30th Jul 2007 07:01
Pearson PLC30 July 2007 30 July 2007 PEARSON 2007 INTERIM RESULTS • Sustained growth. Underlying sales up 6% to £1.7bn; operating profit up 48% to £91m; adjusted EPS up from 1.1p to 3.1p; interim dividend raised by 6% to 11.1p. • Strong performance in all businesses. Education increases sales by 7% and moves into first-half profit of £5m. FT Group revenues up 8% with profits up 28% and Penguin revenues up 1% with profits 11% higher. • Market leadership strengthened. Leadership of worldwide education industry extended through organic investment and acquisitions of eCollege and Harcourt's assessment and international education businesses. FT Group benefiting from rapid growth at Mergermarket; sale of Les Echos under way. • Full-year guidance raised. Guidance for full-year sales raised to 5%-7% underlying growth in Professional education and to 10%-12% growth in IDC (headline growth under US GAAP). Other businesses trading in line with previous guidance. Pearson's profits are always heavily weighted to the second half. Marjorie Scardino, chief executive, said: "Our half-year results are always just a hint of our potential for the year, butcertainly a strong hint this year. The Financial Times Group is showing thevalue of its unique strategy; Penguin's publishing and profit are both solid andpromising, as is its approach to change in publishing; and in Education wecontinue to set the pace as we use technology to personalise learning. "Our investments in content, technology, international expansion and efficiencyhave put us in a position to lead, and we're leading. While our markets arechanging fast, we are continuing to innovate to stay ahead of that change. Thatdynamic strategy will make 2007 another good year, and makes this quality ofperformance sustainable." £ millions Half year Half year Headline Underlying Full year 2007 2006 growth growth 2006-------------------- -------- -------- -------- -------- ------- Business performanceSales 1,722 1,674 3% 6% 4,051Adjusted operatingprofit -continuing 91 62 47% 48% 565Adjusted profitbefore tax 54 31 74% -- 502Adjusted earnings 25 9 178% -- 321Adjusted earningsper share 3.1p 1.1p 182% -- 40.2Operating cashflow (181) (183) 1% -- 575Operating freecash flow (265) (249) (6)% -- 434Net debt 1,432 1,611 11% -- 1,059-------------------- -------- -------- -------- -------- -------Statutory resultsOperating profit 75 54 39% -- 535Profit before tax 40 14 186% -- 461Basicearnings/(loss) (104) 7 -- -- 446Basicearnings/(loss)per share (13.0)p 0.9p -- -- 55.9p-------------------- -------- -------- -------- -------- -------Dividend per share 11.1p 10.5p 6% -- 29.3p Throughout this statement, we refer to business performance measures and growthrates on an underlying basis unless otherwise stated. 'Underlying' means growthexcluding currency impact and businesses acquired or sold. The 'businessperformance' measures are non-GAAP measures and reconciliations to theequivalent statutory heading under IFRS are included in notes to the accounts 2,3, 4, 5, 6, 11 and 14. Adjusted profit measures are presented to show businessperformance and therefore exclude: i) other net gains and losses arising inconnection with the sale of subsidiaries, investments and associates; ii)amortisation of acquired intangible assets; and iii) short-term fluctuations inthe market value of financial instruments (under IAS39) and other currencymovements (under IAS21). 2007 OUTLOOK Due to the seasonal phasing of our education and consumer book businesses,Pearson makes most of its sales and profits in the second half. However, basedon our trading performance in the first half, we remain confident that 2007 willbe another good year for Pearson as we continue to increase margins and growfaster than our markets. Although our headline results will be affected by theweakness of the US dollar, we expect to achieve strong underlying growth on ourkey financial measures: earnings, cash generation and return on investedcapital. Our outlook for underlying growth for the full year is: • Pearson Education (64% of 2006 sales; 68% of operating profit). Our Professional education division is performing strongly, ahead of our expectations in both testing and publishing, and we now expect it to grow sales by 5-7% for the year (against previous guidance of 'broadly level'). We continue to expect School to achieve sales growth in the 4-6% range and Higher Education to grow in the 3-5% range. We continue to expect margins to improve again in School and Professional, and to be stable in Higher Education. • Penguin (21% of 2006 sales; 11% of operating profit). We continue to expect to improve margins further, as our publishing investment and efficiency programmes bear fruit. • Financial Times Group (15% of 2006 sales; 21% of operating profit). We continue to expect strong profit growth with FT Publishing margins moving into double digits in 2007. At IDC, we now expect to achieve revenue growth in the 10-12% range and net income growth in the 20%-24% range (headline growth under US GAAP) against previous guidance of revenue growth in the 6-9% range and net income growth in the high single-digits to low double-digits. Acquisitions and disposals. In May we announced the acquisitions of eCollege andthe Harcourt assessments and international education businesses, for a total of$1.4bn, of which the majority will be paid in the second half. We continue toexpect these acquisitions to have a broadly neutral effect on adjusted earningsper share in 2007 and 2008 as a result of integration costs (which are expensed)and the interest charge on our higher level of net debt. We expect theseacquisitions to enhance Pearson's adjusted earnings per share and return oninvested capital from 2009. In February 2007, we received £286m in cash from the sale of our GovernmentSolutions business. The sale of Les Echos is under way. Interest and tax. We expect our interest charge to be higher than in 2006, as aresult of our higher level of net debt following recent acquisitions, and theeffect of higher interest rates on our floating rate debt. We expect oureffective tax rate to be in the 28-30% range. Cash. We expect another good cash performance, well ahead of our 80% targetconversion threshold. Exchange rates. Pearson generates around two-thirds of its sales in the US andeach five cent change in the average £:$ exchange rate for the full year (whichin 2006 was £1:$1.84) would have a translation impact of approximately 1p onadjusted earnings per share. The average rate during the first half of 2007 was£1:$1.98 and the closing rate at the end of June was £1:$2.01. -------------------------------------------------------------------------------- For more information: Luke Swanson / Simon Mays-Smith + 44 (0) 20 7010 2310 Pearson's results presentation for investors and analysts will be webcast livetoday from 09.00 (BST) and available for replay from 12.00 (BST) viawww.pearson.com. We are holding a conference call for US investors today at15.00 (BST) / 10.00 (EDT). To participate please dial in on +1 866 966 5335(inside the US) or +44 20 3023 4415 (outside the US). Video interviews withMarjorie Scardino and Robin Freestone are also available at www.pearson.com.High resolution photographs are