Interim Results

PEARSON PLC 2 August 1999 PEARSON PLC INTERIM RESULTS (unaudited) Six months ended 30 June 1999 PEARSON MAKES STRONG START TO THE YEAR Highlights Total sales up 32% to £1,306m Operating profits up 15% to £126m - before goodwill and other items Dividend per share up 8% to 8.6p Strong performance across all businesses Pearson Education on track to meet first full year profit expectations FT Group grows profits and invests more in international expansion Penguin doubles first half profits Pearson Television posts 13% increase in underlying profits Commenting on the results, Marjorie Scardino, chief executive of Pearson plc, said: 'We have had a great first half. Pearson Education, now half of our business, is right on track to meet our expectations. Across the company, we're in shape to deliver on our sales, margins and cash targets. We've made Pearson a 100% media company. With our rich content and powerful brands, we're stepping up our investment to exploit the opportunities of the digital age.' ENQUIRIES: 0171 411 2310 Marjorie Scardino, chief executive John Makinson, finance director John Fallon,communications director Overview In the first six months of 1999, operating profits before goodwill and other items increased by 15% to £126m, with strong trading performances across the company. Adjusted earnings of 6.3p per share (10.8p per share in 1998) reflect the seasonal pattern of earnings in Pearson Education which now accounts for around half of our company following the acquisition of the Simon & Schuster education business. Pearson Education, which makes around two thirds of its sales - and all its profits - in the second half of the year, is firmly on track to meet full year expectations. The US school business, in particular, has made an impressive start to the year and the integration process continues to time and budget. The FT Group has increased profits and boosted investment in the international growth of the newspaper and the electronic expansion of its online business news and information services. Pearson Television has increased first half profits; its European production business is performing strongly and losses at Channel 5 are falling as its audience share - and advertising revenues - grow. Penguin has made an excellent start to the year on the back of a stronger publishing list and more efficient operations. This year, Pearson has sold, or reached agreement to sell, assets with a total value of over £1bn. We have disposed of a number of the reference and business & professional operations, acquired from Viacom Inc. as part of the larger acquisition of its Simon & Schuster education business, to a range of buyers for £220m. We have agreed to sell our interests in the three Lazard houses to Gaz et Eaux, a French listed investment company, for £410m in cash. And we have also agreed to sell our 4% indirect stake in BSkyB to Vivendi for £408m. We are using the proceeds of these disposals to reduce debt. Pearson has now formally agreed the strategic alliance with Telefonica, the Spanish telecommunications company, to develop internet and multi-media opportunities in the Spanish and Portuguese speaking worlds. Pearson has agreed to make arrangements for the purchase of Telefonica's 20% stake in Recoletos, our Spanish media group, for 30 billion pesetas, some £121m at current exchange rates. Pearson Education £m 1999 1998 1998 half year half year full year Sales US School 196 62 244 US Higher 188 41 232 Education & Professional International 170 77 226 554 180 702 Operating (38) (19) 99 (loss)/profit Education markets in the United States continue to grow and Pearson Education is capitalising on the revenue opportunities this creates. The school business is performing well in adoption and open territory states throughout the United States. It is on target to emerge as the leading publisher in the major math adoptions this year and is also performing strongly in social studies. The US college publishing business continues to build on its very strong market-leading position. And the International business is making major efficiency gains and publishing the new programmes which will enable it to capitalise on the recovery of Asian and Latin American markets. Across Pearson Education, revenues generated by electronic products continue to grow strongly as we build on our position as the world's leading education technology company. The integration of the Addison Wesley Longman and Simon & Schuster businesses continues to time and budget, with many of the key milestones now reached. We are on track to deliver the anticipated annual cost savings of $130m by the end of next year. FT Group £m 1999 1998 % 1998 half year half year change full year Sales 330 335 683 Operating profit FT Newspaper 34 27 +26% 42 FT branded 6 8 -25% 19 businesses Les Echos 13 9 +44% 12 Recoletos 18 17 +6% 30 Associates 8 8 - 15 79 69 +14% 118 The FT Group increased underlying sales by 10% after taking account of portfolio and exchange rate changes. Underlying operating profits increased by 11% on the same basis. Investment in the international expansion of the FT newspaper continues to bring rewards. Average daily sales for the six months to the end of June 1999 were 385,000, up 9% on last year. Advertising revenues were up 13 %. In North America, average daily sales in June were over 79,000, up 38% on a year ago and on track to reach 100,000 by the end of the year. In FT branded businesses, ft.com continues to grow advertising revenues and traffic - in June alone, overall traffic to the site was up 40% on the back of increased marketing in the UK. Increased investment in ft.com masks strong profits growth at FT Asset Management (FTAM.) The acquisition of the Thomson Financial Securities Management division for $150m, announced last Friday, has enhanced FTAM's position as a leading provider of securities pricing and other specialist information to the global financial community and the integration of the two businesses will deliver substantial cost savings. Les Echos groupe has made a very strong start to the year, with newspaper circulation up 4% year on year and advertising revenues increasing by more than 20%. lesechos.com, the leading French language media website, has more than doubled traffic in the last year. At Recoletos, our Spanish media group, a slight dip in total copy sales has been offset by growing advertising revenues. It continues to develop an on-line presence that capitalises on its position as the leading newspaper publishing group on the Iberian peninsula. Plans for the launch of a new German language business newspaper, in partnership with Gruner + Jahr, one of Germany's leading news and magazine publishers, are going well. We expect to launch the product on the internet later this year with the newspaper making its debut early next year.In Associates, profits from Business Day and Financial Mail,our South African associate, have held up well despite some weakness in the advertising market in the run-up to the South African general election in June. In The Economist Group, the newspaper continues to perform well whilst the group is making significant investment in developing its on- line potential. Penguin £m 1999 1998 % 1998 half year half year change full year Sales 263 232 +13% 523 Operating profit 31 16 +94% 48 The Penguin Group had an excellent first half, with sales up by 13% to £263m and operating profits almost doubling. Penguin titles have featured strongly in best-seller lists in all of its major markets, with a strong publishing schedule that is less heavily geared to the second half of the year than it was in 1998. Penguin is now realising the full benefits of the cost savings resulting from the Penguin Putnam integration in the U.S. and the integration of Ladybird childrens books within Penguin U.K. Penguin continued to build its brand globally with the launch of Penguinclassics.com, which has already generated strong consumer interest. Pearson Television £m 1999 1998 % 1998 half year half year change full year Sales 159 153 +4% 343 Operating profit Pearson TV 35 33 71 Channel 5 (3) (8) (14) BSkyB 1 2 4 33 27 +22% 61 Pearson Television increased sales by 4% to £159m and operating profits by 22% to £33m. Stripping out the benefits of lower losses at Channel 5 and the loss of dividends from last year's disposal of its stake in SES, the satellite broadcast operator, the underlying increase in operating profits was 13%. Pearson Television continues to perform strongly, particularly in its European production markets and in its UK operations. Channel 5, in which Pearson Television owns a 24% stake, is performing ahead of expectations in terms of both audience share and advertising revenues. We expect to complete the disposal of our stake in BSkyB to Vivendi in the autumn. Lazard £m 1999 1998 % 1998 half year half year change full year Attributable 21 15 +40% 42 profit The three houses are all trading well, with a significantly stronger performance in London than at this stage last year. We announced the planned sale of our stake in the three Lazards houses in June, and we anticipate that the disposal will be completed later in the year. OUTLOOK The company, and in particular, Pearson Education, has made a good start to the second half of the year. We are on track to deliver our sales, margins and cash targets and we are committed to our target of annual double digit earnings growth. Consolidated Profit and Loss Account for the six months to 30 June 1999 1999 1998 1998 half half full year year year Note £m £m £m ________________________________________________________________________ Sales 2 Continuing operations 1,302 900 2,251 Acquisitions 4 - - ________________________________________________________________________ 1,306 900 2,251 Discontinued operations - 89 144 ________________________________________________________________________ Total sales 1,306 989 2,395 Operating profit 2 Continuing operations - group 12 88 176 Acquisitions - group 1 - - ________________________________________________________________________ 13 88 176 Discontinued operations - group - 2 23 ________________________________________________________________________ Total operating profit - group 13 90 199 ________________________________________________________________________ Share of operating profit / (loss) of associates: Continuing operations 33 16 53 Discontinued operations - - (2) ________________________________________________________________________ Total share of operating profit of 33 16 51 associates ________________________________________________________________________ ________________________________________________________________________ Total operating profit analysed between: Operating profit before goodwill 126 110 389 amortisation and other items Goodwill amortisation (63) - (12) Other items (17) (4) (127) ________________________________________________________________________ ________________________________________________________________________ Total operating profit 46 106 250 ________________________________________________________________________ Continuing operations: Profit on sale of fixed assets and 3 25 129 142 investments (Loss) / profit on sale of businesses and 4 (17) 84 50 associates Discontinued operations: Profit on sale of businesses and - 60 215 associates ________________________________________________________________________ 