Final Results
Pearson PLC
03 March 2003
3 March 2003
PEARSON PLC PRELIMINARY RESULTS
12 months ended 31 December 2002
Change - Change -
2002 2001 underlying headline
Sales £4,320m £4,225m 6% 2%
Business performance
Operating profit* £493m £426m 18% 16%
Profit before tax* £399m £294m 36%
Adjusted earnings per share 30.3p 21.4p 42%
Operating free cash flow £305m £236m 29%
Statutory results
Operating profit/ (loss) £143m £(47)m --
Loss before tax £(25)m £(436)m --
Loss per share (13.9)p (53.2)p --
Dividend per share 23.4p 22.3p 5%
Net borrowings £1,408m £2,379m 41%
*Continuing operations before goodwill, integration costs and non-operating
items.
Profit before tax includes discontinued operations.
Strong earnings rebound; good progress on cash and working capital
• Profit before tax up £105m as improved business performance and
reduced internet losses more than offset impact of advertising and technology
downturn and currency movements;
• Operating free cash flow up at £305m, boosted by working capital
improvement in book publishing businesses; return on invested capital rises;
• Professional and Higher Education businesses help Pearson
Education deliver 11% revenue growth and 22% profit growth in a slower year for
school textbook adoptions. NCS Pearson benefits from major new business wins and
establishes substantial pipeline of signed contracts;
• FT Group revenues 8% lower due to advertising downturn. Profits
8% higher with good contributions from IDC and Recoletos and lower internet
losses;
• Penguin increases revenues by 5% and profits by 11%, with market
share gains in UK and US and a £15m profit improvement from Dorling Kindersley.
Scope for further significant progress on earnings, cash and return on capital
in 2003
• Good prospects for profit growth from Pearson Education,
supported by better adoption opportunities for the School business;
• Outlook for the FT Group's non-advertising businesses remains
positive; business newspapers face an uncertain advertising environment but are
helped by further cost savings;
• Penguin expected to benefit from further profit improvement at
Dorling Kindersley.
Throughout this statement (unless otherwise stated):
1. Growth rates are given on an underlying basis, excluding the impact of
acquisitions, disposals and currency movements. In 2002, portfolio changes
increased revenues by £10m and reduced profits by £26m;
2. Adjusted figures are presented as additional measures, to provide a
better indicator of business performance. They are stated before goodwill,
integration costs and non-operating items. Goodwill is amortised over no more
than 20 years;
3. Figures are reported after internet enterprises;
4. 2001 numbers have been restated for FRS19, the new accounting standard
for deferred tax.
Marjorie Scardino, chief executive, said:
"Last year we increased earnings, generated more cash and improved our return on
capital, even though we faced an advertising recession far deeper than expected.
Our broadly-based education business and Penguin recorded good growth. We
performed competitively in each of our markets, while managing our costs tightly
and investing in new products to increase sales and new systems to boost
profits. While the economic environment is uncertain, we are confident we will
make further progress on earnings, cash and returns this year."
For more information:
UK: John Fallon/ Luke Swanson + 44 (0) 20 7010 2310
US: David Hakensen + 1 952 681 3040
Pearson's preliminary results presentation for investors and analysts will be
webcast live today from 0930 (GMT) and available for replay from 12 noon (GMT)
via www.pearson.com.
We will also be holding a conference call for US investors at 1500 (GMT)/ 1000
(EST). To participate in the conference call or to listen to the audiocast,
please register at www.pearson.com.
Video interviews with Marjorie Scardino and Rona Fairhead, finance director, are
also available at www.pearson.com.
High resolution photographs are available for the media at www.newscast.co.uk.
2002 overview
In 2002 sales increased by 6% to £4,320m and operating profit improved by £67m
to £493m, an increase of 18%. Adjusted earnings per share grew to 30.3p, a
headline increase of 42%. Operating free cash flow improved by £69m to £305m.
Average use of working capital improved by £53m in our book publishing
businesses, even as we increased investment in new authors, titles and
programmes.
On a statutory basis, Pearson reported a loss before tax for the year of £25m (a
£436m loss in 2001) and generated a loss per share of 13.9p (a loss per share of
53.2p in 2001). The loss includes a (non cash) goodwill charge of £340m. Net
borrowings fell by £971m to end the year at £1,408m. The board is recommending a
5% increase in the dividend to 23.4 pence per share.
Operational and strategic overview
All our businesses aim to prosper in an increasingly knowledge based economy by
helping people get on in, and make the most of, their lives. We do this in two
ways:
1. Publishing. We have market-leading businesses in educational, finance &
business and trade publishing
2. Services. We offer services to our customers that make our publishing
more valuable and take us into new, faster growing markets.
Each of our businesses has a sustainable market leading position. And each
benefits from being part of Pearson because they share brands, content,
technology, people, values and processes with other parts of the company.
Over the last few years, the transformation of Pearson has significantly
increased the capital invested in the business (in the form of the goodwill
associated with the acquisitions necessary to build our market leading
businesses) and required substantial cash investment to integrate those
acquisitions and to deliver an increasing proportion of our publishing and
services online.
With that transformation now largely complete, we are in a strong position to
deliver yearly progress in operating profit, operating free cash flow, and
return on invested capital. In spite of a further significant deterioration in
the global economy, which hit business and financial advertising particularly
hard, we made steady progress on each measure in 2002.
