27th Feb 2006 07:02
Pearson PLC27 February 2006 27 February 2006 PEARSON 2005 PRELIMINARY RESULTS:ALL-ROUND GROWTH, RECORD YEAR IN EDUCATION AND RECORD CASH GENERATION • Strong performance. Sales up 9%; adjusted operating profit up 22% to £509m; adjusted EPS up 24% to 34.1p. • Record cash generation. 113% of operating profit converted to cash; total free cash flow up 52% to £431m. • Above-market growth. Pearson growing faster than its markets in School, Higher Education, Professional, FT Publishing and IDC. • Record results at Pearson Education, our largest business. Sales up 12% to £2.66bn and profits up 22% to £348m. • All-round profit growth. FT Group up 37% to £101m and Penguin up 4% to £60m. • Higher returns. Return on invested capital up to 6.7% (7.2% at constant currency) from 6.2%. Marjorie Scardino, chief executive, said: "These excellent results illustratethe quality and potential of the business we have built. Our leadership ingrowth markets, our innovation and our efficiencies give us real momentum and we expect our strong performance to continue in 2006 and beyond." £ millions 2005 2004 Headline Underlying growth growth Business performanceSales - continuing 4,096 3,696 11% 9%Adjusted operating profit - continuing 509 400 27% 22%Adjusted profit before tax 422 350 21% 23%Adjusted earnings per share 34.1p 27.5p 24% 24% Operating cash flow 570 418 36% --Free cash flow 431 284 52% --Return on invested capital 6.7% 6.2% -- --Net debt 996 1,221 18% -- Statutory resultsOperating profit 536 404 33% --Profit before tax 466 325 43% --Basic earnings per share 78.2p 32.9p 138% --Basic earnings per share - continuing 40.4p 30.8p 31% --Cash flow from operations 875 705 24% -- Dividend per share 27.0p 25.4p 6% -- Throughout this statement, we refer to business performance measures for totaloperations and growth rates on an underlying basis (ie excluding currencymovements and portfolio changes) unless otherwise stated. The 'businessperformance' measures are non-GAAP measures and reconciliations to theequivalent statutory heading under IFRS are included in notes to the accounts 2,5, 7,12 and 14. Profit measures within business performance are presented on anadjusted basis to exclude: i) other net gains and losses arising in connectionwith the sale of subsidiaries, investments and associates; ii) amortisation ofacquired intangible assets; and iii) short-term fluctuations in the market valueof financial instruments (under IAS39) and other currency movements (underIAS21). 2005 OVERVIEW Pearson predicted that 2005 would be a year of strong growth and financialprogress, driven by education, our largest business. We are reporting today thatPearson Education had its best year ever; that the FT Group achieved a furthersignificant profit improvement; and that we see good prospects for continuedgrowth in 2006 and beyond. Pearson's sales increased 9% in 2005, the fastest rate of growth for five years.Adjusted operating profit increased by 22%, well ahead of sales, with profitsimproving in all businesses. Operating margin improved by 1.6% points to 12.4%.Adjusted earnings per share were 34.1p, up 24%. In 2005, Pearson generated more cash than ever before, increasing operating cashflow by £152m or 36% to £570m and free cash flow by £147m or 52% to £431m. Cashconversion was particularly strong at 113% of operating profit. Average workingcapital: sales at Pearson Education and Penguin improved by a further 2% pointsto 27.4%, even as we continued significant investment in new products andservices that will support our future growth. Our return on invested capital improved to 6.7%, or 7.2% at constant currency,from 6.2% in 2004. Our statutory results show an increase in operating profit to £536m (£404m in2004) and in statutory basic earnings per share to 78.2p (32.9p in 2004),benefiting from a £302m profit from Recoletos. We ended the year with net debtof £996m, a £225m reduction on 2004. The sharp December increase in the value ofthe US dollar to £1:$1.72 significantly increased our year-end net debt (whichis approximately 70% dollar-denominated). The £426m proceeds from the sale ofour interests in Recoletos and MarketWatch were partially used in a series ofbolt-on acquisitions in education and financial information, including AGS,Co-nect and IS.Teledata. The board is proposing a dividend increase of 6% to 27.0p. Subject toshareholder approval, 2005 will be Pearson's 14th straight year of increasingour dividend above the rate of inflation, and in the past eight years we havereturned approximately £1.5bn or one-quarter of our current market value toshareholders through the dividend. BUSINESS PERFORMANCE £ millions 2005 2004 Headline Underlying growth growth SalesSchool 1,295 1,087 19% 16%Higher Education 779 729 7% 5%Professional 589 507 16% 15%Pearson Education 2,663 2,323 15% 12%FT Publishing 332 318 4% 4%IDC 297 269 10% 7%FT Group 629 587 7% 5%Penguin 804 786 2% 1% Total continuing 4,096 3,696 11% 9% Adjusted operating profitSchool 147 108 36% 29%Higher Education 156 129 21% 19%Professional 45 40 13% 13%Pearson Education 348 277 26% 22%FT Publishing 21 4 -- --IDC 80 67 19% 13%FT Group 101 71 42% 37%Penguin 60 52 15% 4% Total continuing 509 400 27% 22%Discontinued (Recoletos) (3) 26 -- Total 506 426 19% 22% 2006 OUTLOOK We expect 2006 to be another good year for Pearson as we continue to increasemargins and grow ahead of our markets. We expect to achieve strong underlyingearnings growth, good cash generation and a further significant improvement inreturn on invested capital. At this early stage in the year our outlook is: • Pearson Education (65% of 2005 sales; 68% of continuing operating profit) expected to achieve sales growth in the 3-5% range, with similar rates of growth in each of its three worldwide businesses (School, Higher Education and Professional). We expect margins to improve in School and Professional and to be stable in Higher Education. • Penguin (20% of sales; 12% of continuing 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 sales; 20% of continuing operating profit) expected to achieve a further significant profit improvement. The Financial Times continues to show good momentum, with circulation up 4% and advertising revenues up 12% in the year to date. IDC expects another good year, benefiting from similar business conditions to 2005, strong organic growth and the contribution of recent acquisitions. Cash. We expect another good cash performance in 2006, well ahead of our 80%threshold, even after an exceptionally strong 113% cash conversion rate in 2005. Interest and tax. We expect our full year interest charge to be broadly in linewith 2005, as the benefit of lower average net debt is offset by the impact ofhigher interest rates. We expect our effective tax rate to be in the 32-34%range. 