25th Jul 2005 07:01
Pearson PLC25 July 2005 25 July 2005 PEARSON INTERIM RESULTS (unaudited)Six months ended 30 June 2005 PEARSON MAKES STRONG START TO 2005 • Underlying sales up 10% and operating profit from continuing operations higher at £33m (£7m in 2004) with good growth in all businesses; • Pearson Education sales up 14%. Higher Education up 5%, Professional up 12% and School, our largest business, up 19%; all benefiting from investments in content, testing and technology; • FT Group sales up 5% and profits up 34%; Financial Times advertising revenues up 5% and IDC profits up 23%; • Penguin sales up 5%, with record bestseller performance and stronger first-half phasing. Marjorie Scardino, chief executive, said: "We are very pleased with the startwe've made on 2005. We still have the majority of the year's trading ahead ofus, but the first-half momentum supports our confidence that we will meet ourfinancial goals." £ millions Half year Half year Underlying Full year 2005 2004 growth 2004 Sales 1,613 1,481 10% 3,696 Business performanceAdjusted operating profit -continuing 33 7 395Discontinued (Recoletos) (3) 17 26Adjusted (loss) / profitbefore tax (9) (16) 345Adjusted (loss) / earnings (15) (22) 217Adjusted (loss) / earningsper share (1.9)p (2.8)p 27.3pOperating cash flow (196) (195) 418Free cash flow (265) (262) 284 Statutory resultsOperating profit 73 9 404Profit / (loss) before tax 48 (33) 325Basic earnings / (loss) 337 (20) 262Basic earnings / (loss) pershare 42.3p (2.5)p 32.9p Dividend per share 10p 9.7p 3% 25.4pNet borrowings 1,298 1,747 1,221 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 portfolio changes. Ourcontinuing businesses exclude Recoletos following the sale of our 79% stake on 8April 2005. The basis for our business performance measures is explained overleaf. FIRST HALF 2005 FINANCIAL HIGHLIGHTS These results are Pearson's first to be reported under IFRS. In May we publishedreconciliations of our 2003 and 2004 results from UK GAAP to IFRS, available atwww.pearson.com/ifrs. • Sales up 10%, with good growth in all parts of the company. • Adjusted operating profit from continuing operations higher at £33 million (£7 million in 2004); adjusted loss per share improved to (1.9)p from (2.8)p. • Operating cash flow level with 2004 at £(196)m; average working capital to sales ratio improved to 28.7% (from 30.7% in first half of 2004). • Statutory profit for the period up to £346m from £(9)m, with gains on disposals of £342m after tax. • Net borrowings reduced to £1,298m from £1,747m, with £426m net proceeds from the sale of our stakes in Recoletos and MarketWatch. • Dividend increased 3% to 10p per share. For more information: Luke Swanson / Charlotte Elston + 44 (0) 20 7010 2310Jeff Taylor / David Hakensen + 1 212 641 2409 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 at 15.00 (BST) / 10.00 (EDT).To participate please dial in on +1 866 800 8648 (inside the US) or +1 617 6142702 (outside the US), participant code 69353005. The call will be available onreplay for seven days on +1 888 286 8010 (inside the US) or +1 617 801 6888(outside the US), pass code 51433647. Video interviews with Marjorie Scardino and Rona Fairhead are also available atwww.pearson.com. High resolution photographs are available for the media at www.newscast.co.uk. Note: the 'business performance' measures, which Pearson uses alongside othermeasures to track performance, are included to provide additional detail onbusiness performance. They are non-GAAP measures under both US GAAP and IFRS.Reconciliations of adjusted operating profit, adjusted profit/ (loss) beforetax, adjusted earnings per share and operating cash flow to the equivalentstatutory heading under IFRS are included in notes to the accounts 2, 5, 7 and15 respectively. Business performance measures are presented on an adjustedbasis to exclude other net gains and losses arising on the sale of subsidiaries,investments and associates together with short-term fluctuations in the marketvalue of financial instruments following the adoption of IAS 39. OUTLOOK Due to the seasonal phasing of our book publishing businesses, Pearson makesmost of its sales and almost all of its profits in the second half of the year.However, based on our trading performance in the first half, we are confident ofstrong growth, in line with expectations, for the year as a whole. Our outlookfor the full year is: • Our School business is performing well in rapidly growing markets in the US and around the world. We expect our total worldwide School business to grow sales in double digits, and to improve margins by 1-2 percentage points. • Our