3rd Mar 2008 07:01
Pearson PLC03 March 2008 3 March 2008 PEARSON 2007 PRELIMINARY RESULTS Record profits, earnings, cash and dividends. Adjusted operating profit up 14%to £634m; adjusted earnings per share up 8% to 46.7p (up 15% at constantexchange rates); operating free cash flow up 23% to £533m; dividend up 7.8% to31.6p. Faster growth. Underlying sales growth of 6%, with strong competitiveperformances and every business growing at or above 2006 levels. Higher margins and returns. Margins up 1.1% points to 15.0% with substantialprogress at School (up 0.6% pts), Penguin (up 0.9%pts), Interactive Data (up1.4% pts) and FT Publishing (up 6.7% pts). Return on invested capital up 0.2%points to 8.2% (a 1.0% point underlying improvement). All-round progress. Strong profit growth in all continuing businesses: Educationup 9% to £404m; Penguin up 20% to £74m; FT Group up 30% to £153m. Sustained growth. Good start to 2008; further financial progress expected in allbusinesses. Marjorie Scardino, chief executive, said: "This is another record set of resultsand an excellent performance from every part of Pearson. We continue to reshapePearson into a more digital, more international and more efficient company, andthose changes make us confident that 2008 will be another good year." £ millions 2007 2006 Headline growth Underlying growth-------------------- --------- --------- --------- --------- Business performanceSales 4,218 4,051 4% 6%Adjusted operating 634 592 7% 14%profitAdjusted profit before 549 502 9% --taxAdjusted earnings pershare 46.7p 43.1p* 8% -- Operating cash flow 684 575 19% --Operating free cash flow 533 434 23% --Return on invested 8.2% 8.0% 0.2 ppts 1.0 pptscapitalNet Debt 973 1,059 (8)% ---------------------- --------- --------- --------- --------- Statutory resultsSales 4,162 3,990 4%Operating profit 574 522 10% --Profit before tax 468 448 4% --Basic earnings per share- continuing 39.0p 52.7p (26)% --Cash generated fromoperations 659 621 6% ---------------------- --------- --------- --------- ---------Dividend per share 31.6p 29.3p 7.8% ---------------------- --------- --------- --------- --------- *Restated for tax deductibility of goodwill amortisation of 2.9p Growth rates are stated on an underlying basis (i.e. excluding currencymovements and portfolio changes) unless otherwise stated. The 'businessperformance' measures are non-GAAP measures and reconciliations to theequivalent statutory heading under IFRS are included in notes 2, 7 and 17 to theattached financial statements. 2007 OVERVIEW In 2007, Pearson's sales increased by 6% to £4.2bn and adjusted operating profitby 14% to a record £634m. Every part of Pearson contributed to this profitincrease, with adjusted operating profit at Pearson Education up 9%, Penguin up20% and the FT Group up 30%. Headline earnings per share were 46.7p, up 8% (andup 15% at constant currency). Currency movements reduced adjusted sales by£228m, adjusted operating profit by £37m and adjusted earnings per share by2.7p. We also produced record cash flows. Operating cash flow increased by 19% or£109m to £684m and operating free cash flow by £99m to £533m. Cash conversionwas once again very strong at 108% of operating profit. Over the past threeyears, the proportion of our profits converted to cash has averaged more than100%. The ratio of average working capital to sales at Pearson Education andPenguin improved by a further 0.7% points to 25.6%. Our return on investedcapital shows a headline increase of 0.2% points (to 8.2%) and a 1.0% pointunderlying improvement. Statutory results show an increase of £52m in operating profit to £574m (£522min 2006). Basic earnings per share for continuing businesses were 39.0p in 2007against 52.7p in 2006, largely reflecting the absence of a 2006 tax credit. Netdebt was £86m lower at £973m (from £1,059m in 2006). Acquisitions. In 2007, we announced the acquisitions of Harcourt's US assessmentand international education businesses, eCollege, and several small companieswhich extend our worldwide leadership positions. Our total investment inacquisitions completed in 2007 was £472m and acquisitions added £90m of salesand £13m of operating profit to our 2007 results (after integration costs, whichare expensed). The acquisition of Harcourt's US assessment business, announcedin May 2007, was completed in January 2008 after clearance from the USregulatory authorities and therefore had no impact on the 2007 results. Disposals. In February 2007 we completed the sale of our Government Solutionsbusiness to Veritas Capital for $560m in cash, $40m in preferred stock and a 10%interest in the company. In December 2007 we completed the sale of Les Echos toLVMH for €240m in cash and in January 2008 we announced the disposal of our 50%stake in FT Deutschland to Gruner + Jahr. In February 2008, we sold our DataManagement (Scanners) business to M & F Worldwide Corp for $225m. Dividend. The board is proposing a dividend increase of 7.8% to 31.6p. Subjectto shareholder approval, 2007 will be Pearson's 16th straight year of increasingour dividend above the rate of inflation. Over the last ten years we haveincreased our dividend at a compound annual rate of 6.1%. Our financial goals. Pearson's three key financial measures are adjustedearnings per share, free cash flow and return on invested capital. We use thesemeasures to drive performance and to align our plans and targets with theinterests of shareholders. Our five-year record on these goals is: 2003 2004 2005 2006 2007 Adjusted earning per share 27.6p* 27.5p* 34.1p* 43.1p 46.7pOperating cash flow £318m £418m £570m £575m £684mReturn on invested capital 6.0% 6.2% 6.7% 8.0% 8.2% * As reported (before restatement for tax deductibility of goodwillamortisation). OUTLOOK In recent years we have significantly changed the shape of Pearson, building anddiversifying our education company, shifting our financial informationbusinesses towards recurring revenue streams and becoming more efficient througha centralised operations organisation. These moves have made Pearson a moreprofitable, more cash generative and more resilient company, and we expect tomake further progress on our financial goals in 2008. At this early stage, our outlook for 2008 is: • In Education (64% of 2007 sales and operating profit), we expectanother year of good profit growth, benefiting once again from the uniquebreadth of our education business - from pre-school to adult learning; acrosspublishing, testing and technology; and in the US and around the world. In our School business, integration of our recently-acquired Harcourt businessesis progressing well. In 2008, we expect School margins to be similar to 2007,after expensing integration costs relating to the acquisition. In 2009, weexpect School margins to rise to around 15% as the majority of the integrationcosts fall away and as we realise the financial benefits of the acquisition. Including the Harcourt contribution, we expect our School business to grow saleswell into double digits in 2008 at constant currency. Excluding Harcourt, weexpect underlying sales growth in the low single digits, as US market growth of3-4% is partly offset by our lower participation rate in new US adoptions andthe conclusion of our UK key stage testing contract. In Higher Education, we expect our underlying sales to grow in the mid singledigits, a little ahead of the industry. We expect margins to be stable, as wecontinue to invest in expanding our adaptive learning technologies and in takingour recently-acquired eCollege platform into new segments and geographicmarkets. In Professional, we expect sales to increase in the low single digits inunderlying terms with underlying margins improving once again. • Penguin (20% of sales; 12% of operating profit) expects to improvemargins further and into double digits. Penguin's good publishing and tradingperformance has continued into the early part of 2008. • The Financial Times Group (16% of sales; 24% of operating profit)expects to continue its profit growth. We have substantially increased ourdigital and subscription revenues and reduced our exposure to print advertisingin recent years (in 2007, digital services accounted for 63% of FT Grouprevenues, compared with 28% in 2000; advertising accounted for 30% of FT Grouprevenues, down from 52% in 2000). At FT Publishing, advertising revenues havecontinued to grow in the early part of the year, but future advertising trendsremain difficult to predict. However, as a result of our revenue diversificationand cost actions we expect further profit improvement at FT Publishing thisyear, even without any growth in advertising revenues. Interactive Data expectsto achieve revenue growth in the 7-9% range and operating profit growth in the9-11% range (headline growth under US GAAP). Interest and Tax. We expect our interest charge to be similar to that in 2007with the higher level of net debt following the completion of the Harcourttransaction offset by strong cash generation and the recent proceeds from thedisposals of Les Echos and Data Management (Scanners). Our pension credit willremain at a similar level to 2007, despite an upward revision to life expectancyassumptions. We expect our effective tax rate