UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
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 February 2005
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 documents:
1. A press release from Pearson plc announcing Final Results
28 February 2005
PEARSON: 2004 PRELIMINARY RESULTS
PROGRESS ON ALL FINANCIAL GOALS IN 2004; FASTER GROWTH IN 2005
- Adjusted earnings per share of 30p, up 5% on an underlying basis;
- Free cash flow GBP96m higher at GBP288m;
- Adjusted operating profit from continuing businesses up 7%; 69%
growth at the FT Group and 5% at Pearson Education more than offset the
24% profit decline at Penguin;
- Dividend increase of 5%, ahead of inflation for the 13th successive
year.
Marjorie Scardino, chief executive, said:
"In 2004 we achieved solid progress on all our financial goals and gained share
in most of our markets. At the same time, we reduced costs and invested more
than ever in the content and technology that set our products apart.
"This year, we continue to expect strong growth at Pearson Education and the
Financial Times Group, and we are confident that our performance will be within
market expectations, even while we tackle some challenges at Penguin. In the
longer term, we have set the stage for a new phase in Pearson's growth, with our
network of business newspapers returned to profit and excellent prospects for
our education businesses for the next few years."
2004 Currency 2003 Underlying
---------------- ---------- ----------- ---------- growth
-----------
impact
---------------- ---------- ----------- ---------- -----------
Business performance
Sales GBP3,919m GBP(306)m GBP4,048m 3%
Adjusted operating profit* GBP455m GBP(52)m GBP490m 5%
Adjusted profit before tax* GBP386m GBP410m
Free cash flow GBP288m GBP192m
Adjusted earnings per share* 30.0p (3.7)p 32.0p 5%
Return on invested capital 6.2% (0.4)pts 6.3%
Continuing businesses (excluding Recoletos)
Sales GBP3,729m GBP(302)m GBP3,879m 3%
Adjusted operating profit* GBP433m GBP(51)m GBP462m 7%
Statutory results Actual
Operating profit GBP231m GBP226m 2%
Profit before tax GBP171m GBP152m 13%
Basic earnings per share 11.1p 6.9p 61%
Dividends per share 25.4p 24.2p 5%
Net borrowings GBP1,206m GBP1,361m (11)%
* Before goodwill and non-operating items. In 2004 our goodwill charge on
continuing operations was GBP215m (2003: GBP258m) and non-operating profit was
GBP9m (2003: GBP(6)m). In 2004 Recoletos' goodwill was GBP9m (2003: GBP6m) and
non-operating profit was nil (2003: GBP12m).
Underlying means growth excluding currency impact (noted above) and portfolio
changes which in 2004 had a positive effect on sales of GBP41m and a negative
effect on profits of GBP8m, largely because Edexcel, in which we acquired a 75%
stake in May 2003, is loss-making in the first half. Throughout this statement,
we refer to continuing business performance measures and growth rates on this
basis unless otherwise stated. Our continuing businesses exclude Recoletos
following our acceptance of an offer for our 79% stake on 25 February 2005.
2004 OVERVIEW
GBP millions 2004 Currency 2003 Underlying
impact
Sales
Pearson Education 2,356 (223) 2,451 4%
Penguin 786 (57) 840 -
FT Group 587 (22) 588 3%
Total continuing 3,729 (302) 3,879 3%
Discontinued (Recoletos) 190 (4) 169 15%
Total 3,919 (306) 4,048 3%
---------------- ---------- ----------- ------------ -----------
Adjusted operating
profit
Pearson Education 293 (29) 313 5%
Penguin 54 (14) 91 (24)%
FT Group 86 (8) 58 69%
Total continuing 433 (51) 462 7%
Discontinued (Recoletos) 22 (1) 28 (18)%
Total 455 (52) 490 5%
Pearson's sales grew 3% in 2004, with good sales performances at Pearson
Education and IDC. Adjusted operating profit increased 7% - despite a 24%
decline at Penguin - with good progress at our largest business, Pearson
Education (up 5%) and a significant profit improvement at the FT Group (up 69%),
benefiting from the cost reductions made in the face of a severe advertising
recession in recent years. Adjusted earnings per share of 30.0p (2003: 32.0p)
were up 5% on an underlying basis, helped by this profit improvement and by
lower tax and interest charges.
Our reported results were once again affected by currency movements. The 20 cent
weakening in the average US dollar rate - in which we earn approximately
two-thirds of our sales - against the pound to GBP1:$1.83 reduced our reported
sales by GBP302m and our reported operating profit by GBP51m.
Our cash flow performance was particularly strong. Total free cash flow improved
GBP96m to GBP288m. This was ahead of last year even without the Transportation
and Security Administration (TSA) receivable which we collected in December.