available for the media at www.newscast.co.uk. OVERVIEW Pearson's underlying sales increased 6% in the first half of the year andadjusted operating profit increased by 48% to £91m. Adjusted earnings per shareimproved to 3.1p, from 1.1p in 2006. Operating cash flow improved by £2m to anoutflow of £(181)m and our average working capital to sales ratio improved to26.1% (from 27.3% in the first half of 2006). Our statutory results show an increase in operating profit to £75m (£54m in2006). Statutory profit before tax was £40m (£14m in 2006). Statutory earningsfor the period show a loss of £(104)m, caused by a one-off non-cash tax chargewhich arises because the sale of Government Solutions straddled two reportingperiods. When the sale was announced last year, we recorded a tax credit in the2006 statutory results; this year that credit has been reversed on completion ofthe disposal. Our net borrowings were £1,432m (£1,611m in 2006). On 15 February, we received£286m in cash proceeds from the sale of our Government Solutions business. InMay we announced the acquisitions of eCollege and the Harcourt assessment andinternational education businesses for a total of $1.4bn. We paid £167m inrespect of acquisitions in the first half, primarily related to parts ofHarcourt, and we will pay the balance as we complete the regulatory processesfor these acquisitions. The board has declared an interim dividend of 11.1p per share, a 6% increase on2006, reflecting this strong financial performance and its confidence in theoutlook for the full year. £ millions Half year Half year Headline growth Underlying Full year 2007 2006 growth 2006--------------- --------- --------- -------- --------- ---------SalesSchool 665 625 6% 8% 1,455HigherEducation 195 206 (5)% 3% 795Professional 163 156 4% 9% 341--------------- --------- --------- -------- --------- ---------PearsonEducation 1,023 987 4% 7% 2,591FT Publishing 164 135 21% 7% 280IDC 168 165 2% 9% 332--------------- --------- --------- -------- --------- ---------FT Group 332 300 11% 8% 612Penguin 367 387 (5)% 1% 848--------------- --------- --------- -------- --------- ---------Totalcontinuing 1,722 1,674 3% 6% 4,051--------------- --------- --------- -------- --------- ---------Adjusted operatingprofitSchool 42 36 17% 22% 184HigherEducation (51) (53) 4% (4)% 161Professional 14 8 75% 88% 38--------------- --------- --------- -------- --------- ---------PearsonEducation 5 (9) -- -- 383FT Publishing 23 11 109% 73% 27IDC 45 42 7% 17% 89--------------- --------- --------- -------- --------- ---------FT Group 68 53 28% 28% 116Penguin 18 18 0% 11% 66--------------- --------- --------- -------- --------- ---------Totalcontinuing 91 62 47% 48% 565Discontinued 2 11 -- -- 27--------------- --------- --------- -------- --------- ---------Totaloperatingprofit 93 73 27% 48% 592 SCHOOL £ millions Half year Half year Headline Underlying Full year 2007 2006 growth growth 2006-------------- -------- --------- ---------- ---------- ---------- Sales 665 625 6% 8% 1,455Adjustedoperatingprofit 42 36 17% 22% 184 Market share gains in US school • Market-leading performance in US school publishing. Pearson takes anestimated 30% market share of total new adoptions (and 31% where we competed),with the #1 or #2 position in reading, maths, science and social studies. Goodstart in the open territories, where trading is more concentrated in the secondhalf of the year. • Continued share gains in school testing, building on excellent recordof contract wins in 2005 and 2006. New long-term contracts in Ohio (renewal) andMinnesota (renewal and extension). • Strong growth in sales of college textbooks to schools for AdvancedPlacement courses supported by customised version of MyMathLab for the schoolmarket. • Leading position in teacher certification market, as a result ofintegration of National Evaluation Services (NES). Award of the the Floridateacher certification contract, to be developed by NES and delivered through ourprofessional testing centres. • Acquisition of Harcourt Assessment brings Pearson an extensivecatalogue of high quality research-based education and clinical assessmentproducts for children and adults including the Stanford Achievement Test forschool students, Miller Analogies Test for graduate school applicants and theWechsler Intelligence Scales for clinical assessment. Rapid growth in school technology • Continued strong performance from digital Social Studies programme inCalifornia and recognition of the programme by the Association of EducationalPublishers with a Distinguished Achievement Award. • Digital supplementary businesses benefiting from a shift in schoolspending from traditional print supplementary products to digital services withtimely diagnosis, intervention and remediation. • Leadership in online assessment with 2.3 million secure online testsdelivered across 12 states in the first half. • Successful integration of PowerSchool and Chancery acquisitions,creating the leading school student information systems business. Strong newbusiness momentum with key customers added in large US districts such as AnnArbor, MI (over 17,000 students) and Garden Grove, CA (over 50,000 students).Good track record of delivery including the successful completion of the firstyear of implementation at Houston Independent School District (over 210,000students). PowerTeacher, a gradebook and classroom management technology,launched successfully. Focus on personalisation and school solutions; integration of print and digitalbusinesses. • Reorganisation of Pearson School companies under way, with three majorobjectives: 1. Accelerating the integration of content, assessment, data andtechnology capabilities to personalise learning; 2. Providing schools and districts an integrated suite of services to raisestudent achievement and institutional productivity; 3. Integrating the product development process and teams across print,supplemental and digital products. • Reorganisation costs expensed in 2007; will support continued growth andsteady margin improvement in the School business. Continued growth and margin improvement in International; Harcourt acquisitionadds scale and reach • Acquisition of Harcourt Education International brings leading contentfor school and vocational customers in many markets including the UK, Australiaand New Zealand. Transaction will add further scale to Pearson's internationaleducation businesses and accelerate the combination of educational content andinnovative technology to personalise learning. • Good start to the year in International school publishing, withencouraging new adoption results across a diverse range of markets and regionsincluding Hong Kong, Singapore, Spain, the Middle East and Africa. Newprogrammes for the secondary and adult markets seeing good take-up with revenuesbuilding strongly. Strategy of connecting content, assessment and technology topersonalise learning being applied internationally, benefiting from UStechnology platforms. • English Adventure, our primary English Language Training (ELT) coursedeveloped with Disney, has been successfully launched worldwide and is now ourbestselling ELT course. • In the UK, we have marked 4.6 million GCSE, AS and A-Level scriptson-screen in the first half and over 