28th Feb 2005 07:03
Pearson PLC28 February 2005 28 February 2005 PEARSON: 2004 PRELIMINARY RESULTS PROGRESS ON ALL FINANCIAL GOALS IN 2004; FASTER GROWTH IN 2005 • Adjusted earnings per share of 30p, up 5% on an underlying basis; • Free cash flow £96m higher at £288m; • Adjusted operating profit from continuing businesses up 7%; 69% growth at the FT Group and 5% at Pearson Education more than offset the 24% profit decline at Penguin; • Dividend increase of 5%, ahead of inflation for the 13th successive year. Marjorie Scardino, chief executive, said: "In 2004 we achieved solid progress on all our financial goals and gained sharein most of our markets. At the same time, we reduced costs and invested morethan ever in the content and technology that set our products apart. "This year, we continue to expect strong growth at Pearson Education and theFinancial Times Group, and we are confident that our performance will be withinmarket expectations, even while we tackle some challenges at Penguin. In thelonger term, we have set the stage for a new phase in Pearson's growth, with ournetwork of business newspapers returned to profit and excellent prospects forour education businesses for the next few years." 2004 Currency 2003 Underlying ---------------- ---------- ----------- ---------- growth ----------- impact ---------------- ---------- ----------- ---------- -----------Business performanceSales £3,919m £(306)m £4,048m 3%Adjusted operating profit* £455m £(52)m £490m 5%Adjusted profit before tax* £386m £410mFree cash flow £288m £192mAdjusted earnings per share* 30.0p (3.7)p 32.0p 5%Return on invested capital 6.2% (0.4)pts 6.3% Continuing businesses (excluding Recoletos)Sales £3,729m £(302)m £3,879m 3%Adjusted operating profit* £433m £(51)m £462m 7% Statutory results ActualOperating profit £231m £226m 2%Profit before tax £171m £152m 13%Basic earnings per share 11.1p 6.9p 61% Dividends per share 25.4p 24.2p 5%Net borrowings £1,206m £1,361m (11)% * Before goodwill and non-operating items. In 2004 our goodwill charge oncontinuing operations was £215m (2003: £258m) and non-operating profit was £9m(2003: £(6)m). In 2004 Recoletos' goodwill was £9m (2003: £6m) and non-operatingprofit was nil (2003: £12m). Underlying means growth excluding currency impact (noted above) and portfoliochanges which in 2004 had a positive effect on sales of £41m and a negativeeffect on profits of £8m, largely because Edexcel, in which we acquired a 75%stake in May 2003, is loss-making in the first half. Throughout this statement,we refer to continuing business performance measures and growth rates on thisbasis unless otherwise stated. Our continuing businesses exclude Recoletosfollowing our acceptance of an offer for our 79% stake on 25 February 2005. 2004 OVERVIEW £ millions 2004 Currency 2003 Underlying impact SalesPearson Education 2,356 (223) 2,451 4%Penguin 786 (57) 840 -FT Group 587 (22) 588 3% Total continuing 3,729 (302) 3,879 3%Discontinued (Recoletos) 190 (4) 169 15%Total 3,919 (306) 4,048 3%---------------- ---------- ----------- ------------ ----------- Adjusted operatingprofitPearson Education 293 (29) 313 5%Penguin 54 (14) 91 (24)%FT Group 86 (8) 58 69% Total continuing 433 (51) 462 7%Discontinued (Recoletos) 22 (1) 28 (18)%Total 455 (52) 490 5% Pearson's sales grew 3% in 2004, with good sales performances at PearsonEducation and IDC. Adjusted operating profit increased 7% - despite a 24%decline at Penguin - with good progress at our largest business, PearsonEducation (up 5%) and a significant profit improvement at the FT Group (up 69%),benefiting from the cost reductions made in the face of a severe advertisingrecession in recent years. Adjusted earnings per share of 30.0p (2003: 32.0p)were up 5% on an underlying basis, helped by this profit improvement and bylower tax and interest charges. Our reported results were once again affected by currency movements. The 20 centweakening in the average US dollar rate - in which we earn approximatelytwo-thirds of our sales - against the pound to £1:$1.83 reduced our reportedsales by £302m and our reported operating profit by £51m. Our cash flow performance was particularly strong. Total free cash flow improved£96m to £288m. This was ahead of last year even without the Transportation andSecurity Administration (TSA) receivable which we collected in December. Cashconversion, at 93%, also benefited from further working capital improvements atPearson Education. Average working capital:sales at Pearson Education andPenguin improved by half a percentage point to 32.3%, even as we increasedinvestment in new programmes and contracts. Together these resulted in anincrease in our return on invested capital from 6.3% to 6.6% at constantexchange rates. Our statutory results show an improvement in operating profit of 2%. We reportstatutory basic earnings per share of 11.1p (2003: 6.9p). We ended the year withnet debt of £1,206m, an 11% improvement on 2003. We received $101m from the saleof our stake in MarketWatch in February 2005 and we expect to receive around€550m in net proceeds from the sale of our stake in Recoletos.The board is proposing a dividend increase of 5% to 25.4p. Throughout this statement (unless otherwise stated): 1. Adjusted figures are stated before goodwill, integration costs and non-operating items. We expense business restructuring costs and amortise goodwill over no more than 20 years; 2. The 'business performance' measures, which we use alongside other measures to track performance, are non-GAAP measures for both US and UK reporting. Reconciliations of operating profit, profit before tax, adjusted earnings per share and operating free cash flow to the equivalent statutory heading under UK GAAP are included in notes 2, 5, 6 and 10. 