Interim Results

SThree plc 24 July 2006 SThree plc ('SThree' or the 'Group') Interim Results for the Six Months Ended 31 May 2006 SThree, one of the UK's leading specialist staffing businesses, is today announcing its interim results for the six months ended 31 May 2006. Financial Highlights £m 2006 2005 Change Turnover £178.0m £143.5m + 24.0% Gross Profit (Net fee Income) £59.2m £46.0m + 28.7% Operating profit before exceptional items* £15.1m £10.5m + 44.0% Operating profit after exceptional items* £13.1m £9.7m + 34.4% Profit before tax and exceptional items* £14.5m £9.7m + 49.2% Profit before tax £12.5m £8.9m + 39.2% Basic earnings per share before exceptional items (2005 comparatives adjusted to reflect new post IPO capital structure*) 8.1p 3.3p + 145.5% Basic earnings per share before exceptional items* 8.1p 11.0p Basic earnings/(loss) per share 6.9p 9.5p Interim dividend 2.4p - The above results have been prepared under International Financial Reporting Standards (IFRS) * Exceptional items are detailed in Note 3 Operational Highlights • Strong first half performance, continuing the trend from 2005 • Number of permanent placements increased by 32.0% to 3,475 in the first half (2005: 2,633), with average fees increased by 6.5% • Number of active contractors at period end increased by 14.8% to 4,335 (2005: 3,777), with average gross profit per day rates increased by 2.3% • Information and Communications Technology ('ICT') business segment increased gross profit by 23.0% to £49.7m (2005: £40.4m) • Rapid growth in non-ICT - banking and finance, accountancy, human resources and engineering staffing businesses increased gross profit by 70.4% to £9.5m (2005: £5.6m) • Non-UK businesses continuing to perform strongly - gross profits increased by 43.7% to £15.7m (2005: £10.9m) • Headcount increased by 12.8% to 1,210 since year end • Further expansion of international network - new office opened in Paris in the first half, with further openings in New York, Frankfurt and Munich scheduled for the second half • Maiden dividend of 2.4p per share declared Russell Clements, Chief Executive Officer, said: 'The first half of 2006 has seen the Group report a further strong set of results and it is particularly pleasing to report growth across all sectors and geographies, a reflection of the fact that trading conditions in the specialist recruitment markets we serve remain positive. We remain confident that the first half positions us well to make further progress for the year as a whole.' SThree plc (24.07.06) 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 / Seb Hoyle Notes to editors SThree, founded in 1986, is one of the leading specialist 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 ('ICT') sector and, to an increasing extent, the banking and finance, accountancy, human resources and engineering 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 3 largest being Computer Futures, Progressive and Huxley Associates, 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. UK SThree plc ('SThree' or the 'Group') Interim Results for the Six Months Ended 31 May 2006 Operating Review The Group achieved another strong set of results in the first half, continuing the trends evidenced last year and ahead of market expectations at the beginning of the financial year. As a consequence of the strong growth in the share price since IPO, the Group has recently joined the FTSE 250 index, a significant achievement so early in our life as a public company. These interim results are our first to be prepared under International Financial Reporting Standards (IFRS). While the application of IFRS has no significant impact on the reported results for the Group, the results for 2005 have been restated in accordance with IFRS. A reconciliation of prior periods' results to those restated under IFRS is shown in Note 12. The Group's turnover for the six months ended 31 May 2006 increased by 24.0% to £178.0m (2005: £143.5m). Gross profit increased 28.7% to £59.2m (2005: £46.0m). The inherent operational gearing of the Group's business model has resulted in operating profit before exceptional items increasing by 44.0% to £15.1m (2005: £10.5m). The conversion ratio of operating profit (before exceptional items) to gross profit also increased substantially in the first half to 25.6% (2005: 22.9%). Operating profit after exceptional items increased by 34.4% to £13.1m (2005: £(9.7)m). Profit before tax was £12.5m (2005: £8.9m). In addition to our ongoing investment in human capital we have continued to invest in our international office network and systems infrastructure. At 31 May 2006 our staff numbers had increased to 1,210 (30 November 2005: 1,073) operating from 39 offices in 6 countries. During the period under review we opened a new office for Progressive in Paris. We continue to expand organically and during the second half of 2006 are committed to opening offices in New York and Frankfurt for Huxley Associates, in addition to a new office in Munich for Computer Futures Solutions. These latter two openings will increase our presence in the German market to four offices. We are also successfully progressing the development of a new Enterprise Resource Planning system for the Group which we expect to deliver considerable benefits in staffing efficiencies and other cost savings. The project is on budget and on schedule for implementation at the start of 2007. Gross profit from permanent placements continued to grow in the first half of 2006 at a faster rate (+40. 