Xaar Regulatory News (XAR)

28 March 2023

Xaar plc 

2022 FULL YEAR RESULTS

STRATEGIC PROGRESS DELIVERING PROFITABLE GROWTH

Xaar plc ("Xaar", the "Group" or the "Company"), the leading inkjet printing technology group, today announces its full year results for the 12 months ended 31 December 2022.

Financial Summary:

1 - Excluding the impact of share-based payment charges, exchange differences relating to intra-group transactions, gain on derivative financial instruments, restructuring and transaction expenses, research and development expenditure credit, other operating income, fair value gain on financial assets at fair value through profit and loss, and amortisation of acquired intangible assets, as reconciled in note 2 to the financial statements

2 - Net cash at 31 December includes cash, cash equivalents and treasury deposits

Financial Highlights

· Revenue of £72.8 million representing year-on-year growth of 23%; 8% organically

· Gross margin of 39% (2021: 34%), benefitting from strategic actions and increased operational leverage

· Increased investment in R&D spend in continuing operations of £6.7 million, up £1.0 million on 2021, focused on the ImagineX platform and product roadmap

· Positive adjusted EBITDA contributions from all our businesses

· Adjusted Group profit for the year ahead of expectations

· Robust balance sheet with cash of £8.5 million (2021 - £25.1m) reflecting acquisitions of Megnajet and FFEI and investment in working capital

Strategic and Operational Highlights

· Successful expansion of vertically integrated product range and rollout of product roadmap, including launch of Aquinox, delivering accelerated customer engagement

· Further expanding business capability and vertically integrated product offering: acquisition of Megnajet and successfully completed FFEI integration

· Further operational progress made in Engineered Printing Solutions (EPS), delivering increased customer engagement and strong revenue growth

· Phase 1 of operational efficiency programme with factory re-organisation completed on time and on budget delivering cost savings and increased capacity

· Ongoing delivery of product roadmap with successful Aquinox product launch

· Investment in working capital ensured successful mitigation of supply chain constraints as well as meeting customer demand

· Sustainability roadmap embedded in business with clear strategy to reach 'net zero' by 2030

John Mills, Chief Executive Officer, commented:

"We have transformed and re-energised Xaar as demonstrated by our good performance and further strategic progress with positive contributions from across the Group. We have delivered strong profitable revenue growth and the important milestone of achieving full year profitability which represents great progress against our plan.

From these strong foundations we will continue to invest for growth and the rollout of our product roadmap as we enhance our vertically integrated offer.

Aquinox has been successfully launched and is already being well received by our customers.

While being mindful of the external environment we remain optimistic about the future with the business in good shape to continue to make further progress and deliver full year performance in line with our expectations. With a substantial market opportunity and the progress made, we remain well positioned for the business to achieve its exciting potential.

Contacts:

A presentation for analysts and investors will be held via webcast and conference call at 09:00 today. For further details, please contact Xaar@teneo.com

Chairman's introduction

Into my third year as Chairman, I am delighted with the progress that the business has made, operationally, commercially, and strategically.

We are well positioned in growing markets, with a high-quality leadership team, strong R&D and manufacturing capabilities, and with technology that differentiates us from our competitors. In addition, strong capital discipline is enabling continued investment in growth opportunities.

Our central focus remains on our core competence of designing and manufacturing world leading printheads. The continued rebuilding and strengthening across all areas of our business has resulted in a platform from which we can deliver reliable business performance and meet the requirements of our customers.

We also have a clear focus on the value chain, placing our customers at the centre of our business. We offer integrated solutions in a wide number of market sectors, enabling more consistent financial performance. The technical and competitive advantages of the Xaar Bulk piezo product range has progressed well with the launch of our latest printhead, Aquinox. This product opens new markets to Xaar with its water-based capability, and we were pleased to see the product launched to plan and on time, reaffirming the expertise and focus we have across different teams in the Group.

The Board is delighted with the progress that the management team has made in re-energising the business and would also like to thank our teams and partners worldwide for their commitment and adaptability.

Continued strategic progress

This year's strong trading performance has been driven by all elements of the business and momentum continues to build. A clear strategy is now embedded across the Group with a focus on customer needs and a drive to highlight the benefits delivered by adoption of Xaar digital print technology.

This focus, along with our well-defined product roadmap has increased the quality and responsiveness of the business, and meaning we are well placed for further performance improvements. We believe a significant opportunity exists in market sectors and applications where Xaar technology provides commercial and technical performance advantages.

Operational improvements have also been made. We have previously discussed investing in our manufacturing facilities to improve efficiency and lower costs, and the first phase of this programme has now been completed. The Huntingdon factory re-organisation was completed in early 2023 on time and on budget. This will enable us to operate more efficiently, increase capacity and crucially generates significant cost savings, especially in reducing our energy consumption.

The acquisitions of FFEI and Megnajet have been successfully integrated adding capability and broadening our product range. This has increased our market opportunity and means Xaar is better placed to support customers with the integration of our printhead technology.

Our product print systems business, EPS, has had an excellent year, with increased customer engagement leading to significant revenue growth, higher gross margins and strong profitability.

Strong financial results

In what has proven to be another challenging year for the global economy, the Group delivered strong sales growth of 23% (8% organic) and achieved profitability for the year. We have taken actions to build organisational strength and resilience, while focussing on cost control and careful cash management.

Additionally, there has been investment to increase efficiency and ensure consistency of operational performance. This will mean the business is well placed to further deliver on the significant opportunities ahead as external pressures ease.

As has been the case for many businesses, over the past year we have been faced with unprecedented supply chain issues coupled with rising global inflation. Through taking proactive measures with a focus on managing our supply chain, investing in both raw materials and higher levels of finished goods, we have been continually strengthening our business resilience and maintaining uninterrupted supply to our customers.