13 million in total to date. Results Plusrolled out across the UK providing more than 2,100 schools and more than 36,000students with secure online access to question-level examination performancedata on exam results day for the first time. • In Italy, Paravia Bruno Mondadori (PBM) integration ahead of plan andgood performance in 2007 adoptions. Investing to broaden product offering andexpand addressable market. -------------------------------------------------------------------------------- HIGHER EDUCATION £ millions Half year Half year Headline Underlying Full year 2006-------------- -------- --------- ---------- ---------- --------- 2007 2006 Growth growth-------------- -------- --------- ---------- ---------- --------- Sales 195 206 (5)% 3% 795Adjustedoperatingprofit (51) (53) 4% (4)% 161 • Pearson's Higher Education business is traditionally loss-making inthe first half, as it invests ahead of two major selling seasons in the US: July/ August (ahead of the first college semester) and December (ahead of the secondsemester). • Higher Education sales up 3%; sustained investment in new content,assessment technologies and custom solutions services. • Continued strong growth from custom publishing as Pearson extendsleadership in print custom publishing to custom media and full servicecurriculum solutions. • Good start to the year internationally with our investment in localadaptations of our bestselling franchises, first editions by local authors,custom publishing and personalised learning strategy continuing to fuel goodgrowth. Rapid growth from online homework and assessment programmes • 14 new subject-specific 'MyLab' digital homework and assessmentprogrammes launched in 2007, increasing the total number to 30. These programmessupport over 1,000 textbooks and will be used by approximately 3 millionstudents in 2007. Evaluation studies show significant learning gains forstudents and efficiency improvements for institutions. • More than 1m US college students register for Pearson's onlinelearning programmes in the first half, an increase of 25%. • Increasing institution-wide solutions sales, including winning theintroductory computing adoption at the Miami Dade Community College System, oneof the largest in United States, with our GO! series of materials combined withour new MyITLab programme. Acquisition of eCollege, a leader in online distance learning. • Purchase of eCollege for $477m announced in May and expected toclose shortly. • 30% estimated annual growth rate for students taking onlinepost-secondary qualifications with US institutions (Source: Eduventures).eCollege has played a particular role in helping educational institutionsbroaden access to post-secondary education for students who may be unable toattend full-time. • Acquisition will enable Pearson to provide Higher Educationcustomers with a full range of services across content, curriculum development,formative assessment, homework technologies and outsourced solutions. • Pearson's scale and reach will enable eCollege to serve newcustomers in school, postsecondary education and vocational/ professionalmarkets in the US and around the world. Reorganisation of US Higher Education business; focus on educational solutions • Reorganisation to support transformation from textbook publisher toeducational technology, services and solutions company. Shift from two competingcompanies and salesforces into two discipline-specific companies organisedaround Higher Education institutions (Pearson Professional & Career and PearsonArts & Sciences). • Both companies supported by centralised operations, distribution andtechnology organisation. PROFESSIONAL £ millions Half year Half year Headline Underlying Full year 2006-------------- -------- --------- ---------- ---------- --------- 2007 2006 growth growth-------------- -------- --------- ---------- ---------- --------- Sales 163 156 4% 9% 341Adjustedoperatingprofit 14 8 75% 88% 38 • With the sale of Government Solutions, completed in February, our Professional businesses are focussed on publishing for professional readers in business and technology, and testing and certifying adults to be professionals. Rapid growth in professional testing • Pearson VUE continues to achieve strong sales growth and significantmargin improvement, benefiting from our major contract wins in recent years andour investment in a network of approximately 500 company-owned test centresworldwide. • Strong volume growth on existing long-term contracts including theNCLEX nurses test, the GMAT business school test and the DSA/DVTA driving theorytest. • Good new contract performance, including the National Commission onCertification of Physician Assistants (NCCPA) and an exclusive agreement withCisco; and strong renewals, including the Institute of Financial Services (IFS)and the American Registry of Radiological Technologists (ARRT). Further margin improvement in professional publishing • Professional Publishing achieves modest sales growth after several years of decline caused by weak demand for technology-related books. • Continued cost actions improving margins: technology publishing profits benefiting from reduction in publishing list and overheads. • Strong growth from our digital distribution joint-venture, Safari Books Online, and other digital initiatives. • Good growth from our business publishing imprints, Wharton School Publishing, FT Press and FT Prentice Hall. FINANCIAL TIMES GROUP £ millions Half year Half year Headline Underlying Full year--------------- --------- --------- -------- --------- --------- 2007 2006 growth growth 2006--------------- --------- --------- -------- --------- ---------SalesFT Publishing 164 135 21% 7% 280IDC 168 165 2% 9% 332--------------- --------- --------- -------- --------- ---------Total 332 300 11% 8% 612--------------- --------- --------- -------- --------- --------- Adjusted operating profitFT Publishing 23 11 109% 73% 27IDC 45 42 7% 17% 89--------------- --------- --------- -------- --------- ---------Total 68 53 28% 28% 116--------------- --------- --------- -------- --------- --------- FT Publishing portfolio continues to shift towards global businesses andsubscription revenues • Mergermarket, acquired in 2006 for £101m, increases sales by 73%(pro forma basis) and contributes £4m of operating profit in the first half.Mergermarket is benefiting from 95%+ renewal rates for its established servicesand rapid growth in new products. • Sale of Les Echos under way. In 2006, Les Echos contributed €10m(£6m) of operating profit to Pearson. Continued growth and margin improvement at FT Publishing • FT Publishing revenues up 7% (with advertising revenues also up7%) and operating profit up to £23m (£11m in 2006). • Strong growth from the Financial Times: o More paying readers. FT newspaper circulation up 1% to 450,000, with 12%increase in subscriptions; FT.com subscribers up 12% to 97,000 (on the sameperiod last year). o More content revenues. Cover price increases for all editions (UK from £1to £1.30 Monday-Friday and from £1.50 to £1.80 for the Weekend FT; US $1.50 to$2; Europe €2.60 to €3). o More advertising. FT advertising revenues up 5% in the first halfbenefiting from its global reach and online presence. • Strong trading performance