UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2008
PEARSON plc
(Exact name of registrant as specified in its charter)
N/A
(Translation of registrant's name into English)
80 Strand
London, England WC2R 0RL
44-20-7010-2000
(Address of principal executive office)
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F X Form 40-F
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X
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This Report includes the following document:
1. A press release from Pearson plc announcing Final Results
--------------------------------------------------------------------------------
3 March 2008
PEARSON 2007 PRELIMINARY RESULTS
Record profits, earnings, cash and dividends. Adjusted operating profit up 14%
to GBP634m; adjusted earnings per share up 8% to 46.7p (up 15% at constant
exchange rates); operating free cash flow up 23% to GBP533m; dividend up 7.8% to
31.6p.
Faster growth. Underlying sales growth of 6%, with strong competitive
performances and every business growing at or above 2006 levels.
Higher margins and returns. Margins up 1.1% points to 15.0% with substantial
progress at School (up 0.6% pts), Penguin (up 0.9%pts), Interactive Data (up
1.4% pts) and FT Publishing (up 6.7% pts). Return on invested capital up 0.2%
points to 8.2% (a 1.0% point underlying improvement).
All-round progress. Strong profit growth in all continuing businesses: Education
up 9% to GBP404m; Penguin up 20% to GBP74m; FT Group up 30% to GBP153m.
Sustained growth. Good start to 2008; further financial progress expected in all
businesses.
Marjorie Scardino, chief executive, said: "This is another record set of results
and an excellent performance from every part of Pearson. We continue to reshape
Pearson into a more digital, more international and more efficient company, and
those changes make us confident that 2008 will be another good year."
GBP millions 2007 2006 Headline growth Underlying growth
-------------------- --------- --------- --------- ---------
Business performance
Sales 4,218 4,051 4% 6%
Adjusted operating 634 592 7% 14%
profit
Adjusted profit before 549 502 9% --
tax
Adjusted earnings per
share 46.7p 43.1p* 8% --
Operating cash flow 684 575 19% --
Operating free cash flow 533 434 23% --
Return on invested 8.2% 8.0% 0.2 ppts 1.0 ppts
capital
Net Debt 973 1,059 (8)% --
-------------------- --------- --------- --------- ---------
Statutory results
Sales 4,162 3,990 4%
Operating profit 574 522 10% --
Profit before tax 468 448 4% --
Basic earnings per share
- continuing 39.0p 52.7p (26)% --
Cash generated from
operations 659 621 6% --
-------------------- --------- --------- --------- ---------
Dividend per share 31.6p 29.3p 7.8% --
-------------------- --------- --------- --------- ---------
*Restated for tax deductibility of goodwill amortisation of 2.9p
Growth rates are stated on an underlying basis (i.e. excluding currency
movements and portfolio changes) unless otherwise stated. The 'business
performance' measures are non-GAAP measures and reconciliations to the
equivalent statutory heading under IFRS are included in notes 2, 7 and 17 to the
attached financial statements.
2007 OVERVIEW
In 2007, Pearson's sales increased by 6% to GBP4.2bn and adjusted operating
profit by 14% to a record GBP634m. Every part of Pearson contributed to this
profit increase, with adjusted operating profit at Pearson Education up 9%,
Penguin up 20% and the FT Group up 30%. Headline earnings per share were 46.7p,
up 8% (and up 15% at constant currency). Currency movements reduced adjusted
sales by GBP228m, adjusted operating profit by GBP37m and adjusted earnings per
share by 2.7p.
We also produced record cash flows. Operating cash flow increased by 19% or
GBP109m to GBP684m and operating free cash flow by GBP99m to GBP533m. Cash
conversion was once again very strong at 108% of operating profit. Over the past
three years, the proportion of our profits converted to cash has averaged more
than 100%. The ratio of average working capital to sales at Pearson Education
and Penguin improved by a further 0.7% points to 25.6%. Our return on invested
capital shows a headline increase of 0.2% points (to 8.2%) and a 1.0% point
underlying improvement.
Statutory results show an increase of GBP52m in operating profit to GBP574m
(GBP522m in 2006). Basic earnings per share for continuing businesses were 39.0p
in 2007 against 52.7p in 2006, largely reflecting the absence of a 2006 tax
credit. Net debt was GBP86m lower at GBP973m (from GBP1,059m in 2006).
Acquisitions. In 2007, we announced the acquisitions of Harcourt's US assessment
and international education businesses, eCollege, and several small companies
which extend our worldwide leadership positions. Our total investment in
acquisitions completed in 2007 was GBP472m and acquisitions added GBP90m of
sales and GBP13m of operating profit to our 2007 results (after integration
costs, which are expensed). The acquisition of Harcourt's US assessment
business, announced in May 2007, was completed in January 2008 after clearance
from the US regulatory authorities and therefore had no impact on the 2007
results.
Disposals. In February 2007 we completed the sale of our Government Solutions
business to Veritas Capital for $560m in cash, $40m in preferred stock and a 10%
interest in the company. In December 2007 we completed the sale of Les Echos to
LVMH for EUR240m in cash and in January 2008 we announced the disposal of our
50% stake in FT Deutschland to Gruner + Jahr. In February 2008, we sold our Data
Management (Scanners) business to M & F Worldwide Corp for $225m.
Dividend. The board is proposing a dividend increase of 7.8% to 31.6p. Subject
to shareholder approval, 2007 will be Pearson's 16th straight year of increasing
our dividend above the rate of inflation. Over the last ten years we have
increased our dividend at a compound annual rate of 6.1%.
Our financial goals. Pearson's three key financial measures are adjusted
earnings per share, free cash flow and return on invested capital. We use these
measures to drive performance and to align our plans and targets with the
interests of shareholders. Our five-year record on these goals is:
2003 2004 2005 2006 2007
Adjusted earning per share 27.6p* 27.5p* 34.1p* 43.1p 46.7p
Operating cash flow GBP318m GBP418m GBP570m GBP575m GBP684m
Return on invested capital 6.0% 6.2% 6.7% 8.0% 8.2%
* As reported (before restatement for tax deductibility of goodwill
amortisation).
OUTLOOK
In recent years we have significantly changed the shape of Pearson, building and
diversifying our education company, shifting our financial information
businesses towards recurring revenue streams and becoming more efficient through
a centralised operations organisation. These moves have made Pearson a more
profitable, more cash generative and more resilient company, and we expect to
make further progress on our financial goals in 2008.
At this early stage, our outlook for 2008 is:
- In Education (64% of 2007 sales and operating profit), we expect
another year of good profit growth, benefiting once again from the unique
breadth of our education business - from pre-school to adult learning; across
publishing, testing and technology; and in the US and around the world.
In our School business, integration of our recently-acquired Harcourt businesses
is progressing well. In 2008, we expect School margins to be similar to 2007,
after expensing integration costs relating to the acquisition. In 2009, we
expect School margins to rise to around 15% as the majority of the integration
costs fall away and as we realise the financial benefits of the acquisition.
Including the Harcourt contribution, we expect our School business to grow sales
well into double digits in 2008 at constant currency. Excluding Harcourt, we
expect underlying sales growth in the low single digits, as US market growth of
3-4% is partly offset by our lower participation rate in new US adoptions and
the conclusion of our UK key stage testing contract.
In Higher Education, we expect our underlying sales to grow in the mid single
digits, a little ahead of the industry. We expect margins to be stable, as we
continue to invest in expanding our adaptive learning technologies and in taking
our recently-acquired eCollege platform into new segments and geographic
markets.
In Professional, we expect sales to increase in the low single digits in
underlying terms with underlying margins improving once again.
- Penguin (20% of sales; 12% of operating profit) expects to improve
margins further and into double digits. Penguin's good publishing and trading
performance has continued into the early part of 2008.