5%) than that from contract placements (+19.5%) reflecting the upside gearing of the permanent business in a buoyant market. As a consequence, the ratio of gross profit between the contract and permanent segments reached 52:48 (2005: 56:44). The gross margin on contract placements remained broadly constant at c.21%. The number of active contractors at the half-year end increased by 14.8% to 4,335, and we also saw an increase in the average gross profit per day rates year on year of 2.3% to £59.70. The number of permanent placements increased by 32.0% to 3,475, with an increase in average fees for the six months of 6.5% to £8,140 year on year. United Kingdom vs Non-UK Turnover from UK-based clients increased by 23.3% to £134.7m (2005: £109.2m) and gross profit increased by 24.1% to £43.5m (2005: £35.0m). Turnover from non-UK based clients increased by 26.2% to £43.3m (2005: £34.3m) and gross profit increased by 43.7% to £15.7m (2005: £10.9m). The higher increase in gross profit outside of the UK is partly related to the greater percentage of permanent placements in the business mix. ICT vs non-ICT Turnover from our ICT business increased by 20.4% to £160.9m (2005: £133.6m) and gross profit increased by 23.0% to £49.7m (2005: £40.4m). Turnover from non-ICT increased by 72.2% to £17.1m (2005: £9.9m) and gross profit increased by 70.4% to £9.5m (2005: £5.6m). It is pleasing to note that our long established ICT franchise posted further healthy growth whilst our newer non-ICT businesses, as we would expect, continue to grow at a faster pace. Brand Contribution Gross profit from our four largest brands Computer Futures, Huxley, Progressive and Pathway increased by 14.8%, 41.3%, 20.2% and 39.8% respectively. We are particularly pleased that our longest established brands continue to post strong growth in fee income. The performance of Huxley reflects not only its established presence in ICT, but also particularly strong growth outside the ICT sector and its increasing international presence. Gross profit from our smaller UK-based brands, which are primarily ICT focused, also continued to increase strongly by 42.9% to £11.9m (2005: £8.3m). Exceptional Items Certain employees received share options and awards at flotation and subsequently under related arrangements. Under IFRS2, the charge to the income statement is based on the fair value of the shares at the time of the award or grant of the option. This amounted to £2.1m (2005:£0.8m). However, since these options and awards relate to shares already in issue prior to flotation, the only related cash cost to the Group is the employer's national insurance cost (£0.2m). The difference of £1.9m between the charge reported in the income statement and the net cash cost is reported as a credit to equity. Taxation The charge for taxation on profits before exceptional items amounted to £4.2m (2005: £3.3m), giving an effective tax rate of 29.0% (2005: 34.3%). Under Schedule 23 of the Finance Act 2003, the Group 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 deduction is greater than the tax credit on the exceptional item reported in the income statement. This difference under IFRS is dealt with through equity. The total Schedule 23 tax benefit amounts to £1.8m, of which £0.6m appears in exceptional items in the income statement, and the remaining £1.2m is therefore a credit equity. Earnings Per Share Due to the complex nature of our capital structure before the flotation we have presented an 'adjusted' earnings per share for the 2005 comparative period based on the capital structure immediately post flotation, to enable the figures to be compared meaningfully to earnings per share for the current period. On this basis, the basic earnings per share before exceptional items increased by 145.5% to 8.1p (2005: 3.3p adjusted), with basic earnings per share after exceptional items being 6.9p (2005: 2.8p adjusted). On an unadjusted basis for 2005, basic earnings per share before exceptional items were 8.1p (2005: 11.0p) and after exceptional items were 6.9p (2005: 9.5p). The diluted earnings per share before exceptional items were 7.9p (2005: 11.0p). Cash Flow At the start of 2006, the Group had net debt of £9.6m. This number was flattered to the tune of £10.0m of cash representing income tax and social charge liabilities relating to the share awards made on IPO, which had been collected from beneficiaries but was not liable to be paid over to the tax authorities until shortly after year-end. In the first half of 2006, the Group used £0.2m of cash in operations, after funding a £16.7m increase in working capital as a result of increased business activity and settlement of the above-mentioned income tax liabilities. Tax recovered, as a result of the exceptional tax credit, amounted to £2.0m and net capital expenditure was £1.4m. As at 31 May 2006, the Group had net debt of £9.8m. Dividends It is the Board's intention to pay dividends at a level that it believes is sustainable throughout the economic cycle and is in line with comparable quoted businesses. The Board proposes to pay an interim dividend of 2.4p per share. The interim dividend will be paid on 22 September 2006 to those shareholders on the register at 25 August 2006. Current Trading and Future Prospects The first half of 2006 has seen the Group report a further strong set of results and it is particularly pleasing to report growth across all sectors and geographies, a reflection of the fact that