The Printhead business made good progress both commercially and operationally during the year despite the ongoing impact of COVID-19 related restrictions in China. Whilst sales volumes have grown in the USA and remained stable in EMEA they declined significantly in Asia. The Printhead business has nevertheless performed well and responded to these difficulties in a proactive and controlled manner. 

As I discussed in my report last year, following challenges in market demand and performance, a new management team was appointed in EPS. This has led to a recovery in performance during 2022 with a strong order book profile and excellent results. Revenue grew 41% (24% in local currency USD), gross margin is back at pre-pandemic levels and a full year profit delivered.

We are pleased with the progress made at FFEI and Megnajet. Having only joined the group in July 2021 and March 2022 respectively, the integration of each business has been completed, and performance is in line with our expectations.

Cash of £8.5 million and a robust balance sheet provides a platform for further investment. This is after investment in working capital movements of £12.2 million as we managed supply chain constraints and ensured continued customer supply throughout the factory shutdown in Q1 2023.

The Board has not declared a dividend in 2022. We continue to believe that prioritising cash for investment in the business will deliver more compelling returns for shareholders in the medium term.

Committed to sustainability

We have made significant progress on ESG and the Group's Sustainability Roadmap. The Board remains committed to the business being carbon net zero by 2030. The Sustainability Roadmap demonstrates clear industry leadership and establishes a firm pathway for a more sustainable future. Decarbonisation remains a key objective and we have started work on Scope 3 and TCFD Climate Modelling for all Xaar Group sites which will be completed by early 2023.

We are passionate about delivering solutions and products for our customers that are cleaner and healthier. Our products are well placed to deliver significant benefits environmentally for our customers through greater efficiency in power consumption and reduction in water usage.

We also seek to have a wider positive impact on society by understanding and prioritising employee needs, doing business responsibly, and reaching out to our local communities. The majority of our sites in the UK have moved to 100% renewable energy. We aim to switch all contracts in the UK to renewable electricity by the end of 2023. All printhead product packaging is fully recyclable. Our Apprentice Programme is well developed across the business, and we continue to support activities promoting STEM (Science, Technology, Engineering and Maths) subjects amongst young people as well as several sponsorship programmes supporting young university students and industry placements.

Driven by our people

The Board is delighted with the progress made by the Group this year, in the context of a volatile external environment for both businesses and individuals. I would like to thank all our employees who have worked tirelessly to innovate, deliver for our customers, and inspire and support each other with passion and integrity. Xaar is a great company, and I am excited about what we can achieve in the future.

Outlook

With strong foundations in place as a result of the progress in our strategy over the last three years, the Board is optimistic about the opportunities that lie ahead for the Group and for all our stakeholders including employees, customers, and shareholders.

Andrew Herbert

Chairman

28 March 2023

Strategy Update

Introduction

Over the last 3 years the Group has been transformed, implementing a new strategy across the business, with a new commercial model shifting our focus to very attractive end markets; expanding our technology capabilities; and creating a growth platform. This strategy is now delivering growth across the business, and we are delighted the Group has returned to full year profit.

At the same time, we have also invested significantly in expanding our product and technology capabilities and updating our infrastructure, strengthening our key resource - people - and ensuring we have a robust platform to deliver future profitable growth.

Despite the external macro challenges, we have delivered an impressive performance in 2022 which is borne out in the financial metrics. Our core Printhead business grew in all regions except China which was impacted by COVID-19 restrictions for much of the year, and we have successfully launched our new product Aquinox with a commercial response that has exceeded our expectations.

During the year our US product print business, EPS, delivered its best ever results and with the acquisition of Megnajet we now have a resilient, diverse business well placed to meet the significant market opportunity that exists.

Excellent strategic progress

The turnaround we have described is now at the end of its first phase. We have established a clear strategy and we are ready for the next stage to achieve enduring profitable growth.

The first phase was focused on stabilising the business and establishing a clear strategy. Commercially this has seen the Printhead business reduce complexity in its routes to market by eliminating third party distributors and selling directly to OEMs and UDIs. Our principal objective is to sell more printheads. We provide an integrated solution for customers whereby they can access more of the printing ecosystem, to include supporting elements such as fluid management systems and the electronics required for printing. We help our customers take advantage of the inkjet opportunity, demonstrating to them that working with Xaar means a higher chance of success by being faster to market, making our customers' investment more profitable.

Our strategy is working, we are delivering on what we promised, and the future remains exciting. With phase 1 of the business transformation now complete. The business is stabilised, with a strong management team, delivering profitability and a strong platform on which to build.

Strong revenue growth, improved margin and full-year profitability

We have delivered a strong performance in 2022 in line with our expectations, further demonstrating the operational and strategic progress across the Group. We have improved resilience and have achieved the key milestone of delivering an adjusted profit before tax for the year.

Despite the global macro-economic and political uncertainties, we are successfully mitigating external challenges, principally the cost of inflation and the ongoing COVID-19 impact in China.

Revenue for the year was £72.8 million representing growth of 23%. Organic growth, before the impact of FFEI and Megnajet acquisitions was 8%.

Revenue grew in the US region by 54% and in EMEA by 20%. This demonstrates the resilience we are developing in the business and helped offset the decrease in revenue from Asia of £3.8 million (32%).

Reduced revenue in China has impacted our Ceramics sector printhead sales, however, we are confident in returning to previous levels of trade with our customers in the region as COVID-19 restrictions continue to be lifted. Our commercial and technology proposition remains compelling, and we have retained market share in the region.

We have been able to demonstrate the strength of our technology in market sectors beyond Ceramics and continue to see strong customer engagement in areas where we have a competitive advantage by enabling customers to reduce their own development times.

Our new product, Aquinox, was launched in November 2022. We have received excellent feedback and significant customer engagement, and early promising success indicators through strong sales of development kits.