Cash conversion, at 93%, also benefited from further working capital
improvements at Pearson Education. Average working capital:sales at Pearson
Education and Penguin improved by half a percentage point to 32.3%, even as we
increased investment in new programmes and contracts. Together these resulted in
an increase in our return on invested capital from 6.3% to 6.6% at constant
exchange rates.
Our statutory results show an improvement in operating profit of 2%. We report
statutory basic earnings per share of 11.1p (2003: 6.9p). We ended the year with
net debt of GBP1,206m, an 11% improvement on 2003. We received $101m from the
sale of our stake in MarketWatch in February 2005 and we expect to receive
around EUR550m in net proceeds from the sale of our stake in Recoletos. The
board is proposing a dividend increase of 5% to 25.4p.
Throughout this statement (unless otherwise stated):
1. Adjusted figures are stated before goodwill, integration costs and
non-operating items. We expense business restructuring costs and amortise
goodwill over no more than 20 years;
2. The 'business performance' measures, which we use alongside other
measures to track performance, are non-GAAP measures for both US and UK
reporting. Reconciliations of operating profit, profit before tax, adjusted
earnings per share and operating free cash flow to the equivalent statutory
heading under UK GAAP are included in notes 2, 5, 6 and 10.
3. 'Currency impact' shows the effect of retranslating 2004 reported
results at 2003 (rather than 2004) average exchange rates.
Outlook
We expect Pearson to grow strongly in 2005 and beyond, with further progress on
earnings, cash and return on invested capital. Our outlook is:
- We expect our worldwide School business to deliver significant
underlying sales and profit growth in 2005. With a buoyant adoption
calendar, healthy state budgets, federal funds for reading and testing and
our investment in new programmes, we expect our US School publishing and
testing operations to achieve double-digit sales growth. We also expect to
achieve steady margin improvement in our US school publishing business over
the next three years, as we benefit from a strong new adoption calendar in
both 2006 and 2007, and from a significant increase in our new adoption
participation rate compared with 2005.
- Our US Higher Education business continues to benefit from its
scale, the strength of its publishing and its lead in online learning. We
expect that those qualities will enable our business to grow ahead of its
industry once again in 2005, at a similar rate to 2004 and with similar
margins. Longer-term, we see good growth prospects for our US and
international higher education businesses.
- We expect our Professional business to grow sales in the mid-single
digits in 2005, helped by continued growth in our contract businesses and a
stabilisation in technology publishing. We expect this division to deliver
sustained growth, on the basis of our long-term contracts in Government
Solutions and Professional Testing.
- 2005 will be a year of transition for Penguin. We expect profits to
improve in the UK, in spite of dual-running costs at our distribution
centres. In the US we are planning on the basis that the weak market
conditions experienced in the second half of 2004 continue. We are taking
action to adjust our publishing programme and reduce costs, and we will
expense approximately GBP5m on those actions in 2005.
- We expect further profit progress at the FT Group. Advertising
revenues at the Financial Times are up 3% in the year to date and, assuming
similar advertising revenue growth for the full year, we would expect the FT
to be around breakeven for the year as a whole. IDC expects to grow its
reported revenues and net income under US GAAP in the high single-digit to
low double-digit range. The results of Recoletos will be consolidated for
January and February 2005 and with the launch of its new freesheet during
these months are likely to be around breakeven.
- Interest and tax. Our interest charge in 2005 is likely to be a
little lower than in 2004, as the benefit of lower average net debt will be
partly offset by the expected rise in average interest rates and the absence
of a GBP9m one-off interest credit in 2004. We expect our effective tax rate
for the full year to be around 32%.
- Exchange rates. We generate around two-thirds of total revenues in
the US and a five cent change in the average exchange rate for the full year
(which in 2004 was GBP1:$1.83) will have an impact of approximately 1p on
adjusted earnings per share.
For more information:
UK: Luke Swanson / Charlotte Elston + 44 (0) 20 7010 2310
US: Jeff Taylor (analysts and investors) + 1 952 201 6878 / David Hakensen
(media) + 1 952 681 3040
Pearson's preliminary results presentation for investors and analysts will be
webcast live today from 0900 (GMT) and available for replay from 12 noon (GMT)
via www.pearson.com. We will also be holding a conference call for US investors
at 1500 (GMT) / 1000 (EST). To participate in the conference call or to listen
to the audiocast, please register at www.pearson.com.
Video interviews with Marjorie Scardino, chief executive, and Rona Fairhead,
chief financial officer, are also available at www.pearson.com. High resolution
photographs are available for the media at www.newscast.co.uk.
Except for the historical information contained herein, the matters discussed in
this preliminary announcement include forward-looking statements under UK GAAP
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 and US
Form 20-F. The company undertakes no obligation to publicly update any forward
looking statement, whether as a result of new information, future events or
otherwise.
