Final Results

12 April 2013

WORK GROUP PLC

(the "Company")

Preliminary Results

Work Group plc (LSE - AIM: "WORK") announces preliminary results for the year ended 31 December 2012.

Headlines

·; Gross profit (net fee income) down 11% to £11.6m (2011: £13.1m)

·; Operating loss before exceptional items of £0.2m (2011: £0.5m profit)

·; Exceptional items of £8.0m includes £7.9m goodwill impairment

·; Cash at year end of £0.4m (2011: £1.3m)

·; No bank debt

The operating loss after exceptional costs was £8.2m (2011: £0.1m profit)

Financial highlights

^ References in the report to "net fee income" represent gross profit

* Adjusted diluted earnings per share is stated before exceptional items (see note 8).

Further enquiries:

www.workgroup.plc.uk 

About Work Group plc

The Company offers a range of solutions that enable organisations to win "the war for talent". It focuses on providing services in talent acquisition and talent management that help employers to more effectively attract, engage, develop and retain key staff.

Work Group plc's approach is to help employers reduce their reliance on traditional third-party recruiters, such as head-hunters and recruitment firms, by helping them establish and maintain a direct relationship with prospective employees thereby reducing the cost of hiring. The Company also assists employers in reducing their staff attrition costs through better employee engagement and improved internal communications.

Chairman's Statement

Chairman's review

Trading in 2012 became more challenging as the year progressed and there was substantial change in some of our core client markets. In addition to a small operating loss before exceptional items, our results have been significantly impacted by a substantial write down of goodwill.

Our clients

During 2012 we witnessed accelerating change in client buying behaviour, with even more emphasis placed on project-based activity and less on committed annual budgets. Despite this, overall client expenditure with the Group was over £18m, across a broad spread of industry sectors.

The continued trend towards the establishment of in-house recruitment teams provides us with opportunities to work with a broader range of clients, but also results in us having to cover more ground in order to achieve historic income levels. However, notwithstanding these challenges over 80 new clients used Group services over the course of 2012, producing £2.0m income in the year.

Our team

To match our resources to the changed environment in which we work, we have increased the proportion of the team who work on a flexible basis and our headcount has been reduced by 21 (12%) to 150 people at the year-end.

Our teams have displayed great resilience and commitment in this challenging year.

Outlook

The continued changes in the market for our services place increased emphasis on our ability to invest in sales and marketing in order to compensate for the increased 'churn' of client projects. At the same time we have to minimise overheads in the middle and back office in order to improve profitability.

While overall economic conditions may be forecast to improve slightly, they are not expected to lead to any significant upturn in employers' expenditure. So we remain cautious in our outlook; but we are confident that the major changes that we have made to the business in 2012 will allow us to benefit rapidly from any upturn.

Simon Howard

Chairman

11 April 2013

Operating review

With the backdrop of a fragile recruitment market and continued macro-economic uncertainty, Work Group reports a £0.2m loss (2011:£0.5m profit) at the pre-exceptional operating level, whilst remaining debt free. The operating loss after exceptional costs was £8.2m (2011: profit £0.1m). Net cash at 31 December 2012 was £0.4m (2011: £1.3m). 

*Adjusted operating profit is stated pre-exceptional costs.

With forecasting of predictable revenue streams becoming ever more difficult and client decisions timeframes elongated, the focus through 2012 was to continue to move the Group to a more flexible and appropriate cost base for UK operations and continue building out the footprint of our overseas operations. To this end, UK costs declined 9% year on year whilst overseas income grew by 7%.

Group net fee income (NFI) declined 11% to £11.6m (2011: £13.1m) with both operating divisions recording negative growth. The Group's ability to reach out to new clients remains strong, however, with 80 new clients utilising the Group's service offerings during 2012.

Work Communications combines our service capabilities in recruitment advertising and communications, outsourcing and assessment. NFI declined 13% to £7.6m (2011: £8.7m) which led to an adjusted operating profit of £0.1m (2011: £0.2m). The economic slowdown and the general industry trend towards digital based solutions has continued to impact advertising income which now represents just 8.5% of Group income, down from 9% in 2011.

Armstrong Craven offers search, research and talent management consultancy. NFI declined 8% year on year to £4.0m. However, within this overall decline, our intelligence assignment offerings grew strongly with a 9% increase to £1.6m (2011: £1.5m) of NFI. The due diligence service also continued

its expansion to £0.3m or 8% of NFI. The overall decline was a direct result of reduced activity on search assignments, a reflection of the overall softness in the recruitment market, which declined to £2.1m (2011: £2.6m).

Cost reduction actions were taken in the UK Work Communications business in December, in the non-core delivery teams in London and Hale. This leaves the business with a far more flexible and appropriate cost base for 2013.