- The Financial Times Group (16% of sales; 24% of operating profit)
expects to continue its profit growth. We have substantially increased our
digital and subscription revenues and reduced our exposure to print advertising
in recent years (in 2007, digital services accounted for 63% of FT Group
revenues, compared with 28% in 2000; advertising accounted for 30% of FT Group
revenues, down from 52% in 2000). At FT Publishing, advertising revenues have
continued to grow in the early part of the year, but future advertising trends
remain difficult to predict. However, as a result of our revenue diversification
and cost actions we expect further profit improvement at FT Publishing this
year, even without any growth in advertising revenues. Interactive Data expects
to achieve revenue growth in the 7-9% range and operating profit growth in the
9-11% range (headline growth under US GAAP).
Interest and Tax. We expect our interest charge to be similar to that in 2007
with the higher level of net debt following the completion of the Harcourt
transaction offset by strong cash generation and the recent proceeds from the
disposals of Les Echos and Data Management (Scanners). Our pension credit will
remain at a similar level to 2007, despite an upward revision to life expectancy
assumptions. We expect our effective tax rate to be in the 27-29% range.
Exchange rates. Pearson generates approximately 60% of its sales in the US and
each five cent change in the average GBP:$ exchange rate for the full year
(which in 2007 was GBP1:$2.00) would have an impact of approximately 1p on
adjusted earnings per share.
For more information:
Luke Swanson / Simon Mays-Smith/ Charles Goldsmith + 44 (0) 20 7010 2310
Pearson's results presentation for investors and analysts will be webcast live
today from 09.00 (GMT) and available for replay from 12.00 (GMT) via
www.pearson.com.
We are holding a conference call for US investors at 15.00 (GMT) / 10.00 (EST).
To participate please dial in on + 1 866 966 5335 (inside the US) or +44 (0)203
003 2666 (outside the US). The call will be available for replay at
www.pearson.com
Video interviews with Marjorie Scardino and Robin Freestone are available at
www.pearson.com high resolution photographs are available for the media at
www.newscast.co.uk
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed in
this Preliminary Statement include forward-looking statements. In particular,
all statements that express forecasts, expectations and projections with respect
to future matters, including trends in results of operations, margins, growth
rates, overall market trends, the impact of interest or exchange rates, the
availability of financing, anticipated costs savings and synergies and the
execution of Pearson's strategy, are forward looking statements. By their
nature, forward looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that will occur in future. There
are a number of factors which could cause actual results and developments to
differ materially from those expressed or implied by these forward looking
statements, including a number of factors outside Pearson's control. These
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. Any forward looking statements speak only as of the
date they are made, and Pearson gives no undertaking to update forward-looking
statements to reflect any changes in its expectations with regard thereto or any
changes to events, conditions or circumstances on which any such statement is
based.
BUSINESS PERFORMANCE
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales
School 1,537 1,455 6% 6%
Higher Education 793 795 0% 5%
Professional* 354 341 4% 9%
Pearson Education 2,684 2,591 4% 6%
FT Publishing 344 280 23% 12%
Interactive Data 344 332 4% 8%
FT Group 688 612 12% 10%
Penguin 846 848 0% 3%
-------------- ----------- ----------- ----------- -----------
Total 4,218 4,051 4% 6%
-------------- ----------- ----------- ----------- -----------
Adjusted operating profit
School 203 184 10% 11%
Higher Education 161 161 0% 5%
Professional* 40 38 5% 11%
Pearson Education 404 383 5% 9%
FT publishing 56 27 107% 85%
Interactive Data 97 89 9% 13%
FT Group 153 116 32% 30%
Penguin 74 66 12% 20%
-------------- ----------- ----------- ----------- -----------
Total 631 565 12% 14%
Discontinued 3 27
-------------- ----------- ----------- ----------- -----------
Total 634 592 7% 14%
-------------- ----------- ----------- ----------- -----------
*Professional includes Data Management (Scanners) for both years. It is reported
as discontinued for statutory purposes. In 2007, the Data Management business
contributed GBP56m of sales and GBP12m of operating profit to Pearson.
SCHOOL
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 1,537 1,455 6% 6%
Adjusted operating profit 203 184 10% 11%
-------------- ----------- ----------- ----------- -----------
- Record sales (up 6%) and profits (up 11%)
- Margins up by 0.6% points to 13.2%
Continued share gains in school publishing
- Pearson US School publishing up 3.5%, against industry growth of 2.7%
(source: Association of American Publishers), as we benefit from our sustained
investment in new basal programmes and innovative digital services.
- Faster underlying growth in international school publishing, with
continued margin improvement.
- Pearson takes a leading share of the new US adoption market: 30% of
the total market and 31% where we competed. #1 or #2 market share in reading,
maths, science and social studies. Total 2007 new adoption opportunity of
approximately $830m, up from $670m in 2006.
- US School new adoption market expected to remain strong over the next
three years (estimated at $900m in '08; $860m in '09; and more than $1bn in
'10). In 2008 we are competing for around 90% of the total new adoption
opportunity.
- Acquisition of Harcourt International brings leading content for
school and vocational customers in many markets including the UK, South Africa,
Australia and New Zealand. Transaction adds further scale to Pearson's
international education businesses and accelerates the combination of
educational content and innovative technology to personalise learning.
Integration of the Harcourt business is progressing well.
- Major cross company global English, maths and science projects
launched, with the aim of sharing assets, expertise, investment and technology
across all major international markets.
- Successful global ELT publishing franchises in every major market
segment - primary, secondary, adult, business and exam preparation - drives
strong growth worldwide. Sales of student editions of English Adventure,
developed with Disney, top six million units in less than three years; Economist
and FT branded courses also performing strongly with major launch of Penguin
Readers planned for this year.
- Strong performance from school publishing businesses in South Africa
and Australia; in Italy, integration of Pearson Paravia Bruno Mondadori
complete, producing integration savings, margin improvement and market share
gains; strong organic growth in Spanish language school publishing.
Innovation in school technology
- 13 product nominations in 10 categories, more than any other education
company, for the Software and Information Industry Association 'Codie' awards.
The products include: PASeries, the first formative assessment product designed
to measure progress and forecast student growth toward state goals or grade
level expectations; Pearson Inform 4.1, a K-12 data analysis and decision
support tool; PowerSchool Premier, a student information system that provides
access to student information, enabling data-driven decisions that enhance
student learning; and eCollege, an on-demand distance learning platform.
- Continued investment in digital programmes both for basal adoption and
for special populations, including NovaNet and SuccessMaker. Pre-publication
expenditure for digital programmes growing as a proportion of total
pre-publication expenditure.
- enVision Math, our new integrated print-and-digital elementary maths
programme (and the next generation of our successful California Social Studies
programme), successfully launched for the 2008 adoption campaign. In 2008, maths
accounts for approximately one-third of the total new adoption opportunity.
Strong growth and share gains in school testing
- US School testing sales up in double digits (after high single digit
growth in 2006), benefiting from further contract wins, market share gains and
strength in online assessment.
- 2.5 million secure online tests delivered across 13 states during the
year, up from 1.4 million in 2006.
- Acquisition of Harcourt Assessment complements our existing assessment
business, broadens our scale and reach in adjacent markets and creates new
publishing and digital opportunities both in the US and around the world.
- In the UK, we marked a total of 9.6 million GCSE, AS and A-level exam
scripts, 4.6 million of which were marked on-screen. ResultsPlus rolled out
across the UK and internationally providing more than 2,250 schools with secure
online access to question-level examination performance data on exam results day
for the first time. More than 100,000 students access their results online on
results day for the first time.
HIGHER EDUCATION
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 793 795 0% 5%
Adjusted operating profit 161 161 0% 5%
-------------- ----------- ----------- ----------- -----------
- Sales and profits up 5%.
- US Higher Education up 6%, ahead of the industry for the ninth
straight year.
- Steady growth and good profit improvement in international higher
education.
Rapid growth in online learning and custom publishing
- Investment in established and new author franchises, such as Campbell
's Biology, Kotler's Marketing Management, Hubbard's Economics and Cicarrelli's
Psychology, continues to underpin the strong performance of our higher education
business.