Operating review
PEARSON EDUCATION: HIGHLIGHTS
- Leading position in new US School adoptions; strong growth in open
territories, supplementary publishing and school testing;
- Investment in new programmes in reading, science, literature and
social studies, to capture significant growth opportunities in US School
market in 2005 and beyond;
- 4% sales growth in US Higher Education, ahead of the industry (at
2%) for the sixth straight year;
- 20%+ sales growth and $500m of new professional contract wins in
Government Solutions and Professional Testing. $800m Department of Education
contract win - Pearson's largest ever - early in 2005;
- Record sales of $1.2bn outside the US; excellent growth prospects in
international education.
GBP millions 2004 Currency impact 2003 Underlying
Sales
School 1,118 (94) 1,176 -
Higher Education 731 (69) 772 4%
Professional 507 (60) 503 12%
Total 2,356 (223) 2,451 4%
Adjusted operating profit
School 117 (8) 127 2%
Higher Education 133 (16) 148 1%
Professional 43 (5) 38 30%
Total 293 (29) 313 5%
Pearson Education had a strong year, growing sales by 4% and profits by 5% in
spite of the weakest US new adoption market* for five years. Our School business
increased profits by 2%, our US Higher Education business grew ahead of its
industry and our Professional business increased profits by 30%.
Our School business ended the year with sales level with 2003 and profits up 2%.
In a year when new adoption spending fell by some 40% to approximately $500m we
led the new adoption market, taking a 27% share of this smaller new adoption
opportunity - or 30% of the adoption opportunities we participated in. We
benefited from our strength across a wide range of subjects and grade levels,
with a decline in elementary sales (after particularly strong market share
growth in 2003) mitigated by a strong performance in the secondary market. We
returned to growth in the open territories and in supplementary publishing,
helped by the restructuring actions we took in 2003 and by the sharp recovery in
US state budgets. We also invested in major new programmes in reading, science,
literature and social studies, which should help us capture a good share of a
strong US School market over the next few years.
Our US School testing business benefited from the start-up of a number of new
state contracts, including Texas, Ohio, Virginia and Washington. We continued to
win new multi-year contracts, worth $150m, including Tennessee, New Jersey and
California ahead of implementation of the No Child Left Behind Act testing
requirements, which become mandatory in the school year starting in September
2005. Our digital learning businesses showed a further profit improvement on
slightly lower sales and we continued to develop and sell new products which
integrate our content, testing and technology in a more focused way. The decline
in reported profits reflects the impact of dollar weakness and a full year
contribution from Edexcel, which is loss-making in the first half.
Our Higher Education business grew sales by 4% and profits by 1%. In the US we
grew faster than the market for the sixth straight year, up 4% while the
industry without Pearson was up 2%, according to the Association of American
Publishers. We saw particular strength in two-year career colleges, a
fast-growing segment, with vocational programmes in allied health, technology
and graphic arts, and elsewhere in math and modern languages.
Our margins eased a little as we achieved 5% growth outside the US and continued
to invest to make our technology central to the teaching and learning process.
We rolled out our online learning platforms into new subject areas including
economics, psychology and modern languages and by the end of the year almost
three million US college students were following their courses through one of
our online programmes. Our custom publishing business, which creates specific
programmes built around the curricula of individual faculties or professors,
grew very strongly. Pearson Custom has now increased its sales eight-fold over
the past six years and we have introduced our first customised online resources
for individual college courses.
Recognising concern over the rising cost of higher education, we also
accelerated our strategy of making our content available to students in a wide
range of different formats and price points through our Pearson Choices
programme (www.pearsonchoices.com). Through SafariX, 350 of our leading
textbooks are now available to students in a web-based format, at half the price
of their traditional print counterparts.
Our Professional education business grew sales by 12% and profits by 30%.
Pearson Government Solutions grew sales by 25%, with strong growth from add-ons
to existing programmes. We also won some important contracts, including
multi-year contracts worth $500m from customers such as the US Department of
Health and the London Borough of Southwark. Our Professional Testing business
grew sales 31% as we benefited from the start-up of major new contracts although
we continued to operate at a small loss as we invested in building up the
infrastructure for our 150-strong UK test centre network. Markets remained tough
for our technology publishing titles, where sales were 6% lower, but profits
were broadly level as a result of further cost actions.
Our education businesses outside the US contributed a record $1.2bn in revenues.
We saw a series of good performances across the spectrum of our publishing,
testing and software. We won $200m of multi-year school testing contracts
outside the US. Edexcel successfully introduced our testing technology into the
UK, marking 1.3 million examination scripts on-screen in 2004. Our international
English Language Teaching business grew well, helped by our biggest ever ELT
investment. The new programme, English Adventure, has been developed for primary
school age students using Disney characters, and has now been launched in five
major ELT markets.
Pearson Education completed a number of small bolt-on acquisitions in the year.
These included Knowledge Analytic Technologies, extending our capabilities in
electronic school testing and marking; Causeway Press, strengthening our UK
education publishing for schools and colleges; Altona Ed, a web-based student
information system; and Dominie Press in Spanish language supplementary
publishing.