3. 'Currency impact' shows the effect of retranslating 2004 reported results at 2003 (rather than 2004) average exchange rates. Outlook We expect Pearson to grow strongly in 2005 and beyond, with further progress onearnings, cash and return on invested capital. Our outlook is: • We expect our worldwide School business to deliver significant underlying sales and profit growth in 2005. With a buoyant adoption calendar, healthy state budgets, federal funds for reading and testing and our investment in new programmes, we expect our US School publishing and testing operations to achieve double-digit sales growth. We also expect to achieve steady margin improvement in our US school publishing business over the next three years, as we benefit from a strong new adoption calendar in both 2006 and 2007, and from a significant increase in our new adoption participation rate compared with 2005. • Our US Higher Education business continues to benefit from its scale, the strength of its publishing and its lead in online learning. We expect that those qualities will enable our business to grow ahead of its industry once again in 2005, at a similar rate to 2004 and with similar margins. Longer-term, we see good growth prospects for our US and international higher education businesses. • We expect our Professional business to grow sales in the mid-single digits in 2005, helped by continued growth in our contract businesses and a stabilisation in technology publishing. We expect this division to deliver sustained growth, on the basis of our long-term contracts in Government Solutions and Professional Testing. • 2005 will be a year of transition for Penguin. We expect profits to improve in the UK, in spite of dual-running costs at our distribution centres. In the US we are planning on the basis that the weak market conditions experienced in the second half of 2004 continue. We are taking action to adjust our publishing programme and reduce costs, and we will expense approximately £5m on those actions in 2005. • We expect further profit progress at the FT Group. Advertising revenues at the Financial Times are up 3% in the year to date and, assuming similar advertising revenue growth for the full year, we would expect the FT to be around breakeven for the year as a whole. IDC expects to grow its reported revenues and net income under US GAAP in the high single-digit to low double-digit range. The results of Recoletos will be consolidated for January and February 2005 and with the launch of its new freesheet during these months are likely to be around breakeven. • Interest and tax. Our interest charge in 2005 is likely to be a little lower than in 2004, as the benefit of lower average net debt will be partly offset by the expected rise in average interest rates and the absence of a £9m one-off interest credit in 2004. We expect our effective tax rate for the full year to be around 32%. • Exchange rates. We generate around two-thirds of total revenues in the US and a five cent change in the average exchange rate for the full year (which in 2004 was £1:$1.83) will have an impact of approximately 1p on adjusted earnings per share. For more information:UK: Luke Swanson / Charlotte Elston + 44 (0) 20 7010 2310US: Jeff Taylor (analysts and investors) + 1 952 201 6878 / David Hakensen(media) + 1 952 681 3040 Pearson's preliminary results presentation for investors and analysts will bewebcast live today from 0900 (GMT) and available for replay from 12 noon (GMT)via www.pearson.com. We will also be holding a conference call for US investorsat 1500 (GMT) / 1000 (EST). To participate in the conference call or to listento the audiocast, please register at www.pearson.com. Video interviews with Marjorie Scardino, chief executive, and Rona Fairhead,chief financial officer, are also available at www.pearson.com. High resolutionphotographs are available for the media at www.newscast.co.uk. Except for the historical information contained herein, the matters discussed inthis preliminary announcement include forward-looking statements under UK GAAPthat involve risk and uncertainties that could cause actual results to differmaterially from those predicted by such forward-looking statements. These risksand uncertainties include international, national and local conditions, as wellas competition. They also include other risks detailed from time to time in thecompany's publicly-filed documents, including the company's Annual Report and USForm 20-F. The company undertakes no obligation to publicly update any forwardlooking statement, whether as a result of new information, future events orotherwise. Operating reviewPEARSON EDUCATION: HIGHLIGHTS • Leading position in new US School adoptions; strong growth in open territories, supplementary publishing and school testing; • Investment in new programmes in reading, science, literature and social studies, to capture significant growth opportunities in US School market in 2005 and beyond; • 4% sales growth in US Higher Education, ahead of the industry (at 2%) for the sixth straight year; • 20%+ sales growth and $500m of new professional contract wins in Government Solutions and Professional Testing. $800m Department of Education contract win - Pearson's largest ever - early in 2005; • Record sales of $1.2bn outside the US; excellent growth prospects in international education. £ millions 2004 Currency impact 2003 Underlying SalesSchool 1,118 (94) 1,176 -Higher Education 731 (69) 772 4%Professional 