115%) | Shares | 77,449 | – | – | 77,449 |
| LTIP options | – | 169,759 | – | 169,759 | |||
| SAYE options | – | – | – | – | |||
| Matching SIP | – | – | – | – | |||
| Alex Bevis | 100% of salary | 53,087 (121%) | Shares | 53,087 | – | – | 53,087 |
| LTIP options | – | 198,499 | – | 198,499 | |||
| SAYE options | – | – | 9,570 | 9,570 | |||
| Matching SIP | – | – | 490 | 490 | |||
| Ted Wiggans | 100% of salary | 9,190 (19%) | Shares | 9,190 | – | – | 9,190 |
| LTIP options | – | 179,185 | – | 179,185 | |||
| SAYE options | – | – | 9,570 | 9,570 | |||
| Matching SIP | – | – | 490 | 490 | |||
| Richard Barham | 100% of salary | 6,490 (14%) | Shares | 6,490 | – | – | 6,490 |
| LTIP options | – | 126,081 | – | 126,081 | |||
| SAYE options | – | – | 2,662 | 2,662 | |||
| Matching SIP | – | – | 490 | 490 | |||
| Edmund Creutzmann | 100% of salary | – (0%) | Shares | – | – | – | – |
| LTIP options | – | 19,466 | – | 19,466 | |||
| SAYE options | – | – | 5,325 | 5,325 | |||
| Matching SIP | – | – | – | – | |||
| Non-Executive Directors | |||||||
| Phil Lawler (Chairman) | – | – | Shares | 99,930 | – | – | 99,930 |
| David Cheesman | – | – | Shares | – | – | – | – |
| Robin Williams | – | – | Shares | 1,500 | – | – | 1,500 |
There have been no changes in the Directors' holdings in the share capital of the Company, as set out in the table above, between 31 December 2014 and 19 March 2015.
The outstanding awards granted to each Executive Director of the Company under the Xaar plc 2007 LTIP are as follows. All options under the LTIP are nil-cost options such that no exercise price is payable. The performance conditions for these LTIP awards are the same as those applying to the
| Name | As at 1 January 2014 |
Granted during the year |
Exercised during the year |
As at 31 December 2014 |
Grant date | Share price at date of grant |
Earliest date of exercise |
Expiry date |
|---|---|---|---|---|---|---|---|---|
| Ian Dinwoodie | 88,889 | – | (88,889) | – | 11 April 2011 | £2.29 | 11 April 2014 | 11 April 2021 |
| 86,250 | – | – | 86,250 | 2 April 2012 | £2.36 | 2 April 2015 | 2 April 2022 | |
| 54,588 | – | – | 54,588 | 2 April 2013 | £4.20 | 2 April 2016 | 2 April 2023 | |
| – | 28,921 | – | 28,921 | 2 April 2014 | £8.96 | 2 April 2017 | 2 April 2024 | |
| 229,727 | 28,921 | (88,889) | 169,759 | |||||
| Alex Bevis | 43,556 | – | (30,000) | 13,556 | 11 April 2011 | £2.29 | 11 April 2014 | 11 April 2021 |
| 60,417 | – | – | 60,417 | 2 April 2012 | £2.36 | 2 April 2015 | 2 April 2022 | |
| 45,860 | – | – | 45,860* | 1 May 2012 | £2.28 | 1 May 2015 | 1 May 2022 | |
| 35,529 | – | – | 35,529 | 2 April 2013 | £4.20 | 2 April 2016 | 2 April 2023 | |
| 15,641 | – | – | 15,641* | 15 May 2013 | £6.14 | 15 May 2016 | 15 May 2023 | |
| – | 18,798 | – | 18,798 | 2 April 2014 | £8.96 | 2 April 2017 | 2 April 2024 | |
| – | 8,698 | – | 8,698* | 12 May 2014 | £7.52 | 12 May 2017 | 12 May 2024 | |
| 201,003 | 27,496 | (30,000) | 198,499 | |||||
| Ted Wiggans | 43,556 | – | – | 43,556 | 11 April 2011 | £2.29 | 11 April 2014 | 11 April 2021 |
| 64,583 | – | – | 64,583 | 2 April 2012 | £2.36 | 2 April 2015 | 2 April 2022 | |
| 38,118 | – | – | 38,118 | 2 April 2013 | £4.20 | 2 April 2016 | 2 April 2023 | |
| 3,773 | – | – | 3,773* | 15 May 2013 | £6.14 | 15 May 2016 | 15 May 2023 | |
| – | 20,355 | – | 20,355 | 2 April 2014 | £8.96 | 2 April 2017 | 2 April 2024 | |
| – | 8,800 | – | 8,800* | 12 May 2014 | £7.52 | 12 May 2017 | 12 May 2024 | |
| 150,030 | 29,155 | – | 179,185 | |||||
| Richard Barham | 66,667 | – | – | 66,667 | 2 April 2012 | £2.36 | 2 April 2015 | 2 April 2022 |
| 39,059 | – | – | 39,059 | 2 April 2013 | £4.20 | 2 April 2016 | 2 April 2023 | |
| – | 20,355 | – | 20,355 | 2 April 2014 | £8.96 | 2 April 2017 | 2 April 2024 | |
| 105,726 | 20,355 | – | 126,081 | |||||
| Edmund Creutzmann | – | 19,466 | – | 19,466 | 2 April 2014 | £8.96 | 2 April 2017 | 2 April 2024 |
| – | 19,466 | – | 19,466 |
* LTIPs granted as part of the bonus matching scheme.
Outstanding Directors' share awards
2013 LTIP awards and are described in full in note 33.
LTIP
The awards held by Executive Directors of the Company under the LTIP are shown below:
The Executive Directors may participate in the Company's all employee share plans, the Xaar plc 2007 SAYE Scheme (SAYE Scheme) and the Xaar SIP, on the same basis as other employees.
The SAYE Scheme provides an opportunity to save a set monthly amount (up to £500) over three years towards the exercise of a discounted share option, which is granted at the start of the three years.
The SIP provides an opportunity for employees to buy shares from their pre-tax remuneration up to the limit permitted by the relevant tax legislation (currently £1,800 per year) and are awarded additional shares for free on a matching basis; the Company currently operates the plan on the basis of a 1:1 match but may award Matching Shares up to the maximum ratio permitted by the relevant tax legislation (currently a 2:1 ratio).
Options and awards under these plans are not subject to performance conditions.
The outstanding awards granted to each Executive Director under the SAYE Scheme are as follows:
| Name | As at 1 January 2014 |
Granted during the year |
Exercised during the year |
As at 31 December 2014 |
Grant date | Exercise price |
Earliest date of exercise |
Expiry date |
|---|---|---|---|---|---|---|---|---|
| Alex Bevis | 4,245 | – | – | 4,245 | 1 November 2011 | £2.12 | 1 November 2014 | 1 May 2015 |
| – | 5,325 | – | 5,325 | 1 November 2014 | £3.38 | 1 November 2017 | 1 May 2018 | |
| Ted Wiggans | 4,245 | – | – | 4,245 | 1 November 2011 | £2.12 | 1 November 2014 | 1 May 2015 |
| – | 5,325 | – | 5,325 | 1 November 2014 | £3.38 | 1 November 2017 | 1 May 2018 | |
| Richard Barham | – | 2,662 | – | 2,662 | 1 November 2014 | £3.38 | 1 November 2017 | 1 May 2018 |
| Edmund Creutzmann | – | 5,325 | – | 5,325 | 1 November 2014 | £3.38 | 1 November 2017 | 1 May 2018 |
The outstanding awards granted to each Executive Director under the SIP are as follows:
| Name | Total number of matching shares as at 1 January 2014 |
Total number of partnership shares awarded in the year |
Total number of matching shares as at 31 December 2014 |
|---|---|---|---|
| Alex Bevis | 317 | 173 | 490 |
| Ted Wiggans | 317 | 173 | 490 |
| Richard Barham | 317 | 173 | 490 |
Phil Eaves resigned from the Board in March 2012 and ceased employment with the Company in June 2012. In respect of Mr Eaves' unvested long term incentive awards under the LTIP granted on 11 April 2011, the Remuneration Committee exercised discretion and determined that he would be treated as a 'good leaver' under the terms of the plan. The number of shares which vested on 11 April 2014 was determined by applying the original performance conditions and reducing the number granted on 11 April 2011 to reflect his length of service during the performance period.
No payments for loss of office have been made to Directors during the year ended 31 December 2014.
The graph on page 49 shows the Company's performance measured by total shareholder return (TSR), compared with the performance of the FTSE TechMARK All Share Index, which the Remuneration Committee considers to be the most appropriate index for comparison because they illustrate the Company's TSR performance against a broad equity market index of similar UK companies.
This graph shows the value, by 31 December 2014, of £100 invested in Xaar plc on 31 December 2008 compared with the value of £100 invested in the FTSE TechMARK All Share Index.
The table below shows details of the total remuneration, annual bonus (as a percentage of salary) and LTIP vesting percentage for Ian Dinwoodie over the last six financial years.
| Total remuneration |
Annual bonus as a % of maximum opportunity |
LTIP as a % of maximum opportunity |
|
|---|---|---|---|
| Year ended 31 December 2014 | 562 | 0% | 100% |
| Year ended 31 December 2013 | 1,379 | 83% | 100% |
| Year ended 31 December 2012 | 649 | 53% | 100% |
| Year ended 31 December 2011 | 1,244 | 100% | 100% |
| Year ended 31 December 2010 | 504 | 80% | 32% |
| Year ended 31 December 2009 | 229 | 0% | 0% |
Governance
The table below sets out in relation to salary, taxable benefits and annual bonus the increase between the pay for the year ended 31 December 2013 and the pay for the year ended 31 December 2014 for Ian Dinwoodie compared with the average increase between the same periods for the wider workforce. For the purposes of the table below, the wider workforce has been defined as the UK employees of the Group. This comparator group was chosen because it is the most relevant sub-set of employees and can be used consistently.
| Element of remuneration | Ian Dinwoodie/ % change |
Wider workforce average/ % change |
|---|---|---|
| Salary | 12% | 3% |
| Benefits | (11%) | 3% |
| Annual bonus | (100%) | (100%) |
| Overall | (44%) | (14%) |
The table below sets out the Group's distributions to shareholders by way of dividends and total Group-wide expenditure on pay for all employees (including employer social security, pension contributions and share-based payments), as reported in the audited financial statements for the financial year ended 31 December 2014.
| 2014 £,000 |
2013 £'000 |
Change % |
|
|---|---|---|---|
| Dividends paid to shareholders | 6,377 | 4,059 | 57 |
| Group-wide expenditure on pay for all employees | 34,618 | 35,770 | (3) |
Information on how the Company intends to implement the policy for the financial year commencing 1 January 2015 is set out below.
The fundamental structure of the package remains unchanged and we are not changing the annual bonus opportunity, deferred bonus matching and long term incentive opportunity or defined contribution rate for pensions.
Our approach on base salary continues to be to provide a fixed remuneration component which reflects the experience and capabilities of the individual in the role, the demonstrated performance of the individual in the role, and which is competitive in the markets in which we operate.
Although the Remuneration Committee resolved to move base salaries progressively over a three-year period, this has been delayed for one year. Therefore there is no base salary increases for the Executive Directors with effect from 1 January 2015. The Remuneration Committee will reassess the intended increases in 2016 and 2017 and consider whether it remains appropriate at that time.
The plan to move the Non-Executive Directors' fees towards the lower end of the market competitive range over the next three years has also been delayed by one year, therefore there are no Non-Executive Directors fee increases for 2015.
Doug Edwards joined the Board as Chief Executive from 5 January 2015, and Jim Brault joined the Board as Chief Human Resources Officer from 2 March 2015. The base salary for the newly appointed Executive Directors is as follows:
| Doug Edwards | £300,000 per annum |
|---|---|
| Jim Brault | £169,000 per annum |
The Remuneration Committee has reviewed the performance metrics and targets for the annual bonus to ensure that they remain appropriately stretching in the current environment and continue to be aligned with the business strategy. No changes to the quantum, performance conditions or performance targets are proposed.
The Board considers the Group profit target for 2015 to be a matter that is commercially sensitive and should therefore remain confidential to the Company. It provides our competitors with insight into our business plans, expectations and, in the case of individual performance, our strategic actions. However, the Remuneration Committee may disclose on a retrospective basis how the Company's performance relates to any annual bonus payments made.
Changes to the performance conditions and performance targets are proposed for LTIP awards granted from 2015, as described on pages 40 and 41. The ability to grant awards under the current LTIP rules (which also include the provisions which govern the Matching Share Awards) expires in April 2017. The Remuneration Committee intends to review the structure of the package and operation of the incentive arrangements and will seek shareholder approval for any new plans prior to this date.
In the meantime, in line with best practice, the Remuneration Committee introduced a 1 x salary shareholding guideline for Executive Directors and a malus provision in relation to LTIP awards, in 2014. In 2015, the Remuneration Committee will introduce a clawback provision for future awards under the long term incentive plan, to allow the committee to recover cash or shares which have been paid or transferred, if an act or omission contributes to a material misstatement of the Group's financial statements or results in material loss or reputational damage for the Company, for a period up to two years following determination of the vesting outcome.
The Company has established a Remuneration Committee which is constituted in accordance with the recommendations of the UK Corporate Governance Code. The terms of reference of the Remuneration Committee can be obtained by contacting the Company Secretary.
The Remuneration Committee is chaired by David Cheesman and its other members during the year ended 31 December 2014 were Phil Lawler and Robin Williams. All members of the Remuneration Committee are considered independent within the meaning of the UK Corporate Governance Code.
The principal function of the Remuneration Committee is to determine, on behalf of the Board, the specific remuneration and other benefits of Executive Directors, including pension contributions, bonus arrangements, long term incentives and service contracts. The fees paid to the Non-Executive Directors are determined by the Chief Executive Officer and the Chairman. The fees paid to the Chairman are determined by the Chief Executive Officer and the Non-Executive Directors.
Additionally, the Remuneration Committee makes recommendations to the Board on the framework of Executive Director remuneration as well as principal Companywide compensation programmes.
The members of the Remuneration Committee have no personal financial interest, other than as shareholders, in the matters to be decided, no actual or potential conflicts of interest arising from other directorships and no day to day operational responsibility within the Company. Executive Directors are entitled to accept appointments outside the Group providing that the Chairman's permission is sought.
The Remuneration Committee is assisted in its work by Xaar's human resources department including, from 2 March 2015, the Chief Human Resources Officer. In 2014 the Committee was also assisted by Ian Dinwoodie, Retiring Chief Executive, and Alex Bevis, Finance Director. The Chief Executive Officer is consulted on the remuneration of those who report directly to him and also of other senior executives. No Executive Director or employee is present or takes part in discussions in respect of matters relating directly to their own remuneration.
During the year, the Remuneration Committee was assisted in its work by the following external consultants:
| Advisor | Details of appointment | Services provided by the advisor | Fees paid by the Company for advice to the Remuneration Committee and basis of charge |
Other services provided to the Company in the year ended 31 December 2014 |
|---|---|---|---|---|
| PricewaterhouseCoopers LLP (PwC) |
Appointed by the Board in 2013 |
Advice regarding changes to the LTIP for 2015 onwards |
n/a | Corporate tax advice |
| Deloitte LLP (Deloitte) | Appointed by the Remuneration Committee in 2013 following a competitive tender process |
General remuneration advice, including advice on the new reporting regulations in connection with the disclosure of Directors' remuneration |
£16,800 Charged on a time/ cost basis or fixed fee dependent on nature of project |
External auditor and certain other services (see page 86 of the Annual Report) |
The Remuneration Committee took into account the Remuneration Consultants Group's Code of Conduct when reviewing Deloitte's role as external auditor. As Deloitte are external auditor to the Company, Deloitte's advice to the Remuneration Committee is governed by certain guidelines and safeguards.
