Pearson Interim Results
Pearson PLC
25 July 2005
25 July 2005
PEARSON INTERIM RESULTS (unaudited)
Six months ended 30 June 2005
PEARSON MAKES STRONG START TO 2005
• Underlying sales up 10% and operating profit from continuing operations
higher at £33m (£7m in 2004) with good growth in all businesses;
• Pearson Education sales up 14%. Higher Education up 5%, Professional up
12% and School, our largest business, up 19%; all benefiting from
investments in content, testing and technology;
• FT Group sales up 5% and profits up 34%; Financial Times advertising
revenues up 5% and IDC profits up 23%;
• Penguin sales up 5%, with record bestseller performance and stronger
first-half phasing.
Marjorie Scardino, chief executive, said: "We are very pleased with the start
we've made on 2005. We still have the majority of the year's trading ahead of
us, but the first-half momentum supports our confidence that we will meet our
financial goals."
£ millions Half year Half year Underlying Full year
2005 2004 growth 2004
Sales 1,613 1,481 10% 3,696
Business performance
Adjusted operating profit -
continuing 33 7 395
Discontinued (Recoletos) (3) 17 26
Adjusted (loss) / profit
before tax (9) (16) 345
Adjusted (loss) / earnings (15) (22) 217
Adjusted (loss) / earnings
per share (1.9)p (2.8)p 27.3p
Operating cash flow (196) (195) 418
Free cash flow (265) (262) 284
Statutory results
Operating profit 73 9 404
Profit / (loss) before tax 48 (33) 325
Basic earnings / (loss) 337 (20) 262
Basic earnings / (loss) per
share 42.3p (2.5)p 32.9p
Dividend per share 10p 9.7p 3% 25.4p
Net borrowings 1,298 1,747 1,221
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 portfolio changes. Our
continuing businesses exclude Recoletos following the sale of our 79% stake on 8
April 2005.
The basis for our business performance measures is explained overleaf.
FIRST HALF 2005 FINANCIAL HIGHLIGHTS
These results are Pearson's first to be reported under IFRS. In May we published
reconciliations of our 2003 and 2004 results from UK GAAP to IFRS, available at
www.pearson.com/ifrs.
• Sales up 10%, with good growth in all parts of the company.
• Adjusted operating profit from continuing operations higher at £33
million (£7 million in 2004); adjusted loss per share improved to (1.9)p
from (2.8)p.
• Operating cash flow level with 2004 at £(196)m; average working capital
to sales ratio improved to 28.7% (from 30.7% in first half of 2004).
• Statutory profit for the period up to £346m from £(9)m, with gains on
disposals of £342m after tax.
• Net borrowings reduced to £1,298m from £1,747m, with £426m net proceeds
from the sale of our stakes in Recoletos and MarketWatch.
• Dividend increased 3% to 10p per share.
For more information: Luke Swanson / Charlotte Elston + 44 (0) 20 7010 2310
Jeff Taylor / David Hakensen + 1 212 641 2409
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 at 15.00 (BST) / 10.00 (EDT).
To participate please dial in on +1 866 800 8648 (inside the US) or +1 617 614
2702 (outside the US), participant code 69353005. The call will be available on
replay for seven days on +1 888 286 8010 (inside the US) or +1 617 801 6888
(outside the US), pass code 51433647.
Video interviews with Marjorie Scardino and Rona Fairhead are also available at
www.pearson.com.
High resolution photographs are available for the media at www.newscast.co.uk.
Note: the 'business performance' measures, which Pearson uses alongside other
measures to track performance, are included to provide additional detail on
business performance. They are non-GAAP measures under both US GAAP and IFRS.
Reconciliations of adjusted operating profit, adjusted profit/ (loss) before
tax, adjusted earnings per share and operating cash flow to the equivalent
statutory heading under IFRS are included in notes to the accounts 2, 5, 7 and
15 respectively. Business performance measures are presented on an adjusted
basis to exclude other net gains and losses arising on the sale of subsidiaries,
investments and associates together with short-term fluctuations in the market
value of financial instruments following the adoption of IAS 39.
OUTLOOK
Due to the seasonal phasing of our book publishing businesses, Pearson makes
most of its sales and almost all of its profits in the second half of the year.
However, based on our trading performance in the first half, we are confident of
strong growth, in line with expectations, for the year as a whole. Our outlook
for the full year is:
• Our School business is performing well in rapidly growing markets in the
US and around the world. We expect our total worldwide School business to
grow sales in double digits, and to improve margins by 1-2 percentage
points.
