Final Results

SThree plc 07 February 2007 SThree plc ('SThree' or the 'Group') Preliminary Results for the year ended 30 November 2006 SThree, one of the UK's leading specialist staffing businesses, is today announcing its unaudited preliminary results for the year ended 30 November 2006. Financial Highlights Â£m 2006 2005 Change (Unaudited) (Unaudited) Revenue Â£393.3m Â£315.1m + 24.8% Gross Profit (Fee Income) Â£135.5m Â£104.5m + 29.7% Operating profit before exceptional items* Â£41.0m Â£29.5m + 39.3% Operating profit after exceptional items* Â£18.9m Â£13.5m + 39.7% Profit before taxation and exceptional items* Â£40.3m Â£28.0m + 44.0% Profit before taxation Â£18.1m Â£12.0m + 50.7% Basic earnings per share 9.5p 9.3p Basic earnings per share before exceptional items* 22.4p 38.1p Basic earnings per share before exceptional items* (2005 comparatives adjusted to reflect new post IPO capital structure) 22.4p 15.4p + 45.5% Final dividend 4.8p - Total dividend 7.2p - The above results have been prepared under International Financial Reporting Standards (IFRS) * Exceptional items are detailed in Note 2 Operational Highlights â€¢ Excellent Group-wide performance with substantial volume increases achieved across all sectors whilst maintaining margins â€¢ Both Contract and Permanent businesses delivered further strong growth - Permanent placements increased by 27.6% to 7,685 (2005: 6,023), with average fees increased by 7.4% - Active contractors at period end increased by 8.1% to 4,719 (2005: 4,365), with average gross profit per day rates increased by 11.1% â€¢ Well-established Information and Communications Technology ('ICT') business segment grew gross profit by 26.0% to Â£111.1m (2005: Â£88.2m), reflecting success in further increasing market share â€¢ Significant further progress made with development of new business segments (banking and finance, accountancy, human resources, engineering and pharmaceuticals) and geographical footprint - Gross profit from non-ICT segments increased by 49.8% to Â£24.4m (2005: Â£16.3m), reflecting rapid growth in the UK - Successful initial rollout of non-ICT capabilities in selected non-UK territories and continued expansion of international network with addition of new offices in Paris, Frankfurt, Munich and New York during the year, contributed to 46.4% increase in non-UK gross profit to Â£36.6m (2005: Â£25.0m). New offices in Brussels and Rotterdam scheduled for Q2 2007 â€¢ Headcount increased by 38.0% to 1,481 at year end, with sales consultant numbers growing in line with expectations to 894 (2005: 627) â€¢ Final dividend of 4.8p per share declared Russell Clements, Chief Executive Officer, said: '2006 was another very good year for SThree. Positive business sentiment underpinned healthy demand for the specialist staff we supply. These market conditions allowed the Group to make further significant progress in terms of both the volume and the quality of the business it undertook. '2006 once again proved the robustness and scalability of the SThree business model as we rolled it out across an increasingly wide range of new geographies and new sectors. This process will continue in 2007. 'Trading in the first two months of the current financial year was consistent with our expectation that the market in which we will operate during 2007 will be broadly similar to that of 2006. On this assumption we go into our second full year as a public company comfortable with the fact that our robust 2006 performance sets the standard by which we will be judged in 2007.' SThree plc (07.02.07) 020 7638 9571 Russell Clements, Chief Executive Officer (Thereafter) 020 7292 3838 Michael Nelson, Chief Financial Officer Citigate Dewe Rogerson 020 7638 9571 Kevin Smith / Nicola Smith Notes to editors SThree, founded in 1986, is one of the leading specialist staffing businesses in the UK, providing both permanent and contract specialist staff to a diverse, international client base of well over 4,000 clients. From its well established position as a major player in the information and communications technology (' ICT') sector the Group is now broadening the base of its operations by building fast growing businesses serving the banking and finance, accountancy, human resources, engineering and pharmaceuticals sectors. Following the establishment of its first business, Computer Futures, in 1986, the Group adopted a multi-brand strategy, establishing new operations to address growth opportunities. SThree currently operates 12 brands, the four largest being Computer Futures, Huxley Associates, Progressive and Pathway, and has 32 offices in the UK and 11 offices elsewhere in Europe, in Belgium, The Netherlands, France, Germany and Ireland. In addition, the Group opened in first North American office, in New York, in 2006. SThree has a selective approach to clients and focuses on high margin opportunities, predominantly within the small to medium-sized enterprises ('SME ') market. From its inception the Group has avoided the high volume/low margin business model in favour of a focus on high quality business. SThree plc ('SThree' or the 'Group') Preliminary Results for the year ended 30 November 2006 Operating Review The financial year 2006 was SThree's first full year as a public company. As such, it is particularly pleasing to be able to comment on a highly satisfactory performance with progress made across all of the sectors in which we operate. During the year positive business sentiment underpinned continued healthy demand for specialist staff. This in turn