EPS has delivered an excellent performance. Revenue increased 41%, with growth across all its product lines, and digital inkjet sales at the core of the success growing 54%. The proactive decisions taken in the last two years to strengthen the management team and rationalise the product range are delivering excellent results and demonstrate the continued importance of the business.

Our recent acquisitions, FFEI and Megnajet, are performing ahead of our initial expectations. We are delighted with these acquisitions and as a result we have an expanded product range providing us real traction and opportunity in the printbar and print engine markets, along with Fluid Management Systems.

With this revenue growth and the strong operational performance, we have increased Gross Margins in Printhead and EPS, and overall for the Group to 39% (2021: 34%).

While profit before tax from continuing operations of £0.8m includes some underlying business unit losses (consisting of Printhead £0.3m loss, EPS £2.8m profit, FFEI £0.3m loss and Megnajet £0.4m profit) we can report positive adjusted EBITDA in each of our businesses for 2022. Group adjusted EBITDA of £6.2 million, consists of Printhead adjusted EBITDA of £2.0 million, EPS adjusted EBITDA of £3.1 million, FFEI adjusted EBITDA of £0.5 million, and Megnajet adjusted EBITDA of £0.6 million. This has enabled delivery of full year profitability for the Group.

Investing for future growth

There has been further investment in capability and capacity enabling us to take advantage of the opportunities which we expect to drive our future growth ambitions.

During the year we acquired our fluid management system business, Megnajet, for an initial consideration of £5.1 million. The net cash outflow on acquisition was £3.5 million. This acquisition further strengthens our ability to deliver to customer needs, enhances our technology capability and expands the vertically integrated product offering. It is already delivering profitable growth ahead of expectations, enabling a quick payback on the original investment.

We have invested in inventory, holding higher levels of both raw materials and finished goods. This investment has been undertaken in a controlled, proactive manner to enable continued production of our products and customer supply. This is a vital part of our strategy to ensure we meet customer demand. As supply chains improve, we can look to reduce our raw materials holding although we will do so in a cautious, well-managed way. Higher levels of finished goods have enabled us to meet customer demand whilst the factory is closed for reorganisation and will leave us well placed to meet any increase in market demand.

R&D investment is critical to the ongoing success of the business, and we will continue to invest in our R&D capabilities across the Group to ensure our technology remains market leading. During the year we increased R&D investment by £1.0 million.

Our underlying positive cash generation in the core business has also enabled us to spend £5.4 million on maintenance and asset improvement across the business during 2022.

Additionally, we have invested approximately £1.2 million in our factory reorganisation project in Q1 2023. We expect a rapid return on this investment due to the energy savings it will provide, coupled with increased manufacturing efficiency.

This is the first phase of our transformation programme which will result in modern, efficient and more environmentally beneficial manufacturing facilities across the business.

Significant market opportunity

We have a strong proposition across our five key market sectors. Our digital inkjet technologies provide compelling propositions to transform print processes across a wide range of applications, and the medium and long-term opportunity for the business remains significant. Whilst we have already grown market share in core, mature markets such as Ceramics and Coding & Marking, further growth opportunities exist as our technology is best-in-class and we have a clear competitive advantage over our competitors.

We can capitalise on a number of sectors which need further digitisation of printing to secure increased market opportunities. These opportunities are typically in areas where fluid applications are challenging, such as Flat Panel Display, Semiconductors, Printed Electronics and Optics. We are well placed to succeed in these markets as Xaar technology offers an unrivalled method of non-contact, fluid deposition with incredible precision, control and speed. .

Other markets that already use digital printing such as architectural glass printing and 3D printing are tremendously exciting as our technology has unique benefits that can give our customers commercial advantage in reducing costs and lead times for their products.

By providing an integrated solution for customers whereby they can access more of the printing ecosystem, we help our customers take advantage of the Inkjet opportunity and working with Xaar means a higher chance of success by being faster to market, and therefore, making our customers' investment more profitable. Ultimately this will help us in our overriding strategy to sell more printheads.

We have seen increased customer engagement as our printhead product range has expanded and our ability to offer a broader solution to customers with fluid management systems and printbars, which is evidenced by the increasing number of customers developing machines with our products. Both our current product offering and our product development programme will help drive our success in meeting customer demand in these fast growing sectors.

Expansion of vertically integrated product offering

The acquisition of FFEI in July 2021 and Megnajet in March 2022 further widened our product offering for our OEM and UDI (User Developer Integrator) customers with a broader product range including print engines for adding effects and embellishments digitally. FFEI has been successfully integrated and strengthens Xaar's capabilities and skills and has seen the launch of a new print engine product, the Xaar Versatex. This will accelerate Xaar's existing growth strategy and widen the product portfolio further engaging UDI customers. We have a growing pipeline with a significant number of opportunities thanks to our technology advantages. This platform provides further opportunities for vertical integration, and we will strengthen our offering with more products in the pipeline for 2023.

Megnajet is a global leader in the manufacture of ink supply systems. We are delighted with the acquisition of the business which has been successfully integrated into the Group, and we are already benefiting from the expansion of our product offering.

The latest product powered by our ImagineX platform, our aqueous printhead, Aquinox, was launched in November 2022. This is a significant and tremendously exciting product for the Group and enables us to compete in new sectors, such as Packaging and Textiles, with a product that we believe will deliver superior performance to any currently on the market. We have received positive feedback from customers, evidenced by high engagement and good sales of development kits.

EPS, our product print system business is performing well, delivering high quality products to a variety of customer sectors. As we explore further opportunities in the US, EPS can play an increasing part in our strategy.

This approach has seen us deliver a more vertically integrated product offering to a wider group of customers in more market sectors.

Significantly improved operational capability

We have made further progress in building a world class leadership team, making key appointments which will drive the business in the next phase of our transformation. This has strengthened our capability and experience across the business, most notably in our Operations, R&D, Finance and Human Resources functions. This improved operational capability also includes further and continued investment in infrastructure such as IT, manufacturing, and supply chain management. Our strong and experienced leadership throughout the organisation is focussed on delivering a clearly articulated strategy.