- 'MyLab' digital homework and assessment programmes launched in 22 new
subject disciplines in 2007, increasing the total number of disciplines covered
to 38. These programmes support over 2,000 textbooks and were used globally by
2.9m students in 2007 (up more than 30% on 2006). Evaluation studies show that
the use of the MyLab programmes can significantly improve student test scores
and instructional productivity.
- In corporate finance, one of the largest global markets in business
education, Pearson publishes the successful first edition bestseller, Berk/
DeMarzo's Corporate Finance, together with MyFinanceLab. Pearson's market share
increases from 4% to 11% in the US and from 39% to 48% in the UK. It is the most
successful launch of a first edition in this discipline in more than a decade
and one of Pearson's most successful global launches ever, winning university
adoptions in 22 countries. In World History, the first edition of
Fernandez-Armesto's The World: A History with MyHistoryLab increases Pearson's
market share from 25% to 35%.
- Acquisition of eCollege builds Pearson's position as an education
services provider. eCollege works with partner educational institutions to
design, build and support online degree, certificate, diploma and professional
development programmes. Student enrolments increase 44% in 2007 to 1.9m.
eCollege broadens Pearson's services to academic institutions; Pearson's scale
and reach enable eCollege to access new customers in the school, post-secondary
and professional/vocational markets both in the US and worldwide.
- Pearson is the largest publisher on CourseSmart.com, a joint venture
of the largest US education textbook publishers with over 2,500 titles.
CourseSmart.com provides cost effective ebooks to students and time-efficient
review of textbooks for professors.
- Continued strong double digit growth in our custom solutions business
- which builds customised textbooks and online services and has become a leader
in the creation of courseware and curriculum for e-learning institutions.
Good progress in international markets
- In Europe, good revenue growth and strong margin improvement as
organic and acquisition investment in international education continues to bear
fruit. Particular areas of strength included local language editions of our
major authors and custom publishing including the successful launch of "local
language" science publishing in Germany.
- Major programme of adapting/versioning "MyLab" and "Mastering"
technology platforms for international markets. MyLab programmes now being used
internationally in almost 50 countries, with almost 160,000 student
registrations for online courses in Europe, the Middle East & Africa.
PROFESSIONAL
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 354 341 4% 9%
Adjusted operating profit 40 38 5% 11%
-------------- ----------- ----------- ----------- -----------
Note: excludes Government Solutions and includes Data Management (Scanners).
- Rapid sales growth driven by professional testing and publishing
- Sales up 9%; profits up 11%; margins up by 0.2% points to 11.3%
- With the sale of Government Solutions in 2007 and Data Management in
2008, our Professional business is focused on publishing for professionals in
business and technology, and on testing and certifying adults to be
professionals.
Professional Testing: rapid organic sales and profit growth
- Professional Testing sales up 14% in 2007. Approximately 5.8m secure
online tests delivered in more than 5,000 test centres worldwide in 2007.
- Strong margin improvement as test volumes rise, driven by higher
demand from existing customers such as GMAC (for business school applicants),
NCLEX (for nurses) and the DSA/DVTA driving theory test. Good new contract
performance, including the American Board of Internal Medicine and the National
Association Boards of Pharmacy; and strong renewals, including the Institute of
Financial Services and the American Registry of Radiological Technologists.
Professional publishing: good sales growth and further margin improvement
- Technology Publishing achieves good sales growth and significantly
improved profitability, benefiting from a focused and refreshed front list, a
favourable software release schedule and Safari Books Online, our electronic
publishing platform (a joint venture with O'Reilly Media). Scott Kelby, a
Peachpit author, is the top-selling US computer book author for the fourth
consecutive year with titles including The iPod Book; The Digital Photography
Book; and The Adobe Photoshop Lightroom Book for Digital Photographers.
- Strong performance in Europe, helped by success of publishing for the
new Windows Vista launch; a new partnership with Microsoft Press in the
Netherlands; and a successful move into digital publishing and training in
Germany.
- Strong performance from business imprints Wharton School Publishing
and FTPress, aided by Pearson's global distribution and strong retail
relationships. Wharton School Publishing recognised on the Amazon.com Best
Business Books of 2007 with We Are Smarter Than Me: How to Unleash the Power of
Crowds in Your Business , by Barry Libert and Jon Spector, and Firms of
Endearment: How World-Class Companies Profit from Passion and Purpose, by
Rajendra S. Sisodia, David B. Wolfe and Jaqdish N. Sheth.
Data Management (Scanners): sale completed 22 February 2008
- Sale of Data Management to M & F Worldwide Corp. for $225m. Data
Management contributed $112m of sales and $25m of operating profit to Pearson in
2007.
FT PUBLISHING
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 344 280 23% 12%
Adjusted operating profit 56 27 107% 85%
-------------- ----------- ----------- ----------- -----------
Note: excludes Les Echos, sold in December 2007.
- Sales up 12%; profits up 85%
- Margins up by 6.7% points to 16.3%
Great publishing, continued growth and significant margin improvement
- FT Publishing revenues up 12% (advertising revenues up 10%) with
operating profit more than doubling to GBP56m in headline terms.
- Outstanding year at the Financial Times:
* FT newspaper circulation up 2% to almost 440,000 (for the July-December
2007 ABC period), with a 19% increase in subscriptions;
* Digital subscribers to the FT up 13% to 101,000; monthly unique users up
30% to 5.7m; monthly page views up 33% to 48.2m;
* FT.com attracts 150,000 new registered users since launch of its
innovative new access model in October 2007; strong growth continues in the
early part of 2008.
* FT named Newspaper of the Year at the 2007 What the Papers Say Awards.
- Strong trading performance at FT Business as integration with the FT
Newspaper helps to generate additional revenue and reduce costs.
- The Economist, in which Pearson owns a 50% stake, increases its
circulation by 9% to 1.3m (for the July-December 2007 ABC period).
Continued shift towards global digital businesses and subscription revenues
- Strong contribution from Mergermarket: rapid revenue growth with 90%+
subscription renewal rates and a series of new product launches around the world
including Pharmawire, DebtWire in Asia Pacific and dealReporter in Emerging
Europe, Middle East and Africa.
- FTSE, in which Pearson owns a 50% stake, achieves double digit sales
growth, benefiting from a strong new business performance, a joint venture with
Xinhua Finance in China and strong growth in Exchange Traded Fund (ETF)
licenses.
- Several small acquisitions of complementary subscription-based and
digital businesses:
* Infinata, a provider of research and business information to life science
and financial services companies. The company's products, which include
BioPharm Insight and HNW Insight, provide clients with comprehensive, timely
information used to make strategic and tactical business decisions.
* Exec-Appointments, a well-established global job site that focuses on the
high-earning executive sector with approximately 200,000 registered
executive users.
* Money-Media, acquired in January 2008, a provider of must-have news and
analysis via email and websites to US mutual fund managers, institutional
investors, high net-worth individuals, company directors and advisers.
Approximately two-thirds of Money-Media's revenues were generated through
subscriptions with close to 90% renewal rates.
- Sale of Les Echos to LVMH for EUR240m (GBP174m) completed in December
2007.
- Sale of 50% stake in FT Deutschland to Gruner + Jahr announced in
January 2008.
INTERACTIVE DATA (NYSE:IDC)
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 344 332 4% 8%
Adjusted operating profit 97 89 9% 13%
-------------- ----------- ----------- ----------- -----------
- Good sales growth and significant profit increase
- Sales up 8%; profits up 13%; margins up by 1.4% points to 28.2%
Strong sales momentum
- Underlying sales growth of 8% driven primarily by strong sales to both
existing and new institutional customers and a renewal rate of approximately 95%
within the Institutional Services segment.
- Strong new sales momentum in Q4 2007 further supported activities to
realign the company's two largest institutional businesses under a single
management structure.