507 (60) 503 12% Total 2,356 (223) 2,451 4% Adjusted operating profitSchool 117 (8) 127 2%Higher Education 133 (16) 148 1%Professional 43 (5) 38 30% Total 293 (29) 313 5% Pearson Education had a strong year, growing sales by 4% and profits by 5% inspite of the weakest US new adoption market* for five years. Our School businessincreased profits by 2%, our US Higher Education business grew ahead of itsindustry and our Professional business increased profits by 30%. Our School business ended the year with sales level with 2003 and profits up 2%.In a year when new adoption spending fell by some 40% to approximately $500m weled the new adoption market, taking a 27% share of this smaller new adoptionopportunity - or 30% of the adoption opportunities we participated in. Webenefited from our strength across a wide range of subjects and grade levels,with a decline in elementary sales (after particularly strong market sharegrowth in 2003) mitigated by a strong performance in the secondary market. Wereturned to growth in the open territories and in supplementary publishing,helped by the restructuring actions we took in 2003 and by the sharp recovery inUS state budgets. We also invested in major new programmes in reading, science,literature and social studies, which should help us capture a good share of astrong US School market over the next few years. Our US School testing business benefited from the start-up of a number of newstate contracts, including Texas, Ohio, Virginia and Washington. We continued towin new multi-year contracts, worth $150m, including Tennessee, New Jersey andCalifornia ahead of implementation of the No Child Left Behind Act testingrequirements, which become mandatory in the school year starting in September2005. Our digital learning businesses showed a further profit improvement onslightly lower sales and we continued to develop and sell new products whichintegrate our content, testing and technology in a more focused way. The declinein reported profits reflects the impact of dollar weakness and a full yearcontribution from Edexcel, which is loss-making in the first half. Our Higher Education business grew sales by 4% and profits by 1%. In the US wegrew faster than the market for the sixth straight year, up 4% while theindustry without Pearson was up 2%, according to the Association of AmericanPublishers. We saw particular strength in two-year career colleges, afast-growing segment, with vocational programmes in allied health, technologyand graphic arts, and elsewhere in math and modern languages. Our margins eased a little as we achieved 5% growth outside the US and continuedto invest to make our technology central to the teaching and learning process.We rolled out our online learning platforms into new subject areas includingeconomics, psychology and modern languages and by the end of the year almostthree million US college students were following their courses through one ofour online programmes. Our custom publishing business, which creates specificprogrammes built around the curricula of individual faculties or professors,grew very strongly. Pearson Custom has now increased its sales eight-fold overthe past six years and we have introduced our first customised online resourcesfor individual college courses. Recognising concern over the rising cost of higher education, we alsoaccelerated our strategy of making our content available to students in a widerange of different formats and price points through our Pearson Choicesprogramme (www.pearsonchoices.com). Through SafariX, 350 of our leadingtextbooks are now available to students in a web-based format, at half the priceof their traditional print counterparts. Our Professional education business grew sales by 12% and profits by 30%.Pearson Government Solutions grew sales by 25%, with strong growth from add-onsto existing programmes. We also won some important contracts, includingmulti-year contracts worth $500m from customers such as the US Department ofHealth and the London Borough of Southwark. Our Professional Testing businessgrew sales 31% as we benefited from the start-up of major new contracts althoughwe continued to operate at a small loss as we invested in building up theinfrastructure for our 150-strong UK test centre network. Markets remained toughfor our technology publishing titles, where sales were 6% lower, but profitswere broadly level as a result of further cost actions. Our education businesses outside the US contributed a record $1.2bn in revenues.We saw a series of good performances across the spectrum of our publishing,testing and software. We won $200m of multi-year school testing contractsoutside the US. Edexcel successfully introduced our testing technology into theUK, marking 1.3 million examination scripts on-screen in 2004. Our internationalEnglish Language Teaching business grew well, helped by our biggest ever ELTinvestment. The new programme, English Adventure, has been developed for primaryschool age students using Disney characters, and has now been launched in fivemajor ELT markets. Pearson Education completed a number of small bolt-on acquisitions in the year.These included Knowledge Analytic Technologies, extending our capabilities inelectronic school testing and marking; Causeway Press, strengthening our UKeducation publishing for schools and colleges; Altona Ed, a web-based studentinformation system; and Dominie Press in Spanish language supplementarypublishing. Note: In the US, 20 'adoption' states buy textbooks and related programmes on aplanned contract schedule or 'adoption cycle'. The level of spending varies fromyear to