Harvey Nash Group Regulatory News (HVN)

HARVEY NASH GROUP PLC

"Harvey Nash" or "the Group")

Results for the year ended 31 January 2012

Harvey Nash, the global professional services group, announces increased revenues and profits exceeding expectations for the year ended 31 January 2012

Financial Results

* before investment in additional working capital

** Net cash comprises cash less overdraft and invoice discounting facilities utilised

Financial highlights

·; Organic growth in revenue of 26%

·; Operating profit up 41%

·; Profit before tax up 35%

·; Earnings per share up 36%

·; Strong operating cash inflow up 35% before investment working capital

·; 10% increase in final dividend, to 1.635p per share

Operational Highlights

·; Significant market share gains reported particularly in the Nordics and the UK

·; Robust demand for flexible labour continues despite uncertainty in the Euro zone

·; We have benefited from our broad geographic portfolio with non-UK gross profit increasing to 61%

·; UK & Ireland exceeded expectations with operating profit up 19%

·; Germany and the Nordic region drove 59% increase in operating profit from Europe

·; Integration of Bjerke& Luther AS in Norway on track

·; New offices opened in the UK, China and Australia

·; Current trading in line with expectations

Commenting on the results, Albert Ellis, Chief Executive Officer, said:

"I am delighted to announce another excellent set of financial results, which exceeded expectations. We are seeing the benefits of our focus both on high growth technology markets and on the robust economies of Northern Europe.

We made significant market share gains which delivered an increase in operating profit of 19% in the UK despite the widely reported weakness in the recruitment market and a 59% increase in operating profit in Europe against a background of uncertainty over the Euro zone. All of this growth is organic.

Clearly our unique portfolio of services and strong brand have given us a competitive advantage in challenging markets and we are looking forward to expanding our geographical footprint in Asia in the coming year."

ENQUIRIES:

A presentation of the results will take place at 09h30 this morning at the offices of College Hill, The Registry, Royal Mint Court, London, EC3N 4QN

(Please register your attendance with helen.tarbet@collegehill.com)

CHAIRMAN'S STATEMENT

I am delighted to report another excellent set of results, with organic led growth in revenues and profits across the Group, which exceeded expectations.

Whilst the economic recovery continued during the first half of the year, macro-economic indicators began to turn down in the third quarter and business confidence declined in the UK and Europe as a result. In particular, demand from the financial services sector has been relatively subdued throughout most of the year.

However, the Group's revenues grew 26% exceeding all previous peaks as a result of significant market share gains made during the downturn due to the success of the Group's strategy of expanding and diversifying the business, in particular focussing on high growth technology and the robust economies of northern Europe.

Financial Results

Revenue for the year ended 31 January 2012 increased by 26% to £533.0m (2011: £422.3m). Gross profit was 15% higher at £78.5m (2011: £68.5m) with operating profit up 41% at £9.0m (2011: £6.4m). Profit before tax of £8.5m was up 35% on the prior year (2011: £6.3m). Basic earnings per share were up 36% to 7.97p (2011: 5.85p).

Operating cash inflow was 35% higher at £11.3m (2011: £8.4m) before funding the growth in working capital. As expected, with the significant increase in trading, the additional working capital requirement for the year ended 31 January 2012 was £6.7m, despite the reduction in debtor days. Although the Group has no long term debt, short term working capital funding of circa £40m is available on a rolling twelve month basis for its growing contracting services.

Net cash at the year end was £5.2m (2011: £8.3m) due to the growth in working capital and net tangible assets increased by 22.5%.

Dividend

The Board is recommending an increased final dividend of 1.635 pence per share, 10% up on the prior year (2011: 1.48p). If approved at the forthcoming Annual General Meeting, the final dividend, which would take total dividend payouts for the year to 2.66 pence per share (2011: 2.42p), will be paid on 13 July 2012 to shareholders on the register as at 22 June 2012. This would take the year's total dividend to 2.66 pence per share (2011:2.42p), and marks the fifth successive annual increase. 