• Our Higher Education business has a unique competitive advantage based
on its leading market position, publishing strength and technological
innovation. We expect it to grow by around 4% this year, ahead of the
industry once again, and with similar margins to 2004.
• We expect our Professional division to grow sales in mid-to-high single
digits this year. Our testing and government solutions businesses continue
to achieve double digit sales growth and our worldwide technology publishing
business has seen sales begin to stabilise after a severe downturn in
technology markets.
• Penguin has made a solid start to 2005, a transitional year, in line
with expectations. It has delivered a very strong bestseller performance in
the US and the UK, with some major titles shifted into the first half. Our
UK business is showing good growth, helped by the recovery of our UK
warehouse and the comparison with a difficult first half of 2004. In the US,
we are seeing good success with new imprints, homegrown authors and our new
premium paperback format, although the mass market category has remained
weak.
• We expect profits to improve further at FT Publishing, our group of
business publications. Advertising revenues at the Financial Times were up
5% in the first half and if they grow at similar levels in the second half,
we would expect the FT to be around breakeven for the year as a whole (after
an IFRS impact of approximately £(3)m).
• IDC has reported that it expects to grow net income at the high end of
the high single digit to low double digit range.
Interest and tax. As previously stated, we expect our full year interest charge
to be a little lower than in 2004, with the benefit of lower average net debt
being partly offset by the absence of the 2004 one-off credit of £9m. We expect
our effective tax rate for the full year to be 32%, plus or minus a percentage
point.
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 2004 was £1:$1.83) would have an impact of approximately 1p on adjusted
earnings per share. The average rate during the first half of 2004 was £1:$1.87
and the closing rate at the end of June was £1:$1.79.
FIRST HALF 2005 BUSINESS HIGHLIGHTS
£ millions Half year Half year Underlying Full year
2005 2004 growth 2004
Sales
School 518 444 19% 1,087
Higher Education 192 186 5% 729
Professional 243 220 12% 507
----------------- ---------- ----------- ----------- ----------
Pearson Education 953 850 14% 2,323
FT Publishing 164 160 2% 318
IDC 143 130 8% 269
----------------- ---------- ----------- ----------- ----------
FT Group 307 290 5% 587
Penguin 353 341 5% 786
Total continuing 1,613 1,481 10% 3,696
Adjusted operating profit
School 15 3 -- 108
Higher Education (45) (42) (12)% 129
Professional 8 6 33% 40
----------------- ---------- ----------- ----------- ----------
Pearson Education (22) (33) 30% 277
FT Publishing 6 2 -- 4
IDC 36 29 23% 62
----------------- ---------- ----------- ----------- ----------
FT Group 42 31 34% 66
Penguin 13 9 22% 52
Total continuing 33 7 -- 395
Discontinued (Recoletos) (3) 17 -- 26
Total 30 24 -- 421
SCHOOL
• Market conditions improving: increased new adoption opportunity,
improved state budgets, implementation of No Child Left Behind requirements
in reading, testing and student data.
• Mid single digit growth in US publishing, despite delay of new adoptions
in Texas, and on track for double digit growth for the full year. New
programmes performing well in adoption states: estimated market share of
more than 30% in new adoptions where we competed. Leading positions in
maths, science and music.
• Testing businesses in the US and the UK up more than 30% in the first
half, helped by the build-up of new contracts and phasing. New contracts won
include Michigan, Minnesota and Louisiana; largest single contract, Texas,
renewed for five more years. Edexcel marks three million GCSE and A-level
scripts on screen and begins new contract to mark the UK's Key Stage tests.
• School technology business showing good growth, benefiting from
investments in instructional and student information software.
• $270m acquisition of AGS Publishing completed on 22 July, strengthening
testing and supplementary businesses. Targets growth in funds for students
with special educational needs.
• Strong growth in international school businesses. Continued investment
in English Language Teaching; major new worldwide courses for primary
schools (English Adventure, a partnership with Disney), secondary schools
(Sky), adults (Total English) and business people (Intelligent Business, in
partnership with The Economist).
HIGHER EDUCATION
• Worldwide Higher Education sales growth of 5%, with strong growth in the
US and international level with 2004, ahead of the key second half selling
seasons.
• Rapid growth in career or workforce education segment, with new
publishing in allied health, criminal justice, paralegal, homeland security
and hospitality.
• 3m US college students now following their course through one of our
online learning platforms. Continued roll-out to new subject areas including
economics for the new academic year.
