31st Jul 2006 07:02
Pearson PLC31 July 2006 31 July 2006 --------------------------------------------------------------------------------PEARSON 2006 INTERIM RESULTS • Good start to the year. Sales up 8%; adjusted operating profit up 57% to £73m. • Sustained organic growth and market share gains. Pearson Education salesup 11% with leading position in US School new adoption market and 4% growth in US Higher Education; FT Group sales up 6% with FT advertising revenues up 11%; Penguin sales up 2%. • Strong profit growth in all businesses. Pearson Education, traditionally loss-making in the first half, breaks even (loss of £21m in 2005). FT Group profits up 23% to £55m and Penguin profits up 38% to £18m. • Full-year outlook maintained. Pearson's profits are always heavily weighted to the second half of the year. With this first-half performance, we continue to expect strong earnings growth and cash generation and a further significant rise in our return on invested capital in 2006. Marjorie Scardino, chief executive, said: "These results provide furtherevidence of the quality and potential of our business. All parts of Pearson aremaking strong progress, and our steady investment in new content and services ispaying off with sustained organic growth, market share gains and marginimprovement. We remain confident that 2006 will be another good year for Pearsonboth in competitive and financial terms." £ millions Half year Half year Headline Underlying Full year 2006 2005 growth growth 2005 Business performanceSales 1,878 1,613 16% 8% 4,096Adjusted operatingprofit 73 33 -- 57% 506Adjusted profit/(loss) before tax 31 (6) -- -- 422Adjusted earnings/(loss) 9 (14) -- -- 272Adjusted earnings/(loss) per share 1.1p (1.8)p -- -- 34.1pOperating cashflow (183) (196) 7% -- 570Free cash flow (250) (265) 6% -- 431Net debt 1,611 1,298 (24)% -- 996 Statutory resultsOperating profit 65 73 (11)% -- 536Profit before tax 25 48 (48)% -- 466Basic earnings 7 337 -- -- 624Basic earnings pershare 0.9p 42.3p -- -- 78.2p Dividend per share 10.5p 10.0p 5% -- 27.0p Note: Statutory operating profit for 2005 included a £40m profit on the sale ofour investment in CBSMarketWatch. Statutory basic earnings for 2005 includedCBSMarketWatch and a £302m profit on the sale of Recoletos. Throughout this statement, we refer to business performance measures for totaloperations and growth rates on an underlying basis unless otherwise stated.'Underlying' means growth excluding currency impact and businesses acquired orsold. 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 and 14. 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 of acquired intangible assets; and iii) short-termfluctuations in the market value of financial instruments (under IAS39) andother currency movements (under IAS21). 2006 OUTLOOK Due to the seasonal bias of our book publishing businesses, Pearson makes mostof its sales and almost all of its profits in the second half. However, based on our trading performance in the first half, we remain confidentthat 2006 will be another good year for Pearson as we continue to increasemargins and grow faster than our markets. We expect to achieve strong underlyingearnings growth, good cash generation and a further significant improvement inreturn on invested capital. Our outlook for the full year remains: • Pearson Education (65% of 2005 sales; 68% of operating profit) expected to achieve underlying sales growth in the 3-5% range, with similar rates of growth in each of its three worldwide businesses (School, Higher Education and Professional). School and Professional, which achieved very strong growth in the first half, will face tougher comparables in the second half of the year. We expect margins to improve in School and Professional and to be stable in Higher Education. • Penguin (20% of 2005 sales; 12% of operating profit) expected to grow at a similar rate to 2005 with margins improving steadily as we benefit from efficiency gains. • Financial Times Group (15% of 2005 sales; 20% of operating profit) expected to achieve a further significant profit improvement. The Financial Times continues to show good momentum, with circulation up 5% and advertising revenues up 11% in the first half. IDC expects another good year, benefiting from similar business conditions to 2005, steady organic growth and the contribution of recent acquisitions. Acquisitions.In the first half we invested a total of £273m in a series ofacquisitions in education and the FT Group. For the full year, we expect theseacquisitions to have a broadly neutral effect on adjusted earnings per share asa result of integration spend in the second half and the interest charge on ourhigher level of net debt. We expect these acquisitions to enhance Pearson'sadjusted earnings per share and return on invested capital in 2007, their firstfull year under our ownership. Interest and tax. We expect our interest charge to be a little higher than in2005, as a result of our higher level of net debt. We expect our effective taxrate to be in the 32-34% 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 2005 was £1:$1.81) would have a translation impact of approximately 1p onadjusted earnings per share. The average rate during the first half of 2006 was£1:$1.79 and the closing rate at the end of June was £1:$1.85. 