The overseas offices in Hong Kong and New York continued their growth with a combined 7% increase in NFI to £1.2m (2011: £1.1m). Combined, these businesses recorded a small loss of £0.1m (2011:£0.0) as continued appropriate investment in sales and delivery capability in region was added.

Headcount across the Group decreased by 11% to 139 FTE's at the year-end (2011: 156). This net reduction was mainly a direct result of the redundancy programme undertaken in December 2012 to establish a more appropriate cost base for the UK Work Communications business. Redundancy costs and ex-gratia payments included in the exceptional items were £0.1m (2011: £0.4m).

Total exceptional costs of £8.0m (2011:£0.5m) have been charged in 2012. These related to redundancy costs as noted above and impairment losses as specified below.

The annual impairment review of goodwill for Armstrong Craven and Work Communications business units, after taking a prudent view of likely future trading performance, has resulted in an impairment charge of £7.9m. (See note 9).

Net cash at the year-end was £0.4m (2011: £1.3m). Capital expenditure during 2012 amounted to £0.5m which was investment in IT Infrastructure and software in order to move the Group on to a far more efficient and cost effective platform for future development. An overdraft facility is arranged annually and a facility of £1.0m (2011: £1.0m) has been agreed with the bank until further notice.

The balance sheet has no bank debt.

Julian Maslen

Finance Director

11 April 2013

Consolidated income statement

For the year ended 31 December 2012

The results above are all in respect of continuing operations.

The notes are an integral part of these Consolidated Financial Statements.

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Consolidated and parent company balance sheets

As at 31 December 2012

The notes are an integral part of these financial statements.

The financial statements were approved by the board of directors on 11 April 2013 and signed on its behalf by:

Simon Howard Julian Maslen

Chairman Finance Director

Consolidated and parent company statements of changes in equity

For the year ended 31 December 2012

Group

The notes are an integral part of these financial statements.

The cost of the investment held by the employee benefit trust in Work Group plc is shown above as Shares held by EBT.

The foreign exchange reserve represents the revaluation of the net assets in the foreign subsidiaries.

With the sanction of an Order of the High Court effective from 28 November 2005 the ordinary shares of £1 each and the cumulative ordinary shares of £1 each were both reduced to 10p per share and the share premium was cancelled. This created a special reserve.

Company

The notes are an integral part of these financial statements.

Consolidated and parent company statements of cash flow

For the year ended 31 December 2012

The notes are an integral part of these financial statements.

Notes to the financial statements

For the year ended 31 December 2012

1. Summary of significant accounting policies

Work Group plc is a public limited company incorporated in England and Wales, domiciled in the United Kingdom and listed on the Alternative Investment Market (AIM). The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, International Financial Reporting Interpretation Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. The current overdraft facility is in place for the foreseeable future and will be reviewed annually. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

2 Segmental reporting

IFRS 8; "Operating Segments" requires operating segments to be identified on the basis of internal reports which are regularly reviewed by the chief operating decision-maker to allocate resources to the segments and to assess their performance. During the year under review the chief operating decision-maker, who is the Board, has identified two operating segments, Work Communications and Armstrong Craven. Work Communications combines the employer marketing service and recruitment process outsourcing services, Armstrong Craven provides executive recruitment services. The Board assesses the performance of the operating segments based on net fee income, operating profit before exceptional items and adjusted EBITDA.

The unallocated pool represents the central overheads that are not directly related to the operating trading activities of the segments.

Geographical information

The Group manages its business segments in the UK, which is the home country of the parent.

The sales analysis in the table below is based on the location of the customer. All significant assets and capital expenditure are located in the UK.

3 Key management and employee information

The average monthly number of persons (including executive directors) employed by the Group during the year was:

Staff costs (including directors) were as follows:

Key management remuneration

Key management personnel are identified as the members of the 'Group operating board'. This Group comprises the directors and the leaders of the operating businesses.

4 Exceptional items

The exceptional costs of £7,979,000 (2011: £486,000) principally relate to goodwill impairment losses, redundancies and ex-gratia payments.

5 Operating (loss)/profit

6 Finance income and costs

7 Taxation

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. The standard rate of corporation tax in the UK for the year was 20% (2011: 20.25%), having qualified for the small profits tax rate. The differences are explained below:

8 (Losses)/Earnings per share

As there were basic losses per share in 2012 the effect of share options is anti-dilutive, consequently diluted losses per share equates to the basic losses per share.

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year excluding treasury shares and shares held by the EBT which are treated as treasury shares.

For diluted earnings per share, the weighted average number of shares is adjusted to reflect the impact of all dilutive potential ordinary shares.