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 an impact of approximately 1p on adjustedearnings per share. For more information: Luke Swanson / Deborah Lincoln + 44 (0) 20 7010 2310 Jeff Taylor + 1 212 641 2409 Pearson's results presentation for investors and analysts will be webcast livetoday from 09.00 (GMT) and available for replay from 12.00 (GMT) viawww.pearson.com. We are holding a conference call for US investors at 15.00 (GMT) / 10.00 (EST).To participate please dial in on +1 718 354 1175 (inside the US) or +44 20 89747900 (outside the US), participant code 280392. The call will be available forreplay at www.pearson.com. Video interviews with Marjorie Scardino and Rona Fairhead are available atwww.pearson.com; high resolution photographs are available for the media atwww.newscast.co.uk. School £ millions 2005 2004 Headline Underlying growth growth Sales 1,295 1,087 19% 16%Adjusted operating profit 147 108 36% 29% RECORD RESULTS IN 2005: SALES UP 16% TO ALMOST £1.3BN; PROFITS UP 29% TO £147M Rapid growth in US School publishing, testing and technology • Pearson's US School publishing business grew 12%, ahead of industry growth of 10.5% (source: Association of American Publishers). • New adoption market share of 33% where Pearson competed (and 24% of the total new adoption market); leading positions in maths, science, literature and foreign languages. • School testing sales up more than 20%, benefiting from significant market share gains and first year of mandatory state testing under No Child Left Behind. • Strong performance in school software, with good sales and profit growth in curriculum and school administration services. Good progress in international school markets • High single digit growth in international school publishing. Worldwide English Language Teaching business benefiting from strong demand for English language learning and investments in new products, including English Adventure (with Disney) for the primary school market, Sky for secondary schools, Total English for adult learners, and Intelligent Business (with The Economist) for the business market. • Strong growth in international school testing. Four million UK GCSE, AS and A-Level scripts marked onscreen; first year of running UK National Curriculum tests completed successfully; new contract for national school testing pilot in Australia. Significant efficiency gains and margin improvement • School margins up by 1.5% points to 11.4% with efficiency gains in central costs, production, distribution and software development. Continued investment for future growth • US School new adoption market expected to grow strongly 2007-09 (estimated at $620m in 2006; $800m in '07; $900m in '08; $1bn in '09). • Steady investment in School publishing: Pearson publishing major new basal curriculum programmes for reading, science and social studies, the three largest adoption disciplines in 2006. • Healthy outlook in school testing underpinned by 2005 contract wins with a lifetime value of $700m (including Texas, Virginia, Michigan and Minnesota). • AGS Publishing, acquired in July 2005, performing ahead of expectations as special needs market grows rapidly and integration is on track. • Acquisition of Co-nect in December 2005 and creation of Pearson Achievement Solutions targets growing market for teacher professional development and integrated school solutions. HIGHER EDUCATION £ millions 2005 2004 Headline Underlying growth growth Sales 779 729 7% 5%Adjusted operating profit 156 129 21% 19% RECORD RESULTS IN 2005: SALES INCREASED BY 5% to £779M; PROFITS UP 19% TO £156M Above-market growth and significant margin improvement • US Higher Education business up 6%, ahead of industry growth of 5% (source: Association of American Publishers). • Pearson's US Higher Education business has grown faster than the industry for seven straight years. • Higher Education margins up by 2.3% points to 20%. Good margin improvement in US and International publishing, boosted by shared services across US and international units and saving in central costs, technology, production and manufacturing. Strong publishing performance • Continued growth from market-leading authors in key academic disciplines including biology (Campbell & Reece), chemistry (Brown & LeMay), sociology (Macionis), marketing (Kotler & Keller), maths (Tobey & Slater), developmental maths (Martin-Gay) and English composition (Faigley's Penguin Handbook). • Rapid expansion in career and workforce education sector, with major publishing initiatives gaining share in allied health, criminal justice, paralegal, homeland security and hospitality. Rapid growth in online learning and custom publishing • Approximately 3.6m US college students studying through one of our online programmes, an increase of 20% on 2004. • MyMathLab, Pearson's innovative online homework and assessment programme, increases unit sales by almost 50% to 1.1m, with student registrations 47% higher. Usage increases by 60%, with students completing and submitting 11m assignments online. Research by colleges using MyMathLab demonstrates significant improvements in student achievement. • Continued strong double digit growth in custom publishing - which builds customised textbooks and online services around the courses of individual faculties or professors. Good progress in international markets • 4% sales growth in Higher Education publishing outside the US. International businesses benefit from local adaptation of global authors, including Campbell and Kotler, and introduction of custom publishing and online learning capabilities into new markets in Asia and the Middle East. Continued investment for future growth • 2006 expected to be a record year for 1st editions, with major new titles in statistics, algebra, psychology, economics, health and writing. • Launch of online homework and assessment programmes in new curriculum areas including