Preliminary Results
Pearson PLC
27 February 2006
27 February 2006
PEARSON 2005 PRELIMINARY RESULTS:
ALL-ROUND GROWTH, RECORD YEAR IN EDUCATION AND RECORD CASH GENERATION
• Strong performance. Sales up 9%; adjusted operating profit up 22% to
£509m; adjusted EPS up 24% to 34.1p.
• Record cash generation. 113% of operating profit converted to cash;
total free cash flow up 52% to £431m.
• Above-market growth. Pearson growing faster than its markets in School,
Higher Education, Professional, FT Publishing and IDC.
• Record results at Pearson Education, our largest business. Sales up 12%
to £2.66bn and profits up 22% to £348m.
• All-round profit growth. FT Group up 37% to £101m and Penguin up 4% to
£60m.
• Higher returns. Return on invested capital up to 6.7% (7.2% at constant
currency) from 6.2%.
Marjorie Scardino, chief executive, said: "These excellent results illustrate
the quality and potential of the business we have built. Our leadership in
growth markets, our innovation and our efficiencies give us real momentum and
we expect our strong performance to continue in 2006 and beyond."
£ millions 2005 2004 Headline Underlying
growth growth
Business performance
Sales - continuing 4,096 3,696 11% 9%
Adjusted operating profit - continuing 509 400 27% 22%
Adjusted profit before tax 422 350 21% 23%
Adjusted earnings per share 34.1p 27.5p 24% 24%
Operating cash flow 570 418 36% --
Free cash flow 431 284 52% --
Return on invested capital 6.7% 6.2% -- --
Net debt 996 1,221 18% --
Statutory results
Operating profit 536 404 33% --
Profit before tax 466 325 43% --
Basic earnings per share 78.2p 32.9p 138% --
Basic earnings per share - continuing 40.4p 30.8p 31% --
Cash flow from operations 875 705 24% --
Dividend per share 27.0p 25.4p 6% --
Throughout this statement, we refer to business performance measures for total
operations and growth rates on an underlying basis (ie excluding currency
movements and portfolio changes) unless otherwise stated. The 'business
performance' measures are non-GAAP measures and reconciliations to the
equivalent statutory heading under IFRS are included in notes to the accounts 2,
5, 7,12 and 14. Profit measures within business performance are presented on an
adjusted basis to exclude: i) other net gains and losses arising in connection
with the sale of subsidiaries, investments and associates; ii) amortisation of
acquired intangible assets; and iii) short-term fluctuations in the market value
of financial instruments (under IAS39) and other currency movements (under
IAS21).
2005 OVERVIEW
Pearson predicted that 2005 would be a year of strong growth and financial
progress, driven by education, our largest business. We are reporting today that
Pearson Education had its best year ever; that the FT Group achieved a further
significant profit improvement; and that we see good prospects for continued
growth in 2006 and beyond.
Pearson's sales increased 9% in 2005, the fastest rate of growth for five years.
Adjusted operating profit increased by 22%, well ahead of sales, with profits
improving in all businesses. Operating margin improved by 1.6% points to 12.4%.
Adjusted earnings per share were 34.1p, up 24%.
In 2005, Pearson generated more cash than ever before, increasing operating cash
flow by £152m or 36% to £570m and free cash flow by £147m or 52% to £431m. Cash
conversion was particularly strong at 113% of operating profit. Average working
capital: sales at Pearson Education and Penguin improved by a further 2% points
to 27.4%, even as we continued significant investment in new products and
services that will support our future growth.
Our return on invested capital improved to 6.7%, or 7.2% at constant currency,
from 6.2% in 2004.
Our statutory results show an increase in operating profit to £536m (£404m in
2004) and in statutory basic earnings per share to 78.2p (32.9p in 2004),
benefiting from a £302m profit from Recoletos. We ended the year with net debt
of £996m, a £225m reduction on 2004. The sharp December increase in the value of
the US dollar to £1:$1.72 significantly increased our year-end net debt (which
is approximately 70% dollar-denominated). The £426m proceeds from the sale of
our interests in Recoletos and MarketWatch were partially used in a series of
bolt-on acquisitions in education and financial information, including AGS,
Co-nect and IS.Teledata.
The board is proposing a dividend increase of 6% to 27.0p. Subject to
shareholder approval, 2005 will be Pearson's 14th straight year of increasing
our dividend above the rate of inflation, and in the past eight years we have
returned approximately £1.5bn or one-quarter of our current market value to
shareholders through the dividend.
BUSINESS PERFORMANCE
£ millions 2005 2004 Headline Underlying
growth growth
Sales
School 1,295 1,087 19% 16%
Higher Education 779 729 7% 5%
Professional 589 507 16% 15%
Pearson Education 2,663 2,323 15% 12%
FT Publishing 332 318 4% 4%
IDC 297 269 10% 7%
FT Group 629 587 7% 5%
Penguin 804 786 2% 1%
Total continuing 4,096 3,696 11% 9%
Adjusted operating profit
School 147 108 36% 29%
Higher Education 156 129 21% 19%
Professional 45 40 13% 13%
Pearson Education 348 277 26% 22%
FT Publishing 21 4 -- --
IDC 80 67 19% 13%
FT Group 101 71 42% 37%
Penguin 60 52 15% 4%
Total continuing 509 400 27% 22%
Discontinued (Recoletos) (3) 26 --
Total 506 426 19% 22%
2006 OUTLOOK
We expect 2006 to be another good year for Pearson as we continue to increase
margins and grow ahead of our markets. We expect to achieve strong underlying
earnings growth, good cash generation and a further significant improvement in
return on invested capital. At this early stage in the year our outlook is:
• Pearson Education (65% of 2005 sales; 68% of continuing operating
profit) expected to achieve sales growth in the 3-5% range, with similar
rates of growth in each of its three worldwide businesses (School, Higher
Education and Professional). We expect margins to improve in School and
Professional and to be stable in Higher Education.