encouraged candidates to seek new challenges creating additional placing opportunities as their employers looked to replace in their wake. These market conditions allowed the Group to build on the progress made in the previous year and to further increase its sales consultant headcount to capitalise on the available opportunities. This capacity-driven growth was enhanced by increases in both the average contract day rate achieved as well as the average fee charged for permanent placements. We were therefore able to build substantial increases in the volume of transactions undertaken without compromising value. We see this as a further vindication of our long-established strategy of avoiding the high volume, low margin model in favour of quality business. The outcome achieved as a result was an improvement in gross profit of 29.7% to Â£135.5m (2005: Â£104.5m). This figure translated into a 39.3% growth in operating profit before exceptional items to Â£41.0m (2005: Â£29.5m). As a result our operating profit before exceptional items to gross profit conversion ratio improved to 30.3% (2005: 28.2%). This is a noteworthy achievement, particularly given that this metric was already amongst the best in class relative to our peer group and also that during the year we invested significantly in geographical and sector expansion. Staffing Levels The Group continued to grow front-office staff numbers significantly during the year. Total headcount at year-end was 1,481 (2005: 1,073) of which 894 (2005: 627) were sales consultants. The remaining 587 staff cover sales management, direct sales support, sales training, internal recruitment and back office functions. The expansion of the sales function required some increases in headcount in the H.R., Legal, Internal Recruitment and Information Systems functions. However, headcount in Finance decreased shortly after the year-end as a consequence of restructuring associated with the implementation of SAP. During the year the Group maintained its core strategy of recruiting sales staff at a trainee level and from outside of the staffing industry. These recruits were then put through an in-house graduate training and development programme. In terms of sales staff the Group ended the year on planned headcount. However, the last quarter represented a particularly intense recruitment phase meaning that those hired in this latter period had limited opportunity to contribute before the end of the financial year. Given the highly competitive environment in which we operate, when recruiting sales staff we must take every opportunity to establish in the minds of our potential recruits that SThree is an employer of choice. For this reason it was particularly pleasing to note that in the 2006 'Sunday Times/Best Companies Top 100 Places To Work' index SThree was placed in overall 13th position. Strategy The Group's first year as a public company saw minimal changes to the strategy that has served it well over its long history as a private company. In particular, we continued to be highly selective in terms of the quality of business undertaken, consistently avoiding low margin clients in favour of those prepared to pay a favourable rate for our services. We also maintained our commitment to ensuring our key staff were able to gain equity participation in the Group, either through employee share schemes or minority stakes in individual businesses. Key factors supporting our successful pursuit of this strategy were once again our multi-brand model and our strong SME franchise. Both factors mitigate against any potential over-reliance on a limited number of clients and this insulates us against the downward margin pressure experienced by less diversified players. At the same time, our niche-within-niche approach allows us to credibly position ourselves as market experts, particularly in relation to candidate acquisition. This in turn justifies our higher margins. During the year we took further strides in applying this model to an ever-increasing number of staffing sectors and geographies. This continuous programme of rolling out the business model across a matrix of complementary disciplines and territories is expected to be the core group growth strategy on an ongoing basis. We have also continued to underpin our expansion strategy through investment in and development of 'best in breed' ERP and CRM technology. Contract / Permanent Business Mix Both parts of the Group's business experienced strong growth during the year. By year-end the Group had made a total of 7,685 permanent placements (2005: 6,023) an increase of 27.6%. In addition, the number of active contractors had risen to a record 4,719 at the year end (2005: 4,365) representing a more modest but nevertheless healthy increase of 8.1% on the previous year. The difference in the relative growth rates is consistent with benign market conditions in which employers have the confidence to make permanent hires. In the Group's case, this macro element is further impacted by the fact that our fast-growing non-UK business is disproportionately biased towards permanent placements. Imbalances in candidate supply and demand in the specialist staffing market complemented the Group's proactive efforts to place higher-level staff, resulting in contract day rates increasing to Â£64.91, an increase of 11.1% (2005: Â£58.42) and permanent fees reaching an average of Â£8,563 (2005: Â£7,972), an increase of 7.4%. The aggregate effect of all of the above was to see an increase of permanent business within