year with this schedule, depending on the number of adoptions in thelargest states and subjects. In 'open territory' states, school districts orindividual schools buy textbooks according to their own individual schedulesrather than on a statewide basis. PENGUIN: HIGHLIGHTS • Strong UK publishing and sales performance in spite of distribution disruption in 2004; UK profit improvement expected in 2005; • Strong bestseller performance in US, but weakness in US mass market and backlist worldwide in second half; • Taking actions to adjust business and publishing for changing market conditions. £ millions 2004 Currency impact 2003 Underlying Sales 786 (57) 840 - Adjusted operating profit 54 (14) 91 (24)% Penguin had a difficult year, with flat sales and significantly lower profits,despite a successful publishing schedule. The single largest factor in thedecline in reported operating profit was the weak dollar. Penguin makesapproximately two-thirds of its sales in the US and the dollar's decline againststerling reduced Penguin's profits by £14m. The 24% decline in underlyingoperating profit was caused by a number of factors, including disruption to ourUK distribution and weakness in the US consumer publishing market. In the UK, our move to a new warehouse, to be shared between Penguin and PearsonEducation, disrupted supply of our books and had a particular impact on backlisttitles. Although we traded well in the second half, and shipped more books toour UK customers than in the previous year, we incurred some £9m of additionalcosts as we took special measures to deliver books, including the cost ofrunning two warehouses, shipping books direct and additional marketing support.By the end of the year, we had eliminated the order backlog in the warehouse,and the new management team has continued to make good progress in the earlypart of 2005, successfully installing the new automated warehouse managementsystem. We will continue to incur dual running costs until Pearson Educationmoves into the new warehouse, which is planned for the second half. After a good start to the year, the US consumer publishing market deterioratedsharply in the second half and full-year industry sales were 1% lower than in2003, according to the Association of American Publishers. The adult mass marketsegment, which accounts for approximately one-third of Penguin's US sales, wasdown 9% for the industry for the full year, and 13% in the second half. Penguinis planning for 2005 on the basis that tough market conditions continue and isadjusting its business and publishing programmes accordingly. We are takingactions to reduce costs, accelerating investment in successful new imprints,focusing publishing in premium market categories and finding new ways to sellhigh margin backlist titles. Despite this, Penguin had another great publishing year. We benefited from ournew imprint strategy, with a further four imprints publishing for the firsttime. Non-fiction performed particularly well, with a 40% increase in our titleson the New York Times bestseller list, including Lynne Truss's Eats, Shoots &Leaves (now with over one million copies in print), Ron Chernow's AlexanderHamilton and Maureen Dowd's Bushworld. Best-selling UK titles included JamieOliver's Jamie's Dinners, Sue Townsend's Adrian Mole and the Weapons of MassDestruction and Gillian McKeith's You Are What You Eat. FT GROUP: HIGHLIGHTS • £23 million profit improvement at the Financial Times; advertising revenues up for the first time in 4 years, and up 3% in the first two months of this year; • Return to profit at our network of business newspapers with advertising revenues stabilising and cost savings coming through; • IDC profits up 9% with 95%+ institutional renewal rates. £ millions 2004 Currency impact 2003 Underlying SalesFT Newspaper 208 (1) 203 3%Other FT publishing 110 (2) 112 5%IDC 269 (19) 273 3% Total continuing 587 (22) 588 3%Discontinued (Recoletos) 190 (4) 169 15% Total 777 (26) 757 6% Adjusted operating profit / (loss) FT Newspaper (9) -- (32) 72%Other FT publishing 11 -- 6 61%Associates & Joint Ventures 6 -- 3 100%IDC 78 (8) 81 9% Total continuing 86 (8) 58 69%Discontinued (Recoletos) 22 (1) 28 (18)%Total 108 (9) 86 39% The Financial Times Group increased sales by 3% and profits by 69% with anothergood year from IDC, a more stable business advertising environment and thebenefit of cost actions taken in recent years. The Financial Times achieved revenue growth for the first year since 2000 andreduced losses from £32m in 2003 to £9m, returning to profit in the seasonallystrong fourth quarter. Sales increased 3% with advertising revenues up 2% andcirculation revenues also ahead. Advertising performance across categories and regions was mixed throughout theyear. While the recruitment and luxury goods categories increased by more than20%, the business-to-business and technology sectors showed few signs ofrecovery. In terms of geography, good growth in Europe and Asia offset a veryweak US corporate advertising market. We continued to reduce the FT's cost base,which is now £110 million or one-third lower than it was in 2000. At the sametime, we invested in editorial initiatives, printing the FT in Australia - afirst for any international daily newspaper publisher - and increasing the reachand number of our colour magazines, FT Magazine and How To Spend It. Averagecirculation for the year of 435,000 was 3% lower than the previous year, whileFT.com has 76,000 paying subscribers and 3.7m unique users. The FT's performanceon international surveys of business readership in print and online remainedstrong. Les