• Penguin (20% of sales; 12% of continuing operating profit) expected to
grow at a similar rate to 2005, with margins improving steadily as we
benefit from efficiency gains.
• Financial Times Group (15% of sales; 20% of continuing operating profit)
expected to achieve a further significant profit improvement. The Financial
Times continues to show good momentum, with circulation up 4% and
advertising revenues up 12% in the year to date. IDC expects another good
year, benefiting from similar business conditions to 2005, strong organic
growth and the contribution of recent acquisitions.
Cash. We expect another good cash performance in 2006, well ahead of our 80%
threshold, even after an exceptionally strong 113% cash conversion rate in 2005.
Interest and tax. We expect our full year interest charge to be broadly in line
with 2005, as the benefit of lower average net debt is offset by the impact of
higher interest rates. We expect our effective tax rate to be in the 32-34%
range.
Exchange rates. Pearson generates around two-thirds of its sales in the US and
each five cent change in the average £:$ exchange rate for the full year (which
in 2005 was £1:$1.81) would have an impact of approximately 1p on adjusted
earnings per share.
For more information: Luke Swanson / Deborah Lincoln + 44 (0) 20 7010 2310
Jeff Taylor + 1 212 641 2409
Pearson's results presentation for investors and analysts will be webcast live
today from 09.00 (GMT) and available for replay from 12.00 (GMT) via
www.pearson.com.
We are holding a conference call for US investors at 15.00 (GMT) / 10.00 (EST).
To participate please dial in on +1 718 354 1175 (inside the US) or +44 20 8974
7900 (outside the US), participant code 280392. The call will be available for
replay at www.pearson.com.
Video interviews with Marjorie Scardino and Rona Fairhead are available at
www.pearson.com; high resolution photographs are available for the media at
www.newscast.co.uk.
School
£ millions 2005 2004 Headline Underlying
growth growth
Sales 1,295 1,087 19% 16%
Adjusted operating profit 147 108 36% 29%
RECORD RESULTS IN 2005: SALES UP 16% TO ALMOST £1.3BN; PROFITS UP 29% TO £147M
Rapid growth in US School publishing, testing and technology
• Pearson's US School publishing business grew 12%, ahead of industry
growth of 10.5% (source: Association of American Publishers).
• New adoption market share of 33% where Pearson competed (and 24% of the
total new adoption market); leading positions in maths, science, literature
and foreign languages.
• School testing sales up more than 20%, benefiting from significant
market share gains and first year of mandatory state testing under No Child
Left Behind.
• Strong performance in school software, with good sales and profit growth
in curriculum and school administration services.
Good progress in international school markets
• High single digit growth in international school publishing. Worldwide
English Language Teaching business benefiting from strong demand for
English language learning and investments in new products, including
English Adventure (with Disney) for the primary school market, Sky for
secondary schools, Total English for adult learners, and Intelligent
Business (with The Economist) for the business market.
• Strong growth in international school testing. Four million UK GCSE, AS
and A-Level scripts marked onscreen; first year of running UK National
Curriculum tests completed successfully; new contract for national school
testing pilot in Australia.
Significant efficiency gains and margin improvement
• School margins up by 1.5% points to 11.4% with efficiency gains in
central costs, production, distribution and software development.
Continued investment for future growth
• US School new adoption market expected to grow strongly 2007-09
(estimated at $620m in 2006; $800m in '07; $900m in '08; $1bn in '09).
• Steady investment in School publishing: Pearson publishing major new
basal curriculum programmes for reading, science and social studies, the
three largest adoption disciplines in 2006.
• Healthy outlook in school testing underpinned by 2005 contract wins with
a lifetime value of $700m (including Texas, Virginia, Michigan and
Minnesota).
• AGS Publishing, acquired in July 2005, performing ahead of expectations
as special needs market grows rapidly and integration is on track.
• Acquisition of Co-nect in December 2005 and creation of Pearson
Achievement Solutions targets growing market for teacher professional
development and integrated school solutions.
HIGHER EDUCATION
£ millions 2005 2004 Headline Underlying
growth growth
Sales 779 729 7% 5%
Adjusted operating profit 156 129 21% 19%
RECORD RESULTS IN 2005: SALES INCREASED BY 5% to £779M; PROFITS UP 19% TO £156M
Above-market growth and significant margin improvement
• US Higher Education business up 6%, ahead of industry growth of 5%
(source: Association of American Publishers).
• Pearson's US Higher Education business has grown faster than the
industry for seven straight years.
• Higher Education margins up by 2.3% points to 20%. Good margin
improvement in US and International publishing, boosted by shared services
across US and international units and saving in central costs, technology,
production and manufacturing.
Strong publishing performance
• Continued growth from market-leading authors in key academic disciplines
including biology (Campbell & Reece), chemistry (Brown & LeMay), sociology
(Macionis), marketing (Kotler & Keller), maths (Tobey & Slater),
developmental maths (Martin-Gay) and English composition (Faigley's Penguin
Handbook).
• Rapid expansion in career and workforce education sector, with major
publishing initiatives gaining share in allied health, criminal justice,
paralegal, homeland security and hospitality.
Rapid growth in online learning and custom publishing
• Approximately 3.6m US college students studying through one of our
online programmes, an increase of 20% on 2004.
• MyMathLab, Pearson's innovative online homework and assessment
programme, increases unit sales by almost 50% to 1.1m, with student
registrations 47% higher. Usage increases by 60%, with students completing
and submitting 11m assignments online. Research by colleges using MyMathLab
demonstrates significant improvements in student achievement.
• Continued strong double digit growth in custom publishing - which builds
customised textbooks and online services around the courses of individual
faculties or professors.
Good progress in international markets
• 4% sales growth in Higher Education publishing outside the US.
International businesses benefit from local adaptation of global authors,
including Campbell and Kotler, and introduction of custom publishing and
online learning capabilities into new markets in Asia and the Middle East.
Continued investment for future growth
• 2006 expected to be a record year for 1st editions, with major new
titles in statistics, algebra, psychology, economics, health and writing.