the overall mix. For the year the gross profit was split 51% vs.49% in favour of contract as opposed to the 54% vs. 46% split of the previous year. Sector Focus Given the history of the group it is unsurprising that a significant percentage of our business is in the ICT sector with 82.0% of gross profit derived from this source in 2006 (2005: 84.4%). However, non-ICT is clearly now a substantial and rapidly growing element of our business. During the year gross profit from non-ICT sectors grew by 49.8% to Â£24.4m (2005: Â£16.3m). The latter point should be seen in the context that the vast majority of the fast growing non-UK businesses are currently predominantly ICT-based and hence the growth figure illustrates the scope of the market opportunity within the UK from newer sectors. That said, during the year we started to see the results of newer sector disciplines being rolled out outside of the UK. Although still at a relatively early stage, as this trend develops further we would expect to see it impact meaningfully on the Group's overall sector mix. The potential of this was well illustrated during the year with the opening of Huxley's New York office in Q3. This office was initially launched off the strength of Huxley's franchise in specialist banking and finance recruitment and has subsequently added ICT to its portfolio. This was the first time that a non-ICT platform has pioneered geographical expansion but we see no reason why this should not become more widespread going forward. The ICT versus non-ICT breakdown is also influenced by the growth in the actual number of non-ICT sectors in which we operate as well as the number of group brands that have extended their remits beyond an ICT-specific focus. In both of these respects 2006 was a year of progress with a number of brands taking their first steps towards enhancing their portfolios to include other specialist staffing sectors. In each case, however, the Group intends to remain tightly focused on niche, higher value segments. Geographical Breakdown By the end of the year the Group operated from a total of thirty-two UK offices, eleven elsewhere in Europe and one office in New York. During the year, in addition to the New York office, the Group opened new offices in Paris, Frankfurt and Munich. Further international expansion through new offices for Huxley in Brussels and Computer Futures in Rotterdam is scheduled for Q2 2007. Although physical offices outside of the UK remained limited to the three largest brands i.e. Computer Futures, Huxley and Progressive, certain of the other brands increased their trading with non-UK clients during the year with a view to establishing overseas offices in due course. At a total of Â£98.9m (2005: Â£79.5m), UK gross profit grew by 24.4% during the year and represented 73.0% of the overall business compared to 76.1% in 2005. Given the highly competitive nature of the UK specialist staffing market, this is an encouraging result, particularly as we achieved this whilst maintaining our margins. In other words, we were able to win market share rather than buy market share. As expected, a stronger rate of growth was achieved from the newer businesses outside of the UK, with gross profit of Â£36.6m (2005: Â£25.0m), representing an increase of 46.4% on the previous year. Overall-non-UK share of gross profit increased to 27.0% from 23.9% in 2005. As we continue to expand into new territories and at the same time add new sectors to the non-UK business, the proportion of non-UK contribution is expected to continue to grow as a percentage of the overall total. Brand Breakdown In aggregate our four largest brands, Computer Futures, Huxley, Progressive and Pathway accounted for 78.7% of overall gross profit, the same as in 2005. All of these brands posted impressive levels of growth during the year. Computer Futures remained marginally the largest brand measured by gross profit, achieving Â£36.7m which equated to a growth of 20.0% on 2005. This performance was achieved despite the brand having focused to date solely on rolling out ICT across all its geographies. We are confident this brand is now well positioned to start to add new disciplines to its established branch network and is at an exciting new phase in its development. Huxley achieved a total gross profit of Â£35.6m, a 42.9% improvement on the previous year. This is a remarkable achievement given that the 2005 growth figure was itself 48%. Huxley's outstanding growth is a reflection of not only its strong ICT franchise but also the fact that it has the most developed programme of sector diversification with established businesses in banking and finance and engineering. During the year Huxley took steps to roll out these disciplines into newer territories, most notably with the opening of the New York office. In this sense Huxley has acted as a pathfinder for a route that we expect the other brands to increasingly follow. Progressive's total gross profit of Â£24.8m was 25.5% ahead, a result that reflected a particularly strong performance from its non-UK business. During the year headway was made in adding new sector disciplines, with this brand making encouraging progress in the pharmaceuticals sector, a large international market we feel is particularly well suited to our model. Pathway, the fourth largest brand delivered a total gross profit of Â£9.5m, an improvement of 35.7% on the previous year. Historically, this brand has focused exclusively on the UK ICT market. However, in Q4 it established teams to address the