REG - Xaar PLC - Annual Financial Report
Xaar plc
2019 FULL YEAR RESULTS
NEW STRATEGY IN PLACE TO RETURN XAAR TO GROWTH
Xaar plc ("Xaar", "the Group" or "the Company"), the leading inkjet printing technology, today announces its full year results for the 12 months ended 31 December 2019.
Summary of results for the year to 31 December 2019:
Adjusted¹
IFRS
2019
2018
2019
2018
Continuing operations
Revenue
£49.4m
£60.5m
£49.4m
£60.5m
Gross Profit
£12.0m
£29.5m
£12.0m
£29.5m
Gross Margin %
24.2%
48.8%
24.2%
48.8%
Gross R&D investment²
£5.7m
£8.3m
£5.7m
£8.3m
Net R&D investment²
£3.5m
£6.4m
£3.5m
£6.4m
(Loss)/profit before tax
(£9.8m)
£4.5m
(£11.9m)
£0.3m
Operating Margin %
(19.9%)
7.4%
(24.1%)
0.5%
Total operations
(Loss)/profit before tax
(£69.8m)
(£10.9m)
(£71.9m)
(£15.1m)
(Loss)/profit for the year
(£69.4m)
(£8.3m)
(£71.5m)
(£12.5m)
Diluted Earnings (loss) per share
(89.4p)
(10.5p)
(92.1p)
(15.9p)
Net Cash³ at year end
£25.3m
£27.9m
£25.3m
£27.9m
Dividend per share
0.0p
1.0p
0.0p
1.0p
1 - Excluding the impact of share-based payment charges, exchange differences relating to intra-group transactions, research and development expenditure credit and restructuring and derivative expenses, as reconciled in note 2
2 - Net R&D investment excludes the capitalised costs of the High-Speed Sintering development programme and includes the amortisation cost from December 2019 as required under International Financial Reporting Standards (IAS 38)
3 - Net cash includes cash, cash equivalents and treasury deposits
Strategic and operational highlights
· New Strategy in place and a clear path for all our business units
· New management team with appointment of John Mills as CEO in October 2019, and Ian Tichias as CFO in January 2020
· Printhead business restructured in November 2019 to align with new strategy to focus on the Bulk technology platform
· Significant progress in Xaar 3D Printing saw Stratasys increase its investment from 15% to 45% with an option to acquire the business outright
· Cessation of Thin Film programme in September 2019 following unsuccessful search for investment
· Appropriate measures taken to mitigate the impact of COVID-19 ensuring the health of our employees while ensuring we continue to deliver for customers
Financial highlights
· Revenue from Continuing Operations of £49.4 million (2018: £60.5 million) down £11.1 million year-on-year, underlying revenue excluding one-off Licensee Royalties in 2018 fell £1.2 million
· Decline in gross margin to 24.2% (2018: 48.8%) caused by declining licensee royalties and reduced factory throughput as cash conversion is prioritised
· Adjusted loss before tax for the continuing operations of £9.8 million (2018: £4.5 million profit)
· Loss for the year under IFRS of £71.5 million (2018: £12.5 million) driven by the cessation of the Thin Film programme
· Strong balance sheet with Net cash at 31 December 2019 of £25.3 million (2018: £27.9 million), significant cash outflows associated from Thin Film £18.0 million offset by increased Stratasys investment in Xaar 3D, £12.0 million, and cash generated by the continuing operations of £3.4 million
· Continued uncertainty associated with COVID-19 and any potential impact on financial performance therefore we believe it is prudent to suspend financial guidance
John Mills, Chief Executive Officer, commented:
"2019 has been a difficult year for the Group as a result of the performance of the Printhead business and decision to end investment in Thin Film. We entered 2020 with confidence in the long-term future of the business, with a revised strategy and product roadmap.
With a strong balance sheet and net cash we have the appropriate level of funding to deliver improved business performance. We have the fundamentals in place with a new management team executing a strategy to return to profitability and deliver sustainable growth for the long term."
Subsequent events with the rise of the COVID-19 virus and measures taken to stem its spread worldwide means it is impossible to determine the impact on Xaar's 2020 results. While we are yet to see a significant impact on customer demand it is too early to predict what effect the virus will have over the remainder of the year. Appropriate measures to preserve cash have been taken across all of our business units and we have placed upmost priority on securing the health and wellbeing of all employees and their families."
CONTACTS
Xaar plc
John Mills, Chief Executive Officer
Today: 020-7353-4200
Ian Tichias, Chief Finance Officer
Thereafter: 01223-423663
www.xaar.com
Tulchan Communications
James Macey White
Giles Kernick
Hollie Ralston
020-7353-4200
Chairman's Statement
These are exceptional times. The rise of the COVID-19 early in 2020 and the resulting actions globally are having a profound effect on economies, business and society at large. At Xaar our priority in managing this crisis has been to ensure the wellbeing of our people while taking necessary actions to navigate through what appears likely to be an extended period of uncertainty.
This situation comes on top of a tough year for the business in 2019. Following a review of strategy, difficult decisions were taken. Specifically the decision to stop work on the Group's Thin Film technology, with consequent cost actions and resulting job losses, was necessary for the good of the business but painful for all involved.
We entered 2020 with a printhead strategy re-focused on exploiting the Group's excellent bulk piezo technological capabilities. This, coupled with our investment in direct to shape product printing and strong progress and fresh investment including that from our partner Stratasys in Xaar 3D, provided a sense of optimism as the year started. Early signs have been promising with a change to the business model in the printhead business already leading to stronger engagement with key customers. Our order book in the first quarter has been encouraging, our operations teams are maintaining supply to customers and we have renewed vigour and focus in both our sales and marketing and R&D programmes.
The impact of COVID-19 was first felt in our China based operations. Our customers saw production levels fall but the relatively short period of 'lockdown' in China meant the impact on our business levels to date in the region has been minimal. Across Europe and, at time of writing, to a lesser extent America, the effects of Government action were being felt as the first quarter of 2020 came to a close.
The situation continues to evolve rapidly and that has led us to take actions to preserve cash and maintain liquidity. The Group entered 2020 debt free and with £25.3 million of net cash. This positive cash position means that even in our most pessimistic scenario for trading during the remainder of the year, along with actions to reduce costs and cash outflow and use government support where appropriate, we are confident that the business is well placed to manage through an extended period of uncertainty.
One of the consequences of the Covid-19 outbreak has been the delay in publishing these 2019 results. Further to the announcement made in September 2019 that Robin Williams had already served more than nine years on the board and would be standing down at the end of March 2020, I was appointed Chairman on 1 April 2020. In expectation of publishing results before this event, Robin as retiring chairman had prepared a report which, given the timing of the change, I am including below.
Retiring Chairman's Report
Dear Shareholder,
2019 has been a very challenging year for Xaar. In reaching the conclusion of the Strategic Review the Board has had to make a number of tough decisions to address the funding requirements for the Thin Film operation and issues affecting the underlying performance of the Printhead business.