• Custom publishing business continues to grow at 20%+; launch of custom
media solutions team to provide integrated print and online programmes.
• Contract to provide customised print and online materials for DeVry
University's 43,000 students across 69 locations.
• Exclusive partnership with Audible.com to publish audio study guides,
downloadable to iPods, other MP3 players and PDAs, beginning autumn 2005.
PROFESSIONAL
• Double digit sales growth in Government Solutions and Professional
Testing.
• Solid execution on major new contracts including the Driving Standards
Agency, National Association of Securities Dealers and the Graduate
Management Admissions Council.
• Government Solutions' largest contract, with the US Department of
Education, renewed and extended for a further ten years.
• Technology Publishing sales level on first half of 2004; stabilising
after four years of severe declines.
FT PUBLISHING
• Financial Times sales up 4% to £108m and first-half loss reduced to £2m
(loss of £7m in first half of 2004).
• FT advertising revenues up 5% with FT.com up more than 20%. Average
circulation of 427,000 for the first six months; UK circulation stabilising,
with three consecutive months of modest year-on-year growth.
• Excellent performance on key readership surveys. FT is Europe's leading
business title with 22% more readers than its nearest rival (Europe 2005);
UK readership is up 11% (NRS).
• Sales and profits broadly level at the FT's other business newspapers
and magazines in erratic advertising markets. Circulation up 2% at Les Echos
to 120,000, up 6% at FT Deutschland to 101,000, and growing beyond the one
million mark at The Economist.
• Continued cost actions at our business newspapers. FT Publishing cost
base now more than £160 million lower than it was four years ago.
INTERACTIVE DATA CORPORATION (NYSE:IDC)
• Underlying sales growth of 8% from customer wins and 95%+ renewal rate,
with profit growth of 23%.
• Successful integration of FutureSource into e-Signal, adding new
real-time futures, commodities and FX data.
• Special dividend of $0.80 per share announced in June (and paid after
the period end).
• IDC reported second-half results on 21 July 2005, available at
www.interactivedatacorp.com .
PENGUIN
• Strong first-half publishing performance, helped by shift in publishing
strategy towards the first half of the year.
• Record number of bestsellers in the US (79 New York Times bestsellers),
with strong showings in adult hardcover, adult paperback and young readers.
Successful focus on new imprints, including Steve Coll's 2005 Pulitzer
Prize-winning Ghost Wars from Penguin Press, and on homegrown talent with
close to 150 first-time authors published in the US.
• Good growth in the UK with great publishing, recovery of UK distribution
and benefit of comparison with a difficult first half of 2004. Strong growth
at Dorling Kindersley with more key titles published in the first half.
• £4m invested in actions to reduce Penguin's cost base.
• Launch of 'premium paperback' format in US as part of plans to tackle
industry-wide challenges in mass market segment (industry mass market sales
down a further 2% in first five months of 2005, according to the AAP). Six
major Penguin authors publishing new premium paperbacks in the second half.
• Good performance in children's books across the group, developing strong
best-selling brands such as Eoin Colfer's Artemis Fowl, Young Bond, Charlie
and the Chocolate Factory and US licences including The Little Engine That
Could and Atomic Betty.
• Second half publishing schedule includes new books from Patricia
Cornwell, Nora Roberts, Jan Karon, Amy Tan, Peggy Noonan, John Berendt,
Terry McMillan, Maureen Dowd, Billy Graham, JM Coetzee, Paul McCartney,
Jamie Oliver, Zadie Smith, Ryan Giggs, Ellen MacArthur and Gloria Hunniford.
ENDS
Except for the historical information contained herein, the matters discussed 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 2005
------------------------------ ------ -------- -------- --------
2005 2004 2004
all figures in £ millions note half half full
year year year
------------------------------ ------ -------- -------- --------
Continuing operations
Sales 2 1,613 1,481 3,696
Cost of goods sold (812) (747) (1,789)
------------------------------ ------ -------- -------- --------
Gross profit 801 734 1,907
Operating expenses (776) (730) (1,520)
Other net gains and losses 3 40 2 9
Share of results of joint ventures
and associates 8 3 8
------------------------------ ------ -------- -------- --------
Operating profit 2 73 9 404
Net finance costs 4 (25) (42) (79)
------------------------------ ------ -------- -------- --------
Profit / (loss) before tax 5 48 (33) 325
Income tax 6 (2) 11 (63)
------------------------------ ------ -------- -------- --------
Profit / (loss) for the period from
continuing operations 46 (22) 262
Discontinued operations
Profit for the period from
discontinued operations 8 300 13 22
------------------------------ ------ -------- -------- --------
Profit / (loss) for the period 346 (9) 284
Attributable to:
Equity holders of the parent
company 337 (20) 262
Minority interest 9 11 22
------------------------------ ------ -------- -------- --------
Earnings / (loss) per share from continuing and discontinued
operations
Basic 7 42.3p (2.5)p 32.9p
Diluted 7 42.2p (2.5)p 32.9p
Earnings / (loss) per share from continuing
operations
Basic 7 4.6p (3.8)p 30.8p
Diluted 7 4.6p (3.8)p 30.8p
The results are presented under IFRS and comparatives have been restated
accordingly (see note 1). None of the figures have been audited or reviewed.