Continued focus on high value services
- Pricing and Reference Data continues to generate good growth in North
American and Europe. The business continues to broaden its coverage of complex
securities by expanding its universe of European asset-backed and
mortgage-backed securities. The business also launched a new web-based offering,
the Basket Calculation Service, designed to provide clients with the indicative
optimised portfolio value for equity and fixed income exchange traded funds.
- Real-Time Services continues to achieve strong growth with new
institutional sales in its two core product areas of real-time data feeds and
managed solutions. Highlights include: growing adoption of its PlusFeed data
service for algorithmic trading applications; the introduction of DirectPlus, a
new ultra low latency direct exchange data service; and excellent sales momentum
for managed solutions in North America with new customers including media
companies, online brokerages, stock exchanges and financial institutions.
- Fixed Income Analytics completed 30 new BondEdge(R) installations
during the year and made good progress in the development of its next-generation
BondEdge(R) platform.
- In the Active Trader Services segment, eSignal experienced modest
expansion of its direct subscriber base, delivered numerous innovations across
its suite of active trader services, and added new content and capabilities on
its financial websites.
- Interactive Data is listed on the New York Stock Exchange (NYSE: IDC)
and Pearson owns a 62% stake. Interactive Data's 2007 results under US GAAP are
available at www.pearson.com .
PENGUIN
-------------- ----------- ----------- ----------- -----------
GBP millions 2007 2006 Headline Underlying
growth growth
-------------- ----------- ----------- ----------- -----------
Sales 846 848 0% 3%
Adjusted operating profit 74 66 12% 20%
-------------- ----------- ----------- ----------- -----------
- Good sales growth and significant profit increase
- Sales up 3%; profits up 20%
- Margins up by 0.9% pts to 8.7%; on track for double-digit margins in 2008
Strong competitive performance in major markets
- Successful global publishing performance led by Alan Greenspan's The
Age of Turbulence, with almost 1m hard cover copies shipped to date worldwide,
and Kim Edwards' first novel, The Memory Keeper's Daughter, a global #1
bestseller for Penguin in the US, UK, Australia and Canada.
- Outstanding year for bestsellers in the US with titles including
Elizabeth Gilbert's Eat, Pray, Love (4.4m copies shipped to date); Khaled
Hosseini's A Thousand Splendid Suns (2.2m); and Ken Follett's World Without End
(almost 1m).
- UK bestsellers included Marian Keyes' Anybody Out There?, Jamie
Oliver's Jamie at Home, Jeremy Clarkson's Don't Stop Me Now and Charlie Higson's
Double or Die. Strong year for Brands & Licensing division driven by The Dr Who
Annual (the second best-selling children's book of 2007) and bestselling In the
Night Garden titles.
- Australia: strong publishing from authors including Bryce Courtenay
with The Persimmon Tree and Dr Manny Noakes with CSIRO Total Wellbeing Diet Book
2.
- DK delivered a strong global performance in traditional, custom and
digital publishing, benefiting from innovative formats including The Human Body
Book, personalised travel guides via traveldk.com and the first DK textbooks for
higher education markets.
Rapid growth in emerging markets
- India: Penguin India celebrated its 20th anniversary in 2007 with
continued rapid growth. Penguin authors win all the major English language
prizes in India's national book awards: Vikram Chandra in fiction for Sacred
Games, Vikram Seth in non-fiction for Two Lives and Kiran Desai in readers'
choice for The Inheritance of Loss.
- China: Jiang Rong and Howard Goldblatt win inaugural Man Asian
Literary prize for Wolf Totem, to be published in English around the world by
Penguin in 2008.
- South Africa: another strong year led by John van de Ruit's Spud: The
Madness Continues.
Innovation in print and online
- Rapid growth in sales through online retail and digital channels
driven by innovative digital marketing initiatives and investment in ebooks
(with 5,000 Penguin titles currently available) and digital content. Strong
growth in online revenues and unique visitors to Penguin and DK websites.
- Continued innovation in formats (including the pioneering US premium
paperback and personalised 'on-demand' travel guides), genres (Portfolio
business imprint in India), sales channels (bestselling eBooks via online
retailers and Penguin's own websites; audio books via iTunes and Audible; Rough
Guides via Motorola, Nokia and Samsung phones) and communications channels (
www.spinebreakers.com, an online community for teenagers).
- Subscribers to Penguin and DK opt-in newsletters building rapidly, up
34% year-on-year to over 150,000, allowing Penguin consumers to personalise
areas of interest and strengthening relationship with Penguin brand.
Continued focus on quality and efficiency
- Pearson-wide renegotiation of major global paper, print and binding
contracts continue to bring cost savings in 2007.
- Further improvement expected in 2008 from ongoing management of
production, warehousing and distribution costs.
Strong 2008 publishing schedule; strong start to the year
- Strong list of new titles for 2008 from bestselling and new authors
including Patricia Cornwell, Steve Coll, Michael Pollan, Jamie Oliver, Marian
Keyes, Jeremy Clarkson, Thomas Friedman, Niall Ferguson and the new James Bond
book from Sebastian Faulks.
- Outstanding sales performance from Eckhart Tolle's A New Earth, with
4m copies shipped since its selection for Oprah Winfrey's book club on 30
January. First of ten online classes featuring Eckhart Tolle and Oprah Winfrey
airs today, 3 March.
FINANCIAL REVIEW
Operating result
On a headline basis, adjusted sales increased by GBP167m or 4% from GBP4,051m to
GBP4,218m and total adjusted operating profit increased by GBP42m or 7% to
GBP634m in 2007 from GBP592m in 2006.
On an underlying basis adjusted sales grew by 6% and adjusted operating profit
by 14%. Our underlying measures exclude the effects of exchange and portfolio
changes. In 2007 currency movements reduced adjusted sales by GBP228m and
adjusted operating profit by GBP37m while portfolio changes increased adjusted
sales by GBP146m and adjusted operating profit by GBP22m.
Adjusted sales include discontinued operations held throughout the current and
previous year. In 2007 the sales by our Data Management (Scanners) business have
been included in adjusted sales. Adjusted operating profit excludes amortisation
and adjustment of acquired intangibles but also includes the adjusted profits
from discontinued operations.
Statutory operating profit from continuing operations increased by GBP52m or
10%, to GBP574m in 2007 from GBP522m in 2006. The statutory operating profit
includes the effect of increased intangible amortisation but does not reflect
the decreased contribution from discontinued operations.
Net finance costs
Net finance costs reported in our adjusted earnings comprise net interest
payable and net finance income relating to post-retirement plans. Net interest
payable in 2007 was GBP95m, up from GBP94m in 2006. Although we were partly
protected by our fixed rate policy, a rise in average US dollar floating
interest rates had an adverse effect. Year on year, average three month LIBOR
(weighted for the Group's borrowings in US dollars, euros and sterling at each
year end) rose by 0.5% to 5.4%, reflecting a rise in interest rates and a change
in the currency mix of year end debt. These two factors, together with a
decrease in the Group's average net debt of GBP90m, increased the Group's
average net interest rate payable by 0.3% to 7.3%. In 2007 the net finance
income relating to post-retirement plans was an income of GBP10m compared to an
income of GBP4m in the previous year, giving an overall net finance cost
reflected in adjusted earnings of GBP85m in 2007 compared to GBP90m in 2006.
Also included in the statutory definition of net finance costs are foreign
exchange and other gains and losses. These are excluded from adjusted earnings
as they represent short-term fluctuations in market value and are subject to
significant volatility. Other gains and losses may not be realised in due course
as it is normally the intention to hold the related instruments to maturity. Net
foreign exchange losses of GBP17m in 2007 mainly relate to exchange losses on
Euro-denominated debt used to hedge the receipt of proceeds from the sale of Les
Echos. A corresponding gain is included in higher proceeds realised on this
sale. In 2006 the exchange gains mainly relate to the un-hedged exposure on Euro
borrowings and swaps that could not be designated as a net investment hedge
under IAS 39.