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 (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 +1 718 354 1175(inside the US) or +44 (0)208 974 7900 (outside the US), participant code C 348483. Video interviews with Marjorie Scardino and Robin Freestone are alsoavailable at www.pearson.com. High resolution photographs are available for the media at www.newscast.co.uk. OVERVIEW Pearson's sales increased 8% in the first half of the year and adjustedoperating profits increased by 57% to £73m. Adjusted earnings per share improvedto 1.1p, from a loss of (1.8)p in 2005. Operating cash flow improved by £13m to £(183)m and our average working capitalto sales ratio improved to 27.3% (from 28.7% in the first half of 2005). Our statutory results show a reduction in operating profit to £65m (£73m in2005, including a £40m profit on the sale of our stake in CBSMarketWatch).Statutory earnings for the period were £7m, compared with £337m in the firsthalf of 2005 which included a £302m profit on the sale of Recoletos, our Spanishmedia group. Excluding those one-off gains on disposals, our statutory profitwas £12m higher than in 2005. Our net borrowings, which peak at the half-year stage, increased to £1,611m(£1,298m in 2005), largely as a result of a series of bolt-on acquisitions ineducation (including Promissor, PBM, National Evaluation Systems, PowerSchooland Chancery) and financial information (Quote.com). Our total investment in allacquisitions in the first half was £273m. The board has declared an interim dividend of 10.5p per share, a 5% increase on2005, reflecting this strong financial performance and its confidence in theoutlook for the full year. £ millions Half year Half year Headline Underlying Full year 2006 2005 growth growth 2005 SalesSchool 625 518 21% 10% 1,295HigherEducation 206 192 7% 3% 779Professional 316 243 30% 20% 589--------------- --------- --------- -------- --------- ---------PearsonEducation 1,147 953 20% 11% 2,663FT Publishing 179 164 9% 9% 332IDC 165 143 15% 3% 297--------------- --------- --------- -------- --------- ---------FT Group 344 307 12% 6% 629Penguin 387 353 10% 2% 804 Totalcontinuing 1,878 1,613 16% 8% 4,096 Adjusted operatingprofitSchool 36 16 -- 46% 147HigherEducation (53) (45) (18)% (13)% 156Professional 17 8 -- 60% 45--------------- --------- --------- -------- --------- ---------PearsonEducation 0 (21) -- -- 348FT Publishing 13 6 -- -- 21IDC 42 38 11% 8% 80--------------- --------- --------- -------- --------- ---------FT Group 55 44 25% 23% 101Penguin 18 13 38% 38% 60 Totalcontinuing 73 36 -- 57% 509Discontinued(Recoletos) -- (3) (3) Total 73 33 -- 57% 506 SCHOOL £ millions First half First half Headline Underlying Full year 2006 2005 growth growth 2005 Sales 625 518 21% 10% 1,295AdjustedoperatingProfit 36 16 -- 46% 147 Further share gains in the US • Market-leading performance in US school publishing. Strong first-half sales growth, benefiting from earlier phasing of our major state adoption wins compared with 2005. • Pearson takes an estimated 30% market share of total new adoptions (and 33% where we competed), and makes a strong start in open territories. Pearson takes the #1 or #2 market share of new adoptions in reading, maths, science and social studies. • #1 position in Elementary Social Studies in California with an innovative new digital programme. It has so far taken a 41% share, reaching more than 1.5m students. • Testing business, benefiting from excellent record of contract wins in 2005, continues to gain share with new long-term contracts in Illinois, Maryland, Mississippi and New York. Rapid growth in online assessment, with pilots underway in nine states and 1.4 million secure online tests delivered in the first half. • Curriculum software continues to show good growth with increasing adoption of technology in schools and new version releases for some of our major programmes including Waterford and NovaNet. Good growth in International, with strong performance in Canada, Europe andLatin America • International English Language Teaching business outperforms market, capitalising on growing demand for English language proficiency and local adaptations of new and established global programmes. English Adventure, developed with Disney for the ELT primary market, gains share with new versions for Asia and Latin America building on the success already achieved in Europe. • UK school businesses benefit from technology leadership. In school testing, we have marked a total of 8 million GCSE, AS and A-Level scripts onscreen, and we are piloting a programme to provide students and their parents - in addition to schools - with online access to question-level examination performance data. Our new science qualification, textbook, e-learning and teacher support programmes, designed for major changes in science curriculum