As announced in March 2019, further investment was required in order to realise the full potential of Xaar's Thin Film technology. Having undergone a thorough advisor-led process that explored a number of different options the Board took the decision, in the absence of additional investment and with annual cash outflows in excess of £15 million, to cease Thin Film activities. This is clearly disappointing given the strength of the technology and the capability of the Xaar 5601 printhead. However, with volume sales still a number of years away and significant funding required for both the on-going development of the Thin Film platform and associated working capital the Board was left with no choice other than to cease investment.
We have also decided to stop all other related Thin Film programmes. Consequently, we have initiated the End Of Life of the Thin Film Xaar 1201. Unfortunately, with several integration and quality issues this product has not achieved the success that was originally anticipated and the consequential impairment charge was significant.
Our conclusion of the Thin Film programme and the decline in the rest of the Printhead business necessitated a significant restructuring of the business and a new strategy for the Printhead business, which is outlined in detail in the CEO report.
Following restructuring we have retained a small team of engineers in the hope of being able to monetise our Thin Film assets and IP.
Ceasing Thin Film activities has resulted in a significant impairment and write-off of assets; this combined with the underlying performance of our Thin Film programmes has resulted in a loss from discontinued operations of £56.1 million for the year. In December the further investment agreement between Stratasys and Xaar in relation to Xaar 3D was approved. This agreement saw Stratasys pay $15.5 million, £12.0 million, to increase its shareholding to 45% and acquire a written call option, exercisable within 3 years, to purchase all remaining shares in Xaar 3D. This investment agreement secures the funding required to commercialise whilst further strengthening the relationship between the two parties.
The underlying performance of our continuing operations was disappointing with revenues of £49.4 million (2018: £60.5 million) and losses before tax for the Group of £9.8 million on an adjusted basis (2018: £4.5m profit) with both our Printhead and Product Print Systems business units underperforming. However, our strong cash focus saw the continuing operations generate £3.4 million of cash in the year and the change in business model has shown some early signs of success with OEMs starting to reengage with the business.
In summary, the Company has undergone a significant change of direction arising from a Strategic Review and a major restructuring of the Printhead business. However, a substantial level of R&D expertise is retained in the Printhead business to make the advances in the Bulk product platform, which are required to underpin the new business plan.
We are confident that we now have the correct strategy in place to return Xaar to growth in the medium term.
Board changes
Having served almost five years as CEO, Doug Edwards resigned from the Board at the conclusion of the Thin Film Strategic Review and John Mills took over as CEO on 11th October 2019. John has extensive technical experience of the Print industry and of inkjet in particular and has successfully overseen the growth of several companies, most recently at Inca Digital where customer satisfaction and technical innovation drove performance.
Shomit Kenkare, CFO, stood down from his position at the 31 December 2019 in order to return to the USA and we are delighted to have Ian Tichias join us as CFO on 1 March 2020. Previously Group Finance Director and Deputy CFO at Ibstock plc, Ian brings over 15 years' experience in senior financial roles alongside a fresh new perspective, which will add significant value to the Company.
Margaret Rice-Jones indicated that she will not seek re-election at the 2020 AGM and so will leave the Board at that time, in order to be able to focus on her other Non-Executive responsibilities. A search has been initiated to find her successor as Chairman of the Remuneration Committee.
We announced in September 2019 that I had been on the Board of Xaar for more than the nine years recommended by the Governance Code. Having now overseen the Strategic Review and managed the CEO succession, I stepped down from the Board on 31st March. We are fortunate to have Andrew Herbert as a non-executive Director, who has taken over as Chairman from 1st April.
Employees
As a business we have faced a number of challenges this year, not least in the Printhead business where we have had to make a number of redundancies. It is through the hard work, dedication and professionalism of our employees that we have been able to overcome these challenges and start on a path to a brighter future. Our people are vital to our future success. The entire Board and I would like to take this opportunity to thank them for everything they have done this year.
Robin Williams
Chairman (retired 31 March 2020)
Outlook
Despite the difficulties in the last few years and the disappointing end of the Thin Film programme, the Company entered 2020 well positioned. Our strong balance sheet including a significant cash position with no debt, coupled with the steps taken to right size our cost base and improve our working capital position, provided confidence in our ability to re-establish a platform for profitable growth.
Our new management team has a clear insight into the environment in which our printheads and printers operate and a competitive product range with which to address both existing and new markets. In addition, we have a 3D Printing business with the potential to deliver a significant return on investment in the next few years and a Product Print business capable of improved performance and expansion.
While the uncertainty created by the measures taken to stem the spread of Covid-19 worldwide means it is impossible to determine the impact on Xaar's 2020 results, the board believes the actions taken to address the issues that have hindered performance in recent years will enable a return to profitability and growth in the medium term.
Andrew Herbert
Chairman (appointed 1 April 2020)
Chief Executive Officer's Report
I was delighted to join Xaar in August 2019 taking over as Chief Executive Officer on 11th October 2019. Whilst I joined Xaar at a challenging time I am excited by the commitment, passion and innovation of the people at Xaar and would like to take this opportunity to thank them for their welcome, and their continued hard work and dedication.
Strategic review
My immediate priority was to review the strategy for the Group and stabilise the Group's performance. We now have a clear strategy for the each of the individual business units as follows.
Printhead strategy
The decision taken in September 2019 to stop the Thin Film program, whilst difficult, was clearly necessary. That decision and the subsequent restructuring have left the Printhead business in a stronger more stable position from which to rebuild and eventually return to growth.
My management team and I have worked to evaluate and define a new strategy for the Printhead business which focusses on its Bulk technology. We have undertaken a detailed evaluation of our product portfolio and R&D roadmap, the market opportunities, our competitive position, core capabilities, and the cost structure, effectiveness and efficiency of the organisation.
Based on this evaluation, we have set out 4 strategies for our Printhead business:
1. A customer-centric business model that places the OEM at the heart of everything we do
2. Focus on markets where Xaar Bulk technology has a competitive advantage
3. A product roadmap that will develop the Bulk printhead range to offer advantages over the competition in existing and new markets
4. A marketing and communications plan that drives home the advantages of our current products, sells the value and capabilities of the new products on our roadmap, and builds trust in the new business model.
A customer-centric business model
A change in go-to-market strategy is critical to the future success of Xaar products. Our customers must be at the heart of our strategy. Whilst it is clear that Xaar has lost market share partly due to a failure to keep its Bulk product portfolio up to date, we have already seen a willingness from our customers to re-engage now we no longer use distributor channels. We will focus on helping OEMs to use Xaar printheads in their next generation products by emphasising our product's strong competitive features now they can be more certain about the impact on their own commercial models.
Key to the change in our business model will be moving from dual distribution to only selling through our OEMs. By selling printheads through distribution, Xaar removed the OEM's potential aftermarket which is fundamental to their sustained success. Removing distribution will eliminate the channel conflict which has made OEMs cautious of developing new machines with Xaar's printheads.
In addition, several behavioural and cultural changes regarding the way Xaar acts towards, and perceives, its OEM partners is required. These changes are already being embraced by the business. Fundamental to this change is a clear pricing strategy and more importantly a sales process that is focussed on selling the printhead based on its technical merits and the value of the relationship with Xaar.
Competitive advantage of our Bulk technology
Xaar's Bulk technology offers several benefits over the competition.
