8th Feb 2006 07:01
SThree plc08 February 2006 Embargoed until 0700 8 February 2006 SThree plc ("SThree" or the "Group") Preliminary Results for the Year Ended 30 November 2005 SThree, one of the UK's leading information, communication and technology("ICT") staffing businesses, is today announcing its preliminary results for theyear ended 30 November 2005. The results are the first to be reported by theGroup since its flotation on 16 November 2005. Financial Highlights £m 2005 2004 ChangeTurnover 315.1 242.4 + 30.0%Gross Profit (Fee Income) 104.5 75.9 + 37.7%Operating profit before exceptional items* 29.5 17.4 + 69.9%Operating profit/(loss) after exceptional items* 13.6 (15.7) -Profit before tax and exceptional items* 28.0 16.0 + 75.5%Profit/(loss) before tax 12.2 (17.1) -Basic earnings/(loss) per share 16.2p (65.4)p -Basic earnings per share before exceptional items*+ 35.1p 16.4p + 114.0%Basic earnings per share before exceptional items adjusted for effect of new shares issued at IPO*+# 15.4p 8.9p + 73.0% * Exceptional items in 2005 were a charge of £15.9m against operating profit and a credit of £7.9m against tax, all relating to non-recurring items+ 2004 figures also exclude goodwill amortisation and other exceptional items less related tax# Calculated using the number of shares in issue at 30 November 2005 (excluding shares in the EBT), rather than the weighted average number of shares in issue throughout the year. Earnings before preference dividends are used as the numerator in this EPS calculation since, had the year-end share structure been in place throughout FY 2005, there would have been no preference dividend paid. Operational Highlights • Strong overall performance driven by multi-brand strategy and first full year of broad-based recovery in core ICT market - performance in line with expectations at flotation • Significant recovery in permanent market conditions - number of placements in the year increased by 35% to 6,023 (2004: 4,460) with average placement fees increasing by 6.9% to a record £7,915 (2004: £7,407) • Number of active contractors at year end increased 16.9% to 4,365 (2004: 3,735) with gross profit per day rates increasing by 14.4% to £58.42 (2004: £51.08) • Strategic focus on higher margin opportunities and strong presence in the SME market delivers significant improvement in margins year-on-year • Further organic expansion and market share growth achieved in core UK ICT business • Non-UK businesses growing strongly - gross profits increased by 28.9% to £25.0m (2004: £19.4m), with overseas businesses now accounting for 23.9% of Group gross profit • Continued successful expansion of non-ICT businesses - Banking & Finance, Engineering, Accountancy and HR brands achieved 56.5% increase in gross profit to £13.1m (2004: £8.3m), accounting for 12.5% of Group total • Successful IPO and admission to the Official List in November 2005 • Strong start to current financial year - current trading encouraging Russell Clements, Chief Executive Officer, said: "2005 was a very good year forSThree. Our UK ICT business delivered significant growth despite operating in arelatively mature and competitive marketplace. Our fast-growing, younger revenuestreams, both geographic and sector-specific, also made significantcontributions. Consistent with our core strategy, we did not buy this growth atthe price of margins, which, on the contrary, we improved year on year. "Current trading is in line with our expectations, although the start of ourfinancial year coincides with December and January - a quiet period for therecruitment market - and hence revenue visibility in our business is relativelylimited. We expect the momentum seen in the closing months of 2005 will continuein both our UK and European businesses. Activity levels in our non-ICT brandsare also positive. We remain confident that our well-proven strategy willunderpin another year of progress." SThree plc (08.02.06) 020 7067 0700Russell Clements, Chief Executive Officer (Thereafter) 020 7292 3838Sunil Wickremeratne, Chief Operating OfficerMichael Nelson, Chief Financial Officer Weber Shandwick Square Mile 020 7067 0700Kevin Smith / Stephanie Badjonat Notes to editors SThree, founded in 1986, is one of the leading ICT staffing businesses in theUK. The Group provides both permanent and contract specialist staffing servicesin the UK and Europe, primarily in the information and communications technologysector and, to an increasing extent, the banking and finance, accountancy, humanresources and engineering sectors. Following the establishment of its firstbrand, Computer Futures, in 1986, the Group adopted a multi-brand strategy,establishing new operations to address growth opportunities. SThree currentlyoperates 12 brands, the 3 largest by turnover being Computer Futures,Progressive and Huxley, and has 30 offices in the UK and 9 offices in mainlandEurope, in Belgium, The Netherlands, France, Germany and Ireland. SThree has a selective approach to clients and focuses on high marginopportunities, predominantly within the small to medium-sized enterprises("SME") market, which SThree defines as including autonomous divisions of largecorporates. The Group does not pursue a high volume/low margin model. SThree hasa diverse, international client list of over 4,000 clients. SThree plc is quoted on the Official List of the London Stock Exchange under theticker symbol STHR. SThree plc ("SThree" or the "Group") Preliminary Results for the Year Ended 30 November 2005 Operational Review 2004/2005 was the first year of a substantial widespread improvement in our coreUK ICT market since the significant downturn of 2002/2003. In particular, webenefited from a return in confidence in the permanent market, which had laggedbehind the improvements in the contract market already in evidence in theprevious year. The improved sentiment and associated upturn in demand allowed us theopportunity to increase the sales consultant headcount to a level moreappropriate