Final Results - Part 3

Pearson PLC 5 March 2001 PART 3 Notes to the 2000 Results for the year ended 31 December 2000 1. Basis of preparation ______________________________________________________________________________ The results for the year ended 31 December 2000 have been prepared in accordance with the accounting policies set out in the 1999 Annual Report except that FRS16 'Current Tax' has been adopted and hence comparative figures have been restated to reflect that UK dividend income is now presented net of UK tax credits. In 1999 the taxation charge has been reduced by £3m and profit on the sale of fixed assets and investments has also been reduced by £3m. FRS15 'Tangible Fixed Assets' has also been adopted. 2a. Sector analysis - sales ______________________________________________________________________________ ------- 2000 ------- -------- 1999 ------- Internet Internet enter- Total enter- Total all figures in £ millions Sales prises sales Sales prises sales ___________________________________________________________________________ Business sectors Pearson Education 2,087 3 2,090 1,725 - 1,725 FT Group 802 42 844 680 7 687 The Penguin Group 755 - 755 565 - 565 Television 185 - 185 355 - 355 ___________________________________________________________________________ Continuing operations 3,829 45 3,874 3,325 7 3,332 ___________________________________________________________________________ Geographical markets supplied United Kingdom 520 13 533 539 5 544 Continental Europe 459 7 466 516 2 518 North America 2,504 24 2,528 1,990 - 1,990 Asia Pacific 229 1 230 200 - 200 Rest of world 117 - 117 80 - 80 ___________________________________________________________________________ Continuing operations 3,829 45 3,874 3,325 7 3,332 ___________________________________________________________________________ 2b. Sector analysis - operating profit ______________________________________________________________________________ ---------------- 2000 --------------- Operating Results from Internet Integ- Goodwill Operating operat- enter- gration amort- Profit all figures in £ millions ions prises costs isation ___________________________________________________________________________ Business sectors Pearson Education 320 (83) (13) (157) 67 FT Group 211 (113) - (53) 45 The Penguin Group 79 - (27) (14) 38 Television 68 - - (15) 53 ___________________________________________________________________________ Continuing operations 678 (196) (40) (239) 203 Discontinued operations 8 - - - 8 ___________________________________________________________________________ 686 (196) (40) (239) 211 ___________________________________________________________________________ 2b. Sector analysis - operating profit (continued) ______________________________________________________________________________ ---------------- 2000 ---------------- Results from Internet Integ- Goodwill Operat- operat- enter- ration amort- ing all figures in £ millions ions prises costs isation profit ___________________________________________________________________________ Geographical markets supplied United Kingdom 89 (90) (16) (22) (39) Continental Europe 124 (8) - (14) 102 North America 405 (97) (21) (203) 84 Asia Pacific 26 - (3) - 23 Rest of world 34 (1) - - 33 ___________________________________________________________________________ Continuing operations 678 (196) (40) (239) 203 Discontinued operations 8 - - - 8 ___________________________________________________________________________ 686 (196) (40) (239) 211 ___________________________________________________________________________ ------------------- 1999 -------------------- Results from Internet Integ- Year Goodwill Operat- operat- enter- ration 2000 amort- ing all figures in £ millions ions prises costs costs isation profit ___________________________________________________________________________ Business sectors Pearson Education 257 (3) (95) (2) (121) 36 FT Group 150 (36) - (2) (9) 103 The Penguin Group 65 - - (1) - 64 Television 68 - - - (1) 67 ___________________________________________________________________________ Continuing operations 540 (39) (95) (5) (131) 270 Discontinued operations 48 - - - - 48 ___________________________________________________________________________ 588 (39) (95) (5) (131) 318 ___________________________________________________________________________ Geographical markets supplied United Kingdom 46 (34) (14) (2) - (4) Continental Europe 110 (1) (2) - (4) 103 North America 340 (4) (72) (3) (127) 134 Asia Pacific 29 - (6) - - 23 Rest of world 15 - (1) - - 14 ___________________________________________________________________________ Continuing operations 540 (39) (95) (5) (131) 270 Discontinued operations 48 - - - - 48 __________________________________________________________________________ 588 (39) (95) (5) (131) 318 __________________________________________________________________________ Note: Integration costs include costs in respect of the Simon & Schuster acquisition in 1998 and the Dorling Kindersley and National Computer Systems acquisitions in 2000. Discontinued operations relate to the withdrawal of the Group from the banking business following its disposal of Lazard in March 2000. Internet enterprises consists of the Group's discrete internet operations, principally FT.com and Learning Network. Analyses of the profits of joint ventures and associates are shown in note 2c. 2c. Sector analysis - joint ventures and associates ______________________________________________________________________________ Included in the analysis of operating profit in note 2b are the following amounts in respect of joint ventures and associates: __________________________________________________________________________ Joint Ventures ------ Associates ------ Results from operations Total all figures in £ millions 2000 1999 2000 2000 1999 __________________________________________________________________________ Pearson Education - - 7 7 6 FT Group (21) - 7 (30) 14 Television - - 39 25 3 __________________________________________________________________________ Continuing operations (21) - 53 2 23 Discontinued operations - - 8 8 48 __________________________________________________________________________ (21) - 61 10 71 __________________________________________________________________________ 3. (Loss)/profit on sale of fixed assets and investments ____________________________________________________________________________ 1999 all figures in £ millions 2000 restated ___________________________________________________________________________ Continuing operations: Profit on disposal of interest in BSB Holdings Ltd - 345 Net(loss)/profit on other investments and property interests (4) 4 ___________________________________________________________________________ (4) 349 ___________________________________________________________________________ Taxation 3 (90) ___________________________________________________________________________ 4. Profit/(loss) on sale of businesses and associates ______________________________________________________________________________ all figures in £ millions 2000 1999 __________________________________________________________________________ Continuing operations: Profit on sale of 20% of Recoletos 86 - Loss on closure of Dorling Kindersley Family Learning business (16) - Net loss on sale of other businesses and associates (40) (44) __________________________________________________________________________ 30 (44) __________________________________________________________________________ Discontinued operations: Profit on sale of Lazard 231 - __________________________________________________________________________ Taxation (51) 5 __________________________________________________________________________ 5. Earnings per share ______________________________________________________________________________ In order to show results from operating activities on a comparable basis two adjusted earnings per equity share are presented. First, an adjusted earnings per share is presented which excludes profits or losses on the sale of fixed assets and investments, businesses and associates (see notes 3 and 4) which in 2000 relate primarily to the sale of Lazard and the sale of 20% of Recoletos. Also excluded are Year 2000 compliance costs, integration costs in respect of the acquisitions of Simon & Schuster, Dorling Kindersley and National Computer Systems (NCS) (see note 2), the accelerated amortisation of a financing arrangement fee following the early redemption of a borrowing facility, the premium paid in respect of a forward currency option in connection with the acquisition of NCS, and goodwill amortisation. Due to a significant level of expenditure on internet enterprises, a second adjusted earnings per equity share is presented in which the results of these are also excluded from earnings. ____________________________________________________________________________ ----- 2000 ---- 1999 restated Earnings Earnings per per share share £m (p) £m (p) ____________________________________________________________________________ Profit for the financial year 179 24.6 294 43.0 Adjustments: Loss/(profit) on sale of fixed assets and investments: continuing operations 4 0.5 (349) (51.0) (Profit)/loss on sale of businesses and associates: continuing operations (30) (4.0) 44 6.4 (Profit) on sale of businesses and associates: discontinued operations (231) (31.7) - - Loss/(profit) on sale of businesses and associates by an associate: continuing operations 3 0.4 (1) (0.1) Internet enterprises 196 26.9 39 5.7 Interest on internet enterprises 9 1.2 - - Goodwill amortisation 239 32.9 131 19.2 Integration costs 40 5.5 95 13.9 Other net finance costs 24 3.3 - - Year 2000 compliance costs - - 5 0.7 Taxation on above items (18) (2.5) 67 9.8 Minority interest share of above items (18) (2.5) - - ____________________________________________________________________________ Adjusted earnings before internet enterprises 397 54.6 325 47.6 ____________________________________________________________________________ Internet enterprises (196) (26.9) (39) (5.7) Interest on internet enterprises (9) (1.2) - - Taxation on internet enterprises 37 5.0 10 1.4 Minority interest share of internet enterprises 3 0.4 - - ____________________________________________________________________________ Adjusted earnings after internet enterprises 232 31.9 296 43.3 ____________________________________________________________________________ Profit for the financial year 179 294 Taxation on the conversion of ordinary shares (2) (1) ____________________________________________________________________________ Diluted earnings 177 293 ____________________________________________________________________________ Weighted average number of equity shares (millions) - for earnings and adjusted earnings 727.7 683.4 Effect of dilutive share options 8.4 7.8 ____________________________________________________________________________ Weighted average number of equity shares (millions) - for diluted earnings 736.1 691.2 ____________________________________________________________________________ Adjusted earnings per equity share before internet enterprises 54.6p 47.6p Adjusted earnings per equity share after internet enterprises 31.9p 43.3p Earnings per equity share 24.6p 43.0p Diluted earnings per equity share 24.0p 42.4p Note: The weighted average number of shares in 1999 has been restated to reflect the rights issue of equity shares during 2000. 