trading conditions in the specialist recruitment markets we serve remain positive. We remain confident that the first half positions us well to make further progress for the year as a whole. - Ends - Consolidated Income Statement - unaudited for the 6 months ended 31 May 2006 Six months ended 31 May 2006 Six months ended 31 May 2005 Year ended 30 November 2005 Ordinary Exceptional Total Ordinary Exceptional Total Ordinary Exceptional Total activities items activities items activities items restated restated restated restated restated restated Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 2 177,993 - 177,993 143,546 - 143,546 315,087 - 315,087 Cost of sales (118,829) - (118,829) (97,587) - (97,587) (210,606) - (210,606) Gross profit 2 59,164 - 59,164 45,959 - 45,959 104,481 - 104,481 Administrative 3 (44,038) (2,068) (46,106) (35,456) (788) (36,244) (75,022) (15,939) (90,961) expenses Operating 15,126 (2,068) 13,058 10,503 (788) 9,715 29,459 (15,939) 13,520 profit Finance Income 84 - 84 229 229 482 482 Finance cost (738) - (738) (999) - (999) (1,973) - (1,973) Share of 49 - 49 - - - - - - profit of joint venture Profit before 14,521 (2,068) 12,453 9,733 (788) 8,945 27,968 (15,939) 12,029 taxation Taxation 4 (4,214) 621 (3,593) (3,336) 236 (3,100) (8,702) 4,759 (3,943) Profit after 10,307 (1,447) 8,860 6,397 (552) 5,845 19,266 (11,180) 8,086 taxation Dividends - 5 - - - (2,263) - (2,263) (4,351) - (4,351) non-equity Profit for the 10,307 (1,447) 8,860 4,134 (552) 3,582 14,915 (11,180) 3,735 period Attributable to: Equity holders of the 10,173 (1,447) 8,726 4,076 (552) 3,524 14,780 (11,180) 3,600 Company Minority 134 - 134 58 - 58 135 - 135 interest 10,307 (1,447) 8,860 4,134 (552) 3,582 14,915 (11,180) 3,735 Earnings per 6 pence pence pence pence pence pence pence pence pence share Basic 8.1 (1.2) 6.9 11.0 (1.5) 9.5 35.1 (26.6) 8.5 Diluted 7.9 (1.1) 6.8 11.0 (1.5) 9.5 34.1 (25.8) 8.3 Adjusted - 8.1 (1.2) 6.9 3.3 (0.5) 2.8 11.9 (9.0) 2.9 basic Adjusted - 7.9 (1.1) 6.8 3.3 (0.5) 2.8 11.5 (8.7) 2.8 diluted All amounts relate to continuing operations. An interim dividend of 2.4 pence (2005: nil) per Ordinary Share will be paid on 22 September 2006 to shareholders on the register at the close of business on 25 August 2006. Consolidated Statement of Changes in Equity - unaudited as at 31 May 2006 Share Share Shares to Capital Currency Retained Total capital premium be issued reserve translation earnings equity reserve £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 December 2004 2,214 - 6,035 - - (1,967) 6,282 (restated) Profit for the 6 months to 31 3,524 3,524 May 2005 Issue of share capital 14 74 88 Deferred tax on employee share 8,641 8,641 options Currency translation (187) (187) differences Balance at 31 May 2005 2,228 74 6,035 - (187) 10,198 18,348 (restated) Profit for the 6 months to 30 76 76 November 2005 Employee share award and share 11,966 11,966 option credit Deferred tax on employee share (1,326) (1,326) options Current tax on employee share 3,136 3,136 options Satisfaction of rights of 30 6,005 (6,035) - shares to be issued Share issue costs charged to (3,154) (3,154) share premium Conversion of preference (878) 878 - shares Currency translation 41 41 differences Balance at 30 November 2005 1,380 2,925 - 878 (146) 24,050 29,087 (restated) Profit for the 6 months to 31 8,726 8,726 May 2006 Employee share award and share 1,874 1,874 option credit Deferred tax on employee share 2,337 2,337 options Current tax on employee share 1,231 1,231 options Currency translation 63 63 differences Balance at 31 May 2006 1,380 2,925 - 878 (83) 38,218 43,318 Consolidated Balance Sheet - unaudited as at 31 May 2006 31 May 31 May 30 November 2006 2005 2005 restated restated Note £'000 £'000 £'000 ASSETS Non-current assets Intangible assets 68 57 43 Property, plant and equipment 2,623 2,579 2,815 Assets under construction 790 - - Investment in joint venture 49 Deferred tax asset 12,115 10,374 10,014 15,645 13,010 12,872 Current assets Trade and other receivables 83,761 66,128 74,900 Current tax debtor - - 2,994 Cash and cash equivalents 8 2,468 21,995 2,901 86,229 88,123 80,795 Total assets 2 101,874 101,133 93,667 LIABILITIES Current liabilities Provisions for liabilities and charges (484) (316) (364) Trade and other payables (38,342) (36,560) (46,141) Financial liabilities - borrowings (12,250) (39,900) (12,451) Current tax liabilities (1,114) (1,207) - (52,190) (77,983) (58,956) Non-current liabilities Provisions for liabilities and charges (6,061) (4,714) (5,453) (6,061) (4,714) (5,453) Total liabilities (58,251) (82,697) (64,409) Net Assets 43,623 18,436 29,258 EQUITY Capital and reserves attributable to the Company's shareholders Share capital 1,380 2,228 1,380 Share premium 2,925 74 2,925 Shares to be issued - 6,035 - Capital reserve 878 - 878 Currency translation reserve (83) (187) (146) Retained earnings 38,218 10,198 24,050 43,318 18,348 29,087 Minority interest 305 88 171 Total equity 43,623 18,436 29,258 Consolidated Cash Flow Statement for the 6 months ended 31 May 2006 Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated restated Note £'000 £'000 £'000 Cash flows from operating activities Cash (used in)/generated from operating 7 (179) 6,192 24,954 activities Income tax received/(paid) 1,978 (2,556) (5,449) Net cash generated from operating activities 1,799 3,636 19,505 Cash flows from investing activities Purchase of fixed assets (1,446) (1,327) (2,702)- Proceeds from disposal of fixed assets 