Final Results

SThree plc 08 February 2006 Embargoed until 0700 8 February 2006 SThree plc ('SThree' or the 'Group') Preliminary Results for the Year Ended 30 November 2005 SThree, one of the UK's leading information, communication and technology ('ICT') staffing businesses, is today announcing its preliminary results for the year ended 30 November 2005. The results are the first to be reported by the Group since its flotation on 16 November 2005. Financial Highlights Â£m 2005 2004 Change Turnover 315.1 242.4 + 30.0% Gross Profit (Fee Income) 104.5 75.9 + 37.7% Operating profit before exceptional items* 29.5 17.4 + 69.9% Operating profit/(loss) after exceptional items* 13.6 (15.7) - Profit before tax and exceptional items* 28.0 16.0 + 75.5% Profit/(loss) before tax 12.2 (17.1) - Basic earnings/(loss) per share 16.2p (65.4)p - Basic earnings per share before exceptional items*+ 35.1p 16.4p + 114.0% Basic earnings per share before exceptional items adjusted for effect of new shares issued at IPO*+# 15.4p 8.9p + 73.0% * Exceptional items in 2005 were a charge of Â£15.9m against operating profit and a credit of Â£7.9m against tax, all relating to non-recurring items + 2004 figures also exclude goodwill amortisation and other exceptional items less related tax # Calculated using the number of shares in issue at 30 November 2005 (excluding shares in the EBT), rather than the weighted average number of shares in issue throughout the year. Earnings before preference dividends are used as the numerator in this EPS calculation since, had the year-end share structure been in place throughout FY 2005, there would have been no preference dividend paid. Operational Highlights â€¢ Strong overall performance driven by multi-brand strategy and first full year of broad-based recovery in core ICT market - performance in line with expectations at flotation â€¢ Significant recovery in permanent market conditions - number of placements in the year increased by 35% to 6,023 (2004: 4,460) with average placement fees increasing by 6.9% to a record Â£7,915 (2004: Â£7,407) â€¢ Number of active contractors at year end increased 16.9% to 4,365 (2004: 3,735) with gross profit per day rates increasing by 14.4% to Â£58.42 (2004: Â£51.08) â€¢ Strategic focus on higher margin opportunities and strong presence in the SME market delivers significant improvement in margins year-on-year â€¢ Further organic expansion and market share growth achieved in core UK ICT business â€¢ Non-UK businesses growing strongly - gross profits increased by 28.9% to Â£25.0m (2004: Â£19.4m), with overseas businesses now accounting for 23.9% of Group gross profit â€¢ Continued successful expansion of non-ICT businesses - Banking & Finance, Engineering, Accountancy and HR brands achieved 56.5% increase in gross profit to Â£13.1m (2004: Â£8.3m), accounting for 12.5% of Group total â€¢ Successful IPO and admission to the Official List in November 2005 â€¢ Strong start to current financial year - current trading encouraging Russell Clements, Chief Executive Officer, said: '2005 was a very good year for SThree. Our UK ICT business delivered significant growth despite operating in a relatively mature and competitive marketplace. Our fast-growing, younger revenue streams, both geographic and sector-specific, also made significant contributions. Consistent with our core strategy, we did not buy this growth at the price of margins, which, on the contrary, we improved year on year. 'Current trading is in line with our expectations, although the start of our financial year coincides with December and January - a quiet period for the recruitment market - and hence revenue visibility in our business is relatively limited. We expect the momentum seen in the closing months of 2005 will continue in both our UK and European businesses. Activity levels in our non-ICT brands are also positive. We remain confident that our well-proven strategy will underpin another year of progress.' SThree plc (08.02.06) 020 7067 0700 Russell Clements, Chief Executive Officer (Thereafter) 020 7292 3838 Sunil Wickremeratne, Chief Operating Officer Michael Nelson, Chief Financial Officer Weber Shandwick Square Mile 020 7067 0700 Kevin Smith / Stephanie Badjonat Notes to editors SThree, founded in 1986, is one of the leading ICT staffing businesses in the UK. The Group provides both permanent and contract specialist staffing services in the UK and Europe, primarily in the information and communications technology sector and, to an increasing extent, the banking and finance, accountancy, human resources and engineering sectors. Following the establishment of its first brand, Computer Futures, in 1986, the Group adopted a multi-brand strategy, establishing new operations to address growth opportunities. SThree currently operates 12 brands, the 3 largest by turnover being Computer Futures, Progressive and Huxley, and has 30 offices in the UK and 9 offices in mainland Europe, in Belgium, The Netherlands, France, Germany and Ireland. SThree has a selective approach to clients and focuses on high margin opportunities, predominantly within the small to medium-sized enterprises ('SME') market, which SThree defines as including autonomous divisions of large corporates. The Group does not pursue a high volume/low margin model. SThree has a diverse, international client list of over 4,000 clients. SThree plc is quoted on the Official List of the London Stock Exchange under the ticker symbol STHR. SThree plc ('SThree' or the 'Group') Preliminary Results for the Year Ended 30 November 2005 Operational Review 2004/2005 was the first year of a substantial widespread improvement in our core UK ICT market since the significant downturn of 2002/2003. In particular, we benefited from a return in confidence in the permanent market, which had lagged behind the improvements in the contract market already in evidence in the previous year. The improved sentiment and associated upturn in demand allowed us the opportunity to increase the sales consultant headcount to a level