in 2006, are gaining significant market share. Bolt-on acquisitions adding breadth, scale and value • School testing business gains scale and enters a new growth market through the acquisition of National Evaluation Systems, America's leading provider of certification tests for the teaching profession. • School technology business transformed through the acquisitions of Chancery and PowerSchool, the #2 and #3 providers of student information systems to US schools. Pearson now has an installed base of 29,200 schools serving 25 million students - close to half of all school students in America. • Pearson gains a leading position in the Italian school publishing market through the acquisition of Paravia Bruno Mondadori. Healthy outlook 2007-2009 • US school new adoption market expected to grow strongly from 2007- 2009 (estimated at $660m in 2006; $800m in '07; $900m in '08; $1bn in '09). • US state tax receipts - the major source of school funding - remain healthy. According to the Rockefeller Institute, state tax receipts grew by 6.8% in Q1 2006 with all three major categories (personal income tax, sales tax and corporate income tax) showing solid growth. • Increasing technology adoption by US schools and shift of No Child Left Behind policies from implementation to remediation creates favourable environment for Pearson's mix of curriculum, assessment and technology services. HIGHER EDUCATION £ millions First half First half Headline Underlying Full year 2006 2005 growth growth 2005 Sales 206 192 7% 3% 779Adjusted operating profit (53) (45) (18)% (13)% 156 Investments generate higher first half losses . . . • Pearson's Higher Education business is traditionally loss-making in the 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 second semester). • Worldwide Higher Education sales growth of 3%; good growth in the US (up 4%). • First half losses increase to £53m (£45m in 2005) as Pearson invests in new content and online services. . . . and sustainable competitive advantage • Pearson's US Higher Education business, the market leader, has grown ahead of the industry for seven straight years. • Strong performance from major schedule of 1st editions with major new titles in Economics, Algebra, Accounting, Psychology and Written Composition. • Rapid growth from online homework and assessment services including MyMathLab and Mastering Physics. More than 900,000 US college students register for Pearson's online learning programme in the first half, an increase of 29%. Evaluation studies show significant learning gains for students and efficiency improvements for institutions. • New online homework and assessment programmes in economics, psychology and developmental writing to be launched in the second half. • Continued strong growth from custom publishing as Pearson extends leadership in print custom publishing to custom media and full service curriculum solutions. • Further innovation in product models and student channels. Pearson is piloting downloadable audio study guides; digital textbooks; purchasing-by-the-chapter; and an online store for all our higher education materials. • International Higher Education business continuing to invest in global and local authors, publishing in new languages, online learning tools and custom publishing, and new markets in Asia and the Middle East. PROFESSIONAL £ millions First half First half Headline Underlying Full year 2006 2005 growth growth 2005 Sales 316 243 30% 20% 589Adjusted operating profit 17 8 -- 60% 45 Note: At the beginning of 2006 we transferred Brady Games, our video gamesimprint, out of Professional and into Penguin. This move reduces Professionalsales by £6m in the first half. There is no operating profit impact. Professional Testing • Substantial revenue and profit growth, as major contracts continue to build and business emerges from investment phase. • Successful execution on major new contracts. Graduate Management Admissions Test now being administered through Pearson's network of more than 4,000 test centres in 145 countries, the world's largest. • Promissor, acquired in January 2006, performing well. Acquisition brings additional scale in professional testing and enables Pearson to enter new US state and federal regulatory markets. Government Solutions • Exceptional revenue growth in the first half, benefiting from phasing of US Department of Health Medicaid contract (which is expected to reverse in the second half). • New contract wins with the US Defense Information Systems Agency and governments of Argentina and Mexico; strong pipeline of new long-term business opportunities in the second half. Technology Publishing • Worldwide technology publishing business maintaining market share despite weak industry conditions. • Further cost actions: continued reduction in publishing list and overheads; consumer technology business transferred to Penguin to gain additional scale in distribution. FINANCIAL TIMES GROUP £ millions Half year Half year Headline Underlying Full year 2006 2005 growth growth 2005 SalesFT Publishing 179 164 9% 9% 332IDC 165 143 15% 3% 297 Total 344 307 12% 6% 629 Adjusted operating profitFT Publishing 13 6 -- -- 21IDC 42 38 11% 8% 80 Total 55 44 25% 23% 101 FT Publishing • Financial Times sales up 10% to £119m and profit improved to £5m (loss of £2m in first half of 2005). • FT advertising revenues up 11%, continuing steady acceleration in advertising revenue growth. 