Strategy

Total shareholder returns* over the five years ending on the balance sheet date, 31 January 2012, compared to a comprehensive list of comparator companies revealed the Group yielded returns which were within the top quartile.

This has been achieved through successfully implementing a strategy of increasing market share predominantly through organic growth, but complemented by earnings enhancing bolt on acquisitions. This is executed by implementing a unique portfolio of services in attractive growth markets in geographies across the world in high value service sectors.

The Group's strategy is to expand and diversify the business through offering this broad portfolio of services in diverse client sectors too. The Group's key assets - its market leading brands, broad portfolio of services and highly experienced management team, have been crucial in maintaining and developing existing client relationships, winning additional mandates and retaining key employees. Our professional values involve placing clients at the centre of our strategy. This has resulted in an increase in the Group's client base.

The Group's managed outsourcing service, including its valuable offshoring component, gives it competitive advantage and a measure of stability in times of economic uncertainty when demand for recruitment is naturally lower. This benefited the Group during the downturn and then enabled it to take significant market share as the recovery took hold, as it was able to offer recruitment services to these clients as well as managed outsourcing.

The Group continues to focus on growing its market share across all its disciplines and expanding its portfolio of services geographically including Vietnam, and now in China and Australia.

Tight control of costs and achieving cost efficiencies has always been at the heart of our strategy. The Group's prudent approach to expansion has served it well over the last five years. Continuing this strategy, in June 2012 we will be relocating our largest office in London and achieving significant economies of scale through flexible working practices by reducing our rental footprint and also taking advantage of the subdued rental market.

As tighter credit markets squeeze smaller recruitment companies and limit their ability to fund working capital growth, the management team is mindful of opportunities for earnings enhancing bolt-on acquisitions, and will explore these as they arise, to augment its organic growth.

Employees

On behalf of the Board, I would like to thank all of the Group's employees and associates who have worked hard to exceed expectations during challenging market conditions. In particular, these excellent results could not have been achieved, without the skill and commitment of our consultants and management. The Board appreciates their loyalty and hard work.

Board

During the period we were pleased to make two further board appointments and also announced the retirement of Gus Moore from the Board as a Non-executive director at the Company's Annual General Meeting on the 30 June 2011.

The appointment of Margot Katz, as an Executive Director responsible for Group Talent, to the Board took effect from 1 May 2011. This was followed by the appointment with effect from 1 September 2011, of Julie Baddeley, a Non-executive director who chairs the remuneration committee and was recently appointed the Senior Independent Non Executive Director on 4 April 2012.

Having overseen the appointment of two independent Non Executive Directors in the last two years and in order to allow sufficient time for an external search, I have indicated to the Board my intention to retire following the Annual General Meeting in 2013. Given the recent changes to the Board I believe this timeframe will allow an orderly transition and give the Nomination Committee time to properly consider its options for a replacement Chairman.

Current trading and Outlook

Results for the year ended 31 January 2012 exceeded expectations largely as a result of the Group's broad portfolio of services and significant market share gains.

However, in our trading update of the 17 February 2012, expectations for the current year ending 31 January 2013 were revised when we said the ongoing economic uncertainty in the Euro zone meant that our clients continue to exercise caution in relation to hiring permanent staff and that this had impacted demand for executive recruitment in the UK, the Nordics and mainland Europe.

As our clients begin to focus increasingly on the Asia Pacific region, we will invest £0.75m in new offices in 2012 in Asia Pacific to meet growing demand in the region and to supplement our existing offices in Vietnam.

Whilst the softening of permanent recruitment demand experienced in the fourth quarter has resulted in lower run rates into the first quarter of the current year, this now appears to have stabilised. The outlook for freelance contracting remains encouraging with little evidence of a slowdown. As a result, the Board is pleased to report that first quarter trading is on track to deliver in line with current expectations.

Ian Kirkpatrick

Chairman

30 April 2012

* The Total Shareholder Return is calculated by adding the dividends in the period to the capital gain/loss in the period and dividing this by the share price at the start of the period.