to the more buoyant market conditions. In general this was achievedby utilising the existing office infrastructure and therefore the associatedincremental costs were largely limited to salaries and commissions, resulting inthe Group benefiting from its operational gearing. In addition, as the supply and demand equation moved more in our favour through2005, we also benefited from an increase in both the average contract day ratewe charged and an improvement in our average permanent fee rate, as detailedbelow. We continued our strategy of avoiding high volume/low margin business in favourof pursuing quality opportunities associated with superior margins. During the 2005 financial year, these factors all helped to contribute to anincrease in gross profit of 37.7% to £104.5m (2004: £75.9m). This in turntranslated to an operating profit before exceptional items which was improved byover 69.9% to £29.5m (2004: £17.4m). After taking account of exceptional items,operating profit grew by £12.1m. As well as an improved performance in our core market and geography, the yearalso saw noteworthy progress outside of the UK and in other specialist staffingsectors outside of ICT. Both have come to represent increasingly significantcontributions to Group revenues and profits. Staffing Levels Total employees at the year end were 1,073 of which 911 were in sales, salesmanagement, direct sales support and sales training (2004: 965 and 775,respectively). The balance of 162 (2004: 190) were employed in the Group'sshared support functions which include accounts, legal, HR and informationservices. Recruitment and retention of sales consultants remains a crucial priority forthe Group. Unlike many other businesses in the sector SThree's model is based onhome-grown talent; i.e. rather than looking to hire experienced staff fromelsewhere within the industry, the Group's sales consultants are typically takenon through our graduate recruitment and training programme. Strategy Since its formation in 1986 the Group has pursued a clearly defined strategy offocusing on higher margin client opportunities. This entails adopting a highlyselective approach to clients and, in particular, an explicit avoidance of the"high volume, low margin" model which has been central to the strategy of someother specialist staffing companies. Although this by no means precludes us from dealing on favourable economic termswith larger organisations, in practice it has resulted in the Group havingparticular strength in the small to medium-sized enterprises ("SME") marketwhere margins are typically higher. We believe that our multi-brand model has been central to the Group's successfulexecution of this strategy, as it enables us to address a variety of fastgrowing sub-markets via a number of specialist brands able to offer nicheexpertise. Having proven this model in our core UK ICT market we have undertaken aprogressive roll out into new geographies and, latterly, into other specialiststaffing markets, such as banking and finance and accountancy. We expect thecontinuation of this highly successful approach to continue to drive growth forthe foreseeable future. Contract v. Permanent Split Strong progress was made in both our permanent and contract business segments.The Group made 6,023 permanent placements during the year (2004: 4,460), anincrease of 35.0%. Our average fees from permanent recruitment also grew to£7,915 by the end of the year which is the Group's highest ever and a 6.9%improvement over the prior year. At 30 November 2005, SThree had 4,365 active contractors, its highest numberever, and an increase of 16.9% over the prior year (2004: 3,735). Contractorgross profit per day rates also increased by 14.4% to £58.42 by the end of theyear (2004: £51.08). When comparing the relative contribution of the contract and permanent sides ofthe business, we believe the most meaningful yardstick is that of gross profit.On this basis during the year contract activities contributed £56.5m andpermanent £48.0m or 54.0% and 46.0% respectively. In the 2004 financial year the contract/permanent percentages were 56.5% and43.5%, respectively, reflecting the fact that the recovery in the permanentmarket only began to be felt in earnest in the second half of that year. Onceunder way the recovery fed through into the 2005 financial year. Sector Focus ICT remains by some way the Group's largest market and is likely to remain sofor the foreseeable future. In recent years, however, an increasingly meaningfulcontribution has been derived from our other disciplines - Banking & Finance,Engineering, Accountancy and Human Resources. During the course of the year gross profit from outside the ICT sector grew to12.5% of total from 11.0% the year previously. This performance is encouragingparticularly when seen in the context of the buoyant conditions and growth ofour core ICT market in the same period. In absolute terms the gross profitderived from newer sectors grew by 56.5% compared to the previous year. TheGroup continues to assess opportunities in other sectors of the specialiststaffing market. Geographical Breakdown During the course of the year the Group operated thirty UK offices and eightelsewhere in Europe. A further international office was opened in Paris early in2006. All of the three largest SThree brands, Computer Futures, Progressive andHuxley Associates, have growing and profitable operations in Europe. During theyear the brand longest-established in Europe, Computer Futures, for the firsttime generated slightly more than 50% of its gross profit from outside of the UK. UK gross profit of £79.5m was 76% of the Group total and represented ayear-on-year increase of 40.7%. Even allowing for improving underlying demandlevels this is a very positive result. Given the relatively mature nature of theUK market we believe this improvement represents capacity-based growth, derivedfrom increased headcount and market share. It is worth noting that the latterwas achieved