20%+ growth in financial, luxury goods and online advertising; more than 80% of advertising revenue improvement converted to profit in the first half. • FT's average circulation 447,000 for the first six months, up 5%; 86,000 FT.com subscribers in June, up 11% (on the same period last year). • Deeper integration of the FT's print and online editorial processes under way. Reinforcement of print and online teams through senior appointments and reorganisation. • Circulation up 2% at Les Echos to 120,000, FT Deutschland level at 102,000; The Economist up 9% up to 1,096,000 (for the July-December ABC period). • Strong performance of the portfolio of finance titles, websites and events at FT Business, with sales up 15% and improved margins in institutional finance titles. Interactive Data Corporation • Underlying sales growth of 3% with increased business with existing customers and 95%+ renewal rate within its Institutional Services segment. • Demand for fixed income evaluations and related reference data drives new sales for FT Interactive Data, which grew over 6% excluding the impact of foreign exchange. • Steady international expansion; working with some of largest clients to pursue enterprise-wide opportunities that involve offering multiple Interactive Data businesses. • IS. Teledata integration progressing well; re-branded Interactive Data Managed Solutions in July 2006. • e-Signal, which provides real time financial market data to financial professionals and active traders, continues to expand its direct subscriber base and online advertising across its family of financial websites, which together rank among the top 10 financial destinations. Quote.com integration progressing well. • CMS BondEdge introduction of fixed income analytical data feed service well received by customers. • IDC reported second-quarter and first-half 2006 results on 27 July 2006, available at www.interactivedatacorp.com . PENGUIN £ millions First half First half Headline Underlying Full year 2006 2005 growth growth 2005 Sales 387 353 10% 2% 804Adjusted operating profit 18 13 38% 38% 60 Note: At the beginning of 2006 we transferred Brady Games, our video gamesimprint, out of our Professional segment and into Penguin. This move increasesPenguin sales by £6m in the first half. There is no operating profit impact. • Continued margin improvement, with sales up 2% and profits up 38%. • Record bestseller performance with 85 titles on New York Times bestseller lists and 43 top ten bestsellers in UK. Brand name author bestsellers and newly created bestsellers including titles by Patricia Cornwell, Clive Cussler, Nathaniel Philbrick, Anthony Horowitz, Tyler Perry, Kim Edwards, Jeremy Clarkson, Jane Green and Marina Lewycka. • Major literary awards. Penguin authors win a Pulitzer Prize for the second year in a row - this year the Pulitzer Prize for Fiction (Geraldine Brooks for March), two Orange Prizes (Zadie Smith for On Beauty and debut writer Naomi Alderman for Disobedience), and two Whitbread Prizes (Ali Smith for Accidental and Hilary Spurling for Matisse: the Master). • Strong second half publishing list, including bestselling authors Thomas Pynchon, Nora Roberts, Clive Cussler, Carly Fiorina, John Dean, Jamie Oliver, Jeremy Clarkson, Sue Townsend, Eoin Colfer and Kylie Minogue. • Successful innovation with new formats. Penguin authors published in new "Premium Paperback" format achieve higher sales than with their previous traditional mass market titles. • Strong backlist performance with innovative publishing and marketing. New editions and lines introduced for the 60th Anniversary of the Penguin Classics, including Red Classics and Penguin Epics in the UK, and Penguin Graphic Classics, and a successful partnership with the National Basketball Association in the US. • Further efficiency gains. Continued programme to capitalise on combined scale of Penguin and Pearson Education in book publishing, with shared warehousing, distribution, purchasing and information technology. • Investment in new digital channels and formats, including Penguin online bookstores, e-books, digital audio and podcasts, to reach new audiences. • Continued investment in India, where Penguin has #1 market share, with expansion of local language publishing programme, and shift of some travel and illustrated reference pre-production processes to Delhi. 