The Remuneration Committee is satisfied that the remuneration advice provided by both PwC and Deloitte is objective and independent.
Financial Statements
The Company remains committed to on-going shareholder dialogue and takes an active interest in voting outcomes. The following table sets out actual voting in respect of the resolution to approve the Directors' Remuneration report for the year ended 31 December 2013 and in respect of the resolution to approve the Directors' remuneration policy to take effect immediately after the AGM on 14 May 2014.
| Number of votes | For (including discretion) |
Against | Withheld |
|---|---|---|---|
| Directors' Remuneration report for the year ended 31 December 2013 |
56,993,056 (99.85%) |
85,639 (0.15%) |
44,774 |
| Directors' remuneration policy | 54,548,407 (98.03%) |
1,096,092 (1.97%) |
1,478,970 |
This part of the report sets out the Company's Directors' remuneration policy, which, following shareholder approval at the 2014 AGM, took binding effect from 14 May 2014.
The Directors' remuneration policy is not audited.
The table below describes each of the elements of the remuneration package for the Executive Directors:
| Alignment with strategy/purpose | Operation |
|---|---|
| Base salary Core element of fixed remuneration that provides the |
Normally reviewed annually, any increases generally apply from 1 January (but may be reviewed more frequently if required). |
| basis to recruit and retain talent necessary to deliver the business strategy. |
When determining base salary levels, consideration is given to the following: |
| • role, responsibility and experience of the individual • corporate and individual performance • market conditions including typical pay levels for comparable roles in companies of a similar size and complexity • the range of salary increases awarded across the Group. |
Provide a market-competitive benefits package to recruit and retain Directors of the calibre required for the business.
Participation in the Company's Share Incentive Plan (SIP) and Share Save Scheme (SAYE) encourages share ownership and alignment with the wider workforce.
Executive Directors receive base benefits including car allowance (or company car), private medical insurance, and basic levels of other insurances (such as critical illness cover).
All UK staff, including Executive Directors, are also provided with a benefit allowance which they can apply to a range of benefits, including pension contributions. In some circumstances, and subject to Remuneration Committee approval, the allowance may be paid in cash rather than utilised to purchase benefits.
The SIP and SAYE are HMRC approved share plans for all employees facilitating the acquisition of shares in the Company at a discount.
Other benefits may be provided based on individual circumstances, such as, but not limited to: housing or relocation allowances, travel allowance or other expatriate benefits.
Provide market competitive post-employment benefits to recruit and retain Directors of the calibre required for the business.
Executive Directors are eligible to participate in the defined contribution pension scheme (or such other pension plan as may be deemed appropriate). In appropriate circumstances, Executive Directors may take a salary supplement instead
of contributions into a pension plan.
Rewards performance against annual targets which support the strategic direction of the Company. The majority of staff participate in the same scheme. Targets are set annually and any pay-out is determined by the Remuneration Committee after the period-end, based on performance against those targets. The Remuneration Committee has discretion to vary the bonus pay-out should any formulaic output not produce a fair result for either the Executive Director or the Company, taking account of the Remuneration Committee's assessment of overall business performance.
The annual bonus is delivered in cash. Executive Directors may choose to invest the bonus earned (on a post-tax basis) in bonus investment shares, in return for participation in the bonus matching element of the LTIP – see pages 56 and 57 for further details.
Bonus investment shares are beneficially owned by the individual and are not subject to forfeiture.
Additionally Directors may opt to invest in the Company SIP (refer to note 33 for details).
'on-target' individual performance.
| Alignment with strategy/purpose | Operation | |
|---|---|---|
| Long Term Incentive Plan Drive and reward the achievement of longer term |
The LTIP was approved by shareholders in April 2007 and comprises two elements: Performance Share Awards and Matching Share Awards. |
|
| objectives aligned closely to shareholders' interests. Retain key executives over a longer term |
Performance Share Awards: are usually made on an annual basis and will vest subject to the achievement of performance conditions. |
|
| measurement period. | Matching Share Awards: as described above, Executive Directors may choose to invest | |
| Provide alignment with shareholders' interests. | the bonus earned (on a post-tax basis) in bonus investment shares, in return for the opportunity to earn a Matching Share Award subject to the achievement of |
|
| Supports retention and promotes share ownership. Malus applies to enable the Company to mitigate risk. |
performance conditions. | |
| For both elements of the LTIP, awards of conditional shares, restricted stock or nil cost options can be made with vesting dependent on the achievement of performance conditions, normally over a three year performance period. Vested LTIP options must be exercised within ten years of the date of grant. Under the rules of the LTIP, the Remuneration Committee has discretion to satisfy vested LTIP awards in cash. |
||
| On the vesting/exercise of an LTIP award, the Remuneration Committee has the discretion to decide that executives can receive an amount (in cash or shares) equal to the dividends paid or payable between the date of grant and the vesting of an award on the number of shares which have vested. |
||
| Awards may vest early on a change of control (or other relevant event) subject to the satisfaction of the performance conditions (as determined by the Remuneration Committee) and pro-rating for the LTIP was approved by shareholders in April 2007 and comprises two elements: Matching Share Awards and Performance Share Awards. |
||
| In 'good leaver' circumstances the Remuneration Committee has the discretion to allow all or part of unvested awards to be retained by the individual. |
||
| For awards granted on or after 1 January 2014, the Remuneration Committee has the right to reduce any LTIP awards which have not yet vested (i.e. a malus provision) if an act or omission contributes to a material misstatement of the Group's financial statements or results in material loss or reputational damage for the Company. |
||
| For awards granted on or after 1 January 2015, the Remuneration Committee has the right to recover cash or shares which have been paid or transferred (i.e. a clawback provision) if an act or omission contributes to a material misstatement of the Group's financial statements or results in material loss or reputational damage for the Company, for a period up to two years following determination of the vesting outcome. |
||
| The Remuneration Committee may at its discretion structure awards as Approved Long Term Incentive Plan ('ALTIP') awards. ALTIP awards enable the participant and Company to benefit from HMRC approved option tax treatment in respect of part of the award, without increasing the pre-tax value delivered to participants. ALTIP awards may be structured either as an approved option for the part of the award up to the HMRC limit (currently £30,000) with an unapproved option for the balance and a 'linked award' to fund the exercise price of the approved option, or as an approved option and an LTIP award, with the vesting of the LTIP award scaled back to take account of any gain made on the exercise of the approved option. Other than to enable the grant of ALTIP awards, the Company will not grant awards to Executive Directors under the Executive Share Option Plan. |
Financial Statements
Maximum Performance Share Award: 100% of salary.
Maximum Matching Share Award: 1 for 1 match on the (pre-tax) value of the bonus used to acquire bonus investment shares (subject to an overall maximum of 100% of salary).
For both elements of the LTIP, for threshold performance, 35% of salary will be payable (25% for awards from 2015 onwards). Straight-line vesting applies between threshold and maximum vesting.
These limits do not include the value of shares subject to any approved option granted as part of an ALTIP award.
Alignment with strategy/purpose Operation Maximum opportunity Performance measures
Stretching performance targets are set each year reflecting the business priorities that underpin longer term Group strategy.
The table below sets out an overview of the remuneration of Non-Executive Directors.
| Alignment with strategy/purpose | Approach of the Company |
|---|---|
| Chairman and Non-Executive Directors' fees Provide an appropriate reward to attract and retain Directors of the calibre required for the |
The remuneration of the Chairman of the Board is set by the Remuneration Committee and the Chief Executive Officer. Fees are set at a level which reflects the skills, knowledge, and experience of the individual, whilst taking into account appropriate market data. |
| business. | The fee is set as a fixed annual fee and may be paid wholly or partly in cash or Company shares. |
| The Chairman and the Chief Executive Officer are responsible for deciding Non-Executive Directors' fees. Fees are set taking into account several factors, including the size and complexity of the business, fees paid to Non-Executive Directors of UK listed companies of a similar size and complexity, and the expected time commitment and contribution for the role. |
|
| The fees are set as a fixed annual fee and may be paid wholly or partly in cash or Company shares. |
|
| Overall fees paid to Directors will remain within the limit stated in our Articles of Association, currently £200,000. |
|
| Non-Executive Directors do not participate in any incentive scheme. | |
| Directors may be eligible to benefits such as the use of secretarial support, travel costs or other benefits that may be appropriate. |
|
The annual bonus is assessed against financial targets which are determined by the Remuneration Committee, typically Group adjusted profit before tax. This incentivises Executive Directors to focus on delivering the key financial goals of the Company. The annual bonus multiplier reflects individual performance which is aligned to delivering the overall business strategy and to encourage behaviours which facilitate profitable growth and the future development of the business. These targets therefore ensure that the interests of the Executive Directors are aligned with those of the shareholders.
For the LTIP, long term performance measures are chosen by the Remuneration Committee to provide a robust and transparent basis on which to measure Xaar's performance over the longer term and to provide alignment with Xaar's business strategy. Currently EPS growth is deemed to be the key measure of success of the execution of our long term strategy.
The Remuneration Committee retains the discretion to adjust the performance targets and measures where it considers it appropriate to do so (for example, to reflect changes in the structure of the business and to assess performance on a fair and consistent basis from year to year), and has exercised its discretion in this area as described on pages 40 and 41. The changes described in relation to performance targets and measures will relate to LTIP grants made from 2015.
Awards may be adjusted in the event of a variation of capital in accordance with the scheme rules.
The Company values its wider workforce and aims to provide a remuneration package that is market competitive, complies with any statutory requirements, and is applied fairly and equitably across the wider employee population. Where remuneration is not determined by statutory regulation,
the key principles of the compensation philosophy are as follows:
The charts below set out an illustration of the remuneration policy, as approved at the 2014 AGM, in line with the policy above and include base salary, pension, benefits and incentives. The charts provide an illustration of the proportion of total remuneration made up of each component of the policy and the value of each component.
For these purposes base salary is the latest known salary from 1 January 2015 and benefits is as disclosed in the single figure table on page 42 for the year ended 31 December 2014. Pension is based on the policy set out in the policy table and base salary effective at 1 January 2015.
Three scenarios have been illustrated for each Executive Director.
| Minimum performance | • No bonus pay-out • No vesting under the LTIP |
|---|---|
| Performance in line with expectations | • 50% of salary pay-out under the annual bonus • Assume bonus earned invested in bonus investment shares and shares equivalent to 12.5% of salary vesting under the Matching Share Award element of the LTIP (i.e. 50% of salary equal to gross bonus invested x 25% Matching Share Award vesting) • Shares equivalent to 25% of salary vesting under the LTIP |
| Maximum performance | • 133% of salary pay-out under the annual bonus • Assume maximum investment in bonus investment shares and shares equivalent to 100% of salary vesting under the Matching Share Award element of the LTIP (i.e. 100% of salary equal to gross bonus invested x 100% Matching Share Award vesting) • Shares equivalent to 100% of salary vesting under the Performance Share Award element of the LTIP |
As required by the regulations, the scenarios do not include any share price growth assumptions or take into account any dividends that may be paid.
1,200
1,400
200 400
0
Finance Director – Alex Bevis, total remuneration £'000
Sales and Marketing Director – Richard Barham, total remuneration£'000
line with expectations performance
performance
| 1,400 | ||||
|---|---|---|---|---|
| 1,200 | ||||
| 1,000 | ||||
| 800 | £832k | |||
| 600 | 44% | |||
| 400 | £382k | |||
| 200 | £222k | 18% 24% |
29% | |
| 0 | 100% | 58% | 27% | |
| Minimum performance |
Performance in line with expectations |
Maximum performance |
■ Base salary, benefits and pension ■ Annual bonus ■ LTIP and Matching Share Award
800 1,000 600 £832k
100% £222k £382k 27% 29% 58% 24% 18%
Performance in line with expectations Minimum performance Maximum performance
When appointing a new Executive Director, whether with an internal or external candidate, the Remuneration Committee will typically seek to use the policy detailed in the table on pages 54 to 57 to determine the Executive Director's on-going remuneration package.
To facilitate the appointment of candidates of the appropriate calibre required to implement the Group's strategy, the Remuneration Committee also retains the discretion to include any other remuneration component or award which is outside the policy. The Remuneration Committee does not intend to use this discretion to make a non-performance related incentive payment (for example, a 'golden hello'). In determining appropriate remuneration, the Remuneration Committee will take into consideration all relevant factors (including the quantum and nature of remuneration) to ensure that the arrangements are in the best interests of the Company and its shareholders. This may, for example, include (but is not limited to) the following circumstances:
The Remuneration Committee may also alter the performance measures, performance period and vesting period of the annual bonus or long term incentive, subject to the rules of the scheme, if the Remuneration Committee determines that the circumstances of the recruitment merit such alteration. The rationale will be clearly explained.
In determining appropriate remuneration arrangements on hiring a new Executive Director, the Remuneration Committee will take into account relevant factors such as the calibre of the individual, local market practice, the existing remuneration arrangements for other executives and the business circumstances. It will seek to ensure that arrangements are in the best interests of both the Company and its shareholders and seek not to pay more than is appropriate.
The Remuneration Committee may make an award or payment to 'buy-out' remuneration arrangements forfeited on leaving a previous employer. In doing so the Remuneration Committee will take account of relevant factors regarding the forfeited arrangements which may include the form of any forfeited awards (e.g. cash or shares), any performance conditions attached to these awards (and the likelihood of meeting those conditions), and the time over which they would have vested. It will generally seek to structure buyout awards and payments on a comparable basis to remuneration arrangements forfeited. These awards or payments are excluded from the maximum level of variable pay referred to below; however, the Remuneration Committee's intention is that the value awarded or paid would be no higher than the expected value of the forfeited arrangements.
Appropriate costs and support will be covered if the recruitment requires the relocation of the individual. All buy-out awards and payments will normally be liable to forfeiture or 'clawback' on early departure. For Executive Directors, early departure is typically defined as being within the first two years of employment although the Remuneration Committee has the ability to amend this definition in appropriate circumstances.
The maximum level of variable pay which may be awarded to new Executive Directors, excluding buy-out arrangements, would normally be in line with the maximum level of variable pay that may be awarded under the annual bonus plan and LTIP, but in any event the Remuneration Committee would not make an award of annual variable pay above 283% of salary. The Remuneration Committee may determine that such awards will be forfeited if performance or continued employment conditions are not met and it is deemed appropriate to do so.
Any share awards referred to in this section will be granted as far as possible under the Company's existing share plans. If necessary, and subject to the limits referred to above, in order to facilitate the awards mentioned above, the committee may rely on exemption 9.4.2. of the Listing Rules which allows for the grant of awards to facilitate, in exceptional circumstances, the recruitment of a Director.
Where a position is fulfilled internally, any on-going remuneration obligations or outstanding variable pay elements shall be allowed to continue according to the original terms.
Fees payable to a newly-appointed Chairman or Non-Executive Director will be in line with the fee policy in place at the time of appointment.