Higher Education business has a unique competitive advantage based on its leading market position, publishing strength and technological innovation. We expect it to grow by around 4% this year, ahead of the industry once again, and with similar margins to 2004. • We expect our Professional division to grow sales in mid-to-high single digits this year. Our testing and government solutions businesses continue to achieve double digit sales growth and our worldwide technology publishing business has seen sales begin to stabilise after a severe downturn in technology markets. • Penguin has made a solid start to 2005, a transitional year, in line with expectations. It has delivered a very strong bestseller performance in the US and the UK, with some major titles shifted into the first half. Our UK business is showing good growth, helped by the recovery of our UK warehouse and the comparison with a difficult first half of 2004. In the US, we are seeing good success with new imprints, homegrown authors and our new premium paperback format, although the mass market category has remained weak. • We expect profits to improve further at FT Publishing, our group of business publications. Advertising revenues at the Financial Times were up 5% in the first half and if they grow at similar levels in the second half, we would expect the FT to be around breakeven for the year as a whole (after an IFRS impact of approximately £(3)m). • IDC has reported that it expects to grow net income at the high end of the high single digit to low double digit range. Interest and tax. As previously stated, we expect our full year interest chargeto be a little lower than in 2004, with the benefit of lower average net debtbeing partly offset by the absence of the 2004 one-off credit of £9m. We expectour effective tax rate for the full year to be 32%, plus or minus a percentagepoint. 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 2004 was £1:$1.83) would have an impact of approximately 1p on adjustedearnings per share. The average rate during the first half of 2004 was £1:$1.87and the closing rate at the end of June was £1:$1.79. FIRST HALF 2005 BUSINESS HIGHLIGHTS £ millions Half year Half year Underlying Full year 2005 2004 growth 2004 SalesSchool 518 444 19% 1,087Higher Education 192 186 5% 729Professional 243 220 12% 507----------------- ---------- ----------- ----------- ----------Pearson Education 953 850 14% 2,323FT Publishing 164 160 2% 318IDC 143 130 8% 269----------------- ---------- ----------- ----------- ----------FT Group 307 290 5% 587Penguin 353 341 5% 786 Total continuing 1,613 1,481 10% 3,696 Adjusted operating profitSchool 15 3 -- 108Higher Education (45) (42) (12)% 129Professional 8 6 33% 40----------------- ---------- ----------- ----------- ----------Pearson Education (22) (33) 30% 277FT Publishing 6 2 -- 4IDC 36 29 23% 62----------------- ---------- ----------- ----------- ----------FT Group 42 31 34% 66Penguin 13 9 22% 52 Total continuing 33 7 -- 395Discontinued (Recoletos) (3) 17 -- 26 Total 30 24 -- 421 SCHOOL • Market conditions improving: increased new adoption opportunity, improved state budgets, implementation of No Child Left Behind requirements in reading, testing and student data. • Mid single digit growth in US publishing, despite delay of new adoptions in Texas, and on track for double digit growth for the full year. New programmes performing well in adoption states: estimated market share of more than 30% in new adoptions where we competed. Leading positions in maths, science and music. • Testing businesses in the US and the UK up more than 30% in the first half, helped by the build-up of new contracts and phasing. New contracts won include Michigan, Minnesota and Louisiana; largest single contract, Texas, renewed for five more years. Edexcel marks three million GCSE and A-level scripts on screen and begins new contract to mark the UK's Key Stage tests. • School technology business showing good growth, benefiting from investments in instructional and student information software. • $270m acquisition of AGS Publishing completed on 22 July, strengthening testing and supplementary businesses. Targets growth in funds for students with special educational needs. • Strong growth in international school businesses. Continued investment in English Language Teaching; major new worldwide courses for primary schools (English Adventure, a partnership with Disney), secondary schools (Sky), adults (Total English) and business people (Intelligent Business, in partnership with The Economist). HIGHER EDUCATION • Worldwide Higher Education sales growth of 5%, with strong growth in