more appropriate to the more buoyant market conditions. In general this was achieved by utilising the existing office infrastructure and therefore the associated incremental costs were largely limited to salaries and commissions, resulting in the Group benefiting from its operational gearing. In addition, as the supply and demand equation moved more in our favour through 2005, we also benefited from an increase in both the average contract day rate we charged and an improvement in our average permanent fee rate, as detailed below. We continued our strategy of avoiding high volume/low margin business in favour of pursuing quality opportunities associated with superior margins. During the 2005 financial year, these factors all helped to contribute to an increase in gross profit of 37.7% to Â£104.5m (2004: Â£75.9m). This in turn translated to an operating profit before exceptional items which was improved by over 69.9% to Â£29.5m (2004: Â£17.4m). After taking account of exceptional items, operating profit grew by Â£12.1m. As well as an improved performance in our core market and geography, the year also saw noteworthy progress outside of the UK and in other specialist staffing sectors outside of ICT. Both have come to represent increasingly significant contributions to Group revenues and profits. Staffing Levels Total employees at the year end were 1,073 of which 911 were in sales, sales management, direct sales support and sales training (2004: 965 and 775, respectively). The balance of 162 (2004: 190) were employed in the Group's shared support functions which include accounts, legal, HR and information services. Recruitment and retention of sales consultants remains a crucial priority for the Group. Unlike many other businesses in the sector SThree's model is based on home-grown talent; i.e. rather than looking to hire experienced staff from elsewhere within the industry, the Group's sales consultants are typically taken on through our graduate recruitment and training programme. Strategy Since its formation in 1986 the Group has pursued a clearly defined strategy of focusing on higher margin client opportunities. This entails adopting a highly selective approach to clients and, in particular, an explicit avoidance of the 'high volume, low margin' model which has been central to the strategy of some other specialist staffing companies. Although this by no means precludes us from dealing on favourable economic terms with larger organisations, in practice it has resulted in the Group having particular strength in the small to medium-sized enterprises ('SME') market where margins are typically higher. We believe that our multi-brand model has been central to the Group's successful execution of this strategy, as it enables us to address a variety of fast growing sub-markets via a number of specialist brands able to offer niche expertise. Having proven this model in our core UK ICT market we have undertaken a progressive roll out into new geographies and, latterly, into other specialist staffing markets, such as banking and finance and accountancy. We expect the continuation of this highly successful approach to continue to drive growth for the foreseeable future. Contract v. Permanent Split Strong progress was made in both our permanent and contract business segments. The Group made 6,023 permanent placements during the year (2004: 4,460), an increase of 35.0%. Our average fees from permanent recruitment also grew to Â£7,915 by the end of the year which is the Group's highest ever and a 6.9% improvement over the prior year. At 30 November 2005, SThree had 4,365 active contractors, its highest number ever, and an increase of 16.9% over the prior year (2004: 3,735). Contractor gross profit per day rates also increased by 14.4% to Â£58.42 by the end of the year (2004: Â£51.08). When comparing the relative contribution of the contract and permanent sides of the business, we believe the most meaningful yardstick is that of gross profit. On this basis during the year contract activities contributed Â£56.5m and permanent Â£48.0m or 54.0% and 46.0% respectively. In the 2004 financial year the contract/permanent percentages were 56.5% and 43.5%, respectively, reflecting the fact that the recovery in the permanent market only began to be felt in earnest in the second half of that year. Once under way the recovery fed through into the 2005 financial year. Sector Focus ICT remains by some way the Group's largest market and is likely to remain so for the foreseeable future. In recent years, however, an increasingly meaningful contribution has been derived from our other disciplines - Banking & Finance, Engineering, Accountancy and Human Resources. During the course of the year gross profit from outside the ICT sector grew to 12.5% of total from 11.0% the year previously. This performance is encouraging particularly when seen in the context of the buoyant conditions and growth of our core ICT market in the same period. In absolute terms the gross profit derived from newer sectors grew by 56.5% compared to the previous year. The Group continues to assess opportunities in other sectors of the specialist staffing market. Geographical Breakdown During the course of the year the Group operated thirty UK offices and eight elsewhere in Europe. A further international office was opened in Paris early in 2006. All of the three largest SThree brands, Computer Futures, Progressive and Huxley Associates, have growing and profitable operations in Europe. During the year the brand longest-established in Europe, Computer Futures, for the first time generated slightly more than 50% of its gross profit from outside of the UK. UK gross profit of Â£79.5m was 76% of the Group total and represented a year-on-year increase of 40.7%. Even allowing for improving underlying demand levels this is a very positive result. Given the relatively mature nature of the UK market we believe this improvement represents capacity-based growth, derived from increased headcount and market share. It is worth noting