During the year we have continued to work on ensuring our values are embedded into our culture. This ongoing focus on our values is important to ensure we have a supportive culture with employees who are engaged and empowered to succeed. 

Continued commitment to sustainability

Xaar has made significant and positive progress to drive forward its ESG commitments across our operations. We uphold the highest of standards across our business and comply with all relevant regulations in the territories in which we operate whilst enhancing the working environment for our employees and minimising the environmental impact of our products and operations.

During the year, Xaar launched its Sustainability Roadmap to 2030 which is a principal driver for positive change and investment within the business. Led by our ESG Committee and a Sustainability Team which is comprised of colleagues from across our business operations, chaired by the Group Sustainability Manager; we have been working hard to achieve our goals and ambitions across all four sustainability pillars: Environment, People, Innovation and Community.

Environment

Decarbonisation remains a key objective for us as we move towards our goal of Net Zero operations by 2030. We are pleased to report that we are working with an external partner to support us with Scope 3 and TCFD Climate Modelling. This year we have offset our regulatory Scope 1 and 2 carbon impact, making the Group a carbon neutral inkjet manufacturer in 2022. We are committed to continuing this practice on our journey to achieve complete carbon neutrality in line with our 2030 goal.

We set a target to source 100% of our power from renewable sources by the end of 2023 and excellent progress has been made. Our move to Green energy is now complete in the UK, and we are pleased to confirm that EPS is now also supplied with power generated from renewable sources. We will continue to assess ways to bring our remaining office locations in line with Green tariff power.

All printhead packaging is now fully recyclable and we are working towards complete packaging recyclability.

Xaar is committed to supporting decarbonisation of staff and visitors' vehicles. In early 2022 we launched a salary sacrifice scheme, supported by the UK government, to allow all UK staff the ability to order electric vehicles (EV) through a company scheme. We have also completed the installation of EV charging infrastructure across our sites.

People

Supporting young people and nurturing their skills is key to our ESG strategy and for this reason we have placed significant emphasis on our Early Careers programme. As part of this, Xaar's new Apprenticeship scheme is operational and our first intake is working within our Logistics team. Further efforts are underway to connect with local schools and colleges to allow future work experience programmes to be developed. In the UK, Xaar supported Learning at Work Week in May, which attracted 109 attendees across 9 events and resulted in 131 hours of learning.

We will further strengthen this approach in 2023 and plan to hold Xaar Group workshops bringing together a cross functional group of people with the aim of understanding what makes Xaar an 'employer of choice'. This will help to inform and shape our talent attraction and retention strategies feeding into our wellbeing programmes.

Innovation

We are currently researching ways to use biodegradable structural parts in the manufacture of our products. An area of focus is to find an alternative, more sustainable material than Polylactic Acid (PLA) which is a biodegradable plastic used to print the majority of our jigs and fixtures. Our Operations team has successfully trialled the use of recycled PLA filaments generated from returned and waste PLA. These are supplied in 100% plastic-free sustainable packaging with easy to recycle cardboard spools.

Digital inkjet printing is inherently more sustainable compared to traditional analogue printing with a smaller carbon footprint. It reduces and prevents excessive waste and uses less energy due to the ability to print short runs or direct-to-shape. With TF Technology ink recirculation, Xaar printheads, are capable of printing very viscous fluids, which in the Textiles sector, for example, results in a reduction in energy used in intensive drying processes. We are passionate about continuing further adoption and understanding of the environmental benefits our products can bring to customers.

Product development and increased capability

Overall, the market opportunity for Xaar printheads is significant. We have a unique roadmap of product development to ensure we offer an increasingly vertically integrated commercial strategy to capitalise on this market opportunity.

The, already successful, ImagineX platform will deliver a number of features over the next few years which will provide significant enhancements to the current portfolio, including:

· substantially improved speed and throughput (frequencies up to 150kHz, equivalent to a threefold increase in speed compared to current products),

· increased throw distance to improve image quality on curved surfaces,

· increased robustness to improve the life of the printhead and maintain image quality,

· higher viscosities enabling a broader range of fluids to be printed (above 100cP), and

· higher resolutions (up to 1440 dpi).

These features will help strengthen our position in markets where we are already well represented and will drive improved adoption in several markets where we are currently not, such as Wide Format Graphics and Labels, The recently launched Aquinox is positioned to drive our adoption in Packaging and Textiles. The performance enhancements in our product roadmap give a clear path for OEMs to upgrade their products and maintain their product differentiation.

We have made strategic bolt-on acquisitions to the Group that enable us to strengthen our customer offering and we will continue to adopt this approach in the future as we look to continue increasing our capability and become a fully integrated inkjet product provider.

The strong operational gearing that exists in the business, which has already delivered good margin growth, has greater capacity to support further margin improvement in the medium term. The business is well placed to move into the next phase of its transformation and to deliver sustainable profitable growth in the medium term.

Outlook

We have maintained our policy of increased investment in inventory during H2 2021 and throughout 2022 which means we are well placed to satisfy customer demand in 2023 and we believe we have the supply chain resilience to withstand most disruption. We are continuing to invest in the business adding skills, capability and capacity and continue to work on delivering efficiency gains aimed at improving gross margins and business profitability in the medium term. 

Sales volumes in the Printhead business continue to be affected by the uncertainty in China, which is expected to continue in the short term as Covid cases increase. At this stage it remains unclear when normal levels of business will return, however we can look forward to the medium-term future with confidence.

There is a positive momentum in the business, as is reflected in our 2022 results. Customer engagement and sales orders have been maintained in the first quarter of 2023, in line with our expectations. As previously communicated, we expect the Huntingdon factory re-organisation to impact the first half, however, given continued progress and exciting product launches ahead, the Board remains confident in delivering an outturn for the full year in line with its expectations.