Echos achieved sales growth of 4% and profits grew very strongly, despite avolatile advertising market. Average circulation grew 3% to 119,800, whilecompetitors continued to see falling sales. FT Business also posted significantprofit growth, with sales growth across all its main markets, and a continuingemphasis on cost management. Profit from the FT's associates and joint ventures doubled in the year. Lossesnarrowed at FT Deutschland as circulation and advertising revenue both grewstrongly. FT Deutschland reached the 100,000 copy sales mark in December, andcirculation averaged 96,600 (+6%). The Economist Group again increased itsoperating profit, with The Economist's circulation passing the significant onemillion mark, with an average weekly circulation of 1,009,759. The Group alsolaunched a new annual, Intelligent Life, as well the first Chinese languageedition of The World in 2005. Interactive Data Corporation (NYSE: IDC), our 61%-owned financial informationbusiness, increased sales by 3% and profits by 9%. FT Interactive Data ande-Signal performed well, particularly in the US, where we saw some signs ofimprovement in market conditions. Worldwide renewal rates among institutionalclients remained at or above 95%. Demand for Interactive Data's value-addedservices remained strong, with the signing of our 100th customer for our FairValue Information Service product in December. IDC had a first full yearcontribution from acquisitions made in 2003, ComStock and HyperfeedTechnologies, and acquired FutureSource in September to expand and complementeSignal. The consolidation of seven US data centres into two facilities is ontrack for completion at the end of this year. In December, we announced our intention to sell our shareholding in Recoletos,our 79%-owned Spanish media group, to Retos Cartera as part of a tender offerfor all of Recoletos. Retos Cartera's tender offer was launched on 16 February2005 and we accepted it on 25 February. In January of this year, we alsoaccepted an offer from Dow Jones & Co. for our 22% stake in MarketWatch,bringing in proceeds of $101m. Financial review Profit before taxIn 2004 we report a profit before tax of £171m. This is higher than our profitof £152m in 2003, mainly due to a reduction in goodwill expense and interestcharge. Goodwill Goodwill amortisation is a non-cash item. This is the final year of amortisationunder UK GAAP, ahead of moving to International Financial Reporting Standards in2005. No impairments were reported in 2004 and goodwill amortisation as a wholewas £224m, down by £40m from £264m in 2003. This reflects the impact of exchangerates in the year and the reduction in charges relating to fully amortisedassets. Non operating items Non operating items reflect gains and losses on the sale or closure ofbusinesses and on the disposal of fixed assets and investments. In 2004 we hadprofits on the sale of our stakes in Capella and Business.com, partially offsetby small losses elsewhere. Interest Net operating interest fell by £11m to £69m as an increase in floating interestrates was offset by a combination of lower levels of average net debt and aone-off credit of £9m for interest on the repayment of tax in France. Taxation The total tax charge for the year was £62m, representing a 36% rate on pre-taxprofits of £171m. This rate is higher than the UK statutory rate of 30%; as inprevious years, this is largely attributable to the fact that goodwillamortisation charged in the profit and loss account is only in part eligible fortax relief. The total tax charge includes credits of £48m relating to previousyears; as in 2003, these reflect a combination of progress in settlements withthe Revenue authorities and changes to deferred tax balances. The mix of profitsbetween jurisdictions with different tax rates is also a relevant factor; theeffect in 2004 was similar to that in 2003. The tax rate on adjusted earnings fell from 31.2% in 2003 to 30.3% in 2004; thisdecline reflected a number of factors including adjustments relating to previousyears and withholding taxes. Minority interests Minority interests include a 39% minority share in IDC and a 21% minority sharein Recoletos. Dividends The dividend payment of £201m which we are recommending in respect of 2004represents 25.4p per share - a 5% increase on 2003. The dividend is covered 1.2times by adjusted earnings and 1.4 times by total free cash flow. Pensions Pearson operates a variety of pension schemes. Our UK fund is by far the largestand we also have some smaller defined benefit funds in the US and Canada.Outside the UK, most of our people operate 401K (essentially definedcontribution) plans. The UK pension funding level is kept under regular reviewby the company and the Fund trustees. The scheme was valued as at 1 January 2004and the next valuation will be at 1 January 2006. As a result of the 2004valuation, the company agreed to increase contributions to £30m in respect of2004; to £35m in 2005; and to £41m from 2006 to 2014. Adoption of International Financial Reporting Standards (IFRS) From 2005 onwards Pearson will be adopting IFRS in its consolidated financialstatements in compliance with European Union regulation. This will lead to anumber of changes in reported financial data, which will also be reflected inPearson's comparative financial information for prior periods. Pearson hasdecided to adopt IFRS as at 1 January 2003 which will have the advantage ofproviding two years of comparative IFRS data. The group started its IFRS transition project in 2003. The project is governedby a steering committee chaired by the chief financial officer