that the latter was achieved without sacrificing margin - a reflection of our highly selective approach to formal Preferred Supplier Agreements (PSA's) and our strong SME franchise. Non-UK gross profit at Â£25.0m or 24% of the total was a similar percentage to the prior year, reflecting the fact that the UK also grew strongly over the same period. We believe that the Group is now well positioned to benefit from opportunities for structural growth in the liberalising markets of the Continental European specialist-staffing sector. Brand Breakdown The three largest SThree brands between them represented c. 72% of the gross profit generated by the Group during the year. In addition, each of these brands posted positive year-on-year profit growth. Computer Futures, our largest brand, accounted for 29.3% of total gross profit, achieving 19.8% growth helped by an excellent performance from its European operations. The second largest brand by share of gross profit at 23.8% was Huxley. This was a noteworthy performance given that this represented a year-on-year growth of some 48%. Significant contributions were made by the Banking and Finance team which extended its existing City of London based activities to include placements for clients in Amsterdam and through its London office, in New York. Huxley's Engineering division also enjoyed a strong year. Progressive ended the year with 18.9% of total gross profit. During the last quarter, to support further European expansion, Progressive opened its second non-UK office in Amsterdam. A third office in Paris was opened early in the new financial year. The other Group brands grew their share of overall Group gross profit to 27.9% of the total from 23.1% the year previously. In terms of absolute value this represented a year-on-year increase of 66.6%. This result is all the more impressive when we consider that with the exception of the IT Job Board, which derived a small percentage of its income from Belgium and Holland, none of the smaller brands were active in Continental Europe. As such, virtually all of this growth was generated from the relatively mature UK market. Outlook 2005 was a very good year for SThree. Our core UK ICT business delivered significant growth despite operating in a relatively mature and particularly competitive marketplace. Our fast-growing, younger revenue streams, both geographic and sector-specific, made significant contributions. Consistent with our core strategy, we did not buy this growth at the price of margins, which, on the contrary, we improved year on year. In our view, above all else it was our multi-brand strategy which made this possible. We are particularly encouraged by the fact that we achieved what we achieved against an economic backdrop of below-trend economic growth in the UK and very modest growth in the Eurozone. This suggests to us that, whilst we are a somewhat cyclical business, we do not need exceptional economic circumstances to post impressive growth. Current trading is in line with our expectations, although the start of our financial year coincides with December and January - a quiet period for the recruitment market - and hence revenue visibility in our business is relatively limited. We expect the momentum seen in the closing months of 2005 will continue in both our UK and European businesses. Activity levels in our non-ICT brands are also positive. We remain confident that our well-proven strategy will underpin another year of progress. Financial Review Profit & Loss Account Turnover for the year was 30.0% higher at Â£315.1m (2004: Â£242.4m). Turnover from contractor placements grew by 27.6% to Â£267.1m (2004: Â£209.4m), representing 85% of Group turnover. Turnover from permanent placements was Â£48.0m (2004: Â£33.0m), an increase of 45.4%. Gross Profit ('Fee Income') for the year increased by 37.7% to Â£104.5m (2004: Â£75.9m) representing an overall gross margin of 33.2% (2004: 31.3%). The percentage increase in gross profit is greater than the increase in turnover due to a higher proportion of permanent business in 2005 (45.6% vs 43.5%) coupled with an increase in the gross margin on contract placements from 20.5% to 21.1%. Gross profit from contractor placements was Â£56.5m (2004: Â£42.9m) and represented 54.1% (2004: 56.5%) of Group gross profit. The Group's strategy and profit-based bonuses result in a cost structure that is significantly operationally geared as evidenced by the 70% increase in operating profits before exceptional items from a 38% increase in gross profit. The conversion ratio (Operating Profit divided by Gross Profit) increased significantly from 22.9% to 28.2%. Administrative expenses (before exceptional items) increased by 28.2% to Â£75.0m (2004: Â£58.5m before amortisation of goodwill and exceptional items) principally due to increased numbers of staff. Headcount of the Group totalled 965 at 30 November 2004 and increased by 11.2% to 1,073 by 30 November 2005. Average headcount for the year was 1,037 (2004: 805), the increase of 28.8% reflecting steps taken in the second half of 2004 to increase headcount in anticipation of favourable market conditions in 2005. Exceptional items are detailed in Note 2 to the accounts. As a consequence of the IPO, the Group allocated a number of share awards and options to certain employees who have contributed to the Group's success over recent years. The resultant charge to the profit and loss account amounted to Â£14.4m inclusive of related social charges and Employer National Insurance. Since the Group satisfied these awards principally through shares held in the SThree Employee Benefit Trusts, there is a corresponding credit of Â£11.9m to reserves, being the value of the shares awarded before related social charges and Employer National Insurance. The Board expects to allocate a further tranche of share options during 2006; this will result in a further exceptional charge to the profit and loss account in the current financial year. In addition to the above, management bonuses of Â£1.5m previously