That progress was possible for three reasons:
1. Good competitive performances. We made significant share gains in
four of our biggest markets - college publishing, trade publishing, asset
valuation and government services - and more modest gains in most of our other
markets. The one exception was US school publishing, where the investment
allocation decisions we made shaved around half a percentage point off our
market share in 2002 but should enable us to gain a bigger market share, more
profitably, in 2003.
2. Tight cost controls. We reduced costs across our company,
especially in those markets (such as business & financial advertising and
technology publishing) which are suffering most in the global slowdown. We also
reduced losses from our internet enterprises by £78m.
3. Strong cash management. We maintained a high operating cash
conversion of 92%, well ahead of our 80% target, and improved our cash
utilisation by improving the management of our working capital throughout the
year.
At the same time, we ensured we could make further progress on our financial
goals in future years by investing approximately £250m in new product
development, which will sustain future top line growth, and a further £30m* in
new back office systems and processes that will improve our bottom line.
* This investment was split £20m: £10m between Pearson Education and Penguin.
We expect to expense a further £20 million through the P&L in 2003, delivering
£20 million in annual cost savings from 2005.
Operating review
Pearson Education
Change - Change - headline
£ millions 2002 2001 underlying
Sales
School 1,151 1,266 (5)% (9)%
Higher Education 775 721 13% 7%
Professional 784 558 48% 41%
FT Knowledge 46 59 (18)% (22)%
Total 2,756 2,604 11% 6%
Operating profit/(loss)
School 140 167 (15)% (16)%
Higher Education 142 127 17% 12%
Professional 81 80 8% 1%
Internet enterprises (25) (77) -- --
FT Knowledge (12) (23) -- --
Total 326 274 22% 19%
Note: This is a revised segmental analysis for Pearson Education, aimed at
making it easier for investors to track the performance of our largest division.
We will now report sales and profit on the basis of our three major global
markets - School, Higher Education and Professional - rather than on a
geographical basis. This year, we are also reporting the 2002 revenues in the '
old' segmental analysis, presented below:
Change - Change - headline
£ millions 2002 2001 underlying
Sales
US School 892 986 (6)% (10)%
US College 624 574 14% 9%
US Professional 645 417 79% 55%
International 549 568 (3)% (3)%
FT Knowledge 46 59 (18)% (22)%
Total 2,756 2,604 11% 6%
Underlying sales at Pearson Education increased 11% and profits 22%. Profits
were helped by a £52 million reduction in internet losses but offset by Pearson
Education's £20 million share of investment in new back-office systems and
processes and an £11m increase in pension contributions. NCS Pearson is now an
integral part of Pearson Education. On a standalone basis, revenues increased
42% to £843m and profits increased 46% to £92m.
In our School business (27% of Pearson's total revenues in 2002), sales were
down 5% and operating profits down 15%. In the US, our School business includes
publishing, testing and software operations. School publishing revenues were
down 6% due to the slower adoption cycle* and our decision to compete for just
65% of the available new adoption dollars. Our school imprints, Scott Foresman
and Prentice Hall, took a 23% share of the total new adoption market and a 36%
share of the adoptions in which we participated. We maintained our share of
open territory sales, which were down a little on the previous year. Overall,
our share of the US School publishing market was 24% (24.5% in 2001).
* In the US, 21 'adoption' states buy textbooks and related programmes to a
planned contract schedule, which means the level of spending varies from year to
year according to this schedule. The 'open territory' states are those that buy
textbooks on an as-needed basis rather than on a published adoption schedule.
After 13% growth in 2001, our school testing business grew by a further 3%. It
renewed and expanded two of its largest multi-year statewide contracts -
California and Ohio - as well as the National Assessment of Educational Progress
contract from the US Department of Education. It won new contracts in California
and six other states that will start to contribute to revenues in 2003. Revenues
were down 12% at our school software business, primarily due to the deferral of
a number of contracts into 2003, but losses fell as we outsourced more of our
software development needs. Late in the year we launched Concert, our integrated
curriculum and enterprise software platform for schools.
Outside the US, our school publishing businesses performed strongly in Hong
Kong, Japan, Singapore and Spain. Strong growth in English Language Teaching
sales in Europe and Asia was partially offset by some weakness in US and Latin
American markets.
Our Higher Education business (18% of Pearson's 2002 revenues) increased
revenues by 13% and operating profits by 17%. In the US the Higher Education
publishing business grew its revenues by 14%, ahead of market growth of 10% (8%
excluding Pearson). The business benefited from a booming college population,
its publishing and salesforce strength and its lead in making online services an
integral part of its products. These online services helped us continue to take
share from the used book market, increasing retention rates - the proportion of
backlist sales of a title we make compared to sales in its copyright year - by
several percentage points. Our custom publishing business, which produces text
books and course materials custom-made for individual college professors,
continued its rapid growth, with sales up 50% in the year (and 300% over the
past three years). Around the world, our Higher Education operations benefited
from the same trends we saw in the US, with a particularly strong performance in
Europe where revenues were up in double digits.
The Professional business (18% of 2002 revenues) increased sales by 48% and
profits by 8%. A major investment in 200 professional certification centres
across the US, along with a further decline in our higher-margin technology
publishing businesses, meant that profits grew considerably slower than
revenues. In the US, we helped the newly-formed Transportation Security
Administration to recruit 64,000 security personnel for US airports, a one-year
contract worth more than $300 million in revenues to our Government Solutions
business. A series of smaller, longer-term contract wins - with the Immigration
and Naturalization Service, the Department of Health and Human Services and the
US Department of Defense - give the business a strong pipeline for 2003 and
future years. Our professional certification centres opened for business in the
fourth quarter, with contracts to manage professional examinations for nurses
and clinical pathologists. With IT and technology markets continuing to be
bleak, sales at our technology publishing arm were down 12% in the US (following
a 20% fall in 2001) and margins declined, although due to further cost actions
they were still in double digits. In Europe, where technology publishing sales
were down more than 20% in 2002, we have taken similar actions to reduce costs.