Business Performance

Revenue - Continuing Operations

Revenue for the Group of £72.8 million is an excellent performance for the year, representing a year-on-year increase of £13.5 million (2021: £59.3 million) of which Organic growth was 8% (£4.8 million).

Group revenue growth

This result demonstrates momentum across the business, mitigating short term challenges due to the ongoing restrictions in China arising from COVID-19. Printhead revenue was down £1.1 million year on year, although outside China it increased 10%, and EPS increased revenue by 41% (24% in USD). This performance across the business demonstrates the positive customer engagement and trust that is being regained across our customer base.

Group revenue by geographic region

Megnajet was acquired on 2 March 2022, figures reflected in the table above are 10 months of post-acquisition revenue.

Group revenues were £36.6 million in the first half of the year and £36.2 million in the second half. This reflects the consistent performance of EPS, which has offset the impact on Printhead revenue of the restrictions in China in the second half of the year.

Revenue from the Americas grew year-on-year across the Group, rising £12.6 million (2022: £36.2 million, 2021: £23.6 million). The increase, driven by the recovery in EPS revenue, along with strong growth in US printhead sales demonstrates the wider geographic opportunity that exists for the business.

Performance in Asia, and China in particular, has been impacted by the ongoing COVID-19 restrictions in China, which has resulted in revenue declining from £12 million in 2021 to £8.2 million. The restrictions have delayed product development and sales for our customers and consequently sales of printheads for Xaar. As this region has been a key driver for growth in Printhead in the previous two years, the impact in the second half of 2022 has been significant. However, the work we have done in the last two years to re-engage Chinese Ceramics OEM customers means they understand and are interested in our new products and roadmap. Accordingly, we are well placed to meet the high demand in the region as the COVID restrictions are lifted.

Revenue in EMEA has increased from £23.7 million to £28.4 million driven by our wider product offering through FFEI and Megnajet, contributing to an increase for the Group of £4.7 million (20%).

Printhead Revenue by Sector

Printhead revenue for the year fell by £1.1 million to £39.0 million (2021: £40.1 million). The second half of 2022 saw revenue decrease by 8% (£1.6 million) compared to H2 2021 (£19.9 million), following growth of £0.5 million in the first half of the year. This is due to the impact of customers based in China predominantly in the Ceramics sector. Our technology offering proved successful in a wider number of other sectors, which has partially mitigated this decrease.

Growth in the year was achieved in 3D Printing, Coding and Marking (C&M) and Décor sectors. This is pleasing as it further proves our core technology can be successful in many applications and our customers increasingly benefit from the advantages our technology brings. Despite revenue in the Ceramics and Glass sector declining £2 million (11%) we have not lost market share during the year as the fall can be attributed to the reduction in orders received by our OEMs in China themselves. We have been able to consistently demonstrate our clear technology advantages in the Chinese Ceramics market, where we have regained trust with our customers. We have also established a market leading position in the Glass sector. Together with our extended product portfolio we expect to return to growth in this sector during 2023 as the negative external market factors subside.

Coding and Marking (C&M) and Direct-to-Shape (DTS) revenues have grown by £1.5 million (14%) further demonstrating our ability to expand our market reach with a wider product offering.

An increasingly exciting opportunity for us is the 3D printing market, and we expect this sector to grow significantly in the future. Revenue in 3D Printing and Advanced Manufacturing (AVM) together grew £1.5 million (62%) in 2022. Both 3D Printing and AVM are markets where we are well positioned to take advantage of growth opportunities, and although development cycles can be long, which means extended timescales for a customer to reach full production, the market opportunity is significant.

Wide Format Graphics (WFG) and Labels revenue fell in the year from £6.2 million to £4.8 million. This is an area which has also been impacted with delays in orders, largely COVID-19 related, and we also need further product development.

Revenues from Packing & Textiles remain modest. Our ability to target this sector effectively has been somewhat limited by our product range, although the launch of the Aquinox printhead will start to address this. However, advancements in the product portfolio driven by the ImagineX platform should make this large sector more accessible in the future. Full year revenue of £0.5 million was down year-on-year (2021: £0.8 million).

EPS Revenue by Sector

Revenue from the EPS business increased by £5.7 million to £19.6 million (2021: £13.9 million) as the new commercial approach has seen some significant customer order wins.

Growth has been achieved across all product groups with a particularly strong performance in the core area of digital inkjet machine sales which have grown £4.4 million (54%). This is particularly pleasing as it continues to be the focus for the business in the future. Pad print machine revenue has also risen 22% and the increased focus on consumables and accessory sales have also contributed to the growth as a result of the change in commercial approach, with increased revenue from ink, plates and parts. The order book remains strong and we are well placed to deliver further growth in 2023 as companies increasingly invest in capital equipment.

Gross profit

Gross profit for the year increased by £8.4 million to £28.6 million (2021: £20.2 million) with an increase in the gross margin to 39% (2021: 34%). This was primarily the result of an improvement in the Printhead business unit's gross margin which grew from 38% to 43%, and EPS which moved from 23% to 40%.

In Printhead we increased utilisation of the factory as production volumes were increased during the year resulting in better overhead cost recovery, supporting margin gains.

There was also continued investment to secure raw materials to reduce further supply chain risks. Although there are indications of easing in the global supply chain, we remain cautious and have continued to focus on meeting customer demand. We have increased our working capital with inventory rising £10.3 million (2021: £9.1 million increase in inventory). The higher level of finished goods will ensure continued supply to customers during our factory re-organisation shutdown and enable us to capitalise on any uplift in demand across all our market sectors. This higher level of both raw materials and finished goods is a deliberate, prudent approach which we believe will see us well placed to both manage customer requirements and further insulate the business from external supply chain risks.

We remain focussed on cost saving initiatives which will continue to deliver efficiency gains and support our Gross Margin.