It is the Group's policy that Executive Directors should have contracts with an indefinite term, providing for one year's notice.
| Date of contract1 | Date of appointment | Notice from the Company | Notice from Director | |
|---|---|---|---|---|
| Ian Dinwoodie | 5 December 2013 | 13 November 2001 | 12 months | 12 months |
| Alex Bevis | 12 December 2013 | 14 February 2011 | 12 months | 12 months |
| Ted Wiggans | 4 December 2013 | 10 January 2011 | 12 months | 12 months |
| Richard Barham | 12 December 2013 | 5 March 2012 | 12 months | 12 months |
| Edmund Creutzmann | 4 March 2014 | 1 April 2014 | 12 months | 12 months |
| Doug Edwards | 5 January 2015 | 5 January 2015 | 12 months | 12 months |
| Jim Brault | 2 March 2015 | 2 March 2015 | 12 months | 12 months |
1 The dates of contract above refer to the dates of the latest service agreements for each of the Directors.
All Non-Executive Directors are appointed for an initial three-year term with provision for two further three-year terms, subject to satisfactory performance.
| Date of letter of appointment | Date of appointment | Unexpired term of contract on 31 December 2014 |
|
|---|---|---|---|
| Phil Lawler (Chairman) | 17 May 2007 | 1 June 2007 | 1 year and 5 months |
| David Cheesman1 | 18 May 2011 | 4 July 2011 | 2 years and 6 months |
| Robin Williams | 3 March 2010 | 1 March 2010 | 1 year and 2 months |
1 David Cheesman will not stand for re-election at the 2015 AGM, following his notice of retirement.
All Directors offer themselves for annual re-election at each AGM in accordance with the UK Corporate Governance Code. Letters of appointment are available for inspection at the registered office address of the Company.
The principles on which the determination of payments for loss of office will be approached is set out on page 63. Where the Remuneration Committee retains discretion, as outlined below, it will be used to provide flexibility in certain situations, taking into account the particular circumstance of the Director's departure and recent performance of the Company.
| Policy | |
|---|---|
| Notice period on termination by employing company |
12 months. The committee has the discretion to determine what proportion of the notice period will be utilised in active service. |
| Termination payment | Severance payments are limited to no more than one year's salary plus benefits in kind (including company car or car allowance and private health insurance) and pension contributions (which may include salary supplements). |
| Benefits provided in connection with termination of employment may also include, but are not limited to, outplacement and legal fees. |
|
| Vesting of incentives for leavers | The Remuneration Committee has the discretion to determine appropriate bonus amounts taking into consideration the circumstances in which an Executive Director leaves. Typically for 'good leavers' bonus amounts will be determined by reference to the applicable performance targets, pro-rated for time in service to termination and paid at the usual time. The Remuneration Committee may decide to pay a good leaver's bonus earlier than the usual time in appropriate circumstances. 'Good leavers' typically include leavers due to death, illness, injury, disability, redundancy, retirement with the consent of the Company, or any other reason as determined by the Remuneration Committee. |
| The vesting of share-based awards is governed by the rules of the relevant incentive plan, as approved by shareholders. |
|
| Under the LTIP, the provisions for good leavers provide that awards will vest at the end of the normal vesting period, subject to the satisfaction of the performance conditions. However, the Remuneration Committee has the discretion to accelerate vesting to the date of cessation of employment. If accelerated to the date of cessation of employment, the Remuneration Committee will determine the extent to which the performance conditions are considered satisfied. In either case, the extent to which an award vests will be subject to pro-rating for time (although the Remuneration Committee has discretion not to apply time pro-rating). In circumstances other than good leavers, awards will lapse. |
|
| Were a buy-out award is to be made under Listing Rule 9.4.2 then the leaver provisions would be determined at the time of the award. |
|
| Payments may be made under the Company's SAYE and SIP which are governed by HMRC approved plan rules and which cover certain leaver provisions. |
Under the terms of their engagement, the notice period to be given by the Non-Executive Directors on the Company is six months and the Company is obliged to give the same length of notice. Discretion is retained to terminate with or without due notice or paying any payment in lieu of notice dependent on what is considered to be in the best interests of the Company in the particular circumstances.
Salary, benefits and performance related reward provided to employees is taken into account when setting policy for Executive Directors' remuneration (although employees are not formally consulted in relation to the setting of the policy). This includes consideration of:
The Remuneration Committee reserves the right to make any remuneration payments and payments for loss of office notwithstanding that they are not in line with the policy set out below where the terms of the payment were agreed:
For these purposes 'payments' includes the Remuneration Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are 'agreed' at the time the award is granted.
The Remuneration Committee may make minor changes to this policy, which do not have a material advantage to Directors, to aid in its operation or implementation without seeking shareholder approval but taking into account the interests of shareholders.
In the interests of ensuring on-going and transparent dialogue with shareholders, the Remuneration Committee consulted major shareholders on changes to the LTIP performance targets and vesting conditions for 2015. There were no other significant changes to the Directors' remuneration policy proposed for 2015.
This Report was approved by the Board on 19 March 2015 and signed on its behalf by:
David Cheesman Remuneration Committee Chairman
19 March 2015
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the parent Company financial statements, the Directors are required to:
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
This responsibility statement was approved by the Board of Directors and is signed on its behalf by:
Doug Edwards Chief Executive
Alex Bevis Finance Director and Company Secretary
19 March 2015
| Opinion on financial statements of Xaar plc |
In our opinion: • the financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2014 and of the Group's profit for the year then ended • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union • the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes 1 to 36, and the Parent Company Balance Sheet and the related notes 1 to 10. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). |
|---|---|
| Going concern | As required by the Listing Rules we have reviewed the Directors' statement in the Directors' report that the Group is a going concern. We confirm that: • we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and • we have not identified any material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern. |
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
As part of the audit of the Group, in addition to substantive tests, we also test the design and implementation of internal controls over financial reporting in each of the risk areas.
Management perform a detailed review of the standard costing of the raw materials, work-in-progress and finished goods recorded in inventory by reference to variance reports produced as part of the month end control process, in order to ensure that the absorption of costs accurately reflects the activity of the Group at a normal level of production.
Our response Our audit procedures included, amongst others, critically assessing whether the Group's standard costing valuation methodology is determined in accordance with International Accounting Standard 2 (IAS 2). This has included testing the controls designed and implemented in relation to the inventory standard costing system, such as the review of variance reports, and the data generated by that system.
We consider there to be a significant risk with respect to the valuation of raw materials, work-in-progress and finished goods at all stages of the assembly process owing to the judgemental nature of determining the costs used in the inventory standard costing model.
The accounting policy is disclosed in note 3 to the financial statements, and the values of inventories are disclosed in note 19 to the financial statements.
Our response We challenged the assumptions used in the derivation of the cost absorption rates through performing independent checks against actual costs for the year and comparing cost absorption rates with prior years for consistency. Our testing assessed the reasonableness of the amendments to inventory valuation for changes in actual costs of production.
We tested the completeness and accuracy of the year-end inventory valuation, assessing whether standard costs have been applied appropriately to items of raw materials, work-in-progress and finished goods.
Our findings We found that the management assumptions and estimates were appropriate and applied consistently. Our testing has not identified any material issues with regards to the standard costing methodology or inventory valuation, monitoring and recording processes.
The Group accounts for revenue on printheads and system components at the point of despatch as this is the point at which the risks and rewards of the products held as stock are transferred to the customer. The Group has no significant distribution/consignment agreements in place with third parties.
We consider there to be a significant risk with respect to the accounting for customer contract pricing with Xaar's significant customers owing to the degree of estimation involved in accounting for contract pricing and the associated revenue in line with IFRSs and the Group's accounting policy.
The accounting policy is disclosed in note 3 to the financial statements.
Our response When auditing revenue streams we considered the Group's revenue recognition policy, per International Accounting Standard 18 'Revenue' (IAS 18), to assess whether the revenue recognition policy is compiled and whether the policy has been applied consistently through the year.
We performed testing over customer contract pricing agreements that Xaar has with all its major customers by reviewing the terms and conditions of sale and agreeing the accounting treatment and revenue recognition applied; also assessing compliance with IAS 18. For the most significant customers we obtained the customer contract pricing agreement and reconciled this to the accounting treatment per the financial statements.
We reviewed and tested the volume price agreements and tested a sample of journals to establish whether there were any unusual items.
Our findings We noted no material instances of inappropriate revenue recognition arising in our testing.
The Group incurred £19.2m on research and development costs in the year ended 31 December 2014 (2013: £16.4m), representing an increase of 14% from 2013. Xaar management has concluded that the only development project meeting the IAS 38 capitalisation criteria is the work in relation to the P4 platform and therefore £7.4m development costs have been capitalised during the year (2013: £nil). Because of the judgements and the complexity of the criteria applied, we consider there to be a significant risk in relation to development costs being incorrectly capitalised.
The accounting policy is disclosed in note 3 to the financial statements. The carrying values of the capitalised development costs are disclosed in note 15 to the financial statements.
Our response We challenged management's accounting treatment of development costs by reviewing research and development project costs and discussing those projects with significant expenditure with the Research and Development Directors and Chief Technical Officer, in order for us to assess whether projects have reached the development phase and therefore require capitalisation. For each project we made an assessment of the technical feasibility and likelihood of future economic benefit by reference to product test stage classifications and agreements entered into with partners. We also audited the research and development costs incurred by test of detail.
Our findings Based on the audit procedures performed, we believe that management has appropriately applied the principles of IAS 38.
There are two components to the warranty provision, a general provision (based on the historic product return rate over a twelve month period) and a specific provision.
We consider there to be a significant risk with respect to the completeness and valuation of the specific warranty provision owing to the judgemental nature of the provision calculations which are estimated with reference to known product issues which have arisen during the year.
The accounting policy is disclosed in note 3 to the financial statements. The warranty provisions are disclosed in note 25 to the financial statements.
Our response We performed a review of sales returns to identify any specific warranty issues that have arisen over the course of the year. We discussed warranty issues with staff external to finance and challenged estimates and assumptions when our wider audit procedures indicated to us that product issues may exist that have yet to be updated for in the warranty provision calculation. In addition, we assessed the current year warranty provision by reference to historic product return reports and the accuracy of the prior year provision. We also agreed all known issues back to the specific warranty calculation.
Our findings The evidence that we obtained from our audit procedures supported the completeness and valuation of the warranty provision, and the assumptions used in these calculations.
Due to the downturn in the performance of the Group, and the proposed future closure of the manufacturing facility in Sweden we considered there to be an indication of impairment of the group fixed assets, in particular the assets held by the Swedish subsidiary XaarJet AB. We therefore identified there to be a significant risk that the carrying value of the group fixed assets may not be recoverable, and that any possible impairment may not be accounted for or disclosed appropriately in the financial statements.
The accounting policy is disclosed in note 3 to the financial statements. The carrying values of fixed assets are disclosed in note 16 to the financial statements.
Our response Our audit procedures included, amongst others, critically assessing the Group's method for determining carrying value of the fixed assets and whether it appropriately reflected current and future production (asset utilisation) and financial forecasts, the past experience of the Group and other specific circumstances associated with the tangible fixed assets. We performed independent physical inspection of a sample of tangible fixed assets to identify underutilised, inactive and damaged plant and machinery. We held discussions with staff in production and engineering departments to understand the current and projected future utilisation, useful life and alternative uses of these fixed assets relating to various production lines. We tested the value in use calculation prepared by management in relation to fixed assets in Sweden.
Our findings The evidence we examined supported the Directors' conclusion that there are no indicators suggesting that the carrying value of the tangible fixed assets is impaired. Additionally the value in use of calculation supported the carrying value of the fixed assets held by XaarJet AB.
The Board have proposed the possible closure of the Group's manufacturing facility in Sweden during 2016. XaarJet AB manufactures some of Xaar's legacy printheads.
We consider there to be a risk in relation to completeness of provisions associated with restructuring and discontinued operations (e.g. redundancies and impairment of assets).
The accounting policy is disclosed in note 3 to the financial statements. The proposed closure of the Swedish manufacturing facility is disclosed as an event after the balance sheet date in note 36 to the financial statements.
Our response From our discussions with management and Directors, we noted that the Board is currently exploring various options with respect to the Group's operations in Sweden.
We reviewed the minutes of the Board meetings and held discussions with key management personnel in this regard.
Our findings We found no evidence to indicate that the Board had committed to the closure of the manufacturing facility in Sweden at the year-end date. We concur with management's conclusion that no provisions are required in accordance with IAS 37 'Provisions, contingent liabilities and contingent assets'. The Board's proposed closure of the manufacturing facility is appropriately disclosed as a post balance sheet event in note 36 of the Annual Report.
In 2013 our report included depreciation of property, plant and equipment (PPE) as a risk due to the significant PPE additions in the year (£19.4m). This risk is not included in our 2014 report due to additions being significantly reduced to £10.5m.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on page 35.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group to be £1.6m (2013: £1.9m), which is below 5% (2013: 5%) of profit before tax. We agreed with the Audit Committee that we would report to the committee all audit differences in excess of £23,000 (2013: £40,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit work at the UK headquarters in Cambridge. Five entities were subject to a full audit (Xaar plc, XaarJet Ltd, Xaar Technology Ltd, XaarJet (Overseas) Ltd and Xaar Digital Ltd) performed directly by the Group audit team. Three entities (XaarJet AB, Xaar Group AB and Xaar America Inc.) were subject to specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group's operations at those locations. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work for each entity was executed at levels of materiality applicable to each individual entity which were lower than Group materiality. The component materialities range between £60,000 to £1,060,000. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. As the Group auditor the partner and the senior member of Group audit team visited the component auditors in Sweden, we planned the work conducted by the component auditor, reviewed their work and attended an audit planning conference call, status update and close meetings. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors' Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Strategic Report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception
Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns.
| Directors' remuneration |
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters. |
|---|---|
| Corporate governance statement |
Under the Listing Rules we are also required to review the part of the Corporate governance statement relating to the Company's compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. |
| Our duty to read other information in the Annual Report |
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors' statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements. |
| Respective responsibilities of Directors and auditor |
As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team, and independent partner reviews. This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. |
| Scope of the audit of the financial statements |
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. |
For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Cambridge, United Kingdom
for the year ended 31 December 2014
| Notes | 2014 £'000 |
2013 £'000 |
|
|---|---|---|---|
| Revenue | 5 | 109,150 | 137,128 |
| Cost of sales | (60,548) | (63,114) | |
| Gross profit | 48,602 | 74,014 | |
| Research and development expenses | (11,797) | (16,389) | |
| Research and development expenditure credit | 234 | 586 | |
| Sales and marketing expenses | (5,551) | (6,114) | |
| General and administrative expenses | (7,900) | (12,398) | |
| Restructuring costs | (872) | – | |
| Operating profit | 22,716 | 39,699 | |
| Investment income | 5, 9 | 394 | 443 |
| Finance costs | 10 | – | (55) |
| Profit before tax | 23,110 | 40,087 | |
| Tax | 11 | (4,418) | (8,226) |
| Profit for the year attributable to shareholders | 7 | 18,692 | 31,861 |
| Earnings per share | |||
| Basic | 13 | 25.0p | 43.3p |
| Diluted | 13 | 24.4p | 41.6p |
Dividends paid in the year amounted to £6,377,000 (2013: £4,059,000). Further disclosures are given in note 12.