Industry conditions for FT Knowledge were particularly tough as major
corporations continued to cut back their training budgets. Though sales were
down 18%, losses were reduced by £11 million as we scaled back the business. We
have now restructured FT Knowledge, integrating its financial training business
within the FT Group; combining its customized learning operations with our
government solutions business; and selling its remaining training arm early in
2003. These changes resulted in a non-cash non-operating charge of £40 million
in 2002.
The Penguin Group
Change - Change - headline
£ millions 2002 2001 underlying
Sales 838 820 5% 2%
Operating profit 87 80 11% 9%
The Penguin Group (19% of Pearson's 2002 revenues) increased sales by 5% and
operating profits by 11%, in spite of Penguin's £10 million share of our £30
million investment in new back office systems and processes.
In the US, Penguin published 24 titles that became New York Times number one
bestsellers, more than any other publisher and a 25% increase on 2001. In the
UK, Penguin posted its best performance on the bestseller lists for a decade as
45 titles reached the Neilsen Bookscan top 15, a 10% increase on 2001. This
strong performance enabled Penguin to gain share in both the US and the UK.
Dorling Kindersley increased sales by 8% and profits by £15 million as it
benefited from its integration within Penguin, the revitalisation of DK's
creative style and our investment in a stronger frontlist of key titles.
Pearson is now, by some distance, the world's largest book publisher and Pearson
Education and Penguin are working on a number of initiatives to maximise the
scale advantages that this brings.
At the start of 2003, we moved our Alpha imprint, publisher of the Idiot Guides
and other consumer - related titles from Pearson Education to Penguin. This
transfers approximately £19m of revenues and £8m of profits to Penguin.
Financial Times Group
Change - Change - headline
£ millions 2002 2001 underlying
Sales
FT Newspaper 202 250 (19)% (19)%
Other FT publishing 102 138 (14)% (26)%
(Les Echos & FT Business)
Internet enterprises* 48 51 (5)% (6)%
Recoletos 148 150 (4)% (1)%
Interactive Data Corporation 226 212 7% 7%
Total 726 801 (8)% (9)%
Operating profit / (loss)
FT Newspaper 1 31 (92)% (97)%
Other FT publishing 13 21 (39)% (38)%
(Les Echos & FT Business)
Associates & Joint Ventures (3) (10) 65% 70%
Internet enterprises* (34) (60) 46% 43%
Recoletos 29 23 21% 26%
Interactive Data Corporation 74 67 12% 10%
80 72 8% 11%
Total
* The FT Group's internet enterprises include online businesses related to the
FT, Les Echos,
Recoletos, FT Deutschland, The Economist, IDC and CBSMarketWatch.
The Financial Times Group (17% of 2002 revenues) saw revenues fall £75 million
(8%) as the global economic downturn continued to hit advertising revenues and,
to a much lesser extent, newsstand sales. Despite the revenue decline, operating
profits increased 8% to £80 million due to double digit profit growth at IDC and
Recoletos (the FT Group's two businesses least affected by the downturn),
successful cost reduction programmes across the group, and sharply lower
internet losses of £34 million (down from £60 million in 2001). Excluding the
benefit of lower internet losses, the FT Group's profits declined by 14% to £114
million.
The Financial Times newspaper and its internet partner, FT.com, are now fully
integrated. A 14% reduction in their combined cost base mitigated - but could
not offset - a sharp reduction in advertising revenues at the newspaper. A
further advertising deterioration in the second half, together with some one-off
costs, meant that, although the newspaper remained in profit for the full year,
it operated at a loss in the second half. Industry conditions remained tough for
FT's major advertising categories, including financial services, technology and
business to business. Advertising volumes fell by 24% (on top of a 29% fall in
2001) and advertising revenues by 23% (after a 20% decline in 2001). The
newspaper ended the year with average daily circulation of 473,587, a decline of
6% on the previous year primarily due to lower sales in the UK.
FT.com broke even in the fourth quarter of 2002. Revenues were up 9% to £25
million. Despite the introduction of paid-for elements of the site, FT.com's
popularity continued to grow, up 30% to a record 3.5 million unique monthly
users in January 2003.
Les Echos made a profit of £7 million (down 34% on 2001) as advertising revenues
fell sharply. Average daily circulation was 121,000, a 6% decline, but well
ahead of its market. FT Business delivered double digit margins as its major
titles - Investors Chronicle, The Banker and Financial Adviser - all
strengthened their market positions.
Losses from the FT's associates and joint ventures were less than half the level
of the previous year due to continued progress at FT Deutschland, our joint
venture with Gruner + Jahr. Despite the tough German advertising market, FT
Deutschland grew its advertising revenues slightly and increased its circulation
by 14% to 89,000 at the end of the year. The Economist Group, in which Pearson
owns a 50% interest, offset falling advertising revenues with tight cost
controls. The Economist's worldwide weekly circulation grew by 6% to 881,259.