without sacrificing margin - a reflection of our highly selectiveapproach to formal Preferred Supplier Agreements (PSA's) and our strong SMEfranchise. Non-UK gross profit at £25.0m or 24% of the total was a similar percentage tothe prior year, reflecting the fact that the UK also grew strongly over the sameperiod. We believe that the Group is now well positioned to benefit fromopportunities for structural growth in the liberalising markets of theContinental European specialist-staffing sector. Brand Breakdown The three largest SThree brands between them represented c. 72% of the grossprofit generated by the Group during the year. In addition, each of these brandsposted positive year-on-year profit growth. Computer Futures, our largest brand, accounted for 29.3% of total gross profit,achieving 19.8% growth helped by an excellent performance from its Europeanoperations. The second largest brand by share of gross profit at 23.8% was Huxley. This wasa noteworthy performance given that this represented a year-on-year growth ofsome 48%. Significant contributions were made by the Banking and Finance teamwhich extended its existing City of London based activities to includeplacements for clients in Amsterdam and through its London office, in New York.Huxley's Engineering division also enjoyed a strong year. Progressive ended the year with 18.9% of total gross profit. During the lastquarter, to support further European expansion, Progressive opened its secondnon-UK office in Amsterdam. A third office in Paris was opened early in the newfinancial year. The other Group brands grew their share of overall Group gross profit to 27.9%of the total from 23.1% the year previously. In terms of absolute value thisrepresented a year-on-year increase of 66.6%. This result is all the moreimpressive when we consider that with the exception of the IT Job Board, whichderived a small percentage of its income from Belgium and Holland, none of thesmaller brands were active in Continental Europe. As such, virtually all of thisgrowth was generated from the relatively mature UK market. Outlook 2005 was a very good year for SThree. Our core UK ICT business deliveredsignificant growth despite operating in a relatively mature and particularlycompetitive marketplace. Our fast-growing, younger revenue streams, bothgeographic and sector-specific, made significant contributions. Consistent withour core strategy, we did not buy this growth at the price of margins, which, onthe contrary, we improved year on year. In our view, above all else it was ourmulti-brand strategy which made this possible. We are particularly encouraged by the fact that we achieved what we achievedagainst an economic backdrop of below-trend economic growth in the UK and verymodest growth in the Eurozone. This suggests to us that, whilst we are asomewhat cyclical business, we do not need exceptional economic circumstances topost impressive growth. Current trading is in line with our expectations, although the start of ourfinancial year coincides with December and January - a quiet period for therecruitment market - and hence revenue visibility in our business is relativelylimited. We expect the momentum seen in the closing months of 2005 will continuein both our UK and European businesses. Activity levels in our non-ICT brandsare also positive. We remain confident that our well-proven strategy willunderpin another year of progress. Financial Review Profit & Loss Account Turnover for the year was 30.0% higher at £315.1m (2004: £242.4m). Turnover fromcontractor placements grew by 27.6% to £267.1m (2004: £209.4m), representing 85%of Group turnover. Turnover from permanent placements was £48.0m (2004: £33.0m),an increase of 45.4%. Gross Profit ("Fee Income") for the year increased by 37.7% to £104.5m (2004:£75.9m) representing an overall gross margin of 33.2% (2004: 31.3%). Thepercentage increase in gross profit is greater than the increase in turnover dueto a higher proportion of permanent business in 2005 (45.6% vs 43.5%) coupledwith an increase in the gross margin on contract placements from 20.5% to 21.1%.Gross profit from contractor placements was £56.5m (2004: £42.9m) andrepresented 54.1% (2004: 56.5%) of Group gross profit. The Group's strategy and profit-based bonuses result in a cost structure that issignificantly operationally geared as evidenced by the 70% increase in operatingprofits before exceptional items from a 38% increase in gross profit. Theconversion ratio (Operating Profit divided by Gross Profit) increasedsignificantly from 22.9% to 28.2%. Administrative expenses (before exceptional items) increased by 28.2% to £75.0m(2004: £58.5m before amortisation of goodwill and exceptional items) principallydue to increased numbers of staff. Headcount of the Group totalled 965 at 30 November 2004 and increased by 11.2%to 1,073 by 30 November 2005. Average headcount for the year was 1,037 (2004:805), the increase of 28.8% reflecting steps taken in the second half of 2004 toincrease headcount in anticipation of favourable market conditions in 2005. Exceptional items are detailed in Note 2 to the accounts. As a consequence ofthe IPO, the Group allocated a number of share awards and options to certainemployees who have contributed to the Group's success over recent years. Theresultant charge to the profit and loss account amounted to £14.4m inclusive ofrelated social charges and Employer National Insurance. Since the Groupsatisfied these awards principally through shares held in the SThree EmployeeBenefit Trusts, there is a corresponding credit of £11.9m to reserves, being thevalue of the shares awarded before related social charges and Employer NationalInsurance. The Board expects to allocate a further tranche of share optionsduring 2006; this will result in a further exceptional charge to the profit andloss account in the current financial year. In addition to the above, management bonuses of £1.5m previously paid to holdersof zero coupon preference shares