All activities relate to continuing operations.
| Notes | 2014 £'000 |
2013 £'000 |
|---|---|---|
| Profit for the year attributable to shareholders | 18,692 | 31,861 |
| Items that may be reclassified subsequently to profit or loss: Exchange differences on retranslation of net investment 29 Tax benefit on share option gains |
(224) 855 |
(7) 1,379 |
| Other comprehensive income for the year | 631 | 1,372 |
| Total comprehensive income for the year | 19,323 | 33,233 |
| Notes | 2014 £'000 |
2013 £'000 |
|
|---|---|---|---|
| Non-current assets | |||
| Goodwill | 14 | 720 | 720 |
| Other intangible assets | 15 | 10,077 | 3,387 |
| Property, plant and equipment | 16 | 38,539 | 38,452 |
| Investments | 18 | 1,000 | 1,000 |
| Deferred tax asset | 22 | – | 4,308 |
| 50,336 | 47,867 | ||
| Current assets | |||
| Inventories | 19 | 19,795 | 15,285 |
| Trade and other receivables | 20 | 13,452 | 15,441 |
| Current tax asset | 20 | 2,909 | 782 |
| Treasury deposits | 20 | 21,000 | 22,000 |
| Cash and cash equivalents | 20 | 25,963 | 31,485 |
| Derivative financial instruments | – | 6 | |
| 83,119 | 84,999 | ||
| Total assets | 133,455 | 132,866 | |
| Current liabilities | |||
| Trade and other payables | 23 | (9,888) | (19,225) |
| Other financial liabilities | 24 | (57) | (57) |
| Current tax liabilities | – | (1,848) | |
| Provisions | 25 | (425) | (1,074) |
| (10,370) | (22,204) | ||
| Net current assets | 72,749 | 62,795 | |
| Non-current liabilities | |||
| Deferred tax liabilities | 22 | (617) | (328) |
| Other financial liabilities | 24 | (308) | (292) |
| Total non-current liabilities | (925) | (620) | |
| Total liabilities | (11,295) | (22,824) | |
| Net assets | 122,160 | 110,042 | |
| Equity | |||
| Share capital | 26 | 7,664 | 7,589 |
| Share premium | 27 | 26,345 | 25,484 |
| Own shares | 28 | (3,796) | (4,066) |
| Other reserves | 30 | 9,716 | 8,610 |
| Translation reserve | 29 | 126 | 350 |
| Retained earnings | 30 | 82,105 | 72,075 |
| Equity attributable to shareholders | 122,160 | 110,042 | |
| Total equity | 122,160 | 110,042 |
The financial statements of Xaar plc, registered number 3320972, were approved by the Board of Directors and authorised for issue on 19 March 2015.
They were signed on its behalf by:
Doug Edwards Chief Executive
Alex Bevis Finance Director and Company Secretary
for the year ended 31 December 2014
| Share capital |
Share premium |
Own shares |
Other reserves |
Translation reserve |
Retained earnings |
Total | ||
|---|---|---|---|---|---|---|---|---|
| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Balance at 1 January 2013 | 7,474 | 24,406 | (4,215) | 6,507 | 357 | 39,590 | 74,119 | |
| Profit for the year | – | – | – | – | – | 31,861 | 31,861 | |
| Exchange differences on retranslation | ||||||||
| of net investment | – | – | – | – | (7) | – | (7) | |
| Tax benefit on share option gains | – | – | – | – | – | 1,379 | 1,379 | |
| Total comprehensive income for | ||||||||
| the period | – | – | – | – | (7) | 33,240 | 33,233 | |
| Issue of share capital | 115 | 1,078 | – | – | – | (46) | 1,147 | |
| Own shares sold in the period | – | – | 149 | – | – | (24) | 125 | |
| Dividends | 12 | – | – | – | – | – | (4,059) | (4,059) |
| Tax on share option gains | – | – | – | – | – | 3,374 | 3,374 | |
| Credit to equity for equity-settled | ||||||||
| share-based payments | – | – | – | 2,103 | – | – | 2,103 | |
| Balance at 1 January 2014 | 7,589 | 25,484 | (4,066) | 8,610 | 350 | 72,075 | 110,042 | |
| Profit for the year | – | – | – | – | – | 18,692 | 18,692 | |
| Exchange differences on retranslation | ||||||||
| of net investment | – | – | – | – | (224) | – | (224) | |
| Tax benefit on share option gains | – | – | – | – | – | 855 | 855 | |
| Total comprehensive income for | ||||||||
| the period | – | – | – | – | (224) | 19,547 | 19,323 | |
| Issue of share capital | 75 | 861 | – | – | – | (28) | 908 | |
| Own shares sold in the period | – | – | 270 | – | – | (9) | 261 | |
| Dividends | 12 | – | – | – | – | – | (6,377) | (6,377) |
| Tax on share option gains | – | – | – | – | – | (3,103) | (3,103) | |
| Credit to equity for equity-settled | ||||||||
| share-based payments | – | – | – | 1,106 | – | – | 1,106 | |
| Balance at 31 December 2014 | 7,664 | 26,345 | (3,796) | 9,716 | 126 | 82,105 | 122,160 |
for the year ended 31 December 2014
| Notes | 2014 £'000 |
2013 £'000 |
|---|---|---|
| Net cash from operating activities 31 |
18,397 | 45,093 |
| Investing activities | ||
| Investment income | 427 | 278 |
| Acquisition of investment bonds | – | (1,000) |
| Purchases of property, plant and equipment | (12,483) | (16,713) |
| Proceeds on disposal of property, plant and equipment | 2 | 42 |
| Expenditure on software | (217) | (245) |
| Expenditure on capitalised product development | (7,357) | – |
| Net cash used in investing activities | (19,628) | (17,638) |
| Financing activities | ||
| Dividends paid | (6,377) | (4,059) |
| Treasury deposits | 1,000 | (18,000) |
| Proceeds from the sale of ordinary share capital | 261 | 125 |
| Proceeds from issue of ordinary share capital | 908 | 1,147 |
| Finance costs | – | (55) |
| Repayments of borrowings | – | (594) |
| Net cash used in financing activities | (4,208) | (21,436) |
| Net (decrease)/increase in cash and cash equivalents | (5,439) | 6,019 |
| Effect of foreign exchange rate changes on cash balances | (83) | 20 |
| Cash and cash equivalents at beginning of year | 31,485 | 25,446 |
| Cash and cash equivalents at end of year | 25,963 | 31,485 |
Cash and cash equivalents (which are presented as a single class of asset on the face of the balance sheet) comprise cash at bank and other short term highly liquid investments with a maturity of three months or less. The carrying amount of these assets is approximately equal to their fair value.
for the year ended 31 December 2014
Xaar plc ('the Company') is incorporated in England and Wales under the Companies Act 2006. The address of the registered office is given on the inside back cover. The nature of the Group's operations and its principal activity is set out in the Strategic Report starting on page 2.
The key assumptions concerning the future and other sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
Throughout the year, management considers the carrying value of both receivables and inventory balances. Provisions against both balances are made on the basis of past losses, current trading patterns and anticipated future events.
Management regularly consider the potential liabilities which may arise from product warranty claims, commercial disputes, restructuring or other activities which may result in future losses or charges. Management create and maintain appropriate financial provisions based on specific known issues and underlying historical experience.
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the 'value-in-use' of the cashgenerating units to which the goodwill is allocated. Estimating a value-in-use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2014 was £720,000 (2013: £720,000). Further details are given in note 14.
As described in note 3, the Group capitalises development expenditure as an intangible assets where the criteria under IAS 38 'Intangible assets' is met. In 2014, development expenditure incurred relating to Platform 4 was capitalised, amounting to £7,357,000 (2013: £nil). The development project is on-going and therefore amortisation is yet to commence.
The financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS'), as adopted for use in the European Union. Therefore the Group financial statements have been prepared in accordance with Article 4 of the EU IAS regulation.
The financial information has been prepared on the basis of all applicable IFRS, including all International Accounting Standards ('IAS'), Standing Interpretations Committee ('SIC') interpretations and International Financial Reporting Interpretations Committee ('IFRIC') interpretations issued by the International Accounting Standards Board ('IASB') that are applicable to the financial period, as adopted by the European Union.
The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The Group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.
The principal accounting policies adopted are set out below.
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company ('its subsidiaries') made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Foreign exchange gains and losses arising on the retranslation of trading balances with subsidiaries with different functional currencies are reported in the income statement.
The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report on pages 8 to 11. Notes 20, 21 and 24 include a description of the Group's objectives; policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources and through a diverse customer base is exposed not only to the Western economies but also China, India and Latin America. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, based on the Group's forecasts and projections for the next four years, taking account of reasonably possible changes in trading performance. For this reason, we continue to adopt the going concern basis in preparing the financial statements.
The acquisition of subsidiaries is accounted for using the acquisition method.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the income statement.
Goodwill arising on consolidation is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.
For the purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of the cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes, but gross of any tax withheld.
Sales of goods are recognised when all of the following conditions are satisfied:
For sales of goods to a distributor with consignment stock arrangements, revenue is recognised at the point of sale by the distributor which is when the risks and rewards of ownership of inventory have transferred.
Development fees gained from joint development agreements are treated as income over the periods necessary to match them with the related costs.
Funding received for internally generated intangible assets is recognised on a straight-line basis to match the amortisation period of the related intangible fixed asset.
Royalties are recognised on an accruals basis in accordance with the actual revenue trend in the most recent quarterly statements received from each licensee.
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease, except where another more systematic basis is more representative of the time pattern in which the economic benefits from the lease asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Sterling, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.
Exchange differences arising on the settlement of monetary assets and liabilities, and on the retranslation of monetary assets and liabilities, are included in the income statement for the period.
In order to hedge its exposure to certain foreign exchange risks, the Group may enter into forward contracts (see page 80 for details of the Group's accounting policies in respect of such derivative financial instruments).
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at the exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period.
Exchange differences arising are recognised in other comprehensive income and taken to the translation reserve. Exchange differences on the translation of net investments are taken to the translation reserve of the applicable entity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRS as Sterling denominated assets and liabilities.
Government and EU grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attached to them and that the grant will be received.
Government and EU grants relating to research and development are treated as income over the periods necessary to match them with the related costs.
Operating profit is stated after charging restructuring costs but before investment income and finance costs.
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group's obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
The tax expense represents the sum of the tax currently payable and deferred tax, including UK corporation tax and foreign tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
To the extent that the Group receives a tax deduction relating to share-based payment transactions, deferred tax is provided at the appropriate tax rate on the difference in value between the market price of the underlying equity as at the date of the financial statements and the exercise price of the outstanding share options. As a result, the deferred tax impact of share options will not be derived directly from the expense reported in the consolidated income statement. The amount by which the deductible difference exceeds the cumulative charge to the consolidated income statement is recorded in the consolidated statement of comprehensive income.
Deferred tax assets and liabilities are measured on an undiscounted basis and are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
All property, plant and equipment is shown at original historical cost less accumulated depreciation and any recognised impairment loss.
Assets in the course of construction for production or administrative purposes are carried at cost, less any recognised impairment loss. Depreciation of these assets, on the same basis as other assets in the same class, commences when the assets are ready for their intended use.
Depreciation is charged so as to write off the cost or valuation of assets, less their residual values, other than assets in the course of construction, over their estimated useful lives, using the straight-line method, on the following bases:
| Leasehold property improvements | ten years or, where shorter, over the term of the relevant lease |
|---|---|
| Plant and machinery | three to eight years |
| Furniture, fittings and equipment | three to five years |
| Motor vehicles | three years |
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.
The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
In accordance with IAS 38 'Intangible assets' where a project has entered the development phase and is sufficiently self-contained that the expected future economic benefits can be traced directly to the assets developed within the project, it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably, the development costs related to the project will be capitalised as an intangible asset.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Costs incurred in maintaining the patent and trademark portfolio are written off to the income statement as incurred.
Payments in respect of software, external product development costs and licence rights acquired are capitalised at cost and amortised on a straightline basis over their estimated useful lives.
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss is subsequently reversed, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately.
Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the first in, first out (FIFO) cost formula, by applying the standard cost methodology, with costs including direct materials, direct labour costs and an attributable proportion of manufacturing overheads based on normal levels of activity that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow-moving or defective items where applicable.
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.
Trade receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market concerned and are initially measured at fair value, equating to cost, including transaction costs. Investments are classified as available for sale, and on the basis that the investments have no active market and their fair values cannot be reliably determined using valuation techniques, the investments are carried at cost.
If there is objective evidence that an impairment loss on an unquoted equity investment that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
Bonds with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are measured at amortised cost using effective interest method less any impairment.
Cash and cash equivalents comprise cash on hand and demand deposits and other short term highly liquid investments that are readily convertible to a known amount of cash within a period of up to three months post balance sheet and are subject to an insignificant risk of changes in value.
Treasury deposits comprise demand deposits that are convertible to a known amount of cash with an original maturity of up to twelve months, which are due to mature more than three months after the balance sheet date and are subject to an insignificant risk of changes in value.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out within the policy on derivative financial instruments and hedge accounting below.
Interest-bearing loans and bank overdrafts are measured initially at fair value, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis in the income statement using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables are measured at original cost.
Equity instruments issued by the Company are recorded as the proceeds received, net of direct issue costs.
The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates and liquidity risk.
The Group uses derivative financial instruments (primarily foreign currency forward contracts) to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and forecast transactions.
The Group's interest rate risk arises mainly from its funds invested in short term bank deposits. To mitigate these risks, limits have been set by the Board in relation to maturity period and maximum deposits with any one institution.
In order to mitigate the Group's liquidity risks, the Group can choose to fund significant fixed asset purchases by finance leases repayable over a period of three to five years dependent on the individual asset being financed and interest-bearing loans.
The use of financial derivatives is governed by the Group's policies approved by the Board of Directors, which provides written principles on the use of financial derivatives consistent with the Group's risk management strategy. The Group does not use derivative financial instruments for speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date and are remeasured to fair value at subsequent reporting dates.
Changes in the fair value of derivative financial instruments that are designated as hedges of future cash flows and deemed to be effective are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecast transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.
Changes in fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value, with gains or losses reported in the income statement.
Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted where the effect of the time value of money is material.
A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it, and the plan has reached a stage where the decision is unlikely to be reversed. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity.
Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised in the month of sale of the relevant products, at the Directors' best estimate of the expenditure required to settle the Group's obligation.
The Group has applied the requirements of IFRS 2 'Share-based payment'. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2005.
The Group issues equity-settled share-based payments to certain employees. These payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.
The fair value of options issued under the Group's Long Term Incentive Plan is measured using a stochastic (Monte Carlo binomial) model for grants made between 2007 and 2009 inclusive. The fair value of all other equity-settled share-based payments is measured using the Black-Scholes pricing model. The expected life used in these models has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
SAYE share options granted to employees are treated as cancelled when employees cease to contribute to the scheme. This results in accelerated recognition of the expenses that would have arisen over the remainder of the original vesting period.
Own shares are deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the Group's own shares.
In the current year, the following new and revised Standards and Interpretations have been adopted:
Their adoption has not had any material impact on the disclosures or on the amounts reported in the consolidated financial statements.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
| IFRS 9 | Financial Instruments |
|---|---|
| IFRS 15 | Revenue from Contracts with Customers |
| IFRS 11 (amendments) | Accounting for Acquisitions of Interests in Joint Operations |
| IAS 16 and IAS 38 (amendments) | Clarification of acceptable Methods of Depreciation and Amortisation |
| IAS 27 (amendments) | Equity Method in Separate Financial Statements |
Annual Improvements to IFRSs (amendments)
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Revenue | 109,150 | 137,128 |
| Non-recurring royalty income | – | (2,994) |
| Adjusted revenue | 109,150 | 134,134 |
| Profit before tax | 23,110 | 40,087 |
| Share-based payment charges | 242 | 4,204 |
| Exchange differences relating to the Swedish operations | 614 | 416 |
| Loss/(gain) on derivative financial instruments | 6 | (9) |
| Restructuring costs | 872 | – |
| Non-recurring royalty income | – | (2,994) |
| Research and development expenditure credit | (234) | (586) |
| Adjusted profit before tax | 24,610 | 41,118 |
Share-based payment charges include the IFRS 2 charge for the period of £1,106,000, per note 33 (2013: £2,103,000) and the credit relating to National Insurance on the outstanding potential share option gains of £864,000 (2013: charge of £2,101,000).
Exchange differences relating to the Swedish operations represent exchange gains or losses recorded in the consolidated income statement as a result of operating in Sweden.
Loss/(gain) on derivative financial instruments relates to gains and losses made on forward contracts in 2014 and 2013.