Recoletos (Bolsa Madrid: REC), our Spanish media group, increased profits by
21%, benefiting from actions taken in 2001 to reduce costs. After a successful
re-launch Marca, Spain's leading sports newspaper, grew its circulation by 2% to
382,000 and increased advertising revenues and profits. Circulation at business
newspaper Expansion was 9% lower and advertising revenues 25% lower.
Interactive Data Corporation (NYSE: IDC), our 60%-owned asset pricing business,
increased revenues by 7% as contract renewal rates in its institutional business
- which accounts for 90% of revenues - continued to run at 95%. IDC also
benefited from the launch of several new products and the integration of Merrill
Lynch's Securities Pricing business, the latest in a series of successful
bolt-on acquisitions. In January 2003, IDC announced the acquisition of S&P
Comstock, which adds real-time pricing to IDC's existing end-of-day services.
Outlook
In 2003 we expect to make further significant progress in improving adjusted
earnings per share (even at current exchange rates*), operating free cash flow
and return on invested capital.
Clearly, some caution would be necessary in the event of further substantial
deterioriation in the global economy. At this stage, the outlook for our major
businesses is:
• In Pearson Education, we expect further progress on profits in 2003 as our
School business returns to growth (helped by the fact that it is competing
for over 80% of the adoption market, compared to 65% in 2002) and our Higher
Education business continues to gain share of a growing market. We expect
revenues to fall at our Professional business, due to the absence of the
one-year TSA contract.
• Penguin aims to grow underlying revenues a little ahead of its market and
improve its margins, even though it faces tough comparisons after a record
year in 2002.
• At the FT Group, we are managing our business newspapers on the basis that
there will be no advertising recovery in 2003. We will continue to benefit
from the actions taken to reduce costs and will make some modest investments
to ensure that our business newspapers are well positioned to benefit from
any advertising upturn. We expect IDC to deliver substantial revenue and
profit growth.
* Pearson generates approximately 70% of its revenues in the US, and a five cent
change in the average exchange rate for the full year (which in 2002 was £1:
$1.51) will have an impact of approximately 1p on reported adjusted earnings per
share.
Financial review
Revenues increased 2% to £4,320m - an increase of 6% on an underlying basis -
even though the advertising recession drove sales from our business newspapers
down a further £70m.
Operating profits from continuing operations in 2002 increased to £493m, an
underlying growth rate of 18%.
Loss before tax
Almost entirely as a result of our (non-cash) goodwill amortisation charge, we
continue to show an overall loss for the financial year of £25m, an improvement
of £411m on 2001.
Operating free cash flow improved by £69m to £305m, helped by a £18m improvement
from operating businesses and £51m from lower tax and interest charges. Cash
conversion - the proportion of our operating profit we turn into cash - was 92%,
above our 80% target.
Goodwill amortisation
Goodwill is a balance sheet item which represents the difference between the
price paid for acquisitions and the fair value of the assets acquired. Pearson
amortises goodwill to the profit and loss account over the estimated useful life
of the acquisition or a period of 20 years whichever is the shorter. The
goodwill amortisation charge fell by £45m last year to £330m, reflecting the
impact of the RTL disposal.
Goodwill impairment
Goodwill is subject to an impairment review at the end of the first full year
following an acquisition and at any other time if events or changes in
circumstances indicate that the carrying value may not be recoverable. In 2002
we took a £10 million impairment charge relating to a subsidiary of Recoletos in
Argentina.
Integration costs
Integration costs are the one-off costs of integrating significant recent
acquisitions into our existing businesses. In 2002 £3m was incurred in
integrating Dorling Kindersley into the Penguin Group (compared to £45m in 2001)
and £7m related to the integration of NCS into Pearson Education (compared to
£29m in 2001). This expenditure was in line with our forecasts at the time of
the transactions and there will be no further charges in respect of these
acquisitions in 2003. All other restructuring and related costs are expensed
through the P&L as part of the ongoing operations of our businesses.
Non-operating items
In 2002, we took a charge of £37m for non-operating items relating to losses on
the sale or closure of businesses and fixed assets. The principal items are a
profit of £18m relating to the completion of the sale of RTL in January 2002 and
a provision of £40m for the loss on sale of our Forum business, which completed
in January 2003. This provision largely relates to unamortised goodwill at the
balance sheet date. Other items include a loss on sale of PH Direct of £8m, a
profit of £3m on finalisation of the sale of Journal of Commerce by the
Economist and various smaller losses on investments and property.
Amounts written off investments
In 2002, we continued to review our fixed asset investments and concluded that
there have been no further material impairments. This compares to a charge of
£92m taken in 2001 relating to the carrying value of Pearson shares held to
secure employee share option plans and equity investments in a number of
internet businesses.
Interest
Net interest charges fell by £75m to £94m, with average net debt decreasing by
£748m following the receipt of proceeds from the RTL disposal. Interest was
further reduced by the effect of a general fall in interest rates during the
year. The weighted average three month LIBOR rate, reflecting the Group's
borrowings in US dollars, euros, and sterling, fell by 160 basis points, or
1.6%. The effect of these falls was mitigated by our existing portfolio of
interest rate swaps, which converted over half our variable rate commercial
paper and bank debt to a fixed rate basis. As a result, the Group's net interest
rate payable averaged approximately 5.0%, falling 1.4% from the previous year.
During 2002 we took an additional one off charge of £37m for cancellation of
certain swap contracts and the early repayment of debt following re-balancing of
the group's debt portfolio on the receipt of the RTL proceeds.