Taxation
In 2007 we revised our calculation of the effective tax rate on adjusted
earnings to reflect the benefit of tax deductions attributable to amortisation
of acquired goodwill and intangibles as this benefit more accurately aligns the
adjusted tax charge with the expected rate of cash tax payment. We have restated
the 2006 comparative figure.
On this basis the effective tax rate on adjusted earnings was 26.4% in 2007
compared with 25.9% in 2006. Our overseas profits, which arise mainly in the US,
remain mostly subject to tax rates which are higher than the UK corporation tax
rate (which was 30% in 2007 but will fall to 28% from 1 April 2008).
But this factor was offset by the amortisation-related tax deductions and, as in
2006, by releases from provisions reflecting continued progress in agreeing our
tax affairs with the authorities.
The reported tax charge on a statutory basis was GBP131m, representing a rate of
28.0%. As we explained last year, the 2006 rate was abnormally low because of
one-off adjustments related to the recognition of deferred tax assets for both
capital losses and operating losses. The tax effects of the disposals during
2007, mainly Government Solutions (tax GBP93m) and Les Echos (tax GBPnil) are
reflected in discontinued operations.
Tax paid in 2007 was GBP87m, compared with GBP59m in 2006. The 2007 amount
included GBP26m paid in respect of disposals.
Discontinued operations
Discontinued operations relate to the disposal of Government Solutions (in
February 2007), Les Echos (in December 2007) and the Data Management (Scanners)
business (in February 2008). In total, we received cash proceeds of GBP469m for
disposals in 2007.
As previously announced, we realised a loss before tax of GBP19m and a tax
charge of GBP93m on the sale of Government Solutions. We realised a profit
before tax of GBP165m with no tax payable on the sale of Les Echos. In
anticipation of a loss on sale of the Data Management (Scanners) business, a
goodwill impairment of GBP97m has been charged to the income statement in 2007.
We received cash proceeds of $225m on the sale of Data Management on 22 February
2008.
Minority interests
Our minority interests comprise mainly the minority share in Interactive Data.
Our stake in Interactive Data remained at 62% throughout 2007, leaving the
minority interest unchanged at 38%.
Dividends
The dividend accounted for in our 2007 financial statements totalling GBP238m,
represents the final dividend (18.8p) in respect of 2006 and the 2007 interim
dividend of 11.1p.
We are proposing a final dividend for 2007 of 20.5p, bringing the total paid and
payable in respect of 2007 to 31.6p, a 7.8% increase on 2006. This final 2007
proposed dividend was approved by the board in February 2008, is subject to
shareholder approval at the forthcoming AGM and will be charged against 2008
profits. For 2007, the dividend is covered 1.5 times by adjusted earnings.
Pensions
Pearson operates a variety of pension plans. Our UK Group plan is by far the
largest and includes a significant defined benefit section. We also have some
smaller defined benefit plans in the US and Canada. Outside the UK, most of our
companies operate defined contribution plans.
Our charge to profit in respect of worldwide pensions and post retirement
benefits amounted to GBP61m in 2007 (2006: GBP60m) of which a charge of GBP71m
(2006: GBP64m) was reported in operating profit and the net finance benefit of
GBP10m (2006: GBP4m) was reported against interest.
Following the completion of the latest actuarial valuation of the UK Group
pension plan as at January 2006, we made additional payments to the plan in 2007
amounting to GBP100m. These additional payments have contributed to the overall
surplus recognised on the UK plan.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2007
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions note
------------------------------------ ----- ------- -------
Continuing operations
Sales 2 4,162 3,990
Cost of goods sold (1,910) (1,841)
------------------------------------ ----- ------- -------
Gross profit 2,252 2,149
Operating expenses (1,701) (1,651)
Share of results of joint ventures and associates 23 24
------------------------------------ ----- ------- -------
Operating profit 2 574 522
Finance costs 3 (150) (133)
Finance income 3 44 59
------------------------------------ ----- ------- -------
Profit before tax 4 468 448
Income tax 5 (131) (4)
------------------------------------ ----- ------- -------
Profit for the year from continuing operations 337 444
Discontinued operations
(Loss) / profit for the year from discontinued
operations 8 (27) 25
------------------------------------ ----- ------- -------
Profit for the year 310 469
Attributable to:
Equity holders of the Company 284 446
Minority interest 26 23
------------------------------------ ----- ------- -------
Earnings per share from continuing and discontinued operations (in pence per
share)
Basic 6 35.6p 55.9p
Diluted 6 35.6p 55.8p
Earnings per share from continuing operations (in pence per share)
Basic 6 39.0p 52.7p
Diluted 6 39.0p 52.6p
The accompanying notes to the condensed consolidated financial statements form
an integral part of the financial information.
CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
for the year ended 31 December 2007
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions note
------------------------------------ ----- ------- -------
Net exchange differences on translation of foreign 25 (417)
operations
Actuarial gains on retirement benefit obligations 80 107
Taxation on items charged to equity 29 12
------------------------------------ ----- ------- -------
Net income / (expense) recognised directly in equity 134 (298)
Profit for the year 310 469
------------------------------------ ----- ------- -------
Total recognised income and expense for the year 444 171
Attributable to:
Equity holders of the Company 14 418 148
Minority interest 26 23
------------------------------------ ----- ------- -------
CONDENSED CONSOLIDATED BALANCE SHEET
as at 31 December 2007
------------------------------------ ------ ------- -------
2007 2006
all figures in GBP millions note
------------------------------------ ------ ------- -------
Property, plant and equipment 355 348
Intangible assets 12 3,814 3,581
Investments in joint ventures and associates 20 20
Deferred income tax assets 328 417
Financial assets - Derivative financial instruments 23 36
Retirement benefit assets 62 -
Other financial assets 52 17
Other receivables 129 124
------------------------------------ ------ ------- -------
Non-current assets 4,783 4,543
Intangible assets - Pre-publication 450 402
Inventories 368 354
Trade and other receivables 946 953
Financial assets - Derivative financial instruments 28 50
Financial assets - Marketable securities 40 25
Cash and cash equivalents (excluding overdrafts) 560 592
------------------------------------ ------ ------- -------
Current assets 2,392 2,376
Non-current assets classified as held for sale 117 294
------------------------------------ ------ ------- -------
Total assets 7,292 7,213
Financial liabilities - Borrowings (1,049) (1,148)
Financial liabilities - Derivative financial (16) (19)
instruments
Deferred income tax liabilities (287) (245)
Retirement benefit obligations (95) (250)
Provisions for other liabilities and charges (44) (29)
Other liabilities (190) (162)
------------------------------------ ------ ------- -------
Non-current liabilities (1,681) (1,853)
Trade and other liabilities (1,050) (998)
Financial liabilities - Borrowings (559) (595)
Current income tax liabilities (96) (74)
Provisions for other liabilities and charges (23) (23)
------------------------------------ ------ ------- -------
Current liabilities (1,728) (1,690)
Liabilities directly associated with non-current assets
held for sale (9) (26)
------------------------------------ ------ ------- -------
Total liabilities (3,418) (3,569)
------------------------------------ ------ ------- -------
Net assets 3,874 3,644
Share capital 202 202
Share premium 2,499 2,487
Treasury shares (216) (189)
Reserves 1,210 976
------------------------------------ ------ ------- -------
Total equity attributable to equity holders of the
Company 3,695 3,476
Minority interest 179 168
------------------------------------ ------ ------- -------
Total equity 14 3,874 3,644
The condensed consolidated financial statements were approved by the board on 02
March 2008.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2007
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions note
------------------------------------ ----- ------- -------
Cash flows from operating activities
Net cash generated from operations 17 659 621
Interest paid (109) (106)
Tax paid (87) (59)
------------------------------------ ----- ------- -------
Net cash generated from operating activities 463 456
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (472) (363)
Acquisition of joint ventures and associates (4) (4)
Purchase of property, plant and equipment (PPE) (86) (68)
Proceeds from sale of PPE 14 8
Purchase of intangible assets (33) (29)
Disposal of subsidiaries, net of cash disposed 469 10
Interest received 19 24
Dividends received from joint ventures and associates 32 45
------------------------------------ ----- ------- -------
Net cash used in investing activities (61) (377)
Cash flows from financing activities
Proceeds from issue of ordinary shares 12 11
Purchase of treasury shares (72) (36)
Proceeds from borrowings 272 84
Liquid resources acquired (15) (24)
Repayment of borrowings (391) (145)
Finance lease principal payments (2) (3)
Dividends paid to Company's shareholders (238) (220)
Dividends paid to minority interests (10) (15)
------------------------------------ ----- ------- -------
Net cash used in financing activities (444) (348)
Effects of exchange rate changes on cash and cash
equivalents 3 (44)
------------------------------------ ----- ------- -------
Net decrease in cash and cash equivalents (39) (313)
Cash and cash equivalents at beginning of year 531 844
------------------------------------ ----- ------- -------
Cash and cash equivalents at end of year 492 531
For the purposes of the cash flow statement, cash and cash equivalents are
presented net of overdrafts repayable on demand. These overdrafts are excluded
from cash and cash equivalents disclosed on the balance sheet.