Xaar's Through Flow (TF) Technology ink recirculation provides a significant benefit where nozzle open time is an issue as it improves print reliability and machine uptime as well as reducing ink waste. Furthermore, Xaar's TF Technology improves ink stability. This means that ink companies and OEMs can broaden the specification for pigment suspensions in ink which in turn could reduce costs and improve reliability.
Xaar's High Laydown Technology allows the printhead to produce a drop which is more than 5 times the size of the native drop without any reduction in the number of drops per second. This feature is unique, and many OEMs have requested a demonstration to help them understand this significant achievement. High Laydown Technology offers the OEMs the ability to differentiate their products to provide print features that are not possible with any other printhead. This technology is particularly relevant to Ceramics, Labels, Product Print, 3D and Advanced Manufacturing.
Xaar's printhead architecture also enables jetting of ultra-high viscosity fluids. This high viscosity capability means that ink manufacturers and OEMs can formulate and use inks with more degrees of freedom in order to achieve desired end user properties. We have seen this capability gain traction in applications such as Glass, 3D and Advanced Manufacturing, where Xaar technology has proved to be superior to the competition.
Xaar's Bulk printhead technology and architecture enables operation in multiple orientations whilst maintaining print uniformity across the length and breadth of the printhead. This provides increased opportunities and unique solutions to printing on a range of objects. This has led to Xaar's printheads being used in vertical 'skyscraper' mode in Coding & Marking, Direct-to-Shape and Product Print applications.
Product roadmap
Despite the lack of investment in the Bulk technology in recent years, I have been surprised and excited to discover a range of technology projects that are at varying stages of the R&D life cycle. These are all projects that have either been put on hold because resources were redirected to Thin Film or are specific research projects undertaken by R&D team members who were not focussed purely on Thin Film. These technology projects provide a real opportunity to build on the current product portfolio by addressing some of the gaps whilst further enhancing the competitive advantages we have in other areas.
These technology developments have been prioritised in our roadmap and are focused on delivering performance enhancements within our core product range that will both strengthen our position in markets where we already hold a competitive advantage whilst adding capability that makes Xaar technology more applicable to a range of applications where we are presently under represented, such as Wider Format Graphics, Labels, Packaging and Textiles.
The product roadmap will also provide our OEMs with a more differentiated product offering than we have today and enable Xaar to better serve several key markets.
With a number of technology developments in the pipeline we are planning a more regular cadence of product launches over the next few years. We expect to launch the first product from our roadmap later in 2020 and we will start providing alpha and beta samples of products based on the new technology programmes to partner OEMs before the end of this year with the view to commercial launches in 2021. We are already engaging with our OEM partners and have received positive feedback on the new roadmap, with a number of OEMs looking to actively participate in the alpha and beta testing.
Marketing and communications
Rebuilding the Xaar brand and regaining the trust of OEMs is vital to the company's future success. Much of Xaar's resources, including those of the go-to-market functions, in recent years have been focussed on the Thin Film platform. Consequently, the benefits of the Bulk technology are poorly understood, and market perception is that Xaar's Bulk platform is aged. However, the advantages of the Bulk platform are clearly valid in a number of applications and based on the current competitive position will be well into the future. We need to do a better job of ensuring that Xaar's technology advantages are properly understood by our core markets.
Furthermore, our competitors have been very successful in promoting the benefits of their own technology particularly in areas where Xaar has an advantage, such as ink recirculation; consequently, market belief is that these technologies are fundamentally all the same.
Work is required to change perception and educate our target markets by demonstrating that the Xaar Bulk technology platform provides several significant and demonstrable advantages over competitor technology. Marketing resources are now focussed on meeting this challenge.
Through rebuilding the Xaar brand and promoting Xaar's technology advantages in focussed markets we expect to be able to recover some of the market share we have lost in recent years and gain traction in the newer markets we are targeting.
Product Print System Strategy
Our Product Print Systems company EPS has a strong reputation in the US product printing market and has grown its top line in recent years by delivering high quality, reliable, highly customised print systems. Opportunities remain to accelerate growth and to improve profitability and cash generation. The new priorities for EPS are as follows:
1. Focussed business development aimed at utilising existing technologies to expand into adjacent markets
2. Increased scalability through the standardisation of modular components whilst retaining the ability to meet each customers' unique requirements through customised fixtures and tooling
3. Improved controls over pricing and costs
This strategy is now becoming embedded in our operations and will help drive our performance during 2020 and beyond.
3D Strategy
The Xaar 3D business has made significant progress and following the increased investment in the business by Stratasys in December 2019 Xaar 3D now has sufficient financial resources to accelerate development and fully fund the commercialisation of its first High Speed Sintering based 3D printer. The business is moving towards beta testing of the first products during 2020 leading to product introduction by end of 2020. Technical progress is good and feedback from customer trials to date has been positive.
The investment agreement allows Xaar 3D to benefit to a greater degree from Stratasys' leading knowledge of the 3D market and go-to-market expertise providing confidence in the commercialisation programme.
As part of this investment agreement Xaar granted Stratasys a written call option to acquire all its remaining shares in Xaar 3D within the next 3 years for the greater of $33m or two times the revenue in the previous 12 months. In addition, Xaar will be entitled to an annual payment of 2% of the revenue associated with this business for a period of 15 years starting from the date the call option is exercised, up to a maximum aggregate amount of US$10 million. This potentially represents a significant return for shareholders based on a relatively modest initial investment. Additionally, Xaar expects to retain a strong long-term commercial relationship with the business for printhead supply.
COVID-19 (Coronavirus)
Following the coronavirus outbreak earlier this year our thoughts are first and foremost with our employees and their families in affected areas and to ensuring their wellbeing. Across all three business units we are taking measures to mitigate the impact of COVID-19 whilst doing all we can to ensure the health and wellbeing of our employees. We have stopped all international travel, remote access and business continuity testing has been performed, employees in at risk areas are working from home, we have communicated sick and self-quarantine policies to our staff, and we are closely following local government guidance.
The Xaar Printhead business has a significant customer base in both China and EMEA, including a strong customer presence in both Italy and Spain. These regions are supported by operations based out of Hong Kong, Italy and the UK. We are closely monitoring the situation and have stopped all travel in the affected areas and employees based in those regions are working from home. Our local teams have done a superb job in maintaining communications and support for our customers in difficult circumstances.
We have yet to see a significant impact on customer demand despite the impact of COVID-19 in China and Italy. However, it is too early to predict what impact the virus will have on customer demand during 2020; it is possible that the impact of the economic slowdown has not yet filtered through the entire supply chain so that we may see a drop off in demand from Q3 2020.
In addition, we are carefully monitoring our own supply chain and are in regular contact with our suppliers. We hold a sufficient buffer stock of critical components and at present we do not foresee any supply issues. We are also putting in place contingencies should the virus continue to spread and impact on production at our manufacturing facility in Huntingdon, UK. We currently feel we are well placed to ensure the continuity of supply to customers of our Printhead business.