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 2006 ------------------------------- ----- ------- ------- ------- 2006 2005 2005all figures in £ millions note half year half year full year------------------------------- ----- ------- ------- ------- Continuing operations Sales 2 1,878 1,613 4,096Cost of goods sold (933) (812) (2,022)------------------------------- ----- ------- ------- -------Gross profit 945 801 2,074 Operating expenses (890) (776) (1,592)Other net gains and losses 3 - 40 40Share of results of joint venturesand associates 10 8 14------------------------------- ----- ------- ------- -------Operating profit 2 65 73 536 Finance costs 4 (70) (69) (132)Finance income 4 30 44 62------------------------------- ----- ------- ------- -------Profit before tax 5 25 48 466Income tax 6 (8) (2) (124)------------------------------- ----- ------- ------- -------Profit for the period fromcontinuing operations 17 46 342 Discontinued operations Profit for the period fromdiscontinued operations 8 - 300 302------------------------------- ----- ------- ------- -------Profit for the period 17 346 644 Attributable to:Equity holders of the Company 7 337 624Minority interest 10 9 20------------------------------- ----- ------- ------- ------- Earnings per share from continuing and discontinued operationsBasic 7 0.9p 42.3p 78.2pDiluted 7 0.9p 42.2p 78.1p Earnings per share from continuing operationsBasic 7 0.9p 4.6p 40.4pDiluted 7 0.9p 4.6p 40.3p The results are presented under IFRS (see note 1). The figures for the sixmonths to 30 June 2006 and 30 June 2005 have not been audited or reviewed. Condensed consolidated statement of recognised income and expense for the six months to 30 June 2006 ------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions note half half full year year year------------------------------- ----- ------- ------- ------- Net exchange differences ontranslation of foreign operations (228) 191 327Actuarial gains / (losses) on defined benefit pensionand post retirementmedical schemes 96 (31) 26Taxation on items taken directly toequity - - 12------------------------------- ----- ------- ------- -------Net income / (expense) recogniseddirectly in equity (132) 160 365Profit for the financial period 17 346 644------------------------------- ----- ------- ------- -------Total recognised income and expensefor the financial period (115) 506 1,009 Attributable to:Equity holders of the Company 13 (125) 497 989Minority interest 10 9 20------------------------------- ----- ------- ------- ------- Effect of transition adjustment on adoption ofIAS 39Attributable to:Equity holders of the Company - (12) (12) Condensed consolidated balance sheet as at 30 June 2006 ------------------------------- ------ ------- ------- ------- 2006 2005 2005all figures in £ millions note half year half year full year------------------------------- ------ ------- ------- ------- Non-current assetsProperty, plant and equipment 363 359 384Intangible assets 11 3,869 3,506 3,854Investments in joint ventures andassociates 33 42 36Deferred income tax assets 391 404 385Financial assets - Derivativefinancial instruments 39 63 79Other financial assets 18 17 18Other receivables 120 100 108------------------------------- ------ ------- ------- ------- 4,833 4,491 4,864Current assetsIntangible assets - pre-publication 442 402 426Inventories 462 401 373Trade and other receivables 976 1,003 1,031Financial assets - Derivativefinancial instruments 31 49 4Cash and cash equivalents(excluding overdrafts) 649 810 902------------------------------- ------ ------- ------- ------- 2,560 2,665 2,736------------------------------- ------ ------- ------- -------Total assets 7,393 7,156 7,600 Non-current liabilitiesFinancial liabilities - Borrowings (1,703) (1,832) (1,703)Financial liabilities - Derivativefinancial instruments (37) (5) (22)Deferred income tax liabilities (202) (148) (204)Retirement benefit obligations (270) (436) (389)Provisions for other liabilitiesand charges (14) (35) (31)Other liabilities (110) (139) (151)------------------------------- ------ ------- ------- ------- (2,336) (2,595) (2,500)Current liabilitiesTrade and other liabilities (866) (779) (974)Financial liabilities - Borrowings (590) (368) (256)Financial liabilities - Derivativefinancial instruments - (15) -Current income tax liabilities (110) (88) (104)Provisions for other liabilitiesand charges (27) (17) (33)------------------------------- ------ ------- ------- ------- (1,593) (1,267) (1,367)------------------------------- ------ ------- ------- -------Total liabilities (3,929) (3,862) (3,867)------------------------------- ------ ------- ------- -------Net assets 3,464 3,294 3,733 Share capital 202 201 201Share premium 2,479 2,475 2,477Reserves 610 472 886------------------------------- ------ ------- ------- -------Total equity attributable to equityholders of the Company 3,291 3,148 3,564Minority interest 173 146 169------------------------------- ------ ------- ------- -------Total equity 13 3,464 3,294 3,733 Condensed consolidated cash flow statement for the six months to 30 June 2006 -------------------------------- ----- ------- ------- ------- 2006 2005 2005all figures in £ millions note half year half year full year------------------------------- ----- ------- ------- ------- Cash flows from operating activitiesCash (used in) / generated fromoperations 14 (44) (62) 875Interest paid (53) (55) (101)Tax