Note: In the US, 20 'adoption' states buy textbooks and related programmes on a
planned contract schedule or 'adoption cycle'. The level of spending varies from
year to year with this schedule, depending on the number of adoptions in the
largest states and subjects. In 'open territory' states, school districts or
individual schools buy textbooks according to their own individual schedules
rather than on a statewide basis.
PENGUIN: HIGHLIGHTS
- Strong UK publishing and sales performance in spite of distribution
disruption in 2004; UK profit improvement expected in 2005;
- Strong bestseller performance in US, but weakness in US mass market
and backlist worldwide in second half;
- Taking actions to adjust business and publishing for changing market
conditions.
GBP millions 2004 Currency impact 2003 Underlying
Sales 786 (57) 840 -
Adjusted operating profit 54 (14) 91 (24)%
Penguin had a difficult year, with flat sales and significantly lower profits,
despite a successful publishing schedule. The single largest factor in the
decline in reported operating profit was the weak dollar. Penguin makes
approximately two-thirds of its sales in the US and the dollar's decline against
sterling reduced Penguin's profits by GBP14m. The 24% decline in underlying
operating profit was caused by a number of factors, including disruption to our
UK distribution and weakness in the US consumer publishing market.
In the UK, our move to a new warehouse, to be shared between Penguin and Pearson
Education, disrupted supply of our books and had a particular impact on backlist
titles. Although we traded well in the second half, and shipped more books to
our UK customers than in the previous year, we incurred some GBP9m of additional
costs as we took special measures to deliver books, including the cost of
running two warehouses, shipping books direct and additional marketing support.
By the end of the year, we had eliminated the order backlog in the warehouse,
and the new management team has continued to make good progress in the early
part of 2005, successfully installing the new automated warehouse management
system. We will continue to incur dual running costs until Pearson Education
moves into the new warehouse, which is planned for the second half.
After a good start to the year, the US consumer publishing market deteriorated
sharply in the second half and full-year industry sales were 1% lower than in
2003, according to the Association of American Publishers. The adult mass market
segment, which accounts for approximately one-third of Penguin's US sales, was
down 9% for the industry for the full year, and 13% in the second half. Penguin
is planning for 2005 on the basis that tough market conditions continue and is
adjusting its business and publishing programmes accordingly. We are taking
actions to reduce costs, accelerating investment in successful new imprints,
focusing publishing in premium market categories and finding new ways to sell
high margin backlist titles.
Despite this, Penguin had another great publishing year. We benefited from our
new imprint strategy, with a further four imprints publishing for the first
time. Non-fiction performed particularly well, with a 40% increase in our titles
on the New York Times bestseller list, including Lynne Truss's Eats, Shoots &
Leaves (now with over one million copies in print), Ron Chernow's Alexander
Hamilton and Maureen Dowd's Bushworld. Best-selling UK titles included Jamie
Oliver's Jamie's Dinners, Sue Townsend's Adrian Mole and the Weapons of Mass
Destruction and Gillian McKeith's You Are What You Eat.
FT GROUP: HIGHLIGHTS
- GBP23 million profit improvement at the Financial Times; advertising
revenues up for the first time in 4 years, and up 3% in the first two months
of this year;
- Return to profit at our network of business newspapers with
advertising revenues stabilising and cost savings coming through;
- IDC profits up 9% with 95%+ institutional renewal rates.
GBP millions 2004 Currency impact 2003 Underlying
Sales
FT Newspaper 208 (1) 203 3%
Other FT publishing 110 (2) 112 5%
IDC 269 (19) 273 3%
Total continuing 587 (22) 588 3%
Discontinued (Recoletos) 190 (4) 169 15%
Total 777 (26) 757 6%
Adjusted operating profit / (loss)
FT Newspaper (9) -- (32) 72%
Other FT publishing 11 -- 6 61%
Associates & Joint Ventures 6 -- 3 100%
IDC 78 (8) 81 9%
Total continuing 86 (8) 58 69%
Discontinued (Recoletos) 22 (1) 28 (18)%
Total 108 (9) 86 39%
The Financial Times Group increased sales by 3% and profits by 69% with another
good year from IDC, a more stable business advertising environment and the
benefit of cost actions taken in recent years.
The Financial Times achieved revenue growth for the first year since 2000 and
reduced losses from GBP32m in 2003 to GBP9m, returning to profit in the
seasonally strong fourth quarter. Sales increased 3% with advertising revenues
up 2% and circulation revenues also ahead.