at FT Business; integration with theFT Newspaper operations concentrating on vertical and niche markets progressingwell, both in print and online. • The Economist, in which Pearson owns a 50% stake, increasescirculation by 9% to 1.2m (for the July-December ABC period). FT Deutschlandsees good circulation growth, up 2% to 105,000. Continued innovation at FTSEinto new markets and products continues to drive strong revenue growth. Growth accelerating at Interactive Data • Underlying sales growth of 9% driven primarily by strong sales toboth existing and new customers, and 95%+ renewal rate within its InstitutionalServices segment. • Pricing and Reference Data continues to generate good growth inNorth America and Europe, and has continued to broaden its coverage of complexsecurities, introducing a new service for independent valuations of interestrate swaps in June 2007. • Real-Time Services continues to experience strong growth due tostrong new sales to institutions. Highlights for this business included itsfirst new customer for DirectPlus, a new ultra low latency, direct exchange dataservice. • Interactive Data Fixed Income Analytics has made its new fixedincome analytic datafeed service, Analytix Direct, available to Interactive Data's evaluated pricing clients in North America. • In addition to expanding its business with active traders, eSignalalso generated higher online advertising revenue across its financial websites. • IDC reported second-quarter and first-half 2007 results on 26 July2007, available at www.interactivedata.com. -------------------------------------------------------------------------------- PENGUIN £ millions Half year Half year Headline Underlying Full year 2006-------------- -------- --------- ---------- ---------- --------- 2007 2006 Growth growth-------------- -------- --------- ---------- ---------- --------- Sales 367 387 (5)% 1% 848Adjustedoperatingprofit 18 18 0% 11% 66 • Sales up 1% and profits up 11% with further margin improvement. • Steady sales performance in the US and UK despite challenging retailmarket conditions; faster growth in international markets and throughdigital channels. • Operating profit benefits from ongoing efficiency gains in production,warehousing, distribution and many other areas. Great publishing • In the US, Khaled Hosseini's second novel, A Thousand Splendid Suns,topped the New York Times hardcover fiction bestseller list and has 1.4million copies in print. (His first, The Kite Runner, has been a New YorkTimes paperback bestseller for 124 weeks so far). Other New York Times #1bestsellers include Al Gore's The Assault on Reason and Elizabeth Gilbert'sEat, Pray, Love. • In the UK, Penguin named Publisher of the Year at the British BookIndustry Awards. Marian Keyes' novel Anybody Out There topped thefiction bestseller list and has 600,000 copies in print. Otherbest-sellers included Jamie Oliver's Cook with Jamie and CharlieHigson's new Young Bond title Double or Die. • Benefiting from Penguin's international reach, Kim Edwards' firstnovel The Memory Keeper's Daughter was a global #1 bestseller forPenguin in the US, UK, Australia and Canada. • Strong second-half publishing schedule. Key authors include AlanGreenspan, Patricia Cornwell, Sue Grafton, Nick Hornby, Naomi Klein,Jamie Oliver and Jeremy Clarkson. Continued innovation • Continued innovation in new publishing formats (further growth with thepioneering US premium paperback), genres (Penguin leads the US industry inthe fast-growing paranormal fiction category) and sales channels (both soldvia online retailers and Penguin's own websites; audiobooks via iTunes;Rough Guides via Motorola Razr phones). International expansion • In India, Penguin won all three major categories at the CrosswordAwards, India's biggest book awards: best fiction (Sacred Games by VikramChandra), best nonfiction (An Equal Music by Vikram Seth) and popularfiction (The Inheritance of Loss by Kiran Desai). Penguin India's businesspublishing imprint, Portfolio, has continued to do well since its launchlast year. • In China, Penguin will publish 30 Penguin Classics Titles this Autumn(including Wuthering Heights, The Prince and The Way We Live Now) inChinese, in partnership with the Chongqing Publishing Group. ENDS-------------------------------------------------------------------------------- Except for the historical information contained herein, the matters discussed inthis press release include forward-looking statements that involve risk anduncertainties that could cause actual results to differ materially from thosepredicted by such forward-looking statements. These risks and uncertaintiesinclude 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, including the company's Annual Report on form 20-F.The company undertakes no obligation to update publicly any forward lookingstatement, whether as a result of new information, future events or otherwise. Condensed consolidated income statement for the six months to 30 June 2007 -------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions note half year half year full year-------------------------------- ----- ------- ------- ------- Continuing operations Sales 2 1,722 1,674 4,051Cost of goods sold (826) (811) (1,875)-------------------------------- ----- ------- ------- -------Gross profit 896 863 2,176 Operating expenses (832) (819) (1,665)Other net gains and losses - - -Share of results of joint venturesand associates 11 10 24-------------------------------- ----- ------- ------- -------Operating profit 2 75 54 535 Finance costs 3 (57) (70) (133)Finance income 3 22 30 59-------------------------------- ----- ------- ------- -------Profit before tax 4 40 14 461Income tax 5 (11) (4) (9)-------------------------------- ----- ------- ------- -------Profit for the period fromcontinuing operations 29 10 452 Discontinued operations (Loss) / profit for the period fromdiscontinued operations 7 (122) 7 17-------------------------------- ----- ------- ------- -------(Loss) / profit for the period (93) 17 469 Attributable to:Equity holders of the Company (104) 7 446Minority interest 11 10 23-------------------------------- ----- ------- ------- ------- (Loss) / earnings per share from continuing and discontinuedoperations (in pence per share)Basic 6 (13.0)p 0.9p 55.9pDiluted 6 (13.0)p 0.9p 55.8p Earnings per share from continuingoperations (in pence per share)Basic 6 2.3p - p 53.7pDiluted 6 2.3p - p 53.6p The accompanying notes to the condensed consolidated financial statements forman integral part of the interim financial information. Condensed consolidated statement of recognised income and expense for the six months to 30 June 2007 -------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions note half year half year full year-------------------------------- ----- ------- ------- ------- Net exchange differences ontranslation of foreign operations (39) (228) (417)Actuarial gains on defined benefit pension andpost-retirementmedical plans 134 96 107Taxation on items charged to equity 8 - 12-------------------------------- ----- ------- ------- -------Net income / (expense) recogniseddirectly in equity 103 (132) (298)(Loss) / profit for the period (93) 17 469-------------------------------- ----- ------- ------- -------Total