the US and international level with 2004, ahead of the key second half selling seasons. • Rapid growth in career or workforce education segment, with new publishing in allied health, criminal justice, paralegal, homeland security and hospitality. • 3m US college students now following their course through one of our online learning platforms. Continued roll-out to new subject areas including economics for the new academic year. • Custom publishing business continues to grow at 20%+; launch of custom media solutions team to provide integrated print and online programmes. • Contract to provide customised print and online materials for DeVry University's 43,000 students across 69 locations. • Exclusive partnership with Audible.com to publish audio study guides, downloadable to iPods, other MP3 players and PDAs, beginning autumn 2005. PROFESSIONAL • Double digit sales growth in Government Solutions and Professional Testing. • Solid execution on major new contracts including the Driving Standards Agency, National Association of Securities Dealers and the Graduate Management Admissions Council. • Government Solutions' largest contract, with the US Department of Education, renewed and extended for a further ten years. • Technology Publishing sales level on first half of 2004; stabilising after four years of severe declines. FT PUBLISHING • Financial Times sales up 4% to £108m and first-half loss reduced to £2m (loss of £7m in first half of 2004). • FT advertising revenues up 5% with FT.com up more than 20%. Average circulation of 427,000 for the first six months; UK circulation stabilising, with three consecutive months of modest year-on-year growth. • Excellent performance on key readership surveys. FT is Europe's leading business title with 22% more readers than its nearest rival (Europe 2005); UK readership is up 11% (NRS). • Sales and profits broadly level at the FT's other business newspapers and magazines in erratic advertising markets. Circulation up 2% at Les Echos to 120,000, up 6% at FT Deutschland to 101,000, and growing beyond the one million mark at The Economist. • Continued cost actions at our business newspapers. FT Publishing cost base now more than £160 million lower than it was four years ago. INTERACTIVE DATA CORPORATION (NYSE:IDC) • Underlying sales growth of 8% from customer wins and 95%+ renewal rate, with profit growth of 23%. • Successful integration of FutureSource into e-Signal, adding new real-time futures, commodities and FX data. • Special dividend of $0.80 per share announced in June (and paid after the period end). • IDC reported second-half results on 21 July 2005, available at www.interactivedatacorp.com . PENGUIN • Strong first-half publishing performance, helped by shift in publishing strategy towards the first half of the year. • Record number of bestsellers in the US (79 New York Times bestsellers), with strong showings in adult hardcover, adult paperback and young readers. Successful focus on new imprints, including Steve Coll's 2005 Pulitzer Prize-winning Ghost Wars from Penguin Press, and on homegrown talent with close to 150 first-time authors published in the US. • Good growth in the UK with great publishing, recovery of UK distribution and benefit of comparison with a difficult first half of 2004. Strong growth at Dorling Kindersley with more key titles published in the first half. • £4m invested in actions to reduce Penguin's cost base. • Launch of 'premium paperback' format in US as part of plans to tackle industry-wide challenges in mass market segment (industry mass market sales down a further 2% in first five months of 2005, according to the AAP). Six major Penguin authors publishing new premium paperbacks in the second half. • Good performance in children's books across the group, developing strong best-selling brands such as Eoin Colfer's Artemis Fowl, Young Bond, Charlie and the Chocolate Factory and US licences including The Little Engine That Could and Atomic Betty. • Second half publishing schedule includes new books from Patricia Cornwell, Nora Roberts, Jan Karon, Amy Tan, Peggy Noonan, John Berendt, Terry McMillan, Maureen Dowd, Billy Graham, JM Coetzee, Paul McCartney, Jamie Oliver, Zadie Smith, Ryan Giggs, Ellen MacArthur and Gloria Hunniford. 