banking and finance marketplaces in the UK, and we expect to see the results of this initiative start to flow through during 2007. The other group brands accounted for a combined total of Â£28.9m gross profit, a growth of 30.1% on the previous year - a highly creditable performance given the over 95% growth rate in 2005 provided a particularly challenging benchmark. Again it is worth commenting that most of this growth was still derived from UK ICT which is generally regarded as amongst the most competitive of all the specialist staffing markets. We see this as further evidence that even our most mature markets are capable of generating healthy growth if the strategy applied to them is well formulated and properly executed. Outlook 2006 was another very good year for SThree. We built not only on the strong performances of recent years but also on the solid platform we have developed over our twenty years in the specialist staffing market. Clearly our maiden year as a public company was particularly significant and it was critical that our performance during the year reflected the confidence placed in us by our investors. We feel that in our relatively short history as a listed business we have taken major strides forward in terms of establishing our credibility as a key player in our sector. Without question we enjoyed positive market conditions in which the candidate supply/demand balance was once again in our favour. However, it is worth observing that the overall economic backdrop was not exceptionally vibrant. This demonstrates that we do not need a particularly strong economic tailwind to post very impressive growth levels. Our view remains that as long as economic conditions are at least benign and candidates have the confidence to put themselves on the job market, then demand levels in the specialist staffing market will remain supportive of continued strong performance. We also take great confidence in that 2006 once again proved the robustness and scalability of the SThree business model as we roll it out across an increasingly wide range of new geographies and new sectors. The fact that we achieved the growth we did with only limited parts of the business meaningfully engaged outside of our core ICT franchise suggests that we have as yet only seen a small part of the potential that this strategy has to offer. Into 2007 and beyond we expect to see a significant increase in the number of brands actively adding to their portfolios. During 2006 proactive steps were taken to expedite this process whilst at the same time ensuring that the more established markets remain appropriately well resourced. Trading in the first two months of the current financial year was consistent with our expectation that the market in which we will operate during 2007 will be broadly similar to that of 2006. On this assumption we go into our second full year as a public company comfortable with the fact that our robust 2006 performance sets the standard by which we will be judged in 2007. Financial Review Income Statement Revenue 2006 2005 - Contractor placements Â£327.5m Â£267.1m +22.6% - Permanent placements Â£65.8m Â£48.0m +37.0% Total Â£393.3m Â£315.1m +24.8% Gross profit ('Fee Income') for the year increased by 29.7% to Â£135.5m (2005: Â£104.5m) representing an overall gross profit margin of 34.5% (2005: 33.2%). The percentage increase in gross profit is greater than the increase in turnover due to a higher proportion of permanent business (which is 100% gross margin) in 2006 (48.6% vs. 46.0%) coupled with a small increase in the gross margin on contract placements to 21.3% from 21.1%. Gross profit from contractor placements was Â£69.7m (2005: Â£56.5m) and represented 51.4% (2005: 54.0%) 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 39.3% increase in operating profits before exceptional items from a 29.7% increase in gross profit. The conversion ratio (operating profit divided by gross profit) again increased strongly from 28.2% to a record 30.3%. Administrative expenses before exceptional items increased by 26.0% to Â£94.5m (2005: Â£75.0m), principally due to increased numbers of staff. Headcount of the Group totalled 1,073 at 30 November 2005 and increased by 38.0% to 1,481 by 30 November 2006. Sales consultant headcount increased by 42.6% to 894 (2005: 627). Average headcount for the year was 1,288 (2005: 1,037). Exceptional items are detailed in note 3 to the accounts. At the IPO, the Group allocated a number of share awards and options to certain employees who had contributed to the Group's prior success. As disclosed in last year's annual report, some such awards occurred at IPO with a further tranche of share awards and options crystallising during 2006. The resultant charge to the income statement amounted to Â£22.1m (2005: Â£15.9m) inclusive of related social charges. Since the Group satisfied these awards principally through shares held in the SThree Employee Benefit Trusts, there is a corresponding credit of Â£19.5m (2005: Â£12.0m) to reserves, being the value of the shares awarded before related social charges. For 2007 and beyond it is anticipated that there will be no exceptional items relating to IPO-related share awards. The net finance charge of Â£0.9m (2005: Â£1.5m) predominantly relates to bank loan interest paid (2005: loan stock interest), offset by interest income on periodic cash deposits and gains on financial instruments. During 2006, the Group entered into new principal banking relationships and is now financed through a flexible credit line