recognised income and expensefor the period 10 (115) 171 Attributable to:Equity holders of the Company 13 (1) (125) 148Minority interest 11 10 23-------------------------------- ----- ------- ------- ------- Condensed consolidated balance sheet as at 30 June 2007 -------------------------------- ------ ------- ------- ------- 2007 2006 2006all figures in £ millions note half year half year full year-------------------------------- ------ ------- ------- ------- Property, plant and equipment 342 363 348Intangible assets 10 3,641 3,869 3,581Investments in joint ventures andassociates 26 33 20Deferred income tax assets 353 391 417Financial assets - Derivativefinancial instruments 16 39 36Retirement benefit asset 40 - -Other financial assets 52 18 17Other receivables 126 120 124-------------------------------- ------ ------- ------- -------Non-current assets 4,596 4,833 4,543 Intangible assets - Pre-publication 437 442 402Inventories 437 462 354Trade and other receivables 984 976 953Financial assets - Derivativefinancial instruments 19 31 50Financial assets - Marketablesecurities 28 - 25Cash and cash equivalents(excluding overdrafts) 383 649 592-------------------------------- ------ ------- ------- -------Current assets 2,288 2,560 2,376 Non-current assets classified asheld for sale 45 - 294-------------------------------- ------ ------- ------- -------Total assets 6,929 7,393 7,213 Financial liabilities - Borrowings (1,471) (1,703) (1,148)Financial liabilities - Derivativefinancial instruments (28) (37) (19)Deferred income tax liabilities (252) (202) (245)Retirement benefit obligations (81) (270) (250)Provisions for other liabilitiesand charges (37) (14) (29)Other liabilities (116) (110) (162)-------------------------------- ------ ------- ------- -------Non-current liabilities (1,985) (2,336) (1,853) Trade and other liabilities (891) (866) (998)Financial liabilities - Borrowings (392) (590) (595)Current income tax liabilities (61) (110) (74)Provisions for other liabilitiesand charges (14) (27) (23)-------------------------------- ------ ------- ------- -------Current liabilities (1,358) (1,593) (1,690) Liabilities directly associatedwith non-current assets held forsale (46) - (26)-------------------------------- ------ ------- ------- -------Total liabilities (3,389) (3,929) (3,569) -------------------------------- ------ ------- ------- -------Net assets 3,540 3,464 3,644 Share capital 203 202 202Share premium 2,493 2,479 2,487Treasury shares (224) (181) (189)Reserves 892 791 976-------------------------------- ------ ------- ------- -------Total equity attributable to equityholders of the Company 3,364 3,291 3,476Minority interest 176 173 168-------------------------------- ------ ------- ------- -------Total equity 13 3,540 3,464 3,644 The condensed consolidated financial statements were approved for issue by theboard on 29 July 2007. Condensed consolidated cash flow statement for the six months to 30 June 2007 -------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions note half year half year full year-------------------------------- ----- ------- ------- ------- Cash flows from operating activitiesNet cash (used in) / generated fromoperations 14 (188) (156) 621Interest paid (50) (53) (106)Tax paid (48) (26) (59)-------------------------------- ----- ------- ------- -------Net cash (used in) / generated fromoperating activities (286) (235) 456 Cash flows from investing activities Acquisition of subsidiaries, net ofcash acquired (167) (273) (363)Acquisition of joint ventures andassociates (2) (4) (4)Purchase of property, plant andequipment (PPE) (30) (33) (68)Proceeds from sale of PPE - 1 8Purchase of intangible assets (14) (8) (29)Disposal of subsidiaries, net ofcash disposed 289 6 10Interest received 5 13 24Dividends received from jointventures and associates 3 14 45-------------------------------- ----- ------- ------- -------Net cash generated from / (used in)investing activities 84 (284) (377) Cash flows from financing activitiesProceeds from issue of ordinaryshares 7 3 11Purchase of treasury shares (51) (27) (36)Proceeds from borrowings 597 477 84Liquid resources acquired (4) (11) (24)Repayment of borrowings (391) - (145)Finance lease principal payments (1) (2) (3)Dividends paid to Company'sshareholders (150) (136) (220)Dividends paid to minorityinterests (4) - (15)-------------------------------- ----- ------- ------- -------Net cash generated from / (used in)financing activities 3 304 (348) Effects of exchange rate changes oncash and cash equivalents 7 (21) (44)-------------------------------- ----- ------- ------- -------Net decrease in cash and cashequivalents (192) (236) (313) Cash and cash equivalents at thebeginning of the period 531 844 844-------------------------------- ----- ------- ------- -------Cash and cash equivalents at theend of the period 339 608 531 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 £(8)m (2006half year: £19m, 2006 full year: £24m); investing activities £1m (2006 halfyear: £(6)m, 2006 full year: £(8)m); financing activities £nil (2006 half year:£(1)m, 2006 full year: £(1)m). Notes to the condensed consolidated financial statements for the six months to 30 June 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 EU-adopted International Financial Reporting Standards (IFRS) andInternational Financial Reporting Interpretations Committee (IFRIC)interpretations. These financial statements comply with the requirements of IAS34 'Interim Financial Reporting'. 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. 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 reflectGovernment Solutions and Les Echos as discontinued businesses (see note 7). AsGovernment Solutions was previously presented as discontinued in the financialinformation for the full year 2006, only the half year is re-presented. The figures for the six months to 30 June 2007 and 30 June 2006 have not beenaudited or reviewed. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 2. Segment information The Group is organised into five primary business segments: School, HigherEducation, Financial Times Publishing, Interactive Data Corporation (IDC) andPenguin. 