Interim Results
Pearson PLC
31 July 2006
31 July 2006
--------------------------------------------------------------------------------
PEARSON 2006 INTERIM RESULTS
• Good start to the year. Sales up 8%; adjusted operating profit up 57% to £73m.
• Sustained organic growth and market share gains. Pearson Education salesup 11%
with leading position in US School new adoption market and 4% growth in US
Higher Education; FT Group sales up 6% with FT advertising revenues up 11%;
Penguin sales up 2%.
• Strong profit growth in all businesses. Pearson Education, traditionally
loss-making in the first half, breaks even (loss of £21m in 2005). FT Group
profits up 23% to £55m and Penguin profits up 38% to £18m.
• Full-year outlook maintained. Pearson's profits are always heavily weighted
to the second half of the year. With this first-half performance, we continue
to expect strong earnings growth and cash generation and a further significant
rise in our return on invested capital in 2006.
Marjorie Scardino, chief executive, said: "These results provide further
evidence of the quality and potential of our business. All parts of Pearson are
making strong progress, and our steady investment in new content and services is
paying off with sustained organic growth, market share gains and margin
improvement. We remain confident that 2006 will be another good year for Pearson
both in competitive and financial terms."
£ millions Half year Half year Headline Underlying Full year
2006 2005 growth growth 2005
Business performance
Sales 1,878 1,613 16% 8% 4,096
Adjusted operating
profit 73 33 -- 57% 506
Adjusted profit/
(loss) before tax 31 (6) -- -- 422
Adjusted earnings/
(loss) 9 (14) -- -- 272
Adjusted earnings/
(loss) per share 1.1p (1.8)p -- -- 34.1p
Operating cash
flow (183) (196) 7% -- 570
Free cash flow (250) (265) 6% -- 431
Net debt 1,611 1,298 (24)% -- 996
Statutory results
Operating profit 65 73 (11)% -- 536
Profit before tax 25 48 (48)% -- 466
Basic earnings 7 337 -- -- 624
Basic earnings per
share 0.9p 42.3p -- -- 78.2p
Dividend per share 10.5p 10.0p 5% -- 27.0p
Note: Statutory operating profit for 2005 included a £40m profit on the sale of
our investment in CBSMarketWatch. Statutory basic earnings for 2005 included
CBSMarketWatch and a £302m profit on the sale of Recoletos.
Throughout this statement, we refer to business performance measures for total
operations and growth rates on an underlying basis unless otherwise stated.
'Underlying' means growth excluding currency impact and businesses acquired or
sold. The 'business performance' measures are non-GAAP measures and
reconciliations to the equivalent 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 an adjusted basis to exclude: i) other net gains
and losses arising in connection with the sale of subsidiaries, investments and
associates; ii) amortisation of acquired intangible assets; and iii) short-term
fluctuations in the market value of financial instruments (under IAS39) and
other currency movements (under IAS21).
2006 OUTLOOK
Due to the seasonal bias of our book publishing businesses, Pearson makes most
of its sales and almost all of its profits in the second half.
However, based on our trading performance in the first half, we remain confident
that 2006 will be another good year for Pearson as we continue to increase
margins and grow faster than our markets. We expect to achieve strong underlying
earnings growth, good cash generation and a further significant improvement in
return on invested capital. Our outlook for the full year remains:
• Pearson Education (65% of 2005 sales; 68% of operating profit) expected
to achieve underlying sales growth in the 3-5% range, with similar rates of
growth in each of its three worldwide businesses (School, Higher Education
and Professional). School and Professional, which achieved very strong
growth in the first half, will face tougher comparables in the second half
of the year. We expect margins to improve in School and Professional and to
be stable in Higher Education.
• Penguin (20% of 2005 sales; 12% of operating profit) expected to grow at
a similar rate to 2005 with margins improving steadily as we benefit from
efficiency gains.
• Financial Times Group (15% of 2005 sales; 20% of operating profit)
expected to achieve a further significant profit improvement. The Financial
Times continues to show good momentum, with circulation up 5% and
advertising revenues up 11% in the first half. IDC expects another good
year, benefiting from similar business conditions to 2005, steady organic
growth and the contribution of recent acquisitions.
Acquisitions.
In the first half we invested a total of £273m in a series of
acquisitions in education and the FT Group. For the full year, we expect these
acquisitions to have a broadly neutral effect on adjusted earnings per share as
a result of integration spend in the second half and the interest charge on our
higher level of net debt. We expect these acquisitions to enhance Pearson's
adjusted earnings per share and return on invested capital in 2007, their first
full year under our ownership.
Interest and tax.
We expect our interest charge to be a little higher than in
2005, as a result of our higher level of net debt. We expect our effective tax
rate to be in the 32-34% range.
Cash.
We expect another good cash performance, well ahead of our 80% target
conversion threshold.
Exchange rates.
Pearson generates around two-thirds of its sales in the US and
each five cent change in the average £:$ exchange rate for the full year (which
in 2005 was £1:$1.81) would have a translation impact of approximately 1p on
adjusted earnings per share. The average rate during the first half of 2006 was
£1:$1.79 and the closing rate at the end of June was £1:$1.85.