• Launch of online homework and assessment programmes in new curriculum
areas including economics, psychology and developmental writing.
• Creation of Custom Media Solutions Group, extending highly successful
customized print publishing model to online curriculum and course
management programmes.
PROFESSIONAL
£ millions 2005 2004 Headline Underlying
growth growth
Sales 589 507 16% 15%
Adjusted operating profit 45 40 13% 13%
SALES INCREASED BY 15% to £589M AND PROFITS UP 13% TO £45M
Professional Testing: rapid organic growth; Promissor acquisition opens new
markets
• Professional Testing sales up more than 40%, benefiting from successful
start-up of major new contracts including the Driving Standards Agency,
National Association of Securities Dealers and the Graduate Management
Admissions Council.
• Acquisition of Promissor in January 2006 brings together two leading
international professional testing companies and takes Pearson into new US
state and federal regulatory markets.
Government Solutions: sales up 38% and $1bn of new long-term contracts
• Sales up a further 38%, helped by new contracts with the US Department
of Education, the Centers for Medicare and Medicaid Services and the London
Borough of Southwark. Margins a little lower, resulting from new contract
start-up costs.
• More than $1bn of new, long-term contract wins for customers including
the US Department of Education, Department of Commerce and the University
of California.
Professional publishing: margins maintained despite further declines in
technology markets
• Worldwide sales of technology-related books 7% lower with continued
weakness in professional markets partly offset by consumer technology
publishing.
• Pearson maintains leading market share and single-digit margins through
further cost actions; sees stronger schedule of new software releases in
professional and consumer technology markets in 2006.
• Good growth in business publishing imprints including Wharton School
Publishing and Financial Times Prentice Hall. Strong 2006 business list
includes new books from NY Times bestselling authors Bernard Lewis, Jeffrey
Gitomer, Ken Blanchard, and Oren Harari.
FT PUBLISHING
£ millions 2005 2004 Headline Underlying
growth growth
Sales 332 318 4% 4%
Adjusted operating profit 21 4 -- --
PROFITS UP BY £17M ON £14M SALES IMPROVEMENT
Advertising growth continues and Financial Times returns to profit
• FT Newspaper sales up 6% to £221m; £14m profit improvement to £2m.
• FT advertising revenues up 9% (and up 18% in the fourth quarter),
improving through the year. Sustained growth in luxury goods and worldwide
display advertising. FT.com advertising revenues up 27% as FT's biggest
advertisers shift to integrated print and online campaigns.
• More than 90% of advertising revenue improvement converted to profit in
2005.
• FT's average worldwide circulation 2% lower for the year at 426,453 but
1% higher in the second half at 430,635. FT.com's paying subscribers up 12%
to 84,000 and average monthly audience up 7% to 3.2m.
Sustained progress at network of business newspapers
• Sales broadly level and profits £3m higher at the FT Group's other
business newspapers and magazines.
• Les Echos advertising revenues and circulation level with 2004 (average
circulation of 119,000) despite tough trading conditions.
• FT Business improves margins and profits with good growth in
international finance titles.
• FT Deutschland reduces losses further despite a weak advertising market
in Germany, and increases average circulation by 6% to 102,000.
• The Economist, in which Pearson owns a 50% stake, increases its
circulation by 10% to 1,038,519 (for the January-June ABC period).
INTERACTIVE DATA CORPORATION (NYSE:IDC)
£ millions 2005 2004 Headline Underlying
growth growth
Sales 297 269 10% 7%
Adjusted operating profit 80 67 19% 13%
RECORD RESULTS IN 2005: SALES UP 7% TO £297M; PROFITS UP 13% TO £80M; MARGINS UP
2% POINTS TO 26.9%
Strong organic growth and operating improvements
• FT Interactive Data, IDC's largest business (approximately two-thirds of
IDC revenues), generates strong growth in North America and returns to
growth in Europe.
• Modest growth at Comstock, IDC's real-time datafeed business for global
financial institutions, and at CMS BondEdge, its fixed income analytics
business.
• Renewal rates for IDC's institutional businesses remain at around 95%.
• eSignal, IDC's active trader services business, increases headline sales
by 27% with continued growth of subscriber base and full-year contribution
from FutureSource, acquired in September 2004.
• Continued progress in transition to two new consolidated data centres,
enabling IDC's four major businesses increasingly to feed off one
centralized data and technology infrastructure.
Continued expansion into adjacent markets
• Acquisition of IS.Teledata for $51m (net of cash acquired) in December
2005 adds web-based financial data applications and further expands IDC's
presence in continental Europe.
• Agreement to acquire Quote.com and related assets for $30m in February
2006 which will broaden IDC's range of online services for active traders
and financial professionals, and create a new revenue stream in online
financial advertising.
PENGUIN
£ millions 2005 2004 Headline Underlying
growth growth
Sales 804 786 2% 1%
Adjusted operating profit 60 52 15% 4%
Sales up 1% and operating profit up 4%
Strong operational progress
• Sales up 1%; operating profit up 4%; margins up 0.9%; strong cash
generation.
• Successful format innovation to help address weakness of mass market
category in the US, down a further 4% for the industry in 2005. First seven
Penguin Premium paperbacks published, priced at $9.99, and all become
bestsellers, with authors including Nora Roberts, Clive Cussler and
Catherine Coulter.
• Pearson Education moves successfully into new shared UK warehouse in
second half of 2005.
Outstanding publishing performance
• Penguin authors win a Pulitzer Prize (for Steve Coll's Ghost Wars), a
National Book Award (William T. Vollman's Europe Central), the Whitbread
Book of the Year (Hilary Spurling's Matisse the Master), the Whitbread
Novel of the Year (Ali Smith's The Accidental) and the FT/ Goldman Sachs
Business Book of the Year (Thomas Friedman's The World is Flat).
• 129 New York Times bestsellers and 54 top ten bestsellers in the UK.