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. ------------------------------- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ------- ------- ------- SalesSchool 665 625 1,455Higher Education 195 206 795Professional 163 156 341------------------------------- ------- ------- -------Pearson Education 1,023 987 2,591FT Publishing 164 135 280IDC 168 165 332------------------------------- ------- ------- -------FT Group 332 300 612Penguin 367 387 848------------------------------- ------- ------- -------Total sales 1,722 1,674 4,051 Adjusted operating profitSchool 42 36 184Higher Education (51) (53) 161Professional 14 8 38------------------------------- ------- ------- -------Pearson Education 5 (9) 383FT Publishing 23 11 27IDC 45 42 89------------------------------- ------- ------- -------FT Group 68 53 116Penguin 18 18 66------------------------------- ------- ------- -------Adjusted operating profit - continuingoperations 91 62 565Adjusted operating profit - discontinuedoperations 2 11 27------------------------------- ------- ------- -------Total adjusted operating profit 93 73 592 Adjusted operating profit - continuingoperations 91 62 565Amortisation and adjustment of acquiredintangibles (16) (9) (35)Other net gains and losses (includingassociates) - - 4Other net finance income of associates - 1 1------------------------------- ------- ------- -------Operating profit 75 54 535 In our adjusted operating profit, we have excluded amortisation and adjustmentof acquired intangibles, other net gains and losses and other net finance incomeof associates. The amortisation and adjustment of acquired intangibles is notconsidered to be fully reflective 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 operations but which distort the performance of theGroup. Other net finance income of associates is the equivalent of the Company'sown other net finance income that is excluded in adjusted earnings (see note 4).Discontinued operations relate to the Group's interest in Government Solutionsand Les Echos (see note 7). Government Solutions was previously reported withinthe Professional group of businesses and Les Echos within the FT Publishingsegment. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 2. Segment information continued The following table reconciles adjusted operating profit from continuingoperations to operating profit for each segment. School Higher Professional FT IDC Penguin Totalall figures in £ millions Education Publishing -------------------------------------------------- 2007 half year -------------------------------------------------- ------ ------ ------ ------ ------ ------ ------- Adjustedoperating profit/ (loss) 42 (51) 14 23 45 18 91Amortisation andadjustment ofacquiredintangibles (10) - - (2) (4) - (16)Other net gains and losses - - - - - - -(including associates)Other net finance income of - - - - - - -associates ------ ------ ------ ------ ------ ------ ----------------------------Operating profit/ (loss) 32 (51) 14 21 41 18 75--------------------- ------ ------ ------ ------ ------ ------ ------- -------------------------------------------------- 2006 half year -------------------------------------------------- ------ ------ ------ ------ ------ ------ ------- Adjustedoperating profit/ (loss) 36 (53) 8 11 42 18 62Amortisation andadjustment ofacquiredintangibles (6) - - - (3) - (9)Other net gains and losses - - - - - - -(including associates)Other netfinance incomeof associates - - - 1 - - 1--------------------- ------ ------ ------ ------ ------ ------ -------Operating profit/ (loss) 30 (53) 8 12 39 18 54--------------------- ------ ------ ------ ------ ------ ------ ------- --------------------- ------ ------ ------ ------ ------ ------ ------- 2006 full year -------------------------------------------------- ------ ------ ------ ------ ------ ------ ------- Adjustedoperating profit 184 161 38 27 89 66 565Amortisation andadjustment ofacquiredintangibles (17) - (1) (2) (7) (8) (35)Other net gainsand losses(includingassociates) - - - 4 - - 4Other netfinance incomeof associates - - - 1 - - 1--------------------- ------ ------ ------ ------ ------ ------ -------Operating profit 167 161 37 30 82 58 535 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. Due to the seasonal bias of our book publishing businesses (in the School,Higher Education, Professional and Penguin segments), the Group makes most ofits sales and almost all of its operating profit in the second half of the year. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 3. Net finance costs------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Net interest payable (44) (44) (94)Finance income in respect of employeebenefits 5 2 4Net foreign exchange gains 6 3 19Other losses on financial instruments in ahedging relationship:- net investment hedges (1) (1) (2)Other gains / (losses) on financial instruments not in a hedging relationship:- amortisation of transitionaladjustment on bonds 1 5 8- derivatives (2) (5) (9)------------------------------- ----- ------- ------- -------Net finance costs (35) (40) (74) Analysed as:Finance costs (57) (70) (133)Finance income 22 30 59------------------------------- ----- ------- ------- -------Net finance costs (35) (40) (74) Analysed as:Net interest payable (44) (44) (94)Finance income in respect of employeebenefits 5 2 4------------------------------- ----- ------- ------- -------Net finance costs reflected in adjustedearnings (39) (42) (90)Other net finance income 4 2 16------------------------------- ----- ------- ------- -------Net finance costs (35) (40) (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 gains and losses may not berealised in due course as it is normally the intention to hold these instrumentsto maturity. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 4. Profit before tax------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Profit before tax - continuingoperations 40 14 461Add back: amortisation and adjustmentof acquired intangibles (see note 2) 16 9 35Add back: other net gains and losses(including associates) (see note 2) - - (4)Add back: other net finance income ofassociates (see note 2) - (1) (1)Add back: other net finance income (seenote 3) (4) (2) (16)------------------------------- ----- ------- ------- -------Adjusted profit before tax -continuing operations 52 20 475Adjusted profit before tax -discontinued operations 2 11 27------------------------------- ----- ------- ------- -------Total adjusted profit before tax 54 31 502 5. Income tax------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Income tax charge - continuingoperations (11) (4) (9) Add back: tax benefit on amortisationof acquired intangibles (5) (3) (10) Add back: tax benefit on other netgains and losses - - (4) Add back: tax charge on other financeincome 1 1 5 Add back: tax benefit on recognition oftax losses - - (127)---------------------------------- ------- ------- ------- -------Adjusted income tax charge -continuing operations (15) (6) (145)Adjusted income tax charge -discontinued operations (1) (4) (10)------------------------------- ----- ------- ------- -------Total adjusted income tax charge (16) (10) (155) Tax rate reflected in adjusted earnings 29.0% 32.0% 30.9% Included within the income tax charge is an amount of £20m (2006 half year:£nil, 2006 full year: £15m) relating to UK tax. For the first time in 2007, the Group has included in its adjusted earnings thetax benefit from tax deductible goodwill and intangibles. This benefit has beenapplied in the first half results, reflecting the seasonality of the business,to achieve the anticipated full year effective tax rate on adjusted earnings of29%. The impact of this change has not been material in the first half of 2007. 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 six months to 30 June 2007 6. 