56 - - Net cash used in investing activities (1,390) (1,327) (2,702) Cash flows from financing activities Expenses paid in respect of share issue - - (1,008) Drawdown on new loan facility 3,250 - 9,000 Repayment of loan stock - - (39,900) Interest received 84 229 482 Interest paid (738) (999) (1,973) Proceeds from issue of ordinary shares - 85 88 Issue of share capital to minority interest - - 30 Preference dividends paid - (4,525) (8,876) Net cash generated from/(used in) financing 2,596 (5,210) (42,157) activities Net increase/(decrease) in cash and cash 3,005 (2,901) (25,354) equivalents Cash and cash equivalents at beginning of (550) 24,956 24,956 the period Exchange gains/(losses) on cash and cash 13 (60) (152) equivalents Cash and cash equivalents at the end of the 8 2,468 21,995 (550) period Notes to the financial statements - unaudited 1 Accounting policies The consolidated interim financial statements are for the six months ended 31 May 2006. These financial statements have been prepared in accordance with accounting policies expected to be followed for the year ending 30 November 2006 and the Listing Rules of the London Stock Exchange. European Union (EU) law requires that the consolidated financial statements for the year ending 30 November 2006 be prepared in accordance with IFRS adopted for use in the EU. The interim financial statements are unaudited but have been reviewed by the auditors. Following the implementation of IFRS, SThree plc's accounting policies, as set out below, have been consistently applied to all the periods presented unless otherwise stated. Consolidation The consolidated financial statements incorporate the financial statements of SThree plc and of its subsidiaries, together with the Group's share of the results of its joint ventures. Subsidiaries are all entities over which SThree plc has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to SThree plc; they are de-consolidated from the date that control ceases. Joint ventures are defined as where the Group has joint control and are accounted for using the equity method of accounting. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Foreign currencies Items included in the financial statements of each of SThree plc's subsidiaries are measured using the currency of the primary economic environment in which that subsidiary operates (its 'functional currency'). The consolidated financial statements of SThree plc are presented in sterling which is SThree plc's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. The results and financial position of all of SThree plc's subsidiaries (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from SThree plc's presentation currency are translated into the presentation currency as follows: - Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; - Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and - All resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the company's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is included in intangible assets and is tested annually for impairment. Any impairment is recognised immediately in the income statement and is not subsequently reversed. Computer software Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over their estimated useful lives. Costs that are directly associated with the production of identifiable and unique software products, controlled by SThree plc and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the employee costs of the development team and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their expected useful lives (not exceeding five years). Amortisation will commence once the computer software is fully implemented and put into use. Costs associated with maintaining computer software programmes are recognised as an expense when incurred. Trademarks Trademarks are recognised at cost. They have a definite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks over their estimated useful lives. Property plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight line method to allocate the depreciable value of property, plant and equipment to the income statement over their useful economic lives as follows: Furniture, fittings and equipment 20% Computer equipment 33.33% Motor 33.33% vehicles Leasehold improvements 20% Assets' residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to SThree plc and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the income statement. Impairment of assets Assets that have an indefinite life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Trade receivables Trade receivables are measured at cost less any provision necessary when there is objective evidence that SThree plc will not be able to collect all amounts due. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Assets leased under an operating lease Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the income statement on a straight line basis over the lease periods. Provisions, contingent liabilities and contingent assets Provisions for dilapidations, onerous leases and deemed employment exposures are recognised when SThree plc has a legal or constructive obligation as a result of past events, it is more likely than not that an outflow or resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligation as a whole. A provision may be recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Employee benefits - Pension obligations - SThree plc has defined contribution plans and pays contributions to privately administered pension plans on a mandatory, contractual or voluntary basis. SThree plc has no further payment obligations once the contributions have been paid. - Bonus plans - SThree recognises a liability and an expense for bonuses based on the Directors' best estimate of the amounts due. SThree plc recognises a provision where contractually obliged or where there is a past practice of payments that has created a constructive obligation. - Termination benefits - Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for those benefits. SThree plc recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value. Employee Benefit Trusts The Employee Benefit Trusts ('EBT') were funded by gifts from certain SThree plc shareholders and Directors. The assets and liabilities of the EBT are consolidated into the SThree plc consolidated financial statements. The EBTs' only assets are the shares in SThree plc which were gifted and hence no cost is attributed to those shares and no amounts are shown in SThree plc's financial statements. Share-based compensation The shares in the EBT are held for awards and grants under the employee share award and share option schemes. Where shares are awarded, the fair value of the shares on the date of the grant is charged to the income statement in the year of grant, or over the period to which any performance criteria relate until the vesting date. Corresponding adjustment is made to equity. Where options are awarded, the fair value of the share options on the date of grant is charged to the income statement over the vesting period of the share option, based on the number of options which are expected to become exercisable. A corresponding adjustment is made to equity. At each balance sheet date, SThree revises its estimates of the number of options that are expected to become exercisable and recognises the impact of any revision of original estimates in the income statement. Revenue Revenue represents sales to third parties for services provided during the period, excluding value added tax and other sales taxes outside the UK. Contract revenue for the supply of professional services is based on the number of hours worked by a contractor. Revenue for permanent placements is recognised when employment candidates commence employment. Exceptional items Items which are non-recurring and sufficiently material are presented separately within their relevant consolidated income statement category. The separate reporting of such items helps provide a better indication of the Group's underlying business performance. 2 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. By location of client By location of operating company Six months ended Year ended Six months ended Year ended 31 May 2006 31 May 30 November 31 May 31 May 30 2005 2005 2006 2005 November 2005 restated restated restated restated £'000 £'000 £'000 £'000 £'000 £'000 Revenue United Kingdom 134,676 109,228 243,602 168,750 136,075 299,019 Europe and rest 43,317 34,318 71,485 9,243 7,471 16,068 of the world 177,993 143,546 315,087 177,993 143,546 315,087 Gross profit United Kingdom 43,469 35,038 79,501 51,663 40,348 92,147 Europe and rest 15,695 10,921 24,980 7,501 5,611 12,334 of the world 59,164 45,959 104,481 59,164 45,959 104,481 Operating profit Operating profit before exceptional items United Kingdom 13,339 10,135 27,789 Europe and rest of the world 1,787 368 1,670 5,126 10,503 29,459 Exceptional items: United Kingdom (2,068) (788) (15,939) 13,058 9,715 13,520 Total assets United Kingdom 96,140 93,761 87,248 Europe and rest 5,734 7,372 6,419 of the world 101,874 101,133 93,667 Capital expenditure United Kingdom 1,446 1,327 2,548 Europe and rest - - 154 of the world 1,446 1,327 2,702 The following segmental analyses, by brand, by recruitment classification and by discipline, have been included as additional disclosure over and above the requirements of IAS 14 'Segment Reporting'. Revenue Gross profit Six months ended Year ended Six months ended Year ended 31 May 2006 31 May 30 November 31 May 2006 31 May 30 2005 2005 2005 November 2005 restated restated restated restated £'000 £'000 £'000 £'000 £'000 £'000 Brand Computer Futures 51,492 46,654 96,223 16,948 14,765 30,620 Solutions Huxley Associates 39,654 28,581 64,971 14,973 10,595 24,911 Progressive 36,375 30,797 66,728 11,070 9,212 19,750 Computer Recruitment Pathway 16,769 12,531 27,586 4,261 3,063 6,979 Others 33,703 24,983 59,579 11,892 8,324 22,221 177,993 143,546 315,087 59,164 45,959 104,481 Recruitment classification Contract 149,707 123,417 267,071 30,878 25,830 56,465 Permanent 28,286 20,129 48,016 28,286 20,129 48,016 177,993 143,546 315,087 59,164 45,959 104,481 Discipline Information & 160,862 133,599 285,388 49,666 40,386 88,190 communication technology Other(1) 17,131 9,947 29,699 9,498 5,573 16,291 177,993 143,546 315,087 59,164 45,959 104,481 (1) Including banking and finance, accountancy, human resources and engineering sectors. 3 Administrative expenses - exceptional items Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated £'000 £'000 £'000 Employee share awards and share options 1,874 - 11,966 Employer's National Insurance on share awards and options, and related costs 194 - 2,529 Special management bonuses - 788 1,444 2,068 788 15,939 Certain employees received share options and awards at flotation and subsequently under related arrangements. In accordance with IFRS 2 'Share-based Payment', a charge has been reflected in the income statement, with a corresponding charge for Employer's National Insurance. Special management bonuses related to amounts paid to certain Directors and senior Group management, in proportion to their interest in Zero coupon preference shares, for services provided, recognising the fact that these preference shares did not bear dividends. The Zero coupon preference shares ceased to exist after the flotation and the special management bonuses are no longer payable. 