economics, psychology and developmental writing. • Creation of Custom Media Solutions Group, extending highly successful customized print publishing model to online curriculum and course management programmes. PROFESSIONAL £ millions 2005 2004 Headline Underlying growth growth Sales 589 507 16% 15%Adjusted operating profit 45 40 13% 13% SALES INCREASED BY 15% to £589M AND PROFITS UP 13% TO £45M Professional Testing: rapid organic growth; Promissor acquisition opens newmarkets • Professional Testing sales up more than 40%, benefiting from successful start-up of major new contracts including the Driving Standards Agency, National Association of Securities Dealers and the Graduate Management Admissions Council. • Acquisition of Promissor in January 2006 brings together two leading international professional testing companies and takes Pearson into new US state and federal regulatory markets. Government Solutions: sales up 38% and $1bn of new long-term contracts • Sales up a further 38%, helped by new contracts with the US Department of Education, the Centers for Medicare and Medicaid Services and the London Borough of Southwark. Margins a little lower, resulting from new contract start-up costs. • More than $1bn of new, long-term contract wins for customers including the US Department of Education, Department of Commerce and the University of California. Professional publishing: margins maintained despite further declines intechnology markets • Worldwide sales of technology-related books 7% lower with continued weakness in professional markets partly offset by consumer technology publishing. • Pearson maintains leading market share and single-digit margins through further cost actions; sees stronger schedule of new software releases in professional and consumer technology markets in 2006. • Good growth in business publishing imprints including Wharton School Publishing and Financial Times Prentice Hall. Strong 2006 business list includes new books from NY Times bestselling authors Bernard Lewis, Jeffrey Gitomer, Ken Blanchard, and Oren Harari. FT PUBLISHING £ millions 2005 2004 Headline Underlying growth growth Sales 332 318 4% 4%Adjusted operating profit 21 4 -- -- PROFITS UP BY £17M ON £14M SALES IMPROVEMENT Advertising growth continues and Financial Times returns to profit • FT Newspaper sales up 6% to £221m; £14m profit improvement to £2m. • FT advertising revenues up 9% (and up 18% in the fourth quarter), improving through the year. Sustained growth in luxury goods and worldwide display advertising. FT.com advertising revenues up 27% as FT's biggest advertisers shift to integrated print and online campaigns. • More than 90% of advertising revenue improvement converted to profit in 2005. • FT's average worldwide circulation 2% lower for the year at 426,453 but 1% higher in the second half at 430,635. FT.com's paying subscribers up 12% to 84,000 and average monthly audience up 7% to 3.2m. Sustained progress at network of business newspapers • Sales broadly level and profits £3m higher at the FT Group's other business newspapers and magazines. • Les Echos advertising revenues and circulation level with 2004 (average circulation of 119,000) despite tough trading conditions. • FT Business improves margins and profits with good growth in international finance titles. • FT Deutschland reduces losses further despite a weak advertising market in Germany, and increases average circulation by 6% to 102,000. • The Economist, in which Pearson owns a 50% stake, increases its circulation by 10% to 1,038,519 (for the January-June ABC period). INTERACTIVE DATA CORPORATION (NYSE:IDC) £ millions 2005 2004 Headline Underlying growth growth Sales 297 269 10% 7%Adjusted operating profit 80 67 19% 13% RECORD RESULTS IN 2005: SALES UP 7% TO £297M; PROFITS UP 13% TO £80M; MARGINS UP2% POINTS TO 26.9% Strong organic growth and operating improvements • FT Interactive Data, IDC's largest business (approximately two-thirds of IDC revenues), generates strong growth in North America and returns to growth in Europe. • Modest growth at Comstock, IDC's real-time datafeed business for global financial institutions, and at CMS BondEdge, its fixed income analytics business. • Renewal rates for IDC's institutional businesses remain at around 95%. • eSignal, IDC's active trader services business, increases headline sales by 27% with continued growth of subscriber base and full-year contribution from FutureSource, acquired in September 2004. • Continued progress in transition to two new consolidated data centres, enabling IDC's four major businesses increasingly to feed off one centralized data and technology infrastructure. Continued expansion into adjacent markets • Acquisition of IS.Teledata for $51m (net of cash acquired) in December 2005 adds web-based financial data applications and further expands IDC's presence in continental Europe. • Agreement to acquire Quote.com and related assets for $30m in February 2006 which will broaden IDC's range of online services for active traders and financial professionals, and create a new revenue stream in online financial advertising. PENGUIN £ millions 2005 2004 Headline Underlying growth growth Sales 804 786 2% 1%Adjusted operating profit 60 52 15% 4% Sales up 1% and operating profit up 4% Strong operational progress • Sales up 1%; operating profit up 4%; margins up 0.9%; strong cash generation. • Successful format innovation to help address weakness of mass market category in the US, down a further 4% for the industry in 2005. First seven Penguin Premium paperbacks published, priced at $9.99, and all become bestsellers, with authors including Nora Roberts, Clive Cussler and Catherine Coulter. • Pearson Education moves successfully into new shared UK warehouse in second half of 2005. Outstanding publishing performance • Penguin authors win a Pulitzer Prize (for Steve Coll's Ghost Wars), a National Book Award (William T. Vollman's Europe Central), the Whitbread Book of the Year (Hilary Spurling's Matisse the Master), the Whitbread Novel of the Year (Ali Smith's The Accidental) and the FT/ Goldman Sachs Business Book of the Year (Thomas Friedman's The World is Flat). • 129 New York Times bestsellers and 54 top ten bestsellers in the UK. Major bestselling authors include Patricia Cornwell, John Berendt, Sue Grafton, Jared Diamond, Jamie Oliver, Gillian