Condensed consolidated statement of recognised income and expense
for the six months to 30 June 2005
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half year half year full year
------------------------------ -------- -------- --------
Exchange differences on translation of
foreign operations 257 (41) (206)
Exchange differences on net investment
hedges (80) - -
Actuarial (losses) / gains on defined
benefit pension schemes (31) 45 (58)
Taxation on items taken directly to equity - 2 9
------------------------------ -------- -------- --------
Net income / (expense) taken directly to
equity 146 6 (255)
Profit / (loss) for the financial period 346 (9) 284
------------------------------ -------- -------- --------
Total recognised income and expense for
the financial period 492 (3) 29
Attributable to:
Equity holders of the parent company 483 (14) 7
Minority interest 9 11 22
------------------------------ -------- -------- --------
Condensed consolidated balance sheet
as at 30 June 2005
------------------------------ ------ ------ -------- --------
2005 2004 2004
all figures in £ millions note half year half year full year
------------------------------ ------ ------ -------- --------
Non-current assets
Property, plant and equipment 359 344 355
Intangible assets 11 3,506 3,409 3,278
Investments in joint ventures and
associates 42 52 47
Deferred income tax assets 404 373 359
Derivative financial instruments 63 - -
Other financial assets 17 14 15
Other receivables 100 110 102
------------------------------ ------ ------ -------- --------
4,491 4,302 4,156
Current assets
Intangible assets - pre publication 402 358 356
Inventories 401 397 314
Trade and other receivables 1,003 994 933
Derivative financial instruments 49 - -
Cash and cash equivalents 810 645 461
------------------------------ ------ ------ -------- --------
2,665 2,394 2,064
Non-current assets classified as
held for sale - 344 358
------------------------------ ------ ------ -------- --------
Total assets 7,156 7,040 6,578
Non-current liabilities
Borrowings (1,832) (1,804) (1,714)
Derivative financial instruments (5) - -
Deferred income tax liabilities (148) (132) (139)
Retirement benefit obligations (436) (316) (408)
Provisions for other liabilities
and charges (35) (50) (43)
Other liabilities (139) (127) (99)
------------------------------ ------ ------- -------- --------
(2,595) (2,429) (2,403)
Current liabilities
Trade and other payables (779) (732) (868)
Borrowings (368) (688) (109)
Derivative financial instruments (15) - -
Current income tax liabilities (88) (52) (89)
Provisions for other liabilities
and charges (17) (16) (14)
------------------------------ ------ ------- -------- --------
(1,267) (1,488) (1,080)
Liabilities directly associated
with non-current assets classified
as held for sale - (77) (81)
------------------------------ ------ ------- -------- --------
Total liabilities (3,862) (3,994) (3,564)
------------------------------ ------ ------ -------- --------
Net assets 3,294 3,046 3,014
Share capital 201 201 201
Share premium 2,475 2,470 2,473
Reserves 472 175 126
------------------------------ ------ ------- -------- --------
Attributable to equity holders of
the parent company 3,148 2,846 2,800
Minority interest 146 200 214
------------------------------ ------ ------- -------- --------
Total equity 13 3,294 3,046 3,014
Condensed consolidated cash flow statement
for the six months to 30 June 2005
------------------------------ ------ -------- -------- --------
2005 2004 2004
All figures in £ millions note half year half year full year
------------------------------ ------ -------- -------- --------
Cash flows from operating
activities
Cash (used in) / generated from
operations 15 (155) (147) 524
Interest paid (55) (43) (98)
Tax paid (23) (29) (45)
------------------------------ ------ -------- -------- --------
Net cash (used in) / generated from
operations (233) (219) 381
Cash flows from investing
activities
Acquisition of subsidiary, net of
cash acquired (28) (13) (35)
Acquisition of joint ventures and
associates (4) (7) (10)
Purchase of property, plant and
equipment (PPE) (40) (50) (125)
Proceeds from sale of PPE 1 - 4
Purchase of intangible assets (3) - (1)
Disposal of subsidiary, net of cash
disposed 367 - 1
Disposal of joint ventures and
associates 54 - 24
Disposal of investments - 3 17
Interest received 10 7 13
Dividends received from joint
ventures and associates 1 1 12
------------------------------ ------ -------- -------- --------
Net cash generated from / (used in)
investing activities 358 (59) (100)
Cash flows from financing
activities
Proceeds from issue of ordinary
shares 2 1 4
Purchase of treasury shares (11) (2) (10)
Proceeds from borrowings 203 469 414
Liquid resources acquired - (1) (5)
Other borrowings - (2) 59
Repayment of borrowings (10) (43) (524)
Finance lease principal payments (1) (1) (2)
Dividends paid to Company's
shareholders (125) (119) (195)
Dividends paid to minority
interests - (1) (2)
------------------------------ ------ -------- -------- --------