For more information:
Luke Swanson / Simon Mays-Smith / Deborah Lincoln + 44 (0) 20 7010 2310
Pearson's results presentation for investors and analysts will be webcast live
today from 09.00 (BST) and available for replay from 12.00 (BST) via
www.pearson.com. We are holding a conference call for US investors today at
15.00 (BST) / 10.00 (EDT). To participate please dial in on +1 718 354 1175
(inside the US) or +44 (0)208 974 7900 (outside the US), participant code
C 348483. Video interviews with Marjorie Scardino and Robin Freestone are also
available at www.pearson.com. High resolution photographs are available for the
media at www.newscast.co.uk.
OVERVIEW
Pearson's sales increased 8% in the first half of the year and adjusted
operating profits increased by 57% to £73m. Adjusted earnings per share improved
to 1.1p, from a loss of (1.8)p in 2005.
Operating cash flow improved by £13m to £(183)m and our average working capital
to sales ratio improved to 27.3% (from 28.7% in the first half of 2005).
Our statutory results show a reduction in operating profit to £65m (£73m in
2005, including a £40m profit on the sale of our stake in CBSMarketWatch).
Statutory earnings for the period were £7m, compared with £337m in the first
half of 2005 which included a £302m profit on the sale of Recoletos, our Spanish
media group. Excluding those one-off gains on disposals, our statutory profit
was £12m higher than in 2005.
Our net borrowings, which peak at the half-year stage, increased to £1,611m
(£1,298m in 2005), largely as a result of a series of bolt-on acquisitions in
education (including Promissor, PBM, National Evaluation Systems, PowerSchool
and Chancery) and financial information (Quote.com). Our total investment in all
acquisitions in the first half was £273m.
The board has declared an interim dividend of 10.5p per share, a 5% increase on
2005, reflecting this strong financial performance and its confidence in the
outlook for the full year.
£ millions Half year Half year Headline Underlying Full year
2006 2005 growth growth 2005
Sales
School 625 518 21% 10% 1,295
Higher
Education 206 192 7% 3% 779
Professional 316 243 30% 20% 589
--------------- --------- --------- -------- --------- ---------
Pearson
Education 1,147 953 20% 11% 2,663
FT Publishing 179 164 9% 9% 332
IDC 165 143 15% 3% 297
--------------- --------- --------- -------- --------- ---------
FT Group 344 307 12% 6% 629
Penguin 387 353 10% 2% 804
Total
continuing 1,878 1,613 16% 8% 4,096
Adjusted operating
profit
School 36 16 -- 46% 147
Higher
Education (53) (45) (18)% (13)% 156
Professional 17 8 -- 60% 45
--------------- --------- --------- -------- --------- ---------
Pearson
Education 0 (21) -- -- 348
FT Publishing 13 6 -- -- 21
IDC 42 38 11% 8% 80
--------------- --------- --------- -------- --------- ---------
FT Group 55 44 25% 23% 101
Penguin 18 13 38% 38% 60
Total
continuing 73 36 -- 57% 509
Discontinued
(Recoletos) -- (3) (3)
Total 73 33 -- 57% 506
SCHOOL
£ millions First half First half Headline Underlying Full year
2006 2005 growth growth 2005
Sales 625 518 21% 10% 1,295
Adjusted
operating
Profit 36 16 -- 46% 147
Further share gains in the US
• Market-leading performance in US school publishing. Strong first-half
sales growth, benefiting from earlier phasing of our major state adoption
wins compared with 2005.
• Pearson takes an estimated 30% market share of total new adoptions (and
33% where we competed), and makes a strong start in open territories.
Pearson takes the #1 or #2 market share of new adoptions in reading, maths,
science and social studies.
• #1 position in Elementary Social Studies in California with an
innovative new digital programme. It has so far taken a 41% share, reaching
more than 1.5m students.
• Testing business, benefiting from excellent record of contract wins in
2005, continues to gain share with new long-term contracts in Illinois,
Maryland, Mississippi and New York. Rapid growth in online assessment, with
pilots underway in nine states and 1.4 million secure online tests delivered
in the first half.
• Curriculum software continues to show good growth with increasing
adoption of technology in schools and new version releases for some of our
major programmes including Waterford and NovaNet.
Good growth in International, with strong performance in Canada, Europe and
Latin America
• International English Language Teaching business outperforms market,
capitalising on growing demand for English language proficiency and local
adaptations of new and established global programmes. English Adventure,
developed with Disney for the ELT primary market, gains share with new
versions for Asia and Latin America building on the success already achieved
in Europe.
• UK school businesses benefit from technology leadership. In school testing,
we have marked a total of 8 million GCSE, AS and A-Level scripts onscreen,
and we are piloting a programme to provide students and their parents - in
addition to schools - with online access to question-level examination
performance data. Our new science qualification, textbook, e-learning and
teacher support programmes, designed for major changes in science curriculum
in 2006, are gaining significant market share.