Taxation
The Group recorded a total pre-tax loss of £25m in 2002 but there was a tax
charge for the year of £64m. This situation reflects the fact that there is only
limited tax relief available for the goodwill amortisation charged in the
accounts. The total tax charge was in fact reduced by a non-operating credit of
£45m attributable to the resolution of the tax position on the disposal of the
group's remaining interest in BSkyB.
The tax charge reflects the adoption of FRS 19 "Deferred Tax". FRS 19 requires
full provisioning for deferred tax and this has had a significant effect on
Pearson's effective tax rate. This is mainly because Pearson has recognised a
deferred tax asset in respect of US tax losses and other timing differences.
Previously the tax benefit of US tax losses was accounted for as the losses were
utilised. FRS 19 has been adopted in these accounts and the comparative figures
have been restated.
The tax rate on adjusted earnings, after restating for FRS 19, decreased from
34.0% to 32.8%. The decrease was attributable to two main factors. There was a
more favourable mix of profits between higher and lower tax regimes than in
2001; in addition there was a benefit from prior year adjustments.
Minority interests
Minority interests include a 40% minority share in IDC and a 21% minority share
in Recoletos.
Dividends
The dividend payment of £187m which we are recommending in respect of 2002
represents 23.4p per share - a 5% increase on 2001. The dividend is covered 1.3
times by adjusted earnings, and 1.6 times by operating free cash flow. The
company seeks to maintain a balance between the requirements of our
shareholders, including our many private shareholders, for a rising stream of
dividend income and the re-investment opportunities that we see across the
Group. This balance has been expressed in recent years as a commitment to
increase our annual dividend faster than the prevailing rate of inflation while
progressively reinvesting a higher proportion of our distributable earnings in
our business. While this commitment remains unchanged, we believe that the
income requirements of our shareholders should take priority over reinvestment
this year.
Pensions
Pearson operates a variety of pension schemes. Of the schemes, the UK fund is
the most significant. In 2001, after a full actuarial valuation, the company
resumed cash contributions to its UK Pension Fund (a £1bn fund) following a
prolonged 'holiday' period. At that time, this resulted in the scheme having a
small surplus of £40m. Although the next full actuarial valuation is not due
until 2004, the funding level is kept under regular review by the company and
the Fund trustees. After an informal indication in 2002, and taking account of
current stock market conditions, the company decided to increase contributions
by £5m to £25m in 2003 ahead of the full valuation in 2004. This was designed
to keep the scheme fully funded.
We have included additional disclosure in respect of FRS 17 (Retirement
Benefits) for pensions and other post retirement benefits in accordance with
that standard. The mandatory implementation of FRS 17 has been postponed and is
now not required to be implemented before adoption of International Accounting
Standards in 2005. FRS 17 approaches pension cost accounting from a balance
sheet perspective with the net surplus or deficit in Pearson's pension schemes
being incorporated into the balance sheet. Changes in this surplus or deficit
will flow through the profit and loss account and the statement of total
recognised gains and losses.
ENDS
Except for the historical information contained herein, the matters discussed in
this press release include forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from those
predicted by such forward-looking statements. These risks and uncertainties
include international, national and local conditions, as well as competition.
They also include other risks detailed from time to time in the company's
publicly-filed documents, including the company's Annual Report on form 20-F.
The company undertakes no obligation to publicly update any forward looking
statement, whether as a result of new information, future events or otherwise.
Consolidated Profit and Loss Account
for the year ended 31 December 2002
-------------------2002-------------- --------------2001------------------
(restated)
Results Results
from from
oper- Other oper- Other
all figures in £ millions Note ations items Total ations items Total
Sales (including share of joint 4,331 - 4,331 4,240 - 4,240
ventures)
Less: share of joint ventures (11) - (11) (15) - (15)
Sales 2a 4,320 - 4,320 4,225 - 4,225
Group operating profit 496 (302) 194 444 (424) 20
Share of operating (loss)/profit of
joint ventures
and associates 2c (3) (48) (51) 19 (86) (67)
Total operating profit/(loss) 2b 493 (350) 143 463 (510) (47)
Loss on sale of fixed assets and 3 - (13) (13) - (12) (12)
investments
Loss on sale of subsidiaries and 4 - (27) (27) - (63) (63)
associates
Profit/(loss) on sale of subsidiaries
and associates
by an associate 5 - 3 3 - (53) (53)
Non operating items - (37) (37) - (128) (128)
Profit/(loss) before interest and 493 (387) 106 463 (638) (175)
taxation
Amounts written off investments - - - - (92) (92)
Net finance costs 6 (94) (37) (131) (169) - (169)
(Loss)/profit before taxation 399 (424) (25) 294 (730) (436)
Taxation 8 (131) 67 (64) (100) 133 33
(Loss)/profit after taxation 268 (357) (89) 194 (597) (403)
Equity minority interests (27) 5 (22) (24) 4 (20)
(Loss)/profit for the financial year 241 (352) (111) 170 (593) (423)
Dividends on equity shares 9 (187) (177)
Loss retained (298) (600)
Adjusted earnings per share 7 30.3p 21.4p
Loss per share 7 (13.9)p (53.2)p
Diluted loss per share 7 (13.9)p (53.2)p
Dividends per share 9 23.4p 22.3p
There is no difference between the loss before taxation and the retained loss
for the year stated above and their historical cost equivalents.
The 2001 comparatives have been restated for the adoption of FRS19 (see note 8).