8 273 407 Profit on sale by an associate - - - 11 continuing operations Profit before interest 54 379 668 Net interest payable - group (70) (19) (36) Net interest payable - associates (1) (2) (3) ________________________________________________________________________ Total net interest payable (71) (21) (39) ________________________________________________________________________ (Loss) / profit before taxation (17) 358 629 Taxation 6 (21) (78) (188) ________________________________________________________________________ (Loss) / profit after taxation (38) 280 441 Equity minority interests (3) (2) (4) ________________________________________________________________________ (Loss) / profit for the financial period (41) 278 437 Dividends on equity shares (54) (46) (126) ________________________________________________________________________ (Deficit) / profit retained (95) 232 311 ________________________________________________________________________ Adjusted earnings per equity share 5 6.3p 10.8p 42.0p (Loss)/earnings per equity share 5 (6.6)p 48.2p 74.1p Diluted (loss)/earnings per equity share 5 (6.5)p 47.8p 73.3p Dividends per equity share 7 8.6p 8.0p 21.0p ________________________________________________________________________ The results for the 1998 full year are an abridged version of the full accounts which have received an unqualified audit report from the auditors and have been filed with the Registrar of Companies. First half figures are neither audited nor reviewed. Consolidated Balance Sheet as at 30 June 1999 _______________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m _______________________________________________________________________ Intangible assets 2,340 17 2,330 Tangible fixed assets 435 508 435 Stocks 724 387 614 Debtors 1,014 668 1,055 Creditors (752) (515) (827) Investments and other net assets 130 57 29 _______________________________________________________________________ Net trading assets 3,891 1,122 3,636 _______________________________________________________________________ Shareholders' funds 1,070 595 1,048 Provisions and minorities 281 213 309 Net debt 2,540 314 2,279 _______________________________________________________________________ Capital employed 3,891 1,122 3,636 _______________________________________________________________________ Reconciliation of Movements in Equity Shareholders' Funds for the six months to 30 June 1999 _______________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m _______________________________________________________________________ (Loss)/profit for the financial period (41) 278 437 Dividends on equity shares (54) (46) (126) _______________________________________________________________________ (95) 232 311 Currency translation differences 71 (11) (8) Goodwill arising on prior year acquisitions - (2) (16) Goodwill written back 40 211 262 Shares issued 6 13 347 _______________________________________________________________________ Net movement for the period 22 443 896 Equity shareholders' funds at beginning of the period 1,048 152 152 _______________________________________________________________________ Equity shareholders' funds at end of the period 1,070 595 1,048 _______________________________________________________________________ Operating Cash Flow, Net Movement of Funds from Operations and Change in Net Debt for the six months to 30 June 1999 The following analysis summarises the group's main cash flows and is in the format used by management to monitor the cash flow of the group. The main difference between this format and the FRS 1 cash flow format is that operating cash flow, a key measure, is calculated after the deduction of capital expenditure. ________________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m ________________________________________________________________________ Operating profit 46 106 250 add : Simon & Schuster integration costs and Year 2000 costs 17 4 127 add : goodwill amortisation 63 - 12 ________________________________________________________________________ 126 110 389 Retained by partnerships and other associates (2) 10 2 ________________________________________________________________________ 124 120 391 Working capital (increase)/decrease (125) (43) 40 Net expenditure on tangible fixed assets (capital expenditure less disposals) (38) (51) (113) Depreciation 41 33 66 Other movements (14) (12) 8 ________________________________________________________________________ Operating cash flow before effect of S&S integration costs (12) 47 392 Cash effect of S&S integration costs (49) - (23) ________________________________________________________________________ Operating cash flow (61) 47 369 Interest (71) (29) (57) Taxation (33) (24) (80) Dividends (79) (69) (116) ________________________________________________________________________ Net movement of funds from operations (244) (75) 116 Acquisition of businesses and investments (80) (97) (3,004) Sale of businesses and investments 131 564 983 Sale of tangible fixed assets (excluded from operating profit) 7 1 1 New equity 6 13 344 Other (including non operating provisions) 10 (10) (7) ________________________________________________________________________ Net movement of funds (170) 396 (1,567) Net debt at beginning of the period (2,279) (707) (707) Exchange differences on net debt (91) (3) (5) ________________________________________________________________________ Net debt at end of the period (2,540) (314) (2,279) ________________________________________________________________________ Notes to the Interim Results for the six months to 30 June 1999 1. Basis of preparation ______________________________________________________________________________ The interim results for the six months to 30 June 1999 have been prepared in accordance with the accounting policies set out in the 1998 Annual Report except that FRS12 'Provisions, Contingent Liabilities and Contingent Assets' has been adopted. 