Bolt-on acquisitions adding breadth, scale and value
• School testing business gains scale and enters a new growth market through
the acquisition of National Evaluation Systems, America's leading provider of
certification tests for the teaching profession.
• School technology business transformed through the acquisitions of Chancery
and PowerSchool, the #2 and #3 providers of student information systems to US
schools. Pearson now has an installed base of 29,200 schools serving 25
million students - close to half of all school students in America.
• Pearson gains a leading position in the Italian school publishing market
through the acquisition of Paravia Bruno Mondadori.
Healthy outlook 2007-2009
• US school new adoption market expected to grow strongly from 2007- 2009
(estimated at $660m in 2006; $800m in '07; $900m in '08; $1bn in '09).
• US state tax receipts - the major source of school funding - remain healthy.
According to the Rockefeller Institute, state tax receipts grew by 6.8% in
Q1 2006 with all three major categories (personal income tax, sales tax and
corporate income tax) showing solid growth.
• Increasing technology adoption by US schools and shift of No Child Left
Behind policies from implementation to remediation creates favourable
environment for Pearson's mix of curriculum, assessment and technology
services.
HIGHER EDUCATION
£ millions First half First half Headline Underlying Full year
2006 2005 growth growth 2005
Sales 206 192 7% 3% 779
Adjusted operating
profit (53) (45) (18)% (13)% 156
Investments generate higher first half losses . . .
• Pearson's Higher Education business is traditionally loss-making in the
first half, as it invests ahead of two major selling seasons in the US: July
/ August (ahead of the first college semester) and December (ahead of the
second semester).
• Worldwide Higher Education sales growth of 3%; good growth in the US (up 4%).
• First half losses increase to £53m (£45m in 2005) as Pearson invests in new
content and online services.
. . . and sustainable competitive advantage
• Pearson's US Higher Education business, the market leader, has grown ahead of
the industry for seven straight years.
• Strong performance from major schedule of 1st editions with major new
titles in Economics, Algebra, Accounting, Psychology and Written Composition.
• Rapid growth from online homework and assessment services including
MyMathLab and Mastering Physics. More than 900,000 US college students
register for Pearson's online learning programme in the first half, an
increase of 29%. Evaluation studies show significant learning gains for
students and efficiency improvements for institutions.
• New online homework and assessment programmes in economics, psychology
and developmental writing to be launched in the second half.
• Continued strong growth from custom publishing as Pearson extends leadership
in print custom publishing to custom media and full service curriculum
solutions.
• Further innovation in product models and student channels. Pearson is
piloting downloadable audio study guides; digital textbooks;
purchasing-by-the-chapter; and an online store for all our higher education
materials.
• International Higher Education business continuing to invest in global and
local authors, publishing in new languages, online learning tools and custom
publishing, and new markets in Asia and the Middle East.
PROFESSIONAL
£ millions First half First half Headline Underlying Full year
2006 2005 growth growth 2005
Sales 316 243 30% 20% 589
Adjusted operating
profit 17 8 -- 60% 45
Note: At the beginning of 2006 we transferred Brady Games, our video games
imprint, out of Professional and into Penguin. This move reduces Professional
sales by £6m in the first half. There is no operating profit impact.
Professional Testing
• Substantial revenue and profit growth, as major contracts continue to build
and business emerges from investment phase.
• Successful execution on major new contracts. Graduate Management Admissions
Test now being administered through Pearson's network of more than 4,000 test
centres in 145 countries, the world's largest.
• Promissor, acquired in January 2006, performing well. Acquisition brings
additional scale in professional testing and enables Pearson to enter new US
state and federal regulatory markets.
Government Solutions
• Exceptional revenue growth in the first half, benefiting from phasing of
US Department of Health Medicaid contract (which is expected to reverse in
the second half).
• New contract wins with the US Defense Information Systems Agency and
governments of Argentina and Mexico; strong pipeline of new long-term
business opportunities in the second half.
Technology Publishing
• Worldwide technology publishing business maintaining market share despite
weak industry conditions.
• Further cost actions: continued reduction in publishing list and overheads;
consumer technology business transferred to Penguin to gain additional scale
in distribution.
FINANCIAL TIMES GROUP
£ millions Half year Half year Headline Underlying Full year
2006 2005 growth growth 2005
Sales
FT Publishing 179 164 9% 9% 332
IDC 165 143 15% 3% 297
Total 344 307 12% 6% 629
Adjusted operating profit
FT Publishing 13 6 -- -- 21
IDC 42 38 11% 8% 80
Total 55 44 25% 23% 101
FT Publishing
• Financial Times sales up 10% to £119m and profit improved to £5m (loss of £2m
in first half of 2005).
• FT advertising revenues up 11%, continuing steady acceleration in advertising
revenue growth. 20%+ growth in financial, luxury goods and online advertising;
more than 80% of advertising revenue improvement converted to profit in the
first half.
• FT's average circulation 447,000 for the first six months, up 5%; 86,000
FT.com subscribers in June, up 11% (on the same period last year).
• Deeper integration of the FT's print and online editorial processes under way.
Reinforcement of print and online teams through senior appointments and
reorganisation.