Advertising performance across categories and regions was mixed throughout the
year. While the recruitment and luxury goods categories increased by more than
20%, the business-to-business and technology sectors showed few signs of
recovery. In terms of geography, good growth in Europe and Asia offset a very
weak US corporate advertising market. We continued to reduce the FT's cost base,
which is now GBP110 million or one-third lower than it was in 2000. At the same
time, we invested in editorial initiatives, printing the FT in Australia - a
first for any international daily newspaper publisher - and increasing the reach
and number of our colour magazines, FT Magazine and How To Spend It. Average
circulation for the year of 435,000 was 3% lower than the previous year, while
FT.com has 76,000 paying subscribers and 3.7m unique users. The FT's performance
on international surveys of business readership in print and online remained
strong.
Les Echos achieved sales growth of 4% and profits grew very strongly, despite a
volatile advertising market. Average circulation grew 3% to 119,800, while
competitors continued to see falling sales. FT Business also posted significant
profit growth, with sales growth across all its main markets, and a continuing
emphasis on cost management.
Profit from the FT's associates and joint ventures doubled in the year. Losses
narrowed at FT Deutschland as circulation and advertising revenue both grew
strongly. FT Deutschland reached the 100,000 copy sales mark in December, and
circulation averaged 96,600 (+6%). The Economist Group again increased its
operating profit, with The Economist's circulation passing the significant one
million mark, with an average weekly circulation of 1,009,759. The Group also
launched a new annual, Intelligent Life, as well the first Chinese language
edition of The World in 2005.
Interactive Data Corporation (NYSE: IDC), our 61%-owned financial information
business, increased sales by 3% and profits by 9%. FT Interactive Data and
e-Signal performed well, particularly in the US, where we saw some signs of
improvement in market conditions. Worldwide renewal rates among institutional
clients remained at or above 95%. Demand for Interactive Data's value-added
services remained strong, with the signing of our 100th customer for our Fair
Value Information Service product in December. IDC had a first full year
contribution from acquisitions made in 2003, ComStock and Hyperfeed
Technologies, and acquired FutureSource in September to expand and complement
eSignal. The consolidation of seven US data centres into two facilities is on
track for completion at the end of this year.
In December, we announced our intention to sell our shareholding in Recoletos,
our 79%-owned Spanish media group, to Retos Cartera as part of a tender offer
for all of Recoletos. Retos Cartera's tender offer was launched on 16 February
2005 and we accepted it on 25 February. In January of this year, we also
accepted an offer from Dow Jones & Co. for our 22% stake in MarketWatch,
bringing in proceeds of $101m.
Financial review
Profit before tax
In 2004 we report a profit before tax of GBP171m. This is higher than our profit
of GBP152m in 2003, mainly due to a reduction in goodwill expense and interest
charge.
Goodwill
Goodwill amortisation is a non-cash item. This is the final year of amortisation
under UK GAAP, ahead of moving to International Financial Reporting Standards in
2005. No impairments were reported in 2004 and goodwill amortisation as a whole
was GBP224m, down by GBP40m from GBP264m in 2003. This reflects the impact of
exchange rates in the year and the reduction in charges relating to fully
amortised assets.
Non operating items
Non operating items reflect gains and losses on the sale or closure of
businesses and on the disposal of fixed assets and investments. In 2004 we had
profits on the sale of our stakes in Capella and Business.com, partially offset
by small losses elsewhere.
Interest
Net operating interest fell by GBP11m to GBP69m as an increase in floating
interest rates was offset by a combination of lower levels of average net debt
and a one-off credit of GBP9m for interest on the repayment of tax in France.
Taxation
The total tax charge for the year was GBP62m, representing a 36% rate on pre-tax
profits of GBP171m. This rate is higher than the UK statutory rate of 30%; as in
previous years, this is largely attributable to the fact that goodwill
amortisation charged in the profit and loss account is only in part eligible for
tax relief. The total tax charge includes credits of GBP48m relating to previous
years; as in 2003, these reflect a combination of progress in settlements with
the Revenue authorities and changes to deferred tax balances. The mix of profits
between jurisdictions with different tax rates is also a relevant factor; the
effect in 2004 was similar to that in 2003.
The tax rate on adjusted earnings fell from 31.2% in 2003 to 30.3% in 2004; this
decline reflected a number of factors including adjustments relating to previous
years and withholding taxes.
Minority interests
Minority interests include a 39% minority share in IDC and a 21% minority share
in Recoletos.
Dividends
The dividend payment of GBP201m which we are recommending in respect of 2004
represents 25.4p per share - a 5% increase on 2003. The dividend is covered 1.2
times by adjusted earnings and 1.4 times by total free cash flow.
Pensions
Pearson operates a variety of pension schemes. Our UK fund is by far the largest
and we also have some smaller defined benefit funds in the US and Canada.
Outside the UK, most of our people operate 401K (essentially defined
contribution) plans. The UK pension funding level is kept under regular review
by the company and the Fund trustees. The scheme was valued as at 1 January 2004
and the next valuation will be at 1 January 2006. As a result of the 2004
valuation, the company agreed to increase contributions to GBP30m in respect of
2004; to GBP35m in 2005; and to GBP41m from 2006 to 2014.