arrangement provided by the new incumbent. Profit before taxation and before exceptional items amounted to Â£40.3m (2005: Â£28.0m), an increase of 44.0%. Total profit before taxation and after exceptional items was Â£18.1m (2005: Â£12.0m), an increase of 50.7% Taxation on profits before exceptional items was Â£12.3m (2005: Â£8.7m), representing an effective tax rate of 30.5% (2005: 31.1%). Under Schedule 23 of the Finance Act 2003, the Company obtains a corporation tax deduction relating to the various share awards and options exercised. The amount of the tax deduction is calculated by reference to the share price at the time of exercise. As a consequence, the cash benefit to the Group of the tax deductions is greater than the tax credit on the exceptional items reported in the income statement. This difference under IFRS is dealt with through equity. The total Schedule 23 tax benefit amounted to Â£10.7m (2005: Â£7.9m), of which Â£6.3m (2005: Â£4.8m) appears in exceptional items in the income statement and the remaining Â£4.4m (2005: Â£3.1m) is therefore a credit to equity. Basic earnings per share were 9.5p (2005: 9.3p) and basic earnings per share before exceptional items were 22.4p (2005: 38.1p). The weighted average number of shares for the year was 123.9m (2005: 38.8m). In order to aid comparability of earnings per share numbers, the Group has included an alternative presentation for 2005 on the face of the income statement. Since the flotation and the related share capital conversion occurred late in 2005, the weighted average number of shares used in the standard EPS calculations for 2005 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 13.7m are held within the Employee Benefit Trusts and therefore not included within the basic EPS calculation. Using the 2005 year-end number of shares the basic earnings per share would have been 6.4p, and before exceptional items 15.4p. The Directors believe that these figures give a more useful representation of the comparative Group earnings per share performance for 2005. The Directors declared an interim dividend of 2.4p per share. The Board proposes to pay a final dividend of 4.8p per share, bringing the total dividend for the year to 7.2p per share. The final dividend will be paid on 4 June 2007 to those shareholders on the register at 4 May 2007. Balance Sheet The Group had net assets of Â£64.1m at 30 November 2006 (2005: Â£29.3m). Net debt amounted to Â£2.9m (2005: Â£9.6m), the reduction in debt of Â£6.7m being achieved through increased trading. Capital expenditure amounted to Â£2.4m (2005: Â£2.7m) and predominantly related to upgrades of IT hardware and fit-out of new offices across the Group. In addition, expenditure of Â£3.0m on new ERP and candidate/client management systems has been capitalised within intangible assets. Net trade debtors increased by 29.1% to Â£69.3m at 30 November 2006 (2005: Â£53.6m) representing debtor days of 54 (2005: 46 days). Total trade and other payables reduced from Â£46.1m to Â£39.0m. Of this reduction, Â£10.5m related to income tax and social charges on share awards made at IPO shortly before the 2005 year-end which had been collected from employees but were not liable to be paid to the tax authorities until early 2006. Cash Flow At the start of the year the Group had net debt of Â£9.6m. During the year the Group generated net cash from operating activities of Â£15.0m (2005: Â£25.0m) being Â£40.1m of operating cashflow before changes in working capital and provisions (2005: Â£27.2m), an increase in working capital requirements of Â£24.9m (2005: Â£2.8m) and a decrease in provisions of Â£0.2m (2005: Â£0.5m increase). At 30 November 2006 the Group had net debt of Â£2.9m. Treasury Management and Currency Risk It is the Directors' intention to finance the activities and development of the Group principally from retained earnings. The continued investment in the business and the cash-consuming nature of a growing contract segment mean that operating cashflow will continue to be largely re-invested in the business. Cash surpluses are invested in short-term deposits with any working capital requirements being provided from Group resources or by local overdraft facilities. The main functional currencies of the Group are Sterling and the Euro. The Group does not have material transactional currency exposures nor is there a material exposure to foreign-denominated monetary assets and liabilities. However, the Group does undertake forward rate agreements for both interest and foreign currency risks. These do not meet the definition of hedging relationship under IFRS, but are used to mitigate future exposures. The Group is exposed to foreign currency translation differences in accounting for its overseas operations although our policy at present is not to hedge this exposure. - Ends - SThree plc Consolidated Income Statement Year ended 30 November 2006 2006 2005 Ordinary Exceptional Total Ordinary Exceptional Total activities items activities items Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Revenue 393,262 - 393,262 315,087 - 315,087 Cost of sales (257,742) - (257,742) (210,606) - (210,606) Gross profit 135,520 - 135,520 104,481 - 104,481 Administrative expenses (94,488) (22,143) (116,631) (75,022) (15,939) (90,961) Operating profit 41,032 (22,143) 18,889 29,459 (15,939) 13,520 Finance income 432 - 432 482 - 482 Finance cost (1,284) - (1,284) (1,973) - (1,973) Share of profit of joint 88 - 88 - - - venture Profit before taxation 40,269 (22,143) 18,126 27,968 (15,939) 12,029 Taxation (12,288) 6,242 (6,046) (8,702) 4,759 (3,943) Profit after taxation 27,981 (15,901) 12,080 19,266 (11,180) 8,086 Dividends - non equity - - - (4,351) - (4,351) Profit for the year 27,981 (15,901) 12,080 14,915 (11,180) 3,735 Attributable to: Equity holders of the Company 27,703 (15,901) 11,802 14,780 (11,180) 3,600 Minority interest 278 - 278 135 - 135 27,981 (15,901) 12,080 14,915 (11,180) 3,735 Earnings per share pence pence pence pence pence pence Basic 22.4 (12.9) 9.5 38.1 (28.8) 9.3 Diluted 21.4 (12.3) 9.1 34.1 (25.8) 8.3 Adjusted - basic 22.4 (12.9) 9.5 15.4 (9.0) 6.4 Adjusted - diluted 21.4 (12.3) 9.1 14.9 (8.7) 6.2 All amounts relate to continuing operations. SThree plc Consolidated Statement of Changes in Equity as at 30 November 2006 Shares Currency Attributable Share Share to be Capital translation Retained to Company's Minority Total capital premium issued reserve reserve earnings shareholders interest equity Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Balance at 1 December 2004 2,214 - 6,035 - - (1,967) 6,282 30 6,312 - Profit for the year to 30 November 3,600 3,600 135 3,735 2005 Issue of share capital 14 74 88 6 94 Employee share award and share option 11,966 11,966 11,966 credit Deferred tax on employee 7,315 7,315 7,315 share options Current tax on employee 3,136 3,136 3,136 share options Satisfaction of rights of 30 6,005 (6,035) - - shares to be issued Share issue costs charged to share (3,154) (3,154) (3,154) premium Conversion of preference (878) 878 - - shares Currency translation (146) (146) (146) differences Total movements in equity (834) 2,925 (6,035) 878 (146) 26,017 22,805 141 22,946 Balance at 30 November 2005 1,380 2,925 - 878 (146) 24,050 29,087 171 29,258 Profit for the year to 30 11,802 11,802 278 12,080 November 2006 Employee share award and share option 19,544 19,544 19,544 credit Deferred tax on employee 2,054 2,054 2,054 share options Current tax on employee 4,416 4,416 4,416 share options Repurchase of minority - - (36) (36) interest Dividends paid (Note 8) (3,038) (3,038) (65) (3,103) Currency translation (102) (102) (102) differences Total movements in equity - - - - (102) 34,778 34,676 177 34,853 Balance at 30 November 2006 1,380 2,925 - 878 (248) 58,828 63,763 348 64,111 SThree plc Balance Sheet as at 30 November 2006 2006 2005 Â£'000 Â£'000 ASSETS Non-current assets Property, plant and equipment 3,558 2,815 Intangible assets - other 3,012 43 Intangible assets - goodwill 364 - Investment in joint venture 89 - Deferred tax asset 11,459 10,014 18,482 12,872 Current assets Trade and other receivables 92,585 74,900 Current tax debtor 533 2,994 Cash and cash equivalents 2,440 2,901 95,558 80,795 Total assets 114,040 93,667 LIABILITIES Current liabilities Provisions for liabilities and charges (188) (364) Trade and other payables (39,024) (46,141) Financial liabilities - borrowings (5,281) (12,451) (44,493) (58,956) Non-current liabilities Provisions for liabilities and charges (5,436) (5,453) (5,436) (5,453) Total liabilities (49,929) (64,409) Net Assets 64,111 29,258 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 1,380 1,380 Share premium 2,925 2,925 Capital reserve 878 878 Currency translation reserve (248) (146) Retained earnings 58,828 24,050 63,763 29,087 Minority interest 348 171 Total equity 64,111 29,258 SThree plc Cash Flow Statement Year ended 30 November 2006 2006 2005 Â£'000 Â£'000 Cash flows from operating activities Cash generated from operating activities 15,025 24,954 Income tax received/(paid) 1,459 (5,449) Net cash generated from operating activities 16,484 19,505 Cash flows from investing activities Purchase of property, plant and equipment (2,442) (2,702) Purchase of intangible assets (3,001) - Proceeds from sale of property, plant and equipment 56 - Net cash used in investing activities (5,387) (2,702) Cash flows from financing activities Expenses paid in respect of share issue - (1,008) Drawdown on new loan facility - 9,000 Repayment of loan facility (8,000) - Repayment of loan stock - (39,900) Interest income 432 482 Interest costs (1,284) (1,973) Proceeds from issue of ordinary shares - 88 Issue of share capital to minority interest - 30 Purchase of minority interest (400) - Dividends paid (3,038) - Dividend paid to minority interest (65) - Preference dividends paid - (8,876) Net cash used in financing activities (12,355) (42,157) Net decrease in cash and cash equivalents (1,258) (25,354) Cash and cash equivalents at beginning of the year (550) 24,956 Exchange losses on cash and cash equivalents (33) (152) Cash and cash equivalents at the end of the year (1,841) (550) SThree plc Notes to the Financial Statements Year ended 30 November 2006 1. Segmental analysis As the Group operates in one business segment, being that of recruitment services, no additional business segment information is required to be provided. The Group's secondary segment is geographical and the segmental results by geographical area are shown below. Geographic analysis By location of client By location of operating company 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 Revenue United Kingdom 295,666 243,602 372,563 299,019 Europe and Rest of World 97,596 71,485 20,699 16,068 393,262 315,087 393,262 315,087 Gross Profit United Kingdom 98,937 79,501 118,612 92,147 Europe and Rest of World 36,583 24,980 16,908 12,334 135,520 104,481 135,520 104,481 Operating Profit Operating profit before exceptional items: United Kingdom 38,659 27,789 Europe and Rest of World 2,374 1,670 41,033 29,459 Exceptional items United Kingdom (22,143) (15,939) 18,890 13,520 Total assets Capital expenditure 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 United Kingdom 106,195 87,248 5,517 2,562 Europe and Rest of World 7,847 6,419 289 154 114,042 93,667 5,806 2,716 The following segmental analyses by brand, recruitment classification and by discipline (being the profession of candidate placed) have been included as additional disclosure over and above the requirements of IAS14 'Segment Reporting'. Revenue Gross profit 2006 2005 2006 2005 Â£'000 Â£'000 Â£'000 Â£'000 Brand Computer Futures Solutions 113,391 96,223 36,749 30,620 Huxley Associates 91,198 64,971 35,609 24,911 Progressive Computer Recruitment 77,288 66,728 24,777 19,750 Pathway 36,649 27,586 9,469 6,979 Others 74,736 59,579 28,916 22,221 393,262 315,087 135,520 104,481 Recruitment classification Contract 327,459 267,071 69,717 56,465 Permanent 65,803 48,016 65,803 48,016 393,262 315,087 135,520 104,481 Discipline Information & communication technology 351,038 285,388 111,121 88,190 Other(1) 42,224 29,699 24,399 16,291 393,262 315,087 135,520 104,481 (1) Including banking and finance, accountancy, human resources, engineering and pharmaceutical sectors. SThree plc Notes to the Financial Statements Year ended 30 November 2006 2. Administrative Expenses - 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: 2006 2005 Â£'000 Â£'000 Exceptional items - charged to operating profit Employee share awards and share options charge 19,544 11,966 Employer's National Insurance on share awards and options, and related costs 2,599 2,529 Special management bonuses - 1,444 Exceptional items - before taxation 22,143 15,939 Certain employees received share awards and share options that were granted during the financial year but linked to arrangements made at IPO. In accordance with IFRS 2 'Share based payments' a charge has been reflected in the income statements. This also resulted in a corresponding charge for Employer's National Insurance contributions. The Group received tax relief in respect of these share awards and other options and will receive tax relief in respect of options to be exercised in the future. These credits have also been classified as exceptional. Special management bonuses relate to amounts paid to certain 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. The charge in respect of the employee share awards and options is a non-cash item. The related Employer's National Insurance contribution was paid in cash after the balance sheet date. In 2005, the special management bonuses were paid, in cash. Corporation tax deductions have arisen on the exercise of options and awards granted to certain employees of the Group. The corporation tax deduction amounted to Â£18.5m (2005: Â£20.9m) which reduces the current year's taxable profits of the Group. The tax effect of this deduction amounted to Â£5.6m (2005: Â£6.3m). SThree plc Notes to the Financial Statements Year ended 30 November 2006 3. Taxation (a) Analysis of tax charge for the year 2006 2005 Ordinary Exceptional Total Total activities items Â£'000 Â£'000 Â£'000 Â£'000 Current taxation UK Corporation tax at 30% (2005: 30%) on profits for the year 11,154 (6,642) 4,512 4,131 Adjustments in respect of prior periods (174) - (174) 63 Overseas Corporation tax on profits for the year 1,594 - 1,594 495 Adjustments in respect of prior periods (495) - (495) 124 Total current tax charge/(credit) 12,079 (6,642) 5,437 4,813 Deferred taxation Origination and reversal of temporary differences 209 - 209 (427) Schedule 23 deferred tax charge/ (credit) in respect of unexercised employee share awards and options - 400 400 (441) Adjustments in respect of prior periods - - - (2) Total deferred tax charge/(credit) 209 400 609 (870) Total income tax expense in the income statement 12,288 (6,242) 6,046 3,943 (b) Reconciliation of the effective tax rate The total tax charge for the year is higher than the standard rate of corporation tax in the UK (30%). The differences are explained below: 2006 2005 Â£'000 % Â£'000 % Profit before taxation 18,126 12,029 Profit before tax multiplied by standard rate of corporation tax in the UK of 30% 5,438 30% 3,609 30% Effects of: Other expenses not deductible for tax purposes 461 3% 469 4% Capital allowances in excess of depreciation and amortisation 153 1% (355) (3)% Other timing differences 383 2% (387) (3)% IFRS 2 charge in respect of share awards and options 5,863 32% 3,567 30% Schedule 23 tax credit in respect of employee share options and awards (5,543) (31%) (3,126) (26%) Lower tax rates on overseas earnings (149) (1%) (67) (1%) Tax losses not utilised within the year. 109 1% 48 0% Adjustments to tax in respect of previous periods(UK) (174) (1%) 63 1% Adjustments to tax in respect of previous periods(Overseas) (495) (3%) 122 1% Tax expense and effective tax rate 6,046 33% 3,943 33% 2006 2005 (c) Current and deferred tax movement recognised Â£'000 Â£'000 directly in equity Current tax Equity settled employee share options 4,416 3,136 Deferred tax Equity settled employee share options 2,054 7,315 6,470 10,451 Corporation tax deductions have arisen on the exercise of options granted to certain employees of the Group during the financial year. The corporation tax deduction amounted to Â£33.2m (2005: Â£20.9m) which reduces the current year's taxable profits of the Group. The current tax effect of this deduction amounted to Â£5.4m (2005 Â£3.6m) recognised in the income statement in the current year. The current tax recognised directly in equity amounted to Â£4.4m (2005: Â£3.1m). 