• Circulation up 2% at Les Echos to 120,000, FT Deutschland level at 102,000;
The Economist up 9% up to 1,096,000 (for the July-December ABC period).
• Strong performance of the portfolio of finance titles, websites and events at
FT Business, with sales up 15% and improved margins in institutional finance
titles.
Interactive Data Corporation
• Underlying sales growth of 3% with increased business with existing
customers and 95%+ renewal rate within its Institutional Services segment.
• Demand for fixed income evaluations and related reference data drives new
sales for FT Interactive Data, which grew over 6% excluding the impact of
foreign exchange.
• Steady international expansion; working with some of largest clients to
pursue enterprise-wide opportunities that involve offering multiple
Interactive Data businesses.
• IS. Teledata integration progressing well; re-branded Interactive Data
Managed Solutions in July 2006.
• e-Signal, which provides real time financial market data to financial
professionals and active traders, continues to expand its direct subscriber
base and online advertising across its family of financial websites, which
together rank among the top 10 financial destinations. Quote.com integration
progressing well.
• CMS BondEdge introduction of fixed income analytical data feed service well
received by customers.
• IDC reported second-quarter and first-half 2006 results on 27 July 2006,
available at www.interactivedatacorp.com .
PENGUIN
£ millions First half First half Headline Underlying Full year
2006 2005 growth growth 2005
Sales 387 353 10% 2% 804
Adjusted operating
profit 18 13 38% 38% 60
Note: At the beginning of 2006 we transferred Brady Games, our video games
imprint, out of our Professional segment and into Penguin. This move increases
Penguin sales by £6m in the first half. There is no operating profit impact.
• Continued margin improvement, with sales up 2% and profits up 38%.
• Record bestseller performance with 85 titles on New York Times bestseller
lists and 43 top ten bestsellers in UK. Brand name author bestsellers and
newly created bestsellers including titles by Patricia Cornwell, Clive
Cussler, Nathaniel Philbrick, Anthony Horowitz, Tyler Perry, Kim Edwards,
Jeremy Clarkson, Jane Green and Marina Lewycka.
• Major literary awards. Penguin authors win a Pulitzer Prize for the second
year in a row - this year the Pulitzer Prize for Fiction (Geraldine
Brooks for March), two Orange Prizes (Zadie Smith for On Beauty and debut
writer Naomi Alderman for Disobedience), and two Whitbread Prizes (Ali Smith
for Accidental and Hilary Spurling for Matisse: the Master).
• Strong second half publishing list, including bestselling authors Thomas
Pynchon, Nora Roberts, Clive Cussler, Carly Fiorina, John Dean, Jamie
Oliver, Jeremy Clarkson, Sue Townsend, Eoin Colfer and Kylie Minogue.
• Successful innovation with new formats. Penguin authors published in new
"Premium Paperback" format achieve higher sales than with their previous
traditional mass market titles.
• Strong backlist performance with innovative publishing and marketing.
New editions and lines introduced for the 60th Anniversary of the Penguin
Classics, including Red Classics and Penguin Epics in the UK, and Penguin
Graphic Classics, and a successful partnership with the National Basketball
Association in the US.
• Further efficiency gains. Continued programme to capitalise on combined
scale of Penguin and Pearson Education in book publishing, with shared
warehousing, distribution, purchasing and information technology.
• Investment in new digital channels and formats, including Penguin online
bookstores, e-books, digital audio and podcasts, to reach new audiences.
• Continued investment in India, where Penguin has #1 market share, with
expansion of local language publishing programme, and shift of some travel
and illustrated reference pre-production processes to Delhi.
ENDS
Except for the historical information contained herein, the matters discussed in
this press release include forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from those
predicted by such forward-looking statements. These risks and uncertainties
include international, national and local conditions, as well as competition.
They also include other risks detailed from time to time in the company's
publicly-filed documents, including the company's Annual Report on form 20-F.
The company undertakes no obligation to update publicly any forward looking
statement, whether as a result of new information, future events or otherwise.
Condensed consolidated income statement
For the six months to 30 June 2006
------------------------------- ----- ------- ------- -------
2006 2005 2005
all figures in £ millions note half year half year full year
------------------------------- ----- ------- ------- -------
Continuing operations
Sales 2 1,878 1,613 4,096
Cost of goods sold (933) (812) (2,022)
------------------------------- ----- ------- ------- -------
Gross profit 945 801 2,074
Operating expenses (890) (776) (1,592)
Other net gains and losses 3 - 40 40
Share of results of joint ventures
and associates 10 8 14
------------------------------- ----- ------- ------- -------
Operating profit 2 65 73 536
Finance costs 4 (70) (69) (132)
Finance income 4 30 44 62
------------------------------- ----- ------- ------- -------
Profit before tax 5 25 48 466
Income tax 6 (8) (2) (124)
------------------------------- ----- ------- ------- -------
Profit for the period from
continuing operations 17 46 342
Discontinued operations
Profit for the period from
discontinued operations 8 - 300 302
------------------------------- ----- ------- ------- -------
Profit for the period 17 346 644
Attributable to:
Equity holders of the Company 7 337 624
Minority interest 10 9 20
------------------------------- ----- ------- ------- -------
Earnings per share from continuing and discontinued operations
Basic 7 0.9p 42.3p 78.2p
Diluted 7 0.9p 42.2p 78.1p
Earnings per share from continuing operations
Basic 7 0.9p 4.6p 40.4p
Diluted 7 0.9p 4.6p 40.3p
The results are presented under IFRS (see note 1). The figures for the six
months to 30 June 2006 and 30 June 2005 have not been audited or reviewed.