paid (26) (23) (65)------------------------------- ----- ------- ------- -------Net cash (used in) / generated fromoperating activities (123) (140) 709 Cash flows from investing activitiesAcquisition of subsidiary, net ofcash acquired (273) (28) (246)Acquisition of joint ventures andassociates (4) (4) (7)Purchase of property, plant andequipment (PPE) (33) (40) (76)Proceeds from sale of PPE 1 1 3Purchase of intangible assets (8) (3) (24)Investment in pre-publication (112) (93) (222)Purchase of other financial assets - - (2)Disposal of subsidiary, net of cashdisposed 6 367 376Disposal of joint ventures andassociates - 54 54Interest received 13 10 29Dividends received from jointventures and associates 14 1 14------------------------------- ----- ------- ------- -------Net cash (used in) / generated frominvesting activities (396) 265 (101) Cash flows from financing activitiesProceeds from issue of ordinaryshares 3 2 4Purchase of treasury shares (27) (11) (21)Proceeds from borrowings 477 203 -Repayment of borrowings (11) (10) (79)Finance lease principal payments (2) (1) (3)Dividends paid to Company'sshareholders (136) (125) (205)Dividends paid to minorityinterests - - (17)------------------------------- ----- ------- ------- -------Net cash generated from / (used in)financing activities 304 58 (321) Effects of exchange rate changes oncash and cash equivalents (21) 23 13------------------------------- ----- ------- ------- -------Net (decrease) / increase in cashand cash equivalents (236) 206 300 Cash and cash equivalents at thebeginning of the period 844 544 544------------------------------- ----- ------- ------- -------Cash and cash equivalents at theend of the period 608 750 844 For the purposes of the cash flow statement, cash and cash equivalents areincluded net of overdrafts repayable on demand. These overdrafts are excludedfrom the definition of cash and cash equivalents disclosed on the balance sheet. Notes to the condensed consolidated financial statementsfor the six months to 30 June 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. Notes to the condensed consolidated financial statements continued for the six months to 30 June 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 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- -------SalesSchool 625 518 1,295Higher Education 206 192 779Professional 316 243 589-------------------------------- ------- ------- -------Pearson Education 1,147 953 2,663FT Publishing 179 164 332IDC 165 143 297-------------------------------- ------- ------- -------FT Group 344 307 629Penguin 387 353 804-------------------------------- ------- ------- -------Total sales 1,878 1,613 4,096 Adjusted operating profitSchool 36 16 147Higher Education (53) (45) 156Professional 17 8 45-------------------------------- ------- ------- -------Pearson Education - (21) 348FT Publishing 13 6 21IDC 42 38 80-------------------------------- ------- ------- -------FT Group 55 44 101Penguin 18 13 60-------------------------------- ------- ------- -------Adjusted operating profit - continuingoperations 73 36 509Adjusted operating profit - discontinuedoperations - (3) (3)-------------------------------- ------- ------- -------Total adjusted operating profit 73 33 506 Adjusted operating profit - continuingoperations 73 36 509Amortisation of acquired intangibles (9) (3) (11)Other gains and losses - 40 40Other net finance costs of associates 1 - (2)-------------------------------- ------- ------- -------Operating profit 65 73 536 In our adjusted operating profit, we have excluded amortisation of acquiredintangibles, other gains and losses and other net finance costs of associates.The amortisation of acquired intangibles is not considered to be fullyreflective of the underlying performance of the Group. Other gains and lossesrepresent profits and losses on the sale of subsidiaries, joint ventures,associates and investments that are included within continuing operations butwhich distort the performance for the year. Other net finance costs ofassociates are the equivalent of the Company's own net finance costs that areexcluded in adjusted earnings (see note 4). Discontinued operations relate tothe disposal of the Group's interest in Recoletos (see note 8). Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2006 3. Other net gains and losses-------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- ------- Profit on sale of interest in MarketWatch - 40 40-------------------------------- ------- ------- -------Total other net gains and losses - 40 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 2005 2005all figures in £ millions half half full year year year-------------------------------- ------- ------- ------- Net interest payable (44) (35) (77)Finance cost re employee benefits 2 (4) (7)Net foreign exchange gains 3 10 12Other gains on financial instruments in a hedgingrelationship: - fair value hedges - 1 - - net investment hedges (1) 2 3Other gains / (losses) on financial instruments notin a hedging relationship: - amortisation of transitional adjustment on bonds 