Gross profit for the EPS business grew £4.6 million in the year to £7.8 million (2020: £3.2 million). The actions taken to refocus the business which impacted 2021 results (non-cash write down adjustments totalling £0.7 million), left the business in a good position to meet the increased market demand for capital equipment in the US which has driven this much improved performance.

Both FFEI and Megnajet have performed ahead of our expectations made when we acquired the businesses. They are strong contributors to the performance of the Group, with FFEI delivering Gross Profit of £3.5 million (at 30% gross margin), and Megnajet £0.8 million (Gross Profit of 33%).

Research & Development spend

R&D spend of £6.7 million was up £1.0 million on 2021 (2021: £5.7 million). This spend reflects further investment in the ImagineX platform which continues to be central to our long-term growth and ongoing product roadmap. We increased spend in FFEI to £1.2 million (2021: £0.4 million) which enhances the support for our vertically integrated product offering. The total increase maintains our spend/revenue ratio in the desired range of 8-11% and is broadly in proportion with our revenue growth.

Operating Expenses

Sales and marketing spend for the year was £6.7 million (2021: £6.3 million). The increase in spend of £0.4 million year-on-year reflects the increased business size along with the focus on sales and business development in the Printhead business. This has seen some increase in commercial travel expenses although we are taking a focussed, targeted approach to managing these costs.

General and administrative expenses increased £4.0 million from £10.1 million in 2021 to £14.1 million in 2022. The increase largely relates to planned investment in key areas of the business and infrastructure, including Operations, IT and Finance, partially offset by, £1.2 million related to trading foreign exchange gains in 2022. This largely relates to key appointments in the senior management team and infrastructure upgrades.

Restructuring and transaction costs of £0.5 million (2021: £1.4 million) predominantly relate to re-organisation costs and acquisition-related professional fees.

Profit for the Year

The profit before tax from continuing operations under IFRS was £0.8 million in 2022 (2021: £1.0 million profit). Basic Earnings per share from continuing operations was 2.3p (2021: 0.9p).

The performance of the Printhead business moved from a £2.2 million profit in 2021 to a £0.3 million loss in 2022. Despite a much-improved gross margin, and a close control in operating expenditure, the revenue reduction and external inflationary pressures resulted in a small loss. The EPS business moved from a £0.9 million loss in 2021 to a £2.8 million profit in 2022 due to the improved performance.

FFEI delivered a loss of £0.3 million (2021: Profit of £0.4 million).

Megnajet contributed a profit before tax of £0.4 million since acquisition on 3rd March 2022.

In calculating the adjusted loss before tax we have adjusted for gains on derivative financial liabilities of £nil (2021: £2.9 million) and fair value loss on financial assets £8,000 (2021: £1.0 million gain) alongside restructuring costs of £0.5 million, foreign exchange gains on intra-group loans of £0.8 million, and share-based payments of £1.7 million with an R&D expenditure credit of £0.4 million and amortisation of acquired intangible assets of £1.0 million.

The adjusted profit before tax from continuing operations was £2.8 million, compared to £0.6 million loss in 2021. This is a significant step forward for the business, emphasised by the delivery of adjusted profit in the year.

The adjusted EBITDA for continuing operations in the year was £6.2 million (2021: £3.2 million).

The Group profit for the year was £1.6 million (2021: £14.2 million profit) all of which is attributable to the owners of the company, (2021: £16.2 million profit with a £2.0 million loss to non-controlling interests). Group profit for the year from continuing operations was £1.8 million (2021: £0.7 million). The total basic earnings per share attributable to shareholders is 2.1p (2021: profit 20.9p).

Cash generation

The Group retained a healthy cash balance of £8.5 million at the year end, representing a decrease of £16.5 million during the year. Operating cash flow, before working capital, was positive by £6.6 million driven by the improved aEBITDA across the business of £6.2 million.

As a result of the managed investment in inventory, working capital saw an outflow of £12.2 million, mainly due to the £9.5 million increase in inventory.

During 2022 we purchased Megnajet for an initial net cash outlay of £3.5 million as well as a further deferred payment for FFEI of £1.7 million. This investment in the business is enhancing our capabilities and supports the strategy of selling more printheads through offering a more vertically integrated solution to customers. Additionally, we invested £5.4 million on key infrastructure and product development.

The business has a clear plan and strategy which the strong balance sheet and cash position will support. There remain external development opportunities which, if they can expand our capabilities and expertise, we will look to potentially add to the Group. We will also continue to invest internally to ensure we have the operational capacity and efficiency to meet future demand, alongside investment in our product roadmap development.

The Group maintains a strong disciplined focus on cash, and this will continue throughout 2023.

Strong balance sheet

Non-current assets increased £5.2 million in the year from £46.8 million to £52.0 million. This was driven by the increase in Goodwill following the acquisition of Megnajet of £1.3 million, along with an increase in intangible assets of £4.7 million. The recognition of financial assets at fair value arising from the sale of 3D assets was £11.1 million (2021: £11.9 million). Additionally, there was a £0.1 million reduction in Property, Plant and Equipment as new purchases were controlled in with line with the Group's cash focus and a decrease in right of use assets of £0.8 million.

Current assets decreased £4.1 million from £54.6 million in 2021 to £50.5 million. A significant proportion of this decrease is attributable to the decrease in cash and cash equivalents holding of £16.5 million. The increase in Inventories of £10.3 million to £29.1 million (2021: £18.8 million) was associated to the managed investment in our supply chain capability. Trade and other receivables increased by £1.3 million to £11.5 million (2021: £10.2 million).

Overall, current liabilities of £20.5 million (2021: £20.5 million) remained flat year-on-year. A reduction in Trade and other payables of £1.1 million to £14.9 million (2021: £16 million) was offset by increases in Provisions for restructuring and warranties by £0.1 million, an increase in current lease liabilities of £0.3 million to £1.0 million (2021: £0.7 million) and a £0.3 million increase in Contract Liabilities. The Group also arranged an invoice financing facility in the year and as at 31st December the balance borrowed was £0.4 million.