and regularupdates are provided to the Audit Committee. The project has entailed a detailedassessment of the impacts of IFRS on Pearson accounting policies and reportedresults; system changes to capture additional data; training of staff criticalto the Group's reporting process and definition of our IFRS communicationstrategy. The work related to all project activities remains on track to provide ananalysis of the full impact of the adoption of IFRS on the Group's audited 2003and 2004 results and respective balance sheets. Other than the format ofpresentation, there is no cash flow impact from the adoption of IFRS. We plan tocommunicate the full impact of the adoption of IFRS on our audited 2003 and 2004results during April 2005. In the meantime we set out below a summary of the main areas of impact on theGroup's operating profit together with indicative estimates of the relatedamounts: 1. Goodwill and other intangibles: Under IFRS3, goodwill is no longeramortised and, instead, is assessed annually for impairment. Goodwill arising onacquisitions before 1 January 2003 will not be restated; other intangible assetsarising from acquisitions after 1 January 2003 will be separately identified andamortised over their estimated useful economic lives, often over shorter periodsthan goodwill has previously been amortised. As a result of this change, Pearson's operating profit will be increased by theamount of goodwill amortisation recorded under UK GAAP (amounting to £224m for2004 and £264m in 2003) but reduced by the amortisation of other purchasedintangible assets (estimated to be up to £10m in each of 2004 and 2003). 2. Share based payments: Under IFRS 2, the imputed fair value at the dateof grant of restricted shares, SAYE schemes and share options issued toemployees will be charged to operating profit over the relevant vesting period.This will result in a reduction in Pearson's reported operating profit, as thecost will be higher than that currently charged under UK GAAP. The UK GAAPcharge is based upon the intrinsic value of the award being the differencebetween exercise price and grant price. The impact is estimated to be between £15m and £25m in 2003 and 2004. 3. Employee Benefits: Under IAS 19 pensions are charged to the profit andloss account using a different basis of accounting from SSAP 24. IAS 19 uses abalance sheet approach (similar to FRS 17) for pension cost accounting ratherthan determinations based on long term actuarial assumptions. The profit andloss expense is determined using annually derived assumptions as to salaryinflation, investment returns and discount rates, based on prevailing conditionsat the start of the year. Any surplus or deficit on a defined benefit scheme atthe balance sheet date is recognised in the balance sheet. Where actualexperience differs from the assumptions made, actuarial gains and losses will berecognised through the Statement of Recognised Income and Expense. The adoption of IAS 19 is not anticipated to result in a significant change tooperating profit compared to SSAP 24 for 2003 and 2004. In addition to the above principal areas of impact, a number of other changeswill arise upon transition to IFRS, for example, in relation to the treatment ofsoftware-costs, deferred tax, dividends payable and certain balance sheetdisclosures related to items such as pre-publication costs. We will report onthese other adjustments including further details relating to the presentationand layout of the Group's IFRS income statement and balance sheet in our Aprilbriefing. Going forward, Pearson has elected to adopt IAS39 relating to financialinstruments from 1 January 2005. Accounting for derivative financial instrumentsin accordance with IAS 39 may result in increased volatility of earnings.However, Pearson has been tracking its key derivatives during 2004 and has putin place the required documentation to qualify for hedge accounting: where hedgeaccounting cannot be applied under IAS39's prescriptive rules, changes in thismarket value of financial investment will be reported through the profit andaccount. Given the adoption date, this will have no impact on the 2003 or 2004accounts. A number of new IFRS standards were published in final form by the InternationalAccounting Standards Board in the period between November 2003 and March 2004which will be mandatory for Pearson in preparing the group's first IFRSfinancial statements. As a large number of countries, including the UnitedKingdom, are simultaneously adopting the standards for the first time there islimited established practice on which to draw when forming opinions regardingIFRS interpretation and application. Therefore at this stage, the full financialeffect of reporting under IFRS cannot be definitively quantified due to thepossible amendment of interpretative guidance by the IASB and developingindustry practice. Consolidated profit and loss accountfor the year ended 31 December 2004 ----------------2004---------- -----------------2003----------all figures note Results from Other Total Results from Other Totalin £ operations items operations itemsmillions Sales(includingshare ofjoint ventures) 3,940 - 3,940 4,066 - 4,066 Less: shareof joint ventures (21) - (21) (18) - (18) Sales of which 2a 3,919 - 3,919 4,048 - 4,048Continuingoperations 3,729 - 3,729 3,879 - 3,879 Discontinuedoperations 190 - 190 169 - 169 Groupoperatingprofit ofwhich 445 (224) 221 483 (257) 226 Continuingoperations 425 (215) 210 457 (251) 206 Discontinuedoperations 20 (9) 11 26 (6) 20 Share ofoperatingprofit ofjointventures andassociates ofwhich 2c / d 10 - 10 7 (7) - Continuingoperations 