Included in the figures above is net cash generated from / (used in) amounts
relating to discontinued operations as follows: operating activities GBP7m
(2006: GBP33m); investing activities GBP3m (2006: GBP(10)m); financing
activities GBP(21)m (2006: GBP(15)m).
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
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 International Financial Reporting Standards (IFRS) and International
Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted
by the European Union (EU). In respect of accounting standards applicable to the
Group there is no difference between EU-adopted IFRS and International
Accounting Standards Board (IASB)-adopted IFRS.
The condensed consolidated financial statements have also been prepared in
accordance with the accounting policies set out in the 2006 Annual Report and
have been prepared under the historical cost convention as modified by the
revaluation of financial assets and liabilities (including derivative financial
instruments) at fair value. The 2006 Annual Report refers to new standards
effective from 1 January 2007. None of these standards have had a material
impact in these financial statements.
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 Group'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 2006 Annual Report.
This preliminary announcement does not constitute the Group's full financial
statements for the year ended 31 December 2007, which will be approved by the
Board of Directors and reported on by the auditors later in March 2008.
Accordingly, the financial information for 2007 is presented unaudited.
The financial information for the year ended 31 December 2006 does not
constitute statutory accounts as defined in section 240 of the Companies Act
1985. A copy of the statutory accounts for that year has been delivered to the
Registrar of Companies. The Auditors' report on the full financial statements
for the year ended 31 December 2006 was unqualified and did not contain
statements under section 237 (2) of the Companies Act 1985 (regarding the
adequacy of accounting records and returns), or under section 237 (3) (regarding
provision of necessary information and explanations).
In accordance with IFRS, the comparatives have been re-presented to reflect Les
Echos, Datamark and the Data Management (Scanners) business as discontinued
businesses (see note 8). Government Solutions was previously presented as
discontinued in the financial information for 2006.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
2. Segment information
The Group is organised into five primary business segments: School, Higher
Education, Financial Times Publishing, Interactive Data and Penguin. 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.
------------------------------------ ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ------- -------
Sales
School 1,537 1,455
Higher Education 793 795
Professional 298 280
------------------------------------ ------- -------
Pearson Education 2,628 2,530
FT Publishing 344 280
Interactive Data 344 332
------------------------------------ ------- -------
FT Group 688 612
Penguin 846 848
------------------------------------ ------- -------
Total sales - continuing operations 4,162 3,990
Discontinued operations - Scanners business 56 61
------------------------------------ ------- -------
Adjusted sales 4,218 4,051
Adjusted operating profit
School 203 184
Higher Education 161 161
Professional 28 25
------------------------------------ ------- -------
Pearson Education 392 370
FT Publishing 56 27
Interactive Data 97 89
------------------------------------ ------- -------
FT Group 153 116
Penguin 74 66
------------------------------------ ------- -------
Adjusted operating profit - continuing operations 619 552
Adjusted operating profit - discontinued operations 15 40
------------------------------------ ------- -------
Total adjusted operating profit 634 592
Discontinued operations relate to the Group's interest in Government Solutions,
Les Echos and the Data Management (Scanners) business (see note 8). Government
Solutions and the Scanners business were previously reported within the
Professional group of businesses and Les Echos within the FT Publishing segment.
Adjusted sales include sales from discontinued operations held throughout the
current and previous year. The Scanners business was the only discontinued
operation held throughout the two periods.
Adjusted operating profit includes the operating profit from the total business
including the results of discontinued operations.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
2. Segment information continued
In our adjusted operating profit, we have excluded amortisation of acquired
intangibles, other net gains and losses and other net finance income of
associates.
The amortisation of acquired intangibles is not considered to be fully
reflective of the underlying performance of the Group.
Other net gains and losses represent profits and losses on the sale of
subsidiaries, joint ventures, associates and other financial assets that are
included within continuing or discontinued operations but which distort the
performance of the Group.
Other net finance income of associates is the equivalent of the Company's own
other net finance income that is excluded in adjusted earnings (see note 3).
The following table reconciles adjusted operating profit from continuing
operations to operating profit for each segment.
School Higher Professional FT Publishing Interactive Penguin Total
Education Data
all figures in GBP
millions
----------------------------------------------------------------------------------------------------
2007
----------------------------------------------------------------------------------------------------
Adjusted
operating
profit 203 161 28 56 97 74 619
Amortisation
of acquired
intangibles (28) (2) (1) (6) (7) (1) (45)
Other net gains and - - - - - - -
losses (including
associates)
Other net finance - - - - - - -
income of associates ------ ------ ------ ------ ------ ------ -------
Operating
profit 175 159 27 50 90 73 574
----------------------------------------------------------------------------------------------------
2006
----------------------------------------------------------------------------------------------------
Adjusted
operating
profit 184 161 25 27 89 66 552
Amortisation
of acquired
intangibles (17) - (1) (2) (7) (8) (35)
Other net
gains and
losses
(including
associates) - - - 4 - - 4
Other net
finance income
of associates - - - 1 - - 1
--------------------- ------ ------ ------ ------ ------ ------ -------
Operating
profit 167 161 24 30 82 58 522
Corporate costs are allocated to business segments on an appropriate basis
depending on the nature of the cost and therefore the segment result is equal to
the Group operating profit.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
3. Net finance costs
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Net interest payable (95) (94)
Finance income in respect of employee benefits 10 4
Net foreign exchange (losses) / gains (17) 19
Other losses on financial instruments in a hedging
relationship:
- fair value hedges (1) -
- net investment hedges (1) (2)
Other gains / (losses) on financial instruments not in a hedging
relationship:
- amortisation of transitional adjustment on bonds 1 8
- derivatives (3) (9)
------------------------------------ ----- ------- -------
Net finance costs (106) (74)
Analysed as:
Finance costs (150) (133)
Finance income 44 59
------------------------------------ ----- ------- -------
Net finance costs (106) (74)
Analysed as:
Net interest payable (95) (94)
Finance income in respect of employee benefits 10 4
------------------------------------ ----- ------- -------
Net finance costs reflected in adjusted earnings (85) (90)
Other net finance (costs) / income (21) 16
------------------------------------ ----- ------- -------
Net finance costs (106) (74)
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 other gains and losses may not be
realised in due course as it is normally the intention to hold the related
instruments to maturity.