Adoption of International Financial Reporting Standards (IFRS)
From 2005 onwards Pearson will be adopting IFRS in its consolidated financial
statements in compliance with European Union regulation. This will lead to a
number of changes in reported financial data, which will also be reflected in
Pearson's comparative financial information for prior periods. Pearson has
decided to adopt IFRS as at 1 January 2003 which will have the advantage of
providing two years of comparative IFRS data.
The group started its IFRS transition project in 2003. The project is governed
by a steering committee chaired by the chief financial officer and regular
updates are provided to the Audit Committee. The project has entailed a detailed
assessment of the impacts of IFRS on Pearson accounting policies and reported
results; system changes to capture additional data; training of staff critical
to the Group's reporting process and definition of our IFRS communication
strategy.
The work related to all project activities remains on track to provide an
analysis of the full impact of the adoption of IFRS on the Group's audited 2003
and 2004 results and respective balance sheets. Other than the format of
presentation, there is no cash flow impact from the adoption of IFRS. We plan to
communicate the full impact of the adoption of IFRS on our audited 2003 and 2004
results during April 2005.
In the meantime we set out below a summary of the main areas of impact on the
Group's operating profit together with indicative estimates of the related
amounts:
1. Goodwill and other intangibles: Under IFRS3, goodwill is no longer
amortised and, instead, is assessed annually for impairment. Goodwill arising on
acquisitions before 1 January 2003 will not be restated; other intangible assets
arising from acquisitions after 1 January 2003 will be separately identified and
amortised over their estimated useful economic lives, often over shorter periods
than goodwill has previously been amortised.
As a result of this change, Pearson's operating profit will be increased by the
amount of goodwill amortisation recorded under UK GAAP (amounting to GBP224m for
2004 and GBP264m in 2003) but reduced by the amortisation of other purchased
intangible assets (estimated to be up to GBP10m in each of 2004 and 2003).
2. Share based payments: Under IFRS 2, the imputed fair value at the date
of grant of restricted shares, SAYE schemes and share options issued to
employees will be charged to operating profit over the relevant vesting period.
This will result in a reduction in Pearson's reported operating profit, as the
cost will be higher than that currently charged under UK GAAP. The UK GAAP
charge is based upon the intrinsic value of the award being the difference
between exercise price and grant price.
The impact is estimated to be between GBP15m and GBP25m in 2003 and 2004.
3. Employee Benefits: Under IAS 19 pensions are charged to the profit and
loss account using a different basis of accounting from SSAP 24. IAS 19 uses a
balance sheet approach (similar to FRS 17) for pension cost accounting rather
than determinations based on long term actuarial assumptions. The profit and
loss expense is determined using annually derived assumptions as to salary
inflation, investment returns and discount rates, based on prevailing conditions
at the start of the year. Any surplus or deficit on a defined benefit scheme at
the balance sheet date is recognised in the balance sheet. Where actual
experience differs from the assumptions made, actuarial gains and losses will be
recognised through the Statement of Recognised Income and Expense.
The adoption of IAS 19 is not anticipated to result in a significant change to
operating profit compared to SSAP 24 for 2003 and 2004.
In addition to the above principal areas of impact, a number of other changes
will arise upon transition to IFRS, for example, in relation to the treatment of
software-costs, deferred tax, dividends payable and certain balance sheet
disclosures related to items such as pre-publication costs. We will report on
these other adjustments including further details relating to the presentation
and layout of the Group's IFRS income statement and balance sheet in our April
briefing.
Going forward, Pearson has elected to adopt IAS39 relating to financial
instruments from 1 January 2005. Accounting for derivative financial instruments
in accordance with IAS 39 may result in increased volatility of earnings.
However, Pearson has been tracking its key derivatives during 2004 and has put
in place the required documentation to qualify for hedge accounting: where hedge
accounting cannot be applied under IAS39's prescriptive rules, changes in this
market value of financial investment will be reported through the profit and
account. Given the adoption date, this will have no impact on the 2003 or 2004
accounts.
A number of new IFRS standards were published in final form by the International
Accounting Standards Board in the period between November 2003 and March 2004
which will be mandatory for Pearson in preparing the group's first IFRS
financial statements. As a large number of countries, including the United
Kingdom, are simultaneously adopting the standards for the first time there is
limited established practice on which to draw when forming opinions regarding
IFRS interpretation and application. Therefore at this stage, the full financial
effect of reporting under IFRS cannot be definitively quantified due to the
possible amendment of interpretative guidance by the IASB and developing
industry practice.