in compensation for the lack of a dividend,have been classified as exceptional items due to materiality and thenon-repeatable nature of these costs following the conversion of all preferenceshares to ordinary shares on IPO. The net interest charge of £1.5m was comparable to 2004 and predominantlyrelates to loan stock interest paid, with cash and bank overdraft interestnetting off to a small positive balance. At IPO, the then outstanding loan stockbalance of £37.4m was repaid in full. The Group is now financed through aflexible credit line arrangement provided by Barclays. Profit before taxation and before exceptional items amounted to £28.0m (2004:£16.0m before amortisation of goodwill and exceptional items), an increase of75.5%. Total profit before taxation and after exceptional items was £12.2m(2004: Loss before tax of £17.1m). Tax on profits before exceptional items was £8.7m (2004: £5.1m), representing aneffective tax rate of 31.1% (2004: 32.0%). The tax credit relating toexceptional items amounts to £7.9m (2004: £0.5m credit). Under Schedule 23 ofthe Finance Act 2003, the Company expects to obtain a corporation tax deductionrelating to the various share awards and options exercised following IPO.Although the charge to the profit and loss account relating to these items is,in accordance with UK GAAP, based on the value of the share award or shareoption at the time of grant, the related tax credit is based on the value at thetime of gift or exercise. As a result the tax credit relating to the exceptionalitems is at an effective rate of 49.8%. At a total level therefore, the Group'stax charge for 2005 amounts to £0.8m, an effective rate of 6.8%. Basic earnings per share were 16.2p (2004: Loss per share of 65.4p) and basicearnings per share before exceptional items more than doubled to 35.1p (200416.4p). The weighted average number of shares for the year was 42.2m (2004:39.9m). Since the flotation and the related share capital conversion occurred late inthe financial year, the weighted average number of shares used in the standardEPS calculations is far below the actual number of ordinary shares in issue atthe year-end itself. At 30 November 2005, there were 138.0m shares in issue, ofwhich 13.6m are held within the Employee Benefit Trust and therefore notincluded within the basic EPS calculation. Using the year-end number of sharesthe basic earnings per share would have been 9.0p (2004: loss per share of 17.3pon the same basis), and before exceptional items 15.4p (2004: 8.9p), theDirectors believe that these figures give a more useful representation of theGroup's earnings per share performance in the period. A preference dividend of £4.4m was paid at IPO in accordance with the terms ofconversion of preference shares into ordinary shares. In line with statementsmade in our Prospectus, no ordinary dividend is proposed for 2005. The Directorscurrently expect to declare the Group's first dividend with the interim resultsfor the six months ended 31 May 2006. Balance Sheet The Group had net assets of £21.9m at 30 November 2005 (2004: £6.3m). Net debtamounted to £9.6m (2004: £14.9m), the reduction in debt of £5.3m being achievedthrough increased trading. Capital expenditure amounted to £2.7m (2004: £2.1m) and predominantly related toupgrades of IT hardware and fit-out of new offices across the Group. Trade debtors increased at a lower rate than turnover (26.7%) to £53.6m at 30November 2005 (2004: £42.3m) representing debtor days of 46 (2004: 47 days). Cash Flow At the start of the year the Group had net debt of £14.9m. During the year theGroup generated net cash from operating activities of £25.0m (2004: £5.1m) being£27.2m of EBITDA (2004: £17.0m), an increase in working capital requirements of£2.8m (2004: £10.5m) and an increase in provisions of £0.5m (2004: decrease of£1.5m). At 30 November 2005 the Group had net debt of £9.6m (2004: £14.9m). International Financial Reporting Standards (IFRS)Following the European Union's adoption of Regulation (EC) No 1606/2002, in linewith other EU companies whose securities are publicly traded, the Group will berequired to adopt International Financial Reporting Standards ("IFRS") togetherwith revised International Accounting Standards ("IAS"), in issue at 31 March2004, for the first time for our financial statements to 30 November 2006. Thefirst reported results under IFRS will be our interim results to 31 May 2006.The 2005 financial year's consolidated financial statements remain in accordancewith UK GAAP. - Ends - SThree PLCConsolidated Profit and Loss AccountYear ended 30 November 2005 2005 2004------------------------------------------------------------------------------------------------------------- Exceptional items and Ordinary Exceptional Ordinary amortisation activities items Total activities of goodwill Total £'000 £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------- Turnover 315,087 - 315,087 242,413 - 242,413 Cost of sales (210,606) - (210,606) (166,516) - (166,516)------------------------------------------------------------------------------------------------------------- Gross profit 104,481 - 104,481 75,897 - 75,897 Administrative expenses (74,974) (15,864) (90,838) (58,530) (33,083) (91,613)------------------------------------------------------------------------------------------------------------- Operating profit/(loss) 29,507 (15,864) 13,643 17,367 (33,083) (15,716) Net Interest (1,491) - (1,491) (1,405) - (1,405)------------------------------------------------------------------------------------------------------------- Profit/(loss) before taxation 28,016 (15,864) 12,152 15,962 (33,083) (17,121) Taxation (8,726) 7,895 (831) (5,114) 470 (4,644)------------------------------------------------------------------------------------------------------------- Profit/(loss) after taxation 19,290 (7,969) 11,321 10,848 (32,613) (21,765) Minority interest (135) - (135) 207 - 207------------------------------------------------------------------------------------------------------------- Profit/(loss) for