OPERATIONAL REVIEW

United Kingdom and Ireland

Revenue in the UK and Ireland increased 36% to £178.4m (2011: £131.5m) with gross profit up 8% to £30.7m (2011: £28.3m). Included in these results are revenues of £7.6m (2011: £6.1m) attributable to clients based in Asia. Operating profit was up 19% at £3.2m compared to £2.7m the previous year. These results are excellent given the challenging UK and Ireland market and the weak results reported from across the recruitment sector.

These are very encouraging results, given the challenging market in the UK and Ireland and the well-reported weakness across the recruitment sector as a whole. Once again the Group's market leading brand and focus on faster growing, new technology, niche markets have resulted in significant market share gains which have driven the increase in revenue. The UK business continues to capitalise on its strategic advantages, which were recognised in 2011 by the Orange Business Awards when Harvey Nash was made a finalist in the Mid Cap Company of the Year category.

Demand continues to be strong in the digital and media markets due to the increasing requirements for mobile application development (smartphone and tablet) and social media integration. There is continuing growth in this area as clients increase their investment in online retailing and marketing of their products and services. This market has therefore suffered from an acute skills shortage in many areas and the Group is well placed to meet demand.

In 2010 the Group consolidated its Financial Services practice in a new office in the City of London. Strategically, the Group sees continued opportunities in this sector. The industry landscape continues to change with fluctuating levels of demand and the impact of regulatory change being felt. These trends have enabled the Group to gain market share by leveraging its broad portfolio of services to meet fluctuations in demand. Permanent recruitment appears to be on the verge of growing again as institutions seek to reduce their reliance on temporary workers, thereby retaining talent, skills and intellectual property.

Our UK regional offices performed with revenues up over 20% in aggregate driven by expansion in the Midlands and the North West. Scotland reported the highest increase at 30% despite the weak overall UK economy. In Ireland, the Group continued to achieve profitable growth driven by demand from global corporations based in Dublin.

We reported in our Interim Results Statement in September 2011, that the senior executive market in particular had been affected by the weakening of the economy and the subsequent decline in business confidence in the corporate sector. Having reported a decline in the final quarter we are pleased to see slightly more confidence returning to the market; run rates are stabilising mainly due to improving demand from the Health and Education markets. Our specialist expertise and our market leadership particularly in healthcare, has continued to open up fresh opportunities in the first quarter of the current year, not only in the UK but also overseas.

Our market leading CIO (Chief Information Officer) search practice saw a significant increase in the number and value of FTSE 250 mandates this year, and we continue to gain share in a relatively weak market. Leadership of the technology and digital marketing function of an organisation is increasingly falling to the CIO, particularly in larger global organisations. During the year, over one thousand IT leaders attended Harvey Nash thought leadership events and our flagship CIO Survey, one of the largest and most comprehensive of its kind in the world, was launched in eleven countries across four continents.

Revenue from offshoring was flat throughout the year and some investment in additional headcount also led to a reduction from their peak in the prior year. However, growth in onshore managed services was strong with large organisations seeking to reduce their supplier base and achieve margin reductions. The Group's market share improved throughout the year particularly in London with increased revenues up 19%.

Tight cost control has always been at the heart of our strategy. The Group's prudent approach to expansion has served it well over the last five years. In June 2012 we will be relocating our London office to achieve significant economies of scale and take advantage of the subdued rental market in the City. The relocation will result in circa £0.8m non-recurring costs in the first half year ended 31 July 2012 with some savings flowing through into the final quarter of the year and savings over a ten year period expected to be in the region of £1.0m per annum beginning the next financial year. Capital expenditure in the first half, expected to be approximately £1.5m, will be fully funded through leasehold incentives secured over the initial term of the agreement.

Mainland Europe

Revenue in Europe increased 24% to £317.8m (2011: £256.4m) and gross profit increased 23% to £38.3m (2011: £31.1m). Operating profit was 59% higher at £5.1m compared to £3.2m in the previous year.