Major bestselling authors include Patricia Cornwell, John Berendt, Sue
Grafton, Jared Diamond, Jamie Oliver, Gillian McKeith, Jeremy Clarkson and
Gloria Hunniford.
Successful focus on new talent
• Strong contribution from new imprints and first-time authors. New
imprint strategy continues to gather pace and Penguin publishes 160 new
authors in the US and approximately 250 worldwide - its largest ever
investment in new talent.
• Sue Monk Kidd's first novel, The Secret Life of Bees, has been a NY
Times bestseller for almost two years; her second, The Mermaid Chair,
reaches #1 in 2005. The Kite Runner, Khaled Hosseini's first book, stays on
the NY Times bestseller list for all of 2005, selling an additional two
million copies (three million in total). In the UK, strong performance from
new fiction authors including Jilliane Hoffman, PJ Tracy, Karen Joy Fowler
and Marina Lewycka.
Continued investment in new markets and international talent
• Launch of regional language publishing programme in India with first ten
titles in Hindi and Marathi; approximately 70 new titles to be published in
2006. Acquisition of worldwide English language rights to Wolf Totem, one
of China's top five bestselling books for more than a year.
Strong 2006 publishing schedule
• Strong list of new titles for 2006 from bestselling authors including
Nathaniel Philbrick, Patricia Cornwell, Senator Edward M. Kennedy, Jamie
Oliver, Sue Townsend and Jeremy Paxman.
FINANCIAL REVIEW
Our adjusted earnings exclude other gains and losses on the sale or closure of
businesses. We also exclude amortisation of acquired intangible assets (defined
under IFRS 3); short-term fluctuations in the market value of financial
instruments (as determined under IAS 39) and other currency movements charged
to statutory profits (in accordance with IAS 21).
Statutory numbers in 2005 are significantly improved by profits on disposals
(notably Recoletos and Marketwatch); statutory profit for the year was £644m,
up £360m on 2004, with continuing operations up from £262m to £342m.
This year we saw relatively small effects of exchange on our P&L account. The
average US dollar rate against sterling strengthened slightly to £1:$1.81 (£1:
$1.83 in 2004) which marginally increased our reported operating profit.
However, the stronger year end dollar (£1:$1.72 vs £1:$1:92 in 2004) had a
significant impact on our balance sheet.
Financial Statements
These are our first set of consolidated financial statements under International
Financial Reporting Standards (IFRS). We have chosen a transition date to IFRS
of 1st January 2003, which means we have comparable data under IFRS for both
2004 and 2003, displayed in our financial statements. Where material, the impact
of IFRS on our accounts is discussed below.
Interest
Net interest payable in 2005 was £77m, up from £74m (restated for IFRS) in 2004.
The group's average net interest rate payable rose by 0.9% to 5.9%. Although we
were partly protected by our fixed rate policy the strong rise in US dollar
floating interest rates had an adverse effect. Year on year, average 3 month
LIBOR (weighted for the Group's borrowings in US dollars, Euros and Sterling)
rose by 1.9% to 3.4%. This was largely offset by the £260m fall in average net
debt, reflecting in particular the proceeds from the disposal of Recoletos and
good cash generation. In addition, in 2005 we did not benefit from a one-off
credit of £9m for interest on a repayment of tax that occurred in 2004. Year
end net debt fell from £1,221m to £996m.
Taxation
The tax rate on adjusted earnings was barely changed from 2004 to 2005, reducing
from 30.9% to 30.3%. The tax rate on adjusted earnings is very close to the UK
statutory rate of 30%: The higher tax rate on US and overseas profits was offset
by the use of UK losses and by credits relating to previous years, reflecting
continued progress in settlement of the group's affairs with the authorities.
The total tax charge for the year was £124 million, representing a 27% rate on
pre-tax profits of £466 million (on a statutory basis excluding discontinued
operations). This compares with a 2004 rate (restated to reflect IFRS) of 19%
(or £63 million on a pre-tax profit of £325 million). In 2004 the tax charge
reflected credits of £48 million relating to previous years, a substantial
element of which was non-recurring; adjustments relating to previous years in
2005 resulted in a credit of £18 million. The 2005 rate benefited from the fact
that the profit of £40 million on the sale of Marketwatch.com is free of tax.
Minority Interests
Following the disposal of our 79% holding in Recoletos in April 2005 and the
purchase of the outstanding 25% stake in Edexcel our minority interests now
comprise mainly the 39% minority share in IDC. In January 2006 we increased our
stake in IDC by the purchase of 1.1m shares, so the future minority interest
will be 38%.
Dividends
Under IFRS, dividends are accrued only once approved. Therefore, the dividend
accounted for in our 2005 financial statements totalling £205m, represents the
final dividend (15.7p) in respect of 2004 and the interim 2005 dividend of 10p.
We are paying a final dividend for 2005 of 17p, bringing the total paid and
payable in respect of 2005 to 27p, a 6.5% increase on 2004. Our final 2005
proposed dividend was approved by the board in February 2006 and will be
charged against 2006 profits. The dividend (including minorities) paid in 2005
is covered 1.9 times by total free cash flow.
We seek to maintain a balance between the requirements of our shareholders for
a rising stream of dividend income and the re-investment opportunities which we
identify around the Company. This balance has been expressed in recent years as
a desire to increase our annual dividend by more than inflation, while also
re-investing a higher proportion of our distributable earnings in our businesses
Other financial items
Pensions
Pearson operates a variety of pension schemes. Our UK fund is by far the largest
and we also have some smaller defined benefit funds in the US and Canada.
Outside the UK, most of our companies operate defined contribution schemes.
Pension funding levels are kept under regular review by the Company and the Fund
trustees.
The UK scheme was valued as at 1 January 2004 and the next valuation will be as
at 1 January 2006. As a result of the 2004 valuation, the group agreed to
increase contributions to £30m in respect of 2004: to £35m in 2005: and to £41m
annually from 2006 to 2014.
Our total liability for retirement benefits was £389m at December 2005 (2004:
£408m).