Restructuring costs of £872,000 were incurred in relation to a reduction made to the global work force in 2014.
Non-recurring royalty income in 2013 relates to the settlement of under-reported royalties payable by licensees for the period 2006 to 2012.
The research and development expenditure credit relates to the corporation tax relief receivable relating to qualifying research and development expenditure.
| 2014 Pence per share |
2013 Pence per share |
|
|---|---|---|
| Diluted earnings per share | 24.4p | 41.6p |
| Share-based payment charges | 0.3p | 5.5p |
| Exchange differences relating to the Swedish operations | 0.8p | 0.5p |
| Restructuring costs | 1.1p | – |
| Non-recurring royalty income | – | (3.9p) |
| Tax effect of adjusting items | (0.2p) | (0.5p) |
| Adjusted diluted earnings per share | 26.4p | 43.2p |
This reconciliation is provided to enable a better understanding of the Group's results.
An analysis of the Group's revenue is as follows:
| Notes | 2014 £'000 |
2013 £'000 |
|
|---|---|---|---|
| Product sales, commissions and fees Royalties |
102,804 6,346 |
127,210 9,918 |
|
| Investment income | 9 | 109,150 394 |
137,128 443 |
| 109,544 | 137,571 |
Products and services from which reportable segments derive their revenues.
For management reporting purposes, the Group's operations are currently analysed according to the two operating segments of 'product sales, commissions and fees' and 'royalties'. These two operating segments are the basis on which the Group reports its primary segment information and on which decisions are made by the Group's Chief Executive Officer and Board of Directors, and resources allocated. The Group's chief operating decision maker is the Chief Executive Officer.
Segment information is presented below:
| Year ended 31 December 2014 | Product sales, commissions and fees £'000 |
Royalties £'000 |
Unallocated £'000 |
Consolidated £'000 |
|---|---|---|---|---|
| Revenue | ||||
| Total segment revenue | 102,804 | 6,346 | – | 109,150 |
| Result | ||||
| Adjusted profit before tax | 17,870 | 6,346 | 394 | 24,610 |
| Share-based payment charges | – | – | (242) | (242) |
| Exchange differences relating to the Swedish operations | (614) | – | – | (614) |
| Loss on derivative financial instruments | – | – | (6) | (6) |
| Restructuring costs | (872) | – | – | (872) |
| Research and development expenditure credit | 234 | – | – | 234 |
| Profit before tax | 16,618 | 6,346 | 146 | 23,110 |
Investment income and finance costs are not allocated to reportable segments for the purposes of reporting to the Group's Chief Executive Officer and Board of Directors.
Share-based payment charges include the IFRS 2 charge for the period and the charge relating to National Insurance on the outstanding potential share option gains.
| Year ended 31 December 2013 | Product sales, commissions and fees £'000 |
Royalties £'000 |
Unallocated £'000 |
Consolidated £'000 |
|---|---|---|---|---|
| Revenue | ||||
| Total segment adjusted revenue | 127,210 | 6,924 | – | 134,134 |
| Non-recurring royalty income | – | 2,994 | – | 2,994 |
| Revenue | 127,210 | 9,918 | – | 137,128 |
| Result | ||||
| Adjusted profit before tax | 33,806 | 6,924 | 388 | 41,118 |
| Non-recurring royalty income | – | 2,994 | – | 2,994 |
| Share-based payment charges | – | – | (4,204) | (4,204) |
| Exchange differences relating to the Swedish operations | (416) | – | – | (416) |
| Gain on derivative financial instruments | – | – | 9 | 9 |
| Research and development expenditure credit | 586 | – | – | 586 |
| Profit/(loss) before tax | 33,976 | 9,918 | (3,807) | 40,087 |
Segment assets
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Product sales, commissions and fees | 83,719 | 76,812 |
| Royalties | 1,773 | 1,563 |
| Total segment assets | 85,492 | 78,375 |
| Investments | 1,000 | 1,000 |
| Treasury deposits | 21,000 | 22,000 |
| Cash and cash equivalents | 25,963 | 31,485 |
| Derivative financial instruments | – | 6 |
| Total assets | 133,455 | 132,866 |
Assets are allocated to the segment which has responsibility for their control.
No information is provided for segment liabilities as this measure is not provided to the chief operating decision maker.
| Year ended 31 December 2014 | Notes | Product sales, commissions and fees £'000 |
Royalties £'000 |
Unallocated £'000 |
Consolidated £'000 |
|---|---|---|---|---|---|
| Depreciation and amortisation | 15, 16 | 10,721 | – | – | 10,721 |
| Share-based payment charges | – | – | 242 | 242 | |
| Capital expenditure | 15, 16 | 18,048 | – | – | 18,048 |
| Year ended 31 December 2013 | Notes | Product sales, commissions and fees £'000 |
Royalties £'000 |
Unallocated £'000 |
Consolidated £'000 |
|---|---|---|---|---|---|
| Depreciation and amortisation | 15, 16 | 8,299 | – | – | 8,299 |
| Share-based payment charges | – | – | 4,204 | 4,204 | |
| Capital expenditure | 15, 16 | 19,750 | – | – | 19,750 |
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Product sales, commissions and fees Royalties |
102,804 6,346 |
127,210 9,918 |
| Consolidated revenue (excluding investment income) | 109,150 | 137,128 |
The Group operates in three principal geographical areas: EMEA, Asia and the Americas. The Group's revenue from external customers and information about its segments (non-current assets excluding deferred tax assets and other financial assets) by geographical location is detailed below:
| Revenue from external customers | ||
|---|---|---|
| 2014 £'000 |
2013 £'000 |
|
| EMEA | 60,088 | 67,494 |
| Asia | ||
| – China | 34,317 | 50,270 |
| – Japan | 6,637 | 10,398 |
| – Other | 1,611 | 2,101 |
| The Americas (including USA) | 6,497 | 6,865 |
| 109,150 | 137,128 |
Revenues are attributed to geographical areas on the basis of the customers' operating location.
| Non-current assets | ||
|---|---|---|
| 2014 £'000 |
2013 £'000 |
|
| EMEA | 50,265 | 47,773 |
| Asia | 67 | 90 |
| The Americas (including USA) | 4 | 7 |
| 50,336 | 47,870 |
Non-current assets, being property, plant and equipment, goodwill, other intangible assets, investments and the deferred tax asset, are attributed to the location where they are situated.
Included in revenues arising from product sales, commissions and fees are revenues of approximately £11.4 million (10% of revenues) (2013: £18.6 million, 14% of revenues) which arose from sales to the Group's largest customer. In the year ended 31 December 2014 revenues of approximately £11.2 million (10% of revenues) (2013: £13.2 million, 10% of revenues) were included in the product sales, commissions and fees which arose from sales to the Group's second largest customer. In 2014, the largest and second largest customers were the only customers to exceed 10% of revenue in the period (2013: only the largest customer exceeded 10% of revenue in the period). Revenue from the top five customers represents 47% of revenues (2013: 45%).
Profit for the year has been arrived at after charging/(crediting):
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Net foreign exchange losses (including exchange differences relating to the Swedish operations) | 1,052 | 262 |
| Research and development expenses (net of capitalised development costs) | 11,797 | 16,389 |
| Grants towards research and development including the research and development expenditure credit | (349) | (595) |
| Depreciation of property, plant and equipment | 9,836 | 7,410 |
| Amortisation of intangible assets | 885 | 889 |
| Loss on disposal of property, plant and equipment | 189 | 250 |
| Cost of inventories recognised as expense | 60,548 | 63,114 |
| Impairment of other financial assets | (70) | 215 |
| Total fees payable to the Company's auditor and its associates | 182 | 250 |
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Fees payable to the Company's auditor for the audit of the Company's annual accounts | 22 | 22 |
| Fees payable to the Company's auditor and its associates for other services to the Group | ||
| The audit of the Company's subsidiaries | 106 | 111 |
| Total audit fees | 128 | 133 |
| – Interim review | 24 | 23 |
| – Tax services | 6 | 46 |
| – Recruitment and remuneration services | 17 | 24 |
| – Audit advisory | 7 | – |
| – Other services | – | 24 |
| Total non-audit fees | 54 | 117 |
| Total fees payable to the Company's auditor and its associates | 182 | 250 |
The Audit Committee has considered the independence of the auditor in relation to non-audit services throughout the year. A description of the work of the Audit Committee is set out in the Corporate governance statement on pages 35 to 36 and includes an explanation of how the auditor's objectivity and independence is safeguarded when non-audit services are provided by the auditor.
The Group paid £8,000 (2013: £10,000) to Cambridge Network Limited, an associate of Deloitte LLP. Cambridge Network is a networking organisation which draws its members from companies and individuals interested in the Cambridge technology industry. Neither Deloitte LLP nor any of its partners receive any financial return from Cambridge Network.
The average monthly number of persons employed by the Group including Executive Directors was as follows:
| 2014 Number |
2013 Number |
|
|---|---|---|
| Research and development | 168 | 105 |
| Sales and marketing | 62 | 57 |
| Manufacturing and engineering | 491 | 465 |
| Business support | 64 | 65 |
| 785 | 692 |
| Notes | 2014 £'000 |
2013 £'000 |
|
|---|---|---|---|
| Wages and salaries | 28,981 | 26,949 | |
| Social security costs | 3,753 | 3,521 | |
| Pension costs | 34 | 1,642 | 1,096 |
| Share-based payments | 242 | 4,204 | |
| 34,618 | 35,770 |
Share-based payment charges include the IFRS 2 charge for the period and the charge relating to National Insurance on the outstanding potential share option gains.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Interest receivable on cash and bank balances, and treasury deposits | 389 | 439 |
| Interest receivable on held-to-maturity investments | 5 | 4 |
| 394 | 443 | |
| 10. Finance costs | ||
| 2014 £'000 |
2013 £'000 |
|
| Interest payable on bank loans and overdrafts | – | 55 |
| Notes | 2014 £'000 |
2013 £'000 |
|---|---|---|
| Current tax – UK | 3,191 | 7,843 |
| Current tax – overseas | 278 | 263 |
| 3,469 | 8,106 | |
| Amounts (over)/under provided in previous years | (545) | 66 |
| Total current income tax | 2,924 | 8,172 |
| Deferred tax – origination and reversal | 1,195 | (270) |
| Adjustment in respect of prior years | 299 | 324 |
| Total deferred tax charge 22 |
1,494 | 54 |
| Total tax expense for the year | 4,418 | 8,226 |
The blended standard rate of tax for the year, based on the UK standard rate of corporation tax, is 21.49% (2013: 23.25%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
The Finance Act 2014, which provides for a reduction in the main rate of corporation tax from 21% to 20% effective from 1 April 2015, was substantively enacted on 17 July 2014. This rate reduction has been reflected in the calculation of deferred tax at the balance sheet date.
In 2013, the Company benefited from the enhanced tax deduction for research and development expenditure for three months of the year under the large company scheme. The Company has opted into the research and development expenditure credit scheme from 1 April 2013, which is not a tax deduction and is taken as income included in operating profit.
Governance
The charge for the year can be reconciled to the profit per the income statement as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Profit on ordinary activities before tax | 23,110 | 40,087 |
| Tax on ordinary activities at a blended standard rate of 21.49% (2013: 23.25%) | 4,967 | 9,319 |
| Effect of: | ||
| Expenses not deductible for tax purposes | 486 | 254 |
| Effect of different tax rates of subsidiaries operating overseas | 111 | 59 |
| Enhanced tax deduction for patent box | (820) | (1,805) |
| Enhanced tax deduction for research and development expenditure | – | (134) |
| Effect of change in UK corporation tax rate | (80) | 143 |
| Prior period adjustments | (246) | 390 |
| Total tax expense for the year | 4,418 | 8,226 |
The effective tax rate for the year is 19% (2013: 21%).
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Amounts recognised as distributions to equity holders in the year: | ||
| Final dividend for the year ended 31 December 2013 of 5.5p (2012: 3.0p) per share | 4,124 | 2,211 |
| Interim dividend for the year ended 31 December 2014 of 3.0p (2013: 2.5p) per share | 2,253 | 1,848 |
| Total distributions to equity holders in the year | 6,377 | 4,059 |
| Proposed final dividend for the year ended 31 December 2014 of 6.0p (2013: 5.5p) per share | 4,599 | 4,174 |
The proposed final dividend is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements.
The calculation of basic and diluted earnings per share is based on the following data:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Earnings Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent |
18,962 | 31,861 |
| Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: |
74,863,310 | 73,652,808 |
| Share options | 1,629,537 | 2,989,912 |
| Weighted average number of ordinary shares for the purposes of diluted earnings per share | 76,492,847 | 76,642,720 |
| 2014 Pence per share |
2013 Pence per share |
|
|---|---|---|
| Basic | 25.0p | 43.3p |
| Diluted | 24.4p | 41.6p |
The weighted average number of ordinary shares for the purposes of basic earnings per share is calculated after the exclusion of ordinary shares in Xaar plc held by Xaar Trustee Ltd and the Xaar plc ESOP trust.
For 2014, there were share options granted over 688,038 shares that had not been included in the diluted earnings per share calculation because they were anti-dilutive at the period end. For 2013, there were no anti-dilutive share options at the period end.
This adjusted earnings per share information is considered to provide a fairer representation of the Group's trading performance year on year, as it removes items which, in the Board's opinion, do not reflect the underlying performance of the Group.
The calculation of adjusted EPS excluding share-based payment charges, exchange differences relating to the Swedish operations, the gain or loss on derivative financial instruments, restructuring costs, and non-recurring royalty income, is based on earnings of:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent | 18,692 | 31,861 |
| Share-based payment charges | 242 | 4,204 |
| Exchange differences relating to the Swedish operations | 614 | 416 |
| Loss/(gain) on derivative financial instruments | 6 | (9) |
| Restructuring costs | 872 | – |
| Non-recurring royalty income | – | (2,994) |
| Tax effect of adjusting items | (197) | (376) |
| Adjusted profit after tax | 20,229 | 33,102 |
The denominators used are the same as those detailed above for both basic and diluted earnings per share.
Share-based payment charges include the IFRS 2 charge for the period of £1,106,000, per note 33 (2013: £2,103,000) and the credit relating to National Insurance on the outstanding potential share option gains of £864,000 (2013: charge of £2,101,000).
Adjusted earnings per share is earnings per share excluding the items adjusted for as detailed above:
| 2014 Pence per share |
2013 Pence per share |
|
|---|---|---|
| Adjusted basic | 27.0p | 44.9p |
| Adjusted diluted | 26.4p | 43.2p |
The carrying amount of goodwill at 31 December 2014 was £720,000 (2013: £720,000). There were no accumulated impairment losses at the end of the year.
Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill had been allocated as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Printheads and related products (a single CGU) | 720 | 720 |
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired.
The recoverable amount of the CGU is determined from a value-in-use calculation. The key assumptions to which the value-in-use calculation is most sensitive are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.
The Group prepares cash flow forecasts derived from the most recent financial forecasts reviewed by management for the next four years and these have been used in the value-in-use calculation. The discount rate applied to the cash flow projections is 10% (2013: 8%) and reflects management's estimate of return on capital employed.
Sensitivity analysis has been completed on each key assumption in isolation and this indicates that reasonable changes in key assumptions on which we have based our determination of the recoverable amount would not cause the carrying amount of goodwill to exceed its recoverable amount.