8 - 8 5 (7) (2)Discontinuedoperations 2 - 2 2 - 2 Totaloperatingprofit 2b 455 (224) 231 490 (264) 226 ContinuingoperationsProfit/(loss)on sale offixed assetsandinvestments 3a - 12 12 - (2) (2) Loss on saleofsubsidiariesand associates 3b - (3) (3) - (4) (4) DiscontinuedoperationsProfit onsaleofsubsidiaries and associates 3b - - - - 12 12 Non operatingitems - 9 9 - 6 6 Profit beforeinterest andtaxation 455 (215) 240 490 (258) 232Net financecosts 4 (69) - (69) (80) - (80) Profit beforetaxation 5 386 (215) 171 410 (258) 152Taxation 7 (117) 55 (62) (128) 53 (75) Profit aftertaxation 269 (160) 109 282 (205) 77 Equityminorityinterests (30) 9 (21) (28) 6 (22) Profit forthefinancial period 239 (151) 88 254 (199) 55 Dividends onequity shares 8 (201) (192) Loss (113) (137)retained Adjustedearnings pershare 6 30.0p 32.0p Basicearnings per share 6 11.1p 6.9p Dilutedearnings pershare 6 11.0p 6.9p Dividends pershare 8 25.4p 24.2p There is no difference between the profit before taxation and the loss retainedfor the period stated above and their historical cost equivalents. Consolidated balance sheetas at 31 December 2004 ------------------------- ----------- ---------- all figures in £ millions 2004 2003 restated------------------------- ----------- ---------- Fixed assetsIntangible assets 2,890 3,260Tangible assets 473 468Investments: joint ventures ----------- ----------Share of gross assets 9 7Share of gross liabilities (2) (1) ----------- ---------- 7 6Investments: associates 41 58Investments: other 17 21------------------------- ----------- ---------- 3,428 3,813Current assetsStocks 676 683Debtors 1,103 1,132Deferred taxation 165 145Investments 1 2Cash at bank and in hand 613 561------------------------- ----------- ---------- 2,558 2,523Creditors - amounts falling due within one yearShort-term borrowing (107) (575)Other creditors (1,168) (1,129)------------------------- ----------- ---------- (1,275) (1,704) ----------- ----------Net current assets 1,283 819------------------------- ----------- ----------Total assets less current liabilities 4,711 4,632 Creditors - amounts falling due after more than oneyearMedium and long-term borrowing (1,712) (1,347)Other creditors (60) (45)------------------------- ----------- ---------- (1,772) (1,392)Provisions for liabilities and charges (123) (152)------------------------- ----------- ----------Net assets 2,816 3,088 Capital and reservesCalled up share capital 201 201Share premium account 2,473 2,469Profit and loss account (71) 223------------------------- ----------- ----------Equity shareholders' funds 2,603 2,893Equity minority interests 213 195------------------------- ----------- ---------- 2,816 3,088 The 2003 comparatives have been restated for the adoption of UITF 38 (see notes1 and 11) Consolidated statement of cash flowsfor the year ended 31 December 2004 ---------------------------- ------- -------- --------- all figures in £ millions note 2004 2003 restated---------------------------- ------- -------- --------- Net cash inflow from operating activities 10 530 359Dividends from joint ventures and associates 10 9Interest received 13 11Interest paid (97) (86)Debt issue costs (1) (1)Dividends paid to minority interests (2) (19)---------------------------- ------- -------- ---------Returns on investments and servicing of finance (87) (95)Taxation (45) (44)Purchase of tangible fixed assets (125) (105)Sale of tangible fixed assets 4 8Purchase of investments (1) (3)Sale of investments 17 ----------------------------- ------- -------- ---------Capital expenditure and financial investment (105) (100)Purchase of subsidiaries (35) (94)Net cash acquired with subsidiaries - 34Purchase of joint ventures and associates (10) (5)Sale of subsidiaries - (4)Net overdrafts disposed with subsidiaries 1 1Sale of associates 24 57---------------------------- ------- -------- ---------Acquisitions and disposals (20) (11)Equity dividends paid (195) (188)---------------------------- ------- -------- ---------Net cash inflow/(outflow) before management of liquidresources andFinancing 88 (70)Management of liquid resources 1 (85)Issue of equity share capital 4 5Purchase of own shares (10) (1)Capital element of finance leases (2) (3)Loan facility (repaid)/advanced (42) 1Bonds advanced 414 180Bonds repaid (456) (159)Collateral deposit (placed)/reimbursed (26) 54Net movement in other borrowings 59 (13)---------------------------- ------- -------- ---------Financing (59) 64---------------------------- ------- -------- ---------Increase/(decrease) in cash in the period 30 (91) Statement of total recognised gains and lossesfor the year ended 31 December 2004 ---------------------------- ------ -------- --------- all figures in £ millions note 2004 2003---------------------------- ------ -------- --------- Profit for the financial period 88 55Other net gains and losses recognised in reservesExchange differences net of taxation (176) (254)---------------------------- ------ -------- ---------Total recognised losses relating to the period (88) (199)Prior year adjustment - UITF 38 11 37 ----------------------------- ------ -------- ---------Total recognised losses (51) (199) Reconciliation of movements in equity shareholders' fundsfor the year ended 31 December 2004 ---------------------------- ------ -------- --------- all figures in £ millions note 2004 2003 restated---------------------------- ------ -------- --------- Profit for the financial period 88 55Dividends on equity shares (201) (192)---------------------------- ------ -------- --------- (113) (137)Exchange differences net of taxation (176) (254)Shares issued 