Non-current liabilities reduced by £2.0 million to £10.2 million (2021: £12.2 million), which mainly relates to lease liabilities recorded under IFRS 16 for property which reduced by £0.7 million to £7.8 million (2021: £8.5 million) in the year. Additionally, further deferred consideration payments due in 2023 have now become current, reducing the balance of other financial liabilities from £3.4 million to £2.1 million.

Dividend

No dividend has been declared for 2022 as the Board believes that prioritising cash for continued investment in the business will deliver more compelling returns for shareholders in the medium term.

There were no dividends paid during the current and preceding year.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

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 callable deposits with a notice period of 3 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 2021

1. Basis of preparation and accounting policies

Basis of preparation

The Group financial statements have been prepared in accordance with UK adopted International Accounting Standards (IAS). 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.

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.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out on pages 3 to 14. Notes 21 and 22 of the Annual Report and Accounts include a description of the Company'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's day-to-day working capital requirements are expected to be met through the current cash and cash equivalent resources (including treasury deposits) at the balance sheet date of 31 December 2022 of £8.5 million. The Group have a £5m invoice discounting facility, of which £0.4 million was drawn as at the Balance Sheet date.

The Group has prepared and reviewed monthly profit and cashflow forecasts which cover a period up to 30 June 2024, the going concern period. This base case forecast position has been compiled by considering the performance of the different businesses across the Group and each of their funding requirements which represents the current Board approved forecasts. These forecasts reflect existing technologies and products, existing OEM adoption, the committed order pipeline, an increasing customer install base and demand for consumables such as fluids across the customer base and no specific risks around creditworthiness. This creates a high degree of predictability within the short term cashflows, which have been factored in to the level of sensitivity testing and reverse stress testing performed below. The operational steps described in the Strategic Report also provide increased predictability over future margins, which have been incorporated in this base case forecast. Using this base case, liquidity compliance has been assessed across the going concern period and is sufficient to enable the Group to settle its obligations as they fall due.

To support the going concern conclusion, a sensitivity analysis has been performed which models a 10% reduction in revenue and 2% reduction in gross margin in comparison to the base case and is below the reported FY22 actual result. The outcome of this sensitivity analysis is that the Group maintain liquidity across the going concern period and are able to meet all forecasted obligations as they fall due. A reverse stress scenario has also been performed to model the circumstances required to eliminate available liquidity during the going concern period. This includes reducing revenues and reducing gross margin. This reverse stress scenario requires a reduction in revenue in excess of 25% in comparison to the base case and is below the reported FY22 actual result, as is the assumed margin. The Directors believe the possibility of this combination of severe downsides arising to be remote given the recurring revenue base and predictability of forecasts, and that there are numerous controllable mitigating actions such as deferring non-committed capital expenditure and reducing performance related pay which could be taken to avoid a liquidity breach.

Should extreme downside scenarios occur, the Group has further options within their control to mitigate a cash shortfall which have not been factored into the above forecasts and stress testing, such as staffing reductions, further delaying/stopping capital and research and development expenditure and aligning performance related pay to actual results. The Group also have received credit pre-approval for a £5 million revolving credit facility. No drawdowns have been assumed during the going concern period, nor are they required in the sensitivity or reverse stress scenarios described above and as such the facility would provide additional liquidity headroom to the Group across the going concern period.

Based on the above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 30 June 2024. For this reason, we continue to adopt the going concern basis in preparing the financial statements.

2. Reconciliation of adjusted financial measures

EBITDA is calculated as statutory operating profit before depreciation (other than that arising from IFRS16 accounting), amortisation and impairment of property, plant and equipment, intangible assets and goodwill. Adjusted EBITDA is calculated as EBITDA excluding other adjusting items as defined.

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 £1,559,000 (2021: £653,000) and the debit relating to National Insurance on the outstanding potential share option gains of £189,000 (2021: £105,000).

Exchange differences relating to the United States and Swedish operations represent exchange gains or losses recorded in the consolidated income statement as a result of intragroup transactions in the United States and Sweden. These costs were included in general and administrative expenses in the consolidated income statement.

Gain on derivative financial instruments relates to gains made on call option contracts which were exercised in 2021. These amounts are included on the consolidated income statement under gain on derivative financial liabilities.

Restructuring and transaction expenses of £450,000 (2021: £1,404,000) relate to costs incurred and provisions made in relation to acquisition transactions of £194,000 (2021: £961,000) and re-organisation costs. The calculated impact of the restructuring and transaction expenses at the corporation tax rate of 19% would be £32,000 based on the expenses included that would be treated as tax deductible (2021: £52,000). The cash paid related to restructuring and investment expenses is £792,000 (2021: £992,000).

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. Cash receipts of £198,000 received during the year were in relation to the Xaar RDEC claim which related to the claim for the year ended 31 December 2020. In 2021 £219,000 was received in relation to the FFEI RDEC and R&D claim which related to their financial year 1 April 2020 to 31 March 2021.

The fair value loss of £8,000 (2021: £987,000 gain) on financial assets at fair value through profit and loss relates to the sale of Xaar 3D Limited. The net consideration includes contingent consideration that is valued and reported at fair value. The fair value movement is recognised in the income statement as fair value loss on financial assets at fair value through profit and loss.

The amortisation of acquired intangible assets relates to the acquisition of FFEI Limited in 2021 and the acquisition of Megnajet Limited and Technomation Limited in 2022. These include software, patents and customer relationships for FFEI which are being amortised over six years and IP, brand and customer relationships for Megnajet and Technomation which are being amortised over eight to ten years. These costs were included in general and administrative expenses in the consolidated income statement.

This reconciliation is provided to align with how the Board measures and monitors the business at an underlying level, and is a measure used in establishing remuneration.

