Xaar Regulatory News (XAR)

Xaar plc

2013 INTERIM REPORT

Xaar plc ("Xaar", "the Group" or "the Company"), the inkjet printing technology Group headquartered in Cambridge, has issued its interim report for the 6 months ended 30 June 2013.

Financial summary for the six months to 30 June 2013

1 Excluding the impact of £3.0 million of revenue recognised in H1 2013 which related to the settlement of under-reported licensee royalties for the period 2006 to 2012, exchange differences relating to the Swedish operations, unrealised gains/losses on derivative financial instruments, share-based payment charges, and impairment of trade investment (H1 2012).

2 Net cash includes cash and cash equivalents, treasury deposits, less obligations under finance leases and loan liabilities.

Key points

o Adjusted revenue up 78% versus H1 2012.

o Adjusted profit before tax more than trebled versus H1 2012.

o Sales increased across all markets, with revenue growth being led by sales into ceramics.

o Adjusted gross margin increased by 8 percentage points to 54% through volume related manufacturing efficiency and exceptionally high asset utilisation.

o Investment in research and development almost doubled to £6.7m (10% of revenue).

o Headcount increased by 44% versus 30 June 2012 to 681.

o Net cash increased to £49.4m at June 2013 (June 2012: £15.7m; December 2012: £28.9m).

o Interim dividend increased to 2.5 pence (H1 2012: 1 pence).

o Results reported under IFRS include £3.0m of non-recurring incremental revenue (and profit before tax) related to the settlement of under-reported royalties payable by licensees for the period 2006 to 2012.

Chairman, Phil Lawler commented:

"Once again I am pleased to report continuing and significant progress in the development of our business. This has been driven by the continued success of our digital inkjet solutions which are transforming industrial applications through the achievement of cost, efficiency and end-product improvements when compared to traditional analogue manufacturing techniques. The Company is positioned to continue to grow over the longer term, albeit at a slower rate than experienced over the last few years. Our decision to accelerate our investment in product development and technology research is intended to strengthen our competitive position and develop major new opportunities on a global stage. We remain optimistic and excited about Xaar's long-term potential."

Contacts

CHAIRMAN'S STATEMENT

Introduction

Once again I am pleased to report continuing and significant progress in the development of our business. During the first half of 2013 revenues on a comparable basis increased 78% compared to the first half of 2012. This has been driven by the continued success of our digital inkjet solutions which are transforming industrial applications through the achievement of cost, efficiency and end-product improvements when compared to traditional analogue manufacturing techniques. Demand for our products in the first six months of the year fully utilised our manufacturing facility at Huntingdon where we continue to invest in additional capacity.

Demand from the ceramic tile industry has accelerated as tile manufacturers in China, the world's largest producer and consumer of ceramic tiles, have rapidly adopted Xaar as the solution of choice for the digital printing of ceramic tiles. Our patented TF Technology™ continues to demonstrate its advantages over both traditional analogue printing techniques and competitor inkjet offerings. Xaar is now the clear world leader in this market as the major ceramic tile manufacturers realise the considerable economic and aesthetic advantages provided by Xaar's digital inkjet technology.

The geographical balance of our revenue in H1 2013, based on the location of our customers, shifted towards Asia (45% of adjusted sales versus 29% in H1 2012) with revenue from this region growing 172% compared to H1 2012. The Europe, Middle East and Africa (EMEA) region grew by more than 40% but reduced as a proportion of total revenue (50% of adjusted sales against 62% in H1 2012). The Americas (5% of adjusted sales, 9% in H1 2012) remains little changed in terms of actual sales, reflecting the lower number of Original Equipment Manufacturers (OEMs) present in that region compared to either EMEA or Asia.

Whilst the demand from ceramic tile digital conversion is the major factor driving growth, it is pleasing to see applications in the packaging market generating additional growth and some recovery in the graphics market from the low point of a year ago.

The Group's further strong sales growth continues to drive profitability. Adjusted profit before tax more than trebled against the same period last year. Similarly strong cash generation continues with an operational cash flow of over £20 million for the first half of the year. Net cash has grown significantly despite an increased dividend payment and further manufacturing and R&D infrastructure investments. Gross margin improvements reflect greater operational leverage and very high levels of manufacturing equipment utilisation.

Royalty revenue has continued at similar rates to 2012, although results reported under IFRS include £3.0m of non-recurring incremental revenue (and profit before tax) related to the settlement of under-reported royalties payable by licensees for the period 2006 to 2012.

Despite exporting the majority of our production, we continue to manage currency risk carefully with the majority of our sales denominated in sterling.