Condensed consolidated statement of recognised income and expense
for the six months to 30 June 2006
------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions note half half full
year year year
------------------------------- ----- ------- ------- -------
Net exchange differences on
translation of foreign operations (228) 191 327
Actuarial gains / (losses) on defined benefit pension
and post retirement
medical schemes 96 (31) 26
Taxation on items taken directly to
equity - - 12
------------------------------- ----- ------- ------- -------
Net income / (expense) recognised
directly in equity (132) 160 365
Profit for the financial period 17 346 644
------------------------------- ----- ------- ------- -------
Total recognised income and expense
for the financial period (115) 506 1,009
Attributable to:
Equity holders of the Company 13 (125) 497 989
Minority interest 10 9 20
------------------------------- ----- ------- ------- -------
Effect of transition adjustment on adoption of
IAS 39
Attributable to:
Equity holders of the Company - (12) (12)
Condensed consolidated balance sheet
as at 30 June 2006
------------------------------- ------ ------- ------- -------
2006 2005 2005
all figures in £ millions note half year half year full year
------------------------------- ------ ------- ------- -------
Non-current assets
Property, plant and equipment 363 359 384
Intangible assets 11 3,869 3,506 3,854
Investments in joint ventures and
associates 33 42 36
Deferred income tax assets 391 404 385
Financial assets - Derivative
financial instruments 39 63 79
Other financial assets 18 17 18
Other receivables 120 100 108
------------------------------- ------ ------- ------- -------
4,833 4,491 4,864
Current assets
Intangible assets - pre-publication 442 402 426
Inventories 462 401 373
Trade and other receivables 976 1,003 1,031
Financial assets - Derivative
financial instruments 31 49 4
Cash and cash equivalents
(excluding overdrafts) 649 810 902
------------------------------- ------ ------- ------- -------
2,560 2,665 2,736
------------------------------- ------ ------- ------- -------
Total assets 7,393 7,156 7,600
Non-current liabilities
Financial liabilities - Borrowings (1,703) (1,832) (1,703)
Financial liabilities - Derivative
financial instruments (37) (5) (22)
Deferred income tax liabilities (202) (148) (204)
Retirement benefit obligations (270) (436) (389)
Provisions for other liabilities
and charges (14) (35) (31)
Other liabilities (110) (139) (151)
------------------------------- ------ ------- ------- -------
(2,336) (2,595) (2,500)
Current liabilities
Trade and other liabilities (866) (779) (974)
Financial liabilities - Borrowings (590) (368) (256)
Financial liabilities - Derivative
financial instruments - (15) -
Current income tax liabilities (110) (88) (104)
Provisions for other liabilities
and charges (27) (17) (33)
------------------------------- ------ ------- ------- -------
(1,593) (1,267) (1,367)
------------------------------- ------ ------- ------- -------
Total liabilities (3,929) (3,862) (3,867)
------------------------------- ------ ------- ------- -------
Net assets 3,464 3,294 3,733
Share capital 202 201 201
Share premium 2,479 2,475 2,477
Reserves 610 472 886
------------------------------- ------ ------- ------- -------
Total equity attributable to equity
holders of the Company 3,291 3,148 3,564
Minority interest 173 146 169
------------------------------- ------ ------- ------- -------
Total equity 13 3,464 3,294 3,733
Condensed consolidated cash flow statement
for the six months to 30 June 2006
-------------------------------- ----- ------- ------- -------
2006 2005 2005
all figures in £ millions note half year half year full year
------------------------------- ----- ------- ------- -------
Cash flows from operating activities
Cash (used in) / generated from
operations 14 (44) (62) 875
Interest paid (53) (55) (101)
Tax paid (26) (23) (65)
------------------------------- ----- ------- ------- -------
Net cash (used in) / generated from
operating activities (123) (140) 709
Cash flows from investing activities
Acquisition of subsidiary, net of
cash acquired (273) (28) (246)
Acquisition of joint ventures and
associates (4) (4) (7)
Purchase of property, plant and
equipment (PPE) (33) (40) (76)
Proceeds from sale of PPE 1 1 3
Purchase of intangible assets (8) (3) (24)
Investment in pre-publication (112) (93) (222)
Purchase of other financial assets - - (2)
Disposal of subsidiary, net of cash
disposed 6 367 376
Disposal of joint ventures and
associates - 54 54
Interest received 13 10 29
Dividends received from joint
ventures and associates 14 1 14
------------------------------- ----- ------- ------- -------
Net cash (used in) / generated from
investing activities (396) 265 (101)
Cash flows from financing activities
Proceeds from issue of ordinary
shares 3 2 4
Purchase of treasury shares (27) (11) (21)
Proceeds from borrowings 477 203 -
Repayment of borrowings (11) (10) (79)
Finance lease principal payments (2) (1) (3)
Dividends paid to Company's
shareholders (136) (125) (205)
Dividends paid to minority
interests - - (17)
------------------------------- ----- ------- ------- -------
Net cash generated from / (used in)
financing activities 304 58 (321)
Effects of exchange rate changes on
cash and cash equivalents (21) 23 13
------------------------------- ----- ------- ------- -------
Net (decrease) / increase in cash
and cash equivalents (236) 206 300
Cash and cash equivalents at the
beginning of the period 844 544 544
------------------------------- ----- ------- ------- -------
Cash and cash equivalents at the
end of the period 608 750 844
For the purposes of the cash flow statement, cash and cash equivalents are
included net of overdrafts repayable on demand. These overdrafts are excluded
from the definition of cash and cash equivalents disclosed on the balance sheet.