Our EPS business, which is based in the US, has so far been unaffected by the COVID-19 outbreak. With sales predominantly in North America, the slowdown in output in China, the rest of Asia, and parts of Europe has not affected demand. However, EPS is the US master distributor for Comec Italia which is based in Italy, just north of Milan, so its supply of pad machines and parts are at risk. At present, EPS holds sufficient inventory to cover demand for the next 3 months for inks and approximately 6 months for parts and machine kits and we are working with Comec Italia to ensure continuity of supply. Depending on the severity of the spead of the virus, this could pose a significant risk to performance in 2020 with over half of EPS revenues coming from its Pad Printing product lines.
The supply chain of parts for EPS's digital inkjet machines has been unaffected at present. We are working closely with our suppliers to monitor the situation and are taking measures to mitigate any disruption in the supply chain.
Our 3D business is based primarily out of Nottingham, UK, and Copenhagen, Denmark. Measures implemented by the Danish government are impacting on the Copenhagen team who are restricting the number of individuals working from the office. This is slowing down the testing of the 3D machines due to the limit on individuals and the additional steps being taken to sanitize workspaces.
The supply chain for our 3D machines is reliant on components sourced from China and from our UK based Printhead business. Whilst our contract manufacturer is based in Israel. We are working with our suppliers to pull forward orders in order to mitigate supply risk.
Issues in the supply chain and further workplace restrictions may threaten to slow down, or delay, testing and the commercialisation of the 3D printers. However, currently Xaar 3D remains on track to commercialise its first product in the second half of this year.
With the continued uncertainty associated with the virus it is too early to assess the impact on the Groups financial performance. We remain committed to supporting our customers and suppliers whilst ensuring the health and wellbeing of our employees. Our thoughts remain with all those affected by the situation.
Brexit
The Group operates globally and the potential impact following the transition phase of Brexit is being monitored. One of the greatest challenges is potentially concerning EU workers and migration. Any actual or perceived barriers to free trade are an obvious area of concern for us as this could make trading with our EU customers more complex. As a result of Brexit, the Group is exposed to potential currency fluctuations, although not significant. Brexit and trade barriers continue to be an integral part of the Group's ongoing risk management and review process, for which solutions to address the risks identified are explored and implemented. Although there is still uncertainty surrounding the outcome of Brexit post the transition phase, we do not expect the direct consequences of Brexit to have a material impact on the Group.
2019 Business Performance
2019 has been a tough year for the Group with the disappointing performance of the Printhead Business Unit, and to a lesser extent Product Print Systems, outweighing the positive steps taken in 3D Business Unit.
Printhead Business Unit
The decision to stop the Thin Film program whilst difficult was clearly necessary. This decision along with the subsequent restructuring have left the Printhead Business in a stronger more stable position from which to rebuild and eventually return to growth. Beyond Thin Film the Printhead business, whilst still in decline, has stabilised.
Revenues excluding the discontinued Thin Film part of the business continued to decline falling from £46.7 million in 2018 to £33.7 million in 2019. However, the majority of this can be attributed to the presence of one-off Licensee Royalties of £9.9 million in 2018. Excluding the one-off Licensee Royalties, the 2019 revenue was down £3.1 million year on year, an 8% decline.
Historically Xaar has assessed its performance by looking at different market segments and sectors. From now on, whilst we will continue to group market sectors together, we will do this based on the required printhead functionality, primarily driven by the ink type; speed; resolution; price point; and robustness. From here on in we will assess our performance in following market sectors:
· Ceramics and Glass (includes Décor)
· Wide-Format Graphics (WFG) and Labels
· Packaging and Textiles
· Coding & Marking and Direct-to-Shape (includes Product Print)
· 3D and Advanced Manufacturing
· Licensee Royalties
Reported Revenue
Underlying Revenue
2019
2018
Var %
2019
2018
Var %
Ceramics and Glass
12,161
14,301
(15%)
12,161
14,301
(15%)
WFG and Labels
5,550
7,076
(22%)
5,550
7,076
(22%)
Packaging and Textiles
885
1,130
(22%)
885
1,131
(22%)
C&M and DTS
11,862
10,410
14%
11,862
10,410
14%
3D and Adv. Manufacturing
2,581
2,694
(4%)
2,581
2,694
(4%)
Royalties
642
11,098
(94%)
642
1,187
(46%)
Total
33,681
46,709
(28%)
33,681
36,799
(8%)
The performance of the Ceramics and Glass sector remains heavily influenced by the Ceramics market. We continued to see erosion of the Ceramics installed base with older Xaar-based machines being replaced by new machines with competitor printheads. Therefore, sales of the Xaar 1003, which addresses the existing install base, continued to decline. Xaar's market share of new installations remains low, estimated to be in single digits, with the Xaar 2001+ struggling to gain traction. The poor performance within the Ceramics sector can be attributed to several things. At the heart of this is the channel conflict caused by the dual distribution strategy that was in place. Secondly, the value proposition of the Xaar 2001+ is still not well understood and therefore the product is undervalued. Dealing with these issues will be key to reversing the declines in Ceramics with sales in 2019 declining 17% year-on-year.
We have started to make good progress in the Glass sector where we believe we have a clear competitive advantage due to the printhead architecture which has allowed us to develop a number of key accounts in this area and leaves us well positioned for growth in 2020.
Revenue from the WFG and Labels sector continues to fall due to the declining install base of printers using Xaar technology. Until we deliver on our product roadmap, we will struggle to gain traction with new installs in these sectors as there is a fundamental requirement for higher resolution and robust nozzle plates which Xaar cannot currently meet.
The Packaging and Textiles sector largely requires printheads which are aqueous compatible. Without this in the current portfolio of products, Xaar's Bulk technology is unable to compete.
In the Coding & Marking and Direct-to-Shape sectors we have seen mixed fortunes. We have had great success with our Xaar 501 and Xaar 502 products in Coding & Marking, with this sector growing 25% year-on-year. Direct-to-Shape, which includes the Product Print sector, has declined 20% year-on-year. With Direct-to-Shape still, relatively speaking, in its infancy the speed of conversion is modest and sales into this sector are inconsistent.
The 3D and Advanced Manufacturing sectors have remained flat year-on-year and are difficult to forecast. These sectors have large potential for Xaar; however, OEM development times are long, and demand is often driven by specific programmes which makes delivering consistent growth from these sectors in the short term difficult.
The restructuring programme announced in September 2019 has now been completed with a leaner, more efficient and focussed Printhead business designed to deliver the strategy. The targeted cost savings of £8 million, which were split across the Thin Film and Bulk parts of the business, have been delivered.
Xaar has retained a small team of Thin Film engineers in the hope of being able to realise some monetary value from the Thin Film technology we developed. It is our intention to retain this team until a suitable conclusion has been found either through the disposal of the technology through an asset sale or another option. We have also retained a small team to support the 'Last Time Buy' requirements of our Xaar 5601 customers and we expect to be able to absorb these individuals back into the Bulk business once the build out is complete.
Product Print Systems
Revenues from our Product Printing OEM EPS grew 15% year-on-year from £13.7 million in 2018 to £15.7 million in 2019 with improvements across all major product lines. Sales from our digital inkjet product lines grew 11% year-on-year driven by the sales of consumables and spares to the aftermarket, with machines sales up 5%. The analogue pad print product line grew 18% year-on-year driven by a 26% increase in revenues from machine sales.