Results

Adjusted revenues (excluding the non-recurring royalty settlement) for the six months ended 30 June 2013 were £67.2 million (H1 2012: £37.9 million; H2 2012: £48.4 million). Product sales were £63.9 million (H1 2012: £34.3 million; H2 2012: £45.8 million). Adjusted royalty revenue was £3.3 million (H1 2012: £3.6 million; H2 2012 : £2.6 million).

Adjusted gross margin further improved to 54% (H1 2012: 46%; H2 2012: 49%). Adjusted profit before tax for the period was £22.3 million (H1 2012: £6.7 million; H2 2012: £11.7 million).

After payment of the final dividend for 2012 of £2.2 million and £5.6 million of capital investment, net cash (including cash, cash equivalents and treasury deposits) increased by £20.5 million to £49.4 million (30 June 2012: £15.7 million; 31 December 2012: £28.9 million).

Business Commentary

Xaar has developed a significant opportunity for its technology in the ceramic tile decoration market. The last few years have seen the Company maximise the potential from this global market through a focused approach and relentless attention to execution. This success has been clearly visible to our competitors and the level of competitive activity in this market has increased substantially. Our ability to maintain our market leading position in ceramics whilst bringing on applications in new markets is critical to our growth over the next few years.

Manufacturing capacity at our Huntingdon facility is fully utilised and we are continuing to invest heavily in further specialised assets to meet market demand, with capital spend in this area expected to exceed £30 million in 2013/2014. Some of this increased capacity will become operational in H2 2013, with the majority coming on-stream during 2014. This continued expansion has of course resulted in an on-going hiring campaign across many disciplines such that our headcount at the end of the period exceeded 680 people, almost double the headcount of just three years ago.

Revenue from the industrial market more than doubled over the same period last year and now accounts for 71% (H1 2012: 59%) of adjusted Group revenue with the ceramic application being the primary driver of growth. Whilst the ceramic market takes the limelight, I am pleased to report further progress in other areas where we are growing our revenue. Particularly noteworthy is the 36% growth in our sales into the packaging market, driven primarily by the continued adoption of digital label printing, to £8.3 million which accounts for 12% of first half year adjusted revenue. More than half of this figure now comes from applications other than the original Coding and Marking segment. Development activity in the 'direct-to-shape' application (where the label substrate is eliminated) continues to show interesting results, and I look forward to reporting more progress in this application over the medium term.

Although progress in the decorative laminate market has been slower than anticipated we continue to work with our OEM partners in this space and still expect to generate material revenues from this application over the coming years. Advanced manufacturing developments are also continuing across applications such as semiconductor, display screen, and photovoltaic, and whilst revenues are currently still modest these opportunities show promise over the longer term.

We have continued our recovery in the graphics market, traditionally a Xaar stronghold, where we have considerable brand awareness and where we are targeting recovery of the market share lost in recent years. This now makes up 11% (H1 2012: 16%) of adjusted Group revenue and achieved 28% growth in sales albeit against a very weak period last year. A new product, the Xaar 501 GS10, is scheduled for release which we anticipate will give us renewed impetus in this mature but significant market.

While Xaar's recent growth has been significant, adoption of industrial inkjet remains at a very early stage across many markets, providing us with a major opportunity. In order to maximise this opportunity over the long term we are substantially increasing our R&D spend with a view to significantly enhancing both our technology portfolio and product range. R&D spend increased by 94% over H1 2012 and will continue to increase during the second half of this year.

In order to maximise the efficiency and focus of our significantly enlarged technical community we have split R&D into two divisions, the first focused on Bulk Piezo Technology (previously referenced as P1, P2 and P3), and the second focused on Thin Film Piezo Technology (previously referenced as P4). We are significantly expanding our R&D team through an international recruitment drive.

Our Thin Film Piezo programme remains on track with early test structures being evaluated and core technology architecture decisions due to be made before the end of the year, with first revenues from this technology targeted for 2016.

Development of new industrial inkjet technology is a challenging exercise but we are confident that as a company focused exclusively on this area, we have the experience and knowledge to deliver continued success. Meeting these challenges will also represent a significant barrier to entry for new entrants to the market in the future.

Corporate Governance

The Group was fully compliant with the UK Corporate Governance Code 2010 for the year ended 31 December 2012. Given changes in the corporate governance code for the upcoming year end, management is working to ensure that the Group is fully compliant with respect to these changes. The Group constantly looks to improve governance based on measurement against internal objectives and external audits. We continue to give serious attention to risk management despite the difficulty of accurately predicting events in a very unpredictable world.