Given the uncertainty and volatility in European markets and the delayed recovery in countries such as the Netherlands, we are pleased with this performance. Our strategy has been expansion in the stronger Northern European region, including the Nordics, Benelux and Germany, combined with driving project growth from existing and new clients in our wireless outsourcing locations in Nuremburg and Stuttgart. During the year demand for permanent staff was strongest in the Nordic region with overall revenues increasing by 37% and professional recruitment in Sweden rising by 64%. The uncertainty in the Euro zone pushed up demand for temporary or contract staff and numbers of freelance and employed technology specialists rose 21% when compared to 31 January 2011. The demand for flexible labour does not appear to be slowing.

In Switzerland the economy has been severely affected by the rapid appreciation of the Swiss Franc. This has impacted existing clients, particularly those in the dominant Financial Services sector who, in many cases,have implemented recruitment freezes across the board in response to the economic contraction. The business had been providing managed services to key financial services clients for the last two years and the result was an increase in revenues and market share despite the weakness in the overall recruitment market. With substantial upfront investment completed in 2010, the return on this investment flowed through during 2011 and results from Switzerland have improved when compared to the prior year.

The slow macroeconomic recovery in the Netherlands has been widely reported. Actions to reduce the cost base and improve efficiency using technology and offshoring were successfully implemented as well as investment made in additional sales headcount. These actions resulted in a 10% lower contribution despite an overall 5% increase in revenues. Accordingly the business has been steadily improving on a sequential basis, particularly during the last quarter of the year.

In Belgium the Group capitalised on the strong demand for flexible labour across its client base and numbers working on client sites increased by 33% at 31 January 2012 compared to a year ago. Permanent recruitment was lower than the previous year but higher revenues from its managed services and freelance professionals pushed contribution up 43%. Our leading position in the Belgian market and key portfolio of services strength, has provided a strong platform for growth. In the first quarter of the current year we opened a new second office in Ghent and expect to continue to expand our headcount and operations into the first half.

In the Nordics, revenue growth was strongest in the mid-market professional sector with gross profit rising 64%. Harvey Nash Alumni is the engine of growth with its strong networks and Boardroom relationships, key to growing the professional recruitment business by focusing on middle management and specialist search. The successful introduction of an interim management service has also been achieved during the year. Whilst Nordic companies have been affected by the global economic situation, local markets are relatively robust. Harvey Nash Alumni is now the clear market leader in Sweden having further increased its overall market share during the downturn.

Our acquisition in Norway, Bjerke & Luther AS, reported an encouraging rise of 24% in revenues. The acquisition plan remains on track with further integration actions successfully completed during the year. The Group owns 50.1% of the share capital and has an option at its sole discretion to acquire the remaining share capital of which the final tranche of deferred consideration is capped at 30.5m NOK (£3.0m). Satellite operations in Denmark and Poland reported a strong recovery and in Finland revenues were up 34%. The recovery in France was reflected in increased revenues of 57%, albeit from a low base, reducing the prior year loss to broadly breakeven.

As has also been widely reported, the German economy was one of the strongest in Europe in the prior year and continued into the year ended 31 January 2012. The Group's operations in Germany represented 40% of the Group's European results, the largest single contribution outside of the UK. Recruitment growth was strong with gross profit up 33%. Demand for project based technology engineers employed by the Group was highest with freelance recruitment also good, driving the number of specialists on assignment up 23% year on year. Information and communication technology, manufacturing and export growth are driving client expansion and skills shortages are widespread.

Results from the Group's outsourcing locations in Nuremberg and Stuttgart exceeded expectations despite budgets which were lower than the previous year reflecting the legacy nature of the work done by the team in Stuttgart. New clients such as Texas Instruments and Deutsche Telekom are driving growth in rapidly evolving Small Cell Wireless Technology as well as the roll out of IP based landline networks.

We are pleased with the result of our strategic focus, both geographically in the Nordics and also successfully leveraging the demand for flexible labour at a time of uncertainty in the Euro zone combined with strong export led demand from the German economy. This continued demand for freelance labour is providing stability whilst demand for permanent staff is lower compared to the prior year.

United States

Revenue in the USA was up 7% at £36.7m (2011: £34.4m) and gross profit up 4% to £9.5m (2011: £9.1m). Operating profit was up 17% to £0.7m (2011: £0.6m).