In Q4 we installed the first machine designed and manufactured using our modular strategy and already have a second order in place. We have also identified several other opportunities we could win by using designs based around the core modules in this machine.
With profitability failing to match revenue in terms of growth we have started a programme of cost saving initiatives to improve our financial performance.
3D
We have made significant progress with our 3D business and have delivered against a number of key strategic milestones.
The manufacturing strategy has been finalised and we are working with one of the largest contract manufacturers in the world. We received the first machine manufactured by them in December, with 7 machines received in total to date. These are now all undergoing extensive testing prior to commercialisation.
With the receipt of the first sub-contract manufactured machine at the beginning of December we officially locked down the design of the printer. Therefore, we have stopped the capitalisation of development costs (a total of £5.1 million was capitalised) and started to amortise the intangible asset over an amortisation period of 10 years.
We have begun strengthening the go-to-market capabilities of the Xaar 3D team and are working closely with Stratasys on our joint go-to-market plans
Outlook and summary
2019 has undoubtedly been a difficult year for the Group, and for the Printhead business. However, we enter 2020 with a new strategy and a clear path for all our business units.
In the Printhead business we have a strategy which will enable us to re-engage with our OEMS, increase market share in sectors we have a competitive advantage and an exciting product roadmap which will deliver significant growth opportunities in the long run.
We now have a strong management team in place and coupled with our financial resources we have a clear commercial plan and market opportunity backed with great technology to drive increased performance.
In our Product Print Systems business our strategy addresses the key constraints to growth for EPS, expanding into new markets and the ability to scale whilst driving profitability and cash generation.
In 3D our partnership with Stratasys and the increased investment made in December leave the business in a strong position to deliver its potential and realise real value for shareholders.
2020 will be a year of transition setting the foundations for future growth and return to profitability. For the Printhead business this means stabilising, rebuilding relationships with key OEMs and executing on the early stages of the product roadmap. For EPS it will be to continue to grow revenue and move to a more scalable business model. Finally, in 3D the testing and validation of the design of the 3D Printer will continue and the planned commercialisation of the Printer by end of 2020.
The business is entering a new phase, with a new sense of focus and renewed energy. This is embodied in our new vision and mission which we have recently launched.
Our Vision is:
Through relentless innovation, Xaar technology will be at the heart of every inkjet application so that the world can be a more colourful, creative and productive place for all.
The Mission is:
Through consistently delivering on our commitments we will be the partner of choice for all inkjet applications. With 30 years of experience, world class products and talented people our mission is to push technical boundaries to become the inkjet technology leader.
John Mills
Chief Executive Officer
Financial Performance
2019 has been a difficult year for the Group with the loss for the year of £71.5 million reported on an IFRS basis (2018: £12.5 million). This was made up of a £56.1 million loss from the discontinued Thin Film operation and a £15.4 million loss from continuing operations.
During the year the Board took the decision to cease activities in relation to the Thin Film technology platform within its Printhead business. The financial results for this part of the business have been treated as discontinued operations in both the current and prior year financial statements. The remaining activities within the Group are referred to as continuing operations. Xaar also uses an underlying or adjusted measure which excludes the impact of share-based payment charges, exchange differences related to intra-group transactions, research and development expenditure credit, restructuring and investment expenses.
Continuing Operations
Revenue
Total revenue for the Group was £49.4 million down £11.1 million year-on-year (2018: £60.5 million). On an underlying basis, excluding the one-off £9.9 million Licence Royalty in 2018, revenue declined 2% year-on-year.
2019
2018
PH
PPS
3D
Total
PH
PPS
3D
Total
Americas
8,239
15,698
-
23,937
7,256
13,658
15
20,929
Asia
6,969
-
-
6,969
7,458
-
-
7,458
EMEA
18,473
-
18
18,491
22,084
-
86
22,170
Underlying revenue
33,681
15,698
18
49,397
36,798
13,658
101
50,557
2018 one off Royalty *
-
-
-
-
9,911
-
-
9,911
Total revenue
33,681
15,698
18
49,397
46,709
13,658
101
60,468
*royalty relates to Asia
Revenues in the Americas grew £3.0 million with the Printhead business driven by Xaar 501 sales into Coding & Marking up 14% and the EPS business which was 15% year-on-year. In Asia, revenue declined £0.5 million on an underlying basis as year-on-year royalties fell by £0.5 million and product revenues in the Printhead business remained flat. In EMEA the decline of £3.7 million was driven primarily by the Wide-Format Graphics and Labels sectors, down £2.7 million, and Direct-to-Shape which was down £0.5 million.
The gross profit for the Group declined by £17.5 million to £12.0 million (2018: £29.5 million). With the gross profit for the EPS business remaining flat, the decline in the gross profit for the Group can be attributed to the performance of the Printhead business. This was driven by a £10.5 million reduction in Licensee Royalties, £9.9 million of which related to a one-off Royalty in 2018. The contribution margin, excluding the one-off Royalty in 2018, has remained flat which, with the decline in revenue, has led to £2.6 million reduction in gross profit. Despite delivering cash savings of £2.7 million year-on-year, the overhead charge to the income statement increased £3.0 million. The overhead savings were offset by an underutilisation of the factory and a significant net movement of overheads out of inventory. Having seen the amount of Bulk inventory increase significantly in 2018 by £4.2 million and the turns on several product lines reaching excessive levels, action was taken during 2019 to reduce inventory and release cash tied up in working capital. The net result of this is a reduction in inventory of £6.5 million and a significant reduction in factory output leading to an unfavourable year-on-year difference in overheads. Other cost of goods sold increased £2.4 million year-on-year; these were mainly one-off charges related to slow moving and legacy products.
As mentioned, the gross profit for the EPS business remained flat year-on-year. Given the 15% increase in revenues this is a somewhat disappointing result. It can be attributed to a small number of new accounts and lower than anticipated margins on the first bespoke machines for these customers.
Gross R&D for the continuing operations was £5.7 million in 2019 (2018: £8.3 million). Despite investment in the 3D business increasing £0.5 million R&D spend for the Group fell £2.6 million as R&D resources in the Printhead business were focussed on the now discontinued Thin Film operation. Net R&D spend was £3.5 million (2018: £6.4 million) after capitalising £2.3 million in relation to the development of a new High-Speed Sintering 3D printer platform. Capitalisation of the 3D printer platform ceased at the end of November, having capitalised a total of £5.1 million.
General and administrative expenses, on an adjusted basis, decreased by £0.3 million. However, under IFRS general and administrative expenses increased from £6.6 million in 2018 to £8.7 million in 2019. This increase was caused by a £1.2 million variance year-on-year in exchange differences relating to intra-group transactions and a £0.7 million increase in share-based payment charges.
Impairment losses on financial assets of £2.7 million in 2019 (2018: £3.2 million) predominantly relate to a distribution channel utilised by the Printhead business. Xaar has incurred significant charges over the last couple of years in relation to doubtful debts. With a change in business model which will see the Printhead business only selling to OEMs and a greater focus on managing working capital, impairment losses on financial assets are expected to be minimised in the following years.
Restructuring costs of £0.9 million (2018: £5.4 million) relate to the rightsizing of the Bulk technology part of the Printhead business and costs associated with closing our Swedish entity.