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 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. ------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- (Loss) / earnings (104) 7 446Adjustments to exclude profit for the period fromdiscontinued operations:Loss / (profit) for the period fromdiscontinued operations 122 (7) (17)---------------------------------- ------- ------- -------Earnings - continuing operations 18 - 429 (Loss) / earnings (104) 7 446Adjustments:Amortisation and adjustment of acquiredintangibles (see note 2) 16 9 35Other net gains and losses (includingassociates) (see note 2) - - (4)Other net finance income of associates(see note 2) - (1) (1)Other net finance income (see note 3) (4) (2) (16)Loss on sale of discontinued operations(see note 7) 24 - -Taxation on above items 95 (2) (9)Recognition of tax losses (see note 5) - - (127)Minority interest share of above items (2) (2) (3)------------------------------- ----- ------- ------- -------Adjusted earnings 25 9 321 Weighted average number of shares(millions) 797.3 798.4 798.4Effect of dilutive share options(millions) 1.6 1.5 1.5Weighted average number of shares(millions) for diluted earnings 798.9 799.9 799.9 (Loss) / earnings per share from continuing anddiscontinued operations Basic (13.0)p 0.9p 55.9pDiluted (13.0)p 0.9p 55.8p Earnings per share from continuingoperationsBasic 2.3p - p 53.7pDiluted 2.3p - p 53.6p Adjusted earnings per share 3.1p 1.1p 40.2p Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 7. Discontinued operations Discontinued operations relate to the Group's interest in Government Solutionsand Les Echos. Government Solutions was sold on 15 February 2007 and the Groupannounced in June 2007 its commitment to sell Les Echos. The results ofGovernment Solutions and Les Echos have been included in discontinued operationsfor both 2006 and 2007. The results of Government Solutions were consolidatedfor the period to 15 February 2007. As at 30 June 2007, the sale of Les Echoshas not been completed and the results have been consolidated up to that date.The assets and liabilities of Les Echos have been reported as held for sale inthe June 2007 balance sheet. At 31 December 2006 held for sale assets andliabilities relate to Government Solutions. The loss on disposal shown belowrelates entirely to Government Solutions. ------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Sales 69 204 372 Operating profit 2 11 27Net finance income - - -------------------------------- ----- ------- ------- -------Profit before tax 2 11 27Attributable tax expense (1) (4) (10)Loss on sale of discontinued operationsafter tax (see below) (123) - -------------------------------- ----- ------- ------- -------(Loss) / profit for the period fromdiscontinued operations (122) 7 17 Disposal of Government Solutions Net assets disposed (278) Proceeds received 321 Costs (13) -------Profit on sale before cumulativetranslation adjustment 30 Cumulative translation adjustment (54) -------Loss on sale before tax (24) Attributable tax expense (99) -------Loss on sale after tax (123) 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. 8. Dividends------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Amounts recognised as distributions toequity holders in the period 150 136 220 The directors are proposing an interim dividend of 11.1p per equity share,payable on 21 September 2007 to shareholders on the register at the close ofbusiness on 24 August 2007. This interim dividend, which will absorb anestimated £88m of shareholder's funds, has not been included as a liability asat 30 June 2007. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 9. Business combinations On 4 May 2007 Pearson announced the acquisition of Harcourt Assessment andHarcourt Education International for $950m in cash. A substantial part of theHarcourt Education International acquisition was completed during May 2007. Theremainder, together with the Harcourt Assessment acquisition is not expected tocomplete until later in the second half of 2007. On 14 May 2007 Pearsonannounced the acquisition of eCollege for an estimated net cash cost of $477m.At 30 June 2007 this acquisition had not completed. Intangible asset allocationreviews are in progress for the completed acquisitions and should be finalisedin the second half of 2007. Fair value adjustments are provisional and will befinalised in the course of the next year. Provisional values for the assets and liabilities arising from the acquisitionscompleted in the period are as follows: ------------------------------- ------- 2007all figures in £ millions half year------------------------------- ------- Property, plant and equipment 6 Intangible assets 9Intangible assets - Pre-publication 13 Inventories 12 Trade and other receivables 31 Trade and other liabilities (24) Deferred income tax liabilities (1) Provisions for other liabilities and charges (1)------------------------------- ------- Net assets acquired at fair value 45 Consideration paid in excess of net assets acquired 132------------------------------- ------- Total 177 Satisfied by: Cash (165) Deferred consideration - Net prior period adjustments (12)------------------------------- ------- Total consideration (177) Net cash outflow on acquisition: Cash - current period acquisitions (165) Deferred payments for prior period acquisitions and other items (2) Cash and cash equivalents acquired -------------------------------- ------- Cash outflow on acquisition (167) In total the Harcourt Education International acquisition together with othersmaller acquisitions completed in the period contributed an additional £12m ofsales and £3m of operating profit. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 10. Intangible assets------------------------------- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ------- ------- ------- Goodwill 3,341 3,677 3,271 Other intangibles 300 192 310------------------------------- ------- ------- -------Total intangibles 3,641 3,869 3,581 11. Net debt------------------------------- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ------- ------- ------- Non-current assets Derivative financial instruments 16 39 36 Current assets Derivative financial instruments 19 31 50 Marketable securities 28 - 25Cash and cash equivalents (excludingoverdrafts) 383 649 592Non-current liabilities Borrowings (1,471) (1,703) (1,148) Derivative financial instruments (28) (37) (19) Current liabilities Borrowings (392) (590) (595)------------------------------- ------- ------- ------- Net debt - continuing operations (1,445) (1,611) (1,059) Net cash classified as held for sale 13 - -------------------------------- ------- ------- ------- Total net debt (1,432) (1,611) (1,059) In February 2007, Pearson repaid its €591m 6.125% Euro Bonds 2007 and refinancedthis borrowing through available cash and existing bank facilities. 12. 