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 statementfor the six months to 30 June 2005 ------------------------------ ------ -------- -------- -------- 2005 2004 2004all figures in £ millions note half half full year year year------------------------------ ------ -------- -------- -------- Continuing operations Sales 2 1,613 1,481 3,696Cost of goods sold (812) (747) (1,789)------------------------------ ------ -------- -------- --------Gross profit 801 734 1,907 Operating expenses (776) (730) (1,520)Other net gains and losses 3 40 2 9Share of results of joint venturesand associates 8 3 8------------------------------ ------ -------- -------- --------Operating profit 2 73 9 404 Net finance costs 4 (25) (42) (79)------------------------------ ------ -------- -------- --------Profit / (loss) before tax 5 48 (33) 325Income tax 6 (2) 11 (63)------------------------------ ------ -------- -------- --------Profit / (loss) for the period fromcontinuing operations 46 (22) 262 Discontinued operations Profit for the period fromdiscontinued operations 8 300 13 22------------------------------ ------ -------- -------- --------Profit / (loss) for the period 346 (9) 284 Attributable to:Equity holders of the parentcompany 337 (20) 262Minority interest 9 11 22------------------------------ ------ -------- -------- -------- Earnings / (loss) per share from continuing and discontinuedoperationsBasic 7 42.3p (2.5)p 32.9pDiluted 7 42.2p (2.5)p 32.9p Earnings / (loss) per share from continuingoperationsBasic 7 4.6p (3.8)p 30.8pDiluted 7 4.6p (3.8)p 30.8p The results are presented under IFRS and comparatives have been restatedaccordingly (see note 1). None of the figures have been audited or reviewed. Condensed consolidated statement of recognised income and expensefor the six months to 30 June 2005 ------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half year half year full year------------------------------ -------- -------- -------- Exchange differences on translation offoreign operations 257 (41) (206)Exchange differences on net investmenthedges (80) - -Actuarial (losses) / gains on definedbenefit pension schemes (31) 45 (58)Taxation on items taken directly to equity - 2 9------------------------------ -------- -------- --------Net income / (expense) taken directly toequity 146 6 (255)Profit / (loss) for the financial period 346 (9) 284------------------------------ -------- -------- --------Total recognised income and expense forthe financial period 492 (3) 29 Attributable to:Equity holders of the parent company 483 (14) 7Minority interest 9 11 22------------------------------ -------- -------- -------- Condensed consolidated balance sheetas at 30 June 2005 ------------------------------ ------ ------ -------- -------- 2005 2004 2004all figures in £ millions note half year half year full year------------------------------ ------ ------ -------- -------- Non-current assetsProperty, plant and equipment 359 344 355Intangible assets 11 3,506 3,409 3,278Investments in joint ventures andassociates 42 52 47Deferred income tax assets 404 373 359Derivative financial instruments 63 - -Other financial assets 17 14 15Other receivables 100 110 102------------------------------ ------ ------ -------- -------- 4,491 4,302 4,156Current assetsIntangible assets - pre publication 402 358 356Inventories 401 397 314Trade and other receivables 1,003 994 933Derivative financial instruments 49 - -Cash and cash equivalents 810 645 461------------------------------ ------ ------ -------- -------- 2,665 2,394 2,064Non-current assets classified asheld for sale - 344 358------------------------------ ------ ------ -------- --------Total assets 7,156 7,040 6,578 Non-current liabilitiesBorrowings (1,832) (1,804) (1,714)Derivative financial instruments (5) - -Deferred income tax liabilities (148) (132) (139)Retirement benefit obligations (436) (316) (408)Provisions for other liabilitiesand charges (35) (50) (43)Other liabilities (139) (127) (99)------------------------------ ------ ------- -------- -------- (2,595) (2,429) (2,403)Current liabilitiesTrade and other payables (779) (732) (868)Borrowings (368) (688) (109)Derivative financial instruments (15) - -Current income tax liabilities (88) (52) (89)Provisions for other liabilitiesand charges (17) (16) (14)------------------------------ ------ ------- -------- -------- (1,267) (1,488) (1,080)Liabilities directly associatedwith non-current assets classifiedas held for sale - (77) (81)------------------------------ ------ ------- -------- --------Total liabilities (3,862) (3,994) (3,564)------------------------------ ------ ------ -------- --------Net assets 3,294 3,046 3,014 Share capital 201 201 201Share premium 2,475 2,470 2,473Reserves 472 175 126------------------------------ ------ ------- -------- --------Attributable to equity holders ofthe parent company 3,148 2,846 2,800Minority interest 146 200 214------------------------------ ------ ------- -------- --------Total equity 13 3,294 3,046 3,014 Condensed consolidated