McKeith, Jeremy Clarkson and Gloria Hunniford. Successful focus on new talent • Strong contribution from new imprints and first-time authors. New imprint strategy continues to gather pace and Penguin publishes 160 new authors in the US and approximately 250 worldwide - its largest ever investment in new talent. • Sue Monk Kidd's first novel, The Secret Life of Bees, has been a NY Times bestseller for almost two years; her second, The Mermaid Chair, reaches #1 in 2005. The Kite Runner, Khaled Hosseini's first book, stays on the NY Times bestseller list for all of 2005, selling an additional two million copies (three million in total). In the UK, strong performance from new fiction authors including Jilliane Hoffman, PJ Tracy, Karen Joy Fowler and Marina Lewycka. Continued investment in new markets and international talent • Launch of regional language publishing programme in India with first ten titles in Hindi and Marathi; approximately 70 new titles to be published in 2006. Acquisition of worldwide English language rights to Wolf Totem, one of China's top five bestselling books for more than a year. Strong 2006 publishing schedule • Strong list of new titles for 2006 from bestselling authors including Nathaniel Philbrick, Patricia Cornwell, Senator Edward M. Kennedy, Jamie Oliver, Sue Townsend and Jeremy Paxman. FINANCIAL REVIEW Our adjusted earnings exclude other gains and losses on the sale or closure ofbusinesses. We also exclude amortisation of acquired intangible assets (definedunder IFRS 3); short-term fluctuations in the market value of financialinstruments (as determined under IAS 39) and other currency movements charged to statutory profits (in accordance with IAS 21). Statutory numbers in 2005 are significantly improved by profits on disposals(notably Recoletos and Marketwatch); statutory profit for the year was £644m, up £360m on 2004, with continuing operations up from £262m to £342m. This year we saw relatively small effects of exchange on our P&L account. Theaverage US dollar rate against sterling strengthened slightly to £1:$1.81 (£1:$1.83 in 2004) which marginally increased our reported operating profit.However, the stronger year end dollar (£1:$1.72 vs £1:$1:92 in 2004) had asignificant impact on our balance sheet. Financial Statements These are our first set of consolidated financial statements under InternationalFinancial Reporting Standards (IFRS). We have chosen a transition date to IFRSof 1st January 2003, which means we have comparable data under IFRS for both2004 and 2003, displayed in our financial statements. Where material, the impactof IFRS on our accounts is discussed below. Interest Net interest payable in 2005 was £77m, up from £74m (restated for IFRS) in 2004.The group's average net interest rate payable rose by 0.9% to 5.9%. Although wewere partly protected by our fixed rate policy the strong rise in US dollarfloating interest rates had an adverse effect. Year on year, average 3 monthLIBOR (weighted for the Group's borrowings in US dollars, Euros and Sterling)rose by 1.9% to 3.4%. This was largely offset by the £260m fall in average netdebt, reflecting in particular the proceeds from the disposal of Recoletos andgood cash generation. In addition, in 2005 we did not benefit from a one-offcredit of £9m for interest on a repayment of tax that occurred in 2004. Year end net debt fell from £1,221m to £996m. Taxation The tax rate on adjusted earnings was barely changed from 2004 to 2005, reducingfrom 30.9% to 30.3%. The tax rate on adjusted earnings is very close to the UKstatutory rate of 30%: The higher tax rate on US and overseas profits was offsetby the use of UK losses and by credits relating to previous years, reflectingcontinued progress in settlement of the group's affairs with the authorities. The total tax charge for the year was £124 million, representing a 27% rate onpre-tax profits of £466 million (on a statutory basis excluding discontinuedoperations). This compares with a 2004 rate (restated to reflect IFRS) of 19%(or £63 million on a pre-tax profit of £325 million). In 2004 the tax chargereflected credits of £48 million relating to previous years, a substantialelement of which was non-recurring; adjustments relating to previous years in2005 resulted in a credit of £18 million. The 2005 rate benefited from the factthat the profit of £40 million on the sale of Marketwatch.com is free of tax. Minority Interests Following the disposal of our 79% holding in Recoletos in April 2005 and thepurchase of the outstanding 25% stake in Edexcel our minority interests nowcomprise mainly the 39% minority share in IDC. In January 2006 we increased ourstake in IDC by the purchase of 1.1m shares, so the future minority interestwill be 38%. Dividends Under IFRS, dividends are accrued only once approved. Therefore, the dividendaccounted for in our 2005 financial statements totalling £205m, represents thefinal dividend (15.7p) in respect of 2004 and the interim 2005 dividend of 10p. We are paying a final dividend for 2005 of 17p, bringing the total paid andpayable in respect of 2005 to 27p, a 6.5% increase on 2004. Our final 2005proposed dividend was approved by the board in February 2006 and will be charged against 2006 profits. The dividend (including minorities) paid in 2005 is covered 1.9 times by total free cash flow. We seek to maintain a balance between the requirements of our shareholders for a rising stream of dividend income and the re-investment opportunities which weidentify around the Company. This balance has been expressed in recent years asa desire to increase our annual dividend by more than inflation, while alsore-investing a higher proportion of our distributable earnings in our businesses Other financial items Pensions Pearson operates a variety of pension schemes. Our UK fund is by far the largestand we also have some smaller defined benefit funds in the US and Canada.Outside the UK, most of our companies operate defined contribution schemes.Pension funding levels are kept under regular review by the Company and the Fundtrustees. The UK scheme was valued as at 1 January 2004 and the next valuation will be asat 1 January 2006. As a result of the 2004 valuation, the group agreed toincrease contributions to £30m in respect of 2004: to £35m in 2005: and to £41mannually from 2006 to 2014. Our total liability for retirement benefits was £389m at December 2005 (2004:£408m). Accounting policies and disclosures As noted above, Pearson has adopted IFRS for its 2005 consolidated financialstatements, in compliance with the European Union regulation. This has resultedin changes to the format of presentation but has had no impact on the cashresources available to the group. A full list of IFRS Accounting policies can befound in Note 1 to our financial statements. In summary, the main changes to our reported 2005 statutory accounts from IFRSadoption are as follows: Goodwill and other Intangibles Under IFRS 3 goodwill is no longer amortised, but instead is assessed annuallyfor impairment. Goodwill which arose on acquisitions prior to 1.1.03 and whichwas capitalised under UK GAAP has not been restated; other intangible assetsarising from acquisitions since 1.1.03 have been separately identified, fairvalued and capitalised. They are being amortised over their estimated usefuleconomic lives. The charge to P&L for such amortisation was £11m in 2005 (2004£5m). Share-based payments Under IFRS 2, a proportion of the total fair value of restricted shares, SAYEschemes and share options granted to employees has been charged to operatingprofit. The proportion charged is determined with respect to the relevantvesting period. The amount charged is 2005 was £23m (2004 £25m). Employee benefits Under IAS 19, assets and liabilities relating to pension and other deferredbenefits are valued and accounted for at the balance sheet date. The profit and loss expense is determined using annually derived assumptions asto salary inflation, investment returns and discount rates, based on prevailingconditions at the start of the year. We recognise actuarial gains and lossesarising when assumptions diverge from reality through the statement ofrecognised income and expense (SORIE). Our charge to profit in respect of all retirement benefit obligations under IAS19 amounted to £68m in 2005 (2004 £62m) of which the current service charge(£61m) was above operating profit and the net finance charge (£7m) was againstinterest. Pearson has adopted IAS 39, related to accounting for financial investments asat 1.1.05 and the results of this are detailed below under our Treasury policy. There are a number of other relatively minor statutory presentation anddisclosure changes under IFRS which are treated consistently across our 2005actual IFRS reported numbers and our 2004 and 2003 restated comparatives. 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 year ended 31 December 2005 ----------------------------------- ------ -------- -------- 2005 2004all figures in £ millions note----------------------------------- ------ -------- -------- Continuing operations Sales 2 4,096 3,696Cost of goods sold (2,022) (1,789)----------------------------------- ------ -------- --------Gross profit 2,074 1,907 Operating expenses (1,592) (1,520)Other net gains and losses 3 40 9Share of results of joint ventures and associates 14 8----------------------------------- ------ -------- --------Operating profit 2 536 404 Finance costs 4 (132) (96)Finance income 4 62 17----------------------------------- ------ -------- --------Profit before tax 5 466 325Income tax 6 (124) (63)----------------------------------- ------ -------- --------Profit for the year from continuing operations 342 262 Discontinued operations Profit for the year from discontinued operations 8 302 22----------------------------------- ------ -------- --------Profit for the year 644 284 Attributable to:Equity holders of the Company 624 262Minority interest 20 22----------------------------------- ------ -------- -------- Earnings per share from continuing and discontinuedoperationsBasic 7 78.2p 32.9pDiluted 7 78.1p 32.9p Earnings per share from continuing operationsBasic 7 40.4p 30.8pDiluted 7 40.3p 30.8p The results are presented under IFRS and comparatives have been restatedaccordingly (see note 1). Condensed consolidated statement of recognised income and expensefor the year ended 31 December 2005 ----------------------------------- ------ -------- -------- 2005 2004All figures in £ millions note----------------------------------- ------ -------- -------- Net exchange differences on translation of foreign 327 (203)operationsActuarial gains / (losses) on defined benefit pension and post retirement medical schemes 26 (61)Taxation on items taken directly to equity 12 9----------------------------------- ------ -------- --------Net income / (expense) recognised directly in equity 365 (255)Profit for the financial year 644 284----------------------------------- ------ -------- --------Total recognised income and expense for the financialyear 1,009 29 Attributable to:Equity holders of the Company 13 989 7Minority interest 20 22----------------------------------- ------ -------- -------- Effect of transition adjustment on adoption of IAS 39Attributable to:Equity holders of the Company 15 (12) Condensed consolidated balance sheetas at 31 December 2005 ----------------------------------- ------ -------- -------- 2005 2004all figures in £ millions note----------------------------------- ------ -------- -------- Non-current assetsProperty, plant and equipment 384 355Intangible assets 11 3,854 3,278Investments in joint ventures and associates 36 47Deferred income tax assets 385 359Financial assets - Derivative financial instruments 79 -Other financial assets 18 15Other receivables 108 102----------------------------------- ------ -------- -------- 4,864 4,156Current assetsIntangible assets - pre-publication 426 356Inventories 373 314Trade and other receivables 1,031 933Financial assets - Derivative financial instruments 4 -Cash and cash equivalents (excluding overdrafts) 902 461----------------------------------- ------ -------- -------- 2,736 2,064Non-current assets classified as held for sale - 358----------------------------------- ------ -------- --------Total assets 7,600 6,578 Non-current liabilitiesFinancial liabilities - Borrowings (1,703) (1,714)Financial liabilities - Derivative financial instruments (22) -Deferred income tax liabilities (204) (139)Retirement benefit obligations (389) (408)Provisions for other liabilities and charges (31) (43)Other liabilities (151) (99)----------------------------------- ------ -------- -------- (2,500) (2,403)Current liabilitiesTrade and