Accounting policies and disclosures
As noted above, Pearson has adopted IFRS for its 2005 consolidated financial
statements, in compliance with the European Union regulation. This has resulted
in changes to the format of presentation but has had no impact on the cash
resources available to the group. A full list of IFRS Accounting policies can be
found in Note 1 to our financial statements.
In summary, the main changes to our reported 2005 statutory accounts from IFRS
adoption are as follows:
Goodwill and other Intangibles
Under IFRS 3 goodwill is no longer amortised, but instead is assessed annually
for impairment. Goodwill which arose on acquisitions prior to 1.1.03 and which
was capitalised under UK GAAP has not been restated; other intangible assets
arising from acquisitions since 1.1.03 have been separately identified, fair
valued and capitalised. They are being amortised over their estimated useful
economic lives. The charge to P&L for such amortisation was £11m in 2005 (2004
£5m).
Share-based payments
Under IFRS 2, a proportion of the total fair value of restricted shares, SAYE
schemes and share options granted to employees has been charged to operating
profit. The proportion charged is determined with respect to the relevant
vesting period. The amount charged is 2005 was £23m (2004 £25m).
Employee benefits
Under IAS 19, assets and liabilities relating to pension and other deferred
benefits are valued and accounted for at the balance sheet date.
The profit and loss expense is determined using annually derived assumptions as
to salary inflation, investment returns and discount rates, based on prevailing
conditions at the start of the year. We recognise actuarial gains and losses
arising when assumptions diverge from reality through the statement of
recognised income and expense (SORIE).
Our charge to profit in respect of all retirement benefit obligations under IAS
19 amounted to £68m in 2005 (2004 £62m) of which the current service charge
(£61m) was above operating profit and the net finance charge (£7m) was against
interest.
Pearson has adopted IAS 39, related to accounting for financial investments as
at 1.1.05 and the results of this are detailed below under our Treasury policy.
There are a number of other relatively minor statutory presentation and
disclosure changes under IFRS which are treated consistently across our 2005
actual IFRS reported numbers and our 2004 and 2003 restated comparatives.
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 update publicly any forward looking
statement, whether as a result of new information, future events or otherwise.
Condensed consolidated income statement
for the year ended 31 December 2005
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions note
----------------------------------- ------ -------- --------
Continuing operations
Sales 2 4,096 3,696
Cost of goods sold (2,022) (1,789)
----------------------------------- ------ -------- --------
Gross profit 2,074 1,907
Operating expenses (1,592) (1,520)
Other net gains and losses 3 40 9
Share of results of joint ventures and associates 14 8
----------------------------------- ------ -------- --------
Operating profit 2 536 404
Finance costs 4 (132) (96)
Finance income 4 62 17
----------------------------------- ------ -------- --------
Profit before tax 5 466 325
Income tax 6 (124) (63)
----------------------------------- ------ -------- --------
Profit for the year from continuing operations 342 262
Discontinued operations
Profit for the year from discontinued operations 8 302 22
----------------------------------- ------ -------- --------
Profit for the year 644 284
Attributable to:
Equity holders of the Company 624 262
Minority interest 20 22
----------------------------------- ------ -------- --------
Earnings per share from continuing and discontinued
operations
Basic 7 78.2p 32.9p
Diluted 7 78.1p 32.9p
Earnings per share from continuing operations
Basic 7 40.4p 30.8p
Diluted 7 40.3p 30.8p
The results are presented under IFRS and comparatives have been restated
accordingly (see note 1).
Condensed consolidated statement of recognised income and expense
for the year ended 31 December 2005
----------------------------------- ------ -------- --------
2005 2004
All figures in £ millions note
----------------------------------- ------ -------- --------
Net exchange differences on translation of foreign 327 (203)
operations
Actuarial gains / (losses) on defined benefit pension
and post retirement medical schemes 26 (61)
Taxation on items taken directly to equity 12 9
----------------------------------- ------ -------- --------
Net income / (expense) recognised directly in equity 365 (255)
Profit for the financial year 644 284
----------------------------------- ------ -------- --------
Total recognised income and expense for the financial
year 1,009 29
Attributable to:
Equity holders of the Company 13 989 7
Minority interest 20 22
----------------------------------- ------ -------- --------
Effect of transition adjustment on adoption of IAS 39
Attributable to:
Equity holders of the Company 15 (12)
Condensed consolidated balance sheet
as at 31 December 2005
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions note
----------------------------------- ------ -------- --------
Non-current assets
Property, plant and equipment 384 355
Intangible assets 11 3,854 3,278
Investments in joint ventures and associates 36 47
Deferred income tax assets 385 359
Financial assets - Derivative financial instruments 79 -
Other financial assets 18 15
Other receivables 108 102
----------------------------------- ------ -------- --------
4,864 4,156
Current assets
Intangible assets - pre-publication 426 356
Inventories 373 314
Trade and other receivables 1,031 933
Financial assets - Derivative financial instruments 4 -
Cash and cash equivalents (excluding overdrafts) 902 461
----------------------------------- ------ -------- --------
2,736 2,064
Non-current assets classified as held for sale - 358
----------------------------------- ------ -------- --------
Total assets 7,600 6,578
Non-current liabilities
Financial liabilities - Borrowings (1,703) (1,714)
Financial liabilities - Derivative financial
instruments (22) -
Deferred income tax liabilities (204) (139)
Retirement benefit obligations (389) (408)
Provisions for other liabilities and charges (31) (43)
Other liabilities (151) (99)
----------------------------------- ------ -------- --------
(2,500) (2,403)
Current liabilities
Trade and other liabilities (974) (868)
Financial liabilities - Borrowings (256) (109)
Current income tax liabilities (104) (89)
Provisions for other liabilities and charges (33) (14)
----------------------------------- ------ -------- --------
(1,367) (1,080)
Liabilities directly associated with non-current assets
classified as held for sale - (81)
----------------------------------- ------ -------- --------
Total liabilities (3,867) (3,564)
----------------------------------- ------ -------- --------
Net assets 3,733 3,014
Share capital 201 201
Share premium 2,477 2,473
Reserves 886 126