Net cash generated from / (used in)
financing activities 58 301 (261)
Effects of exchange on cash and
cash equivalents 23 (13) (4)
------------------------------ ------ -------- -------- --------
Net increase in cash and cash
equivalents 206 10 16
Cash and cash equivalents at the
beginning of the period 544 528 528
------------------------------ ------ -------- -------- --------
Cash and cash equivalents at the
end of the period 750 538 544
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 2005
1. Basis of preparation
------------------------------ ------ -------- -------- --------
The condensed consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) and IFRIC
interpretations issued and effective or issued and early adopted as at 31 March
2005. The IFRS standards and IFRIC interpretations that will be applicable at 31
December 2005 are not known with certainty at the time of preparing these
condensed consolidated financial statements. The condensed consolidated
financial statements have been prepared under the historical cost convention as
modified by the revaluation of financial assets and liabilities (including
derivative instruments) at fair value through profit or loss from 1 January
2005.
The condensed consolidated financial statements have been prepared using the
accounting policies published by the Company on 30 June 2005 which are available
on the Company's website at www.pearson.com. The applied IFRS accounting
policies were selected by management considering all applicable International
Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB) by 31 March 2005. The policies comply with the amendment
to IAS 19 that was published in December 2004 which the Group expects to early
adopt in its first IFRS financial statements. The applied accounting policies
are also based on the Group's expectation of adopting IFRS 5 'Non-current Assets
Held for Sale and Discontinued Operations' retrospectively from 1 January 2003,
its date of transition to IFRS. IAS 39 'Financial Instruments: Recognition and
Measurement' and IAS 32 'Financial Instruments: Disclosure and Presentation'
have not been applied to the six months ended 30 June 2004 or the 12 months
ended 31 December 2004 because the Group has taken a transitional exemption and
adopted those standards prospectively from 1 January 2005. It should be noted
that these policies may be subject to revision to reflect further IFRS
standards, interpretations and pronouncements.
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 published by the Company on 30 June
2005 which are available on the Company's website as noted above.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
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.
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half year half year full year
------------------------------ -------- -------- --------
Sales
School 518 444 1,087
Higher Education 192 186 729
Professional 243 220 507
------------------------------ -------- -------- --------
Pearson Education 953 850 2,323
FT Publishing 164 160 318
IDC 143 130 269
------------------------------ -------- -------- --------
FT Group 307 290 587
Penguin 353 341 786
------------------------------ -------- -------- --------
Total sales 1,613 1,481 3,696
Adjusted operating profit / (loss)
School 15 3 108
Higher Education (45) (42) 129
Professional 8 6 40
------------------------------ -------- -------- --------
Pearson Education (22) (33) 277
FT Publishing 6 2 4
IDC 36 29 62
------------------------------ -------- -------- --------
FT Group 42 31 66
Penguin 13 9 52
------------------------------ -------- -------- --------
Adjusted operating profit - continuing
operations 33 7 395
Adjusted operating profit - discontinued
operations (3) 17 26
------------------------------ -------- -------- --------
Total adjusted operating profit 30 24 421
Adjusted operating profit - continuing
operations 33 7 395
Other gains and losses 40 2 9
------------------------------ -------- -------- --------
Operating profit 73 9 404
Net finance costs (25) (42) (79)
------------------------------ -------- -------- --------
Profit / (loss) before tax 48 (33) 325
Income tax (2) 11 (63)
------------------------------ -------- -------- --------
Profit / (loss) for the period from
continuing operations 46 (22) 262
Discontinued operations 300 13 22
------------------------------ -------- -------- --------
Profit / (loss) for the period 346 (9) 284
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 2005
3. Other net gains and losses
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half year half year full year
------------------------------ -------- -------- --------
Profit on sale of interest in MarketWatch 40 - -
Other - 2 9
------------------------------ -------- -------- --------
Total other net gains and losses 40 2 9
Other net gains and losses represent profits and losses on the sale of
subsidiaries, joint ventures, associates and investments that are included
within continuing operations.