6. Taxation ______________________________________________________________________________ The tax rate provided in the profit and loss account is analysed as follows: _____________________________________________________________________________ all figures in percentages 2000 1999 _____________________________________________________________________________ United Kingdom tax rate 30.0 30.2 Effect of overseas tax rates 2.2 3.0 Effect of utilisation of tax losses in the US (7.8) (9.8) Other items (1.4) 1.6 _____________________________________________________________________________ Tax rate reflected in adjusted earnings (before internet enterprises) 23.0 25.0 Effect of internet enterprises 3.1 - _____________________________________________________________________________ Tax rate reflected in adjusted earnings (after internet enterprises) 26.1 25.0 Effect of profits/(losses) excluded from adjusted earnings 11.2 12.1 _____________________________________________________________________________ Tax rate reflected in earnings 37.3 37.1 _____________________________________________________________________________ Taxation is analysed as: _____________________________________________________________________________ all figures in £ millions 2000 1999 _____________________________________________________________________________ Parent and subsidiaries 92 162 Joint ventures and associates 14 15 _____________________________________________________________________________ 106 177 _____________________________________________________________________________ Note: The Group has significant tax losses available in the US which are not recognised in the accounts and hence the tax rate reflected in adjusted earnings is lower than the UK tax rate. 7. Dividends ______________________________________________________________________________ 2000 2000 1999 1999 Pence Pence per per share share £m restated £m _____________________________________________________________________________ Interim paid 8.2 58 7.7 53 Final proposed 13.2 106 12.4 85 _____________________________________________________________________________ Dividends for the year 21.4 164 20.1 138 _____________________________________________________________________________ Note: 1999 interim and final, and 2000 interim dividends per share have been restated to reflect the rights issue of equity shares during 2000. 8. 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$ - 2000 1999 ________________________________________________________________________ Average for operating profits 1.51 1.61 Year end rate 1.49 1.61 ________________________________________________________________________ Note: The weakening of sterling on an average basis in 2000 has had a beneficial impact on sales and profits. It is estimated that if the 1999 average rates had prevailed in 2000 then sales would have been lower by £125m and operating profit lower by £20m. 9. Equity shareholders' funds ______________________________________________________________________________ Profit and Share Share loss all figures in £ millions capital premium account Total _____________________________________________________________________________ At 31 December 1999 153 517 651 1,321 Exchange differences - - 87 87 Shares issued 46 - - 46 Premium on issue of shares - 1,923 (8) 1,915 Goodwill arising on prior year acquisitions - - 1 1 Goodwill written back on business combinations - - 585 585 Goodwill written back - - 68 68 Replacement options granted on acquisition of subsidiary - at acquisition - - 5 5 - post acquisition - - 1 1 Profit retained for the year - - 15 15 _____________________________________________________________________________ At 31 December 2000 199 2,440 1,405 4,044 _____________________________________________________________________________ 10. Note to consolidated statement of cash flows ______________________________________________________________________________ _____________________________________________________________________________ all figures in £ millions 2000 1999 _____________________________________________________________________________ Reconciliation of operating profit to net cash inflow from operating activities Operating profit - total 211 318 Share of loss/(profit) of joint ventures and associates 11 (71) Depreciation charges 100 82 Goodwill amortisation 188 130 (Increase) in stocks (97) (57) Decrease/(increase) in debtors 53 (71) (Decrease)/increase in creditors (119) 127 (Decrease) in operating provisions (4) (33) Other and non-cash items 18 8 _____________________________________________________________________________ Net cash inflow from operating activities 361 433 Purchase of fixed assets and finance lease payments (149) (113) Sale of operating tangible fixed assets 22 24 Dividends from joint ventures and associates 49 44 Other (8) 8 _____________________________________________________________________________ Operating cash flow 275 396 _____________________________________________________________________________ Analysed between: Operating cash flow before internet enterprises and other items 580 540 Dorling Kindersley exceptional payments (46) - Integration costs : Simon & Schuster (27) (110) Dorling Kindersley (25) - NCS (9) - Cash effect of internet enterprises (198) (34) _____________________________________________________________________________ Operating cash flow 275 396 _____________________________________________________________________________ Note: The Dorling Kindersley exceptional payments are in respect of creditors on the acquisition balance sheet beyond normal trading terms.

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