The adjusted loss before tax was £9.8 million with a tax charge of £3.5 million bringing the adjusted loss to £13.3 million. The loss before tax reported under IFRS was £12.2million with a tax credit for the year of £0.3 million bringing the loss before tax to £11.9million.
Discontinued Operations
The decision to cease Thin Film operations was based on the level of continued investment required. Combined losses before tax on an adjusted basis over the last two years have been over £31 million (2019: £15.6 million, 2018: £16.2 million), whilst significant cash has also been utilised to fund working capital requirements. The net decrease in cash from discontinued operations for the year was £18.0 million (2018: £16.1 million) being £17.6 million from operating activities and £0.3 million (2018: £0.4 million) from investing activities.
Retaining the Thin Film operation would place a significant burden on the Groups cash position.
In total the loss before tax from discontinued operations was £60.0 million (2018: £15.3 million). This included several significant impairments and one-off expenses:
· £28.5 million for the impairment of capitalised R&D
· £8.7 million of inventory write-offs related to the Xaar 5601 and Xaar 1201
· £5.4 million for the impairment of PPE
· £3.1 million for the settlement and provision of contractual liabilities
· £0.8 million for redundancy costs
· £0.2 million for doubtful debts that have occurred due to the cessation of Thin Film
· £0.1 million on advisory services
· Income of £2.3 million in relation to research and development expenditure credits in 2018/19 and the accelerated relief due to the impairment of the intangible asset.
Financial Position
The net assets for the Group in 2019 fell £60.9 million to £70.7 million (2018: £131.6 million). The decrease in the net asset position attributable to discontinued operations was £56.1 million, with the net assets of the continuing operations decreasing by £4.8 million.
Non-current assets for the Group decreased £30.9 million driven by Thin Film asset impairments of £33.9 million. With a strong cash focus in both the Printhead and EPS businesses the net book value of property, plant and equipment and other intangibles in these businesses declined. In the 3D business £2.3 million was added to the High-Speed Sintering 3D printer platform intangible assets. £3.6 million has been added for Right of Use assets as part of the transition to IFRS 16 and the Group has recognised £0.1 million deferred tax assets.
Current assets decreased by £34.2 million with current assets for the discontinued operation falling £10.8m excluding cash. Inventories for the continuing operations fell £7.5 million as the Group focussed on lowering its working capital and driving cash whilst trade debtors fell £8.9 million driven primarily by £2.1 million of doubtful debts related to distribution channels and a focus on working capital management.
The £2.6 million decline in cash was made up of £18.0 million of outflows related to discontinued operations, £12.0 million cash inflow from Stratasys in relation to 3D investments, and £3.4 million generated by the continuing operations through normal trading.
Current liabilities decreased £5.7 million, £6.0 million related to a decrease in Thin Film trade creditors and other payables. This was offset by a £2.4 million provision for Thin Film supplier commitments. Derivative financial instruments recognised at the end of the period related to the option granted to Stratasys to acquire Xaar 3D. £1.5 million has been added for lease liabilities as part of the transition to IFRS 16.
Non-current liabilities at the end of 2019 of £2.5 million relates to lease liabilities added as part of the transition to IFRS 16.
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019
2019
Restated
2018
Notes
£'000
£'000
Revenue
49,397
60,468
Cost of sales
(37,435)
(30,972)
Gross profit
11,962
29,496
Research and development expenses
(3,502)
(6,358)
Research and development expenditure credit
260
842
Sales and marketing expenses
(8,410)
(8,581)
General and administrative expenses
(8,689)
(6,608)
Impairment losses on financial assets
(2,715)
(3,202)
Restructuring costs
(896)
(5,447)
Gain/(loss) on investment
106
(32)
Operating (loss)/profit
(11,884)
110
Investment income
103
170
Finance costs
(110)
-
(Loss)/profit before tax from continuing operations
(11,891)
280
Income tax (expense)/credit
(3,501)
2,406
(Loss)/profit for the year from continuing operations
(15,392)
2,686
Loss from discontinued operations
(56,082)
(15,166)
Loss for the year
(71,474)
(12,480)
Attributable to:
Owners of the Company
(71,051)
(12,397)
Non-controlling interests
(423)
(83)
(71,474)
(12,480)
Total Earnings (Loss) per share
Basic
3
(92.1p)
(16.1p)
Diluted
3
(92.1p)
(15.9p)
Total Earnings (Loss) per share from continuing operations
Basic
3
(19.4p)
(3.6p)
Diluted
3
(19.4p)
(3.6p)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2019
2019
Restated
2018
£'000
£'000
Loss for the year attributable to shareholders
(71,474)
(12,480)
Items that may be reclassified subsequently to profit and loss:
Exchange differences on retranslation of net investment
(192)
202
Tax charge on share options
-
(41)
Other comprehensive income for the year
(192)
161
Total comprehensive loss for the year
(71,666)
(12,319)
Total comprehensive loss attributable to:
Owners of the Company
(71,208)
(12,234)
Non-controlling interests
(458)
(85)
(71,666)
(12,319)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2019
2019
Restated
2018
£'000
£'000
Non-current assets
Goodwill
5,333
5,522
Other intangible assets
5,543
32,796
Property, plant and equipment
20,908
28,044
Right of use asset
3,561
-
Deferred tax asset
130
-
35,475
66,362
Current assets
Inventories
16,164
32,142
Trade and other receivables
9,109
21,398
Current tax asset
1,788
5,142
Treasury deposits
522
3,277
Cash and cash equivalents
24,800
24,669
52,383
86,628
Total assets
87,858
152,990
Current liabilities
Trade and other payables
(7,284)
(18,958)
Other financial liabilities
-
(33)
Provisions
(2,947)
(499)
Derivative financial instruments
(2,996)
(936)
Lease liabilities
(1,450)
-
(14,677)
(20,426)
Net current assets
37,706
66,202
Non-current liabilities
Deferred tax liabilities
-
(870)
Lease liabilities
(2,521)
-
Other financial liabilities
-
(103)
Total non-current liabilities
(2,521)
(973)
Total liabilities
(17,198)
(21,399)
Net assets
70,660
131,591
Equity
Share capital
7,833
7,833
Share premium
29,328
29,328
Own shares
(2,676)
(3,113)
Translation reserve
660
817
Other reserves
20,921
15,144
Retained earnings
7,855
79,554
Equity attributable to owners of the Company
63,921
129,563
Non-controlling interests
6,739
2,028
Total equity
70,660
131,591
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019
Share
Share
Own
Other
Translation
Retained
Non-controlling
Total
capital
premium
shares
reserves
reserve
earnings
Total
interest
equity
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
Balance at 1 January 2018
7,833
29,317
(3,642)
14,638
613
98,425
147,184
-
147,184
Loss for the year
-
-
-
-
-
(12,276)
(12,276)
(62)
(12,338)
Exchange differences on retranslation of net investment
-
-
-
-
204
-
204
(2)
202
Tax on items taken directly to equity
-
-
-
-
-
(41)
(41)
-
(41)
Total comprehensive income for the period
-
-
-
-
204
(12,317)
(12,113)
(64)
(12,177)
Issue of share capital
-
11
-
-
-
11
-
11
Own shares (acquired)/sold in the period
-
-
529
-
-
(424)
105
-
105
Dividends
-
-
-
-
-
(6,009)
(6,009)
-
(6,009)
Credit to equity for equity-settled share-based payments