to be in the 27-29% range. Exchange rates. Pearson generates approximately 60% of its sales in the US andeach five cent change in the average £:$ exchange rate for the full year (whichin 2007 was £1:$2.00) would have an impact of approximately 1p on adjustedearnings per share. For more information: Luke Swanson / Simon Mays-Smith/ Charles Goldsmith + 44 (0) 20 7010 2310 Pearson's results presentation for investors and analysts will be webcast livetoday from 09.00 (GMT) and available for replay from 12.00 (GMT) viawww.pearson.com. We are holding a conference call for US investors at 15.00 (GMT) / 10.00 (EST).To participate please dial in on + 1 866 966 5335 (inside the US) or +44 (0)203003 2666 (outside the US). The call will be available for replay atwww.pearson.com Video interviews with Marjorie Scardino and Robin Freestone are available atwww.pearson.com high resolution photographs are available for the media atwww.newscast.co.uk FORWARD LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed inthis Preliminary Statement include forward-looking statements. In particular,all statements that express forecasts, expectations and projections with respectto future matters, including trends in results of operations, margins, growthrates, overall market trends, the impact of interest or exchange rates, theavailability of financing, anticipated costs savings and synergies and theexecution of Pearson's strategy, are forward looking statements. By theirnature, forward looking statements involve risks and uncertainties because theyrelate to events and depend on circumstances that will occur in future. Thereare a number of factors which could cause actual results and developments todiffer materially from those expressed or implied by these forward lookingstatements, including a number of factors outside Pearson's control. Theseinclude international, national and local conditions, as well as competition.They also include other risks detailed from time to time in the company'spublicly-filed documents. Any forward looking statements speak only as of thedate they are made, and Pearson gives no undertaking to update forward-lookingstatements to reflect any changes in its expectations with regard thereto or anychanges to events, conditions or circumstances on which any such statement isbased. BUSINESS PERFORMANCE £ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- ----------- SalesSchool 1,537 1,455 6% 6%Higher Education 793 795 0% 5%Professional* 354 341 4% 9%Pearson Education 2,684 2,591 4% 6%FT Publishing 344 280 23% 12%Interactive Data 344 332 4% 8%FT Group 688 612 12% 10%Penguin 846 848 0% 3%-------------- ----------- ----------- ----------- -----------Total 4,218 4,051 4% 6%-------------- ----------- ----------- ----------- ----------- Adjusted operating profitSchool 203 184 10% 11%Higher Education 161 161 0% 5%Professional* 40 38 5% 11%Pearson Education 404 383 5% 9%FT publishing 56 27 107% 85%Interactive Data 97 89 9% 13%FT Group 153 116 32% 30%Penguin 74 66 12% 20%-------------- ----------- ----------- ----------- -----------Total 631 565 12% 14%Discontinued 3 27-------------- ----------- ----------- ----------- -----------Total 634 592 7% 14%-------------- ----------- ----------- ----------- ----------- *Professional includes Data Management (Scanners) for both years. It is reportedas discontinued for statutory purposes. In 2007, the Data Management businesscontributed £56m of sales and £12m of operating profit to Pearson. SCHOOL-------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 1,537 1,455 6% 6%Adjusted operating profit 203 184 10% 11%-------------- ----------- ----------- ----------- ----------- • Record sales (up 6%) and profits (up 11%) • Margins up by 0.6% points to 13.2% Continued share gains in school publishing • Pearson US School publishing up 3.5%, against industry growth of 2.7%(source: Association of American Publishers), as we benefit from our sustainedinvestment in new basal programmes and innovative digital services. • Faster underlying growth in international school publishing, withcontinued margin improvement. • Pearson takes a leading share of the new US adoption market: 30% ofthe total market and 31% where we competed. #1 or #2 market share in reading,maths, science and social studies. Total 2007 new adoption opportunity ofapproximately $830m, up from $670m in 2006. • US School new adoption market expected to remain strong over the nextthree years (estimated at $900m in '08; $860m in '09; and more than $1bn in'10). In 2008 we are competing for around 90% of the total new adoptionopportunity. • Acquisition of Harcourt International brings leading content forschool and vocational customers in many markets including the UK, South Africa,Australia and New Zealand. Transaction adds further scale to Pearson'sinternational education businesses and accelerates the combination ofeducational content and innovative technology to personalise learning.Integration of the Harcourt business is progressing well. • Major cross company global English, maths and science projectslaunched, with the aim of sharing assets, expertise, investment and technologyacross all major international markets. • Successful global ELT publishing franchises in every major marketsegment - primary, secondary, adult, business and exam preparation - drivesstrong growth worldwide. Sales of student editions of English Adventure,developed with Disney, top six million units in less than three years; Economistand FT branded courses also performing strongly with major launch of PenguinReaders planned for this year. • Strong performance from school publishing businesses in South Africaand Australia; in Italy, integration of Pearson Paravia Bruno Mondadoricomplete, producing integration savings, margin improvement and market sharegains; strong organic growth in Spanish language school publishing. Innovation in school technology • 13 product nominations in 10 categories, more than any other educationcompany, for the Software and Information Industry Association 'Codie' awards.The products include: PASeries, the first formative assessment product designedto measure progress and forecast student growth toward state goals or gradelevel expectations; Pearson Inform 4.1, a K-12 data analysis and decisionsupport tool; PowerSchool Premier, a student information system that providesaccess to student information, enabling data-driven decisions that enhancestudent learning; and eCollege, an on-demand distance learning platform. • Continued investment in digital programmes both for basal adoption andfor special populations, including NovaNet and SuccessMaker. Pre-publicationexpenditure for digital programmes growing as a proportion of totalpre-publication expenditure. • enVision Math, our new integrated print-and-digital elementary mathsprogramme (and the next generation of our successful California Social Studiesprogramme), successfully launched for the 2008 adoption campaign. In 2008, mathsaccounts for approximately one-third of the total new adoption opportunity. Strong growth and share gains in school testing • US School testing sales up in double digits (after high single digitgrowth in 2006), benefiting from further contract wins, market share gains andstrength in online assessment. • 2.5 million secure online tests delivered across 13 states during theyear, up from 1.4 million in 2006. • Acquisition of Harcourt Assessment complements our existing assessmentbusiness, broadens our scale and reach in adjacent markets and creates newpublishing and digital opportunities both in the US and around the world. • In the UK, we marked a total of 9.6 million GCSE, AS and A-level examscripts, 4.6 million of which were marked on-screen. ResultsPlus rolled outacross the UK and internationally providing more than 2,250 schools with secureonline access to question-level examination performance data on exam results dayfor the first time. More than 100,000 students access their results online onresults day for the first time. HIGHER EDUCATION -------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 793 795 0% 5%Adjusted operating profit 161 161 0% 5%-------------- ----------- ----------- ----------- ----------- • Sales and profits up 5%. • US Higher Education up 6%, ahead of the industry for the ninthstraight year. • Steady growth and good profit improvement in international highereducation. Rapid growth in online learning and custom publishing • Investment in established and new author franchises, such as Campbell's Biology, Kotler's Marketing Management, Hubbard's Economics and Cicarrelli'sPsychology, continues to underpin the strong performance of our higher educationbusiness. • 'MyLab' digital homework and assessment programmes launched in 22 newsubject disciplines in 2007, increasing the total number of disciplines coveredto 38. These programmes support over 2,000 textbooks and were used globally by2.9m students in 2007 (up more than 30% on 2006). Evaluation studies show thatthe use of the MyLab programmes can significantly improve student test scoresand instructional productivity. • In corporate finance, one of the largest global markets in businesseducation, Pearson publishes the successful first edition