the financial year 19,155 (7,969) 11,186 11,055 (32,613) (21,558) Dividends - including non equity (4,351) - (4,351) (4,525) - (4,525)------------------------------------------------------------------------------------------------------------- Retained profit/(loss) for the year 14,804 (7,969) 6,835 6,530 (32,613) (26,083)------------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share (pence) 35.1 (18.9) 16.2 16.4 (81.7) (65.4) Diluted earnings/(loss) per share (pence) 34.1 (18.4) 15.7 16.4 Adjusted earnings/(loss) per share (pence) Basic 15.4 (6.4) 9.0 8.9 (26.2) (17.3) Diluted 15.0 (6.3) 8.7 8.9 All amounts relate to continuing operations. SThree PLCConsolidated Balance Sheet as at 30 November 2005 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Fixed assetsTangible assets 2,815 1,833-------------------------------------------------------------------------------- 2,815 1,833Current assetsDebtors 80,589 61,336Cash at bank and in hand 2,901 24,956-------------------------------------------------------------------------------- 83,490 86,292 Creditors: amounts falling due within one year (58,592) (39,118)-------------------------------------------------------------------------------- Net current assets 24,898 47,174-------------------------------------------------------------------------------- Total assets less current liabilities 27,713 49,007 Creditors: amounts falling due after more than one year - (37,425) Provisions for liabilities and charges (5,817) (5,317)-------------------------------------------------------------------------------- Net assets 21,896 6,265-------------------------------------------------------------------------------- Capital and reservesCalled up share capital 1,380 2,214Share premium 2,925 -Shares to be issued - 6,035Capital reserve 878 -Profit and loss account 16,542 (2,014)-------------------------------------------------------------------------------- Total equity shareholders' funds 21,725 6,235-------------------------------------------------------------------------------- Minority interest - equity 171 30-------------------------------------------------------------------------------- Capital employed 21,896 6,265-------------------------------------------------------------------------------- SThree PLCConsolidated Statement of Total Recognised Gains and LossesYear ended 30 November 2005 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083) Exchange (loss)/gain on translation of net investment in foreign subsidiaries (173) 527-------------------------------------------------------------------------------- Total recognised gains and losses relating to the financial year 6,662 (25,556)-------------------------------------------------------------------------------- Consolidated Reconciliation of Movements in Shareholders' FundsYear ended 30 November 2005 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Profit/(loss) after taxation 11,321 (21,765) Minority interest (135) 207Dividends (4,351) (4,525)-------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083) Exchange (loss)/gain on translation of net investment in foreign subsidiaries (173) 527New share capital issued 88 4Share issue costs (3,151) -Share award credit (1) 11,891 --------------------------------------------------------------------------------- Net increase/(decrease) in shareholders' funds 15,490 (25,552)-------------------------------------------------------------------------------- Shareholders' funds at the beginning of year 6,235 31,787-------------------------------------------------------------------------------- Shareholders' funds at the end of year 21,725 6,235-------------------------------------------------------------------------------- (1) - The share award credit relates to the reversal of the non-cash chargerecorded as an exceptional charge against operating profit in respect of sharesawarded to employees SThree PLCConsolidated Cash Flow StatementYear ended 30 November 2005 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Net cash inflow from operating activities 24,954 5,053 Returns on investments and servicing of finance Interest received 482 611Interest paid (1,973) (1,983)Preference dividends paid (8,876) (2,643)-------------------------------------------------------------------------------- Net cash outflow from returns on investments and servicing of finance (10,367) (4,015) Taxation (5,449) (3,292) Capital expenditure and financial investment Purchase of tangible fixed assets (2,702) (2,118) Receipts from sale of tangible fixed assets - 38-------------------------------------------------------------------------------- Net cash outflow for capital expenditure and financial investment (2,702) (2,080)-------------------------------------------------------------------------------- Net cash inflow/(outflow) before financing 6,436 (4,334) Financing Issue of ordinary share capital 88 4 Expenses paid in respect of share issue (1,008) - Repayment of loan stock (39,900) -Drawdown on new loan facility 9,000 - Issue of ordinary share capital in subsidiaries to minority interests 30 40-------------------------------------------------------------------------------- Net cash (outflow)/inflow from financing (31,790) 44-------------------------------------------------------------------------------- (Decrease) in cash (25,354) (4,290)-------------------------------------------------------------------------------- SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 1. Segmental analysis The consolidated entity operates in one business segment being that ofrecruitment services. As a result, no additional business segment information isrequired to be provided. The segmental results by geography are shown below: Geographic analysis by destination Turnover Gross profit-------------------------------------------------------------------------------- 2005 2004 2005 2004 £'000 £'000 £'000 £'000-------------------------------------------------------------------------------- United Kingdom 243,602 184,424 79,501 56,511Europe and Rest of World 71,485 57,989 24,980 19,386-------------------------------------------------------------------------------- 315,087 242,413 104,481 75,897-------------------------------------------------------------------------------- 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill:United Kingdom 19,170 15,040Europe and Rest of World 10,337 2,327-------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill 29,507 17,367 Amortisation of goodwill - (31,517) Exceptional items (note 2) (15,864) (1,566) Net interestUnited Kingdom 107 490Europe and Rest of World 302 100Interest paid on loan stock, now repaid (1,900) (1,995)-------------------------------------------------------------------------------- Profit/(loss) before taxation 12,152 (17,121)-------------------------------------------------------------------------------- SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 1. Segmental analysis (continued) Turnover Gross profit-------------------------------------------------------------------------------- 2005 2004 2005 2004 £'000 £'000 £'000 £'000-------------------------------------------------------------------------------- United Kingdom 299,019 227,904 92,147 66,493Europe and Rest of World 16,068 14,509 12,334 9,404-------------------------------------------------------------------------------- 315,087 242,413 104,481 75,897-------------------------------------------------------------------------------- 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill:United Kingdom 27,837 16,791Europe and Rest of World 1,670 576-------------------------------------------------------------------------------- Operating profit before interest, exceptional items and amortisation of goodwill 29,507 17,367 Amortisation of goodwill - (31,517) Exceptional items (note 2) (15,864) (1,566) Interest United Kingdom 557 490Europe and Rest of World (148) 100Interest paid on loan stock, now repaid (1,900) (1,995)-------------------------------------------------------------------------------- Profit/(loss) on ordinary activities before taxation 12,152 (17,121)-------------------------------------------------------------------------------- Net assets 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Net assets including goodwill:United Kingdom 17,871 1,708Europe and Rest of World 4,025 4,557-------------------------------------------------------------------------------- 21,896 6,265-------------------------------------------------------------------------------- SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 2. Exceptional Items Exceptional items are those items which, because of their size or nature, aredisclosed to give a proper understanding of the underlying results for theperiod. Items classified as exceptional are as follows: 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Exceptional items - charged to operating profit Employee share awards and share options at IPO 11,891 -Employer's National Insurance on share awards and options, and other related costs 2,529 -Special management bonuses 1,444 1,566-------------------------------------------------------------------------------- Exceptional items - before taxation 15,864 1,566-------------------------------------------------------------------------------- Exceptional items -taxationTaxation credit in respect of employee share options and awards (Schedule 23) 6,262 -Taxation credit on other exceptional items 1,192 470Schedule 23 deferred tax in respect of unexercised employee share options and awards 441-------------------------------------------------------------------------------- Exceptional items - taxation 7,895 470-------------------------------------------------------------------------------- Certain employees received share awards and share options at IPO and inaccordance with UITF 17, a charge has been reflected in the profit and lossaccount. This also resulted in a corresponding charge for employer's NationalInsurance. The Group received tax relief in respect of these share awards. Thiscredit has also been classified as exceptional. Special management bonuses relate to amounts paid to those directors and seniorGroup management in proportion to their interest in zero coupon preferenceshares. The bonuses were awarded to reward those directors and senior managersfor services provided, recognising the fact that the zero coupon preferenceshares did not bear dividends. After flotation, the zero coupon preference shares ceased to exist and thespecial management bonuses will no longer be payable. SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 3. Taxation on profit from ordinary activites (a) Analysis of tax charge for theyear-------------------------------------------------------------------------------------- Ordinary Exceptional 2005 2004 activities items Total Total £'000 £'000 £'000 £'000-------------------------------------------------------------------------------------- Current tax:UK corporation tax at 30% (2004: 30%) on profits for the year 8,487 (1,192) 7,295 4,328Schedule 23 tax credit in respect of employee share awards and options (note 2) - (6,262) (6,262) -Adjustments in respect of previous periods 63 - 63 (190)-------------------------------------------------------------------------------------- 8,550 (7,454) 1,096 4,138 Overseas tax 495 495 405Adjustments in respect ofprevious periods 97 97 (117)-------------------------------------------------------------------------------------- 592 - 592 288-------------------------------------------------------------------------------------- Total current tax charge 9,142 (7,454) 1,688 4,426-------------------------------------------------------------------------------------- Deferred tax:Origination and reversal of timing differences (414) - (414) 95Schedule 23 deferred tax in respect of unexercised employee share options and awards (Note 