No further shares have been issued since 31 December 2012.

Earnings reconciliation

Adjusted earnings per share exclude the cost of exceptional items less tax at 20% (2011: 20.25%).

*Excludes non tax deductible items related to impairment losses.

9 Intangible assets

Goodwill has arisen in the past on the acquisitions of The Resourceful Group Limited, Park Human Resources Limited, Armstrong Craven Limited and Recruitment Communications Company Limited.

During the year the Group has recognised an impairment loss on goodwill of £7,853,000 (2011: Nil) due to the deterioration in the performance of the Work Communications and Armstrong Craven segments.

The Resourceful Group Limited, Park Human Resources and Recruitment Communications Company Limited's goodwill is allocated to the Work Communications segment, whilst the goodwill of Armstrong Craven Limited is allocated against the Armstrong Craven segment. The recoverable amount of goodwill is calculated based on the lower of, value in use using discounted cash flows and fair value less costs to sell. Management have projected the cash flows for the years 2013, 2014 and 2015. The key assumptions for the value in use calculations for the year 2016 onwards are future projections based on a long term growth rate of 2%.

The carrying value of goodwill at Group level is attributed to The Resourceful Group Limited, Park Human Resources Limited and Recruitment Communications Company Limited (£2,144,000) and Armstrong Craven Limited (£2,200,000).

Management does not currently foresee any change in the key assumptions it has employed when determining the value in use calculations, which would cause the carrying amount to exceed the recoverable amount for each cash-generating unit.

The rate used to discount the forecast cash flows is 11.2% (2011: 11.2%), being the Group's weighted average cost of capital.

During the year the Company recognised a goodwill impairment loss of £10,153,000 (2011: Nil) due to the deterioration of the performance of the Work Communications and Armstrong Craven segments. The carrying value of goodwill at Company level is attributed to The Resourceful Group Limited, Park Human Resources Limited and Recruitment Communications Company Limited (£966,000) and Armstrong Craven Limited (£292,000).

Other intangible assets in Group and Company relate to software licences. Additions in the year represent software licences for intangible assets under construction (2011: Nil). Software licences are amortised over their estimated average useful life of five years after they are brought into use.

10 Property, plant and equipment

Group

Company

11 Investments in subsidiaries

Company

The movements in the year to investments, amounting to £117,000 (2011: increase of £86,000), represents a decrease to loans to the two foreign subsidiaries, Work Group Inc and Work Group Limited, intended for working capital purposes. These loans are long term in nature with no intention of repayment. Consequently they are treated as an investment and any foreign exchange gains or losses are booked to foreign exchange reserves in the consolidated balance sheet.

All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the Parent Company does not differ from the proportion of ordinary shares held.

12 Deferred tax asset

The following table represents the ageing analysis of the deferred tax asset.

The following are the major deferred tax assets recognised by the Group and Company and movements thereon during the year:

Deferred income tax assets are recognised for tax loss purposes to the extent that the realisation of the related tax benefit through future taxable profits is probable.

During the year the Group reversed previously recognised deferred income tax assets of £23,000 relating to trading losses of the Hong Kong subsidiary. The Group did not recognise potential deferred income tax assets totalling £153,000 (2011: £115,000) related to the trading losses of the Hong Kong subsidiary.

The Group did not recognise deferred income tax assets totalling £209,000 (2011: £192,000) related to the trading losses of the US subsidiary.

The total deferred income tax asset not recognised in respect of trading losses of the foreign subsidiaries is £362,000 (2010: £307,000).

Both the US and Hong Kong subsidiaries are early stage businesses and the Board is taking a more cautious and longer term view of the timing of future profits.

13 Inventories

All inventories are carried at fair value less costs to sell.

14 Trade and other receivables

The amount owing from Group undertakings relate to the loan made by the Company to the EBT. No interest is applied to this balance (note 22).

Movements on the Group provision for impairment of trade receivables are as follows:

15 Financial instruments

The Group's financial instruments comprise cash and other items such as trade and other receivables and trade and other payables that arise directly from its operations. Further detail is set out below. The main purpose of holding cash is to finance the Group's future investments and operations. It is (and has been throughout the years presented) the Group's policy that no trading in financial instruments shall be undertaken.

The fair value of financial assets and liabilities is not materially different to their book value.

The Group manages its capital to ensure entities in the Group will be able to continue as a going concern.

The Group monitors and manages the financial risk relating to its operations on a regular basis. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group engages in regular review of policies and practices to bring these risks down to a minimum.

The Group manages liquidity risk by maintaining adequate reserves as well as the use of an overdraft facility if needed. Monthly cash flow and working capital projections are derived to ensure sufficient funds are available to meet obligations and capital expenditure requirements as they fall due.