bestseller, Berk/DeMarzo's Corporate Finance, together with MyFinanceLab. Pearson's market shareincreases from 4% to 11% in the US and from 39% to 48% in the UK. It is the mostsuccessful launch of a first edition in this discipline in more than a decadeand one of Pearson's most successful global launches ever, winning universityadoptions in 22 countries. In World History, the first edition ofFernandez-Armesto's The World: A History with MyHistoryLab increases Pearson'smarket share from 25% to 35%. • Acquisition of eCollege builds Pearson's position as an educationservices provider. eCollege works with partner educational institutions todesign, build and support online degree, certificate, diploma and professionaldevelopment programmes. Student enrolments increase 44% in 2007 to 1.9m.eCollege broadens Pearson's services to academic institutions; Pearson's scaleand reach enable eCollege to access new customers in the school, post-secondaryand professional/vocational markets both in the US and worldwide. • Pearson is the largest publisher on CourseSmart.com, a joint ventureof the largest US education textbook publishers with over 2,500 titles.CourseSmart.com provides cost effective ebooks to students and time-efficientreview of textbooks for professors. • Continued strong double digit growth in our custom solutions business- which builds customised textbooks and online services and has become a leaderin the creation of courseware and curriculum for e-learning institutions. Good progress in international markets • In Europe, good revenue growth and strong margin improvement asorganic and acquisition investment in international education continues to bearfruit. Particular areas of strength included local language editions of ourmajor authors and custom publishing including the successful launch of "locallanguage" science publishing in Germany. • Major programme of adapting/versioning "MyLab" and "Mastering"technology platforms for international markets. MyLab programmes now being usedinternationally in almost 50 countries, with almost 160,000 studentregistrations for online courses in Europe, the Middle East & Africa. PROFESSIONAL -------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 354 341 4% 9%Adjusted operating profit 40 38 5% 11%-------------- ----------- ----------- ----------- ----------- Note: excludes Government Solutions and includes Data Management (Scanners). • Rapid sales growth driven by professional testing and publishing • Sales up 9%; profits up 11%; margins up by 0.2% points to 11.3% • With the sale of Government Solutions in 2007 and Data Management in2008, our Professional business is focused on publishing for professionals inbusiness and technology, and on testing and certifying adults to beprofessionals. Professional Testing: rapid organic sales and profit growth • Professional Testing sales up 14% in 2007. Approximately 5.8m secureonline tests delivered in more than 5,000 test centres worldwide in 2007. • Strong margin improvement as test volumes rise, driven by higherdemand from existing customers such as GMAC (for business school applicants),NCLEX (for nurses) and the DSA/DVTA driving theory test. Good new contractperformance, including the American Board of Internal Medicine and the NationalAssociation Boards of Pharmacy; and strong renewals, including the Institute ofFinancial Services and the American Registry of Radiological Technologists. Professional publishing: good sales growth and further margin improvement • Technology Publishing achieves good sales growth and significantlyimproved profitability, benefiting from a focused and refreshed front list, afavourable software release schedule and Safari Books Online, our electronicpublishing platform (a joint venture with O'Reilly Media). Scott Kelby, aPeachpit author, is the top-selling US computer book author for the fourthconsecutive year with titles including The iPod Book; The Digital PhotographyBook; and The Adobe Photoshop Lightroom Book for Digital Photographers. • Strong performance in Europe, helped by success of publishing for thenew Windows Vista launch; a new partnership with Microsoft Press in theNetherlands; and a successful move into digital publishing and training inGermany. • Strong performance from business imprints Wharton School Publishingand FTPress, aided by Pearson's global distribution and strong retailrelationships. Wharton School Publishing recognised on the Amazon.com BestBusiness Books of 2007 with We Are Smarter Than Me: How to Unleash the Power ofCrowds in Your Business , by Barry Libert and Jon Spector, and Firms ofEndearment: How World-Class Companies Profit from Passion and Purpose, byRajendra S. Sisodia, David B. Wolfe and Jaqdish N. Sheth. Data Management (Scanners): sale completed 22 February 2008 • Sale of Data Management to M & F Worldwide Corp. for $225m. DataManagement contributed $112m of sales and $25m of operating profit to Pearson in2007. FT PUBLISHING -------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 344 280 23% 12%Adjusted operating profit 56 27 107% 85%-------------- ----------- ----------- ----------- ----------- Note: excludes Les Echos, sold in December 2007. • Sales up 12%; profits up 85% • Margins up by 6.7% points to 16.3% Great publishing, continued growth and significant margin improvement • FT Publishing revenues up 12% (advertising revenues up 10%) withoperating profit more than doubling to £56m in headline terms. • Outstanding year at the Financial Times: * FT newspaper circulation up 2% to almost 440,000 (for the July-December 2007 ABC period), with a 19% increase in subscriptions; * Digital subscribers to the FT up 13% to 101,000; monthly unique users up 30% to 5.7m; monthly page views up 33% to 48.2m; * FT.com attracts 150,000 new registered users since launch of its innovative new access model in October 2007; strong growth continues in the early part of 2008. * FT named Newspaper of the Year at the 2007 What the Papers Say Awards. • Strong trading performance at FT Business as integration with the FTNewspaper helps to generate additional revenue and reduce costs. • The Economist, in which Pearson owns a 50% stake, increases itscirculation by 9% to 1.3m (for the July-December 2007 ABC period). Continued shift towards global digital businesses and subscription revenues • Strong contribution from Mergermarket: rapid revenue growth with 90%+subscription renewal rates and a series of new product launches around the worldincluding Pharmawire, DebtWire in Asia Pacific and dealReporter in EmergingEurope, Middle East and Africa. • FTSE, in which Pearson owns a 50% stake, achieves double digit salesgrowth, benefiting from a strong new business performance, a joint venture withXinhua Finance in China and strong growth in Exchange Traded Fund (ETF)licenses. • Several small acquisitions of complementary subscription-based anddigital businesses: * Infinata, a provider of research and business information to life science and financial services companies. The company's products, which include BioPharm Insight and HNW Insight, provide clients with comprehensive, timely information used to make strategic and tactical business decisions. * Exec-Appointments, a well-established global job site that focuses on the high-earning executive sector with approximately 200,000 registered executive users. * Money-Media, acquired in January 2008, a provider of must-have news and analysis via email and websites to US mutual fund managers, institutional investors, high net-worth individuals, company directors and advisers. Approximately two-thirds of Money-Media's revenues were generated through subscriptions with close to 90% renewal rates. • Sale of Les Echos to LVMH for €240m (£174m) completed in December2007. • Sale of 50% stake in FT Deutschland to Gruner + Jahr announced inJanuary 2008. INTERACTIVE DATA (NYSE:IDC) -------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 344 332 4% 8%Adjusted operating profit 97 89 9% 13%-------------- ----------- ----------- ----------- ----------- • Good sales growth and significant profit increase • Sales up 8%; profits up 13%; margins up by 1.4% points to 28.2% Strong sales momentum • Underlying sales growth of 8% driven primarily by strong sales to bothexisting and new institutional customers and a renewal rate of approximately 95%within the Institutional Services segment. • Strong new sales momentum in Q4 2007 further supported activities torealign the company's two largest institutional businesses under a singlemanagement structure. Continued focus on high value services • Pricing and Reference Data continues to generate good growth in NorthAmerican and Europe. The business continues to broaden its coverage of complexsecurities by expanding its universe of European asset-backed andmortgage-backed securities. The business also launched a new web-based offering,the Basket Calculation Service, designed to provide clients with the indicativeoptimised portfolio value for equity and fixed income exchange traded funds. • Real-Time Services continues to achieve strong growth with newinstitutional sales in its two core product areas of real-time data feeds andmanaged solutions. Highlights include: growing adoption of its PlusFeed