-
-
-
506
-
-
506
-
506
Adjustment arising from change in non-controlling interest
-
-
-
-
-
-
-
2,264
2,264
Balance at 31 December 2018 as previously reported
7,833
29,328
(3,113)
15,144
817
79,675
129,684
2,200
131,884
Prior period adjustments
-
-
-
-
-
(121)
(121)
(172)
(293)
Balance at 31 December 2018 restated
7,833
29,328
(3,113)
15,144
817
79,554
129,563
2,028
131,591
Effect of initial application of IFRS 16
-
-
-
-
-
(211)
(211)
(2)
(213)
Balance at 1 January 2019 restated for IFRS 16
7,833
29,328
(3,113)
15,144
817
79,343
129,352
2,026
131,378
Profit for the year
-
-
-
-
-
(71,051)
(71,051)
(423)
(71,474)
Exchange differences on retranslation of net investment
-
-
-
-
(157)
-
(157)
(35)
(192)
Tax on items taken directly to equity
-
-
-
-
-
-
-
-
Total comprehensive income for the period
-
-
-
-
(157)
(71,051)
(71,208)
(458)
(71,666)
Issue of share capital
-
-
-
-
-
-
-
-
-
Own shares sold in the period
-
-
437
-
-
(437)
-
-
-
Credit to equity for equity-settled share-based payments
-
-
-
1,111
-
-
1,111
-
1,111
Adjustment arising from change in non-controlling interest
-
-
-
4,666
-
-
4,666
5,171
9,837
Balance as at 31 December 2019
7,833
29,328
(2,676)
20,921
660
7,855
63,921
6,739
70,660
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2019
2019
Restated
2018
Note
£'000
£'000
Net cash used in operating activities
4
(9,828)
(9,862)
Investing activities
Investment income
103
171
Treasury amounts deposited
2,755
(2,524)
Purchases of property, plant and equipment
(1,071)
(2,790)
Proceeds on disposal of property, plant and equipment
-
584
Expenditure on software
(90)
(160)
Expenditure on licences
-
(177)
Expenditure on capitalised product development
(2,255)
(1,915)
Net cash used in investing activities
(558)
(6,811)
Financing activities
Dividends paid
-
(6,009)
Proceeds from issue of financial instrument
-
902
Proceeds from non-controlling interest
12,003
2,115
Proceeds from the sale of ordinary share capital
-
105
Proceeds from issue of ordinary share capital
-
11
Payment of lease liabilities
(1,274)
-
Net cash provided by (used in) financing activities
10,729
(2,876)
Net increase/(decrease) in cash and cash equivalents
343
(19,549)
Effect of foreign exchange rate changes on cash balances
(212)
274
Cash and cash equivalents at beginning of year
24,669
43,944
Cash and cash equivalents at end of year
24,800
24,669
Cash and cash equivalents (which are presented as a single class of asset on the face of the consolidated statement of financial position) 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.
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED 31 DECEMBER 2019
1. Basis of preparation
The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 December 2018 and 2019 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditor has reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006.
While the financial information included in this summary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with International Financial Reporting Standards. The Company expects to publish full financial statements that comply with IFRSs in April 2020.
2. Reconciliation of adjusted financial measures
2019
Restated
2018
£'000
£'000
Operating (loss) / profit before tax from continuing operations
(11,884)
110
Share-based payment charges
912
235
Exchange differences on intra-group transactions
601
(628)
(Gain) / loss on derivative financial liabilities
(106)
32
Restructuring costs
896
5,447
R&D Expenditure credit
(260)
(842)
Adjusted Operating (loss)/profit before tax
(9,841)
4,354
Investment Income
103
170
Finance costs - for leases
(110)
-
Adjusted (loss) / profit from continuing operations before tax
(9,848)
4,524
Adjusted financial measures are alternative performance measures, which adjust for recurring and non-recurring items that management consider to have a distorting effect on the underlying results of the Group.
Share-based payment charges include the IFRS 2 charge for the period of £1,111,000 (2018: £506,000) and the credit relating to National Insurance on the outstanding potential share option gains of £199,000 (2018: £271,000). These costs were included in the general and administrative expenses in the consolidated income statement.
Exchange differences relating to the United States, Danish and Swedish operations represent exchange gains or losses recorded in the consolidated income statement as a result of operating in the United States, Denmark and Sweden. These costs were included in general and administrative expenses in the Consolidated income statement.
Gain/loss on derivative financial instruments relate to gains and losses made on call option contracts. These amounts are included on the consolidated income statement under (Gain)/loss on derivative financial liabilities.
Restructuring costs of £896,000 (2018: £5,447,000) relates mainly to 2019 redundancy programme, of which £87,000 is accrued as at year end. The calculated impact of the restructuring at Corporation Tax rate of 19% would be £170,000. In the prior year, restructuring costs of £5,447,000 relates mainly to the impairment of fixed assets of £3,126,000 used by the Printhead Business Unit. The fair value less costs of disposal is less than the value in use and hence the recoverable amount of the relevant assets has been determined on the basis of their value in use. The remaining costs in prior year relate to expenses incurred and provisions made in relation to a reorganisation, the closure of the manufacturing facility in Sweden in 2016, and investment related expenditure.
The research and development expenditure credit relates to the corporation tax relief receivable relating to qualifying research and development expenditure. This item is shown on the face of the Consolidated income statement.
2019
Restated
2018
Pence per share
Pence per share
Diluted earnings per share from continuing operations
(19.4p)
3.6p
Share-based payment charges
1.2p
0.3p
Exchange differences on intra-group transactions
0.8p
(0.8p)
(Gain)/loss on derivative financial assets
(0.2p)
-
Restructuring costs
1.2p
7.1p
Tax effect of adjusting items
(0.4p)
(0.2p)
Adjusted diluted earnings per share from continuing operations
(16.9p)
10.0p
3. Earnings (Loss) per ordinary share - basic and diluted
The calculation of basic and diluted earnings per share is based on the following data:
2019
Restated
2018
£'000
£'000
Earnings (Loss)
Earnings (loss) for the purposes of basic earnings per share being net loss attributable to equity holders of the parent
(71,051)
(12,397)
From Continuing Operations
(14,969)
2,769
From Discontinued Operations
(56,082)
(15,166)
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share
77,116,331
76,957,142
Effect of dilutive potential ordinary shares:
Share options
-
941,350
Weighted average number of ordinary shares for the purposes of diluted earnings per share
77,116,331
77,898,492
2019
2018
Pence per share
Pence per share
Basic
(92.1p)
(16.1p)
Diluted
(92.1p)
(15.9p)
Continuing Operations
Basic
(19.4p)
(3.6p)
Diluted
(19.4p)
(3.6p)
Discontinued Operations
Basic
(72.7p)
(19.7p)
Diluted
(72.7p)
(19.5p)
Potential ordinary shares are treated as dilutive if their conversion to ordinary shares would decrease continuing earnings per share or increase continuing loss per share. Accordingly, there is now a dilutive impact in the prior year following classification of Thin Film as discontinued. However, in 2019, the diluted continuing earnings per share is not impacted by the effect of dilutive potential ordinary shares.