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 2006 half year half year full year------------------------------- ------- ------- ------- Average rate for profits 1.98 1.79 1.84Period end rate 2.01 1.85 1.96 Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 13. Statement of changes in equity---------------------------------- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year---------------------------------- ------- ------- ------- Attributable to equity holders of theCompany Total recognised income and expense forthe period (1) (125) 148 Equity settled transactions 13 12 25Issue of ordinary shares - share optionschemes 7 3 11Cumulative translation adjustmentdisposed 54 - -Purchase of treasury shares (35) (27) (52)Dividends paid to equity holders of theCompany (150) (136) (220)---------------------------------- ------- ------- -------Net movement for the period (112) (273) (88)Attributable to equity holders of theCompany at the beginning of the year 3,476 3,564 3,564---------------------------------- ------- ------- -------Attributable to equity holders of theCompany at the end of the period 3,364 3,291 3,476 Minority interest 176 173 168---------------------------------- ------- ------- -------Total equity 3,540 3,464 3,644 Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 14. Cash flows------------------------------- ----- ------- ------- ------- 2007 2006 2006all figures in £ millions half year half year full year------------------------------- ----- ------- ------- ------- Reconciliation of (loss) / profit for the period to netcash generated from operations(Loss) / profit for the period (93) 17 469Income tax 111 8 19Depreciation and amortisation charges 62 58 135Amortisation of pre-publication assets 74 79 210Investment in pre-publication assets (103) (112) (213)Loss on sale of property, plant andequipment 1 1 2Net finance costs 35 40 74Loss on sale of subsidiaries andassociates 24 - -Share of results of joint ventures andassociates (11) (10) (24)Net foreign exchange (losses) / gainsfrom transactions (1) 1 (37)Share-based payment costs 13 12 25Inventories (75) (96) (16)Trade and other receivables (48) 5 (60)Trade and other liabilities (110) (141) 54Provisions (67) (18) (17)------------------------------- ----- ------- ------- -------Net cash (used in) / generated fromoperations (188) (156) 621 Dividends from joint ventures andassociates 2 14 45Net purchase of PPE including financelease principal payments (31) (34) (63)Purchase of intangibles (14) (8) (29)Add back: Special pension contribution 50 - -Add back: Cash spent againstintegration and fair value provisions - 1 1------------------------------- ----- ------- ------- -------Operating cash flow (181) (183) 575Operating tax paid (39) (26) (59)Net operating finance costs paid (45) (40) (82)------------------------------- ----- ------- ------- -------Operating free cash flow (265) (249) 434Non-operating tax paid (9) - -Special pension contribution (50) - -Integration spend - (1) (1)------------------------------- ----- ------- ------- -------Total free cash flow (324) (250) 433Dividends paid (including tominorities) (154) (136) (235)------------------------------- ----- ------- ------- -------Net movement of funds from operations (478) (386) 198 Included in net cash (used in) / generated from operations is an amount of £(4)m(2006 half year: £20m, 2006 full year: £27m) relating to discontinuedoperations. 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. As at 30 June 2007, £50m ofthis special pension contribution had been paid. The Group has excluded this£50m from its definition of operating cash flow and operating free cash flow asit distorts the underlying operating performance for the year. Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 15. Adjusted income statement ------------- ------- -------- ------ -------- ------- ------- -------- Income Re-analyse Other Amortisation/ Other net Recognition Adjusted statement discontinued gains adjustment finance of tax income operations and of acquired costs/ losses statement losses intangibles incomeall figures in£ millions ------------------------------------------------- 2007 half year------------- ------- -------- ------ -------- ------- ------- --------Sales 1,722 - - - - - 1,722------------- ------- -------- ------ -------- ------- ------- -------- Gross profit 896 26 - - - - 922Operatingexpenses (832) (24) - 16 - - (840)Other netgains/losses - (24) 24 - - - -JVs andassociates 11 - - - - - 11------------- ------- -------- ------ -------- ------- ------- --------Operatingprofit 75 (22) 24 16 - - 93 - - - - -Net financecosts (35) - - - (4) - (39)------------- ------- -------- ------ -------- ------- ------- --------Profit beforetax 40 (22) 24 16 (4) - 54Income tax (11) (100) 99 (5) 1 - (16)------------- ------- -------- ------ -------- ------- ------- --------Profit for theperiod -continuing 29 (122) 123 11 (3) - 38 - - - - -Profit for theperiod -discontinued (122) 122 - - - - - - - - - - ------------- ------- -------- ------ -------- ------- ------- --------Profit for theperiod (93) - 123 11 (3) - 38 - - - - -Minorities (11) - - (2) - - (13) - - - - - ------------- ------- -------- ------ -------- ------- ------- --------Earnings (104) - 123 9 (3) - 25 ------------- ------- -------- ------ -------- ------- ------- -------- 2006 half year------------- ------- -------- ------ -------- ------- ------- --------Sales 1,674 - - - - - 1,674 ------------- ------- -------- ------ -------- ------- ------- -------- Gross profit 863 52 - - - - 915Operatingexpenses (819) (41) - 9 - - (851)Other net - - - - - - -gains/lossesJVs andassociates 10 - - - (1) - 9------------- ------- -------- ------ -------- ------- ------- --------Operatingprofit 54 11 - 9 (1) - 73 Net financecosts (40) - - - (2) - (42)------------- ------- -------- ------ -------- ------- ------- --------Profit beforetax 14 11 - 9 (3) - 31Income tax (4) (4) - (3) 1 - (10)------------- ------- -------- ------ -------- ------- ------- --------Profit for theperiod -continuing 10 7 - 6 (2) - 21 Profit for theperiod -discontinued 7 (7) - - - - - ------------- ------- -------- ------ -------- ------- ------- --------Profit for theperiod 17 - - 6 (2) - 21 Minorities (10) - - (2) - - (12) ------------- ------- -------- ------ -------- ------- ------- --------Earnings 7 - - 4 (2) - 9 Notes to the condensed consolidated financial statements continued for the six months to 30 June 2007 15. Adjusted income statement continued ------------- ------- -------- ------ -------- ------- ------- -------- Income Re-analyse Other Amortisation/ Other net Recognition Adjusted statement discontinued gains adjustment of finance of tax income operations and acquired costs/ losses statement losses intangibles incomeall figures in£ millions ------------- ------- -------- ------ -------- ------- ------- -------- 2006 full year------------- ------- -------- ------ -------- ------- ------- --------Sales 4,051 - - - - - 4,051 ------------- ------- -------- ------ -------- ------- ------- -------- Gross profit 2,176 103 - - - - 2,279Operatingexpenses (1,665) (76) - 35 - - (1,706)Other net - - - - - - -gains/lossesJVs andassociates 24 - (4) - (1) - 19------------- ------- -------- ------ -------- ------- ------- --------Operatingprofit 535 27 (4) 35 (1) - 592 Net financecosts (74) - - - (16) - (90)------------- ------- -------- ------ -------- ------- ------- --------Profit beforetax 461 27 (4) 35 (17) - 502Income tax (9) (10) (4) (10) 5 (127) (155)------------- ------- -------- ------ -------- ------- ------- --------Profit for theyear -continuing 452 17 (8) 25 (12) (127) 347 Profit for theyear -discontinued 17 (17) - - - - - ------------- ------- -------- ------ -------- ------- ------- --------Profit for theyear 469 - (8) 25 (12) (127) 347 Minorities (23) - - (3) - - (26) ------------- ------- -------- ------ -------- ------- ------- --------Earnings 446 - (8) 22 (12) (127) 321 16. Related parties There were no material related party transactions and no guarantees have beenprovided to related parties in the period. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pearson