2. Sector analysis ______________________________________________________________________________ -------- Sales -------- 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ FT Group 330 335 683 Pearson Education 554 180 702 The Penguin Group 263 232 523 Pearson Television 159 153 343 ______________________________________________________________________ Continuing operations 1,306 900 2,251 Discontinued operations - 89 144 ______________________________________________________________________ 1,306 989 2,395 ______________________________________________________________________ ______________________________________________________________________ -- Operating profit -- -- Operating profit -- (before goodwill and (after goodwill and other items) other items) 1999 1998 1998 1999 1998 1998 half half full half half full year year year year year year £m £m £m £m £m £m ______________________________________________________________________ FT Group 79 69 118 77 67 114 Pearson Education (38) (19) 99 (116) (20) (34) The Penguin Group 31 16 48 31 15 46 Pearson Television 33 27 61 33 27 61 Lazard 21 15 42 21 15 42 ______________________________________________________________________ Continuing operations 126 108 368 46 104 229 Discontinued operations - 2 21 - 2 21 ______________________________________________________________________ 126 110 389 46 106 250 ______________________________________________________________________ Other items comprises integration costs following the acquisition of Simon & Schuster in November 1998 of £15m (1998 half year £nil; 1998 full year £120m) and Year 2000 compliance costs of £2m (1998 half year £4m; 1998 full year £7m). 2. Sector analysis (continued) ______________________________________________________________________________ Included in the analysis of operating profit above are the following amounts in respect of associates: 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ FT Group 7 7 15 Pearson Education 4 2 4 Pearson Television 1 (6) (8) Lazard 21 15 42 ______________________________________________________________________ Continuing operations 33 18 53 Discontinued operations - (2) (2) ______________________________________________________________________ 33 16 51 ______________________________________________________________________ 3. Profit on sale of fixed assets and investments ______________________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ Profit on partial disposal of indirect interest in BSkyB 19 - - Profit on sale of investment in Societe Europeenne des Satellites - 132 133 Profit on sale of investment in Flextech plc - - 27 Loss on sale of Simon & Schuster related fixed assets - - (6) Net loss on sale of other investments and property interests 6 (3) (12) ______________________________________________________________________ Continuing operations 25 129 142 ______________________________________________________________________ Taxation (6) (24) (40) ______________________________________________________________________ 4. (Loss)/profit on sale of businesses and associates ______________________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ Loss on sale of Extel research products business (16) - - Profit on sale of Law & Tax publishing businesses - 61 61 Profit on sale of 20 percent of Recoletos - 34 34 Loss on sale of Register group - - (20) Loss on closure of Simon & Schuster businesses (3) - (10) Net profit / (loss) on sale of other businesses 2 (11) (15) ______________________________________________________________________ Continuing operations (17) 84 50 ______________________________________________________________________ Profit on sale of The Tussauds Group - - 157 Profit on sale of Pearson New Entertainment - 42 41 Profit on sale of Port Aventura SA - 29 28 Loss on sale of Mindscape Inc. - (11) (11) ______________________________________________________________________ Discontinued operations - 60 215 ______________________________________________________________________ Taxation (3) (30) (63) ______________________________________________________________________ On 22 February Pearson sold its Extel research products business for £19m, giving rise to a loss of £16m. 5. Earnings and adjusted earnings per equity share ______________________________________________________________________________ In order to show results from operating activities on a comparable basis an adjusted earnings per equity share has been calculated which excludes profits or losses on the sale of fixed assets and investments, businesses and associates (see notes 3 and 4), Year 2000 compliance costs and integration costs in respect of the acquisition of Simon & Schuster. Following the prospective implementation of FRS10 'Goodwill and Intangible Assets', goodwill amortisation has also been excluded from adjusted earnings in order to show results on a comparable basis. 