Having performed impairment testing, no impairment has been identified and therefore no impairment loss has been recognised in either period.
| Capitalised development |
Licences | |||
|---|---|---|---|---|
| costs £'000 |
acquired £'000 |
Software £'000 |
Total £'000 |
|
| Cost | ||||
| At 1 January 2013 | 9,491 | 533 | 2,462 | 12,486 |
| Additions | 2 | – | 259 | 261 |
| At 1 January 2014 | 9,493 | 533 | 2,721 | 12,747 |
| Additions | 7,357 | – | 218 | 7,575 |
| Disposals | (2,321) | – | (2) | (2,323) |
| At 31 December 2014 | 14,529 | 533 | 2,937 | 17,999 |
| Amortisation | ||||
| At 1 January 2013 | 6,286 | 533 | 1,652 | 8,471 |
| Charge for the year | 493 | – | 396 | 889 |
| At 1 January 2014 | 6,779 | 533 | 2,048 | 9,360 |
| Charge for the year | 492 | – | 393 | 885 |
| Disposals | (2,321) | – | (2) | (2,323) |
| At 31 December 2014 | 4,950 | 533 | 2,439 | 7,922 |
| Carrying amount | ||||
| At 31 December 2014 | 9,579 | – | 498 | 10,077 |
| At 31 December 2013 | 2,714 | – | 673 | 3,387 |
Capitalised development costs relate to Platform 2, Platform 3, and Platform 4 technology development and other associated product development. Where these assets have commenced amortisation, the amortisation periods are five to ten years.
The amortisation period for software is three to five years.
Licences acquired are amortised over their estimated useful lives which is on average ten years.
At 31 December 2014 the Group had entered into contractual commitments for the acquisition of software amounting to £29,000 (2013: £262,000).
| Leasehold property £'000 |
Plant and machinery £'000 |
Furniture, fittings and equipment £'000 |
Assets in the course of construction £'000 |
Total £'000 |
|
|---|---|---|---|---|---|
| Cost | |||||
| At 1 January 2013 | 8,928 | 43,139 | 2,705 | 1,276 | 56,048 |
| Additions | 1,051 | 8,121 | 964 | 9,353 | 19,489 |
| Transfers | 720 | 504 | 5 | (1,229) | – |
| Exchange movements | (24) | (140) | (7) | (15) | (186) |
| Disposals | (42) | (1,040) | (53) | (122) | (1,257) |
| At 1 January 2014 | 10,633 | 50,584 | 3,614 | 9,263 | 74,094 |
| Additions | 1,922 | 7,751 | 421 | 379 | 10,473 |
| Transfers | 1,277 | 5,942 | 151 | (7,370) | – |
| Exchange movements | (262) | (1,115) | (49) | (2) | (1,428) |
| Disposals | – | (411) | (11) | – | (422) |
| At 31 December 2014 | 13,570 | 62,751 | 4,126 | 2,270 | 82,717 |
| Depreciation | |||||
| At 1 January 2013 | 3,694 | 23,961 | 1,689 | – | 29,344 |
| Charge for the year | 904 | 5,911 | 595 | – | 7,410 |
| Exchange movements | (23) | (118) | (6) | – | (147) |
| Disposals | (60) | (852) | (53) | – | (965) |
| At 1 January 2014 | 4,515 | 28,902 | 2,225 | – | 35,642 |
| Charge for the year | 1,555 | 7,535 | 746 | – | 9,836 |
| Exchange movements | (175) | (848) | (46) | – | (1,069) |
| Disposals | – | (222) | (9) | – | (231) |
| At 31 December 2014 | 5,895 | 35,367 | 2,916 | – | 44,178 |
| Carrying amount | |||||
| At 31 December 2014 | 7,675 | 27,384 | 1,210 | 2,270 | 38,539 |
| At 31 December 2013 | 6,118 | 21,682 | 1,389 | 9,263 | 38,452 |
As at 31 December 2014 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £517,000 (2013: £6,451,000).
A list of the investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest, is given in note 10 to the Company's separate financial statements.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Held-to-maturity investments | ||
| At the beginning of the year | 1,000 | – |
| Additions in the year | – | 1,000 |
| At the end of the year | 1,000 | 1,000 |
Held-to-maturity investments represent investment in bonds returning interest at 3% per annum, which mature on 22 November 2018.
Trading investments fully impaired in 2012 were disposed of in 2014. No trading investments remain as at 31 December 2014.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Raw materials and consumables | 4,818 | 5,978 |
| Work in progress | 1,342 | 2,029 |
| Finished goods | 13,635 | 7,278 |
| 19,795 | 15,285 |
The fair value of all financial assets and financial liabilities approximates their carrying value.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Amount receivable for the sale of goods Allowance for doubtful debts |
8,092 (432) |
9,461 (502) |
| Other debtors Prepayments |
7,660 4,001 1,791 |
8,959 5,029 1,453 |
| 13,452 | 15,441 | |
| Current tax asset | 2,909 | 782 |
No amounts are expected to be settled in more than 12 months.
Financial Statements
The average credit period taken on sales of goods is 26 days (2013: 24 days). No interest is charged on the receivables for the period agreed in the Requirements Contract or, if not specified or applicable, the first 30 days from the date of the invoice. Thereafter, the Group reserves the right to charge interest at a daily rate of the greater of either 3% per annum above the base rate of Barclays Bank plc from time to time, or the maximum rate of interest allowable under the Late Payment of Commercial Debts (Interest) Act 1998, on all sums outstanding until payment in full is received. The Group has provided fully for all receivables over 120 days because historical experience is such that receivables that are past due beyond 120 days are generally not recoverable. Trade receivables between 30 days and 120 days are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience.
The maximum exposure to credit risk is the carrying amount of the financial assets as disclosed on page 92. Before accepting any new customer, the Group uses an external credit scoring system to assess the potential customer's credit quality and defines credit limits by customer. Credit limits are reviewed at least once per year. Letters of credit may be used. Credit insurance has typically been taken out over the most significant customers. Of the trade receivables balance at the end of the year, seven customers each represented greater than 5% of the total receivables balance, totalling £5.0 million (2013: £7.2 million). The total due from these customers represents 29% (2013: 49%) of the Group's revenue; there are no other customers who represent more than 5% of the total balance of trade receivables.
Included in the Group's trade receivables balance are debtors with a carrying amount of £1.4 million (2013: £1.7 million) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. Of these amounts, the Group is in possession of letters of credit to the value of £1,565,000 (2013: £1,667,000) which had not reached maturity as at the reporting date. The Group does not hold any other collateral over these balances. The average age of these receivables is 63 days (2013: 32 days).
Ageing of past due but not impaired receivables:
| Total | 1,352 | 1,884 |
|---|---|---|
| Over 120 days overdue | 76 | 85 |
| 90–120 days overdue | 19 | – |
| 60–90 days overdue | 16 | 7 |
| 30–60 days overdue | 230 | 66 |
| 1–30 days overdue | 1,011 | 1,726 |
| 2014 £'000 |
2013 £'000 |
Movement in the allowance for doubtful debts:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Balance at the beginning of the year Impairment losses (reversed)/recognised |
502 (70) |
287 215 |
| Balance at the end of the year | 432 | 502 |
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.
Ageing of impaired trade receivables:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Current | 94 | 111 |
| 1–30 days overdue | 4 | 23 |
| 30–60 days overdue | 2 | – |
| 60–90 days overdue | – | – |
| 90–120 days overdue | – | 1 |
| Over 120 days overdue | 332 | 367 |
| Total | 432 | 502 |
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
Treasury deposits comprise bank deposits with an original maturity of twelve months or less, which do not mature until more than three months after the balance sheet date. The carrying amount of these assets approximates their fair value.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Treasury deposits | 21,000 | 22,000 |
Cash and cash equivalents comprise cash held by the Group and short term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
The analysis of cash and short term bank deposits is as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Cash Short term deposits |
25,963 – |
19,485 12,000 |
| 25,963 | 31,485 |
The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.
Financial assets of £14,570,000 (2013: £14,770,000) are categorised as loans and receivables. Financial liabilities of £10,679,000 (2013: £22,496,000) are categorised as measured at amortised cost. Derivative financial assets and liabilities are derived from quoted prices (unaudited) in active markets for identical assets and liabilities.
The Group's policy is to manage the Group's financial risk, secure cost effective funding for the Group's operations and to minimise the adverse effects of fluctuations in the financial markets on the value of the Group's financial assets and liabilities, on reported profitability and on the cash flows of the Group.
The Group finances its activities with a combination of bank loans, finance leases, cash and fixed term deposits and forward contracts as deemed appropriate. Other financial assets and liabilities, such as trade debtors and trade creditors, arise directly from the Group's operating activities. The Group also enters into derivative transactions – forward currency contracts. The purpose is to manage the currency risks arising from the Group's operations. It is Group policy that no trading in derivatives shall be undertaken.
Financial instruments give rise to foreign currency, interest rate, credit and liquidity risk. The Group's management of its exposure to credit risk is discussed in note 20 and to liquidity risk is discussed in note 24.
The Group's policy is to manage its cost of borrowing using fixed rate debt. Whilst fixed rate interest-bearing debt is not exposed to cash flow interest rate risk, there is no opportunity for the Group to enjoy a reduction in borrowing costs in markets where rates are falling. In addition, the fair value risk inherent in fixed rate borrowing means that the Group is exposed to unplanned costs should debt be restructured or repaid early as part of the liquidity management process.
The sensitivity analysis prepared below relates to cash balances, since borrowings are at fixed rates of interest. The closing cash and cash equivalents, and treasury deposits balance at the year end have been used as the basis for the calculations. A 2% increase or decrease represents management's assessment of the reasonably possible change in interest rates.
If interest rates had been 2% higher/lower and all other variables were held constant, the Group's profit for the year ended 31 December 2014 would increase by £0.9 million or decrease by £0.4 million (2013: increase by £1.1 million/decrease by £0.4 million). This is mainly attributable to the Group's exposure to interest rates on its cash balances. There would be no effect on equity reserves.
The Group receives approximately 6% of its revenues in US Dollars and 27% of its revenue in Euros, which are partially naturally hedged by supplies in these currencies, but the remainder requires conversion into Sterling in order to fund the remaining costs of the UK offices. The Group has a manufacturing facility in Sweden which necessitates the need for the Group to convert Sterling into Swedish Kronor in order to fund the running costs of this manufacturing facility. The Group may enter into a variety of derivative financial instruments to manage its exposure to foreign currency risk, including forward contracts.
The Group is mainly exposed to foreign currency risk resulting from transactions in US Dollars, Euros and Swedish Kronor. The following table demonstrates the Group's sensitivity to a 10% increase and decrease in the Sterling exchange rate against the relevant foreign currencies on the Group's profit before tax and equity (due to changes in the fair value of monetary assets, liabilities and forward currency contracts). 10% represents management's assessment of the reasonably possible movement in exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes inter company balances within the Group where the denomination of the balance is in a currency other than the functional currency of the debtor or the creditor. A positive number below indicates an increase in profit or equity.
| Euro currency impact |
US Dollar currency impact |
Swedish Kronor currency impact |
||||
|---|---|---|---|---|---|---|
| 2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
|
| Effect of a 10% increase in relevant exchange rate on: | ||||||
| Profit or loss | (725) | (568) | (410) | (195) | (35) | (6) |
| Other equity | – | – | 11 | 13 | 179 | 83 |
| Effect of a 10% decrease in relevant exchange rate on: | ||||||
| Profit or loss | 886 | 694 | 501 | 238 | 43 | 7 |
| Other equity | – | – | (13) | (16) | (219) | (102) |
The Group utilises currency derivatives to hedge significant future transactions and cash flows. The Group does not currently designate its foreign currency denominated debt as a hedging instrument for the purpose of hedging the translation of its foreign operations.
At 31 December 2014, the Group had no open currency derivative assets or liabilities (2013: liabilities £6,000).
As at 31 December 2014 the Group held no outstanding forward contracts.
The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business, maximise shareholder value and provide flexibility for value enhancing investments. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions or as a result of corporate strategy. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. In addition, any potential value enhancing investments may be funded through additional debt instruments. No changes were made in the objectives, policies or processes during the current or prior year, except for the proposed increase in final dividend for 2013, as detailed in note 12 on page 88.
The Group monitors capital using a gearing ratio, which is determined as the proportion of debt to equity. Debt is defined as long and short term borrowings. Equity includes all capital and reserves of the Group attributable to the equity holders of the parent. The Group's policy for its existing business is to use debt where appropriate, whilst maintaining the gearing ratio at a level under 10%.
The gearing ratio at the year-end is as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Net debt | – | – |
| Equity | 122,160 | 110,042 |
| Gearing ratio | 0% | 0% |
The Group is not subject to externally imposed capital requirements.
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults.
Trade receivables consist of a large number of customers, spread across different industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods:
| At 31 December 2014 | 1,256 | (739) | 214 | (114) | 617 |
|---|---|---|---|---|---|
| Charge to equity | – | 3,103 | – | – | 3,103 |
| Charge/(credit) to income | 1,276 | 142 | (16) | 92 | 1,494 |
| At 1 January 2014 | (20) | (3,984) | 230 | (206) | (3,980) |
| Credit to equity | – | (3,374) | – | – | (3,374) |
| Charge/(credit) to income | 65 | 130 | (50) | (91) | 54 |
| At 1 January 2013 | (85) | (740) | 280 | (115) | (660) |
| Accelerated tax depreciation £'000 |
Share-based payment £'000 |
Untaxed reserves £'000 |
Other temporary difference £'000 |
Total £'000 |
Financial Statements
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Deferred tax liabilities | 617 | 328 |
| Deferred tax assets | – | (4,308) |
| 617 | (3,980) | |
| 23. Trade and other payables | ||
| 2014 £'000 |
2013 £'000 |
|
| Trade payables and accruals | 9,888 | 19,225 |
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit taken for trade purchases is 16 days (2013: 18 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value.
Other financial liabilities consist of lease incentives.
The borrowings are repayable as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Within one year | 57 | 57 |
| In the second year | 68 | 57 |
| In the third to fifth years inclusive | 151 | 125 |
| Over five years | 89 | 110 |
| 365 | 349 | |
| Less: amount due for settlement within twelve months (shown under current liabilities) | (57) | (57) |
| Amount due for settlement after twelve months | 308 | 292 |
The amounts included above are not considered to be materially different from the present value of their carrying amounts.
The Group aims to mitigate liquidity risk by managing cash generation by its operations and applying cash collection targets throughout the Group. Investment is carefully controlled, with authorisation limits operating up to Group Board level and cash payback periods applied as part of the investment appraisal process. In this way the Group aims to maintain a good credit rating to facilitate fund raising.
In its funding strategy, the Group's objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts, bank loans, finance leases and hire purchase contracts. The Group manages liquidity risk by maintaining adequate reserves and banking facilities by continually monitoring cash flows and matching the maturity profiles of financial assets and liabilities.
The Group is inherently a net generator of cash at the operating level. Excess cash used in managing liquidity is only invested in financial instruments exposed to insignificant risk of changes in market value, being placed on interest-bearing deposit with maturities no more than 12 months allowed per the policy. Short term flexibility is achieved by overdraft facilities.
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods:
| Warranty and | |||
|---|---|---|---|
| commercial agreements £'000 |
Restructuring £'000 |
Total £'000 |
|
| At 1 January 2013 | 1,629 | – | 1,629 |
| Additional provision in the year | 1,414 | – | 1,414 |
| Utilisation of provision | (1,306) | – | (1,306) |
| Release of provision | (663) | – | (663) |
| At 1 January 2014 | 1,074 | – | 1,074 |
| Additional provision in the year | 297 | 499 | 796 |
| Utilisation of provision | (603) | (492) | (1,095) |
| Release of provision | (350) | – | (350) |
| At 31 December 2014 | 418 | 7 | 425 |
The warranty and commercial disputes provision represents management's best estimate of the Group's liability related to claims against product warranties or commercial sales agreements. The timing of the utilisation of this provision is uncertain.