----------------------------------- ------ -------- --------
Total equity attributable to equity holders of the
Company 3,564 2,800
Minority interest 169 214
----------------------------------- ------ -------- --------
Total equity 13 3,733 3,014
Condensed consolidated cash flow statement
for the year ended 31 December 2005
----------------------------------- ------ -------- --------
2005 2004
All figures in £ millions note
----------------------------------- ------ -------- --------
Cash flows from operating activities
Cash generated from operations 14 875 705
Interest paid (101) (98)
Tax paid (65) (45)
----------------------------------- ------ -------- --------
Net cash generated from operating activities 709 562
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired (246) (41)
Acquisition of joint ventures and associates (7) (10)
Purchase of property, plant and equipment (PPE) (76) (101)
Proceeds from sale of PPE 3 4
Purchase of intangible assets (24) (24)
Investment in pre-publication (222) (181)
Purchase of other financial assets (2) (1)
Disposal of subsidiary, net of cash disposed 376 7
Disposal of joint ventures and associates 54 24
Disposal of investments - 17
Interest received 29 13
Dividends received from joint ventures and associates 14 12
----------------------------------- ------ -------- --------
Net cash used in investing activities (101) (281)
Cash flows from financing activities
Proceeds from issue of ordinary shares 4 4
Purchase of treasury shares (21) (10)
Proceeds from borrowings - 414
Short-term investments acquired - (5)
Other borrowings - 59
Repayment of borrowings (79) (524)
Finance lease principal payments (3) (2)
Dividends paid to Company's shareholders (205) (195)
Dividends paid to minority interests (17) (2)
----------------------------------- ------ -------- --------
Net cash used in financing activities (321) (261)
Effects of exchange rate changes on cash and cash
equivalents 13 (4)
----------------------------------- ------ -------- --------
Net increase in cash and cash equivalents 300 16
Cash and cash equivalents at the beginning of the year 544 528
----------------------------------- ------ -------- --------
Cash and cash equivalents at the end of the year 844 544
For the purposes of the cash flow statement, cash and cash equivalents are
included net of overdrafts repayable on demand. These overdrafts are excluded
from the definition of cash and cash equivalents disclosed on the balance sheet.
Notes to the condensed consolidated financial statements
for the year ended 31 December 2005
1. Basis of preparation
The condensed consolidated financial statements have been prepared in accordance
with EU-adopted International Financial Reporting Standards (IFRS) and IFRIC
interpretations. The condensed consolidated financial statements have been
prepared under the historical cost convention as modified by the revaluation of
financial assets and liabilities (including derivative instruments) at fair
value through profit or loss from 1 January 2005.
The condensed consolidated financial statements have been prepared using the
accounting policies published by the Company on 30 June 2005 which are available
on the Company's website at www.pearson.com. IAS 39 'Financial Instruments:
Recognition and Measurement' and IAS 32 'Financial Instruments: Disclosure and
Presentation' have not been applied to the year ended 31 December 2004 because
the Group has taken a transitional exemption and adopted those standards
prospectively from 1 January 2005.
The preparation of condensed consolidated financial statements requires the use
of certain critical accounting assumptions. It also requires management to
exercise its judgement in the process of applying the company's accounting
policies. The areas requiring a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the condensed
consolidated financial statements have been published by the Company on 30 June
2005 which are available on the Company's website as noted above.
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
2. Segment information
The Group is organised into five primary business segments: School, Higher
Education, Penguin, Financial Times Publishing and Interactive Data Corporation
(IDC). Our remaining business group, Professional, brings together a number of
education publishing, testing and services businesses and does not meet the
criteria for classification as a 'segment' under IFRS.
--------------------------------------- -------- --------
2005 2004
all figures in £ millions
--------------------------------------- -------- --------
Sales
School 1,295 1,087
Higher Education 779 729
Professional 589 507
--------------------------------------- -------- --------
Pearson Education 2,663 2,323
FT Publishing 332 318
IDC 297 269
--------------------------------------- -------- --------
FT Group 629 587
Penguin 804 786
--------------------------------------- -------- --------
Total sales 4,096 3,696
Adjusted operating profit
School 147 108
Higher Education 156 129
Professional 45 40
--------------------------------------- -------- --------
Pearson Education 348 277
FT Publishing 21 4
IDC 80 67
--------------------------------------- -------- --------
FT Group 101 71
Penguin 60 52
--------------------------------------- -------- --------
Adjusted operating profit - continuing operations 509 400
Adjusted operating profit - discontinued operations (3) 26
--------------------------------------- -------- --------
Total adjusted operating profit 506 426
Adjusted operating profit - continuing operations 509 400
Amortisation of acquired intangibles (11) (5)
Other gains and losses 40 9
Other net finance costs of associates (2) -
--------------------------------------- -------- --------
Operating profit 536 404
In our adjusted operating profit, we have excluded amortisation of acquired
intangibles, other gains and losses and other net finance costs of associates.
The amortisation of acquired intangibles is not considered to be fully
reflective of the underlying performance of the Group. Other gains and losses
represent profits and losses on the sale of subsidiaries, joint ventures,
associates and investments that are included within continuing operations but
which distort the performance for the year. Other net finance costs of
associates are the equivalent of the Company's own net finance costs that are
excluded in adjusted earnings (see note 4). Discontinued operations relate to
the disposal of the Group's interest in Recoletos (see note 8).
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
3. Other net gains and losses
--------------------------------------- ------- --------
2005 2004
all figures in £ millions
--------------------------------------- -------- --------
Profit on sale of interest in MarketWatch 40 -
Other items - 9
--------------------------------------- -------- --------
Total other net gains and losses 40 9
Other net gains and losses represent profits and losses on the sale of
subsidiaries, joint ventures, associates and investments that are included
within continuing operations.