Dividend

We are pleased to announce that an interim dividend of 2.5 pence per share will be paid on 4 October 2013 to shareholders on the register at close of business on 6 September 2013.

Board

There have been no changes to the Board during the first half of 2013. There have been five Board meetings in the period, all fully supported with detailed papers distributed in advance and recorded by appropriate minutes. The Board has spent one additional full day devoted to strategy review and development. Board sub-committees have also met four times in the period.

Outlook

Xaar is now clearly recognised as an industrial inkjet technology leader and has made significant gains in certain markets. Competitive pressure will no doubt continue to increase but the Company is positioned to continue to grow over the longer term, albeit at a slower rate than experienced over the last few years. Our decision to accelerate our investment in product development and technology research is intended to strengthen our competitive position and develop major new opportunities on a global stage. We remain optimistic and excited about Xaar's long-term potential.

Phil Lawler

Chairman

29 August 2013

DIRECTORS' RESPONSIBILITIES STATEMENT

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU and gives a true and fair view of the assets, liabilities, financial position and profit of the Group.

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R:

(i) an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and

(ii) a description of principal risks and uncertainties for the remaining six months of the year.

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R:

(i) related parties transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the Group in that period, and

(ii) any changes in the related parties transactions described in the Annual Report 2012 that could have a material effect on the financial position or performance of the Group in the current period.

By order of the board

IAN DINWOODIE

CHIEF EXECUTIVE

ALEX BEVIS

FINANCE DIRECTOR AND COMPANY SECRETARY

29 August 2013

This reconciliation is provided to enable a better understanding of the Group's results and is not a primary statement.

Cash and cash equivalents (which are presented as a single class of asset on the face of the condensed consolidated statement of financial position) comprise cash at bank and other short term highly liquid investments with a maturity of three months or less at the period end.

1. Basis of preparation and accounting policies

Basis of preparation

These interim financial statements have been prepared in accordance with the accounting policies set out in the Group's annual report and accounts 2012 on pages 42 to 48 and were approved by the board of directors on 29 August 2013. The interim financial statements for the six months ended 30 June 2013 have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union. The interim financial statements do not include all the information and disclosures in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 December 2012.

The financial information in these interim financial statements for the six months ended 30 June 2013, does not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The Group's annual report for the year ended 31 December 2012 has been delivered to the Registrar of Companies and the auditor's report on those financial statements was not qualified and did not contain statements made under section 498(2) or (3) of the Companies Act 2006.

The interim financial statements are unaudited but have been reviewed by the auditor Deloitte LLP. The report of the auditor to the Group is set out on page 15.

Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2012.

Risks and uncertainties

An outline of the key risks and uncertainties faced by the Group was outlined in the 2012 financial statements on pages 14 to 15, including anticipating technology trends, retaining key staff and successfully executing business growth initiatives. It is anticipated that the risk profile will not significantly change for the remainder of the year. Risk is an inherent part of doing business and the strong cash position of the Group along with the underlying profitability of the core business leads the directors to believe that the Group is well placed to manage business risks successfully.

Going concern

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, support the conclusion that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the going concern basis of preparation has been adopted in preparing the interim financial statements.

2. Business segments

For management reporting purposes, the Group's operations are currently analysed according to the two operating segments of 'product sales, commissions and fees' and 'royalties'. These two operating segments are the basis on which the Group reports its primary segment information and on which decisions are made and resources allocated.

Segment information is presented below:

Unallocated corporate expense relates to administrative activities which cannot be directly attributed to any of the principal product groups, including impairment of trade investment, share-based payment charges, and unrealised gains or losses on derivative financial instruments.

Assets in the 'product sales, commissions and fees' segment have increased by £5.5m over the period and assets in the 'royalties' segment have increased by £3.5m over the period; there have been no other material movements in segment assets during the period.

3. Income tax

The major components of income tax expense in the income statement are as follows:

4. Earnings per ordinary share - basic and diluted

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

5. Notes to the cash flow statement

6. Date of approval of interim financial statements

The interim financial statements cover the period 1 January 2013 to 30 June 2013 and were approved by the board on 29 August 2013.

Further copies of the interim financial statements are available from the Company's registered office, 316 Science Park, Cambridge CB4 0XR, and can be accessed on the Xaar plc website, www.xaar.com.

INTERIM REVIEW REPORT TO XAAR PLC

For the six months ended 30 June 2013

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 which comprises the condensed consolidated income statement, reconciliation of adjusted financial measures, condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement and related notes 1 to 6. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adoptedby the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Cambridge, United Kingdom

29 August 2013