3. Business segments

For management reporting purposes, the Group's operations are analysed according to the four operating segments of 'Printhead', 'Product Print Systems', 'Digital Imaging' and 'Ink Supply Systems'. These four 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. Each business unit is run independently of the others and headed by a general manager. The Group's chief operating decision maker is the Chief Executive Officer. There is no aggregation of segments for disclosure purposes.

Digital Imaging was added in the second half of 2021 as a result of the acquisition of FFEI and Ink Supply Systems was added in the first half of 2022 as a result of the acquisition of Megnajet on 2 March 2022.

Segment information for continuing operations is presented below:

In addition to the external revenue reported by operating segments, the Printhead segment made £1,399,000 (2021: £1,092,000) of intercompany sales, the Product Print Systems segment made nil (2021: £312,000) intercompany sales and the Ink Supply Systems segment made by £538,000 (2021: nil) of intercompany sales.

4. Earnings per share - basic and diluted

The calculation of basic and diluted earnings per share is based on the following data:

Potential ordinary shares are treated as dilutive if their conversion to ordinary shares would decrease earnings per share or increase loss per share.

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 2022, there were share options granted over 276,547 shares that had not been included in the diluted earnings per share calculation because they were anti-dilutive at the period end (2021: 107,490 shares that would not have been included).

The performance conditions for LTIP awards over 172,492 shares (2021: 1,510,685 shares) have not been met in the current financial period or are not expected to be met in future financial periods, and therefore the dilutive effect of those shares has not been included in the diluted earnings per share calculation.

5. Business Combination

On 2 March 2022, Xaar completed the acquisition of 100% of the share capital of Megnajet Ltd and Technomation Ltd. The companies trade together under the name of Megnajet, and design and manufacture industrial ink management and supply systems for digital inkjet. The acquisitions will accelerate the Company's growth strategy by creating a more integrated inkjet solution whereby customers can access more of the printing ecosystem (such as ink supply systems and the electronics) from Xaar.

Technomation Ltd was acquired for its Intellectual Property and know-how. The acquisition has been accounted for as an asset acquisition using the optional concentration test within IFRS 3. The purchase price of £3,038,000, which includes £187,000 deferred consideration, was allocated to its Intellectual Property amounting £1,990,000 (being the purchase price net of £517,000 cash balance and £531,000 balance relating to working capital consisting of £816,000 receivables, £130,000 Corporation Tax creditor and £155,000 VAT creditor). Whilst Megnajet Ltd was accounted for as a business combination and the details of the net assets acquired, goodwill and purchase consideration are as follows:

The fair value of acquired receivables is £250,000. The gross contractual amount for trade receivables due is £252,000, with a loss allowance of £2,000 recognised on acquisition. Other receivables relate to VAT amounting to £237,000.

The goodwill of £661,000 arising from the acquisition represents those characteristics and valuable attributes of the acquired business that cannot be quantified and attributed to separately identifiable assets in accounting terms. This goodwill is underpinned by a number of elements, the most significant of which is the well established, skilled and assembled workforce and potential new customer relationships and contracts which enable Megnajet to accelerate the development of Ink Management and Supply Systems through the shared expertise, technologies and resources across

the Group. None of the goodwill recognised is expected to be deductible for income tax purposes.

The fair value of the intangible assets attributed to the acquisition of the business relates to customer relationships (£422,000) and brand (£281,000). These have an estimated useful life of eight and ten years respectively.

In addition to the cash consideration, deferred consideration shall be paid in the second year anniversary from the date of acquisition. The undiscounted amount of all future payments that the Company is required to make under the deferred consideration arrangement is £200,000.

Acquisition related costs which are included in administrative expenses in the consolidated income statement for the period ended 31 December 2022 amounted to £193,000.

The acquired business contributed revenues of £2,483,000 and net profit of £758,000 to the Group for the period from 2 March 2022 to 31 December 2022. If the acquisition had occurred on 1 January 2022, consolidated pro-forma revenue and profit for the period ended 31 December 2022 would have been £3,038,000 and £832,000 respectively. These amounts have been calculated using the subsidiary's results and adjusting them for differences in the accounting policies between the Group and the subsidiary; and the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 January 2022, together with the consequential tax effects.

During the prior year, on 11 July 2021, Xaar acquired 100% of the issued share capital of FFEI Limited for a total consideration of £8,762,000, comprising £3,907,000 in initial cash and deferred consideration of £4,4855,000 (which is £5,200,000 discounted using 3.49% discount rate). Net assets acquired totalled £8,073,000, and goodwill of £689,000 arose on the acquisition. The fair value of the intangible assets attributed to the acquisition related to patents and software (£3,044,000) and customer relationships (£1,204,000) with an estimated useful life of six years. Net cashflow arising on the acquisition was an inflow of £168,000, being cash equivalents acquired of £4,075,000 minus the cash consideration paid.

The deferred consideration is payable in three annual instalments, of which one instalment was paid during the year ended 31 December 2022 (£1,733,000). Acquisition costs included in the consolidated income statement for the prior year amounted to £618,000.

6. Restatement of prior period

The financial statements include prior period restatements in relation to leases and contract assets and liabilities.

Right of use asset and Lease liabilities were both overstated by £539,000 due to an error in recording the renewal on one lease with no impact on net assets, cashflows or profit for the period. Since 2022 additional finance reviews have been introduced for all legal contracts. With the current control introduced in 2022, we believe the likelihood of such errors is substantially reduced.

Additionally, EPS division had not been netting contract assets and liabilities and both balances were shown gross in the prior period. This error was identified by management in the current year and was corrected resulting in changes in processes and systems to ensure correct accounting is in place going forward. The respective adjustment for the prior year amounted to $2,672,000 (£1,977,000) with no impact on net assets, cashflows or profit for the period.

The following tables summarise the impact of the prior period restatement on the financial statements of the Group for the periods ended 31 December 2021: