26th Feb 2007 07:03
Pearson PLC26 February 2007 26 February 2007 PEARSON 2006 PRELIMINARY RESULTS • Record results. Pearson reports its highest ever operating profits (adjusted operating profit up 15% to £592m), earnings (adjusted eps up 18% to 40.2p) and cash (free cash flow up £2m to £433m). • Sustained growth and market share gains. School sales up 6% and Higher Education sales up 4%, benefiting from leading position in content, assessment and technology; FT advertising revenues up 9%; Penguin sales up 3% despite tough consumer publishing market. • Stronger margins and double-digit profit growth in all businesses. Pearson margin up a percentage point to 13.4%. Education margin up to 14.1% and profits up 12%; FT Group margin up to 17.3% and profits up 18%; Penguin margin up to 7.8% and profits up 22%. • Higher returns. Return on invested capital up to 8.0% (from 6.7% in 2005), above Pearson's weighted average cost of capital; dividend increased by 8.5% to 29.3p, the largest increase for a decade. Marjorie Scardino, chief executive, said: "This is another strong set ofresults. We have built market-leading businesses and invested consistently intheir content, technology and international expansion. That strategy is payingoff with sustained growth in sales, margins, earnings and returns, and we expect2007 to be another good year." Headline Underlying£ millions 2006 2005 growth growth----------------------- -------- -------- ---------- ---------- Business performance Sales 4,423 4,096 8% 4% Adjusted operating profit 592 506 17% 15% Adjusted profit before tax 502 422 19% -- Adjusted earnings per share 40.2p 34.1p 18% -- Operating cash flow 575 570 1% -- Free cash flow 433 431 -- -- Return on invested capital 8.0% 6.7% 1.3 ppts 0.6 ppts Net debt 1,059 996 (6)% -- Statutory results Sales 4,137 3,808 9% Operating profit 540 516 5% -- Profit before tax 466 446 4% -- Basic earnings per share 55.9p 78.2p (29)% -- Basic earnings per share - 54.1p 38.9p 39% --continuingCash generated from operations 621 653 (5)% -- Dividend per share 29.3p 27.0p 8.5% -- Throughout this statement, we refer to business performance measures for totaloperations (including Government Solutions) and growth rates on an underlyingbasis (ie excluding currency movements and portfolio changes) unless otherwisestated. The 'business performance' measures are non-GAAP measures andreconciliations to the equivalent statutory heading under IFRS are included innotes to the accounts 2, 5, 7,12,14 and 15. Profit measures within businessperformance are presented on an adjusted basis to exclude: i) other net gainsand losses arising in connection with the sale of subsidiaries, investments andassociates; ii) amortisation and adjustment of acquired intangible assets; andiii) short-term fluctuations in the market value of financial instruments (underIAS39) and other currency movements (under IAS21). 2006 OVERVIEW Pearson's three key financial measures are adjusted earnings per share, freecash flow and return on invested capital. In 2006, adjusted EPS and free cashflow reached record levels, and our return on invested capital increased from6.7% in 2005 to 8.0%, above our weighted average cost of capital of 7.7%. Pearson's sales increased by 4% to £4.4bn and adjusted operating profit was up15% to a record £592m. All parts of Pearson contributed, with good sales growth,further margin improvement and double-digit profit increases in each business.Adjusted earnings per share were 40.2p, up 18%. Operating cash flow increased by £5m to £575m and free cash flow by £2m to£433m. Cash conversion was strong at 97% of operating profit (even after anexceptional 113% cash conversion rate in 2005). The ratio of average workingcapital to sales at Pearson Education and Penguin improved by 1.1% points to26.3%. Statutory results show an increase in operating profit to £540m (£516m in 2005).Basic earnings per share were 55.9p (compared with 78.2p in 2005, which includedthe £302m profit on the sale of Recoletos). Net debt rose by £63m to £1,059m(from £996m in 2005). During the year, we completed a series of bolt-on acquisitions in Education(including Promissor, PBM, National Evaluation Systems, PowerSchool andChancery) and the FT Group (Quote.com and Mergermarket). Our total investment inacquisitions in 2006 was £363m. Together, these acquisitions contributed £147mof sales and £17m of operating profit to our 2006 results (after integrationcosts, which are expensed). In December 2006 we announced the sale of Government Solutions to VeritasCapital for $560m in cash, $40m in preferred stock and a 10% interest in thecompany. In 2006 Government Solutions contributed £286m of sales and £22m ofoperating profit to Pearson. The sale was completed on 15 February 2007. As partof our plan to reduce our UK pension deficit, we will inject £100m of the cashproceeds from the sale of Government Solutions into our UK pension scheme during2007. The board is proposing a dividend increase of 8.5% to 29.3p, the largestincrease for a decade. Subject to shareholder approval, 2006 will be Pearson's15th straight year of increasing our dividend above the rate of inflation, andin the past five years alone we have returned approximately £1bn ($1.8bn) toshareholders through the dividend. 2007 OUTLOOK We expect 2007 to be another good year for Pearson, with continued marginimprovement and growth ahead of our markets. We expect to achieve goodunderlying earnings growth, cash conversion ahead of our 80% threshold, and afurther increase in return on invested capital. At this early stage in the yearour outlook is: • Pearson Education (65% of 2006 sales; 68% of operating profit). We expect School to achieve underlying sales growth in the 4-6% range; Higher Education to grow in the 3-5% range; and Professional sales to be broadly level with 2006. We expect margins to improve again in School and Professional, and to be stable in Higher Education. • Penguin (19% of sales; 11% of operating profit) expected to improve margins further, as its publishing investment and efficiency programmes continue to bear fruit. • Financial Times Group (16% of sales; 21% of operating profit) expected to continue its strong profit growth. At FT Publishing, advertising trends remain difficult to predict, but we expect our cost measures, integration actions and revenue diversification to push margins into double digits in 2007. IDC has stated that it expects to achieve revenue growth in the 6-9% range and net income growth in the high single-digits to low double-digits (headline growth under US GAAP). Interest. Our interest charge in 2007 will reflect the receipt of the saleproceeds from Government Solutions, a £100m cash payment into our UK pensionscheme and higher interest rates. Tax. For 2007, we expect our effective tax rate on adjusted earnings to be inthe 28-30% range (compared with our 2006 rate of 30.9%). Our tax positionbenefits from deductions relating to amortisation of goodwill arising onacquisitions, and from 2007 we will reflect those deductions in adjustedearnings. The amount of tax paid (£59m in 2006) is not affected. Exchange rates. Pearson generates about two-thirds of its sales in the US andeach five cent change in the average £:$ exchange rate for the full year (whichin 2006 was £1:$1.84) would have an impact of approximately 1p on adjustedearnings per share. Dividends. In recent years, our dividend policy has been to increase thedividend ahead of the rate of inflation. Looking ahead, the Board expects toraise the dividend more in line with earnings growth, while building ourdividend cover towards two times earnings. For more information: Luke Swanson / Simon Mays-Smith/ Deborah Lincoln + 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 +1 718 354 1175 (inside the US) or +44 20 89747900 (outside the US), participant code 476378. The call will be available forreplay at www.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. BUSINESS PERFORMANCE Headline Underlying£ millions 2006 2005 growth growth SalesSchool 1,455 1,295 12% 6%Higher Education 795 779 2% 4%Professional* 627 589 6% 3%Pearson Education 2,877 2,663 8% 4%FT Publishing 366 332 10% 8%IDC 332 297 12% 4%FT Group 698 629 11% 6%Penguin 848 804 5% 3% Total 4,423 4,096 8% 4% Adjusted operating profitSchool 184 147 25% 17%Higher Education 161 156 3% 3%Professional* 60 45 33% 29%Pearson Education 405 348 16% 12%FT Publishing 32 21 52% 52%IDC 89 80 11% 9%FT Group 121 101 20% 18%Penguin 66 60 10% 22% Total 592 509 16% 15% Recoletos -- (3) Total 592 506 17% 15% * includes Government Solutions SCHOOL RECORD RESULTS: SALES UP 6%; PROFITS UP 17%; MARGINS UP BY 1.2% PTS TO 12.6% Headline Underlying£ millions 2006 2005 growth growth Sales 1,455 1,295 12% 6%Adjusted operating profit 184 147 25% 17% Significant share gains in US School publishing • Pearson US School publishing up 3%, against an industry decline of 6% (source: Association of American Publishers), as we benefit from our sustained investment in new basal programmes and innovative digital services. • Pearson takes the leading share of the new adoption market: 30% of the total market and 33% where we competed. #1 or #2 market share in reading, maths, science and social studies. Total new adoption opportunity of approximately $670m in 2006, down from $900m in 2005. • Innovative digital programme for California takes #1 position and a 43% market share in elementary social studies. Digital curriculum services being developed for new adoptions. • US School new adoption market expected to grow strongly over the next three years (estimated at $760m in '07; $900m in '08; $950m in '09). Strong growth and continued share gains in school testing • US School testing sales up in the high single digits (after 20%+ growth in 2005), benefiting from further contract wins, market share gains and leadership in onscreen marking, online testing and embedded (formative) assessment. • Acquisition of National Evaluation Systems (NES), the leading provider of customised assessments for teacher certification in the US, with testing programmes in 16 states including Florida (won in 2006) and California (renewed in 2006). NES expands our testing capabilities in an attractive adjacent market. School technology business broadened • Acquisition of Chancery and PowerSchool enhances our leading position in the US Student Information Systems (SIS) market. Integration on track and good growth prospects as schools upgrade information systems to manage and report data on student attendance and performance. • Organic growth and margin improvement continues in digital curriculum business, Pearson Digital Learning. Continued investment in new generation digital products to meet demands of school districts for personalised classroom learning. • Four product nominations in six categories, more than any other education company, for the Software and Information Industry Association 'Codie' awards. The products are: Prosper, a formative assessment tool for 'at-risk' students; Write to Learn, a web-based tool for learning to read and write; Chancery SMS, a student information system for middle and large school districts; and California History-Social Studies. Good growth in international school • International testing businesses continue to benefit from technology leadership. In the UK, we have marked over 9 million GCSE, AS and A-Level scripts on screen. In 2007 we will roll out Results Plus across the UK, providing students, teachers and parents with online access to question-level examination performance data. • In school publishing, UK launch of ActiveTeach technology provides multimedia resources for maths and science teaching and brings market share gains. Market-leading school companies in Hong Kong and South Africa outperform their markets. • Acquisition of Paravia Bruno Mondadori (PBM), one of Italy's leading education publishers. Good progress in integrating publishing, sales and marketing, distribution and back office operations with our existing Italian business, and in sharing content and technology. • Successful launch of regional adaptations of English Adventure (with Disney), our worldwide English Language Training programme for elementary schools, in Asia and Latin America. HIGHER EDUCATION RECORD RESULTS: SALES UP 4%; PROFITS UP 3%; MARGINS UP BY 0.3% PTS TO 20.3% Headline Underlying£ millions 2006 2005 growth growth Sales 795 779 2% 4%Adjusted operating profit 161 156 3% 3% Steady growth momentum • US Higher Education up 4%; ahead of the industry once again. • Over the past eight years, Pearson US Higher Education has grown at an average annual rate of 7%, compared to the industry's average growth rate of 4%. Rapid growth in online learning and custom publishing • Approximately 4.5m US college students using one of our online programmes. Of these, approximately 2.3m (up almost 30% on 2005) register for an online course on one of our 'MyLab' online homework and assessment programmes. • 16 subject-specific 'MyLab' online homework and assessment programmes now available supporting more than 200 titles. Research studies show significant gains in student success rates and productivity improvements for institutions. • Strong market share, student performance and institutional productivity gains in college maths, supported by MyMathLab. • In psychology and economics, two of the three largest markets in US higher education, Pearson publishes successful first edition bestsellers: Cicarrelli's Psychology together with MyPyschLab and Hubbard's Economics together with MyEconLab. Cicarrelli's Psychology increases Pearson's market share by 3% to 25% and is the bestselling launch of a first edition in the discipline in the past decade. • Continued strong double digit growth in custom publishing - which builds customised textbooks and online services around the courses of individual faculties or professors. Good progress in international markets • Good growth in local language publishing programmes. Increasing focus on custom publishing and technology based assessment services with the MyLab suite of products. PROFESSIONAL RECORD RESULTS: SALES UP 3%; PROFITS UP 29%; MARGINS UP BY 2.0% PTS TO 9.6% Headline Underlying£ millions 2006 2005 growth growth Sales 627 589 6% 3%Adjusted operating profit 60 45 33% 29% Note: includes Government Solutions Professional Testing: rapid organic sales and profit growth • Professional Testing sales up more than 30% in 2006 (and have doubled over the past two years). Approximately 4m secure online tests delivered in more than 5,000 test centres worldwide in 2006. • Successful start-up of the worldwide Graduate Management Admissions Test. 220,000 examinations delivered in 400 test centres in 96 countries, in first year of new contract. • Professional Testing moves from around breakeven in 2005 to profitability in 2006. • Successful integration of Promissor, acquired in January 2006. Combination brings together two leading international professional testing companies and takes Pearson into new US state and federal regulatory markets. Professional publishing: further margin improvement • Technology publishing profits up as further cost actions offset continued industry weakness. • Strong performance from Wharton School Publishing and FTPress imprints, aided by Pearson's global distribution and strong retail relationships. 41 titles published in 2006 including Jerry Porras, Stewart Emery and Mark Thompson's Success Built To Last (the sequel to Built To Last) and Jeffrey Gitomer's The Little Red Book of Sales Answers, The Little Gold Book of Yes Attitude. Three Wall Street Journal business bestsellers, two BusinessWeek bestsellers and one New York Times bestseller in 2006. Government Solutions: sale completed in February 2007 • Sale of Government Solutions to Veritas Capital for $560m in cash, $40m in preferred stock and a 10% interest in the company completed on 15 February 2007. • Government Solutions contributed £286m of sales and £22m of operating profit to Pearson in 2006. FT PUBLISHING GOOD SALES MOMENTUM AND SIGNIFICANT PROFIT IMPROVEMENT:SALES UP 8%; PROFITS UP 52%; MARGINS UP BY 2.4% PTS TO 8.7% Headline Underlying£ millions 2006 2005 growth growth Sales 366 332 10% 8%Adjusted operating profit 32 21 52% 52% Continued growth and profit improvement at the Financial Times and FT.com • FT newspaper and FT.com sales up 8% to £238m; £9m profit improvement to £11m. • FT advertising revenues up 9% with rapid growth in online, luxury goods and corporate finance categories, all up more than 30%. • FT's worldwide circulation up 1% to 430, 469 (Source: ABC, average for six months to December 2006). FT.com's paying subscribers up 7% to 90,000 and December audience up 29% to 4.2m. • Growing international presence and readership. 47% growth in readership in the US Mendelsohn Affluent Survey and 26% growth in the Asian Business Readership Survey. The FT ranked number one European business title in Europe for the fifteenth time (European Business Readership Survey). • Continued benefits of international expansion: approximately three-quarters of the FT's advertising booked in two or more international editions; almost half of the FT's advertising booked for all four editions worldwide. • 'New newsroom' creates an integrated multi-media newsroom, improving commissioning, reporting, editing and production efficiency, and providing further cost savings. Sustained progress across FT Publishing • Acquisition and integration of Mergermarket, an online financial data and intelligence provider. On a pro forma basis, Mergermarket's revenues grew 80% in 2006, with 90% customer renewals. Margins improving as expected in spite of significant investment in new products and geographic markets. • FT Business shows good growth and improves margins driven by strong performance in events, UK retail finance titles (Investment Adviser, Financial Adviser) and internationally by The Banker, which celebrated its 80th year. FT Business integrated with the Financial Times early in 2007. • Les Echos achieves modest circulation (average circulation of 119,117) and advertising growth in a weak market ahead of the 2007 French presidential elections; FT Deutschland outperforms the German newspaper market once again, increasing circulation 2% to 104,000. • The Economist, in which Pearson owns a 50% stake, increases its circulation by 9% to 1.2m (for the July-December ABC period). INTERACTIVE DATA CORPORATION (NYSE:IDC) RECORD RESULTS: SALES UP 4%; PROFITS UP 9%; MARGINS STABLE AT 26.8% Headline Underlying£ millions 2006 2005 growth growth Sales 332 297 12% 4%Adjusted operating profit 89 80 11% 9% Faster organic growth • FT Interactive Data, IDC's largest business (approximately two-thirds of IDC revenues), generates strong, consistent growth in North America and Europe. • Improving momentum at ComStock and eSignal. Comstock enjoys good new sales progress with institutional clients and lower cancellation levels. eSignal produces continued growth in its base of direct subscription terminals. • Renewal rates for IDC's institutional businesses remain at around 95%. Continued focus on high value services • FT Interactive Data's growth driven by sustained demand for fixed income evaluated pricing services and related reference data. Continues to expand its market coverage, adding independent valuations of credit default swaps and other derivative securities • CMS BondEdge launches fixed income analytical data feed service. Enables CMS BondEdge to deliver new applications for sophisticated risk measures. • ComStock real-time services power algorithmic trading applications. ComStock's highly reliable, low-latency consolidated data-feed service supports increasingly sophisticated institutional electronic trading applications. • IDC divisions unified under the Interactive Data brand to emphasise the breadth of its comprehensive range of products and services across the front, middle and back offices of customers. Further expansion into adjacent markets • Following the acquisition of IS.Teledata (re-branded Interactive Data Managed Solutions in July 2006), IDC now provides customised, web-based financial information systems for retail banking and private client applications as well as for infomedia portals and online brokers. • The acquisition of Quote.com in March 2006, which expanded eSignal's suite of real-time market data platforms and analytics, added two financial websites. As a result, eSignal is generating strong growth in online advertising. • Interactive Data Managed Solutions and Quote.com contribute over $50 million to IDC's 2006 revenue. PENGUIN GOOD SALES GROWTH AND SIGNIFICANT PROFIT INCREASE:SALES UP 3%; PROFITS UP 22%; MARGINS UP BY 0.3% PTS TO 7.8% Headline Underlying£ millions 2006 2005 growth growth Sales 848 804 5% 3%Adjusted operating profit 66 60 10% 22% Record literary success and bestseller performance • Record number of bestsellers for record number of weeks - Penguin US places 139 books on The New York Times bestseller list, 10 more than in 2005, and keeps them there for 809 weeks overall, up 119 weeks from 2005; Penguin UK places 59 titles in the BookScan Top Ten bestseller list, up 5 from 2005, and keeps them there for 361 weeks, up 42 weeks from 2005. • Penguin authors win a large number of prestigious literary awards including: a Pulitzer Prize for Fiction (March by Geraldine Brooks); a National Book Critics Circle Award (THEM: A Memoir of Parents by Francine du Plessix Gray); the Michael L. Printz award (Looking for Alaska by John Green); the Whitbread Book of the Year Award (Matisse the Master by Hilary Spurling); the Orange Prize for Fiction (On Beauty by Zadie Smith); and the Man Booker Prize (The Inheritance of Loss by Kiran Desai). • Penguin UK's focus on fiction rewarded with a substantial increase in market share, led by Marina Lewycka's A Short History of Tractors in Ukrainian. • Penguin US premium paperback format continues to accelerate revenue growth and improves profitability in the important mass market category. Strong performance from paperbacks with Penguin authors holding the #1 position on The New York Times paperback fiction list for a record 22 successive weeks. Continued focus on quality and efficiency • Pearson-wide renegotiation of major global paper, print and binding contracts brings cost savings in 2006 and beyond. • Integration of Australia and New Zealand warehouses and back office operations produces further scale benefits. • Investment in India as a pre-production and design centre for reference titles. Strong international growth • Penguin India, which celebrates its 20th anniversary in 2007, continues its rapid growth and extends its market leadership. Penguin authors win all the prizes in India's national book awards: Vikram Chandra in fiction for Sacred Games, Vikram Seth in non-fiction for Two Lives and Kiran Desai in readers' choice for The Inheritance of Loss. • Penguin China continues to acquire rights to between four and six Chinese titles each year, following acquisition of Jian Rong's Wolf Totem, due to be published in English in 2008. Penguin enters the Chinese market with the launch of ten translated Penguin Classic titles in 2007. • Penguin South Africa grows strongly in 2006 and continues to increase market share. Investing in digital to engage consumers • Strong growth in online revenues and unique visitors to Penguin and DK websites. • Penguin leading the market in developing new content creation and distribution models. In 2006 Penguin won the Revolution Award for Best Brand Building using Digital Channels and the Neilsen Nibbie for Innovation in the Book Business for the Penguin Remixed competition and the Penguin Podcast. These two initiatives have been followed by further campaigns including the launch of the acclaimed Penguin Blog, Penguin's presence in Second Life and the recent wiki-novel, A Million Penguins, which hosted 60,000 unique visitors in its first week. DK Travel content made available on MSN and Rough Guides distributed through mobile phones. • Subscribers to Penguin and DK opt-in newsletters building rapidly, allowing Penguin consumers to personalise areas of interest and strengthening relationship with Penguin brand. • Jamie Oliver's 'Cookcast' was the first ever live streamed cookery webcast and one of the most successful webcasts ever in the UK. Strong 2007 publishing schedule • Strong list of new titles for 2007 from bestselling and new authors including Alan Greenspan, Khaled Hosseini, Jamie Oliver, Al Gore, Jeremy Clarkson, Patricia Cornwell, Marina Lewycka and Naomi Klein. FINANCIAL REVIEW Operating profit Total adjusted operating profit increased by £86m or 17% to £592m in 2006 from£506m in 2005. Adjusted operating profit excludes amortisation and adjustment ofacquired intangibles and other gains and losses on the sale of subsidiaries,joint ventures, associates and investments that are included within continuingoperations. For the purposes of our adjusted operating profit we add back theprofits from discontinued operations. In 2006 these relate to the disposal ofthe Group's interest in Government Solutions and in 2005 to the disposals ofGovernment Solutions and Recoletos. Statutory operating profit increased by £24m or 5%. This was a lower increasethan seen in the adjusted operating profit due to an increased intangibleamortisation charge and the absence of the Marketwatch profit on disposalrecorded in 2005. Net finance costs Net finance costs reported in our adjusted earnings comprise net interestpayable and net finance income relating to pension schemes. Net interest payablein 2006 was £94m, up from £77m in 2005. Although we were partly protected by ourfixed rate policy, the strong rise in average US dollar floating interest rateshad an adverse effect. Year on year, average three month LIBOR (weighted for theGroup's borrowings in US dollars, euros and sterling at the year end) rose by1.5% to 4.9%. Combining the rate rise with an increase in the Group's averagenet debt of £40m, the Group's average net interest rate payable rose by 1.1% to7.0%. In 2006 the net finance income relating to pension schemes was an incomeof £4m compared to a cost of £7m in the previous year, giving an overall netfinance cost of £90m in 2006 compared to £84m in 2005. Taxation The tax rate on adjusted earnings increased slightly from 30.3% in 2005 to30.9%. Our overseas profits, which arise mainly in the US, are generally subjectto tax rates which are higher than the UK Corporation Tax rate of 30%. But thisfactor was again offset by releases of provisions following further progress inagreeing our tax affairs with the authorities and reassessment of the provisionsrequired for uncertain items. The reported tax charge on a statutory basis of £11m represents just over 2% ofreported profits. This low rate was mainly accounted for by two factors. First,in the light of the announcement of the disposal of Pearson GovernmentSolutions, we have recognised a deferred tax asset in relation to capital lossesin the US where previously we were not confident that the benefit of the losseswould be realised prior to their expiry. Second, in the light of our tradingperformance in 2006 and our strategic plans together with the expectedutilisation of US trading losses in the Government Solutions sale, we havere-evaluated the likely utilisation of operating losses both in the US and theUK; this has enabled us to increase the amount of the deferred tax asset carriedforward in respect of such losses. The combined effect of these two factors wasto create a non-recurring credit of £127m. Minority interests Following the disposal of our 79% holding in Recoletos and the purchase of the25% minority stake in Edexcel in 2005, our minority interests now comprisemainly the minority share in IDC. In January 2006 we increased our stake in IDCto 62%, reducing the minority interest from 39% to 38%. Dividends The dividend accounted for in our 2006 financial statements totalling £220m,represents the final dividend (17.0p) in respect of 2005 and the 2006 interimdividend of 10.5p. We are proposing a final dividend for 2006 of 18.8p, bringingthe total paid and payable in respect of 2006 to 29.3p, an 8.5% increase on2005. This final 2006 proposed dividend was approved by the board in February2007, is subject to shareholder approval at the forthcoming AGM and will becharged against 2007 profits. For 2006, the dividend is covered 1.4 times byadjusted earnings. Condensed consolidated income statementfor the year ended 31 December 2006 Unaudited ----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions note----------------------------------- ----- --- ------- ------- Continuing operations Sales 2 4,137 3,808Cost of goods sold (1,917) (1,787)----------------------------------- ----- --- ------- -------Gross profit 2,220 2,021 Operating expenses (1,704) (1,559)Other net gains and losses 3 - 40Share of results of joint ventures and 24 14associates ----- --- ------- ------------------------------------------Operating profit 2 540 516 Finance costs 4 (133) (132)Finance income 4 59 62----------------------------------- ----- --- ------- -------Profit before tax 5 466 446Income tax 6 (11) (116)----------------------------------- ----- --- ------- -------Profit for the year from continuing 455 330operations Discontinued operations Profit for the year from discontinued 8 14 314operations----------------------------------- ----- --- ------- -------Profit for the year 469 644 Attributable to:Equity holders of the Company 446 624Minority interest 23 20----------------------------------- ----- --- ------- ------- Earnings per share from continuing and discontinuedoperations Basic 7 55.9p 78.2pDiluted 7 55.8p 78.1p Earnings per share from continuing operationsBasic 7 54.1p 38.9pDiluted 7 54.0p 38.8p The results are presented under IFRS (see note 1). Condensed consolidated statement of recognised income and expensefor the year ended 31 December 2006Unaudited ----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions note----------------------------------- ----- --- ------- ------- Net exchange differences on translation of (417) 327foreign operationsActuarial gains on defined benefit pension and postretirementmedical schemes 107 26Taxation on items charged to equity 12 12----------------------------------- ----- --- ------- -------Net (expense) / income recognised directly in (298) 365equityProfit for the year 469 644----------------------------------- ----- --- ------- -------Total recognised income and expense for the 171 1,009year Attributable to:Equity holders of the Company 13 148 989Minority interest 23 20----------------------------------- ----- --- ------- ------- Effect of transition adjustment on adoption ofIAS 39Attributable to:Equity holders of the Company - (12) Condensed consolidated balance sheetas at 31 December 2006Unaudited ----------------------------------- ------ --- ------- ------- 2006 2005all figures in £ millions note----------------------------------- ------ --- ------- ------- Non-current assets Property, plant and equipment 348 384Intangible assets 11 3,581 3,854Investments in joint ventures and associates 20 36Deferred income tax assets 417 385Financial assets - Derivative financial 36 79instrumentsOther financial assets 17 18Other receivables 124 108----------------------------------- ------ --- ------- ------- 4,543 4,864Current assetsIntangible assets - pre-publication 402 426Inventories 354 373Trade and other receivables 953 1,031Financial assets - Derivative financial 50 4instrumentsFinancial assets - Marketable securities 25 -Cash and cash equivalents (excluding 592 902overdrafts) ------ --- ------- ------------------------------------------ 2,376 2,736 Non-current assets classified as held for 294 -sale----------------------------------- ------ --- ------- -------Total assets 7,213 7,600 Non-current liabilities Financial liabilities - Borrowings (1,148) (1,703)Financial liabilities - Derivative financial (19) (22)instrumentsDeferred income tax liabilities (245) (204)Retirement benefit obligations (250) (389)Provisions for other liabilities and charges (29) (31)Other liabilities (162) (151)----------------------------------- ------ --- ------- ------- (1,853) (2,500)Current liabilitiesTrade and other liabilities (998) (974)Financial liabilities - Borrowings (595) (256)Current income tax liabilities (74) (104)Provisions for other liabilities and charges (23) (33)----------------------------------- ------ --- ------- ------- (1,690) (1,367) Liabilities directly associated with non-current assets (26) -held for sale----------------------------------- ------ --- ------- -------Total liabilities (3,569) (3,867) ----------------------------------- ------ --- ------- -------Net assets 3,644 3,733 Share capital 202 201Share premium 2,487 2,477Treasury shares (189) (153)Reserves 976 1,039----------------------------------- ------ --- ------- -------Total equity attributable to equity holders of 3,476 3,564the CompanyMinority interest 168 169----------------------------------- ------ --- ------- -------Total equity 13 3,644 3,733 Condensed consolidated cash flow statementfor the year ended 31 December 2006Unaudited ----------------------------------- ----- ------- ------- 2006 2005all figures in £ millions note----------------------------------- ----- ------- ------- Cash flows from operating activitiesCash generated from operations 14 621 653Interest paid (106) (101)Tax paid (59) (65)----------------------------------- ----- ------- -------Net cash generated from operating activities 456 487 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired (363) (246)Acquisition of joint ventures and associates (4) (7)Purchase of property, plant and equipment (PPE) (68) (76)Proceeds from sale of PPE 8 3Purchase of intangible assets (29) (24)Purchase of other financial assets - (2)Disposal of subsidiaries, net of cash disposed 10 376Disposal of joint ventures and associates - 54Interest received 24 29Dividends received from joint ventures and 45 14associates ----------------------------------- ----- ------- -------Net cash (used in) / generated from investing (377) 121activities Cash flows from financing activitiesProceeds from issue of ordinary shares 11 4Purchase of treasury shares (36) (21)Proceeds from borrowings 84 -Liquid resources acquired (24) -Repayment of borrowings (145) (79)Finance lease principal payments (3) (3)Dividends paid to Company's shareholders (220) (205)Dividends paid to minority interests (15) (17)----------------------------------- ----- ------- -------Net cash used in financing activities (348) (321) Effects of exchange rate changes on cash and cash (44) 13equivalents ----------------------------------- ----- ------- -------Net (decrease) / increase in cash and cash (313) 300equivalents Cash and cash equivalents at the beginning of the 844 544year----------------------------------- ----- ------- -------Cash and cash equivalents at the end of the year 531 844 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. Notes to the condensed consolidated financial statementsfor the year ended 31 December 2006 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 EU-adopted International Financial Reporting Standards (IFRS) and IFRICinterpretations. The condensed consolidated financial statements have also been prepared inaccordance with the accounting policies set out in the 2005 Annual Report andhave been prepared under the historical cost convention as modified by therevaluation of financial assets and liabilities (including derivativeinstruments) at fair value. 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 Company'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 2005 Annual Report. The 2005 Annual Report refers to new standards effective from 1 January 2006.None of these standards have had a material impact in these financialstatements. This preliminary announcement does not constitute the Group's full financialstatements for the year ended 31 December 2006, which will be approved by theBoard of Directors and reported on by the auditors in March 2007. Accordingly,the financial information for 2006 is presented unaudited. The financial information for the year ended 31 December 2005 has been extractedfrom the full financial statements. The Auditors' report on the full financialstatements for the year ended 31 December 2005 was unqualified and did notcontain statements under section 237 (2) of the United Kingdom Companies Act1985 (regarding the adequacy of accounting records and returns), or under 237(3) (regarding provision of necessary information and explanations). Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 2. Segment information The Group is organised into five primary business segments: School, HigherEducation, Penguin, Financial Times Publishing and Interactive Data Corporation(IDC). Our remaining business group, Professional, brings together a number ofeducation publishing, testing and services businesses and does not meet thecriteria for classification as a 'segment' under IFRS. ----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- SalesSchool 1,455 1,295Higher Education 795 779Professional 341 301----------------------------------- ------- -------Pearson Education 2,591 2,375FT Publishing 366 332IDC 332 297----------------------------------- ------- -------FT Group 698 629Penguin 848 804----------------------------------- ------- -------Total sales - continuing operations 4,137 3,808Discontinued operations - Government Solutions 286 288----------------------------------- ------- -------Adjusted sales 4,423 4,096 Adjusted operating profitSchool 184 147Higher Education 161 156Professional 38 25----------------------------------- ------- -------Pearson Education 383 328FT Publishing 32 21IDC 89 80----------------------------------- ------- -------FT Group 121 101Penguin 66 60----------------------------------- ------- -------Adjusted operating profit - continuing operations 570 489Adjusted operating profit - discontinued operations 22 17----------------------------------- ------- -------Total adjusted operating profit 592 506 Adjusted operating profit - continuing operations 570 489Amortisation and adjustment of acquired intangibles (35) (11)Other gains and losses (including associates) 4 40Other net finance costs of associates 1 (2)----------------------------------- ------- -------Operating profit 540 516 Adjusted sales include sales from discontinued operations held throughout thecurrent and previous year. In our adjusted operating profit, we have excludedamortisation of acquired intangibles, other net gains and losses and other netfinance costs of associates. The amortisation and adjustment of acquiredintangibles is not considered to be fully reflective of the underlyingperformance of the Group. Other gains and losses represent profits and losses onthe sale of subsidiaries, joint ventures, associates and investments that areincluded within continuing operations but which distort the performance for theyear. Other net finance costs of associates are the equivalent of the Company'sown net finance costs that are excluded in adjusted earnings (see note 4).discontinued operations in 2006 relate to the disposal of the Group's interestin Government Solutions and in 2005 to both the disposal of Government Solutionsand Recoletos (see note 8). Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 3. Other net gains and losses----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- Profit on sale of interest in MarketWatch - 40----------------------------------- ------- -------Total other net gains and losses - 40 Other net gains and losses represent profits and losses on the sale ofsubsidiaries, joint ventures, associates and investments that are includedwithin continuing operations. 4. Net finance costs----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions----------------------------------- ----- --- ------- ------- Net interest payable (94) (77)Finance income / (costs) re employee benefits 4 (7)Net foreign exchange gains 19 12Other (losses) / gains on financial instruments in ahedging relationship:- fair value hedges - -- net investment hedges (2) 3Other gains / (losses) on financial instruments not in ahedging relationship:- amortisation of transitional adjustment on 8 7bonds- derivatives (9) (8)----------------------------------- ----- --- ------- -------Net finance costs (74) (70) Finance costs (133) (132)Finance income 59 62----------------------------------- ----- --- ------- -------Net finance costs (74) (70) Analysed as:Net interest payable (94) (77)Finance income / (costs) re employee benefits 4 (7)----------------------------------- ----- --- ------- -------Net finance costs reflected in adjusted earnings (90) (84)Other net finance income 16 14----------------------------------- ----- --- ------- -------Net finance costs (74) (70) 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 gains and losses may not berealised in due course as it is normally the intention to hold these instrumentsto maturity. The increased volatility has been introduced as a result ofadopting IAS 39 'Financial Instruments: Recognition and Measurement' as at 1January 2005. Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 5. Profit before tax----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- Profit before tax 466 446Add back: amortisation and adjustment of acquired intangibles 35 11(see note 2)Add back: other net gains and losses (including associates) (4) (40)(see note 2)Add back: other net finance costs of associates (see note 2) (1) 2Add back: other net finance income (see note 4) (16) (14)----------------------------------- ------- -------Adjusted profit before tax - continuing operations 480 405Adjusted profit before tax - discontinued operations 22 17----------------------------------- ------- -------Total adjusted profit before tax 502 422 6. Income tax----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions----------------------------------- ----- --- ------- ------- Income tax charge (11) (116) Add back: tax benefit on amortisation of acquired (10) (4)intangibles Add back: tax benefit on other gains and losses (4) (4) Add back: tax charge on other finance income 5 3 Add back: tax benefit on recognition of tax losses (127) --------------------------------------- --- ------- ------- Adjusted income tax charge - continuing (147) (121)operationsAdjusted income tax charge - discontinued (8) (7)operations ----- --- ------- ------------------------------------------Total adjusted income tax charge (155) (128) Tax rate reflected in adjusted earnings 30.9% 30.3% Included within the income tax charge is an amount of £15m (2005: £26m) relatingto UK tax. The Group has excluded from its adjusted earnings tax benefits fromthe recognition of its capital and trading losses (£127m) which, due to theirsize and non-recurring nature are not considered to be fully reflective of theunderlying tax rate of the Group. Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 7. Earnings per share Basic earnings per share is calculated by dividing the profit attributable toequity holders of the Company (earnings) by the weighted average number ofordinary shares in issue during the period, excluding ordinary shares purchasedby the 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 might arisefrom conversion of those shares. 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 Company's definition of adjusted earnings per share may not becomparable to other similarly titled measures reported by other companies. ----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions----------------------------------- ----- --- ------- ------- Earnings 446 624Adjustments to exclude profit for the year fromdiscontinued operations:Profit for the year from discontinued operations (14) (314)-------------------------------------- --- ------- -------Earnings - continuing operations 432 310 Earnings 446 624Adjustments:Amortisation and adjustment of acquired 35 11intangiblesOther gains and losses (including associates) (4) (40)Other net finance (income) / costs of associates (1) 2Other net finance income (see note 4) (16) (14)Profit on sale of discontinued operations (see - (306)note 8)Taxation on above items (9) (3)Recognition of tax losses (127) -Minority interest share of above items (3) (2)----------------------------------- ----- --- ------- -------Adjusted earnings 321 272 Weighted average number of shares (millions) 798.4 797.9Effect of dilutive share options (millions) 1.5 1.1Weighted average number of shares (millions) for diluted 799.9 799.0earnings Earnings per share from continuing and discontinuedoperations Basic 55.9p 78.2pDiluted 55.8p 78.1p Earnings per share from continuing operationsBasic 54.1p 38.9pDiluted 54.0p 38.8p Adjusted earnings per share 40.2p 34.1p Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 8. Discontinued operations Discontinued operations in 2006 relate to the sale of Pearson's wholly ownedsubsidiary, Government Solutions Inc., on 15 February 2007. The results ofGovernment Solutions have been included in discontinued operations for both 2005and 2006. Discontinued operations in 2005 also relate to the sale of Pearson's79% interest in Recoletos Grupo de Communicacion S.A. The results of Recoletoswere consolidated for the period to 28 February 2005. Any profit or loss on thedisposal of Government Solutions will be included in the 2007 results. ------------------------- ----- --- ------- ------- ------- ------- 2006 2005 2005 2005all figures in £ Government Government Recoletos Totalmillions Solutions Solutions ------------------------- ----- --- ------- ------- ------- ------- Sales 286 288 27 315 Operating profit / (loss) 22 20 (3) 17 Net finance income - - - -------------------------- ----- --- ------- ------- ------- -------Profit / (loss) before 22 20 (3) 17taxAttributable tax (expense) (8) (8) 1 (7)/ benefitProfit on disposal of discontinued - - 306 306operations before taxAttributable tax expense - - (2) (2)------------------------- ----- --- ------- ------- ------- -------Profit for the year from 14 12 302 314discontinued operations 9. Dividends----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- Amounts recognised as distributions to equity holders in the 220 205year The directors are proposing a final dividend of 18.8p per equity share, payableon 11 May 2007 to shareholders on the register at the close of business on 10April 2007. This dividend has not been included as a liability as at 31 December2006. An 18.8p final dividend represents a cash payment of £151m (2005: 17.0p or£136m). 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: ----------------------------------- ------- ------- 2006 2005 ----------------------------------- ------- ------- Average rate for profits 1.84 1.81Period end rate 1.96 1.72 Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 11. Intangible assets----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- Goodwill 3,271 3,654 Other intangibles 310 200----------------------------------- ------- -------Total intangibles 3,581 3,854 Pearson has made a number of acquisitions in the year to 31 December 2006including: Mergermarket, a financial information company providing informationto financial institutions, corporations and their advisors; Promissor, acomputerised test provider focused on the regulatory market in the US; NationalEvaluation Systems, the leading provider of customised state assessments forteacher certification in the US and Paravia Bruno Mondadori, one of Italy'sleading educational publishers. Net consideration paid for all acquisitions inthe year to 31 December 2006 was £363m and provisional goodwill recognised was£246m. In total the acquisitions made in 2006 contributed an additional £147m ofsales and £17m of operating profit. 12. Net debt----------------------------------- ------- ------- 2006 2005all figures in £ millions----------------------------------- ------- ------- Non current assets Derivative financial instruments 36 79 Current assets Derivative financial instruments 50 4 Marketable securities 25 -Cash and cash equivalents 592 902Non current liabilities Borrowings (1,148) (1,703) Derivative financial instruments (19) (22) Current liabilities Borrowings (595) (256)----------------------------------- ------- ------- Total net debt (1,059) (996) Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 13. Reconciliation of movements in equity----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions----------------------------------- ----- --- ------- ------- Attributable to equity holders of the Company Total recognised income and expense for the 148 989period Equity settled transactions 25 23Shares issued 11 4Cumulative translation adjustment disposed - (14)Treasury shares purchased (52) (21)Dividends to equity holders of the Company (220) (205)-------------------------------------- --- ------- -------Net movement for the period (88) 776Attributable to equity holders of the Company at the 3,564 2,800beginning of the yearTransition adjustment on adoption of IAS 39 - (12)-------------------------------------- --- ------- -------Attributable to equity holders of the Company at the end 3,476 3,564of the year Minority interests 168 169-------------------------------------- --- ------- -------Total equity 3,644 3,733 Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 14. Cash flows----------------------------------- ----- --- ------- ------- 2006 2005all figures in £ millions----------------------------------- ----- --- ------- ------- Reconciliation of profit for the period to net cashgenerated from operationsProfit for the year 469 644Income tax 19 125Depreciation and amortisation charges 135 109Amortisation of pre-publication 210 192Investment in pre-publication (213) (222)Loss on sale of property, plant and equipment 2 -Net finance costs 74 70Profit on sale of subsidiaries and associates - (346)Share of results of joint ventures and (24) (14)associatesNet foreign exchange (losses) / gains from (37) 39transactionsShare-based payments 25 23Inventories (16) (17)Trade and other receivables (60) (4)Trade and other liabilities 54 71Provisions (17) (17)----------------------------------- ----- --- ------- -------Net cash generated from operations 621 653 Dividends from joint ventures and associates 45 14Net purchase of PPE including finance lease (63) (75)principal paymentsPurchase of intangibles (29) (24)Add back: Cash spent against integration and fair 1 2value provisions ----- --- ------- ------------------------------------------Operating cash flow 575 570Operating tax paid (59) (65)Operating finance charges paid (82) (65)----------------------------------- ----- --- ------- -------Operating free cash flow 434 440Non-operating finance charges paid - (7)Integration and fair value spend (1) (2)----------------------------------- ----- --- ------- -------Total free cash flow 433 431Dividends paid (including tominorities) (235) (222)----------------------------------- ----- --- ------- -------Net movement of funds from operations 198 209 Included in net cash generated from operations is an amount of £20m (2005: £16m)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 a review of accounting policies in 2006, the Group has reclassifiedinvestment in pre-publication assets as cash generated from operations. The 2005number has been reclassified accordingly. Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2006 15. Adjusted income statement Income Re-analyse Re-analyse Other Amortisation Other Recognition Adjusted statement discontinued discontinued gains / adjustment net of tax income operations - operations - and of acquired finance losses statement Government Recoletos losses intangibles costs Solutions all figures in £ millions --------------------------------------------------------------------------------------------------------------- 2006 ---------------------------------------------------------------------------------------------------------------Sales 4,137 286 - - - - - 4,423 --------------------------------------------------------------------------------------------------------------- Gross profit 2,220 59 - - - - - 2,279 Operating (1,704) (37) - - 35 - - (1,706) expenses Other net - - - - - - - - gains/losses JVs and 24 - - (4) - (1) - 19 associates --------------------------------------------------------------------------------------------------------------- Operating 540 22 - (4) 35 (1) - 592 profit Net finance (74) - - - - (16) - (90) costs ---------------------------------------------------------------------------------------------------------------Profit 466 22 - (4) 35 (17) - 502 before tax Income tax (11) (8) - (4) (10) 5 (127) (155) ---------------------------------------------------------------------------------------------------------------Profit for 455 14 - (8) 25 (12) (127) 347 the year - continuing Profit for 14 (14) - - - - - - the year - discontinued ---------------------------------------------------------------------------------------------------------------Profit for 469 - - (8) 25 (12) (127) 347 the year Minorities (23) - - - (3) - - (26) ---------------------------------------------------------------------------------------------------------------Earnings 446 - - (8) 22 (12) (127) 321 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 2005 ---------------------------------------------------------------------------------------------------------------Sales 3,808 288 - - - - - 4,096 --------------------------------------------------------------------------------------------------------------- Gross profit 2,021 53 27 - - - - 2,101 Operating (1,559) (33) (30) - 11 - - (1,611) expenses Other net 40 - 306 (346) - - - - gains/losses JVs and 14 - - - - 2 - 16 associates ---------------------------------------------------------------------------------------------------------------Operating 516 20 303 (346) 11 2 - 506 profit Net finance (70) - - - - (14) - (84) costs ---------------------------------------------------------------------------------------------------------------Profit 446 20 303 (346) 11 (12) - 422 before tax Income tax (116) (8) (1) (2) (4) 3 - (128) ---------------------------------------------------------------------------------------------------------------Profit for 330 12 302 (348) 7 (9) - 294 the year - continuing Profit for 314 (12) (302) - - - - - the year - discontinued ---------------------------------------------------------------------------------------------------------------Profit for 644 - - (348) 7 (9) - 294 the year Minorities (20) - - - (2) - - (22) ---------------------------------------------------------------------------------------------------------------Earnings 624 - - (348) 5 (9) - 272 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pearson