Notes to the condensed consolidated financial statements
for the six months to 30 June 2006
1. Basis of preparation
The condensed consolidated financial statements have been prepared in accordance
with the Listing Rules of the Financial Services Authority and in accordance
with EU-adopted International Financial Reporting Standards (IFRS) and IFRIC
interpretations.
The condensed consolidated financial statements have also been prepared in
accordance with the accounting policies set out in the 2005 Annual Report and
have been prepared under the historical cost convention as modified by the
revaluation of financial assets and liabilities (including derivative
instruments) at fair value.
The preparation of condensed consolidated financial statements requires the use
of certain critical accounting assumptions. It also requires management to
exercise its judgement in the process of applying the Company's accounting
policies. The areas requiring a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the condensed
consolidated financial statements have been set out in the 2005 Annual Report.
The 2005 Annual Report refers to new standards effective from 1 January 2006.
None of these standards have had a material impact in these financial
statements.
Notes to the condensed consolidated financial statements continued for the six
months to 30 June 2006.
2. Segment information
The Group is organised into five primary business segments: School, Higher
Education, Penguin, Financial Times Publishing and Interactive Data Corporation
(IDC). Our remaining business group, Professional, brings together a number of
education publishing, testing and services businesses and does not meet the
criteria for classification as a 'segment' under IFRS.
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Sales
School 625 518 1,295
Higher Education 206 192 779
Professional 316 243 589
-------------------------------- ------- ------- -------
Pearson Education 1,147 953 2,663
FT Publishing 179 164 332
IDC 165 143 297
-------------------------------- ------- ------- -------
FT Group 344 307 629
Penguin 387 353 804
-------------------------------- ------- ------- -------
Total sales 1,878 1,613 4,096
Adjusted operating profit
School 36 16 147
Higher Education (53) (45) 156
Professional 17 8 45
-------------------------------- ------- ------- -------
Pearson Education - (21) 348
FT Publishing 13 6 21
IDC 42 38 80
-------------------------------- ------- ------- -------
FT Group 55 44 101
Penguin 18 13 60
-------------------------------- ------- ------- -------
Adjusted operating profit - continuing
operations 73 36 509
Adjusted operating profit - discontinued
operations - (3) (3)
-------------------------------- ------- ------- -------
Total adjusted operating profit 73 33 506
Adjusted operating profit - continuing
operations 73 36 509
Amortisation of acquired intangibles (9) (3) (11)
Other gains and losses - 40 40
Other net finance costs of associates 1 - (2)
-------------------------------- ------- ------- -------
Operating profit 65 73 536
In our adjusted operating profit, we have excluded amortisation of acquired
intangibles, other gains and losses and other net finance costs of associates.
The amortisation of acquired intangibles is not considered to be fully
reflective of the underlying performance of the Group. Other gains and losses
represent profits and losses on the sale of subsidiaries, joint ventures,
associates and investments that are included within continuing operations but
which distort the performance for the year. Other net finance costs of
associates are the equivalent of the Company's own net finance costs that are
excluded in adjusted earnings (see note 4). Discontinued operations relate to
the disposal of the Group's interest in Recoletos (see note 8).
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
3. Other net gains and losses
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Profit on sale of interest in MarketWatch - 40 40
-------------------------------- ------- ------- -------
Total other net gains and losses - 40 40
Other net gains and losses represent profits and losses on the sale of
subsidiaries, joint ventures, associates and investments that are included
within continuing operations.