Interest rate risk is managed by minimising external debt and periodically reviewing the competitiveness of debt facilities.

The Group's exposure to exchange rate movements has been favourable during 2012. The Group continually reviews its exposure to exchange rate movements and has put in place methods to reduce the exchange rate risk wherever it sees such methods as beneficial.

The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the credit risk.

Trade receivables consist of a large number of customers spread across diverse industries. On-going credit evaluation is performed on the financial condition of trade receivables.

Financial assets

These equate to the fair value for the financial assets.

The Group's financial assets comprise trade and other receivables and cash and cash equivalents. Interest is received on cash deposits on a Group pooling basis at variable rates based on the relevant base rate. In 2012 this interest rate ranged from 0% - 0.5% (2011: 0% - 0.5%).

As of 31 December 2012, Group trade receivables of £1,594,000 (2011: £1,433,000) and Company trade receivables of £1,509,000 (2011: £1,313,000) were not yet due.

The remaining Group trade receivables of £1,514,000 (2011: £1,632,000) and Company trade receivables of £1,452,000 (2011: £1,402,000) were past due but not considered impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

A provision for the trade receivables is established when there is some doubt that the Group will not be able to collect all amounts due.

At 31 December 2012, trade receivables denominated in foreign currencies accounted for 9% of Group trade receivables (2011: 23%) and 5% of Company trade receivables (2011: 13%). No interest was accrued for trade and other receivables.

Financial liabilities

The Group's financial liabilities consist of trade and other payable. A detailed description of these financial liabilities is given below:

These equate to the fair value for the financial liabilities.

Undrawn facilities were as follows:

During 2012 the overdraft facility was utilised resulting in £2,000 interest payable (2011:£500).

During the year the directors negotiated a reduction of the overdraft facility to £1m on a rolling basis with no fixed renewal date.

16 Trade and other payables

The amounts owed to Group undertakings relate to the hive up of RCCHR (£1,178,000) in 2007 and the hive up of Armstrong Craven Limited (£1,908,000) in 2009. No interest is applied on these balances which are repayable on demand.

17 Ordinary share capital

The total number of ordinary shares held in treasury is 673,335 (2011: 673,335) and the number of remaining ordinary shares in issue is 27,949,138. The total number of voting rights in the Company is therefore 27,949,138.

No new shares were issued during the year.

18 Share based payments

Group and Company

Details of directors' share options are included in the Directors' remuneration report. 

At 31 December 2012 36 employees held share options (2011: 41). Options were valued using the Black-Scholes option-pricing model.

19 Reconciliation of operating loss to cash used in operations

20 Cash and cash equivalents

21 Leases

Operating leases

The Group and Company leases all of its properties. The Group and Company also lease plant, machinery and vehicles under non-cancellable operating lease agreements.

The total future minimum lease payments are due as follows:

22 Employee benefit trust

The Resourceful Group Limited Employee Benefit Trust 1995 holds £1,431 (2011: £3,733) in cash offshore for the benefit of employees.

The cash has been recognised in the consolidated balance sheet on the basis that Work Group plc is deemed to be the sponsoring employer of the trust. A corresponding liability for payments to be made for the benefit of employees has been recognised in other payables.

During the year an interest free loan of £250 (2011: £7,000) was made by the Company to the EBT. At 31 December 2012 the total EBT interest free loan was £277,750 (2011: £277,500) and the EBT held 2,921,473 (2011: 2,921,473) shares in Work Group plc.

23 Related party transactions

The Company conducts numerous transactions each year with its subsidiaries: Work Group Inc, Work Group Limited.

For the year ended 31 December 2012, total sales of £nil (2011: £nil) were made to Work Group Inc and Work Group Limited. Recharges relating to operating activities of £4,000 (2011: £27,000) was made to Work Group Limited, recharges relating to operating activities of £121,000 was received from Work Group Inc (recharges made in 2011: £27,000) and a loan of £250 (2011: £7,000) was made to the EBT. In total, £2,213,000 (£2011: £2,330,000) was owing to Work Group plc at 31 December 2012.

All transactions related to directors during the year can be found in the Directors' remuneration report.

24 Post balance sheet events

There are no post balance sheet events.

25 Company income statement

The Company has taken advantage of the exemption in Section 408 of the Companies Act 2006 from publishing a separate income statement and statement of comprehensive income. A loss of £10,260,000 (2011: loss of £1,000) before dividends has been reported for the current year.

26 Availability of Report and Accounts

Copies of the Report and Accounts will be posted to shareholders shortly and will be available from the Company's website (www.workgroup.plc.uk) in due course. A further announcement will be made when they are available.