paid to holders of zero coupon preference shares in compensation for the lack of a dividend, have been classified as exceptional items due to materiality and the non-repeatable nature of these costs following the conversion of all preference shares to ordinary shares on IPO. The net interest charge of Â£1.5m was comparable to 2004 and predominantly relates to loan stock interest paid, with cash and bank overdraft interest netting off to a small positive balance. At IPO, the then outstanding loan stock balance of Â£37.4m was repaid in full. The Group is now financed through a flexible credit line arrangement provided by Barclays. Profit before taxation and before exceptional items amounted to Â£28.0m (2004: Â£16.0m before amortisation of goodwill and exceptional items), an increase of 75.5%. Total profit before taxation and after exceptional items was Â£12.2m (2004: Loss before tax of Â£17.1m). Tax on profits before exceptional items was Â£8.7m (2004: Â£5.1m), representing an effective tax rate of 31.1% (2004: 32.0%). The tax credit relating to exceptional items amounts to Â£7.9m (2004: Â£0.5m credit). Under Schedule 23 of the Finance Act 2003, the Company expects to obtain a corporation tax deduction relating to the various share awards and options exercised following IPO. Although the charge to the profit and loss account relating to these items is, in accordance with UK GAAP, based on the value of the share award or share option at the time of grant, the related tax credit is based on the value at the time of gift or exercise. As a result the tax credit relating to the exceptional items is at an effective rate of 49.8%. At a total level therefore, the Group's tax charge for 2005 amounts to Â£0.8m, an effective rate of 6.8%. Basic earnings per share were 16.2p (2004: Loss per share of 65.4p) and basic earnings per share before exceptional items more than doubled to 35.1p (2004 16.4p). The weighted average number of shares for the year was 42.2m (2004: 39.9m). Since the flotation and the related share capital conversion occurred late in the financial year, the weighted average number of shares used in the standard EPS calculations is far below the actual number of ordinary shares in issue at the year-end itself. At 30 November 2005, there were 138.0m shares in issue, of which 13.6m are held within the Employee Benefit Trust and therefore not included within the basic EPS calculation. Using the year-end number of shares the basic earnings per share would have been 9.0p (2004: loss per share of 17.3p on the same basis), and before exceptional items 15.4p (2004: 8.9p), the Directors believe that these figures give a more useful representation of the Group's earnings per share performance in the period. A preference dividend of Â£4.4m was paid at IPO in accordance with the terms of conversion of preference shares into ordinary shares. In line with statements made in our Prospectus, no ordinary dividend is proposed for 2005. The Directors currently expect to declare the Group's first dividend with the interim results for the six months ended 31 May 2006. Balance Sheet The Group had net assets of Â£21.9m at 30 November 2005 (2004: Â£6.3m). Net debt amounted to Â£9.6m (2004: Â£14.9m), the reduction in debt of Â£5.3m being achieved through increased trading. Capital expenditure amounted to Â£2.7m (2004: Â£2.1m) and predominantly related to upgrades of IT hardware and fit-out of new offices across the Group. Trade debtors increased at a lower rate than turnover (26.7%) to Â£53.6m at 30 November 2005 (2004: Â£42.3m) representing debtor days of 46 (2004: 47 days). Cash Flow At the start of the year the Group had net debt of Â£14.9m. During the year the Group generated net cash from operating activities of Â£25.0m (2004: Â£5.1m) being Â£27.2m of EBITDA (2004: Â£17.0m), an increase in working capital requirements of Â£2.8m (2004: Â£10.5m) and an increase in provisions of Â£0.5m (2004: decrease of Â£1.5m). At 30 November 2005 the Group had net debt of Â£9.6m (2004: Â£14.9m). International Financial Reporting Standards (IFRS) Following the European Union's adoption of Regulation (EC) No 1606/2002, in line with other EU companies whose securities are publicly traded, the Group will be required to adopt International Financial Reporting Standards ('IFRS') together with revised International Accounting Standards ('IAS'), in issue at 31 March 2004, for the first time for our financial statements to 30 November 2006. The first reported results under IFRS will be our interim results to 31 May 2006. The 2005 financial year's consolidated financial statements remain in accordance with UK GAAP. - Ends - SThree PLC Consolidated Profit and Loss Account Year ended 30 November 2005 2005 2004 ------------------------------------------------------------------------------------------------------------- Exceptional items and Ordinary Exceptional Ordinary amortisation activities items Total activities of goodwill Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------------------------------------- Turnover 315,087 - 315,087 242,413 - 242,413 Cost of sales (210,606) - (210,606) (166,516) - (166,516) ------------------------------------------------------------------------------------------------------------- Gross profit 104,481 - 104,481 75,897 - 75,897 Administrative expenses (74,974) (15,864) (90,838) (58,530) (33,083) (91,613) ------------------------------------------------------------------------------------------------------------- Operating profit/(loss) 29,507 (15,864) 13,643 17,367 (33,083) (15,716) Net Interest (1,491) - (1,491) (1,405) - (1,405) ------------------------------------------------------------------------------------------------------------- Profit/(loss) before taxation 28,016 (15,864) 12,152 15,962 (33,083) (17,121) Taxation (8,726) 7,895 (831) (5,114) 470 (4,644) ------------------------------------------------------------------------------------------------------------- Profit/(loss) after taxation 19,290 (7,969) 11,321 10,848 (32,613) (21,765) Minority