dataservice for algorithmic trading applications; the introduction of DirectPlus, anew ultra low latency direct exchange data service; and excellent sales momentumfor managed solutions in North America with new customers including mediacompanies, online brokerages, stock exchanges and financial institutions. • Fixed Income Analytics completed 30 new BondEdge(R) installationsduring the year and made good progress in the development of its next-generationBondEdge(R) platform. • In the Active Trader Services segment, eSignal experienced modestexpansion of its direct subscriber base, delivered numerous innovations acrossits suite of active trader services, and added new content and capabilities onits financial websites. • Interactive Data is listed on the New York Stock Exchange (NYSE: IDC)and Pearson owns a 62% stake. Interactive Data's 2007 results under US GAAP areavailable at www.pearson.com . PENGUIN -------------- ----------- ----------- ----------- -----------£ millions 2007 2006 Headline Underlying growth growth-------------- ----------- ----------- ----------- -----------Sales 846 848 0% 3%Adjusted operating profit 74 66 12% 20%-------------- ----------- ----------- ----------- ----------- • Good sales growth and significant profit increase • Sales up 3%; profits up 20% • Margins up by 0.9% pts to 8.7%; on track for double-digit margins in 2008 Strong competitive performance in major markets • Successful global publishing performance led by Alan Greenspan's TheAge of Turbulence, with almost 1m hard cover copies shipped to date worldwide,and Kim Edwards' first novel, The Memory Keeper's Daughter, a global #1bestseller for Penguin in the US, UK, Australia and Canada. • Outstanding year for bestsellers in the US with titles includingElizabeth Gilbert's Eat, Pray, Love (4.4m copies shipped to date); KhaledHosseini's A Thousand Splendid Suns (2.2m); and Ken Follett's World Without End(almost 1m). • UK bestsellers included Marian Keyes' Anybody Out There?, JamieOliver's Jamie at Home, Jeremy Clarkson's Don't Stop Me Now and Charlie Higson'sDouble or Die. Strong year for Brands & Licensing division driven by The Dr WhoAnnual (the second best-selling children's book of 2007) and bestselling In theNight Garden titles. • Australia: strong publishing from authors including Bryce Courtenaywith The Persimmon Tree and Dr Manny Noakes with CSIRO Total Wellbeing Diet Book2. • DK delivered a strong global performance in traditional, custom anddigital publishing, benefiting from innovative formats including The Human BodyBook, personalised travel guides via traveldk.com and the first DK textbooks forhigher education markets. Rapid growth in emerging markets • India: Penguin India celebrated its 20th anniversary in 2007 withcontinued rapid growth. Penguin authors win all the major English languageprizes in India's national book awards: Vikram Chandra in fiction for SacredGames, Vikram Seth in non-fiction for Two Lives and Kiran Desai in readers'choice for The Inheritance of Loss. • China: Jiang Rong and Howard Goldblatt win inaugural Man AsianLiterary prize for Wolf Totem, to be published in English around the world byPenguin in 2008. • South Africa: another strong year led by John van de Ruit's Spud: TheMadness Continues. Innovation in print and online • Rapid growth in sales through online retail and digital channelsdriven by innovative digital marketing initiatives and investment in ebooks(with 5,000 Penguin titles currently available) and digital content. Stronggrowth in online revenues and unique visitors to Penguin and DK websites. • Continued innovation in formats (including the pioneering US premiumpaperback and personalised 'on-demand' travel guides), genres (Portfoliobusiness imprint in India), sales channels (bestselling eBooks via onlineretailers and Penguin's own websites; audio books via iTunes and Audible; RoughGuides via Motorola, Nokia and Samsung phones) and communications channels (www.spinebreakers.com, an online community for teenagers). • Subscribers to Penguin and DK opt-in newsletters building rapidly, up34% year-on-year to over 150,000, allowing Penguin consumers to personaliseareas of interest and strengthening relationship with Penguin brand. Continued focus on quality and efficiency • Pearson-wide renegotiation of major global paper, print and bindingcontracts continue to bring cost savings in 2007. • Further improvement expected in 2008 from ongoing management ofproduction, warehousing and distribution costs. Strong 2008 publishing schedule; strong start to the year • Strong list of new titles for 2008 from bestselling and new authorsincluding Patricia Cornwell, Steve Coll, Michael Pollan, Jamie Oliver, MarianKeyes, Jeremy Clarkson, Thomas Friedman, Niall Ferguson and the new James Bondbook from Sebastian Faulks. • Outstanding sales performance from Eckhart Tolle's A New Earth, with4m copies shipped since its selection for Oprah Winfrey's book club on 30January. First of ten online classes featuring Eckhart Tolle and Oprah Winfreyairs today, 3 March. FINANCIAL REVIEW Operating result On a headline basis, adjusted sales increased by £167m or 4% from £4,051m to£4,218m and total adjusted operating profit increased by £42m or 7% to £634m in2007 from £592m in 2006. On an underlying basis adjusted sales grew by 6% and adjusted operating profitby 14%. Our underlying measures exclude the effects of exchange and portfoliochanges. In 2007 currency movements reduced adjusted sales by £228m and adjustedoperating profit by £37m while portfolio changes increased adjusted sales by£146m and adjusted operating profit by £22m. Adjusted sales include discontinued operations held throughout the current andprevious year. In 2007 the sales by our Data Management (Scanners) business havebeen included in adjusted sales. Adjusted operating profit excludes amortisationand adjustment of acquired intangibles but also includes the adjusted profitsfrom discontinued operations. Statutory operating profit from continuing operations increased by £52m or 10%,to £574m in 2007 from £522m in 2006. The statutory operating profit includes theeffect of increased intangible amortisation but does not reflect the decreasedcontribution from discontinued operations. Net finance costs Net finance costs reported in our adjusted earnings comprise net interestpayable and net finance income relating to post-retirement plans. Net interestpayable in 2007 was £95m, up from £94m in 2006. Although we were partlyprotected by our fixed rate policy, a rise in average US dollar floatinginterest rates had an adverse effect. Year on year, average three month LIBOR(weighted for the Group's borrowings in US dollars, euros and sterling at eachyear end) rose by 0.5% to 5.4%, reflecting a rise in interest rates and a changein the currency mix of year end debt. These two factors, together with adecrease in the Group's average net debt of £90m, increased the Group's averagenet interest rate payable by 0.3% to 7.3%. In 2007 the net finance incomerelating to post-retirement plans was an income of £10m compared to an income of£4m in the previous year, giving an overall net finance cost reflected inadjusted earnings of £85m in 2007 compared to £90m in 2006. Also included in the statutory definition of net finance costs are foreignexchange and other gains and losses. These are excluded from adjusted earningsas they represent short-term fluctuations in market value and are subject tosignificant volatility. Other gains and losses may not be realised in due courseas it is normally the intention to hold the related instruments to maturity. Netforeign exchange losses of £17m in 2007 mainly relate to exchange losses onEuro-denominated debt used to hedge the receipt of proceeds from the sale of LesEchos. A corresponding gain is included in higher proceeds realised on thissale. In 2006 the exchange gains mainly relate to the un-hedged exposure on Euroborrowings and swaps that could not be designated as a net investment hedgeunder IAS 39. Taxation In 2007 we revised our calculation of the effective tax rate on adjustedearnings to reflect the benefit of tax deductions attributable to amortisationof acquired goodwill and intangibles as this benefit more accurately aligns theadjusted tax charge with the expected rate of cash tax payment. We have restatedthe 2006 comparative figure. On this basis the effective tax rate on adjusted earnings was 26.4% in 2007compared with 25.9% in 2006. Our overseas profits, which arise mainly in the US,remain mostly subject to tax rates which are higher than the UK corporation taxrate (which was 30% in 2007 but will fall to 28% from 1 April 2008). But this factor was offset by the amortisation-related tax deductions and, as in2006, by releases from provisions reflecting continued progress in agreeing ourtax affairs with the authorities. The reported tax charge on a statutory basis was £131m, representing a rate of28.0%. As we explained last year, the 2006 rate was abnormally low because ofone-off adjustments related to the recognition of deferred tax assets for bothcapital losses and operating losses. The tax effects of the disposals during2007, mainly Government Solutions (tax £93m) and Les Echos (tax £nil) arereflected