Consolidated profit and loss account
for the year ended 31 December 2004
----------------2004---------- -----------------2003----------
all figures note Results from Other Total Results from Other Total
in GBP operations items operations items
millions
Sales
(including
share of
joint
ventures) 3,940 - 3,940 4,066 - 4,066
Less: share
of
joint
ventures (21) - (21) (18) - (18)
Sales of
which 2a 3,919 - 3,919 4,048 - 4,048
Continuing
operations 3,729 - 3,729 3,879 - 3,879
Discontinued
operations 190 - 190 169 - 169
Group
operating
profit of
which 445 (224) 221 483 (257) 226
Continuing
operations 425 (215) 210 457 (251) 206
Discontinued
operations 20 (9) 11 26 (6) 20
Share of
operating
profit of
joint
ventures and
associates of
which 2c / d 10 - 10 7 (7) -
Continuing
operations 8 - 8 5 (7) (2)
Discontinued
operations 2 - 2 2 - 2
Total
operating
profit 2b 455 (224) 231 490 (264) 226
Continuing
operations
Profit/(loss)
on sale of
fixed assets
and
investments 3a - 12 12 - (2) (2)
Loss on sale
of
subsidiaries
and
associates 3b - (3) (3) - (4) (4)
Discontinued
operations
Profit on
sale
of
subsidiaries and
associates 3b - - - - 12 12
Non operating
items - 9 9 - 6 6
Profit before
interest and
taxation 455 (215) 240 490 (258) 232
Net finance
costs 4 (69) - (69) (80) - (80)
Profit before
taxation 5 386 (215) 171 410 (258) 152
Taxation 7 (117) 55 (62) (128) 53 (75)
Profit after
taxation 269 (160) 109 282 (205) 77
Equity
minority
interests (30) 9 (21) (28) 6 (22)
Profit for
the
financial
period 239 (151) 88 254 (199) 55
Dividends on
equity shares 8 (201) (192)
Loss (113) (137)
retained
Adjusted
earnings per
share 6 30.0p 32.0p
Basic
earnings
per share 6 11.1p 6.9p
Diluted
earnings per
share 6 11.0p 6.9p
Dividends per
share 8 25.4p 24.2p
There is no difference between the profit before taxation and the loss retained
for the period stated above and their historical cost equivalents.
Consolidated balance sheet
as at 31 December 2004
------------------------- ----------- ----------
all figures in GBP millions 2004 2003
restated
------------------------- ----------- ----------
Fixed assets
Intangible assets 2,890 3,260
Tangible assets 473 468
Investments: joint ventures
----------- ----------
Share of gross assets 9 7
Share of gross liabilities (2) (1)
----------- ----------
7 6
Investments: associates 41 58
Investments: other 17 21
------------------------- ----------- ----------
3,428 3,813
Current assets
Stocks 676 683
Debtors 1,103 1,132
Deferred taxation 165 145
Investments 1 2
Cash at bank and in hand 613 561
------------------------- ----------- ----------
2,558 2,523
Creditors - amounts falling due within one year
Short-term borrowing (107) (575)
Other creditors (1,168) (1,129)
------------------------- ----------- ----------
(1,275) (1,704)
----------- ----------
Net current assets 1,283 819
------------------------- ----------- ----------
Total assets less current liabilities 4,711 4,632
Creditors - amounts falling due after more than one
year
Medium and long-term borrowing (1,712) (1,347)
Other creditors (60) (45)
------------------------- ----------- ----------
(1,772) (1,392)
Provisions for liabilities and charges (123) (152)
------------------------- ----------- ----------
Net assets 2,816 3,088
Capital and reserves
Called up share capital 201 201
Share premium account 2,473 2,469
Profit and loss account (71) 223
------------------------- ----------- ----------
Equity shareholders' funds 2,603 2,893
Equity minority interests 213 195
------------------------- ----------- ----------
2,816 3,088
The 2003 comparatives have been restated for the adoption of UITF 38 (see notes
1 and 11)
Consolidated statement of cash flows
for the year ended 31 December 2004
---------------------------- ------- -------- ---------
all figures in GBP millions note 2004 2003
restated
---------------------------- ------- -------- ---------
Net cash inflow from operating activities 10 530 359
Dividends from joint ventures and associates 10 9
Interest received 13 11
Interest paid (97) (86)
Debt issue costs (1) (1)
Dividends paid to minority interests (2) (19)
---------------------------- ------- -------- ---------
Returns on investments and servicing of finance (87) (95)
Taxation (45) (44)
Purchase of tangible fixed assets (125) (105)
Sale of tangible fixed assets 4 8
Purchase of investments (1) (3)
Sale of investments 17 -
---------------------------- ------- -------- ---------
Capital expenditure and financial investment (105) (100)
Purchase of subsidiaries (35) (94)
Net cash acquired with subsidiaries - 34
Purchase of joint ventures and associates (10) (5)
Sale of subsidiaries - (4)
Net overdrafts disposed with subsidiaries 1 1
Sale of associates 24 57
---------------------------- ------- -------- ---------
Acquisitions and disposals (20) (11)
Equity dividends paid (195) (188)
---------------------------- ------- -------- ---------
Net cash inflow/(outflow) before management of liquid
resources and
Financing 88 (70)
Management of liquid resources 1 (85)