interest (135) - (135) 207 - 207 ------------------------------------------------------------------------------------------------------------- Profit/(loss) for the financial year 19,155 (7,969) 11,186 11,055 (32,613) (21,558) Dividends - including non equity (4,351) - (4,351) (4,525) - (4,525) ------------------------------------------------------------------------------------------------------------- Retained profit/(loss) for the year 14,804 (7,969) 6,835 6,530 (32,613) (26,083) ------------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share (pence) 35.1 (18.9) 16.2 16.4 (81.7) (65.4) Diluted earnings/(loss) per share (pence) 34.1 (18.4) 15.7 16.4 Adjusted earnings/(loss) per share (pence) Basic 15.4 (6.4) 9.0 8.9 (26.2) (17.3) Diluted 15.0 (6.3) 8.7 8.9 All amounts relate to continuing operations. SThree PLC Consolidated Balance Sheet as at 30 November 2005 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Fixed assets Tangible assets 2,815 1,833 -------------------------------------------------------------------------------- 2,815 1,833 Current assets Debtors 80,589 61,336 Cash at bank and in hand 2,901 24,956 -------------------------------------------------------------------------------- 83,490 86,292 Creditors: amounts falling due within one year (58,592) (39,118) -------------------------------------------------------------------------------- Net current assets 24,898 47,174 -------------------------------------------------------------------------------- Total assets less current liabilities 27,713 49,007 Creditors: amounts falling due after more than one year - (37,425) Provisions for liabilities and charges (5,817) (5,317) -------------------------------------------------------------------------------- Net assets 21,896 6,265 -------------------------------------------------------------------------------- Capital and reserves Called up share capital 1,380 2,214 Share premium 2,925 - Shares to be issued - 6,035 Capital reserve 878 - Profit and loss account 16,542 (2,014) -------------------------------------------------------------------------------- Total equity shareholders' funds 21,725 6,235 -------------------------------------------------------------------------------- Minority interest - equity 171 30 -------------------------------------------------------------------------------- Capital employed 21,896 6,265 -------------------------------------------------------------------------------- SThree PLC Consolidated Statement of Total Recognised Gains and Losses Year ended 30 November 2005 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083) Exchange (loss)/gain on translation of net investment in foreign subsidiaries (173) 527 -------------------------------------------------------------------------------- Total recognised gains and losses relating to the financial year 6,662 (25,556) -------------------------------------------------------------------------------- Consolidated Reconciliation of Movements in Shareholders' Funds Year ended 30 November 2005 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Profit/(loss) after taxation 11,321 (21,765) Minority interest (135) 207 Dividends (4,351) (4,525) -------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083) Exchange (loss)/gain on translation of net investment in foreign subsidiaries (173) 527 New share capital issued 88 4 Share issue costs (3,151) - Share award credit (1) 11,891 - -------------------------------------------------------------------------------- Net increase/(decrease) in shareholders' funds 15,490 (25,552) -------------------------------------------------------------------------------- Shareholders' funds at the beginning of year 6,235 31,787 -------------------------------------------------------------------------------- Shareholders' funds at the end of year 21,725 6,235 -------------------------------------------------------------------------------- (1) - The share award credit relates to the reversal of the non-cash charge recorded as an exceptional charge against operating profit in respect of shares awarded to employees SThree PLC Consolidated Cash Flow Statement Year ended 30 November 2005 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Net cash inflow from operating activities 24,954 5,053 Returns on investments and servicing of finance Interest received 482 611 Interest paid (1,973) (1,983) Preference dividends paid (8,876) (2,643) -------------------------------------------------------------------------------- Net cash outflow from returns on investments and servicing of finance (10,367) (4,015) Taxation (5,449) (3,292) Capital expenditure and financial investment Purchase of tangible fixed assets (2,702) (2,118) Receipts from sale of tangible fixed assets - 38 -------------------------------------------------------------------------------- Net cash outflow for capital expenditure and financial investment (2,702) (2,080) -------------------------------------------------------------------------------- Net cash inflow/(outflow) before financing 6,436 (4,334) Financing Issue of ordinary share capital 88 4 Expenses paid in respect of share issue (1,008) - Repayment of loan stock (39,900) - Drawdown on new loan facility 9,000 - Issue of ordinary share capital in subsidiaries to minority interests 30 40 -------------------------------------------------------------------------------- Net cash (outflow)/inflow from financing (31,790) 44 -------------------------------------------------------------------------------- (Decrease) in cash (25,354) (4,290) -------------------------------------------------------------------------------- SThree PLC Notes to the Financial Statements Year ended 30 November 2005 1. Segmental analysis The consolidated entity operates in one business segment being that of recruitment services. As a result, no additional business segment information is required to be provided. The segmental results by geography are shown below: Geographic analysis by destination Turnover Gross profit -------------------------------------------------------------------------------- 2005 2004 2005 2004 Â£'000 Â£'000 Â£'000 Â£'000 -------------------------------------------------------------------------------- United Kingdom 243,602 184,424 79,501 56,511 Europe and Rest of World 71,485 57,989 24,980 19,386 -------------------------------------------------------------------------------- 315,087 242,413 104,481 75,897 -------------------------------------------------------------------------------- 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill: United Kingdom 19,170 15,040 Europe and Rest of World 10,337 2,327 -------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill 29,507 17,367 Amortisation of goodwill - (31,517) Exceptional items (note 2) (15,864) (1,566) Net interest United Kingdom 107 490 Europe and Rest of World 302 100 Interest paid on loan stock, now repaid (1,900) (1,995) -------------------------------------------------------------------------------- Profit/(loss) before taxation 12,152 (17,121) -------------------------------------------------------------------------------- SThree PLC Notes to the Financial Statements Year ended 30 November 2005 1. Segmental analysis (continued) Turnover Gross profit -------------------------------------------------------------------------------- 2005 2004 2005 2004 Â£'000 Â£'000 Â£'000 Â£'000 -------------------------------------------------------------------------------- United Kingdom 299,019 227,904 92,147 66,493 Europe and Rest of World 16,068 14,509 12,334 9,404 -------------------------------------------------------------------------------- 315,087 242,413 104,481 75,897 -------------------------------------------------------------------------------- 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill: United Kingdom 27,837 16,791 Europe and Rest of World 1,670 576 -------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill 29,507 17,367 Amortisation of goodwill - (31,517) Exceptional items (note 2) (15,864) (1,566) Interest United Kingdom 557 490 Europe and Rest of World (148) 100 Interest paid on loan stock, now repaid (1,900) (1,995) -------------------------------------------------------------------------------- Profit/(loss) on ordinary activities before taxation 12,152 (17,121) -------------------------------------------------------------------------------- Net assets 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Net assets including goodwill: United Kingdom 17,871 1,708 Europe and Rest of World 4,025 4,557 -------------------------------------------------------------------------------- 21,896 6,265 -------------------------------------------------------------------------------- SThree PLC Notes to the Financial Statements Year ended 30 November 2005 2. Exceptional Items Exceptional items are those items which, because of their size or nature, are disclosed to give a proper understanding of the underlying results for the period. Items classified as exceptional are as follows: 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Exceptional items - charged to operating profit Employee share awards and share options at IPO 11,891 - Employer's National Insurance on share awards and options, and other related costs 2,529 - Special management bonuses 1,444 1,566 -------------------------------------------------------------------------------- Exceptional items - before taxation 15,864 1,566 -------------------------------------------------------------------------------- Exceptional items -taxation Taxation credit in respect of employee share options and awards (Schedule 23) 6,262 - Taxation credit on other exceptional items 1,192 470 Schedule 23 deferred tax in respect of unexercised employee share options and awards 441 -------------------------------------------------------------------------------- Exceptional items - taxation 7,895 470 -------------------------------------------------------------------------------- Certain employees received share awards and share options at IPO and in accordance with UITF 17, a charge has been reflected in the profit and loss account. This also resulted in a corresponding charge for employer's National Insurance. The Group received tax relief in respect of these share awards. This credit has also been classified as exceptional. Special management bonuses relate to amounts paid to those directors and senior Group management in proportion to their interest in zero coupon preference shares. The bonuses were awarded to reward those directors and senior managers for services provided, recognising the fact that the zero coupon preference shares did not bear dividends. After flotation, the zero coupon preference shares ceased to exist and the special management bonuses will no longer be payable. SThree PLC Notes to the Financial Statements Year ended 30 November 2005 3. Taxation on profit from ordinary activites (a) Analysis of tax charge for theyear -------------------------------------------------------------------------------------- Ordinary Exceptional 2005 2004 activities items Total Total Â£'000 Â£'000 Â£'000 Â£'000 -------------------------------------------------------------------------------------- Current tax: UK corporation tax at 30% (2004: 30%) on profits for the year 8,487 (1,192) 7,295 4,328 Schedule 23 tax credit in respect of employee share awards and options (note 2) - (6,262) (6,262) - Adjustments in respect of previous periods 63 - 63 (190) -------------------------------------------------------------------------------------- 8,550 (7,454) 1,096 4,138 Overseas tax 495 495 405 Adjustments in respect of previous periods 97 97 (117) -------------------------------------------------------------------------------------- 592 - 592 288 -------------------------------------------------------------------------------------- Total current tax charge 9,142 (7,454) 1,688 4,426 -------------------------------------------------------------------------------------- Deferred tax: Origination and reversal of timing differences (414) - (414) 95 Schedule 23 deferred tax in respect