in discontinued operations. Tax paid in 2007 was £87m, compared with £59m in 2006. The 2007 amount included£26m paid in respect of disposals. Discontinued operations Discontinued operations relate to the disposal of Government Solutions (inFebruary 2007), Les Echos (in December 2007) and the Data Management (Scanners)business (in February 2008). In total, we received cash proceeds of £469m fordisposals in 2007. As previously announced, we realised a loss before tax of £19m and a tax chargeof £93m on the sale of Government Solutions. We realised a profit before tax of£165m with no tax payable on the sale of Les Echos. In anticipation of a loss onsale of the Data Management (Scanners) business, a goodwill impairment of £97mhas been charged to the income statement in 2007. We received cash proceeds of$225m on the sale of Data Management on 22 February 2008. Minority interests Our minority interests comprise mainly the minority share in Interactive Data.Our stake in Interactive Data remained at 62% throughout 2007, leaving theminority interest unchanged at 38%. Dividends The dividend accounted for in our 2007 financial statements totalling £238m,represents the final dividend (18.8p) in respect of 2006 and the 2007 interimdividend of 11.1p. We are proposing a final dividend for 2007 of 20.5p, bringing the total paid andpayable in respect of 2007 to 31.6p, a 7.8% increase on 2006. This final 2007proposed dividend was approved by the board in February 2008, is subject toshareholder approval at the forthcoming AGM and will be charged against 2008profits. For 2007, the dividend is covered 1.5 times by adjusted earnings. Pensions Pearson operates a variety of pension plans. Our UK Group plan is by far thelargest and includes a significant defined benefit section. We also have somesmaller defined benefit plans in the US and Canada. Outside the UK, most of ourcompanies operate defined contribution plans. Our charge to profit in respect of worldwide pensions and post retirementbenefits amounted to £61m in 2007 (2006: £60m) of which a charge of £71m (2006:£64m) was reported in operating profit and the net finance benefit of £10m(2006: £4m) was reported against interest. Following the completion of the latest actuarial valuation of the UK Grouppension plan as at January 2006, we made additional payments to the plan in 2007amounting to £100m. These additional payments have contributed to the overallsurplus recognised on the UK plan. CONDENSED CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2007 ------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions note------------------------------------ ----- ------- ------- Continuing operations Sales 2 4,162 3,990Cost of goods sold (1,910) (1,841)------------------------------------ ----- ------- -------Gross profit 2,252 2,149 Operating expenses (1,701) (1,651)Share of results of joint ventures and associates 23 24------------------------------------ ----- ------- -------Operating profit 2 574 522 Finance costs 3 (150) (133)Finance income 3 44 59------------------------------------ ----- ------- -------Profit before tax 4 468 448Income tax 5 (131) (4)------------------------------------ ----- ------- -------Profit for the year from continuing operations 337 444 Discontinued operations (Loss) / profit for the year from discontinuedoperations 8 (27) 25------------------------------------ ----- ------- -------Profit for the year 310 469 Attributable to:Equity holders of the Company 284 446Minority interest 26 23------------------------------------ ----- ------- ------- Earnings per share from continuing and discontinued operations (in pence per share) Basic 6 35.6p 55.9pDiluted 6 35.6p 55.8p Earnings per share from continuing operations (in pence per share)Basic 6 39.0p 52.7pDiluted 6 39.0p 52.6p The accompanying notes to the condensed consolidated financial statements forman integral part of the financial information. CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 31 December 2007 ------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions note------------------------------------ ----- ------- ------- Net exchange differences on translation of foreign 25 (417)operationsActuarial gains on retirement benefit obligations 80 107Taxation on items charged to equity 29 12------------------------------------ ----- ------- -------Net income / (expense) recognised directly in equity 134 (298)Profit for the year 310 469------------------------------------ ----- ------- -------Total recognised income and expense for the year 444 171 Attributable to:Equity holders of the Company 14 418 148Minority interest 26 23------------------------------------ ----- ------- ------- CONDENSED CONSOLIDATED BALANCE SHEET as at 31 December 2007 ------------------------------------ ------ ------- ------- 2007 2006all figures in £ millions note------------------------------------ ------ ------- ------- Property, plant and equipment 355 348Intangible assets 12 3,814 3,581Investments in joint ventures and associates 20 20Deferred income tax assets 328 417Financial assets - Derivative financial instruments 23 36Retirement benefit assets 62 -Other financial assets 52 17Other receivables 129 124------------------------------------ ------ ------- -------Non-current assets 4,783 4,543 Intangible assets - Pre-publication 450 402Inventories 368 354Trade and other receivables 946 953Financial assets - Derivative financial instruments 28 50Financial assets - Marketable securities 40 25Cash and cash equivalents (excluding overdrafts) 560 592------------------------------------ ------ ------- -------Current assets 2,392 2,376 Non-current assets classified as held for sale 117 294------------------------------------ ------ ------- -------Total assets 7,292 7,213 Financial liabilities - Borrowings (1,049) (1,148)Financial liabilities - Derivative financial (16) (19)instrumentsDeferred income tax liabilities (287) (245)Retirement benefit obligations (95) (250)Provisions for other liabilities and charges (44) (29)Other liabilities (190) (162)------------------------------------ ------ ------- -------Non-current liabilities (1,681) (1,853) Trade and other liabilities (1,050) (998)Financial liabilities - Borrowings (559) (595)Current income tax liabilities (96) (74)Provisions for other liabilities and charges (23) (23)------------------------------------ ------ ------- -------Current liabilities (1,728) (1,690) Liabilities directly associated with non-current assetsheld for sale (9) (26)------------------------------------ ------ ------- -------Total liabilities (3,418) (3,569) ------------------------------------ ------ ------- -------Net assets 3,874 3,644 Share capital 202 202Share premium 2,499 2,487Treasury shares (216) (189)Reserves 1,210 976------------------------------------ ------ ------- -------Total equity attributable to equity holders of theCompany 3,695 3,476Minority interest 179 168------------------------------------ ------ ------- -------Total equity 14 3,874 3,644 The condensed consolidated financial statements were approved by the board on 02March 2008. CONDENSED CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2007 ------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions note------------------------------------ ----- ------- ------- Cash flows from operating activitiesNet cash generated from operations 17 659 621Interest paid (109) (106)Tax paid (87) (59)------------------------------------ ----- ------- -------Net cash generated from operating activities 463 456 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired (472) (363)Acquisition of joint ventures and associates (4) (4)Purchase of property, plant and equipment (PPE) (86) (68)Proceeds from sale of PPE 14 8Purchase of intangible assets (33) (29)Disposal of subsidiaries, net of cash disposed 469 10Interest received 19 24Dividends received from joint ventures and associates 32 45------------------------------------ ----- ------- -------Net cash used in investing activities (61) (377) Cash flows from financing activitiesProceeds from issue of ordinary shares 12 11Purchase of treasury shares (72) (36)Proceeds from borrowings 272 84Liquid resources acquired (15) (24)Repayment of borrowings (391) (145)Finance lease principal payments (2) (3)Dividends paid to Company's shareholders (238) (220)Dividends paid to minority interests (10) (15)------------------------------------ ----- ------- -------Net cash used in financing activities (444) (348) Effects of exchange rate changes on cash and cashequivalents 3 (44)------------------------------------ ----- ------- -------Net decrease in cash and cash equivalents (39) (313) Cash and cash equivalents at beginning of year 531 844------------------------------------ ----- ------- -------Cash and cash equivalents at end of year 492 531 For the purposes of the cash flow statement, cash and cash equivalents arepresented net of overdrafts repayable on demand. These overdrafts are excludedfrom cash and cash equivalents disclosed on the balance sheet. Included in the figures above is net cash generated from / (used in) amountsrelating to discontinued operations as follows: operating activities £7m (2006:£33m); investing activities £3m (2006: £(10)m); financing