Consolidated Balance Sheet
as at 31 December 2002
2002 2001
all figures in £ millions Note (restated)
Fixed assets
Intangible assets 3,610 4,193
Tangible assets 503 542
Investments: joint ventures
Share of gross assets 7 8
Share of gross liabilities - (1)
7 7
Investments: associates 106 893
Investments: other 84 84
4,310 5,719
Current assets
Stocks 734 849
Debtors 1,057 1,005
Deferred taxation 174 272
Investments 2 3
Cash at bank and in hand 575 393
2,542 2,522
Creditors - amounts falling due within one year
Short term borrowing (249) (165)
Other creditors (1,114) (1,203)
(1,363) (1,368)
Net current assets 1,179 1,154
Total assets less current liabilities 5,489 6,873
Creditors - amounts falling due after more than one year
Medium and long term borrowing (1,734) (2,607)
Other creditors (60) (54)
(1,794) (2,661)
Provisions for liabilities and charges (165) (239)
Net assets 3,530 3,973
Capital and reserves
Called up share capital 11 200 200
Share premium account 11 2,465 2,459
Profit and loss account 11 673 1,138
Equity shareholders' funds 3,338 3,797
Equity minority interests 192 176
3,530 3,973
Consolidated Statement of Cash Flows
for the year ended 31 December 2002
2002 2001
all figures in £ millions Note
Net cash inflow from operating activities 12 529 490
Dividends from joint ventures and associates 6 25
Interest received 11 31
Interest paid (151) (187)
Debt issue costs - (1)
Dividends paid to minority interests (1) (9)
Returns on investments and servicing of finance (141) (166)
Taxation (55) (71)
Purchase of tangible fixed assets (126) (165)
Sale of tangible fixed assets 7 36
Purchase of investments (21) (35)
Sale of investments 3 22
Capital expenditure and financial investment (137) (142)
Purchase of subsidiary undertakings (87) (128)
Net cash acquired with subsidiary undertakings 1 83
Purchase of joint ventures and associates (40) (26)
Sale of subsidiary undertakings 3 41
Net cash disposed with subsidiary undertakings (1) -
Sale of associates 920 1
Acquisitions and disposals 796 (29)
Equity dividends paid (181) (174)
Net cash inflow/(outflow) before management of liquid
resources and financing 817 (67)
Liquid resources acquired (65) (48)
Collateral deposit reimbursed 22 47
Management of liquid resources (43) (1)
Issue of equity share capital 6 20
Capital element of finance lease rentals (5) (7)
Loan facility repaid (507) (521)
Bonds (repaid)/advanced (167) 507
Collateral deposit reimbursed 17 -
Net movement in other borrowings (7) 3
Financing (663) 2
Increase/(decrease) in cash in the year 111 (66)
2002 results
The preliminary results for the year ended 31 December 2002 have been extracted
from audited accounts which have not yet been delivered to the Registrar of
Companies. The 2001 accounts carry an unqualified audit report and have been so
delivered. The 2002 Annual Report will be posted to shareholders on Tuesday 25
March 2003.
Dividend
The directors recommend a final dividend of 14.3p per share, payable on Friday 9
May 2003 to shareholders on the register at the close of business on Friday 14
March 2003.
Annual General Meeting
The AGM will be held at The Queen Elizabeth II Conference Centre, Broad
Sanctuary, Westminster, London, SW1P 3EE, at 12 noon on Friday 25 April 2003.
Statement of Total Recognised Gains and Losses
for the year ended 31 December 2002
2002 2001
all figures in £ millions (restated)
Loss for the financial year (111) (423)
Other net gains and losses recognised in reserves:
Currency translation differences (317) 26
Taxation on currency translation differences - UK 5 (6)
Total recognised losses relating to the year (423) (403)
Prior year adjustment - FRS 19 209
Total recognised losses (214)
Reconciliation of Movements in Equity Shareholders' Funds
for the year ended 31 December 2002
2002 2001
all figures in £ millions (restated)
Loss for the financial year (111) (423)
Dividends on equity shares (187) (177)
(298) (600)
Currency translation differences (net of taxation) (312) 20
Goodwill written back on sale of subsidiary undertakings and associates 144 37
Goodwill written back on sale of subsidiary undertakings and associates by an
associate - 36
Shares issued 6 18
Replacement options granted on acquisition of subsidiary 1 2
Net movement for the year (459) (487)
Equity shareholders' funds at beginning of the year 3,797 4,044
Prior period adjustment - FRS 19 - 240
Equity shareholders' funds at end of the year 3,338 3,797
Notes to the 2002 Results
for the year ended 31 December 2002
1. Basis of preparation
The results for the year ended 31 December 2002 have been prepared in accordance
with the accounting policies set out in the 2001 Annual Report, except that
FRS19 'Deferred Tax' has been adopted. The effect of this change in accounting
policy is disclosed in note 8.
2a. Sector analysis - sales
-------------- 2002 --------------- ------------------ 2001 ------------------
Sales before Internet Sales Sales before Internet Sales
internet internet
enterprises enterprises enterprises enterprises
all figures in £ millions
Business sectors
Pearson Education 2,752 4 2,756 2,596 8 2,604
FT Group 678 48 726 750 51 801
The Penguin Group 838 - 838 820 - 820
Continuing operations 4,268 52 4,320 4,166 59 4,225
Geographical markets supplied
United Kingdom 395 16 411 423 10 433
Continental Europe 413 6 419 438 8 446
North America 3,110 29 3,139 2,936 39 2,975
Asia Pacific 248 1 249 239 2 241
Rest of world 102 - 102 130 - 130
Continuing operations 4,268 52 4,320 4,166 59 4,225
2b. Sector analysis - operating profit/(loss)
------------------------------------------ 2002 ---------------------------------------
Results from Internet Results Integration Goodwill Goodwill Operating
operations enterprises from costs amortisation impairment profit
before internet operations
all figures in £ enterprises
millions
Business sectors
Pearson Education 351 (25) 326 (7) (244) - 75
FT Group 114 (34) 80 - (65) (10) 5
The Penguin Group 87 - 87 (3) (18) - 66
Continuing 552 (59) 493 (10) (327) (10) 146
operations
Discontinued - - - - (3) - (3)
operations
552 (59) 493 (10) (330) (10) 143
2b. Sector analysis - operating profit/(loss) (continued)
----------------------------------------- 2002 ---------------------------------
Results from Internet Results Integration Goodwill Goodwill Operating
operations enterprises from costs amortisation impairment profit
before internet operations
all figures in £ enterprises
millions
Geographical
markets
supplied
United Kingdom (37) (35) (72) (5) (25) - (102)
Continental Europe 41 (1) 40 - (8) - 32
North America 518 (23) 495 (5) (288) - 202
Asia Pacific 31 - 31 - (6) - 25
Rest of world (1) - (1) - - (10) (11)
Continuing 552 (59) 493 (10) (327) (10) 146
operations
Discontinued - - - - (3) - (3)
operations
552 (59) 493 (10) (330) (10) 143
--------------------------------------------- 2001 ----------------------------------
(restated)
Results from Internet Results Integration Goodwill Goodwill Operating
operations from
before enterprises operations costs amortisation impairment loss
internet
all figures in £ enterprises
millions
Business sectors
Pearson Education 351 (77) 274 (29) (254) (8) (17)
FT Group 132 (60) 72 - (67) (3) 2
The Penguin Group 80 - 80 (45) (19) (50) (34)
Continuing 563 (137) 426 (74) (340) (61) (49)
operations
Discontinued 37 - 37 - (35) - 2
operations
600 (137) 463 (74) (375) (61) (47)
Geographical
markets supplied
United Kingdom 16 (53) (37) (33) (27) (55) (152)
Continental Europe 55 (10) 45 - (6) - 39
North America 470 (73) 397 (41) (302) (3) 51
Asia Pacific 24 - 24 - (4) - 20
Rest of world (2) (1) (3) - (1) (3) (7)
Continuing 563 (137) 426 (74) (340) (61) (49)
operations
Discontinued 37 - 37 - (35) - 2
operations
600 (137) 463 (74) (375) (61) (47)
Note: Internet enterprises consist of the Group's discrete internet operations,
including FT.com and Family Education Network. Integration costs in 2002 and
2001 include costs in respect of the Dorling Kindersley and National Computer
Systems acquisitions. In 2002, the goodwill impairment charge of £10m relates
to the impairment of goodwill arising on acquisition of subsidiaries.
Discontinued operations relate to the withdrawal of the Group from the
television business following the disposal of its 22% interest in the RTL Group
in January 2002. Analyses of the profits of joint ventures and associates are
shown in note 2c.
2c. Sector analysis - share of operating loss of joint ventures and
associates
Joint ventures ---------------------------------------- 2002 --------------------------------
Results from Internet Results Integration Goodwill Goodwill Operating
operations before enterprises from costs amortisation impairment profit
internet operations
all figures in £ enterprises
millions
Pearson Education (1) - (1) - - - (1)
FT Group (13) - (13) - - - (13)
The Penguin Group 1 - 1 - - - 1
(13) - (13) - - - (13)
Joint ventures ------------------------------------ 2001 ----------------------------------
restated
Results from Internet Results Integration Goodwill Goodwill Operating
operations before enterprises from costs amortisation impairment profit
internet operations
all figures in £ enterprises
millions
Pearson Education - - - - - - -
FT Group (20) - (20) - - - (20)
The Penguin Group 1 - 1 - - - 1
(19) - (19) - - - (19)
Associates --------------------------------- 2002 ---------------------------------
Results from Internet Results Integration Goodwill Goodwill Operating
operations enterprises from costs amortisation impairment profit
before internet operations
all figures in £ enterprises
millions
Pearson Education 3 - 3 - (1) - 2
FT Group 10 (3) 7 - (44) - (37)
The Penguin Group - - - - - - -
Continuing operations 13 (3) 10 - (45) - (35)
Discontinued - - - - (3) - (3)
operations
13 (3) 10 - (48) - (38)
Associates --------------------------------- 2001 ----------------------------------------
Results from Internet Results Integration Goodwill Goodwill Operating
operations enterprises from costs amortisation impairment profit
before operations
all figures in £ internet
millions enterprises
Pearson Education 3 - 3 - (1) (3) (1)
FT Group 8 (10) (2) - (47) - (49)
Continuing operations 11 (10) 1 - (48) (3) (50)
Discontinued 37 - 37 - (35) - 2
operations
48 (10) 38 - (83) (3) (48)
3. Loss on sale of fixed assets and investments
all figures in £ millions 2002 2001
Continuing operations:
Net loss on sale of property (3) (2)
Net loss on sale of investments (10) (10)
(13) (12)
Taxation 6 1
4. Loss on sale of subsidiaries and associates
2002 2001
all figures in £ millions (restated)
Continuing operations:
Loss on sale of Forum (40) -
Loss on sale of PH Direct (8) -
Loss on sale of iForum - (27)
Net profit/(loss) on sale of other businesses and associates 3 (36)
(45) (63)
Discontinued operations:
Profit on sale of the RTL Group 18 -
(27) (63)
Taxation (6) 4
5. Profit/(loss) on sale of subsidiaries and associates by an
associate
all figures in £ millions 2002 2001
Continuing operations:
Profit/(loss) on sale of Journal of Commerce 3 (36)
3 (36)
Discontinued operations:
Loss on sale of subsidiaries and
associates by the RTL Group - (17)
3 (53)
6. Net finance costs
all figures in £ millions 2002 2001
Net interest payable (94) (169)
Early repayment of debt and termination of swap contracts (37) -
(131) (169)
7. Earnings/(loss) per share
In order to show results from operating activities on a comparable basis, an
adjusted earnings per share is presented which excludes certain items as set out
below. The company's definition of adjusted earnings per share may not be
comparable to other similarly titled measures reported by other companies.
2001
2002 (restated)
£m £m
Loss for the financial year (111) (423)
Adjustments:
Non operating items 37 128
Goodwill amortisation 330 375
Goodwill impairment 10 61
Integration costs 10 74
Amounts written off investments - 92
Other net finance costs 37 -
Taxation on above items (67) (133)
Minority interest share of above items (5) (4)
Adjusted earnings 241 170
Weighted average number of shares (millions)
- for earnings and adjusted earnings 796.3 795.4
Effect of dilutive share options - -
Weighted average number of shares (millions)
- for diluted earnings 796.3 795.4
Adjusted earnings per share 30.3p 21.4p
Loss per share (13.9)p (53.2)p
Diluted loss per share (13.9)p (53.2)p
In 2002 and 2001 the Group made a loss for the financial year (after taking into
account goodwill amortisation), consequently the effect of share options is
anti-dilutive and there is no difference between the loss per share and the
diluted loss per share.
8. Taxation
The tax rate provided in the profit and loss account is analysed as follows:
2002 2001
all figures in percentages (restated)
United Kingdom tax rate 30.0 30.0
Effect of overseas tax rates 2.8 4.5
Other items - (0.5)
Tax rate reflected in adjusted earnings 32.8 34.0
The taxation (charge)/benefit is analysed as:
2002 2001
all figures in £ millions (restated)
Parent and subsidiaries (60) 48
Joint ventures and associates (4) (15)
(64) 33
Note: FRS 19 'Deferred Tax' has been adopted for the first time in these
financial statements. Pearson previously provided deferred tax using the
liability method under SSAP 15 and only recognised deferred tax liabilities to
the extent that it was probable that the liabilities would crystallise.
Deferred tax assets were only recognised to the extent that their recoverability
was assured beyond reasonable doubt. Under FRS 19 the recognition criteria for
deferred tax assets has changed with the result that Pearson has recognised a
deferred tax asset in respect of US tax losses and other timing differences that
are regarded as recoverable against future taxable profits. The adoption of
FRS19 has also had an impact on capitalised goodwill since the restatement of
deferred tax balances acquired has had a corresponding effect upon the goodwill
recognised on those acquisitions. A prior year adjustment has been made in
these financial statements to reflect the adoption of FRS 19 and comparative
figures have been restated. The impact on the profit and loss account for the
year ended December 2002 has been to increase the loss after taxation by £45
million (£50 million relating to the tax charge and £5 million reduction to
goodwill amortisation) and to increase opening shareholders' funds by £209
million. The effect on the loss after taxation for the year ended December 2001
was to increase the loss by £32 million.
9. Dividends
2002 2002 2001 2001
Pence per Pence per
share £m share £m
Interim paid 9.1 72 8.7 68
Final proposed 14.3 115 13.6 109
Dividends for the year 23.4 187 22.3 177
10. Exchange rates
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant rates are as
follows:
-- £ versus US$ ---
2002 2001
Average for operating profits 1.51 1.44
Year end rate 1.61 1.46
11. Equity shareholders' funds
(restated)
Profit
Share Share and loss
all figures in £ millions capital premium account Total
At 31 December 2001 200 2,459 929 3,588
Prior year adjustment - - 209 209
200 2,459 1,138 3,797
Exchange differences - - (312) (312)
Premium on issue of shares - 6 - 6
Goodwill written back on disposal of subsidiary undertakings and - - 144 144
associates
Replacement options granted on acquisition of subsidiary - - 1 1
Loss retained for the year - - (298) (298)
At 31 December 2002 200 2,465 673 3,338
12. Note to consolidated statement of cash flows
2002 2001
all figures in £ millions (restated)
Reconciliation of operating profit/(loss) to net cash
inflow from operating activities
Operating profit/(loss) - total 143 (47)
Share of loss of joint ventures and associates 51 67
Depreciation charge 122 125
Goodwill amortisation and impairment 292 350
Decrease/(increase) in stocks 43 (6)
(Increase)/decrease in debtors (111) 102
Increase/(decrease) in creditors 64 (103)
(Decrease)/increase in operating provisions (50) 3
Other and non-cash items (25) (1)
Net cash inflow from operating activities 529 490
Dividends from joint ventures and associates 6 25
Purchase of tangible fixed assets (126) (165)
Capital element of finance leases (5) (7)
Proceeds from sale of tangible fixed assets 7 36
Add back: Non operating fixed asset disposal proceeds - (11)
Add back: Cash spent against integration and fair value provisions 44 69
Operating cashflow 455 437
Operating tax paid (46) (44)
Operating finance charges (104) (157)
Operating free cashflow 305 236
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