4 Taxation Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 Ordinary Exceptional items activities Total restated restated £'000 £'000 £'000 £'000 £'000 Current - United Kingdom 3,422 (621) 2,801 2,574 4,318 tax - Overseas 729 - 729 450 495 Deferred 63 - 63 76 (870) tax 4,214 (621) 3,593 3,100 3,943 The total tax charge is in line with the standard rate of corporation tax in the UK (30%). In the six months to 31 May 2006 a current tax credit of £1.2m (31 May 2005: nil; 30 November 2005: £3.1m)) has been taken directly to equity under IFRS 2 'Share-based Payment' and IAS 12 'Income Taxes'. The tax charge does not include the anticipated Schedule 23 tax credit which would crystallise on share awards that are expected to be granted during the second half of the financial year (no later than 9 months after the date of flotation). Only the Schedule 23 tax credit on share awards and options actually granted during the six months to 31 May 2006 has been included. 5 Dividends Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated restated £'000 £'000 £'000 Amounts paid as distributions to non-equity holders in the period: Preference dividend payable of 5% (net) on Preference and - 2,263 4,351 'A' Preference Shares 6 Earnings per share Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated restated £'000 £'000 £'000 Earnings Profit for the 8,726 3,524 3,600 period Effect of exceptional items (net 1,447 552 11,180 of tax) Profit for the period excluding 10,173 4,076 14,780 exceptional items millions millions millions Number of shares Weighted average number of shares used for 125.9 37.1 42.2 basic EPS Dilution effect of 2.1 - 1.2 share plans Diluted weighted average number of shares used for diluted 128.0 37.1 43.4 EPS pence pence pence Basic Basic earnings 6.9 9.5 8.5 per share Basic earnings per share excluding 8.1 11.0 35.1 exceptional items Dilutive Diluted earnings per 6.8 9.5 8.3 share Diluted earnings per share excluding 7.9 11.0 34.1 exceptional items Additional disclosure The earnings per share figures presented above have been prepared in accordance with International 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 an additional EPS figure as at 31 May 2005 and 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 millions Adjusted basic number of ordinary 125.9 124.3 124.3 shares Adjusted dilutive number of 128.0 124.3 128.0 ordinary shares pence pence pence Basic earnings 6.9 2.8 2.9 per share Basic earnings per share excluding 8.1 3.3 11.9 exceptional items Diluted earnings per 6.8 2.8 2.8 share Diluted earnings per share excluding 7.9 3.3 11.5 exceptional items All earnings are derived from continuing operations 7 Cash flows from operating activities Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated restated £'000 £'000 £'000 Profit before 12,453 8,945 12,029 taxation Adjustments for: Depreciation and 708 570 1,442 amortisation Loss on disposal of fixed 23 - 275 assets Non-cash element of the charge for share awards and options 1,874 - 11,966 Profit from partial deemed - - 24 disposal Interest (84) - - receivable Interest 738 770 1,491 payable Foreign - (106) - exchange gain Changes in working capital and provisions: Increase in (8,891) (6,621) (15,462) debtors (Decrease)/increase in (7,728) 2,921 500 creditors Increase/(decrease) in 728 (287) 12,689 provisions Cash (used in)/generated from (179) 6,192 24,954 operations 8 Cash and cash equivalents Six months ended Year ended 31 May 31 May 30 November 2006 2005 2005 restated restated £'000 £'000 £'000 Cash and cash equivalents include the following for the purposes of the cash flow statement: Cash at bank 2,468 21,995 2,901 and in hand Bank overdrafts - - (3,451) 2,468 21,995 (550) 9 Capital commitments The Group had capital commitments of £5.8m (31 May 2005: nil; 30 November 2005: £0.1m). 10 Basis of preparation The interim financial information has been prepared on the assumption that all IFRS statements, including International Accounting Standards (IAS's), Standing Interpretations Committee (SIC) interpretations and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Board (IASB) as effective for 2006 reporting will be endorsed by the European Commission. These are subject to ongoing review and possible amendment by the IASB and subsequent endorsement by the European Commission and therefore may change. Further standards and interpretations may also be issued that will become applicable for the Group's financial year ending 30 November 2006. In 2006 the Group has adopted IFRS for the first time with the date of transition being 1 December 2004. The interim financial information is covered by IFRS1 'First-time Apoption of International Financial Statements', being part of the period covered by the Group's first IFRS financial statements for the year ended 30 November 2006. IAS 34 'Interim Financial Reporting' has not been applied to this interim financial information. The financial information does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. Statutory accounts for the year ended 30 November 2005, which were prepared under accounting policies generally accepted in the UK, have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain a statement made under Section 237(2) of Section 237(3) of the Companies Act 1985. 