The US recruitment market has been very challenging over the last two years. The Group's focus on offshoring and outsourcing has resulted in profitable growth when many US based recruitment companies have been reporting losses. This was reflected in much lower demand for permanent IT staff. However, in the final quarter of the year business sentiment began to improve and jobs and employment is once again increasing.

Outsourcing and offshoring grew strongly, increasing revenues by 56% year on year, a major factor contributing to the resilience of the Group's US business. Our managed services delivered from New York also increased revenues and contribution. Revenues and profits have doubled in Colorado and Illinois as recovery finally took hold in these markets.

The West Coast was slightly lower overall due to much higher comparatives and relatively strong demand throughout the recession particularly in Seattle, Washington. The East Coast offices, New York and New Jersey reported more modest growth as much of the client base is mainly in the financial services sector.

As the US economy seems to be following the classic recovery pattern whereby flexible and temporary labour demand lead the market for permanent technology appointments; we therefore expect improvement in demand for permanent staff to be the key feature of the coming year. Demand continues to grow and we are prudently increasing headcount to take advantage of the expected growth.

Summary

Once again we are delighted with an excellent result across all of our businesses, with organic led growth in revenues and profits increasing in all the major economies and geographies in which we operate. The first quarter has got off to a positive start when compared to budget and we believe that we are very well placed to make further progress as and when business sentiment improves.

Albert Ellis

Chief Executive Officer

30 April 2012

FINANCIAL REVIEW

Profit & Loss

Revenue and gross profit grew in each principal geographical region with strong organic growth in the Nordics and Germany in particular. Permanent revenue increased in the year by 23%, contracting revenue by 17%, outsourcing revenue by 4% and revenue from Managed Services by 41%. It was this change in the mix towards lower margin Managed Services, which caused the overall gross margin to fall to 14.7% (2011: 16.2%) The margins on contracting (14%) and outsourcing (30%) were stable. The growth in Managed Services revenue was strongest in the United Kingdom (114%), but it also grew in Mainland Europe (by 27%). Growth in permanent revenue was highest in the Nordics (37%), followed by the rest of mainland Europe (30%) and the United States (25%). It grew in mainland Europe (excluding the Nordics) owing mainly to strong growth in Germany and Switzerland. In the UK, permanent revenue grew by 9%.

Continued tight control of costs and further improvements in productivity resulted in a 41% increase in operating profit to £9.0m (2011: £6.4m). Net interest payable rose to £0.4m (2011: £0.2m) as a result of increased working capital caused by growth. Profit before tax rose by 35% to £8.5m (2011: £6.3m).

Taxation

The tax charge for the year was £2.6m (2011: £1.9m) giving an overall effective rate of tax of 30.3% (2011: 30.5%). This included an adjustment in respect of prior years of £0.1m (2011: £0.1m) and a deferred tax charge of £1.1m (2011: £0.4m) of which £0.6m related to a deferred tax liability on accrued revenue in respect of outsourcing contracts in Germany. The balance related to other timing differences plus the utilisation of brought forward losses. The overall effective rate of tax is a function of the mix of profits between the various countries in which the Group operates, with higher rates in the United States, Germany and Belgium being offset by lower rates in Ireland and Vietnam in particular.

Non controlling interest

The non controlling interest in the year represents the minority share of profit after tax of Bjerke & Luther AS and TechDiscovery LLC. Dividends to non controlling interests of £0.2m (2011: £0.2m) are payable in the second quarter.

Earnings per Share

Basic earnings per share rose by 36% to 7.97p (2011: 5.85p), while diluted earnings per share rose also rose by 36% to 7.86p (2011: 5.80p)

Key Performance Indicators

Productivity as measured by gross profit per employee rose during the year by 1.3% while adjusted operating profit per employee rose by 22.5%. The ratio of fee earners to non fee earners increased to 68% from 67%.

Average debtor days fell by 6.4%. Had debtor days remained the same at year end as prior year, then trade debtors would have been higher by £3.1m.