of unexercised employee share options and awards (Note 2) - (441) (441) - Adjustments in respect of previous periods (2) - (2) 123 -------------------------------------------------------------------------------------- Total deferred tax charge (416) (441) (857) 218 -------------------------------------------------------------------------------------- Tax on profit on ordinary activities 8,726 (7,895) 831 4,644 -------------------------------------------------------------------------------------- SThree PLC Notes to the Financial Statements Year ended 30 November 2005 3. Taxation on profit from ordinary activites (continued) The total current tax charge for the year is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Profit/(loss) before 12,152 (17,121) -------------------------------------------------------------------------------- Profit /(loss) before tax multiplied by standard rate of corporation tax in the UK of 30% 3,646 (5,136) Effects of: Goodwill amortisation not deductible for tax purposes - 9,455 Other expenses not deductible for tax purposes 469 275 Capital allowances in excess of depreciation and amortisation 72 (6) Other timing differences 55 (34) UITF 17 charge in respect of share awards and options 3,567 - Schedule 23 tax credit in respect of employee share options and awards (note 3) (6,262) - Lower tax rates on overseas earnings (67) (14) Tax losses not utilised within the year 48 193 Adjustments to tax in respect of prior period (UK) 63 (190) Adjustments to tax in respect of prior period (Overseas) 97 (117) -------------------------------------------------------------------------------- Total current tax charge 1,688 4,426 -------------------------------------------------------------------------------- Corporation tax deductions have arisen on the exercise of options granted to certain employees of the Group prior to the flotation. The corporation tax deduction amounted to Â£20.9m which reduces the current year's taxable profits of the Group. The tax effect of this deduction amounted to Â£6.3m, and the effective current tax rate reduced to 13.9% in the current year. This credit has been treated as exceptional due to its unusual nature and its materiality. In addition to the tax deductions described above, the Directors expect to receive additional tax deductions in respect of the share awards and share options currently unexercised. There is a timing difference between recognition of a charge for these share options for accounting purposes and the receipt of a tax credit. A deferred tax asset of Â£0.4m has been recognised in respect of this timing difference. 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Deferred tax comprises: Other timing differences 1,854 730 Accelerated capital allowances 832 1,099 -------------------------------------------------------------------------------- Deferred tax asset 2,686 1,829 -------------------------------------------------------------------------------- The movement in deferred taxation for the Group can be analysed as follows: At 1 December 1,829 2,047 Amount credited/(charged) to the profit and loss account 857 (218) -------------------------------------------------------------------------------- At 30 November 2,686 1,829 -------------------------------------------------------------------------------- In addition to the recognised deferred tax asset detailed above, the Group has carried forward tax losses of Â£0.2 million (2004: Â£0.2 million) for which no deferred tax asset has been recognised. Utilisation of these losses is currently considered too uncertain to justify recognition. The Group also has tax losses of Â£0.7m for which claims to recover prior period tax payments have been submitted. However, recovery is considered uncertain and therefore no deferred tax asset has been recognised in respect of these losses SThree PLC Notes to the Financial Statements Year ended 30 November 2005 4. Dividends 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Non-equity shares: Preference dividend payable of 5% (net) on Preference and 'A' Preference shares (4,351) (4,525) -------------------------------------------------------------------------------- (4,351) (4,525) -------------------------------------------------------------------------------- 5. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the employee share trust which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. If the dilutive number of ordinary shares result in a lower loss or higher profit these are considered to be anti-dilutive and have been excluded from the earnings per share calculations. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below. 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount Â£'000 millions pence Â£'000 millions pence ---------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share Earnings/(loss) attributable to ordinary shareholders 6,835 42.2 16.2 (26,083) 39.9 (65.4) Effect of dilutive employee share options 1.2 0 ---------------------------------------------------------------------------------------------------------- Diluted earnings/(loss) per share 6,835 43.4 15.7 (26,083) 39.9 (65.4) ---------------------------------------------------------------------------------------------------------- SThree PLC Notes to the Financial Statements Year ended 30 November 2005 5. Earnings per share (continued) Supplementary earnings per share to exclude goodwill amortisation and exceptional items Earnings per share before exceptional items and amortisation of goodwill is presented because the Directors believe it better explains the underlying trends of the Group's performance. 