4. Net finance costs
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half half full
year year year
-------------------------------- ------- ------- -------
Net interest payable (44) (35) (77)
Finance cost re employee benefits 2 (4) (7)
Net foreign exchange gains 3 10 12
Other gains on financial instruments in a hedging
relationship:
- fair value hedges - 1 -
- net investment hedges (1) 2 3
Other gains / (losses) on financial instruments not
in a hedging relationship:
- amortisation of transitional adjustment on bonds 5 5 7
- derivatives (5) (4) (8)
-------------------------------- ------- ------- -------
Net finance costs (40) (25) (70)
Finance costs (70) (69) (132)
Finance income 30 44 62
-------------------------------- ------- ------- -------
Net finance costs (40) (25) (70)
Analysed as:
Net interest payable (44) (35) (77)
Finance cost re employee benefits 2 (4) (7)
-------------------------------- ------- ------- -------
Net finance cost reflected in adjusted
earnings (42) (39) (84)
Other net finance income 2 14 14
-------------------------------- ------- ------- -------
Net finance costs (40) (25) (70)
Fair value gains and losses on financial instruments are analysed between three
elements: net interest payable, foreign exchange and other gains and losses. For
the purposes of adjusted earnings we have excluded foreign exchange and other
gains and losses as they represent short-term fluctuations in market value and
are subject to significant volatility. These gains and losses may not be
realised in due course as it is normally the intention to hold these instruments
to maturity. The increased volatility has been introduced as a result of
adopting IAS 39 'Financial Instruments: Recognition and Measurement' as at 1
January 2005.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
5. Profit before tax
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Profit before tax 25 48 466
Add back: amortisation of acquired
intangibles (see note 2) 9 3 11
Add back: other gains and losses (see note
2) - (40) (40)
Add back: other net finance costs of
associates (see note 2) (1) - 2
Add back: other finance income (see note
4) (2) (14) (14)
-------------------------------- ------- ------- -------
Adjusted profit before tax - continuing
operations 31 (3) 425
Adjusted profit before tax - discontinued
operations - (3) (3)
-------------------------------- ------- ------- -------
Total adjusted profit before tax 31 (6) 422
6. Taxation
------------------------------ ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
------------------------------- ------- ------- -------
Income tax charge (8) (2) (124)
Add back: tax benefit on amortisation
of acquired intangibles (3) (1) (4)
Add back: tax benefit on other gains
and losses - - (4)
Add back: tax charge on other finance
income 1 4 3
-------------------------------- ------- ------- -------
Adjusted income tax charge -
continuing operations (10) 1 (129)
Adjusted income tax charge -
discontinued operations - 1 1
------------------------------- ------- ------- -------
Total adjusted income tax charge (10) 2 (128)
Tax rate reflected in adjusted earnings 32.0% 32.0% 30.3%
Included within the income tax charge is an amount of £1m (2005 half year: £nil,
2005 full year: £26m) relating to UK tax.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
7. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
equity holders of the Company (earnings) by the weighted average number of
ordinary shares in issue during the period, excluding ordinary shares purchased
by the Company and held as treasury shares. Diluted earnings per share is
calculated by adjusting the weighted average number of ordinary shares to take
account of all dilutive potential ordinary shares and adjusting the profit
attributable if applicable to account for any tax consequences that might arise
from conversion of those shares.
In order to show results from operating activities on a consistent basis, an
adjusted earnings per share is presented which excludes certain items as set out
below. The Company's definition of adjusted earnings per share may not be
comparable to other similarly titled measures reported by other companies.
------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half half full
year year year
------------------------------- ------- ------- -------
Earnings 7 337 624
Adjustments to exclude profit for the year from
discontinued operations:
Profit for the period from discontinued
operations - (300) (302)
----------------------------------- ------- ------- -------
Earnings - continuing operations 7 37 322
Earnings 7 337 624
Adjustments:
Amortisation of acquired intangibles 9 3 11
Other gains and losses - (40) (40)
Other net finance costs of associates (1) - 2
Other finance income (2) (14) (14)
Profit on sale of discontinued
operations (see note 8) - (304) (306)
Taxation on above items (2) 5 (3)
Minority interest share of above items (2) (1) (2)
------------------------------- ------- ------- -------
Adjusted earnings / (loss) 9 (14) 272
Amortisation of acquired intangibles
(net of taxation and minority interest) (5) (1) (5)
----------------------------------- ------- ------- -------
Adjusted earnings / (loss) including
amortisation of acquired intangibles 4 (15) 267
Weighted average number of shares
(millions) 798.4 797.0 797.9
Effect of dilutive share options 1.5 1.0 1.1
Weighted average number of shares
(millions) for diluted earnings 799.9 798.0 799.0
Earnings per share from continuing and discontinued operations
Basic 0.9p 42.3p 78.2p
Diluted 0.9p 42.2p 78.1p
Earnings per share from continuing operations
Basic 0.9p 4.6p 40.4p
Diluted 0.9p 4.6p 40.3p
Adjusted earnings / (loss) per share 1.1p (1.8)p 34.1p
Adjusted earnings per share including
amortisation of acquired intangibles 0.5p (1.9)p 33.5p
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
8. Discontinued operations
Discontinued operations relate to the sale of Pearson's 79% interest in
Recoletos Grupo de Communicacion S.A. The transaction became unconditional on
approval from the Spanish regulatory authorities in February 2005. The results
of Recoletos were consolidated for the period to 28 February 2005 and are
included in profit from discontinued operations shown in the table below.