Balance Sheet

Net assets rose in the year by 4% to £63.5m (2011: £61.3m), while net tangible assets rose by 22.5% to £15.5m (2011: £12.6m). The net book value of tangible fixed assets at 31 January 2012 was £3.5m (2011: £4.0m). Additions during the year of £2.0m included expenditure of £0.7m on hardware and software incurred by Nash Technologies in Germany, rechargeable to clients. Other than the client-related capital expenditure in the German outsourcing business, expenditure was £1.0m, of which £0.6m was on computer equipment, £0.4m was on leasehold improvements, office equipment, furniture and fixtures. The deferred income tax asset fell by £0.5m to £2.0m mainly as a result of the utilisation of brought forward losses.

The carrying value of intangible assets at 31 January 2012 was £48.1m (2011: £48.7m) of which £1.0m related to the Alumni brand, £0.5m related to the Bjerke & Luther brand and the balance was goodwill. The reduction in goodwill was entirely as a result of exchange movements.

Net trade receivables rose to £78.2m (2011: £69.5m) as a result of higher revenue. Prepayments and accrued income rose by £6.7m owing mainly to an increase of £3.5m in accrued income in the Netherlands and £2.2m in accrued revenue in outsourcing contracts in Germany. Debtor days fell to 42.9 days (2011: 44.6 days). Trade payables rose to £48.2m (2011: £44.4m) as a result of increased trading, while accruals and deferred income rose to £32.0m (2011: £23.0m) as a result of accruals relating to Managed Services, principally in the Netherlands but also in the United Kingdom and Belgium. Provisions for liabilities and charges of £0.4m relate to property leases expiring in 2012, 2013, and 2014.

Cash Flow

There was a strong operating cash inflow in the year before changes in working capital of £11.3m (2011: £8.4m). Changes in working capital consumed £6.7m (2011: £1.6m inflow). Income tax paid was £2.8m and this included £1.0m of tax prepayments in Germany following the agreement of prior year tax computations by the tax authorities. Capital expenditure totalled £2.0m of which £1.0m related to client IT projects in the German outsourcing business. The balance of £1.0m related to investment in new offices in Manchester and Birmingham and catch up investment in IT equipment around the world following a reduction in investment during the downturn. Net interest paid was £0.4m and dividend payments totalled £2.1m (including £0.2m paid to non controlling interests). This resulted, after a foreign exchange loss of £0.3m, in a decrease in net cash during the year of £3.1m to £5.2m (2011: £8.3m). To aid transparency, net cash has been split into gross cash of £18.6m (2011: £15.6m) and gross borrowings of £13.4m (2011: £7.3m).

Banking Facilities

The Group continues to enjoy substantial headroom in relation to its banking facilities. At the balance sheet date these comprised invoice discounting and overdraft facilities for working capital in the UK of £22.0m and invoice discounting facilities in Europe of €18m and the United States of $6.0m. The invoice discounting facilities are available on a rolling annual basis. The Group has no term debt.

Acquisitions

As previously reported, on 29 April 2010 the Group acquired a 50.1% stake in Bjerke & Luther AS an executive search and selection company in Norway. The consideration comprised cash of Norwegian Kroner 18.5m (approximately £2.0m). In addition Harvey Nash has been granted a call option to acquire the additional 49.9% of the shares in Bjerke & Luther from the sellers which may be exercised between 1 February 2013 and 2 April 2013. The consideration for the acquisition of the additional shares shall be calculated on the same basis as the consideration for the initial shares, subject to a minimum aggregate consideration of NOK 11.5m (approximately £1.3 million) and a maximum of NOK 30.5m (approximately £3.4 million).

The value of the call option has been considered and at the balance sheet date, based on valuations in the Norwegian market, is deemed to reflect the fair value of the final consideration due should the remaining 49.9% be acquired and as such no asset has been recognised in respect of the option.