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount Â£'000 millions pence Â£'000 millions pence ---------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share 6,835 42.2 16.2 (26,083) 39.9 (65.4) Effect of goodwill amortisation and exceptional items 7,969 42.2 18.9 32,613 39.9 81.7 ---------------------------------------------------------------------------------------------------------- Basic earnings per share excluding exceptional items and goodwill amortisation 14,804 42.2 35.1 6,530 39.9 16.4 ---------------------------------------------------------------------------------------------------------- Diluted earnings per share 6,835 43.4 15.7 (26,083) Effect of goodwill amortisation and exceptional items 7,969 43.4 18.4 32,613 ---------------------------------------------------------------------------------------------------------- Diluted earnings per share excluding exceptional items and goodwill amortisation 14,804 43.4 34.1 6,530 39.9 16.4 ---------------------------------------------------------------------------------------------------------- Additional Disclosure The earnings per share figures presented above have been prepared in accordance with UK Financial Reporting Standard 14 'Earnings per share'. Due to the flotation and, consequently, the share capital conversion occurring late in the financial year, the weighted average number of shares used in the above calculations is considerably lower than the actual number of Ordinary shares in issue at the end of the financial year. Therefore the directors believe that a more meaningful denominator, based on the capital structure at the balance sheet date, should be used in order to provide a better understanding of the true position. The earnings used in the additional earnings per share calculation is before deduction of the preference dividend as this is considered as more representative of the future earnings position. The tables below set out the number of shares and earnings used in the calculation of the adjusted earnings per share. 2005 2004 Number of Number of shares shares millions millions -------------------------------------------------------------------------------- Total share capital in issue 138.0 138.0 Shares held by the EBT (13.6) (13.6) Basic number of shares 124.3 124.3 Effect of dilutive options 3.7 0 -------------------------------------------------------------------------------- Dilutive number of ordinary shares 128 124.3 -------------------------------------------------------------------------------- 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount Â£'000 millions pence Â£'000 millions pence ---------------------------------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083) Add preference dividend 4,351 4,525 Adjusted basic earnings/ (loss) per share 11,186 124.3 9.0 (21,558) 124.3 (17.3) Effect of goodwill amortisation and exceptional items 7,969 124.3 6.4 32,613 124.3 26.2 ---------------------------------------------------------------------------------------------------------- Adjusted basic earnings per share excluding exceptional items and goodwill amortisation 19,155 124.3 15.4 11,055 124.3 8.9 ---------------------------------------------------------------------------------------------------------- Adjusted diluted earnings/ (loss) per share 11,186 128.0 8.7 (21,558) Effect of goodwill amortisation and exceptional items 7,969 128.0 6.3 32,613 ---------------------------------------------------------------------------------------------------------- Adjusted diluted earnings per share excluding exceptional items and goodwill amortisation 19,155 128.0 15.0 11,055 124.3 8.9 ---------------------------------------------------------------------------------------------------------- 6. Reconciliation of operating profit to net cash inflow from operating activities 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Operating profit/(loss) 13,643 (15,716) Depreciation charge 1,442 1,311 Goodwill amortisation - 31,517 Negative goodwill arising on acquisition of minority interest in a subsidiary - (58) Profit from partial deemed disposal of subsidiary (24) (32) Charge in respect of employee share awards and options 11,891 - Loss/(profit) on sale of tangible fixed assets 275 (38) Increase in debtors (15,462) (17,503) Increase/(decrease) in provisions 500 (1,454) Increase in creditors 12,689 7,026 -------------------------------------------------------------------------------- Net cash inflow from operating activities 24,954 5,053 -------------------------------------------------------------------------------- 7. Reconciliation of net cash flow to movement in net debt 2005 2004 Â£'000 Â£'000 -------------------------------------------------------------------------------- Decrease in cash in the year (25,354) (4,290) Repayment of loan stock 39,900 - Drawdown on short-term loan facility (9,000) - Exchange differences and other non-cash changes (152) 527 -------------------------------------------------------------------------------- Movement in net debt 5,394 (3,763) Opening net debt (14,944) (11,181) -------------------------------------------------------------------------------- Closing net debt (9,550) (14,944) -------------------------------------------------------------------------------- 8. Nature of financial information The financial information set out above has been prepared in accordance with the accounting policies used in preparing the Group's accounts for the year ended 30 November 2004. It does not constitute the Group's audited statutory accounts within the meaning of Section 240 of the Companies Act 1985. The financial information for the year ended 30 November 2004 has been extracted from the s tatutory accounts for that year which have been delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The Group accounts for the year ended 30 November 2005 will be finalised on the basis of the financial information presented by the Directors in the preliminary announcement. 9. Annual Report and Accounts The 2005 Annual Report and Accounts will be posted to shareholders in due course. Further copies will be available from the Company Secretary, 41-44 Great Windmill Street, London W1D 7NB. Telephone No. 020 7292 3838. 10. Annual General Meeting The Annual General Meeting of SThree plc will be held on 3 May 2006. This information is provided by RNS The company news service from the London Stock Exchange

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