11 Date of approval of interim statements The interim announcement covers the period 1 December 2005 to 31 May 2006 and was approved by the Board on 21 July 2006. The interim report will be sent to shareholders in due course. Further copies will be available from the Company's registered office, 41-44 Great Windmill Street, London W1D 7NB, and can be accessed on the SThree website, www.sthree.com. 12 Principal impact of IFRS The key differences between UK GAAP and IFRS that will impact the SThree Group are set out below. The Group has taken advantage of the exemption available under IFRS 1 where cumulative translation differences for all foreign operations are deemed to be zero at the date of transition. The Group has also taken the exemption not to apply IFRS 2 'Share-based Payment' to share options granted before 7 November 2002. In addition, as permitted by IFRS 1, the Group has adopted IAS 32 'Financial Instruments: disclosure and presentation' and IAS 39 'Financial Instruments: recognition and measurement', prospectively from 1 December 2005. Software development costs Under UK GAAP, the costs of developing software were written off to the income statement in the year in which they were incurred. Under IFRS, IAS 38 'Intangible assets', the company is required to capitalise the cost of software development where certain recognition criteria are met, including technical feasibility and probable future economic benefit. The capitalised cost is then amortised over the expected future life of the developed software. As a result of this change in accounting policy, SThree plc's net assets under IFRS have increased by £67,000 as at 1 December 2004, £57,000 as at 31 May 2005 and £43,000 as at 30 November 2005, before the impact of deferred tax. Operating profit decreased for the six month period ended 31 May 2005 by £10,000 and for the year to 30 November 2005 by £24,000, represented by the capitalisation of costs previously written off under UK GAAP of £7,000 and £14,000 respectively, offset by £17,000 and £38,000 of amortisation of amounts capitalised. Foreign exchange on inter-company loans Under UK GAAP, foreign exchange differences arising on inter-company financing loans were recognised directly within reserves, where those loans were deemed to be permanent in nature. For SThree plc, a number of these loans are between one subsidiary of SThree plc and another subsidiary, rather than from the parent to a subsidiary. Under IFRS, IAS 21 'The effects of changes in foreign exchange rates' does allow foreign exchange permanent differences arising on loans between fellow subsidiaries to be dealt with in reserves when it is considered to be part of the net investment in a foreign operations. Any temporary foreign exchange differences that do not form part of the net investment in a foreign operation must be recognised within the income statement. As a result of the application of IAS 21, SThree plc's reported profit for the six months ended 31 May 2005 has increased by £106,000 and for the year ended 30 November 2005 has decreased by £24,000, following the reclassification of a foreign exchange credit from reserves into the IFRS income statement. Share-based payments SThree plc operates a number of share-based incentive schemes (both awards of options and awards of shares) that fall into the scope of IFRS 2 'Share-based payments'. Under UK GAAP, SThree plc recognised a charge based on the intrinsic value of any such award at the date of issue, where the intrinsic value is defined as being the difference between the fair value of an SThree plc equity share at the date of issue of the award, and any exercise price payable in respect of the award. In the past, the calculation of intrinsic value has led to a minimal charge being recognised in the income statement. Under IFRS, IFRS 2 'Share-based payments' requires that a charge be recognised in respect of all share-based payments based on the fair value of the options or shares at the date of grant, where that fair value is calculated using an appropriate pricing model; the charge is recognised over the vesting period of the award. The application of IFRS 2 has not resulted in any material adjustment to SThree plc's reported profits for the six months ended 31 May 2005 as SThree plc have concluded that the fair value of SThree plc share awards at the date of their issue was not significant. For the year ended 30 November 2005 the adjustment was £3.2m of which £3.1m was due to the change in the treatment of current tax which has been taken directly to equity (IAS 12 'Income Taxes'). If further share options are issued in the future then the charge in respect of any such share options could be significant. Deferred tax Under UK GAAP, deferred tax was recognised in respect of all timing differences that had originated but not reversed at the balance sheet date where transactions or events had occurred at that date that would result in an obligation to pay more, or a right to pay less or to receive more tax. Under IFRS, IAS 12 'Income taxes' requires that deferred tax be recognised on all taxable temporary differences between the tax base and the accounting base of the balance sheet items included in the balance sheet of SThree plc, except to the extent that such