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. Under IFRS the Group is required to provide for deferred tax on all unexercised share awards and options. At 30 November 2006 a deferred tax asset of Â£9.4m (2005: Â£7.8m) has been recognised in respect of this. 4. Dividends 2006 2005 Â£'000 Â£'000 Amounts recognised and distributed to shareholders in the year Equity Interim dividend for the year ended 30 November 2006 of 2.4p per ordinary share (2005: nil) 3,038 - Non-equity Preference dividend payable of 5% (net) on Preference and 'A' Preference shares1 - 4,351 3,038 4,351 1 IAS 32 'Financial Instruments - Disclosure and presentation' and IAS 39 'Financial Instruments - Recognition and measurements' were not implemented in the prior year comparative figures in accordance with the transitional rules set out in IFRS 1, thus the preference dividend was not reclassified as interest within the income statement. Amounts proposed for approval at the AGM Proposed final dividend for year end 30 November 2006: 4.8p (2005: nil) 6,624 - The proposed final dividend had not been approved by the shareholders at 30 November 2006 and consequently has not been included as a liability within the financial statements. A final dividend of 4.8p (2005: nil) per ordinary share will be paid on 4 June 2007 to shareholders on the register at the close of business on 4 May 2007. 5. Earnings per share The calculation of the basic and diluted earnings per share is based on the following data. 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. 2006 2005 Â£'000 Â£'000 Earnings Profit after taxation 12,080 8,086 Minority Interest (278) (135) Preference dividend paid - (4,351) Basic Earnings 11,802 3,600 Effect of exceptional items (net of tax) 15,820 11,180 Profit for the year excluding exceptional items 27,622 14,780 millions millions Number of shares Weighted average number of shares used for basic EPS 123.9 38.8 Dilution effect of share plans 5.8 4.5 Diluted weighted average number of shares used for diluted EPS 129.7 43.3 pence pence Basic Basic earnings per share 9.5 9.3 Basic earnings per share excluding exceptional items 22.4 38.1 Dilutive Diluted earnings per share 9.1 8.3 Diluted earnings per share excluding exceptional items 21.4 34.1 Additional disclosure The earnings per share figures presented above have been prepared in accordance with IAS 33 'Earnings per share'. As the flotation and, consequently the share capital conversion, occurred towards the end of the 2005 financial year, the weighted average number of shares used in the above calculations for 2005 is considerably lower than the actual number of Ordinary Shares in issue at the end of that financial year. Therefore the Directors believe that an additional EPS figure as at 30 November 2005 should be disclosed, based on the capital structure at the balance sheet date. For this EPS figure the preference dividend is excluded from the calculation of earnings as it would not have been paid had the capital structure as at the balance sheet date been in place throughout the relevant period. The Directors believe that these adjustments result in an EPS figure which is a better representation of the underlying trend in Group performance. The following tables set out the number of shares and the earnings used in the calculation of the adjusted earnings per share. Adjusted millions millions Adjusted basic number of ordinary shares 123.9 124.3 Adjusted dilutive number of ordinary shares 129.7 128.0 pence pence Basic earnings per share 9.5 6.4 Basic earnings per share excluding exceptional items 22.4 15.4 Diluted earnings per share 9.1 6.2 Diluted earnings per share excluding exceptional items 21.4 14.9 All earnings are derived from continuing operations SThree plc Notes to the Financial Statements Year ended 30 November 2006 6. Cash flows from operating activities Group 2006 2005 Â£'000 Â£'000 Profit before taxation 18,126 12,029 Depreciation and amortisation charge 1,556 1,480 Interest income (432) (482) Interest costs 1,284 1,973 Loss on disposal of property, plant and equipment 116 275 Profit attributable to Joint venture (89) - Profit from partial deemed disposal of subsidiary - (24) Non-cash element of the exceptional charge for share options and awards. 19,544 11,966 Operating cashflow before changes in working capital and provisions 40,105 27,217 Increase in receivables (17,760) (15,452) (Decrease)/increase in payables (7,127) 12,689 (Decrease)/increase in provisions (193) 500 Net cash inflow from operating activities 15,025 24,954 7. Cash and cash equivalents Group 2006 2005 Â£'000 Â£'000 Cash in hand and at bank 2,440 2,901 Bank overdraft (5,281) (12,451) Net debt (2,841) (9,950) 8. Nature of financial information The financial information is not audited and does not constitute statutory accounts within the meaning of S240 of the Companies Act 1985. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The accounting policies (that comply with IFRS and IAS) adopted by SThree plc (the 'Group') are set out in the 2006 Interim report. The restatement of previously published financial information under UK GAAP (on to an IFRS basis) was publicly disclosed on 24 July 2006. The restated results have been fully adopted in these financial statements. 9. Annual Report and Accounts The 2006 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 27 April 2007. This information is provided by RNS The company news service from the London Stock Exchange SSEFMSWSESE

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