The restructuring provision relates to costs for the reduction made to the global work force in 2014.
| 2014 £'000 |
2013 £'000 |
|||
|---|---|---|---|---|
| Issued and fully paid: | ||||
| 76,642,309 (2013: 75,894,829) ordinary shares of 10.0p each | 7,664 | 7,589 | ||
| The movement during the year on the Company's issued and fully paid shares was as follows: | ||||
| 2014 Number |
2013 Number |
2014 £'000 |
2013 £'000 |
|
| At beginning of year | 75,894,829 | 74,738,321 | 7,589 | 7,474 |
| Exercise of share options | 747,480 | 1,156,508 | 75 | 115 |
| At end of year | 76,642,309 | 75,894,829 | 7,664 | 7,589 |
The Company has one class of ordinary shares which carry no right to fixed income.
| Scheme Date of grant |
Number of shares under option as at 31 December 2014 |
Number of shares under option as at 31 December 2013 |
Subscription price per share |
|---|---|---|---|
| Xaar plc 2004 Share Option Plan 13.04.05 |
5,000 | 5,000 | 208.5p |
| 15.09.05 | 17,144 | 17,144 | 274.0p |
| 21.08.08 | 1,000 | 3,500 | 108.25p |
| 01.04.09 | – | 7,500 | 56.0p |
| 22.11.10 | 39,175 | 44,175 | 211.0p |
| 01.06.11 | 212,591 | 335,000 | 250.0p |
| 27.10.11 | 20,000 | 25,000 | 243.0p |
| 01.05.12 | 410,000 | 425,000 | 226.5p |
| 18.10.12 | 15,000 | 17,500 | 249.75p |
| 719,910 | 879,819 | ||
| Xaar plc Share Save Scheme 21.12.10 |
– | 265,853 | 174.0p |
| 01.11.11 | 39,935 | 123,242 | 212.0p |
| 01.11.12 | 245,587 | 279,422 | 185.0p |
| 01.11.13 | 45,618 | 220,449 | 616.0p |
| 01.11.14 | 678,919 | – | 338.0p |
| 1,010,059 | 888,966 | ||
| Xaar plc Share Incentive Plan 17.04.13 |
24,887 | 26,447 | 0.0p |
| 16.04.14 | 29,085 | – | 0.0p |
| 53,972 | 26,447 | ||
| Total share options outstanding at 31 December | 1,783,941 | 1,795,232 |
Options granted under the Xaar plc 2004 Share Option Plan are ordinarily exercisable within three to ten years after the date of the grant.
The maximum value of approved options, under the Xaar plc 2004 Share Option Plan, which may be granted to individual employees is £30,000.
Options under the Xaar plc Share Save Scheme are ordinarily exercisable between 36 and 42 months after the date of the grant.
Awards under the Xaar plc Share Incentive Plan are ordinarily exercisable between three and five years after the date of the grant.
Governance
Performance Share Awards outstanding under the Xaar plc 2007 Long Term Incentive Plan are as follows:
| Date of grant | Number of shares under option as at 31 December 2014 |
Number of shares under option as at 31 December 2013 |
|---|---|---|
| 11.04.11 | 57,112 | 299,242 |
| 03.05.11 | 33,740 | 74,769 |
| 02.04.12 | 370,110 | 389,084 |
| 01.05.12 | 183,784 | 183,784 |
| 02.04.13 | 416,106 | 431,441 |
| 15.05.13 | 63,500 | 63,500 |
| 02.04.14 | 243,869 | – |
| 12.05.14 | 38,265 | – |
| 1,406,486 | 1,441,820 |
All awards under this scheme are exercisable within three to ten years after the date of grant.
| £'000 | |
|---|---|
| Balance at 1 January 2013 | 24,406 |
| Premium arising on issue of equity shares | 1,078 |
| Balance at 1 January 2014 | 25,484 |
| Premium arising on issue of equity shares | 861 |
| Balance at 31 December 2014 | 26,345 |
| Balance at 31 December 2014 | (3,796) |
|---|---|
| Transfer to share incentive plan | 270 |
| Balance at 1 January 2014 | (4,066) |
| £'000 |
Of this balance, £20,000 (2013: £20,000) represents 91,250 ordinary shares in Xaar plc held in trust by Xaar Trustee Ltd. Xaar Trustee Ltd was formed in 1995 to act as Trustee to the Employee Benefit Trust established in 1995 to hold shares for the benefit of the employees of the Company and the Group. There has been no movement in the number of shares held in trust by Xaar Trustee Ltd during the year.
The remaining balance of £3,776,000 (2013: £4,046,000) represents the cost of 1,373,703 (2013: 1,433,901) shares in Xaar plc purchased in the market at market value and held by the Xaar plc ESOP trust to satisfy options granted under the Company's share option schemes.
The market value of own shares as at 31 December 2014 was £5,647,000 (2013: £17,082,000).
Exchange differences on retranslation of net investment (7)
£'000
Balance at 1 January 2013 357
| Notes | Merger reserve £'000 |
Share-based payments £'000 |
Other reserves £'000 |
Total other reserves £'000 |
Retained earnings £'000 |
Total £'000 |
|
|---|---|---|---|---|---|---|---|
| Balance at 1 January 2013 | 1,105 | 4,917 | 485 | 6,507 | 39,590 | 46,097 | |
| Net profit for the year | – | – | – | – | 31,861 | 31,861 | |
| Share issue related to | |||||||
| LTIP awards | – | – | – | – | (46) | (46) | |
| Own shares sold in the period | – | – | – | – | (24) | (24) | |
| Dividends paid | 12 | – | – | – | – | (4,059) | (4,059) |
| Tax taken directly to equity | – | – | – | – | 4,753 | 4,753 | |
| Movement in valuation of | |||||||
| share options | – | 2,103 | – | 2,103 | – | 2,103 | |
| Balance at 1 January 2014 | 1,105 | 7,020 | 485 | 8,610 | 72,075 | 80,685 | |
| Net profit for the year | – | – | – | – | 18,692 | 18,692 | |
| Share issue related to | |||||||
| LTIP awards | – | – | – | – | (28) | (28) | |
| Own shares sold in the period | – | – | – | – | (9) | (9) | |
| Dividends paid | 12 | – | – | – | – | (6,377) | (6,377) |
| Tax taken directly to equity | – | – | – | – | (2,248) | (2,248) | |
| Movement in valuation of | |||||||
| share options | – | 1,106 | – | 1,106 | – | 1,106 | |
| Balance at 31 December 2014 | 1,105 | 8,126 | 485 | 9,716 | 82,105 | 91,821 |
The merger reserve and other reserves are not distributable. The merger reserve represents the share premium account in Xaar Technology Limited. The share-based payment reserve represents the cumulative charge made under IFRS 2 in relation to share options and LTIP awards. Other reserves represent the non-distributable portion of the dividend received in Xaar plc from Xaar Digital Limited.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Profit before tax | 23,110 | 40,087 |
| Adjustments for: | ||
| Share-based payments | 242 | 4,204 |
| Depreciation of property, plant and equipment | 9,836 | 7,410 |
| Amortisation of intangible assets | 885 | 889 |
| Research and development expenditure credit | (234) | (586) |
| Investment income | (394) | (443) |
| Finance costs | – | 55 |
| Foreign exchange losses/(gains) | 331 | (26) |
| Losses/(gains) on forward contracts | 6 | (9) |
| Loss on disposal of property, plant and equipment | 189 | 250 |
| Decrease in provisions | (650) | (555) |
| Operating cash flows before movements in working capital | 33,321 | 51,276 |
| Increase in inventories | (4,725) | (2,121) |
| Decrease/(increase) in receivables | 2,002 | (2,945) |
| (Decrease)/increase in payables | (6,556) | 4,091 |
| Cash generated by operations | 24,042 | 50,301 |
| Income taxes paid | (5,645) | (5,208) |
| Net cash from operating activities | 18,397 | 45,093 |
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Minimum lease payments under operating leases recognised as an expense in the year: | ||
| Fixtures, fittings and equipment | 69 | 60 |
| Land and buildings | 2,194 | 1,844 |
| 2,263 | 1,904 |
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
| Fixtures, fittings and equipment | Land and buildings | |||
|---|---|---|---|---|
| 2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
|
| Within one year | 53 | 47 | 1,807 | 2,148 |
| In the second to fifth years inclusive | 40 | 41 | 4,002 | 5,115 |
| After five years | – | – | 1,409 | 1,740 |
| 93 | 88 | 7,218 | 9,003 |
The operating leases in respect of fixtures, fittings and equipment extend over a period of up to six years.
The Company's share option schemes are open to all employees of the Group. Options are exercisable at a price equal to the average quoted market price of the Company's shares on the date of grant. The standard vesting period is three years.
An option granted under the Xaar plc 2004 Share Option Plan before 2011 will be exercisable over shares with a market value at the date of grant not exceeding a person's annual salary if at the third anniversary of grant the EPS growth of the Company since grant has exceeded the growth in the Retail Prices Index (RPI) over the same period by at least 12%. To the extent that an option relates to shares with a market value as at the date of grant in excess of a person's annual salary, the option will be exercisable over all of the excess shares if EPS growth over this period has exceeded RPI growth by at least 15%. For EPS performance between these two points, options will be exercisable over the excess shares on a sliding scale. In addition, options can only be exercised if EPS is at least 5.5p for the financial year preceding the third anniversary of grant. Performance may be retested once only from the date of grant to the fourth or fifth anniversary of grant (at the discretion of the Remuneration Committee), but the original EPS growth targets will be increased from 12/15% to 16/20% and 20/25% respectively. The 5.5p target will apply for the final financial year in the extended period.
An option granted under the Xaar plc 2004 Share Option Plan from 2011 onwards will be exercisable over shares with a market value at the date of grant not exceeding a person's annual salary, if at the third anniversary of grant, Xaar plc has achieved positive adjusted profit before tax as shown in the consolidated income statement in the Company's Annual Report and Accounts for any of the three years ending during the vesting period. One-third of the shares subject to the option granted rounded to the nearest whole share, will vest based on the performance condition being met per year for each of the three years ending in the vesting period. If the adjusted profit before tax as shown in the consolidated income statement in Xaar plc's Annual Report and Accounts for any relevant year is restated before the option becomes exercisable, the restated figure shall, unless the Remuneration Committee determines otherwise, be applied in determining whether the above targets are met. In addition, options shall only become exercisable in respect of any shares if the committee in its absolute discretion determines that the overall financial performance of Xaar plc over the performance period is satisfactory.
The Xaar 2007 Share Save Scheme provides an opportunity to all UK employees to save a set monthly amount (up to £250 pre 2014, up to £500 from 2014) over three years towards the exercise of a discounted share option, which is granted at the start of the three years.
The Xaar Share Incentive Plan provides an opportunity for all UK employees to buy shares from their pre-tax remuneration up to the limit permitted by the relevant tax legislation (£1,500 per year for the awards made in 2013 and 2014) and are awarded additional shares for free on a matching basis; the Company currently operates the plan on the basis of a 1:1 match but may award matching shares up to the maximum ratio permitted by the relevant tax legislation (currently a 2:1 ratio).
Options and awards under the Xaar 2007 Share Save Scheme and Xaar Share Incentive Plan are not subject to performance conditions.
If the options remain unexercised after a period of ten years from the date of grant, or 42 months in the case of the Share Save Scheme, or five years in the case of the Share Incentive Plan (being the contractual lives), the options expire. Save as permitted in the share option scheme rules, options lapse on an employee leaving the Group.
Details of the share options outstanding during the year are as follows:
| 2014 | 2013 | |||
|---|---|---|---|---|
| Number of share options |
Weighted average exercise price (£) |
Number of share options |
Weighted average exercise price (£) |
|
| Outstanding at beginning of year | 1,795,232 | 2.60 | 2,275,956 | 1.99 |
| Granted during the year | 787,522 | 3.25 | 252,928 | 5.43 |
| Lapsed during the year | (333,537) | 4.53 | (39,848) | 2.10 |
| Exercised during the year | (465,276) | 1.95 | (693,804) | 1.65 |
| Outstanding at the end of the year | 1,783,941 | 2.70 | 1,795,232 | 2.60 |
| Exercisable at the end of the year | 334,845 | 2.41 | 77,319 | 2.05 |
The weighted average share price at the date of exercise for share options exercised during the period was £7.77 (2013: £6.42). The options outstanding at 31 December 2014 had a weighted average remaining contractual life of four years (2013: eight years). In 2014, options were granted on 16 April and 1 November. The aggregate of the estimated fair values of the options granted on those dates is £1.67 million. In 2013, options were granted on 17 April and 1 November. The aggregate of the estimated fair values of the options granted on those dates is £0.78 million.
The inputs into the Black-Scholes model are as follows:
| 2014 | 2013 | |
|---|---|---|
| Weighted average share price | £4.39 | £7.38 |
| Weighted average exercise price | £3.25 | £5.50 |
| Weighted average expected volatility | 55% | 42% |
| Expected life | 3 years | 3 years |
| Risk-free rate | 0.72% | 0.94% |
| Weighted average expected dividends | 0.73% | 0.10% |
Expected volatility was determined by calculating the historical volatility of the Group's share price over periods ranging from the previous one to three years. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Company's Long Term Incentive Plan is open to all employees of the Group. As at 31 December 2014 all unvested LTIP share awards are subject to the achievement of EPS performance conditions, as follows:
The number of shares that vest will depend on the EPS growth of the Company for the three financial years of the Company commencing on 1 January of the year of grant.
Awards that will vest will be calculated on a straight-line basis.
All awards made under this scheme are exercisable within three to ten years after the date of grant. Save as permitted in the Long Term Incentive Plan rules, awards lapse on an employee leaving the Group.
Key individuals are invited to participate in a bonus matching scheme where matching LTIP share awards are granted when the employee invests their bonus in Xaar shares and retains ownership of these shares for the duration of the LTIP share award vesting period. The matching share award is a 1 for 1 match on the pre-tax value of the bonus used to acquire bonus investment shares. Matching LTIP share awards are subject to the same performance criteria as all other LTIP awards.
Details of Performance Share Awards outstanding during the year are as follows:
| 2014 | 2013 | |
|---|---|---|
| Awards outstanding at start of year | 1,441,820 | 1,409,583 |
| Granted during the year | 282,134 | 496,441 |
| Lapsed during the year | (34,309) | (1,500) |
| Exercised during the year | (283,159) | (462,704) |
| Awards outstanding at end of year | 1,406,486 | 1,441,820 |
| Exercisable at the end of the year | 90,852 | – |
In 2014, Performance Share Awards were made on 2 April and 12 May. The aggregate of the estimated fair values of grants made on those dates is £2.5 million. In 2013, Performance Share Awards were made on 2 April and 15 May. The aggregate of the estimated fair values of grants made on those dates is £2.1 million.
The estimated fair values for 2010 grants onwards were calculated using the Black-Scholes model, whereas the estimated fair value of 2009 grants were calculated using a stochastic (Monte-Carlo binomial) model. The inputs into the Black-Scholes model are as follows:
| 2014 | 2013 | |
|---|---|---|
| Weighted average exercise price | £nil | £nil |
| Weighted average expected volatility | 43% | 42% |
| Weighted average expected life | 7 years | 7 years |
| Weighted average expected dividend yield | 0.26% | 0.23% |
The Group recognised total expenses of £1,106,000 and £2,103,000 related to all equity-settled share-based payment transactions in 2014 and 2013, respectively.
The UK-based employees of the Group's UK companies have the option to be members of a defined contribution pension scheme managed by a third party pension provider. For each employee who is a member of the scheme the Company will contribute a fixed percentage of each employee's salary to the scheme. The only obligation of the Group with respect to this scheme is to make the specified contributions.