Other net finance costs of GBP21m in 2007 mainly relate to exchange losses on
legacy euro denominated debt held to hedge the receipt of the euro denominated
proceeds from the Les Echos sale (see also note 8). A corresponding gain is
included in higher sale proceeds realised on this sale. In 2006, euro borrowings
and cross currency swaps that were not designated as net investment hedges
contributed to the overall foreign exchange gains.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
4. Profit before tax
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Profit before tax - continuing operations 468 448
Add back: amortisation and adjustment of acquired intangibles
(see note 2) 45 35
Add back: other net gains and losses (including associates)
(see note 2) - (4)
Add back: other net finance income of associates (see - (1)
note 2)
Add back: other net finance costs / (income) (see note 3) 21 (16)
------------------------------------ ----- ------- -------
Adjusted profit before tax - continuing operations 534 462
Adjusted profit before tax - discontinued operations 15 40
------------------------------------ ----- ------- -------
Total adjusted profit before tax 549 502
5. Income tax
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Income tax charge - continuing operations (131) (4)
Add back: tax benefit on amortisation of acquired
intangibles (19) (10)
Add back: tax benefit on other net gains and losses (9) (4)
Add back: tax (benefit) / charge on other finance income (6) 5
Tax amortisation benefit on goodwill and intangibles 25 25
Tax benefit on recognition of tax losses - (127)
------------------------------------ ----- ------- -------
Adjusted income tax charge - continuing operations (140) (115)
Adjusted income tax charge - discontinued operations (5) (15)
------------------------------------ ----- ------- -------
Total adjusted income tax charge (145) (130)
Tax rate reflected in adjusted earnings 26.4% 25.9%
Included within the income tax charge is an amount of GBP42m (2006: GBP15m)
relating to UK tax.
For the first time in 2007, the Group has included in its adjusted earnings the
tax benefit from tax deductible goodwill and intangibles as this benefit more
accurately aligns the adjusted tax charge with the expected medium term rate of
cash tax payments. The comparative has been re-stated accordingly.
In 2006, the Group excluded from its adjusted earnings tax benefits from the
recognition of its capital and trading losses of GBP127m which, due to their
size and non-recurring nature are not considered to be fully reflective of the
underlying tax rate of the Group.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
6. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
equity share holders of the Company (earnings) by the weighted average number of
ordinary shares in issue during the year, 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.
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Profit for the year from continuing operations 337 444
Minority interests (26) (23)
--------------------------------------- ------- -------
Earnings - continuing operations 311 421
(Loss) / profit for the year from discontinued (27) 25
operations
--------------------------------------- ------- -------
Earnings 284 446
Weighted average number of shares (millions) 796.8 798.4
Effect of dilutive share options (millions) 1.3 1.5
Weighted average number of shares (millions) for diluted
earnings 798.1 799.9
Earnings per share from continuing and discontinued operations
Basic 35.6p 55.9p
Diluted 35.6p 55.8p
Earnings per share from continuing operations
Basic 39.0p 52.7p
Diluted 39.0p 52.6p
7. Adjusted earnings reconciliation
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 adjusted earnings per share includes both continuing and discontinued
businesses on an undiluted basis. The Company's definition of adjusted earnings
per share may not be comparable to other similarly titled measures reported by
other companies.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
>
7. Adjusted earnings reconciliation continued
------- ------- ------ ------ ------ ------ ------ ------
Statutory Re-analyse Other gains Amortisation/ Other net Tax Recognition of Adjusted
Income discontinued gains adjustment of finance amortisation tax losses income
statement operations and acquired costs/ benefit statement
all losses intangibles income
figures
in GBP
millions
---------------------------------------------------------------------------------------------------------------------
2007
------- ------- ------ ------ ------ ------ ------ ------
Operating
profit
(note 2) 574 15 - 45 - - - 634
Net finance
costs
(note 3) (106) - - - 21 - - (85)
------- ------- ------ ------- ------ ------- ------ -------
Profit
before
tax
(note 4) 468 15 - 45 21 - - 549
Income tax
(note 5) (131) (5) (9) (19) (6) 25 - (145)
------- ------- ------ -------- ------- ------- ------ -------
Profit
for the
year -
continuing 337 10 (9) 26 15 25 - 404
Profit
for the
year -
discontinued
(note 8) (27) (10) 37 - - - - -
------ ------- ------ -------- ------- ------- ------ -------
Profit
for the
year 310 - 28 26 15 25 - 404
Minorities (26) - - (4) - (2) - (32)
------ ------- ------ -------- ------- ------- ------ -------
Earnings 284 - 28 22 15 23 - 372
Weighted
average
number
of shares
(millions) 796.8
Adjusted
earnings per
share 46.7p
----------------------------------------------------------------------------------------------------------------------
2006
------ ------- ------ -------- ------- ------- ------ -------
Operating
profit 522 40 (4) 35 (1) - - 592
Net finance
costs (74) - - - (16) - - (90)
------ ------- ------ -------- ------- ------- ------ -------
Profit
before
tax 448 40 (4) 35 (17) - - 502
Income
tax (4) (15) (4) (10) 5 25 (127) (130)
------ ------- ------ -------- ------- ------- ------ -------
Profit
for the
year -
continuing 444 25 (8) 25 (12) 25 (127) 372
Profit
for the
year -
discontinued 25 (25) - - - - - -
------ ------- ------ -------- ------- ------- ------ -------
Profit
for the
year 469 - (8) 25 (12) 25 (127) 372
Minorities (23) - - (3) - (2) - (28)
------ ------- ------ -------- ------- ------- ------ -------
Earnings 446 - (8) 22 (12) 23 (127) 344
Weighted
average number
of shares
(millions) 798.4
Adjusted
earnings per
share 43.1p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
8. Discontinued operations
Discontinued operations relate to the Group's interest in Government Solutions
(sold 15 February 2007), Datamark (acquired with eCollege and subsequently sold
on 31 July 2007), Les Echos (sold 24 December 2007) and the Data Management
(Scanners) business (sold on 22 February 2008).
The results of Government Solutions and Les Echos have been included in
discontinued operations for both 2006 and 2007 and have been consolidated up to
the date of sale. Datamark was sold immediately following its acquisition as
part of the eCollege transaction and consequently none of the results for this
business have been consolidated. The Scanners business was sold on 22 February
2008 and has been included in discontinued operations for the full year in both
2006 and 2007. The assets and liabilities of the Scanners business have been
reported as held for sale in the 31 December 2007 balance sheet. At 31 December
2006 held for sale assets and liabilities relate to Government Solutions.
Sales by discontinued operations are shown in the table below:
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Scanners business sales included in adjusted sales
(see note 2) 56 61
Other sales by discontinued operations 111 372
------- -------
Total sales by discontinued operations 167 433
The loss for the year on discontinued operations is analysed below:
----------------------------- ------- ------- ------- -------
2007 2006
all figures in GBP millions Included Other Total
in adjusted gains and
earnings losses
----------------------------- ------- ------- ------- -------
Operating
profit 15 - 15 40
Goodwill
impairment
(re Scanners
disposal) - (97) (97) -
----------------------------- ------- ------- ------- -------
(Loss) /
profit
before
tax before
sale of
discontinued
ops 15 (97) (82) 40
Attributable
tax expense (5) - (5) (15)
Profit
on sale of
discontinued
operations - 146 146 -
Attributable
tax expense - (86) (86) -
---------------------------- ------- ------- ------- -------
(Loss) /
profit
for the year from
discontinued
operations 10 (37) (27) 25
Profit before
tax 15 49 64 40
Attributable
tax expense (5) (86) (91) (15)
----------------------------- ------- ------- ------- -------
(Loss) /
profit
for the year from
discontinued
operations 10 (37) (27) 25
The goodwill impairment above relates entirely to the anticipated loss on sale
of the Scanners business. The sale of the Scanners business for $225m and the
resulting disposal will be reflected in the 2008 financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
8. Discontinued operations continued
The profit / loss on sale of discontinued operations in 2007 is analysed below:
Government Datamark Les Echos Total
Solutions
all figures in GBP millions
----------------------------- ------- ------- ------- -------
Net (assets) /
liabilities disposed (277) (20) 1 (296)
Proceeds received 321 20 174 515
Costs (10) - (10) (20)
------- ------- ------- -------
Profit on sale before
cumulative translation
adjustment 34 - 165 199
Cumulative translation
adjustment (53) - - (53)
------- ------- ------- -------
Profit / (loss) on sale
before tax (19) - 165 146
Attributable tax
(charge) / benefit (93) 7 - (86)
------- ------- ------- -------
Profit / (loss) on sale
after tax (112) 7 165 60
The proceeds received for the sale of Government Solutions include GBP286m in
cash, GBP20m in loan stock and a 10% interest in the acquiring company valued at
GBP15m.