4 5Purchase of own shares (10) (1)UITF 17 charge for the period 5 4---------------------------- ------ -------- ---------Net movement for the period (290) (383)Equity shareholders' funds at beginning of the period 2,893 3,338Prior year adjustment - UITF 38 11 - (62)---------------------------- ------ -------- ---------Equity shareholders' funds at end of the period 2,603 2,893 2004 resultsThe preliminary results for the year ended 31 December 2004 have been extractedfrom the audited accounts, which have not yet been delivered to the Registrar ofCompanies. The 2003 accounts carry an unqualified audit report and have been sodelivered. The 2004 Annual Report will be posted to shareholders on Thursday 31March 2005. DividendThe directors recommend a final dividend of 15.7p per share, payable on Friday 6May 2005 to shareholders on the register at the close of business on Friday 8April 2005. Annual General MeetingThe AGM will be held at The Queen Elizabeth II Conference Centre, BroadSanctuary, Westminster, London, SW1P 3EE, at 12 noon on Friday 29 April 2005. Notes to the 2004 resultsfor the year ended 31 December 2004 1. Basis of preparation The results for the year ended 31 December 2004 have been prepared in accordancewith the accounting policies set out in the 2003 Annual Report, except that UITF38 'Accounting for ESOP trusts' and the revision of UITF Abstract 17 'Employeeshare schemes' have been adopted in these statements. Restatements have beenmade to the figures for the year ended 31 December 2003 where appropriate (seenote 11). In December 2004, Pearson announced its intention to dispose of its 79% interestin Recoletos Compania Editorial SA. The transaction was approved by the Spanishregulatory authorities in February 2005 and the results of Recoletos have beenincluded in these financial statements as discontinued operations. 2a. Analysis of sales all figures in £ millions 2004 2003 Business sectorsPearson Education 2,356 2,451FT Group 587 588The Penguin Group 786 840------------------------------ ---------- ----------Continuing operations 3,729 3,879Discontinued operations 190 169------------------------------ ---------- ---------- 3,919 4,048 Geographical markets suppliedUnited Kingdom 545 474Continental Europe 300 294North America 2,505 2,742Asia Pacific 261 255Rest of World 118 114------------------------------ ---------- ----------Continuing operations 3,729 3,879Discontinued operations 190 169------------------------------ ---------- ---------- 3,919 4,048 Notes to the 2004 results continuedfor the year ended 31 December 2004 2b. Analysis of total operating profit 2004 all figures in £ millions results from goodwill operating operations amortisation profit Business sectorsPearson Education 293 (174) 119FT Group 86 (20) 66The Penguin Group 54 (21) 33--------------------------- ----------- ---------- --------Continuing operations 433 (215) 218Discontinued operations 22 (9) 13--------------------------- ----------- ---------- -------- 455 (224) 231 Geographical markets suppliedUnited Kingdom (26) (30) (56)Continental Europe 21 (2) 19North America 393 (177) 216Asia Pacific 31 (5) 26Rest of World 14 (1) 13--------------------------- ----- ------ ---------- --------Continuing operations 433 (215) 218Discontinued operations 22 (9) 13--------------------------- ----- ------ ---------- -------- 455 (224) 231 2003 all figures in £ millions results from goodwill operating operations amortisation profitBusiness sectorsPearson Education 313 (207) 106FT Group 58 (30) 28The Penguin Group 91 (21) 70--------------------------- ----- --------- ---------- --------Continuing operations 462 (258) 204Discontinued operations 28 (6) 22--------------------------- ----- --------- ---------- -------- 490 (264) 226Geographical markets suppliedUnited Kingdom (46) (31) (77)Continental Europe 1 (4) (3)North America 466 (218) 248Asia Pacific 33 (5) 28Rest of World 8 - 8--------------------------- ----- --------- ---------- --------Continuing operations 462 (258) 204Discontinued operations 28 (6) 22--------------------------- ----- --------- ---------- -------- 490 (264) 226 Notes to the 2004 results continuedfor the year ended 31 December 2004 2c. Share of operating profit/(loss) of joint ventures 2004 all figures in £ millions results from goodwill operating operations amortisation profit Business sectorsPearson Education - - -FT Group (8) - (8)The Penguin Group 1 - 1 Continuing operations (7) - (7) 2003 all figures in £ millions results from goodwill operating operations amortisation profit Business sectorsPearson Education - - -FT Group (11) - (11)The Penguin Group 1 - 1 Continuing operations (10) - (10) 2d. Share of operating profit of associates 2004 all figures in £ millions results from goodwill operating operations amortisation profit Business sectorsPearson Education 1 - 1FT Group 14 - 14The Penguin Group - - - Continuing operations 15 - 15Discontinued operations 2 - 2 17 - 17 2003 all figures in £ millions results from goodwill operating operations amortisation profit Pearson Education 1 - 1FT Group 14 (7) 7The Penguin Group - - -Continuing operations 15 (7) 8Discontinued operations 2 - 2 17 (7) 10 Notes to the 2004 results continuedfor the year ended 31 December 2004 3a. Profit/(loss) on sale of fixed assets and investments all figures in £ millions 2004 2003 Net loss on sale of property (4) (1)Net profit/(loss) on sale of investments 16 (1) Continuing operations 12 (2) 3b. Profit /(loss) on sale of subsidiaries and associates all figures in £ millions 2004 2003 Net loss on sale of subsidiaries and associates (3) (4)Related Shares:
Pearson