cash flow statementfor the six months to 30 June 2005 ------------------------------ ------ -------- -------- -------- 2005 2004 2004All figures in £ millions note half year half year full year------------------------------ ------ -------- -------- -------- Cash flows from operatingactivitiesCash (used in) / generated fromoperations 15 (155) (147) 524Interest paid (55) (43) (98)Tax paid (23) (29) (45)------------------------------ ------ -------- -------- --------Net cash (used in) / generated fromoperations (233) (219) 381 Cash flows from investingactivitiesAcquisition of subsidiary, net ofcash acquired (28) (13) (35)Acquisition of joint ventures andassociates (4) (7) (10)Purchase of property, plant andequipment (PPE) (40) (50) (125)Proceeds from sale of PPE 1 - 4Purchase of intangible assets (3) - (1)Disposal of subsidiary, net of cashdisposed 367 - 1Disposal of joint ventures andassociates 54 - 24Disposal of investments - 3 17Interest received 10 7 13Dividends received from jointventures and associates 1 1 12------------------------------ ------ -------- -------- --------Net cash generated from / (used in)investing activities 358 (59) (100) Cash flows from financingactivitiesProceeds from issue of ordinaryshares 2 1 4Purchase of treasury shares (11) (2) (10)Proceeds from borrowings 203 469 414Liquid resources acquired - (1) (5)Other borrowings - (2) 59Repayment of borrowings (10) (43) (524)Finance lease principal payments (1) (1) (2)Dividends paid to Company'sshareholders (125) (119) (195)Dividends paid to minorityinterests - (1) (2)------------------------------ ------ -------- -------- --------Net cash generated from / (used in)financing activities 58 301 (261) Effects of exchange on cash andcash equivalents 23 (13) (4)------------------------------ ------ -------- -------- --------Net increase in cash and cashequivalents 206 10 16 Cash and cash equivalents at thebeginning of the period 544 528 528------------------------------ ------ -------- -------- --------Cash and cash equivalents at theend of the period 750 538 544 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 2005 1. Basis of preparation ------------------------------ ------ -------- -------- -------- The condensed consolidated financial statements have been prepared in accordancewith International Financial Reporting Standards (IFRS) and IFRICinterpretations issued and effective or issued and early adopted as at 31 March2005. The IFRS standards and IFRIC interpretations that will be applicable at 31December 2005 are not known with certainty at the time of preparing thesecondensed consolidated financial statements. The condensed consolidatedfinancial statements have been prepared under the historical cost convention asmodified by the revaluation of financial assets and liabilities (includingderivative instruments) at fair value through profit or loss from 1 January 2005. The condensed consolidated financial statements have been prepared using theaccounting policies published by the Company on 30 June 2005 which are availableon the Company's website at www.pearson.com. The applied IFRS accountingpolicies were selected by management considering all applicable InternationalFinancial Reporting Standards (IFRS) issued by the International AccountingStandards Board (IASB) by 31 March 2005. The policies comply with the amendmentto IAS 19 that was published in December 2004 which the Group expects to earlyadopt in its first IFRS financial statements. The applied accounting policiesare also based on the Group's expectation of adopting IFRS 5 'Non-current AssetsHeld for Sale and Discontinued Operations' retrospectively from 1 January 2003,its date of transition to IFRS. IAS 39 'Financial Instruments: Recognition andMeasurement' and IAS 32 'Financial Instruments: Disclosure and Presentation'have not been applied to the six months ended 30 June 2004 or the 12 monthsended 31 December 2004 because the Group has taken a transitional exemption andadopted those standards prospectively from 1 January 2005. It should be notedthat these policies may be subject to revision to reflect further IFRSstandards, interpretations and pronouncements. 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 published by the Company on 30 June2005 which are available on the Company's website as noted above. Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 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. ------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half year half year full year------------------------------ -------- -------- -------- SalesSchool 518 444 1,087Higher Education 192 186 729Professional 243 220 507------------------------------ -------- -------- --------Pearson Education 953 850 2,323FT Publishing 164 160 318IDC 143 130 269------------------------------ -------- -------- --------FT Group 307 290 587Penguin 353 341 786------------------------------ -------- -------- --------Total sales 1,613 1,481 3,696 Adjusted operating profit / (loss)School 15 3 108Higher Education (45) (42) 129Professional 8 6 40------------------------------ -------- -------- --------Pearson Education (22) (33) 277FT Publishing 6 2 4IDC 36 29 62------------------------------ -------- -------- --------FT Group 42 31 66Penguin 13 9 52------------------------------ -------- -------- --------Adjusted operating profit - continuingoperations 33 7 395Adjusted operating profit - discontinuedoperations (3) 17 26------------------------------ -------- -------- --------Total adjusted operating profit 30 24 421 Adjusted operating profit - continuingoperations 33 7 395Other gains and losses 40 2 9------------------------------ -------- -------- --------Operating profit 73 9 404Net finance costs (25) (42) (79)------------------------------ -------- -------- --------Profit / (loss) before tax 48 (33) 325Income tax (2) 11 (63)------------------------------ -------- -------- --------Profit / (loss) for the period fromcontinuing operations 46 (22) 262Discontinued operations 300 13 22------------------------------ -------- -------- --------Profit / (loss) for the period 346 (9) 284 Discontinued operations relate to the disposal of the Group's interest inRecoletos, see note 8.Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 3. Other net gains and losses ------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half year half year full year------------------------------ -------- -------- -------- Profit on sale of interest in MarketWatch 40 - -Other - 2 9------------------------------ -------- -------- --------Total other net gains and losses 40 2 9 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------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- -------- Net interest payable (35) (39) (74)Finance cost re employee benefits (4) (3) (5)Net foreign exchange gains 10 - -Other gains on financial instruments in a hedgingrelationship:- fair value hedges 1 - -- net investment hedges 2 - -Other gains / (losses) on financial instruments notin a hedging relationship:- amortisation of transitionaladjustment on bonds 5 - -- derivatives (4) - ------------------------------- ------ -------- -------- --------Total net finance costs (25) (42) (79) Analysed as:Net interest payable (35) (39) (74)Finance cost re employee benefits (4) (3) (5)------------------------------ ------ -------- -------- --------Net finance cost reflected in adjustedearnings (39) (42) (79)Other net finance income 14 - ------------------------------- ------ -------- -------- --------Total net finance costs (25) (42) (79) 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 (see note 16). Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 5. Profit / (loss) before tax------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- -------- Profit / (loss) before tax 48 (33) 325Add back: other gains and losses (40) (2) (9)Add back: other finance income (see note 4) (14) - ------------------------------- -------- -------- --------Adjusted profit / (loss) before tax -continuing operations (6) (35) 316Adjusted profit / (loss) before tax -discontinued operations (3) 19 29------------------------------ -------- -------- --------Total adjusted profit / (loss) before tax (9) (16) 345 Included within profit / loss before tax are charges relating to share basedpayments of £11m (2004 half year: £11m, 2004 full year £25m), post retirementbenefits £35m (2004 half year: £30m, 2004 full year £64m) and intangibleamortisation £3m (2004 half year: £2m, 2004 full year £5m). 6. Taxation ------------------------------ -------- -------- -------- Income tax is recognised in these condensed consolidated financial statements atthe rate of 32.0% of adjusted profit before tax for the six months ended 30 June2005. This is management's best estimate of the rate expected for the fullfinancial year.