9. Dividends
------------------------------------ ----- ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ----- ------- -------
Amounts recognised as distributions to equity share holders
in the year 238 220
The directors are proposing a final dividend of 20.5p per equity share, payable
on 9 May 2008 to shareholders on the register at the close of business on 11
April 2008. This final dividend, which will absorb an estimated GBP164m of
shareholder's funds, has not been included as a liability as at 31 December
2007.
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:
------------------------------------ ------- -------
2007 2006
------------------------------------ ------- -------
Average rate for profits 2.00 1.84
Year end rate 1.99 1.96
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
11. Business combinations
During the year, Pearson announced the acquisition of Harcourt Assessment and
Harcourt Education International from Reed Elsevier for $950m in cash. The
Harcourt Education International acquisition was completed in stages during 2007
but the Harcourt Assessment acquisition did not complete until 30 January 2008.
In July 2007, Pearson completed the acquisition of eCollege, a leading provider
of eLearning and enrolment services to post-secondary education. Pearson has
also made a number of other smaller acquisitions during the year mainly within
the FT Group.
Provisional values for the assets and liabilities arising from the acquisitions
completed in the year are as follows:
-------------------------------- ------ ------ ------ -------
Harcourt eCollege Other Total
all figures in GBP millions
-------------------------------- ------ ------ ------ -------
Property, plant and equipment 6 5 - 11
Intangible assets 81 100 16 197
Intangible assets - Pre-publication 16 2 - 18
Inventories 15 - - 15
Trade and other receivables 12 13 3 28
Trade and other liabilities (23) (12) (3) (38)
Financial liabilities - borrowings - (1) - (1)
Current income tax 2 2 - 4
Net deferred income tax liabilities (21) (24) - (45)
Provisions for other liabilities and
charges (1) - (1) (2)
-------------------------------- ------ ------ ------ -------
Net assets acquired at fair value 87 85 15 187
Goodwill 68 181 55 304
-------------------------------- ------ ------ ------ -------
Total 155 266 70 491
Satisfied by:
Cash (155) (266) (47) (468)
Deferred consideration - - (12) (12)
Net prior year adjustments - - (11) (11)
-------------------------------- ------ ------ ------ -------
Total consideration (155) (266) (70) (491)
Net cash outflow on acquisition:
Cash - current year acquisitions (468)
Deferred payments for prior year
acquisitions and other items (4)
Cash and cash equivalents acquired -
-------------------------------- ------ ------ ------ -------
Cash outflow on acquisitions (472)
In total acquisitions completed in the year contributed an additional GBP90m of
sales and GBP13m of operating profit.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
12. Intangible assets
------------------------------------ ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ------- -------
Goodwill 3,343 3,271
Other intangibles 471 310
------------------------------------ ------- -------
Total intangibles 3,814 3,581
13. Net debt
------------------------------------ ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ------- -------
Non-current assets
Derivative financial instruments 23 36
Current assets
Derivative financial instruments 28 50
Marketable securities 40 25
Cash and cash equivalents (excluding overdrafts) 560 592
Non-current liabilities
Borrowings (1,049) (1,148)
Derivative financial instruments (16) (19)
Current liabilities
Borrowings (559) (595)
------------------------------------ ------- -------
Total net debt (973) (1,059)
In February 2007, Pearson repaid its EUR591m 6.125% Euro Bonds 2007 and
refinanced this borrowing through available cash and facilities. The Group also
extended the maturity date of its main revolving credit facility by one year and
entered into a short-term bridge financing facility.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
14. Statement of changes in equity
------------------------------------ ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ------- -------
Attributable to equity holders of the Company
Total recognised income and expense for the year 418 148
Equity settled transactions 30 25
Issue of ordinary shares - share option schemes 12 11
Cumulative translation adjustment disposed 53 -
Purchase of treasury shares (56) (52)
Dividends paid to equity holders of the Company (238) (220)
--------------------------------------- ------- -------
Net movement for the year 219 (88)
Attributable to equity holders of the Company at the beginning
of the year 3,476 3,564
--------------------------------------- ------- -------
Attributable to equity holders of the Company at the end of
the year 3,695 3,476
Minority interest 179 168
--------------------------------------- ------- -------
Total equity 3,874 3,644
15. Related parties
There were no material related party transactions and no guarantees have been
provided to related parties in the year.
16. Events after the balance sheet date
On 2 January 2008, the Group completed its acquisition of Money-Media, a
US-based company offering online news and commentary for the money management
industry, for $64m.
On 30 January 2008, the Group completed its $647m acquisition of Harcourt
Assessment from Reed Elsevier, after receiving clearance from the US Department
of Justice.
Also on 30 January 2008 the Group announced that it had agreed to sell its 50%
interest in Financial Times Deutschland (FTD) to its joint venture partner,
Gruner + Jahr. The Group's share of FTD assets at 31 December 2007 was EUR8m and
a small profit on sale is expected.
On 22 February 2008, the Group completed the sale of its Data Management
(Scanners) business to M&F Worldwide Corp. for $225m. The Group expects to
report a loss on this transaction in 2008 after taking into account the
cumulative translation adjustment disposed and tax.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December 2007
17. Cash flows
------------------------------------ ------- -------
2007 2006
all figures in GBP millions
------------------------------------ ------- -------
Reconciliation of profit for the year to net cash generated from
operations
Profit for the year 310 469
Income tax 222 19
Depreciation and amortisation charges 138 135
Investment in pre-publication assets (230) (213)
Amortisation of pre-publication assets 192 210
Loss on sale of property, plant and equipment 1 2
Net finance costs 106 74
Share of results of joint ventures and associates (23) (24)
Profit on sale of subsidiaries and associates (146) -
Goodwill impairment of discontinued operations 97 -
Net foreign exchange gains / (losses) from transactions 11 (37)
Share-based payment costs 30 25
Inventories (1) (16)
Trade and other receivables (5) (60)
Trade and other liabilities 80 54
Retirement benefit obligations (126) (17)
Provisions 3 -
------------------------------------ ------- -------
Net cash generated from operations 659 621
Dividends from joint ventures and associates 32 45
Net purchase of PPE including finance lease principal
payments (74) (63)
Purchase of intangible assets (33) (29)
Add back: Special pension contribution 100 -
Add back: Cash spent against integration and fair value
provisions - 1
------------------------------------ ------- -------
Operating cash flow 684 575
Operating tax paid (61) (59)
Net operating finance costs paid (90) (82)
------------------------------------ ------- -------
Operating free cash flow 533 434
Non-operating tax paid (26) -
Special pension contribution (100) -
Integration spend - (1)
------------------------------------ ------- -------
Total free cash flow 407 433
Dividends paid (including to minorities) (248) (235)
------------------------------------ ------- -------
Net movement of funds from operations 159 198
Included in net cash generated from operations is an amount of GBP7m (2006:
GBP33m) 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.
Following the completion of the latest actuarial valuation of the UK Group
pension plan as at January 2006, the Group agreed that during 2007 it would make
additional payments to the plan amounting to GBP100m. The Group has excluded
this GBP100m from its definition of operating cash flow and operating free cash
flow as it distorts the underlying operating performance for the year.
--------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEARSON plc
Date: 03 March 2008
By: /s/ STEPHEN JONES
-----------------------
Stephen Jones
Deputy Secretary