The employees of the Group's subsidiaries in Sweden are members of a state managed retirement benefit scheme operated by the Government of Sweden. The subsidiaries are required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.
The total cost charged to the income statement in respect of these schemes during 2014 was £1,642,000 (2013: £1,096,000). As at 31 December 2014 contributions of £140,000 (2013: £191,000) due in respect of the current reporting period had not been paid over to the schemes.
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration report on page 42.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Short term employee benefits | 1,252 | 2,002 |
| Post-employment benefits | 98 | 88 |
| Share-based payments | 71 | 1,039 |
| 1,421 | 3,129 |
On 19 March 2015, the Company has proposed to close its manufacturing facility in Järfälla, Sweden during 2016. The sales volume of older generation products which are produced in this plant no longer justify the cost of a standalone operation. The total costs associated with the proposed closure are projected to be £5 million, with half of this cost being non-cash charges related to tangible assets and goodwill.
| Notes | 2014 £'000 |
2013 £'000 |
|---|---|---|
| Fixed assets | ||
| Investments in subsidiaries 3 |
4,445 | 12,445 |
| Held-to maturity investments 3 |
1,000 | 1,000 |
| 5,445 | 13,445 | |
| Current assets | ||
| Debtors – due within one year 4 |
82,791 | 65,886 |
| Debtors – due after one year 4 |
135 | 173 |
| Cash at bank and in hand | 16,021 | 21,018 |
| 98,947 | 87,077 | |
| Creditors: amounts falling due within one year 5 |
(32,640) | (35,653) |
| Net current assets | 66,307 | 51,424 |
| Total assets less current liabilities | 71,752 | 64,869 |
| Net assets | 71,752 | 64,869 |
| Capital and reserves | ||
| Called up share capital 6 |
7,664 | 7,589 |
| Share premium account 6 |
26,345 | 25,484 |
| Other reserves 6 |
25,333 | 25,333 |
| Own shares 6 |
(3,776) | (4,046) |
| Share-based payment reserve 6 |
2,173 | 2,047 |
| Profit and loss account 6 |
14,013 | 8,462 |
| Equity shareholders' funds 8 |
71,752 | 64,869 |
The financial statements of Xaar plc, registered number 3320972, were approved by the Board of Directors and authorised for issue on 19 March 2015. They were and signed on its behalf by:
Doug Edwards Chief Executive
19 March 2015
Alex Bevis Finance Director and Company Secretary
The accompanying notes are an integral part of this balance sheet.
The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the preceding year.
The Company has taken advantage of the exemption of FRS 8 'Related party disclosures' not to show transactions with other companies in the Group headed by Xaar plc.
The Company has taken advantage of the exemption in paragraph 2D of FRS 29 'Financial Instruments: Disclosure' and not disclosed information required by that standard as the Group's consolidated financial statements, in which the Company is included, provide equivalent disclosures for the Group under IFRS 7 'Financial Disclosures'.
Own shares are deducted from equity. No gain or loss is recognised in the profit and loss account on the purchase, sale, issue or cancellation of the Company's own shares.
The Company has applied the requirements of FRS 20 'Share-based payment'. In accordance with the transitional provisions, FRS 20 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2005.
The Company issues equity-settled share-based payments to certain employees. These payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of the shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.
The fair value of options issued under the Company's Long Term Incentive Plan is measured using a stochastic (Monte Carlo binominal) model for grants made between 2007 and 2009 inclusive. The fair value of all other equity-settled share-based payments is measured using the Black-Scholes pricing model.
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when the timing differences crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets and liabilities are not discounted.
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured by reference to the nominal value only of the shares issued. Any premium is ignored.
Bonds with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments and are measured at amortised cost using effective interest method less any impairment.
As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account for the year. Xaar plc reported a profit for the financial year ended 31 December 2014 of £11,965,000 (2013: £9,411,000), which includes a dividend received from XaarJet Limited of £20,500,000 (2013: from Xaar Technology Limited of £10,000,000).
The average number of employees throughout 2014 was 35 (2013: 42). Staff costs amounted to £1.4 million (2013: £2.3 million). Information about the remuneration of Directors is provided in the audited part of the Directors' Remuneration report on page 42 of the consolidated financial statements.
The audit fee for the audit of the Company's annual accounts in 2014 was £22,000 (2013: £22,000).
Governance
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Subsidiary undertakings | ||
| At beginning of the year | 12,445 | 12,445 |
| Additions in the year | 936 | – |
| Impairment loss in the year | (8,936) | – |
| At end of the year | 4,445 | 12,445 |
| Held-to-maturity investments | ||
| At beginning of the year | 1,000 | – |
| Additions in the year | – | 1,000 |
| At end of the year | 1,000 | 1,000 |
Trading investments fully impaired in 2012 were disposed of in 2014. No trading investments remain as at 31 December 2014.
The investment held in Xaar Group AB was fully impaired in 2014.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Amounts receivable within one year | ||
| Amounts owed by Group undertakings | 82,659 | 65,721 |
| Prepayments and accrued income | 132 | 165 |
| 82,791 | 65,886 | |
| Amounts receivable after more than one year | ||
| Deferred tax asset | 135 | 173 |
| 82,926 | 66,059 |
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Amounts falling due within one year | ||
| Amounts owed to Group undertakings | 32,275 | 34,122 |
| Accruals | 365 | 1,531 |
| 32,640 | 35,653 |
For additional disclosures relating to financial liabilities, see note 24 to the consolidated financial statements.
| Notes | Called up share capital £'000 |
Share premium account £'000 |
Other reserves £'000 |
Own shares £'000 |
Share-based payments £'000 |
Profit and loss account £'000 |
Total £'000 |
|
|---|---|---|---|---|---|---|---|---|
| At 1 January 2013 | 7,474 | 24,406 | 25,333 | (4,195) | 1,482 | 3,180 | 57,680 | |
| New shares issued | 115 | 1,078 | – | – | – | (46) | 1,147 | |
| Own shares sold in the period | – | – | – | 149 | – | (24) | 125 | |
| Dividends paid | 7 | – | – | – | – | – | (4,059) | (4,059) |
| Profit for the financial year | – | – | – | – | – | 9,411 | 9,411 | |
| Credit to equity for share-based payments |
– | – | – | – | 565 | – | 565 | |
| At 1 January 2014 | 7,589 | 25,484 | 25,333 | (4,046) | 2,047 | 8,462 | 64,869 | |
| New shares issued | 75 | 861 | – | – | – | (28) | 908 | |
| Own shares sold in the period | – | – | – | 270 | – | (9) | 261 | |
| Dividends paid | 7 | – | – | – | – | – | (6,377) | (6,377) |
| Profit for the financial year | – | – | – | – | – | 11,965 | 11,965 | |
| Credit to equity for share-based payments |
– | – | – | – | 126 | – | 126 | |
| At 31 December 2014 | 7,664 | 26,345 | 25,333 | (3,776) | 2,173 | 14,013 | 71,752 |
Full details of movements in share capital and the share option schemes are given in note 26 to the consolidated financial statements. The share premium account and other reserves are non-distributable.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Amounts recognised as distributions to equity holders in the period: | ||
| Final dividend for the year ended 31 December 2013 of 5.5p (2012: 3.0p) per share | 4,124 | 2,211 |
| Interim dividend for the year ended 31 December 2014 of 3.0p (2013: 2.5p) per share | 2,253 | 1,848 |
| Total distributions to equity holders in the period | 6,377 | 4,059 |
| Proposed final dividend for the year ended 31 December 2014 of 6.0p (2013: 5.5p) per share | 4,599 | 4,174 |
The proposed final dividend is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements.
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Profit for the financial year | 11,965 | 9,411 |
| Credit to equity for share-based payments | 126 | 565 |
| Dividends paid | (6,377) | (4,059) |
| Own shares sold in the period | 261 | 125 |
| Share issue of LTIP award | (28) | (46) |
| New shares issued | 936 | 1,193 |
| Net addition to shareholders' funds | 6,883 | 7,189 |
| Opening shareholders' funds | 64,869 | 57,680 |
| Closing shareholders' funds | 71,752 | 64,869 |
The Company's share option schemes are open to all employees of the Company. Options are exercisable at a price equal to the average quoted market price of the Company's shares on the date of grant. The vesting period is three years. The vesting criteria of these options are disclosed in note 33 to the consolidated financial statements. If the options remain unexercised after a period of ten years from the date of grant, 42 months in the case of the Share Save Scheme, or five years in the case of the Share Incentive Plan, the options expire. Save as permitted in the share option scheme rules, options lapse on an employee leaving the Company.
Details of the share options outstanding during the year are as follows:
| 2014 | ||||
|---|---|---|---|---|
| Number of share options |
Weighted average exercise price (£) |
Number of share options |
Weighted average exercise price (£) |
|
| Outstanding at beginning of year | 197,852 | 2.37 | 378,372 | 1.66 |
| Granted during the year | 51,067 | 3.19 | 14,067 | 4.54 |
| Lapsed during the year | (19,090) | 4.55 | (5,054) | 1.79 |
| Exercised during the year | (27,392) | 1.76 | (189,533) | 1.12 |
| Outstanding at the end of the year | 202,437 | 2.45 | 197,852 | 2.37 |
| Exercisable at the end of the year | 64,223 | 2.38 | 11,875 | 1.89 |
The weighted average share price at the date of exercise for share options exercised during the period was £8.20 (2013: £5.81). The options outstanding at 31 December 2014 had a weighted average remaining contractual life of five years (2013: six years). In 2014, options were granted on 16 April and 1 November. The aggregate of the estimated fair values of the options granted on those dates is £114,000. In 2013, options were granted on 17 April and 1 November. The aggregate of the estimated fair values of the options granted on those dates is £48,000.
The performance conditions relating to the above share options and the exercise prices of options outstanding at the year-end are given in note 33 to the consolidated financial statements.
The inputs into the Black-Scholes model are as follows:
| 2014 £'000 |
2013 £'000 |
|
|---|---|---|
| Weighted average share price | £4.47 | £6.92 |
| Weighted average exercise price | £3.19 | £4.54 |
| Expected volatility | 55% | 42% |
| Expected life | 3.35 years | 3.71 years |
| Risk-free rate | 0.7% | 1.0% |
| Expected dividends | 0.7% | 0.1% |
Expected volatility was determined by calculating the historical volatility of the Company's share price over periods ranging from the previous one to three years. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Company's Long Term Incentive Plan is open to all employees of the Company. Vesting of Performance Share Awards made under this scheme is conditional upon the achievement of performance conditions. Full details of the performance conditions are shown in note 33 of the consolidated financial statements. All awards made under this scheme are exercisable within three to ten years after the date of grant. Save as permitted in the Long Term Incentive Plan rules, awards lapse on an employee leaving the Company.
Details of performance share awards outstanding during the year are as follows:
| 2014 | 2013 | |
|---|---|---|
| Awards outstanding at start of year | 492,916 | 444,676 |
| Granted during the year | 73,113 | 137,813 |
| Lapsed during the year | (750) | – |
| Exercised during the year | (118,889) | (89,573) |
| Awards outstanding at end of year | 446,390 | 492,916 |
| Exercisable at the end of the year | 27,866 | – |
In 2014, Performance Share Awards were made on 2 April and 12 May. The aggregate of the estimated fair values of grants made on those dates is £0.6 million.
In 2013, Performance Share Awards were made on 2 April and 15 May. The aggregate of the estimated fair values of grants made on those dates is £0.6 million.
| 2014 | 2013 | |
|---|---|---|
| Weighted average exercise price | £nil | £nil |
| Expected volatility | 43% | 42% |
| Expected life | 6.5 years | 6.5 years |
| Expected dividend yield | 0.2% | 0.2% |
The Company recognised total expenses of £0.1 million (2013: £0.6 million) related to share-based payment transactions in the year.
The following entities are wholly owned subsidiary undertakings of the Company:
| Name | Country of incorporation |
Principal activity | Issued and fully paid up share capital | Proportion of ordinary share capital held by the Company |
|---|---|---|---|---|
| Xaar Technology Limited | England | Research and development | 4,445,322 ordinary shares of £1 each | 100% |
| XaarJet Limited | England | Manufacturing, research and development and sales and marketing |
2 ordinary shares of £1 each | 100% |
| XaarJet (Overseas) Limited | England | Sales and marketing | 1 ordinary £1 share | 100% |
| Xaar Trustee Limited1 | England | Trustee | 2 ordinary shares of £1 each | 100% |
| Xaar Digital Limited | England | Treasury | 1 ordinary £1 share | 100% |
| Xaar Group AB | Sweden | Holding company | 1,137,000 ordinary shares of SEK 0.09 each |
100% |
| XaarJet AB2 | Sweden | Manufacturing | 1,000 ordinary shares of SEK 100 each | 100% |
| Xaar Americas Inc. | USA | Sales and marketing | 10,000 shares of common stock US\$1 each |
100% |
1 Xaar Trustee Limited shares are held by Xaar Technology Limited.
2 XaarJet AB shares are held by Xaar Group AB.
| 2014 £'000 |
2013 £'000 |
2012 £'000 |
2011 £'000 |
2010 £'000 |
|
|---|---|---|---|---|---|
| Summarised consolidated results | |||||
| Results | |||||
| Adjusted revenue | 109,150 | 134,134 | 86,304 | 68,706 | 54,678 |
| Adjusted gross profit | 48,602 | 71,020 | 40,948 | 30,379 | 22,864 |
| Adjusted profit before tax | 24,610 | 41,118 | 18,386 | 10,566 | 5,560 |
| Adjusted profit after tax | 20,229 | 33,102 | 14,964 | 7,922 | 4,082 |
| Adjusted diluted earnings per share | 26.4p | 43.2p | 20.1p | 10.7p | 6.2p |
| Dividends pence per share | 9.0p | 8.0p | 4.0p | 3.0p | 2.5p |
| Assets employed | |||||
| Net cash* | 46,963 | 53,485 | 28,853 | 17,403 | 21,991 |
* Net cash is made up of cash and cash equivalents, treasury deposits less borrowings.
Notice is hereby given that the eighteenth Annual General Meeting ('AGM') of Xaar plc (the 'Company') will be held at 316 Science Park, Cambridge, CB4 0XR on Wednesday 13 May 2015 at 9:30 am for the following purposes:
To consider and, if thought fit, pass the following resolutions which will be proposed as Ordinary Resolutions:
To consider and, if thought fit, pass the following resolutions which will be proposed in the case of Resolutions 15 and 17 as Special Resolutions and in the case of Resolution 14 and 16 as an Ordinary Resolution:
provided that this authority shall expire on the conclusion of the Company's Annual General Meeting in 2016, or, if earlier, at the close of business on 13 August 2016, save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot such equity securities in pursuance of such an offer or agreement as if the authority conferred by this resolution had not expired.
provided that this authority shall expire on the conclusion of the Company's Annual General Meeting in 2016, or, if earlier, at the close of business on 13 August 2016, save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the authority conferred by this resolution had not expired.
By order of the Board
Alex Bevis Company Secretary
19 March 2015
Registered office
316 Science Park Cambridge CB4 0XR
Registered number 3320972
Company Secretary Alex Bevis
Jefferies International Limited Vintners Place 68 Upper Thames Street London EC4V 3BJ
N+1 Singer One Bartholomew Lane London EC2N 2AX
Deloitte LLP City House 126–130 Hills Road Cambridge CB2 1RY
Mills & Reeve LLP Botanic House 100 Hills Road Cambridge CB2 1PH
Barclays Bank plc 9–11 St Andrews Street Cambridge CB2 3AA
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T +44 (0) 1223 423663 F +44 (0) 1223 423590 E [email protected]
www.xaar.com
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