temporary differences arise on initial recognition of an asset or liability. This means that deferred tax is recognised on certain temporary differences that would not have given rise to deferred tax under UK GAAP. The most significant differences between UK GAAP and IFRS in respect of deferred tax relate to the following: - under IFRS deferred tax is provided on the temporary difference arising between the tax base of any share-based payments and the accounting base of those share based payments. This gives rise to an additional deferred tax asset of £8.6 million as at 31 May 2005 and £7.3 million at 30 November 2005. - under IFRS deferred tax is provided on temporary differences arising on investments in subsidiaries (principally in respect of unremitted earnings), except where an entity can control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. SThree plc has decided that the remittance of earnings held by overseas subsidiaries is not probable and that therefore no deferred tax liability is required. In addition to these adjustments, the carrying values of deferred tax assets and liabilities in the balance sheet have been adjusted to reflect the restatement of assets and liabilities arising from the adoption of IFRS. SThree plc Reconciliation of Profit As at 31 May 2005 As at 30 November 2005 (comparable interim period under (end of last period presented under UK GAAP) UK GAAP) Under UK Effect of Under IFRS Under UK Effect of Under IFRS GAAP transition GAAP transition to to IFRS IFRS £'000 £'000 £'000 £'000 £'000 £'000 Turnover 143,546 - 143,546 315,087 - 315,087 Cost of sales (97,587) - (97,587) (210,606) - (210,606) Gross profit 45,959 - 45,959 104,481 - 104,481 Administrative expenses (36,340) 96 (36,244) (90,838) (123) (90,961) Operating profit 9,619 96 9,715 13,643 (123) 13,520 Net finance cost (770) - 770 (1,491) - (1,491) Profit before 8,849 96 8,945 12,152 (123) 12,029 taxation Taxation (3,103) 3 (3,100) (831) (3,112) (3,943) Profit after taxation 5,746 99 5,845 11,321 (3,235) 8,086 Dividends - (2,263) - (2,263) (4,351) - (4,351) non-equity Profit for the period 3,483 99 3,582 6,970 (3,235) 3,735 Attributable to: Equity holders of the 3,425 99 3,524 6,835 (3,235) 3,600 Company Minority interest 58 - 58 135 - 135 3,483 99 3,582 6,970 (3,235) 3,735 Earnings per share pence pence pence pence pence pence Basic 9.2 0.3 9.5 16.2 (7.7) 8.5 Diluted 9.2 0.3 9.5 15.7 (7.4) 8.3 IAS £'000 £'000 Profit under UK GAAP 3,483 6,970 Capitalisation of intangible assets 38 7 14 Amortisation of intangible assets 36 (17) (38) IFRS 2 employee share awards - (75) Translation differences on 21 106 (24) intercompany loans Tax effect on IFRS adjustments 12 3 (3,112) Profit under IFRS 3,582 3,735 SThree plc Reconciliation of Equity As at As at 31 May 2005 As at 30 November 2005 01 December 2004 (date of (Comparable (end of last transition) interim period period under presented UK GAAP) under UK GAAP) Under UK Effect of Under Under UK Effect of Under Under UK Effect of Under GAAP transition IFRS GAAP transition IFRS GAAP transition to IFRS to IFRS to IFRS IFRS Non-current assets Intangible - 67 67 - 57 57 - 43 43 assets Property, 1,833 - 1,833 2,579 - 2,579 2,815 - 2,815 plant and equipment Deferred tax - 1,809 1,809 - 10,374 10,374 - 10,014 10,014 asset 1,833 1,876 3,709 2,579 10,431 13,010 2,815 10,057 12,872 Current assets Trade and 61,336 (1,829) 59,507 67,878 (1,750) 66,128 80,589 (5,689) 74,900 other receivables Current tax - - - - - - - 2,994 2,994 debtor Cash and cash 24,956 - 24,956 21,995 - 21,995 2,901 - 2,901 equivalents 86,292 (1,829) 84,463 89,873 (1,750) 88,123 83,490 (2,695) 80,795 Total assets 88,125 47 88,172 92,452 8,681 101,133 86,305 7,362 93,667 Current liabilities Provisions for - (479) (479) - (316) (316) - (364) (364) liabilities and charges Trade and (39,118) 3,214 (35,904) (77,667) 41,107 (36,560) (58,592) 12,451 (46,141) other payables Financial - (2,475) (2,475) - (39,900) (39,900) - (12,451) (12,451) liabilities - borrowings Current tax - (739) (739) - (1,207) (1,207) - - - liabilities (39,118) (479) (39,597) (77,667) (316) (77,983) (58,592) (364) (58,956) Non-current liabilities Provisions for (5,317) 479 (4,838) (5,030) 316 (4,714) (5,817) 364 (5,453) liabilities and charges Financial (37,425) - (37,425) - - - - - - liabilities - borrowings (42,742) 479 (42,263) (5,030) 316 (4,714) (5,817) 364 (5,453) Total (81,860) - (81,860) (82,697) - (82,697) (64,409) - (64,409) liabilities Net assets 6,265 47 6,312 9,755 8,681 18,436 21,896 7,362 29,258 Equity Capital and reserves Share capital 2,214 - 2,214 2,228 - 2,228 1,380 - 1,380 Share premium - - - 74 - 74 2,925 - 2,925 Shares to be 6,035 - 6,035 6,035 - 6,035 - - - issued Capital - - - - - - 878 - 878 reserve Currency - - - - (187) (187) - (146) (146) translation reserve Retained (2,014) 47 (1,967) 1,330 8,868 10,198 16,542 7,508 24,050 earnings Shareholders' 6,235 47 6,282 9,667 8,681 18,348 21,725 7,362 29,087 equity Minority 30 - 30 88 - 88 171 - 171 interest Total equity 6,265 47 6,312 9,755 8,681 18,436 21,896 7,362 29,258 Total equity 6,265 9,755 21,896 under UK GAAP Capitalisation 144 151 158 of intangible assets Amortisation (77) (94) (115) of intangible assets Deferred tax - 8,641 7,315 on employee share options Tax effect on (20) (17) 4 IFRS adjustments Total equity 6,312 18,436 29,258 under IFRS This information is provided by RNS The company news service from the London Stock Exchange

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