5 5 7 - derivatives (5) (4) (8)-------------------------------- ------- ------- -------Net finance costs (40) (25) (70) Finance costs (70) (69) (132)Finance income 30 44 62-------------------------------- ------- ------- -------Net finance costs (40) (25) (70) Analysed as:Net interest payable (44) (35) (77)Finance cost re employee benefits 2 (4) (7)-------------------------------- ------- ------- -------Net finance cost reflected in adjustedearnings (42) (39) (84)Other net finance income 2 14 14-------------------------------- ------- ------- -------Net finance costs (40) (25) (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 six months to 30 June 2006 5. Profit before tax-------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- ------- Profit before tax 25 48 466Add back: amortisation of acquiredintangibles (see note 2) 9 3 11Add back: other gains and losses (see note2) - (40) (40)Add back: other net finance costs ofassociates (see note 2) (1) - 2Add back: other finance income (see note4) (2) (14) (14)-------------------------------- ------- ------- -------Adjusted profit before tax - continuingoperations 31 (3) 425Adjusted profit before tax - discontinuedoperations - (3) (3)-------------------------------- ------- ------- -------Total adjusted profit before tax 31 (6) 422 6. Taxation------------------------------ ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year------------------------------- ------- ------- ------- Income tax charge (8) (2) (124)Add back: tax benefit on amortisationof acquired intangibles (3) (1) (4)Add back: tax benefit on other gainsand losses - - (4)Add back: tax charge on other financeincome 1 4 3-------------------------------- ------- ------- -------Adjusted income tax charge -continuing operations (10) 1 (129)Adjusted income tax charge -discontinued operations - 1 1------------------------------- ------- ------- -------Total adjusted income tax charge (10) 2 (128) Tax rate reflected in adjusted earnings 32.0% 32.0% 30.3% Included within the income tax charge is an amount of £1m (2005 half year: £nil,2005 full year: £26m) relating to UK tax. Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 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 2005 2005all figures in £ millions half half full year year year------------------------------- ------- ------- ------- Earnings 7 337 624Adjustments to exclude profit for the year fromdiscontinued operations:Profit for the period from discontinuedoperations - (300) (302)----------------------------------- ------- ------- -------Earnings - continuing operations 7 37 322 Earnings 7 337 624Adjustments:Amortisation of acquired intangibles 9 3 11Other gains and losses - (40) (40)Other net finance costs of associates (1) - 2Other finance income (2) (14) (14)Profit on sale of discontinuedoperations (see note 8) - (304) (306)Taxation on above items (2) 5 (3)Minority interest share of above items (2) (1) (2)------------------------------- ------- ------- -------Adjusted earnings / (loss) 9 (14) 272Amortisation of acquired intangibles(net of taxation and minority interest) (5) (1) (5)----------------------------------- ------- ------- -------Adjusted earnings / (loss) includingamortisation of acquired intangibles 4 (15) 267 Weighted average number of shares(millions) 798.4 797.0 797.9Effect of dilutive share options 1.5 1.0 1.1Weighted average number of shares(millions) for diluted earnings 799.9 798.0 799.0 Earnings per share from continuing and discontinued operationsBasic 0.9p 42.3p 78.2pDiluted 0.9p 42.2p 78.1p Earnings per share from continuing operationsBasic 0.9p 4.6p 40.4pDiluted 0.9p 4.6p 40.3p Adjusted earnings / (loss) per share 1.1p (1.8)p 34.1pAdjusted earnings per share includingamortisation of acquired intangibles 0.5p (1.9)p 33.5p Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2006 8. Discontinued operations Discontinued operations relate to the sale of Pearson's 79% interest inRecoletos Grupo de Communicacion S.A. The transaction became unconditional onapproval from the Spanish regulatory authorities in February 2005. The resultsof Recoletos were consolidated for the period to 28 February 2005 and areincluded in profit from discontinued operations shown in the table below. -------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- ------- Sales - 27 27 Operating loss - (3) (3)Net finance income - - --------------------------------- ------- ------- -------Loss before tax - (3) (3)Attributable tax benefit - 1 1Profit on disposal of discontinuedoperations - 304 306Attributable tax expense - (2) (2)-------------------------------- ------- ------- -------Profit for the period from discontinuedoperations - 300 302 9. Dividends-------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- ------- Amounts recognised as distributions toequity holders in the period 136 125 205 The directors are proposing an interim dividend of 10.5p per equity share,payable on 22 September 2006 to shareholders on the register at the close ofbusiness on 25 August 2006. This dividend has not been included as a liabilityas at 30 June 2006. A 10.5p interim dividend represents a cash payment of £84m(2005: 10.0p or £80m). 