4. Net finance costs
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- --------
Net interest payable (35) (39) (74)
Finance cost re employee benefits (4) (3) (5)
Net foreign exchange gains 10 - -
Other gains on financial instruments in a hedging
relationship:
- fair value hedges 1 - -
- net investment hedges 2 - -
Other gains / (losses) on financial instruments not
in a hedging relationship:
- amortisation of transitional
adjustment on bonds 5 - -
- derivatives (4) - -
------------------------------ ------ -------- -------- --------
Total net finance costs (25) (42) (79)
Analysed as:
Net interest payable (35) (39) (74)
Finance cost re employee benefits (4) (3) (5)
------------------------------ ------ -------- -------- --------
Net finance cost reflected in adjusted
earnings (39) (42) (79)
Other net finance income 14 - -
------------------------------ ------ -------- -------- --------
Total net finance costs (25) (42) (79)
Fair value gains and losses on financial instruments are analysed between 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 (see note 16).
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
5. Profit / (loss) before tax
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- --------
Profit / (loss) before tax 48 (33) 325
Add back: other gains and losses (40) (2) (9)
Add back: other finance income (see note 4) (14) - -
------------------------------ -------- -------- --------
Adjusted profit / (loss) before tax -
continuing operations (6) (35) 316
Adjusted profit / (loss) before tax -
discontinued operations (3) 19 29
------------------------------ -------- -------- --------
Total adjusted profit / (loss) before tax (9) (16) 345
Included within profit / loss before tax are charges relating to share based
payments of £11m (2004 half year: £11m, 2004 full year £25m), post retirement
benefits £35m (2004 half year: £30m, 2004 full year £64m) and intangible
amortisation £3m (2004 half year: £2m, 2004 full year £5m).
6. Taxation
------------------------------ -------- -------- --------
Income tax is recognised in these condensed consolidated financial statements at
the rate of 32.0% of adjusted profit before tax for the six months ended 30 June
2005. This is management's best estimate of the rate expected for the full
financial year.
------------------------------ -------- ------- --------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- --------
Income tax (charge) / benefit (2) 11 (63)
Add back: tax benefit on other gains
and losses - - (36)
Add back: tax charge on other finance
income 4 - -
---------------------------------- -------- -------- --------
Adjusted income tax benefit / (charge)
- continuing operations 2 11 (99)
Adjusted income tax benefit / (charge)
- discontinued operations 1 (6) (7)
---------------------------------- -------- -------- --------
Total adjusted income tax benefit /
(charge) 3 5 (106)
Tax rate reflected in adjusted earnings 32.0% 31.3% 30.7%
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
7. Earnings / (loss) per share
------------------------------ -------- -------- --------
Basic earnings per share is calculated by dividing the profit attributable to
equity holders of the parent 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.
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- --------
Earnings / (loss) 337 (20) 262
Adjustments to exclude profit for the period from
discontinued operations:
Profit for the period from discontinued
operations (300) (13) (22)
Minority interest share of above items - 3 5
------------------------------ -------- -------- --------
Earnings / (loss) - continuing
operations 37 (30) 245
Earnings / (loss) 337 (20) 262
Adjustments:
Other gains and losses (40) (2) (9)
Profit on sale of discontinued
operations (see note 8) (304) - -
Other finance income (14) - -
Taxation on above items 6 - (36)
Minority interest share of above items - - -
------------------------------ -------- -------- --------
Adjusted (loss) / earnings (15) (22) 217
Weighted average number of shares (millions) 797.0 795.4 795.6
Effect of dilutive share options 1.0 - 1.1
Weighted average number of shares
(millions) for diluted earnings / (loss) 798.0 795.4 796.7
Earnings / (loss) per share from continuing and discontinued
operations
Basic 42.3p (2.5)p 32.9p
Diluted 42.2p (2.5)p 32.9p
Earnings / (loss) per share from continuing
operations
Basic 4.6p (3.8)p 30.8p
Diluted 4.6p (3.8)p 30.8p
Adjusted (loss) / earnings per share (1.9)p (2.8)p 27.3p
Where the Group has made a loss for the financial period the effect of share
options is anti-dilutive and there is no difference between the loss per share
and the diluted loss per share.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
8. Discontinued operations
------------------------------
In April 2005, Pearson closed the sale of its 79% interest in Recoletos Grupo de
Communicacion S.A. to Retos Cartera, a consortium of investors, for net cash
proceeds of £372m. The transaction became unconditional on approval from the
Spanish regulatory authorities in February 2005. The results of Recoletos have
been consolidated for the period to 28 February 2005 and are included in profit
from discontinued operations shown in the table below. The related assets and
liabilities have been classified as held for sale in the comparative periods.