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, the Xaar plc ESOP Trust and the matching shares held in trust for the Share Incentive Plan.
For 2019, there were share options granted over 978,915 shares that would not have been included in the diluted earnings per share calculation because they were anti-dilutive at the year-end (2018: 541,008 shares had not been included).
The performance conditions for LTIP awards over 1,733,172 shares (2018: 1,581,632 shares) have not been met in the current financial year or are not expected to be met in future financial periods, and therefore the dilutive effect of those shares have not been included in the diluted earnings per share calculation.
Adjusted earnings per share
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 intra-group transactions, restructuring and acquisition expenses, is based on continued operation earnings of:
2019
Restated
2018
£'000
£'000
(Loss) / Earnings on continuing operations for the purposes of basic earnings per share being Net (loss) / profit attributable to equity holders of the parent
(14,969)
2,769
Share-based payment charges
912
235
Exchange differences relating to intra-group transactions
(601)
(629)
(Gain) / loss on derivative financial assets
(106)
32
Restructuring costs
896
5,447
Tax effect of adjusting items
(337)
(95)
Adjusted (loss) / profit after tax - continuing operations
(13,003)
7,759
Tax effect of adjusting items is calculated at current Corporation tax rate (19%) less any disallowed tax items.
The denominators used are the same as those detailed above for both basic and diluted earnings per share.
Adjusted earnings per share on continuing operations is earnings per share excluding the items adjusted for as detailed above:
2019
Restated
2018
Pence per Share
Pence per Share
Adjusted basic
(16.9p)
10.1p
Adjusted diluted
(16.9p)
10.0p
Adjusted EPS for continuing operations is considered to provide a fairer representation of the Group's trading performance year on year.
4. Notes to the cash flow statement
2019
Restated
2018
£'000
£'000
(Loss) / Profit before tax from continuing operations
(11,891)
280
Loss before tax from discontinued operations
(60,001)
(15,349)
Total loss before tax
(71,892)
(15,069)
Adjustments for:
Share-based payments
912
235
Depreciation of property, plant and equipment
3,776
4,725
Depreciation of right of use assets
1,061
-
Amortisation of intangible assets
Impairment of assets
1,024
39,013
2,139
3,258
Research and development expenditure credit
(2,610)
(1,737)
Investment income
(103)
(170)
Interest expense - finance cost for leases
110
-
Foreign exchange losses / (gains)
Gain on re-measurement of derivative liability
447
(106)
(689)
-
Profit on disposal of property, plant and equipment
(18)
(3)
Loss on disposal of minority interest in subsidiary
-
32
Decrease / (Increase) in provisions
1,267
(1,383)
Operating cash flows before movements in working capital
(27,119)
(8,662)
Decrease/(increase) in inventories
12,172
(12,817)
Decrease in receivables
11,059
9,364
(Decrease)/increase in payables
(9,332)
2,724
Cash (used in)/generated by operations
(13,220)
(9,391)
Income taxes received/(paid)
3,392
(471)
Net cash from operating activities
(9,828)
(9,862)
5. Going concern
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 6 to 25. 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 Board have considered the impact of the ongoing COVID-19 impact. Whilst the impact to date on trading and debtor recoverability has been minimal, the impact of COVID-19 has created a high level of uncertainty as to the outlook for the remainder of the financial year and it is still too early to ascertain the impact this may have on our full year 2020 revenue and profitability.
The Board have therefore performed a number of stress tests to assess the Group's ability to continue as a going concern.
The Directors have prepared cash flow forecasts for the Group for a review period of 12 months from the date of approval of the 2019 financial statements. These forecasts reflect an assessment of current and future market conditions and their impact on the Group's future cash flow performance. The forecasts have been sensitised for a reduction in revenue from the second half of 2020 to the end of the review period. The forecasts have also been reverse stress tested by significantly reducing revenue from the second half of 2020 to the end of the review period, with some cost mitigations.
In the sensitised scenario the forecasts indicate the Group would still have sufficient cash to continue. In the reverse stress tested scenario, the Group would run out of cash. However, with some mitigation such as reducing discretionary spend, delaying capital expenditure and research and development costs, the Group would have sufficient cash. Notwithstanding this, the Group has further options to mitigate a cash shortfall which have not been factored into the above forecasts, such as staffing reductions, further delaying/stopping capital and research and development expenditure and applying for certain government support measures. Should it become apparent that sales orders, revenue and/or cash collections are being affected by a global slowdown, the Directors will undertake a further review on discretionary expenditure, staffing levels and capital investment to protect the Group's cash position.
Having considered all the above, including the Group's current strong cash position, the directors remain confident in the long term future prospects for the Group and its ability to continue as a going concern for the foreseeable future and therefore continue to adopt the going concern basis in preparing the financial statements.
Viability Statement
The long term viability of the Group is assessed by the Directors as part of the risk management process and regular strategic reviews.
The Company has undertaken a thorough strategic review of all three business units which has resulted in a three-year plan which takes into consideration the principal risks, product portfolios and R&D roadmaps, the market opportunities, our competitive position, core capabilities, and the cost structure, effectiveness and efficiency of the organisation.
The plan forms the basis for strategic actions to be taken across the Company and the key objectives for each business. These objectives, and the key performance metrics associated with these, are regularly reviewed by the Directors.
The Company is aware that it operates in an uncertain environment and faces risks both internally and externally that could potentially impact on the Company's ability to achieve its strategy.
As part of the process of reviewing these risks, and other potential risks, the Board assigns responsibility for these to members of the Executive Committee. It is the responsibility of the Executive Committee members to manage the risk and the mitigating actions.
This process is supplemented with strong internal controls and processes. This combination ensures that the Company manages the risks it faces appropriately and that these are considered in all of the
financial models.
The Board have assessed the viability of the Group over a three year timeframe based on the development cycles of our competitors and that of our customers and the probability this could lead to technological advancements that disrupt the markets that Xaar operates in. In practice the combined development time to produce a new printhead and subsequently a new printer is longer than this. The major risks to the Group in the three year timeframe considered predominantly relate to existing competition displacing Xaar with their current product portfolios and macro-economic events, such as the COVID-19 pandemic, that cause a significant downturn in the global
economy.
In assessing the viability of the Group, the Board have reviewed the forecasts and stress tested these by reducing forecasted revenues by the same double digit percentage each year. Whilst the future forecasts show growth (including expected sales from the commercialisation of Xaar 3D), these stress tests indicate that even if revenue decreases to an amount lower than that recognised in 2019, the Group, with some mitigation such as reducing discretionary spend, delaying capital expenditure and research and development costs, would have sufficient cash to survive. Moreover, the Group has further options to mitigate a cash shortfall which have not been factored into the above stress tests, such as staffing reductions, further delaying/stopping capital and research and development expenditure and applying for certain government support measures.
Taking account of the Company's current financial position, operating performance, and the principal risks and uncertainties, the Directors have assessed the prospects of the Company, and confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for the next three years, to December 2022.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR KKBBQBBKBQQB
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