2) - (441) (441) -Adjustments in respect of previous periods (2) - (2) 123-------------------------------------------------------------------------------------- Total deferred tax charge (416) (441) (857) 218-------------------------------------------------------------------------------------- Tax on profit on ordinary activities 8,726 (7,895) 831 4,644-------------------------------------------------------------------------------------- SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 3. Taxation on profit from ordinary activites (continued) The total current tax charge for the year is lower than the standard rate ofcorporation tax in the UK (30%). The differences are explained below: 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Profit/(loss) before 12,152 (17,121)-------------------------------------------------------------------------------- Profit /(loss) before tax multiplied by standard rate of corporation tax in the UK of 30% 3,646 (5,136) Effects of:Goodwill amortisation not deductible for tax purposes - 9,455Other expenses not deductible for tax purposes 469 275Capital allowances in excess of depreciation and amortisation 72 (6)Other timing differences 55 (34)UITF 17 charge in respect of share awards and options 3,567 -Schedule 23 tax credit in respect of employee share options and awards (note 3) (6,262) -Lower tax rates on overseas earnings (67) (14)Tax losses not utilised within the year 48 193Adjustments to tax in respect of prior period (UK) 63 (190)Adjustments to tax in respect of prior period (Overseas) 97 (117)-------------------------------------------------------------------------------- Total current tax charge 1,688 4,426-------------------------------------------------------------------------------- Corporation tax deductions have arisen on the exercise of options granted tocertain employees of the Group prior to the flotation. The corporation taxdeduction amounted to £20.9m which reduces the current year's taxable profits ofthe Group. The tax effect of this deduction amounted to £6.3m, and the effectivecurrent tax rate reduced to 13.9% in the current year. This credit has beentreated as exceptional due to its unusual nature and its materiality.In addition to the tax deductions described above, the Directors expect toreceive additional tax deductions in respect of the share awards and shareoptions currently unexercised. There is a timing difference between recognitionof a charge for these share options for accounting purposes and the receipt of atax credit. A deferred tax asset of £0.4m has been recognised in respect of thistiming difference. 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Deferred tax comprises:Other timing differences 1,854 730Accelerated capital allowances 832 1,099-------------------------------------------------------------------------------- Deferred tax asset 2,686 1,829-------------------------------------------------------------------------------- The movement in deferred taxation for the Group can be analysed as follows:At 1 December 1,829 2,047Amount credited/(charged) to the profit and loss account 857 (218)-------------------------------------------------------------------------------- At 30 November 2,686 1,829-------------------------------------------------------------------------------- In addition to the recognised deferred tax asset detailed above, the Group hascarried forward tax losses of £0.2 million (2004: £0.2 million) for which nodeferred tax asset has been recognised. Utilisation of these losses is currentlyconsidered too uncertain to justify recognition.The Group also has tax losses of £0.7m for which claims to recover prior periodtax payments have been submitted. However, recovery is considered uncertain andtherefore no deferred tax asset has been recognised in respect of these losses SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 4. Dividends 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Non-equity shares:Preference dividend payable of 5% (net) on Preference and 'A' Preference shares (4,351) (4,525)-------------------------------------------------------------------------------- (4,351) (4,525)-------------------------------------------------------------------------------- 5. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the year, excluding those held in the employee share trust which aretreated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. If the dilutive number of ordinary shares result in a lower loss orhigher profit these are considered to be anti-dilutive and have been excludedfrom the earnings per share calculations. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £'000 millions pence £'000 millions pence---------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share Earnings/(loss) attributable to ordinary shareholders 6,835 42.2 16.2 (26,083) 39.9 (65.4) Effect of dilutive employee share options 1.2 0---------------------------------------------------------------------------------------------------------- Diluted earnings/(loss) per share 6,835 43.4 15.7 (26,083) 39.9 (65.4)---------------------------------------------------------------------------------------------------------- SThree PLCNotes to the Financial StatementsYear ended 30 November 2005 5. Earnings per share (continued) Supplementary earnings per share to exclude goodwill amortisation andexceptional items Earnings per share before exceptional items and amortisation of goodwill ispresented because the Directors believe it better explains the underlying trendsof the Group's performance. 