activities £(21)m(2006: £(15)m). NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2007 1. Basis of preparation The condensed consolidated financial statements have been prepared in accordancewith the Listing Rules of the Financial Services Authority and in accordancewith International Financial Reporting Standards (IFRS) and InternationalFinancial Reporting Interpretations Committee (IFRIC) interpretations as adoptedby the European Union (EU). In respect of accounting standards applicable to theGroup there is no difference between EU-adopted IFRS and InternationalAccounting Standards Board (IASB)-adopted IFRS. The condensed consolidated financial statements have also been prepared inaccordance with the accounting policies set out in the 2006 Annual Report andhave been prepared under the historical cost convention as modified by therevaluation of financial assets and liabilities (including derivative financialinstruments) at fair value. The 2006 Annual Report refers to new standardseffective from 1 January 2007. None of these standards have had a materialimpact in these financial statements. The preparation of condensed consolidated financial statements requires the useof certain critical accounting assumptions. It also requires management toexercise its judgement in the process of applying the Group's accountingpolicies. The areas requiring a higher degree of judgement or complexity, orareas where assumptions and estimates are significant to the condensedconsolidated financial statements have been set out in the 2006 Annual Report. This preliminary announcement does not constitute the Group's full financialstatements for the year ended 31 December 2007, which will be approved by theBoard of Directors and reported on by the auditors later in March 2008.Accordingly, the financial information for 2007 is presented unaudited. The financial information for the year ended 31 December 2006 does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. A copy of the statutory accounts for that year has been delivered to theRegistrar of Companies. The Auditors' report on the full financial statementsfor the year ended 31 December 2006 was unqualified and did not containstatements under section 237 (2) of the Companies Act 1985 (regarding theadequacy of accounting records and returns), or under section 237 (3) (regardingprovision of necessary information and explanations). In accordance with IFRS, the comparatives have been re-presented to reflect LesEchos, Datamark and the Data Management (Scanners) business as discontinuedbusinesses (see note 8). Government Solutions was previously presented asdiscontinued in the financial information for 2006. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 2. Segment information The Group is organised into five primary business segments: School, HigherEducation, Financial Times Publishing, Interactive Data and Penguin. Ourremaining business group, Professional, brings together a number of educationpublishing, testing and services businesses and does not meet the criteria forclassification as a 'segment' under IFRS. ------------------------------------ ------- ------- 2007 2006all figures in £ millions------------------------------------ ------- ------- SalesSchool 1,537 1,455Higher Education 793 795Professional 298 280------------------------------------ ------- -------Pearson Education 2,628 2,530FT Publishing 344 280Interactive Data 344 332------------------------------------ ------- -------FT Group 688 612Penguin 846 848------------------------------------ ------- -------Total sales - continuing operations 4,162 3,990Discontinued operations - Scanners business 56 61------------------------------------ ------- -------Adjusted sales 4,218 4,051 Adjusted operating profitSchool 203 184Higher Education 161 161Professional 28 25------------------------------------ ------- -------Pearson Education 392 370FT Publishing 56 27Interactive Data 97 89------------------------------------ ------- -------FT Group 153 116Penguin 74 66------------------------------------ ------- -------Adjusted operating profit - continuing operations 619 552Adjusted operating profit - discontinued operations 15 40------------------------------------ ------- -------Total adjusted operating profit 634 592 Discontinued operations relate to the Group's interest in Government Solutions,Les Echos and the Data Management (Scanners) business (see note 8). GovernmentSolutions and the Scanners business were previously reported within theProfessional group of businesses and Les Echos within the FT Publishing segment. Adjusted sales include sales from discontinued operations held throughout thecurrent and previous year. The Scanners business was the only discontinuedoperation held throughout the two periods. Adjusted operating profit includes the operating profit from the total businessincluding the results of discontinued operations. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 2. Segment information continued In our adjusted operating profit, we have excluded amortisation of acquiredintangibles, other net gains and losses and other net finance income ofassociates. The amortisation of acquired intangibles is not considered to be fullyreflective of the underlying performance of the Group. Other net gains and losses represent profits and losses on the sale ofsubsidiaries, joint ventures, associates and other financial assets that areincluded within continuing or discontinued operations but which distort theperformance of the Group. Other net finance income of associates is the equivalent of the Company's ownother net finance income that is excluded in adjusted earnings (see note 3). The following table reconciles adjusted operating profit from continuingoperations to operating profit for each segment. School Higher Professional FT Publishing Interactive Penguin Total Education Dataall figures in £millions---------------------------------------------------------------------------------------------------- 2007---------------------------------------------------------------------------------------------------- Adjustedoperatingprofit 203 161 28 56 97 74 619Amortisationof acquiredintangibles (28) (2) (1) (6) (7) (1) (45)Other net gains and - - - - - - -losses (includingassociates)Other net finance - - - - - - -income of associates ------ ------ ------ ------ ------ ------ ------- Operatingprofit 175 159 27 50 90 73 574 ---------------------------------------------------------------------------------------------------- 2006---------------------------------------------------------------------------------------------------- Adjustedoperatingprofit 184 161 25 27 89 66 552Amortisationof acquiredintangibles (17) - (1) (2) (7) (8) (35)Other netgains andlosses(includingassociates) - - - 4 - - 4Other netfinance incomeof associates - - - 1 - - 1--------------------- ------ ------ ------ ------ ------ ------ -------Operatingprofit 167 161 24 30 82 58 522 Corporate costs are allocated to business segments on an appropriate basisdepending on the nature of the cost and therefore the segment result is equal tothe Group operating profit. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 3. Net finance costs------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Net interest payable (95) (94)Finance income in respect of employee benefits 10 4Net foreign exchange (losses) / gains (17) 19Other losses on financial instruments in a hedgingrelationship: - fair value hedges (1) - - net investment hedges (1) (2)Other gains / (losses) on financial instruments not in a hedgingrelationship: - amortisation of transitional adjustment on bonds 1 8 - derivatives (3) (9)------------------------------------ ----- ------- -------Net finance costs (106) (74) Analysed as:Finance costs (150) (133)Finance income 44 59------------------------------------ ----- ------- -------Net finance costs (106) (74) Analysed as:Net interest payable (95) (94)Finance income in respect of employee benefits 10 4------------------------------------ ----- ------- -------Net finance costs reflected in adjusted earnings (85) (90)Other net finance (costs) / income (21) 16------------------------------------ ----- ------- -------Net finance costs (106) (74) Fair value gains and losses on financial instruments are analysed between threeelements: net interest payable, foreign exchange and other gains and losses. Forthe purposes of adjusted earnings we have excluded foreign exchange and othergains and losses as they represent short-term fluctuations in market value andare subject to significant volatility. These other gains and losses may not berealised in due course as it is normally the intention to hold the relatedinstruments to maturity. Other net finance costs of £21m in 2007 mainly relate to exchange losses onlegacy euro denominated debt held to hedge the receipt of the euro denominatedproceeds from the Les Echos sale (see also note 8). A corresponding gain isincluded in higher sale proceeds realised on this sale. In 2006, euro borrowingsand cross currency swaps that were not designated as net investment hedgescontributed to the overall foreign exchange gains. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 4. Profit before tax------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Profit before tax - continuing operations 468 448Add back: amortisation and adjustment of acquired intangibles(see note 2) 45 35Add back: other net gains and losses (including associates)(see note 2) - (4)Add back: other net finance income of associates (see - (1)note 2)Add back: other net finance costs / (income) (see note 3) 21 (16)------------------------------------ ----- ------- -------Adjusted profit before tax - continuing operations 534 462Adjusted profit before tax - discontinued operations 15 40------------------------------------ ----- ------- -------Total adjusted profit before tax 549 502 5. Income tax------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Income tax charge - continuing operations (131) (4) Add back: tax benefit on amortisation of acquiredintangibles (19) (10) Add back: tax benefit on other net gains and losses (9) (4) Add back: tax (benefit) / charge on other finance income (6) 5 Tax amortisation benefit on goodwill and intangibles 25 25 Tax benefit on recognition of tax losses - (127)------------------------------------ ----- ------- -------Adjusted income tax charge - continuing operations (140) (115)Adjusted income tax charge - discontinued operations (5) (15)------------------------------------ ----- ------- -------Total adjusted income tax charge (145) (130) Tax rate reflected in adjusted earnings 26.4% 25.9% Included within the income tax charge is an amount of £42m (2006: £15m) relatingto UK tax. For the first time in 2007, the Group has included in its adjusted earnings thetax benefit from tax deductible goodwill and intangibles as this benefit moreaccurately aligns the adjusted tax charge with the expected medium term rate ofcash tax payments. The comparative has been re-stated accordingly. In 2006, the Group excluded from its adjusted earnings tax benefits from therecognition of its capital and trading losses of £127m which, due to their sizeand non-recurring nature are not considered to be fully reflective of theunderlying tax rate of the Group. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 6. Earnings per share Basic earnings per share is calculated by dividing the profit attributable toequity share holders of the Company (earnings) by the weighted average number ofordinary shares in issue during the year, excluding ordinary shares purchased bythe Company and held as treasury shares. Diluted earnings per share iscalculated by adjusting the weighted average number of ordinary shares to takeaccount of all dilutive potential ordinary shares and adjusting the profitattributable, if applicable, to account for any tax consequences that mightarise from conversion of those shares. ------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Profit for the year from continuing operations 337 444Minority interests (26) (23)--------------------------------------- ------- -------Earnings - continuing operations 311 421(Loss) / profit for the year from discontinued (27) 25operations--------------------------------------- ------- -------Earnings 284 446 Weighted average number of shares (millions) 796.8 798.4Effect of dilutive share options (millions) 1.3 1.5Weighted average number of shares (millions) for dilutedearnings 798.1 799.9 Earnings per share from continuing and discontinued operations Basic 35.6p 55.9pDiluted 35.6p 55.8p Earnings per share from continuing operationsBasic 39.0p 52.7pDiluted 39.0p 52.6p 7. Adjusted earnings reconciliation In order to show results from operating activities on a consistent basis, anadjusted earnings per share is presented which excludes certain items as set outbelow. The adjusted earnings per share includes both continuing and discontinuedbusinesses on an undiluted basis. The Company's definition of adjusted earningsper share may not be comparable to other similarly titled measures reported byother companies. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 7. Adjusted earnings reconciliation continued ------- ------- ------ ------ ------ ------ ------ ------ Statutory Re-analyse Other gains Amortisation/ Other net Tax Recognition of Adjusted Income discontinued gains adjustment of finance amortisation tax losses income statement operations and acquired costs/ benefit statementall losses intangibles incomefiguresin £millions --------------------------------------------------------------------------------------------------------------------- 2007 ------- ------- ------ ------ ------ ------ ------ ------ Operatingprofit(note 2) 574 15 - 45 - - - 634 Net financecosts (note 3) (106) - - - 21 - - (85) ------- ------- ------ ------- ------ ------- ------ -------Profit beforetax (note 4) 468 15 - 45 21 - - 549 Income tax(note 5) (131) (5) (9) (19) (6) 25 - (145) ------- ------- ------ -------- ------- ------- ------ -------Profit for theyear -continuing 337 10 (9) 26 15 25 - 404 Profit for theyear -discontinued(note 8) (27) (10) 37 - - - - - ------ ------- ------ -------- ------- ------- ------ -------Profitfor theyear 310 - 28 26 15 25 - 404 Minorities (26) - - (4) - (2) - (32) ------ ------- ------ -------- ------- ------- ------ -------Earnings 284 - 28 22 15 23 - 372 Weightedaverage numberof shares(millions) 796.8 Adjustedearnings pershare 46.7p ---------------------------------------------------------------------------------------------------------------------- 2006 ------ ------- ------ -------- ------- ------- ------ -------Operatingprofit 522 40 (4) 35 (1) - - 592 Net financecosts (74) - - - (16) - - (90) ------ ------- ------ -------- ------- ------- ------ -------Profit beforetax 448 40 (4) 35 (17) - - 502 Income tax (4) (15) (4) (10) 5 25 (127) (130) ------ ------- ------ -------- ------- ------- ------ -------Profit for theyear -continuing 444 25 (8) 25 (12) 25 (127) 372 Profit for theyear -discontinued 25 (25) - - - - - - ------ ------- ------ -------- ------- ------- ------ ------- Profit for theyear 469 - (8) 25 (12) 25 (127) 372 Minorities (23) - - (3) - (2) - (28) ------ ------- ------ -------- ------- ------- ------ -------Earnings 446 - (8) 22 (12) 23 (127) 344 Weightedaverage numberof shares(millions) 798.4 Adjustedearnings pershare 43.1p NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 8. Discontinued operations Discontinued operations relate to the Group's interest in Government Solutions(sold 15 February 2007), Datamark (acquired with eCollege and subsequently soldon 31 July 2007), Les Echos (sold 24 December 2007) and the Data Management(Scanners) business (sold on 22 February 2008). The results of Government Solutions and Les Echos have been included indiscontinued operations for both 2006 and 2007 and have been consolidated up tothe date of sale. Datamark was sold immediately following its acquisition aspart of the eCollege transaction and consequently none of the results for thisbusiness have been consolidated. The Scanners business was sold on 22 February2008 and has been included in discontinued operations for the full year in both2006 and 2007. The assets and liabilities of the Scanners business have beenreported as held for sale in the 31 December 2007 balance sheet. At 31 December2006 held for sale assets and liabilities relate to Government Solutions. Sales by discontinued operations are shown in the table below: ------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Scanners business sales included in adjusted sales (see note 2) 56 61 Other sales by discontinued operations 111 372 ------- -------Total sales by discontinued operations 167 433 The loss for the year on discontinued operations is analysed below: ----------------------------- ------- ------- ------- ------- 2007 2006all figures in £ millions Included Other Total in adjusted gains and earnings losses----------------------------- ------- ------- ------- ------- Operatingprofit 15 - 15 40 Goodwillimpairment (re Scanners disposal) - (97) (97) ------------------------------ ------- ------- ------- -------(Loss) /profit beforetax beforesale ofdiscontinuedops 15 (97) (82) 40 Attributabletax expense (5) - (5) (15) Profit on sale ofdiscontinuedoperations - 146 146 - Attributabletax expense - (86) (86) - ---------------------------- ------- ------- ------- ------- (Loss) /profitfor the year fromdiscontinuedoperations 10 (37) (27) 25 Profit beforetax 15 49 64 40 Attributabletax expense (5) (86) (91) (15)----------------------------- ------- ------- ------- ------- (Loss) /profit for the year fromdiscontinuedoperations 10 (37) (27) 25 The goodwill impairment above relates entirely to the anticipated loss on saleof the Scanners business. The sale of the Scanners business for $225m and theresulting disposal will be reflected in the 2008 financial statements. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 8. Discontinued operations continued The profit / loss on sale of discontinued operations in 2007 is analysed below: Government Datamark Les Echos Total Solutionsall figures in £ millions ----------------------------- ------- ------- ------- ------- Net (assets) /liabilities disposed (277) (20) 1 (296) Proceeds received 321 20 174 515 Costs (10) - (10) (20) ------- ------- ------- -------Profit on sale beforecumulative translationadjustment 34 - 165 199 Cumulative translationadjustment (53) - - (53) ------- ------- ------- -------Profit / (loss) on salebefore tax (19) - 165 146 Attributable tax(charge) / benefit (93) 7 - (86) ------- ------- ------- -------Profit / (loss) on saleafter tax (112) 7 165 60 The proceeds received for the sale of Government Solutions include £286m incash, £20m in loan stock and a 10% interest in the acquiring company valued at£15m. 9. Dividends------------------------------------ ----- ------- ------- 2007 2006all figures in £ millions------------------------------------ ----- ------- ------- Amounts recognised as distributions to equity share holdersin the year 238 220 The directors are proposing a final dividend of 20.5p per equity share, payableon 9 May 2008 to shareholders on the register at the close of business on 11April 2008. This final dividend, which will absorb an estimated £164m ofshareholder's funds, has not been included as a liability as at 31 December2007. 10. Exchange rates Pearson earns a significant proportion of its sales and profits in overseascurrencies, the most important being the US dollar. The relevant rates are asfollows: ------------------------------------ ------- ------- 2007 2006 ------------------------------------ ------- ------- Average rate for profits 2.00 1.84Year end rate 1.99 1.96 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 11. Business combinations During the year, Pearson announced the acquisition of Harcourt Assessment andHarcourt Education International from Reed Elsevier for $950m in cash. TheHarcourt Education International acquisition was completed in stages during 2007but the Harcourt Assessment acquisition did not complete until 30 January 2008.In July 2007, Pearson completed the acquisition of eCollege, a leading providerof eLearning and enrolment services to post-secondary education. Pearson hasalso made a number of other smaller acquisitions during the year mainly withinthe FT Group. Provisional values for the assets and liabilities arising from the acquisitionscompleted in the year are as follows: -------------------------------- ------ ------ ------ ------- Harcourt eCollege Other Totalall figures in £ millions-------------------------------- ------ ------ ------ ------- Property, plant and equipment 6 5 - 11 Intangible assets 81 100 16 197 Intangible assets - Pre-publication 16 2 - 18 Inventories 15 - - 15 Trade and other receivables 12 13 3 28 Trade and other liabilities (23) (12) (3) (38) Financial liabilities - borrowings - (1) - (1) Current income tax 2 2 - 4 Net deferred income tax liabilities (21) (24) - (45) Provisions for other liabilities andcharges (1) - (1) (2)-------------------------------- ------ ------ ------ ------- Net assets acquired at fair value 87 85 15 187 Goodwill 68 181 55 304-------------------------------- ------ ------ ------ ------- Total 155 266 70 491 Satisfied by:Cash (155) (266) (47) (468) Deferred consideration - - (12) (12) Net prior year adjustments - - (11) (11)-------------------------------- ------ ------ ------ ------- Total consideration (155) (266) (70) (491) Net cash outflow on acquisition: Cash - current year acquisitions (468) Deferred payments for prior yearacquisitions and other items (4) Cash and cash equivalents acquired --------------------------------- ------ ------ ------ ------- Cash outflow on acquisitions (472) In total acquisitions completed in the year contributed an additional £90m ofsales and £13m of operating profit. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 12. Intangible assets------------------------------------ ------- ------- 2007 2006all figures in £ millions------------------------------------ ------- ------- Goodwill 3,343 3,271 Other intangibles 471 310------------------------------------ ------- -------Total intangibles 3,814 3,581 13. Net debt------------------------------------ ------- ------- 2007 2006all figures in £ millions------------------------------------ ------- ------- Non-current assetsDerivative financial instruments 23 36 Current assetsDerivative financial instruments 28 50 Marketable securities 40 25Cash and cash equivalents (excluding overdrafts) 560 592 Non-current liabilitiesBorrowings (1,049) (1,148)Derivative financial instruments (16) (19) Current liabilitiesBorrowings (559) (595)------------------------------------ ------- ------- Total net debt (973) (1,059) In February 2007, Pearson repaid its €591m 6.125% Euro Bonds 2007 and refinancedthis borrowing through available cash and facilities. The Group also extendedthe maturity date of its main revolving credit facility by one year and enteredinto a short-term bridge financing facility. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 14. Statement of changes in equity------------------------------------ ------- ------- 2007 2006all figures in £ millions------------------------------------ ------- ------- Attributable to equity holders of the Company Total recognised income and expense for the year 418 148Equity settled transactions 30 25Issue of ordinary shares - share option schemes 12 11Cumulative translation adjustment disposed 53 -Purchase of treasury shares (56) (52)Dividends paid to equity holders of the Company (238) (220)--------------------------------------- ------- -------Net movement for the year 219 (88)Attributable to equity holders of the Company at the beginningof the year 3,476 3,564--------------------------------------- ------- -------Attributable to equity holders of the Company at the end ofthe year 3,695 3,476 Minority interest 179 168--------------------------------------- ------- -------Total equity 3,874 3,644 15. Related parties There were no material related party transactions and no guarantees have beenprovided to related parties in the year. 16. Events after the balance sheet date On 2 January 2008, the Group completed its acquisition of Money-Media, aUS-based company offering online news and commentary for the money managementindustry, for $64m. On 30 January 2008, the Group completed its $647m acquisition of HarcourtAssessment from Reed Elsevier, after receiving clearance from the US Departmentof Justice. Also on 30 January 2008 the Group announced that it had agreed to sell its 50%interest in Financial Times Deutschland (FTD) to its joint venture partner,Gruner + Jahr. The Group's share of FTD assets at 31 December 2007 was €8m and asmall profit on sale is expected. On 22 February 2008, the Group completed the sale of its Data Management(Scanners) business to M&F Worldwide Corp. for $225m. The Group expects toreport a loss on this transaction in 2008 after taking into account thecumulative translation adjustment disposed and tax. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2007 17. Cash flows------------------------------------ ------- ------- 2007 2006all figures in £ millions------------------------------------ ------- ------- Reconciliation of profit for the year to net cash generated fromoperations Profit for the year 310 469Income tax 222 19Depreciation and amortisation charges 138 135Investment in pre-publication assets (230) (213)Amortisation of pre-publication assets 192 210Loss on sale of property, plant and equipment 1 2Net finance costs 106 74Share of results of joint ventures and associates (23) (24)Profit on sale of subsidiaries and associates (146) -Goodwill impairment of discontinued operations 97 -Net foreign exchange gains / (losses) from transactions 11 (37)Share-based payment costs 30 25Inventories (1) (16)Trade and other receivables (5) (60)Trade and other liabilities 80 54Retirement benefit obligations (126) (17)Provisions 3 ------------------------------------- ------- -------Net cash generated from operations 659 621Dividends from joint ventures and associates 32 45Net purchase of PPE including finance lease principalpayments (74) (63)Purchase of intangible assets (33) (29)Add back: Special pension contribution 100 -Add back: Cash spent against integration and fair valueprovisions - 1------------------------------------ ------- -------Operating cash flow 684 575Operating tax paid (61) (59)Net operating finance costs paid (90) (82)------------------------------------ ------- -------Operating free cash flow 533 434Non-operating tax paid (26) -Special pension contribution (100) -Integration spend - (1)------------------------------------ ------- -------Total free cash flow 407 433Dividends paid (including to minorities) (248) (235)------------------------------------ ------- -------Net movement of funds from operations 159 198 Included in net cash generated from operations is an amount of £7m (2006: £33m)relating to discontinued operations. Operating cash flow, operating free cash flow and total free cash flow have beendisclosed as they are part of Pearson's corporate and operating measures.Following the completion of the latest actuarial valuation of the UK Grouppension plan as at January 2006, the Group agreed that during 2007 it would makeadditional payments to the plan amounting to £100m. The Group has excluded this£100m from its definition of operating cash flow and operating free cash flow asit distorts the underlying operating performance for the year. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pearson