------------------------------ -------- -------- --------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- --------
Sales 27 90 190
Operating (loss) / profit (3) 17 26
Net finance income - 2 3
------------------------------ -------- -------- --------
Profit before tax (3) 19 29
Attributable tax benefit / (expense) 1 (6) (7)
Profit on disposal of discontinued
operations 304 - -
Attributable tax expense (2) - -
------------------------------ -------- -------- --------
Profit for the period from discontinued
operations 300 13 22
9. Dividends
------------------------------ --------- -------- --------
2005 2004 2004
all figures in £ millions half year half year full year
------------------------------ --------- -------- --------
Amounts recognised as distributions to
equity holders in the period 125 119 195
The directors have declared an interim dividend of 10.0p per equity share,
payable on 23 September 2005 to shareholders on the register at the close of
business on 26 August 2005. This dividend has not been included as a liability
as at 30 June 2005.
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:
------------------------------ -------- --------- ----------
2005 2004 2004
half year half year full year
------------------------------ -------- --------- ----------
Average rate for profits 1.87 1.82 1.83
Period end rate 1.79 1.81 1.92
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
11. Intangibles
------------------------------ -------- -------- -------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- -------
Goodwill 3,385 3,301 3,160
Other intangibles 121 108 118
------------------------------ -------- -------- -------
Total intangibles 3,506 3,409 3,278
12. Net debt
------------------------------ -------- -------- -------
2005 2004 2004
all figures in £ millions half half full
year year year
------------------------------ -------- -------- -------
Non current assets
Derivative financial instruments 63 - -
Current assets
Derivative financial instruments 49 - -
Cash and cash equivalents 810 645 461
Non current liabilities
Borrowings (1,832) (1,804) (1,714)
Derivative financial instruments (5) - -
Current liabilities
Borrowings (368) (688) (109)
Derivative financial instruments (15) - -
------------------------------ -------- -------- -------
Net debt - continuing operations (1,298) (1,847) (1,362)
Net cash classified as held for sale - 100 141
------------------------------ -------- -------- -------
Total net debt (1,298) (1,747) (1,221)
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
13. Reconciliation of movements in equity
---------------------------------- -------- -------- ------
2005 2004 2004
all figures in £ millions half half full
year year year
---------------------------------- -------- -------- ------
Attributable to equity holders of the
parent
Total recognised income and expense for
the period 483 (14) 7
Share-based payment charges 11 11 25
Shares issued 2 1 4
Treasury shares purchased (11) (2) (10)
Dividends to equity holders of the
parent company (125) (119) (195)
---------------------------------- -------- -------- ------
Net movement for the period 360 (123) (169)
Attributable to equity holders of the
parent at the beginning of the period 2,800 2,969 2,969
Transition adjustment on adoption of
IAS 39 (see note 16) (12) - -
---------------------------------- -------- -------- ------
Attributable to equity holders of the
parent at the end of the period 3,148 2,846 2,800
Minority interests 146 200 214
---------------------------------- --------- -------- -----
Total equity 3,294 3,046 3,014
14. Post balance sheet events
----------------------------------
In June 2005, Pearson announced the acquisition of AGS Publishing from WRC Media
for $270m in cash. The acquisition completed on 22 July 2005 and has not been
accounted for at 30 June 2005.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
15. Cash flows
------------------------------ ------ -------- -------- --------
2005 2004 2004
all figures in £ millions half year half year full year
------------------------------ ------ -------- -------- --------
Reconciliation of profit / (loss) for the period to cash (used in) / generated
from operations
Profit / (loss) for the period 346 (9) 284
Income tax 3 (5) 70
Net finance costs 25 40 76
Other gains and losses (344) (2) (8)
Share of results of joint ventures
and associates (8) (3) (8)
Depreciation and amortisation charges 54 52 108
Equity settled share based payments 11 11 25
Increase in intangible assets - pre
publication (25) (19) (13)
Increase in inventory (70) (67) (14)
Increase in receivables (31) (64) (18)
(Decrease) / increase in payables (104) (71) 61
Decrease in provisions (14) (11) (24)
Other and non-cash items 2 1 (15)
------------------------------ ------ -------- -------- --------
Cash (used in) / generated from
operations (155) (147) 524
Dividends from joint ventures and