4. Net finance costs
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions
----------------------------------- ------ -------- --------
Net interest payable (77) (74)
Finance cost re employee benefits (7) (5)
Net foreign exchange gains 12 -
Other gains on financial instruments in a hedging
relationship:
- fair value hedges - -
- net investment hedges 3 -
Other gains / (losses) on financial instruments not in a
hedging relationship:
- amortisation of transitional adjustment on bonds 7 -
- derivatives (8) -
----------------------------------- ------ -------- --------
Net finance costs (70) (79)
Finance costs (132) (96)
Finance income 62 17
----------------------------------- ------ -------- --------
Net finance costs (70) (79)
Analysed as:
Net interest payable (77) (74)
Finance cost re employee benefits (7) (5)
----------------------------------- ------ -------- --------
Net finance cost reflected in adjusted earnings (84) (79)
Other net finance income 14 -
----------------------------------- ------ -------- --------
Net finance costs (70) (79)
Fair value gains and losses on financial instruments are analysed between three
elements: net interest payable, foreign exchange and other gains and losses. For
the purposes of adjusted earnings we have excluded foreign exchange and other
gains and losses as they represent short-term fluctuations in market value and
are subject to significant volatility. These gains and losses may not be
realised in due course as it is normally the intention to hold these instruments
to maturity. The increased volatility has been introduced as a result of
adopting IAS 39 'Financial Instruments: Recognition and Measurement' as at 1
January 2005 (see note 15).
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
5. Profit before tax
----------------------------------- -------- --------
2005 2004
all figures in £ millions
----------------------------------- -------- --------
Profit before tax 466 325
Add back: amortisation of acquired intangibles (see note 2) 11 5
Add back: other gains and losses (see note 2) (40) (9)
Add back: other net finance costs of associates (see note 2) 2 -
Add back: other finance income (see note 4) (14) -
----------------------------------- -------- --------
Adjusted profit before tax - continuing operations 425 321
Adjusted profit before tax - discontinued operations (3) 29
----------------------------------- -------- --------
Total adjusted profit before tax 422 350
6. Taxation
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions
----------------------------------- ------ -------- --------
Income tax charge (124) (63)
Add back: tax benefit on amortisation of acquired
intangibles (4) (2)
Add back: tax benefit on other gains and losses (4) (36)
Add back: tax charge on other finance income 3 -
--------------------------------------- -------- --------
Adjusted income tax charge - continuing operations (129) (101)
Adjusted income tax charge - discontinued operations 1 (7)
----------------------------------- ------ -------- --------
Total adjusted income tax charge (128) (108)
Tax rate reflected in adjusted earnings 30.3% 30.9%
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
7. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
equity holders of the Company (earnings) by the weighted average number of
ordinary shares in issue during the year, excluding ordinary shares purchased by
the Company and held as treasury shares. Diluted earnings per share is
calculated by adjusting the weighted average number of ordinary shares to take
account of all dilutive potential ordinary shares and adjusting the profit
attributable if applicable to account for any tax consequences that might arise
from conversion of those shares.
In order to show results from operating activities on a consistent 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.
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions
----------------------------------- ------ -------- --------
Earnings 624 262
Adjustments to exclude profit for the year from discontinued
operations:
Profit for the year from discontinued operations (302) (22)
Minority interest share of above items - 5
----------------------------------- ------ -------- --------
Earnings - continuing operations 322 245
Earnings 624 262
Adjustments:
Amortisation of acquired intangibles 11 5
Other gains and losses (40) (9)
Other net finance costs of associates 2 -
Other finance income (14) -
Profit on sale of discontinued operations (see note 8) (306) -
Taxation on above items (3) (38)
Minority interest share of above items (2) (1)
----------------------------------- ------ -------- --------
Adjusted earnings 272 219
Amortisation of acquired intangibles (net of taxation
and minority interest) (5) (2)
----------------------------------- ------ -------- --------
Adjusted earnings including effect of amortisation of
acquired intangibles 267 217
Weighted average number of shares (millions) 797.9 795.6
Effect of dilutive share options 1.1 1.1
Weighted average number of shares (millions) for diluted
earnings 799.0 796.7
Earnings per share from continuing and discontinued operations
Basic 78.2p 32.9p
Diluted 78.1p 32.9p
Earnings per share from continuing operations
Basic 40.4p 30.8p
Diluted 40.3p 30.8p
Adjusted earnings per share 34.1p 27.5p
Adjusted earnings per share including effect of
amortisation of acquired intangibles 33.5p 27.3p
Notes to the condensed consolidated financial statements
continued for the year ended 31 December 2005
8. Discontinued operations
In April 2005, Pearson sold its 79% interest in Recoletos Grupo de Communicacion
S.A. to Retos Cartera, a consortium of investors, for net cash proceeds of
£372m. The transaction became unconditional on approval from the Spanish
regulatory authorities in February 2005. The results of Recoletos have been
consolidated for the period to 28 February 2005 and are included in profit from
discontinued operations shown in the table below. The related assets and
liabilities have been classified as held for sale in the comparative period.
----------------------------------- -------- --------
2005 2004
all figures in £ millions
----------------------------------- -------- --------
Sales 27 190
Operating (loss) / profit (3) 26
Net finance income - 3
----------------------------------- -------- --------
Profit before tax (3) 29
Attributable tax benefit / (expense) 1 (7)
Profit on disposal of discontinued operations 306 -
Attributable tax expense (2) -
----------------------------------- -------- --------
Profit for the year from discontinued operations 302 22
9. Dividends
----------------------------------- -------- --------
2005 2004
all figures in £ millions
----------------------------------- -------- --------
Amounts recognised as distributions to equity holders
in the period 205 195
The directors are proposing a final dividend of 17.0p per equity share, payable
on 5 May 2006 to shareholders on the register at the close of business on 7
April 2006. This dividend has not been included as a liability as at 31 December
2005.