other liabilities (974) (868)Financial liabilities - Borrowings (256) (109)Current income tax liabilities (104) (89)Provisions for other liabilities and charges (33) (14)----------------------------------- ------ -------- -------- (1,367) (1,080)Liabilities directly associated with non-current assetsclassified as held for sale - (81)----------------------------------- ------ -------- --------Total liabilities (3,867) (3,564)----------------------------------- ------ -------- --------Net assets 3,733 3,014 Share capital 201 201Share premium 2,477 2,473Reserves 886 126----------------------------------- ------ -------- --------Total equity attributable to equity holders of theCompany 3,564 2,800Minority interest 169 214----------------------------------- ------ -------- --------Total equity 13 3,733 3,014 Condensed consolidated cash flow statementfor the year ended 31 December 2005 ----------------------------------- ------ -------- -------- 2005 2004All figures in £ millions note----------------------------------- ------ -------- -------- Cash flows from operating activitiesCash generated from operations 14 875 705Interest paid (101) (98)Tax paid (65) (45)----------------------------------- ------ -------- --------Net cash generated from operating activities 709 562 Cash flows from investing activitiesAcquisition of subsidiary, net of cash acquired (246) (41)Acquisition of joint ventures and associates (7) (10)Purchase of property, plant and equipment (PPE) (76) (101)Proceeds from sale of PPE 3 4Purchase of intangible assets (24) (24)Investment in pre-publication (222) (181)Purchase of other financial assets (2) (1)Disposal of subsidiary, net of cash disposed 376 7Disposal of joint ventures and associates 54 24Disposal of investments - 17Interest received 29 13Dividends received from joint ventures and associates 14 12----------------------------------- ------ -------- --------Net cash used in investing activities (101) (281) Cash flows from financing activitiesProceeds from issue of ordinary shares 4 4Purchase of treasury shares (21) (10)Proceeds from borrowings - 414Short-term investments acquired - (5)Other borrowings - 59Repayment of borrowings (79) (524)Finance lease principal payments (3) (2)Dividends paid to Company's shareholders (205) (195)Dividends paid to minority interests (17) (2)----------------------------------- ------ -------- --------Net cash used in financing activities (321) (261) Effects of exchange rate changes on cash and cashequivalents 13 (4)----------------------------------- ------ -------- --------Net increase in cash and cash equivalents 300 16Cash and cash equivalents at the beginning of the year 544 528----------------------------------- ------ -------- --------Cash and cash equivalents at the end of the year 844 544 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 year ended 31 December 2005 1. Basis of preparation The condensed consolidated financial statements have been prepared in accordancewith EU-adopted International Financial Reporting Standards (IFRS) and IFRICinterpretations. The condensed consolidated financial statements have beenprepared under the historical cost convention as modified by the revaluation offinancial assets and liabilities (including derivative instruments) at fairvalue 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. IAS 39 'Financial Instruments:Recognition and Measurement' and IAS 32 'Financial Instruments: Disclosure andPresentation' have not been applied to the year ended 31 December 2004 becausethe Group has taken a transitional exemption and adopted those standardsprospectively from 1 January 2005. 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 year ended 31 December 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 2004all figures in £ millions--------------------------------------- -------- -------- SalesSchool 1,295 1,087Higher Education 779 729Professional 589 507--------------------------------------- -------- --------Pearson Education 2,663 2,323FT Publishing 332 318IDC 297 269--------------------------------------- -------- --------FT Group 629 587Penguin 804 786--------------------------------------- -------- --------Total sales 4,096 3,696 Adjusted operating profitSchool 147 108Higher Education 156 129Professional 45 40--------------------------------------- -------- --------Pearson Education 348 277FT Publishing 21 4IDC 80 67--------------------------------------- -------- --------FT Group 101 71Penguin 60 52--------------------------------------- -------- --------Adjusted operating profit - continuing operations 509 400Adjusted operating profit - discontinued operations (3) 26--------------------------------------- -------- --------Total adjusted operating profit 506 426 Adjusted operating profit - continuing operations 509 400Amortisation of acquired intangibles (11) (5)Other gains and losses 40 9Other net finance costs of associates (2) ---------------------------------------- -------- --------Operating profit 536 404 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 year ended 31 December 2005 3. Other net gains and losses--------------------------------------- ------- -------- 2005 2004all figures in £ millions--------------------------------------- -------- -------- Profit on sale of interest in MarketWatch 40 -Other items - 9--------------------------------------- -------- --------Total other net gains and losses 40 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 2004all figures in £ millions----------------------------------- ------ -------- -------- Net interest payable (77) (74)Finance cost re employee benefits (7) (5)Net foreign exchange gains 12 -Other gains on financial instruments in a hedgingrelationship:- fair value hedges - -- net investment hedges 3 -Other gains / (losses) on financial instruments not in ahedging relationship:- amortisation of transitional adjustment on bonds 7 -- derivatives (8) ------------------------------------ ------ -------- --------Net finance costs (70) (79) Finance costs (132) (96)Finance income 62 17----------------------------------- ------ -------- --------Net finance costs (70) (79) Analysed as:Net interest payable (77) (74)Finance cost re employee benefits (7) (5)----------------------------------- ------ -------- --------Net finance cost reflected in adjusted earnings (84) (79)Other net finance income 14 ------------------------------------ ------ -------- --------Net finance costs (70) (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 15). Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 5. Profit before tax----------------------------------- -------- -------- 2005 2004all figures in £ millions----------------------------------- -------- -------- Profit before tax 466 325Add back: amortisation of acquired intangibles (see note 2) 11 5Add back: other gains and losses (see note 2) (40) (9)Add back: other net finance costs of associates (see note 2) 2 -Add back: other finance income (see note 4) (14) ------------------------------------ -------- --------Adjusted profit before tax - continuing operations 425 321Adjusted profit before tax - discontinued operations (3) 29----------------------------------- -------- --------Total adjusted profit before tax 422 350 6. Taxation----------------------------------- ------ -------- -------- 2005 2004all figures in £ millions----------------------------------- ------ -------- -------- Income tax charge (124) (63)Add back: tax benefit on amortisation of acquiredintangibles (4) (2)Add back: tax benefit on other gains and losses (4) (36)Add back: tax charge on other finance income 3 ---------------------------------------- -------- --------Adjusted income tax charge - continuing operations (129) (101)Adjusted income tax charge - discontinued operations 1 (7)----------------------------------- ------ -------- --------Total adjusted income tax charge (128) (108) Tax rate reflected in adjusted earnings 30.3% 30.9% Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 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 year, excluding ordinary shares purchased bythe Company and held as treasury shares. Diluted earnings per share iscalculated by adjusting the weighted average number of ordinary shares to takeaccount of all dilutive potential ordinary shares and adjusting the profitattributable if applicable to account for any tax consequences that 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 2004all figures in £ millions----------------------------------- ------ -------- -------- Earnings 624 262Adjustments to exclude profit for the year from discontinuedoperations:Profit for the year from discontinued operations (302) (22)Minority interest share of above items - 5----------------------------------- ------ -------- --------Earnings - continuing operations 322 245 Earnings 624 262Adjustments:Amortisation of acquired intangibles 11 5Other gains and losses (40) (9)Other net finance costs of associates 2 -Other finance income (14) -Profit on sale of discontinued operations (see note 8) (306) -Taxation on above items (3) (38)Minority interest share of above items (2) (1)----------------------------------- ------ -------- --------Adjusted earnings 272 219Amortisation of acquired intangibles (net of taxationand minority interest) (5) (2)----------------------------------- ------ -------- -------- Adjusted earnings including effect of amortisation ofacquired intangibles 267 217 Weighted average number of shares (millions) 797.9 795.6Effect of dilutive share options 1.1 1.1Weighted average number of shares (millions) for dilutedearnings 799.0 796.7 Earnings per share from continuing and discontinued operationsBasic 78.2p 32.9pDiluted 78.1p 32.9p Earnings per share from continuing operationsBasic 40.4p 30.8pDiluted 40.3p 30.8p Adjusted earnings per share 34.1p 27.5pAdjusted earnings per share including effect ofamortisation of acquired intangibles 33.5p 27.3p Notes to the condensed consolidated financial statements continued for the year ended 31 December 2005 8. Discontinued operations In April 2005, Pearson sold its 79% interest in Recoletos Grupo de CommunicacionS.A. to Retos Cartera, a consortium of investors, for net cash proceeds of£372m. The transaction became unconditional on approval from the Spanishregulatory authorities in February 2005. The results of Recoletos have beenconsolidated for the period to 28 February 2005 and are included in profit fromdiscontinued operations shown in the table below. The related assets andliabilities have been classified as held for sale in the comparative period. ----------------------------------- -------- -------- 2005 2004all figures in £ millions----------------------------------- -------- -------- Sales 27 190 Operating (loss) / profit (3) 26Net finance income - 3----------------------------------- -------- --------Profit before tax (3) 29Attributable tax benefit / (expense) 1 (7)Profit on disposal of discontinued operations 306 -Attributable tax expense (2) ------------------------------------ -------- --------Profit for the year from discontinued operations 302 22 9. Dividends----------------------------------- -------- -------- 2005 2004all figures in £ millions----------------------------------- -------- -------- Amounts recognised as distributions to equity holdersin the period 205 195 The directors are proposing a final dividend of 17.0p per equity share, payableon 5 May 2006 to shareholders on the register at the close of business on 7April 2006. This dividend has not been included as a liability as at 31 December2005. 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 ----------------------------------- -------- -------- Average rate for profits 1.81 1.83Period end rate 1.72 1.92 Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 11. Intangibles----------------------------------- -------- -------- 2005 2004all figures in £ millions----------------------------------- -------- -------- Goodwill 3,654 3,160Other intangibles 200 118----------------------------------- -------- --------Total intangibles 3,854 3,278 12. Net debt----------------------------------- -------- -------- 2005 2004all figures in £ millions----------------------------------- -------- -------- Non current assetsDerivative financial instruments 79 -Current assetsDerivative financial instruments 4 -Cash and cash equivalents 902 461Non current liabilitiesBorrowings (1,703) (1,714)Derivative financial instruments (22) -Current liabilitiesBorrowings (256) (109)----------------------------------- -------- --------Net debt - continuing operations (996) (1,362)Net cash classified as held for sale - 141----------------------------------- -------- --------Total net debt (996) (1,221) Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 13. Reconciliation of movements in equity----------------------------------- ------ -------- -------- 2005 2004all figures in £ millions----------------------------------- ------ -------- -------- Attributable to equity holders of the CompanyTotal recognised income and expense for the year 989 7Share-based payment charge 23 25Shares issued 4 4Cumulative translation adjustment disposed (14) -Treasury shares purchased (21) (10)Dividends to equity holders of the Company (205) (195)--------------------------------------- -------- --------Net movement for the year 776 (169)Attributable to equity holders of the Company at the beginning of the year 2,800 2,969Transition adjustment on adoption of IAS 39 (see note 15) (12) ---------------------------------------- -------- --------Attributable to equity holders of the Company at the end of the year 3,564 2,800 Minority interests 169 214--------------------------------------- -------- --------Total equity 3,733 3,014 Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 14. Cash flows----------------------------------- ------ -------- -------- 2005 2004all figures in £ millions----------------------------------- ------ -------- -------- Reconciliation of profit for the year to net cash generated from operationsProfit for the year 644 284Income tax 125 70Depreciation and amortisation charges 301 277Loss on sale of property, plant and equipment - 4Profit on sale of investments - (16)Net finance costs 70 76Profit on sale of subsidiaries and associates (346) 3Share of results of joint ventures and associates (14) (10)Net foreign exchange gains from transactions 39 (15)Share-based payments 23 25Inventories (17) (12)Trade and other receivables (4) (18)Trade and other payables 71 61Provisions (17) (24)----------------------------------- ------ -------- --------Net cash generated from operations 875 705Dividends from joint ventures and associates 14 12Net purchase of PPE including finance lease principalpayments (75) (98)Purchase of intangibles (24) (24)Investment in pre-publication (222) (181)Add back: Cash spent against integration and fair valueprovisions 2 4----------------------------------- ------ -------- --------Pearson operating cash flow 570 418Operating tax paid (65) (55)Operating finance charges paid (65) (85)----------------------------------- ------ -------- --------Operating free cash flow 440 278Non operating tax received - 10Non operating finance charges paid (7) -Integration and fair value spend (2) (4)----------------------------------- ------ -------- --------Total free cash flow 431 284Dividends paid (including minorities) (222) (197)----------------------------------- ------ -------- --------Net movement of funds from operations 209 87 Included in net cash generated from operations is an amount of £(6)m (2004:£24m) 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. Taxpayments and receipts that can be clearly identified with disposals, integrationand exchange differences taken to reserves are allocated as non operating taxpayments and receipts. Notes to the condensed consolidated financial statements continuedfor the year ended 31 December 2005 15. Explanation of transition to IFRS Reconciliations, including explanations, from UK GAAP to IFRS of the condensedconsolidated balance sheet as at 1 January 2003 (the date of transition toIFRS), 31 December 2003 and 31 December 2004 (the date of the last UK GAAPfinancial statements) together with the reconciliations of the condensedconsolidated income statement, the condensed consolidated cash flow statementand the condensed consolidated statement of recognised income and expense forthe years to 31 December 2003 and 31 December 2004 have been published on theCompany's website at www.pearson.com. IAS 39 'Financial Instruments: Recognition and Measurement' and IAS 32'Financial Instruments: Disclosure and Presentation' have not been applied tothe year ended 31 December 2004 because the Group has taken a transitionalexemption and adopted those standards prospectively from 1 January 2005. Theaccounting policy in respect of financial instruments, as applied from 1 January2005, is as follows: Derivatives are initially recognised at fair value on the date a derivative isentered into and are subsequently re-measured at their fair value. The Groupdesignates certain of the derivative instruments within its portfolio to behedges of the fair value of recognised assets or liabilities or a firmcommitment (fair value hedges) or hedges of net investments in foreignoperations (net investment hedges). All income statement movements have beendisclosed within net finance costs. Changes in the fair value of derivatives that are designated and qualify as fairvalue hedges are recorded in the income statement, together with any changes inthe fair value of the hedged asset or liability that are attributable to thehedged risk. The effective portion of changes in the fair value of derivatives that aredesignated and qualify as net investment hedges are recognised in equity. Gainsor losses relating to the ineffective portion are recognised immediately in theincome statement. Certain derivatives do not qualify or are not designated ashedging instruments. Such derivatives are classified at fair value and anymovement in their fair values is recognised in the income statement immediately. The effect of the transitional adjustment on the balance sheet as at 1 January2005 is as follows:------------------------------ --------- -------- -------- 31 December Transition 1 JanuaryAll figures in £ millions 2004 Adjustment 2005------------------------------ --------- -------- -------- Non-current assetsDerivative financial instruments - 145 145Deferred income tax assets 359 5 364------------------------------ --------- -------- -------- Current assetsDerivative financial instruments - 1 1------------------------------ --------- -------- -------- Non-current liabilitiesBorrowings (1,714) (134) (1,848)Derivative financial instruments - (40) (40)------------------------------ --------- -------- -------- Current liabilitiesTrade and other payables (868) 14 (854)Borrowings (109) - (109)Derivative financial instruments - (3) (3)------------------------------ --------- -------- -------- Reserves (126) 12 (114) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pearson