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 2005 half year half year full year-------------------------------- ------- ------- ------- Average rate for profits 1.79 1.87 1.81Period end rate 1.85 1.79 1.72 Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2006 11. Intangibles-------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year-------------------------------- ------- ------- ------- Goodwill 3,677 3,385 3,654Other intangibles 192 121 200-------------------------------- ------- ------- -------Total intangibles 3,869 3,506 3,854 Pearson has made a number of acquisitions in the six months to 30 June 2006including Promissor, a computerised testing provider focused on the regulatorymarket in the US, National Evaluation Systems, the leading provider ofcustomised state assessments for teacher certification in the US and ParaviaBruno Mondadori, one of Italy's leading educational publishers. Netconsideration paid for all acquisitions in the six months to June 2006 was £273mand provisional goodwill recognised was £252m. Intangible asset allocationreviews are in progress for these acquisitions and should be finalised in thesecond half of 2006. In total the acquisitions made in the six months to 30 June2006 contributed an additional £40m of sales and £8m of operating profit. 12. Net debt------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year------------------------------- ------- ------- ------- Non current assetsDerivative financial instruments 39 63 79Current assetsDerivative financial instruments 31 49 4Cash and cash equivalents 649 810 902Non current liabilitiesBorrowings (1,703) (1,832) (1,703)Derivative financial instruments (37) (5) (22)Current liabilitiesBorrowings (590) (368) (256)Derivative financial instruments - (15) -------------------------------- ------- ------- -------Total net debt (1,611) (1,298) (996) Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2006 13. Reconciliation of movements in equity------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half year half year full year------------------------------- ------- ------- ------- Attributable to equity holders of theCompanyTotal recognised income and expense forthe period (125) 497 989Share-based payment charge 12 11 23Shares issued 3 2 4Cumulative translation adjustmentdisposed - (14) (14)Treasury shares purchased (27) (11) (21)Dividends to equity holders of theCompany (136) (125) (205)----------------------------------- ------- ------- -------Net movement for the period (273) 360 776Attributable to equity holders of theCompany at the beginning of the period 3,564 2,800 2,800Transition adjustment on adoption ofIAS 39 - (12) (12)----------------------------------- ------- ------- -------Attributable to equity holders of theCompany at the end of the period 3,291 3,148 3,564 Minority interests 173 146 169----------------------------------- ------- ------- -------Total equity 3,464 3,294 3,733 Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2006 14. Cash flows------------------------------- ------- ------- ------- 2006 2005 2005all figures in £ millions half half full year year year------------------------------- ------- ------- ------- Reconciliation of profit for the period to net cashgenerated from operationsProfit for the period 17 346 644Income tax 8 3 125Depreciation and amortisation charges 137 119 301Loss on sale of property, plant andequipment 1 - -Net finance costs 40 25 70Profit on sale of subsidiaries andassociates - (344) (346)Share of results of joint ventures andassociates (10) (8) (14)Net foreign exchange gains fromtransactions 1 5 39Share-based payments 12 11 23Inventories (96) (70) (17)Trade and other receivables 5 (31) (4)Trade and other payables (141) (104) 71Provisions (18) (14) (17)------------------------------- ------- ------- -------Net cash generated from operations (44) (62) 875 Dividends from joint ventures andassociates 14 1 14Net purchase of PPE including financelease principal payments (34) (40) (75)Purchase of intangibles (8) (3) (24)Investment in pre-publication (112) (93) (222)Add back: Cash spent againstintegration and fair value provisions 1 1 2------------------------------- ------- ------- -------Pearson operating cash flow (183) (196) 570Operating tax paid (26) (23) (65)Operating finance charges paid (40) (34) (65)------------------------------- ------- ------- -------Operating free cash flow (249) (253) 440Non operating finance charges paid - (11) (7)Integration and fair value spend (1) (1) (2)------------------------------- ------- ------- -------Total free cash flow (250) (265) 431Dividends paid (including minorities) (136) (125) (222)------------------------------- ------- ------- -------Net movement of funds from operations (386) (390) 209 Included in net cash generated from operations is an amount of £nil (2005 halfyear: £(6)m, 2005 full year: £(6)m) 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. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pearson