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:
----------------------------------- -------- --------
2005 2004
----------------------------------- -------- --------
Average rate for profits 1.81 1.83
Period end rate 1.72 1.92
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
11. Intangibles
----------------------------------- -------- --------
2005 2004
all figures in £ millions
----------------------------------- -------- --------
Goodwill 3,654 3,160
Other intangibles 200 118
----------------------------------- -------- --------
Total intangibles 3,854 3,278
12. Net debt
----------------------------------- -------- --------
2005 2004
all figures in £ millions
----------------------------------- -------- --------
Non current assets
Derivative financial instruments 79 -
Current assets
Derivative financial instruments 4 -
Cash and cash equivalents 902 461
Non current liabilities
Borrowings (1,703) (1,714)
Derivative financial instruments (22) -
Current liabilities
Borrowings (256) (109)
----------------------------------- -------- --------
Net debt - continuing operations (996) (1,362)
Net cash classified as held for sale - 141
----------------------------------- -------- --------
Total net debt (996) (1,221)
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
13. Reconciliation of movements in equity
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions
----------------------------------- ------ -------- --------
Attributable to equity holders of the Company
Total recognised income and expense for the year 989 7
Share-based payment charge 23 25
Shares issued 4 4
Cumulative translation adjustment disposed (14) -
Treasury shares purchased (21) (10)
Dividends to equity holders of the Company (205) (195)
--------------------------------------- -------- --------
Net movement for the year 776 (169)
Attributable to equity holders of the Company at the
beginning of the year 2,800 2,969
Transition adjustment on adoption of IAS 39 (see note 15) (12) -
--------------------------------------- -------- --------
Attributable to equity holders of the Company at the
end of the year 3,564 2,800
Minority interests 169 214
--------------------------------------- -------- --------
Total equity 3,733 3,014
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
14. Cash flows
----------------------------------- ------ -------- --------
2005 2004
all figures in £ millions
----------------------------------- ------ -------- --------
Reconciliation of profit for the year to net cash generated from operations
Profit for the year 644 284
Income tax 125 70
Depreciation and amortisation charges 301 277
Loss on sale of property, plant and equipment - 4
Profit on sale of investments - (16)
Net finance costs 70 76
Profit on sale of subsidiaries and associates (346) 3
Share of results of joint ventures and associates (14) (10)
Net foreign exchange gains from transactions 39 (15)
Share-based payments 23 25
Inventories (17) (12)
Trade and other receivables (4) (18)
Trade and other payables 71 61
Provisions (17) (24)
----------------------------------- ------ -------- --------
Net cash generated from operations 875 705
Dividends from joint ventures and associates 14 12
Net purchase of PPE including finance lease principal
payments (75) (98)
Purchase of intangibles (24) (24)
Investment in pre-publication (222) (181)
Add back: Cash spent against integration and fair value
provisions 2 4
----------------------------------- ------ -------- --------
Pearson operating cash flow 570 418
Operating tax paid (65) (55)
Operating finance charges paid (65) (85)
----------------------------------- ------ -------- --------
Operating free cash flow 440 278
Non operating tax received - 10
Non operating finance charges paid (7) -
Integration and fair value spend (2) (4)
----------------------------------- ------ -------- --------
Total free cash flow 431 284
Dividends paid (including minorities) (222) (197)
----------------------------------- ------ -------- --------
Net movement of funds from operations 209 87
Included in net cash generated from operations is an amount of £(6)m (2004:
£24m) relating to discontinued operations.
Operating cash flow, operating free cash flow and total free cash flow have been
disclosed as they are part of Pearson's corporate and operating measures. Tax
payments and receipts that can be clearly identified with disposals, integration
and exchange differences taken to reserves are allocated as non operating tax
payments and receipts.
Notes to the condensed consolidated financial statements continued
for the year ended 31 December 2005
15. Explanation of transition to IFRS
Reconciliations, including explanations, from UK GAAP to IFRS of the condensed
consolidated balance sheet as at 1 January 2003 (the date of transition to
IFRS), 31 December 2003 and 31 December 2004 (the date of the last UK GAAP
financial statements) together with the reconciliations of the condensed
consolidated income statement, the condensed consolidated cash flow statement
and the condensed consolidated statement of recognised income and expense for
the years to 31 December 2003 and 31 December 2004 have been published on the
Company's website at www.pearson.com.
IAS 39 'Financial Instruments: Recognition and Measurement' and IAS 32
'Financial Instruments: Disclosure and Presentation' have not been applied to
the year ended 31 December 2004 because the Group has taken a transitional
exemption and adopted those standards prospectively from 1 January 2005. The
accounting policy in respect of financial instruments, as applied from 1 January
2005, is as follows:
Derivatives are initially recognised at fair value on the date a derivative is
entered into and are subsequently re-measured at their fair value. The Group
designates certain of the derivative instruments within its portfolio to be
hedges of the fair value of recognised assets or liabilities or a firm
commitment (fair value hedges) or hedges of net investments in foreign
operations (net investment hedges). All income statement movements have been
disclosed within net finance costs.
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
The effective portion of changes in the fair value of derivatives that are
designated and qualify as net investment hedges are recognised in equity. Gains
or losses relating to the ineffective portion are recognised immediately in the
income statement. Certain derivatives do not qualify or are not designated as
hedging instruments. Such derivatives are classified at fair value and any
movement in their fair values is recognised in the income statement immediately.
The effect of the transitional adjustment on the balance sheet as at 1 January
2005 is as follows:
------------------------------ --------- -------- --------
31 December Transition 1 January
All figures in £ millions 2004 Adjustment 2005
------------------------------ --------- -------- --------
Non-current assets
Derivative financial instruments - 145 145
Deferred income tax assets 359 5 364
------------------------------ --------- -------- --------
Current assets
Derivative financial instruments - 1 1
------------------------------ --------- -------- --------
Non-current liabilities
Borrowings (1,714) (134) (1,848)
Derivative financial instruments - (40) (40)
------------------------------ --------- -------- --------
Current liabilities
Trade and other payables (868) 14 (854)
Borrowings (109) - (109)
Derivative financial instruments - (3) (3)
------------------------------ --------- -------- --------
Reserves (126) 12 (114)
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