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Sales - 27 27
Operating loss - (3) (3)
Net finance income - - -
-------------------------------- ------- ------- -------
Loss before tax - (3) (3)
Attributable tax benefit - 1 1
Profit on disposal of discontinued
operations - 304 306
Attributable tax expense - (2) (2)
-------------------------------- ------- ------- -------
Profit for the period from discontinued
operations - 300 302
9. Dividends
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Amounts recognised as distributions to
equity holders in the period 136 125 205
The directors are proposing an interim dividend of 10.5p per equity share,
payable on 22 September 2006 to shareholders on the register at the close of
business on 25 August 2006. This dividend has not been included as a liability
as at 30 June 2006. A 10.5p interim dividend represents a cash payment of £84m
(2005: 10.0p or £80m).
10. Exchange rates
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant rates are as
follows:
-------------------------------- ------- ------- -------
2006 2005 2005
half year half year full year
-------------------------------- ------- ------- -------
Average rate for profits 1.79 1.87 1.81
Period end rate 1.85 1.79 1.72
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
11. Intangibles
-------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
-------------------------------- ------- ------- -------
Goodwill 3,677 3,385 3,654
Other intangibles 192 121 200
-------------------------------- ------- ------- -------
Total intangibles 3,869 3,506 3,854
Pearson has made a number of acquisitions in the six months to 30 June 2006
including Promissor, a computerised testing provider focused on the regulatory
market in the US, National Evaluation Systems, the leading provider of
customised state assessments for teacher certification in the US and Paravia
Bruno Mondadori, one of Italy's leading educational publishers. Net
consideration paid for all acquisitions in the six months to June 2006 was £273m
and provisional goodwill recognised was £252m. Intangible asset allocation
reviews are in progress for these acquisitions and should be finalised in the
second half of 2006. In total the acquisitions made in the six months to 30 June
2006 contributed an additional £40m of sales and £8m of operating profit.
12. Net debt
------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
------------------------------- ------- ------- -------
Non current assets
Derivative financial instruments 39 63 79
Current assets
Derivative financial instruments 31 49 4
Cash and cash equivalents 649 810 902
Non current liabilities
Borrowings (1,703) (1,832) (1,703)
Derivative financial instruments (37) (5) (22)
Current liabilities
Borrowings (590) (368) (256)
Derivative financial instruments - (15) -
------------------------------- ------- ------- -------
Total net debt (1,611) (1,298) (996)
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
13. Reconciliation of movements in equity
------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half year half year full year
------------------------------- ------- ------- -------
Attributable to equity holders of the
Company
Total recognised income and expense for
the period (125) 497 989
Share-based payment charge 12 11 23
Shares issued 3 2 4
Cumulative translation adjustment
disposed - (14) (14)
Treasury shares purchased (27) (11) (21)
Dividends to equity holders of the
Company (136) (125) (205)
----------------------------------- ------- ------- -------
Net movement for the period (273) 360 776
Attributable to equity holders of the
Company at the beginning of the period 3,564 2,800 2,800
Transition adjustment on adoption of
IAS 39 - (12) (12)
----------------------------------- ------- ------- -------
Attributable to equity holders of the
Company at the end of the period 3,291 3,148 3,564
Minority interests 173 146 169
----------------------------------- ------- ------- -------
Total equity 3,464 3,294 3,733
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2006
14. Cash flows
------------------------------- ------- ------- -------
2006 2005 2005
all figures in £ millions half half full
year year year
------------------------------- ------- ------- -------
Reconciliation of profit for the period to net cash
generated from operations
Profit for the period 17 346 644
Income tax 8 3 125
Depreciation and amortisation charges 137 119 301
Loss on sale of property, plant and
equipment 1 - -
Net finance costs 40 25 70
Profit on sale of subsidiaries and
associates - (344) (346)
Share of results of joint ventures and
associates (10) (8) (14)
Net foreign exchange gains from
transactions 1 5 39
Share-based payments 12 11 23
Inventories (96) (70) (17)
Trade and other receivables 5 (31) (4)
Trade and other payables (141) (104) 71
Provisions (18) (14) (17)
------------------------------- ------- ------- -------
Net cash generated from operations (44) (62) 875
Dividends from joint ventures and
associates 14 1 14
Net purchase of PPE including finance
lease principal payments (34) (40) (75)
Purchase of intangibles (8) (3) (24)
Investment in pre-publication (112) (93) (222)
Add back: Cash spent against
integration and fair value provisions 1 1 2
------------------------------- ------- ------- -------
Pearson operating cash flow (183) (196) 570
Operating tax paid (26) (23) (65)
Operating finance charges paid (40) (34) (65)
------------------------------- ------- ------- -------
Operating free cash flow (249) (253) 440
Non operating finance charges paid - (11) (7)
Integration and fair value spend (1) (1) (2)
------------------------------- ------- ------- -------
Total free cash flow (250) (265) 431
Dividends paid (including minorities) (136) (125) (222)
------------------------------- ------- ------- -------
Net movement of funds from operations (386) (390) 209
Included in net cash generated from operations is an amount of £nil (2005 half
year: £(6)m, 2005 full year: £(6)m) relating to discontinued operations.
Operating cash flow, operating free cash flow and total free cash flow have been
disclosed as they are part of Pearson's corporate and operating measures.
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