------------------------------ -------- ------- -------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- -------- Income tax (charge) / benefit (2) 11 (63)Add back: tax benefit on other gainsand losses - - (36)Add back: tax charge on other financeincome 4 - ----------------------------------- -------- -------- --------Adjusted income tax benefit / (charge)- continuing operations 2 11 (99)Adjusted income tax benefit / (charge)- discontinued operations 1 (6) (7)---------------------------------- -------- -------- --------Total adjusted income tax benefit /(charge) 3 5 (106) Tax rate reflected in adjusted earnings 32.0% 31.3% 30.7% Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 7. Earnings / (loss) per share ------------------------------ -------- -------- -------- Basic earnings per share is calculated by dividing the profit attributable toequity holders of the parent Company (earnings) by the weighted average numberof ordinary shares in issue during the period, excluding ordinary sharespurchased by the Company and held as treasury shares. Diluted earnings per shareis calculated by adjusting the weighted average number of ordinary shares totake account 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. ------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- -------- Earnings / (loss) 337 (20) 262Adjustments to exclude profit for the period fromdiscontinued operations:Profit for the period from discontinuedoperations (300) (13) (22)Minority interest share of above items - 3 5------------------------------ -------- -------- --------Earnings / (loss) - continuingoperations 37 (30) 245 Earnings / (loss) 337 (20) 262Adjustments:Other gains and losses (40) (2) (9)Profit on sale of discontinuedoperations (see note 8) (304) - -Other finance income (14) - -Taxation on above items 6 - (36)Minority interest share of above items - - ------------------------------- -------- -------- --------Adjusted (loss) / earnings (15) (22) 217 Weighted average number of shares (millions) 797.0 795.4 795.6Effect of dilutive share options 1.0 - 1.1Weighted average number of shares(millions) for diluted earnings / (loss) 798.0 795.4 796.7 Earnings / (loss) per share from continuing and discontinuedoperationsBasic 42.3p (2.5)p 32.9pDiluted 42.2p (2.5)p 32.9p Earnings / (loss) per share from continuingoperationsBasic 4.6p (3.8)p 30.8pDiluted 4.6p (3.8)p 30.8p Adjusted (loss) / earnings per share (1.9)p (2.8)p 27.3p Where the Group has made a loss for the financial period the effect of shareoptions is anti-dilutive and there is no difference between the loss per shareand the diluted loss per share. Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 8. Discontinued operations ------------------------------ In April 2005, Pearson closed the sale of its 79% interest in Recoletos Grupo deCommunicacion S.A. to Retos Cartera, a consortium of investors, for net cashproceeds of £372m. The transaction became unconditional on approval from theSpanish regulatory authorities in February 2005. The results of Recoletos havebeen consolidated for the period to 28 February 2005 and are included in profitfrom discontinued operations shown in the table below. The related assets andliabilities have been classified as held for sale in the comparative periods. ------------------------------ -------- -------- -------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- -------- Sales 27 90 190 Operating (loss) / profit (3) 17 26Net finance income - 2 3------------------------------ -------- -------- --------Profit before tax (3) 19 29Attributable tax benefit / (expense) 1 (6) (7)Profit on disposal of discontinuedoperations 304 - -Attributable tax expense (2) - ------------------------------- -------- -------- --------Profit for the period from discontinuedoperations 300 13 22 9. Dividends------------------------------ --------- -------- -------- 2005 2004 2004all figures in £ millions half year half year full year------------------------------ --------- -------- -------- Amounts recognised as distributions toequity holders in the period 125 119 195 The directors have declared an interim dividend of 10.0p per equity share,payable on 23 September 2005 to shareholders on the register at the close ofbusiness on 26 August 2005. This dividend has not been included as a liabilityas at 30 June 2005. 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: ------------------------------ -------- --------- ---------- 2005 2004 2004 half year half year full year------------------------------ -------- --------- ---------- Average rate for profits 1.87 1.82 1.83Period end rate 1.79 1.81 1.92 Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 11. Intangibles------------------------------ -------- -------- ------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- ------- Goodwill 3,385 3,301 3,160Other intangibles 121 108 118------------------------------ -------- -------- -------Total intangibles 3,506 3,409 3,278 12. Net debt------------------------------ -------- -------- ------- 2005 2004 2004all figures in £ millions half half full year year year------------------------------ -------- -------- ------- Non current assetsDerivative financial instruments 63 - -Current assetsDerivative financial instruments 49 - -Cash and cash equivalents 810 645 461Non current liabilitiesBorrowings (1,832) (1,804) (1,714)Derivative financial instruments (5) - -Current liabilitiesBorrowings (368) (688) (109)Derivative financial instruments (15) - ------------------------------- -------- -------- -------Net debt - continuing operations (1,298) (1,847) (1,362)Net cash classified as held for sale - 100 141------------------------------ -------- -------- -------Total net debt (1,298) (1,747) (1,221) Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 13. Reconciliation of movements in equity---------------------------------- -------- -------- ------ 2005 2004 2004all figures in £ millions half half full year year year---------------------------------- -------- -------- ------ Attributable to equity holders of theparentTotal recognised income and expense forthe period 483 (14) 7Share-based payment charges 11 11 25Shares issued 2 1 4Treasury shares purchased (11) (2) (10)Dividends to equity holders of theparent company (125) (119) (195)---------------------------------- -------- -------- ------Net movement for the period 360 (123) (169)Attributable to equity holders of theparent at the beginning of the period 2,800 2,969 2,969Transition adjustment on adoption ofIAS 39 (see note 16) (12) - ----------------------------------- -------- -------- ------Attributable to equity holders of theparent at the end of the period 3,148 2,846 2,800 Minority interests 146 200 214---------------------------------- --------- -------- -----Total equity 3,294 3,046 3,014 14. Post balance sheet events---------------------------------- In June 2005, Pearson announced the acquisition of AGS Publishing from WRC Mediafor $270m in cash. The acquisition completed on 22 July 2005 and has not beenaccounted for at 30 June 2005. Notes to the condensed consolidated financial statements continuedfor the six months to 30 June 2005 15. Cash flows ------------------------------ ------ -------- -------- -------- 2005 2004 2004all figures in £ millions half year half year full year ------------------------------ ------ -------- -------- -------- Reconciliation of profit / (loss) for the period to cash (used in) / generatedfrom operationsProfit / (loss) for the period 346 (9) 284Income tax 3 (5) 70Net finance costs 25 40 76Other gains and losses (344) (2) (8)Share of results of joint venturesand associates (8) (3) (8)Depreciation and amortisation charges 54 52 108Equity settled share based payments 11 11 25Increase in intangible assets - prepublication (25) (19) (13)Increase in inventory (70) (67) (14)Increase in receivables (31) (64) (18)(Decrease) / increase in payables (104) (71) 61Decrease in provisions (14) (11) (24)Other and non-cash items 2 1 (15)------------------------------ ------ -------- -------- --------Cash (used in) / generated fromoperations (155) (147) 524Dividends from joint ventures andassociates 1 1 12Net purchase of PPE including financelease principal payments (40) (51) (123)Purchase of intangibles (3) - -Add back: Cash spent againstintegration and fair value provisions 1 2 5------------------------------ ------ -------- -------- --------Pearson operating cash flow (196) (195) 418Operating tax paid (23) (25) (55)Operating finance charges paid (34) (36) (85)------------------------------ ------ -------- -------- --------Operating free cash flow (253) (256) 278Non operating tax (paid) / received - (4) 10Non operating finance charges paid (11) - -Integration and fair value spend (1) (2) (4)------------------------------ ------ -------- -------- --------Total free cash flow (265) (262) 284Dividends paid (including minorities) (125) (120) (197)------------------------------ ------ -------- -------- --------Net movement of funds from operations (390) (382) 87Acquisitions of businesses andinvestments (32) (20) (46)Disposals of businesses, investmentsand property 422 3 42New equity 2 1 4Purchase of treasury shares (11) (2) (10)Other non operating items (1) - 3------------------------------ ------ -------- -------- --------Net movement of funds (10) (400) 80Fair value and exchange movements onnet debt (67) 29 75------------------------------ ------ -------- -------- --------Total movement in net debt (77) (371) 155 Included in net cash (used in) / generated from operations is an amount of £(6)m(2004 half year: £(3)m, 2004 full year £24m) 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. Taxpayments and receipts that can be clearly identified with disposals, integrationRelated Shares:
Pearson