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £'000 millions pence £'000 millions pence---------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share 6,835 42.2 16.2 (26,083) 39.9 (65.4)Effect of goodwill amortisation and exceptional items 7,969 42.2 18.9 32,613 39.9 81.7----------------------------------------------------------------------------------------------------------Basic earnings per share excluding exceptional items and goodwill amortisation 14,804 42.2 35.1 6,530 39.9 16.4---------------------------------------------------------------------------------------------------------- Diluted earnings per share 6,835 43.4 15.7 (26,083) Effect of goodwill amortisation and exceptional items 7,969 43.4 18.4 32,613----------------------------------------------------------------------------------------------------------Diluted earnings per share excluding exceptional items and goodwill amortisation 14,804 43.4 34.1 6,530 39.9 16.4---------------------------------------------------------------------------------------------------------- Additional Disclosure The earnings per share figures presented above have been prepared in accordancewith UK Financial Reporting Standard 14 "Earnings per share". Due to theflotation and, consequently, the share capital conversion occurring late in thefinancial year, the weighted average number of shares used in the abovecalculations is considerably lower than the actual number of Ordinary shares inissue at the end of the financial year. Therefore the directors believe that amore meaningful denominator, based on the capital structure at the balance sheetdate, should be used in order to provide a better understanding of the trueposition. The earnings used in the additional earnings per share calculation isbefore deduction of the preference dividend as this is considered as morerepresentative of the future earnings position. The tables below set out thenumber of shares and earnings used in the calculation of the adjusted earningsper share. 2005 2004 Number of Number of shares shares millions millions-------------------------------------------------------------------------------- Total share capital in issue 138.0 138.0Shares held by the EBT (13.6) (13.6)Basic number of shares 124.3 124.3Effect of dilutive options 3.7 0-------------------------------------------------------------------------------- Dilutive number of ordinary shares 128 124.3-------------------------------------------------------------------------------- 2005 2004 Weighted Weighted average average number Per-share number Per-share Earnings of shares amount Earnings of shares amount £'000 millions pence £'000 millions pence---------------------------------------------------------------------------------------------------------- Retained profit/(loss) for the year 6,835 (26,083)Add preference dividend 4,351 4,525 Adjusted basic earnings/ (loss) per share 11,186 124.3 9.0 (21,558) 124.3 (17.3)Effect of goodwill amortisation and exceptional items 7,969 124.3 6.4 32,613 124.3 26.2----------------------------------------------------------------------------------------------------------Adjusted basic earnings per share excluding exceptional items and goodwill amortisation 19,155 124.3 15.4 11,055 124.3 8.9---------------------------------------------------------------------------------------------------------- Adjusted diluted earnings/ (loss) per share 11,186 128.0 8.7 (21,558)Effect of goodwill amortisation and exceptional items 7,969 128.0 6.3 32,613----------------------------------------------------------------------------------------------------------Adjusted diluted earnings per share excluding exceptional items and goodwill amortisation 19,155 128.0 15.0 11,055 124.3 8.9---------------------------------------------------------------------------------------------------------- 6. Reconciliation of operating profit to net cash inflow from operating activities 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Operating profit/(loss) 13,643 (15,716)Depreciation charge 1,442 1,311Goodwill amortisation - 31,517Negative goodwill arising on acquisition of minority interest in a subsidiary - (58)Profit from partial deemed disposal of subsidiary (24) (32)Charge in respect of employee share awards and options 11,891 -Loss/(profit) on sale of tangible fixed assets 275 (38)Increase in debtors (15,462) (17,503)Increase/(decrease) in provisions 500 (1,454)Increase in creditors 12,689 7,026-------------------------------------------------------------------------------- Net cash inflow from operating activities 24,954 5,053-------------------------------------------------------------------------------- 7. Reconciliation of net cash flow to movement in net debt 2005 2004 £'000 £'000-------------------------------------------------------------------------------- Decrease in cash in the year (25,354) (4,290)Repayment of loan stock 39,900 -Drawdown on short-term loan facility (9,000) -Exchange differences and other non-cash changes (152) 527-------------------------------------------------------------------------------- Movement in net debt 5,394 (3,763) Opening net debt (14,944) (11,181)-------------------------------------------------------------------------------- Closing net debt (9,550) (14,944)-------------------------------------------------------------------------------- 8. Nature of financial information The financial information set out above has been prepared in accordance with the accounting policies used in preparing the Group's accounts for the year ended 30 November 2004. It does not constitute the Group's audited statutory accounts within the meaning of Section 240 of the Companies Act 1985. The financial information for the year ended 30 November 2004 has been extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The Group accounts for the year ended 30 November 2005 will be finalised on the basis of the financial information presented by the Directors in the preliminary announcement. 9. Annual Report and Accounts The 2005 Annual Report and Accounts will be posted to shareholders in due course. Further copies will be available from the Company Secretary, 41-44 Great Windmill Street, London W1D 7NB. Telephone No. 020 7292 3838. 10. Annual General Meeting The Annual General Meeting of SThree plc will be held on 3 May 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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