associates 1 1 12
Net purchase of PPE including finance
lease principal payments (40) (51) (123)
Purchase of intangibles (3) - -
Add back: Cash spent against
integration and fair value provisions 1 2 5
------------------------------ ------ -------- -------- --------
Pearson operating cash flow (196) (195) 418
Operating tax paid (23) (25) (55)
Operating finance charges paid (34) (36) (85)
------------------------------ ------ -------- -------- --------
Operating free cash flow (253) (256) 278
Non operating tax (paid) / received - (4) 10
Non operating finance charges paid (11) - -
Integration and fair value spend (1) (2) (4)
------------------------------ ------ -------- -------- --------
Total free cash flow (265) (262) 284
Dividends paid (including minorities) (125) (120) (197)
------------------------------ ------ -------- -------- --------
Net movement of funds from operations (390) (382) 87
Acquisitions of businesses and
investments (32) (20) (46)
Disposals of businesses, investments
and property 422 3 42
New equity 2 1 4
Purchase of treasury shares (11) (2) (10)
Other non operating items (1) - 3
------------------------------ ------ -------- -------- --------
Net movement of funds (10) (400) 80
Fair value and exchange movements on
net debt (67) 29 75
------------------------------ ------ -------- -------- --------
Total movement in net debt (77) (371) 155
Included in net cash (used in) / generated from operations is an amount of £(6)m
(2004 half year: £(3)m, 2004 full year £24m) relating to 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. Tax
payments and receipts that can be clearly identified with disposals, integration
and exchange differences taken to reserves are allocated as non operating tax
payments and receipts.
Notes to the condensed consolidated financial statements continued
for the six months to 30 June 2005
16. Explanation of transition to IFRS
------------------------------ ------ -------- -------- --------
Reconciliations, including explanations, from UK GAAP to IFRS of the condensed
consolidated balance sheet as at 1 January 2003 (the date of transition to
IFRS), 31 December 2003, 30 June 2004 and 31 December 2004 (the date of the last
UK GAAP financial statements) together with the reconciliations of the condensed
consolidated income statement, the condensed consolidated cash flow statement
and the condensed consolidated statement of recognised income and expense for
the years to 31 December 2003 and 31 December 2004 and the six months to 30 June
2004 have been published on the Company'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 to
the six months ended 30 June 2004 or the 12 months ended 31 December 2004
because the Group has taken a transitional exemption and adopted those standards
prospectively from 1 January 2005. The accounting policy in respect of financial
instruments, as applied from 1 January 2005, is as follows:
Derivatives are initially recognised at fair value on the date a derivative is
entered into and are subsequently re-measured at their fair value. The Group
designates certain of the derivative instruments within its portfolio to be
hedges of the fair value of recognised assets or liabilities or a firm
commitment (fair value hedges) or hedges of net investments in foreign
operations (net investment hedges). All income statement movements have been
disclosed within net finance costs.
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
The effective portion of changes in the fair value of derivatives that are
designated and qualify as net investment hedges are recognised in equity. Gains
or losses relating the ineffective portion are recognised immediately in the
income statement. Certain derivatives do not qualify or are not designated as
hedging instruments. Such derivatives are classified at fair value and any
movement in their fair values is recognised in the income statement immediately.
The effect of the transitional adjustment on the balance sheet as at 1 January
2005 is as follows:
------------------------------ -------- ----------- -----------
1 January Transition 31 December
All figures in £ millions 2005 Adjustment 2004
------------------------------ -------- ----------- -----------
Non-current assets
Derivative financial instruments 79 79 -
Deferred income tax assets 364 5 359
------------------------------ -------- --------- ---------
Current assets
Derivative financial instruments 67 67 -
------------------------------ -------- --------- ---------
Non-current liabilities
Borrowings (1,848) (134) (1,714)
Derivative financial instruments (12) (12) -
------------------------------ -------- --------- ---------
Current liabilities
Trade and other payables (854) 14 (868)
Borrowings (109) - (109)
Derivative financial instruments (31) (31) -
------------------------------ -------- --------- ---------
Reserves (114) 12 (126)
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