Richard Ashcroft

Group Finance Director

30 April 2012

Consolidated Income Statement

for the year ended 31 January 2012

Consolidated Statement of Comprehensive Income

for the year ended 31 January 2012

Consolidated Balance Sheet

as at 31 January 2012

Consolidated Statement of Changes in Equity

for the year ended 31 January 2012

* The movements in the Own shares held reserve relate to shares awarded from and purchased by the Employee Benefit Trust.

Consolidated Cash Flow Statement

for the year ended 31 January 2012

Notes

1. Basis of preparation

The financial information in this preliminary announcement has been extracted from the audited financial statements of the Group for the year ended 31 January 2012. The financial statements were approved by the board of directors on 27 April 2012 and are prepared in accordance with IFRS as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial information for the year ended 31 January 2011 has been extracted from the audited financial statements of the Group for that year which have been delivered to the Registrar of Companies. The auditors' report on the accounts for 2012 and 2011 were unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The basis of preparation of the financial information in both years presented is consistent with the accounting policies set out in the Group's statutory accounts for the year ended 31 January 2011. No additional standards or amendments to existing standards have been adopted by the Group with effect from 1 February 2011.

On the basis of enquiries made by the directors and in the light of current financial projections and facilities available, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial information.

2. Segment Information

IFRS 8 requires disclosure of information about the Group's operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. It requires a management approach under which segment information is presented on the same basis as that used for internal reporting purposes. The chief operating decision maker has been identified as the Group Board.

This has resulted in three reportable segments, UK and Ireland, Rest of Europe and United States. Asia Pacific is included in the UK and Ireland segment in line with the way the results are analysed by the Group Board.

The directors do not consider revenue by origin to be materially different from revenue by destination. Also all revenue is external and not inter-segment.

Services provided by each reportable segment are permanent recruitment, contracting and outsourcing.

The Group Board analyses segmental information as follows:

Revenue

Gross Profit

Operating Profit

Depreciation and amortisation charge

Within the Rest of Europe segment there is an amortisation charge of £73k (2011: £70k).

3. Income tax expense

4. Earnings Per Share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the employee share trust, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has two categories of potential ordinary shares: those share options granted to employees where the exercise price is less than the average price of the Company's ordinary shares during the year, and deferred consideration shares to be issued.

5. Provisions

Provisions relate to a dilapidations provision on a lease which expires in June 2012 and two onerous property leases which run to September 2013 and September 2014 respectively.

£287k will fall due within one year and £88k will be payable after more than one year.

6. Risk Management

The Board reviews the key risks facing the business regularly. Outlined below are the main risks that could potentially impact the Group's operating and financial performance:

·; Economic Environment

The performance of the Group is aligned to the underlying growth of the economies of the countries in which it operates. The group has a number of policies in place to mitigate macro economic risks. These include a unique portfolio of services appropriate to different stages of the economic cycle and a focus on annuity revenue streams which provide greater visibility of revenue. The Group has strengthened its balance sheet by increasing its net cash position.

·; Key ClientsThe risk of loss of a key client is lessened by the Group not being overly reliant on any one client. The Group also ensures that there are regular reviews of relationships with all clients.

·; TalentThe loss of senior management or key personnel could adversely affect the Group's results. This is mitigated by an ongoing talent management programme, sponsored by the Group's Executive Council and Group Director of Talent.

·; Technology

The Group relies on technology systems to provide services to clients and candidates. These systems a dependent on a number of suppliers that provide the technology infrastructure and disaster recovery solutions. The Group mitigates technology risks by conducting regular reviews of technology both externally with third party providers of IT services and internally.

·; Regulatory Environment

The recruitment industry is governed by an increasing level of compliance, which varies from country to country and market to market. The Group mitigates this risk by taking external professional advice where appropriate and maintaining robust internal controls and processes to ensure compliance with respect to legal and contractual obligations.

·; Foreign Exchange

The Group has significant operations outside the UK and is therefore exposed to movements in exchange rates. The Group's policy is to minimise foreign currency risk. Harvey Nash manages its exposure on equity investments in overseas subsidiaries through foreign currency borrowings. The currency risk of holding assets and liabilities in foreign currencies across the Group is managed by partially matching foreign currency assets with foreign currency liabilities.