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ Earnings (41) 278 437 Less: (Profit) on sale of fixed assets and investments: continuing operations (25) (129) (142) Loss/(profit) on sale of businesses and associates: continuing operations 17 (84) (50) (Profit) on sale of businesses and associates: discontinued operations - (60) (215) (Profit) on sale of businesses and associates: - - (11) by an associate: continuing operations Add: Goodwill amortisation 63 - 12 Simon & Schuster integration costs 15 - 120 Year 2000 compliance costs 2 4 7 Taxation on above items 7 53 90 ______________________________________________________________________ Adjusted earnings 38 62 248 ______________________________________________________________________ Earnings (41) 278 437 Tax on the conversion of ordinary shares - - (1) ______________________________________________________________________ Diluted earnings (41) 278 436 ______________________________________________________________________ Weighted average number of equity shares (millions) - for earnings and adjusted earnings* 609.7 577.5 589.8 Effect of dilutive share options 6.8 4.6 5.1 ______________________________________________________________________ Weighted average number of equity shares (millions) - for diluted earnings 616.5 582.1 594.9 ______________________________________________________________________ Adjusted earnings per equity share 6.3p 10.8p 42.0p (Loss)/earnings per equity share (6.6)p 48.2p 74.1p Diluted (loss)/earnings per equity share (6.5)p 47.8p 73.3p ______________________________________________________________________ * 1998 half year weighted average number of equity shares has been restated in accordance with FRS14 'Earnings Per Share' 6. Taxation ______________________________________________________________________________ The tax rate provided in the profit and loss account for the half year is based on the estimated effective rate for the full year and is analysed as follows: 1999 1998 1998 half half full year year year per per per cent cent cent ______________________________________________________________________ United Kingdom tax rate 30.2 31.0 31.0 Effect of utilisation of tax losses in the USA (10.6) (3.6) (2.7) Effect of rate differences 2.2 1.7 (1.3) Other items 3.2 (1.1) 1.0 ______________________________________________________________________ Tax rate reflected in adjusted earnings 25.0 28.0 28.0 Effect of profits/(losses) excluded from n/a (6.2) 1.9 adjusted earnings ______________________________________________________________________ Tax rate reflected in earnings n/a 21.8 29.9 ______________________________________________________________________ Taxation is analysed as: ______________________________________________________________________ 1999 1998 1998 half half full year year year £m £m £m ______________________________________________________________________ Parent and subsidiaries 13 74 175 Associates 8 4 13 ______________________________________________________________________ 21 78 188 ______________________________________________________________________ The group continues to have substantial tax losses available in the US which are not recognised in the accounts. Following the acquisition of Simon & Schuster at the end of 1998, US profits are expected to be substantially higher in 1999 than in 1998 but are still expected to be more than offset by available losses so reducing the group tax rate reflected in adjusted earnings. The pre-tax loss for the half year of £17m is arrived at after charging goodwill amortisation of £63m, which is generally not eligible for tax relief. In addition relief has not been taken for Simon & Schuster integration costs to the extent that they arose in the US. These are the most important factors contributing to there being a tax charge of £21m even though a pre-tax loss arose. 7. Dividend ______________________________________________________________________________ The directors have declared an interim dividend of 8.6p per equity share, payable on 29 October 1999 to shareholders on the register at the close of business on 10 September. 8. Exchange rates ______________________________________________________________________________ Pearson earns a significant proportion of its sales and profits in overseas currencies, the most prominent being the US dollar. The relevant rates are as follows: ______________________________________________________________________ ---- £ versus US$ ----- 1999 1998 1998 half half full year year year ______________________________________________________________________ Average for operating profits 1.61 1.66 1.66 Period end rate 1.58 1.67 1.66 ______________________________________________________________________ 9. Year 2000 ______________________________________________________________________________ The group's proposals to address the Year 2000 issue were discussed fully in the 1998 Annual Report. There is a group wide programme in place and progress is reported regularly to the board. The majority of operating companies achieved material Year 2000 compliance in January and the remainder, including the newly acquired Simon & Schuster businesses, are on target to be compliant by the end of August 1999. Work is well advanced to develop contingency plans to deal with any business disruption which may arise and in addition key suppliers and customers are continually under review to ensure their Year 2000 readiness is fully understood. The estimated total cost to resolve the Year 2000 problem in Pearson remains at £19m. 10. Post balance sheet events ______________________________________________________________________________ Lazard - On 24 June 1999 Pearson announced that it is to sell its interests in the three Lazard houses for £410m in cash together with a completion payment in respect of 1999 profits, the amount being conditional on the completion date. British Sky Broadcasting Group (BSkyB) - On 22 July 1999 Pearson announced that it is to sell its 4 percent indirect stake in BSkyB for £408m. Thomson Financial Securities Management - On 30 July 1999 Pearson announced the acquisition of this business for $150m.

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