Issue of equity share capital 4 5
Purchase of own shares (10) (1)
Capital element of finance leases (2) (3)
Loan facility (repaid)/advanced (42) 1
Bonds advanced 414 180
Bonds repaid (456) (159)
Collateral deposit (placed)/reimbursed (26) 54
Net movement in other borrowings 59 (13)
---------------------------- ------- -------- ---------
Financing (59) 64
---------------------------- ------- -------- ---------
Increase/(decrease) in cash in the period 30 (91)
Statement of total recognised gains and losses
for the year ended 31 December 2004
---------------------------- ------ -------- ---------
all figures in GBP millions note 2004 2003
---------------------------- ------ -------- ---------
Profit for the financial period 88 55
Other net gains and losses recognised in reserves
Exchange differences net of taxation (176) (254)
---------------------------- ------ -------- ---------
Total recognised losses relating to the period (88) (199)
Prior year adjustment - UITF 38 11 37 -
---------------------------- ------ -------- ---------
Total recognised losses (51) (199)
Reconciliation of movements in equity shareholders' funds
for the year ended 31 December 2004
---------------------------- ------ -------- ---------
all figures in GBP millions note 2004 2003
restated
---------------------------- ------ -------- ---------
Profit for the financial period 88 55
Dividends on equity shares (201) (192)
---------------------------- ------ -------- ---------
(113) (137)
Exchange differences net of taxation (176) (254)
Shares issued 4 5
Purchase of own shares (10) (1)
UITF 17 charge for the period 5 4
---------------------------- ------ -------- ---------
Net movement for the period (290) (383)
Equity shareholders' funds at beginning of the period 2,893 3,338
Prior year adjustment - UITF 38 11 - (62)
---------------------------- ------ -------- ---------
Equity shareholders' funds at end of the period 2,603 2,893
2004 results
The preliminary results for the year ended 31 December 2004 have been extracted
from the audited accounts, which have not yet been delivered to the Registrar of
Companies. The 2003 accounts carry an unqualified audit report and have been so
delivered. The 2004 Annual Report will be posted to shareholders on Thursday 31
March 2005.
Dividend
The directors recommend a final dividend of 15.7p per share, payable on Friday 6
May 2005 to shareholders on the register at the close of business on Friday 8
April 2005.
Annual General Meeting
The AGM will be held at The Queen Elizabeth II Conference Centre, Broad
Sanctuary, Westminster, London, SW1P 3EE, at 12 noon on Friday 29 April 2005.
Notes to the 2004 results
for the year ended 31 December 2004
1. Basis of preparation
The results for the year ended 31 December 2004 have been prepared in accordance
with the accounting policies set out in the 2003 Annual Report, except that UITF
38 'Accounting for ESOP trusts' and the revision of UITF Abstract 17 'Employee
share schemes' have been adopted in these statements. Restatements have been
made to the figures for the year ended 31 December 2003 where appropriate (see
note 11).
In December 2004, Pearson announced its intention to dispose of its 79% interest
in Recoletos Compania Editorial SA. The transaction was approved by the Spanish
regulatory authorities in February 2005 and the results of Recoletos have been
included in these financial statements as discontinued operations.
2a. Analysis of sales
all figures in GBP millions 2004 2003
Business sectors
Pearson Education 2,356 2,451
FT Group 587 588
The Penguin Group 786 840
------------------------------ ---------- ----------
Continuing operations 3,729 3,879
Discontinued operations 190 169
------------------------------ ---------- ----------
3,919 4,048
Geographical markets supplied
United Kingdom 545 474
Continental Europe 300 294
North America 2,505 2,742
Asia Pacific 261 255
Rest of World 118 114
------------------------------ ---------- ----------
Continuing operations 3,729 3,879
Discontinued operations 190 169
------------------------------ ---------- ----------
3,919 4,048
Notes to the 2004 results continued
for the year ended 31 December 2004
2b. Analysis of total operating profit
2004
all figures in GBP millions results from goodwill operating
operations amortisation profit
Business sectors
Pearson Education 293 (174) 119
FT Group 86 (20) 66
The Penguin Group 54 (21) 33
--------------------------- ----------- ---------- --------
Continuing operations 433 (215) 218
Discontinued operations 22 (9) 13
--------------------------- ----------- ---------- --------
455 (224) 231
Geographical markets supplied
United Kingdom (26) (30) (56)
Continental Europe 21 (2) 19
North America 393 (177) 216
Asia Pacific 31 (5) 26
Rest of World 14 (1) 13
--------------------------- ----- ------ ---------- --------
Continuing operations 433 (215) 218
Discontinued operations 22 (9) 13
--------------------------- ----- ------ ---------- --------
455 (224) 231
2003
all figures in GBP millions results from goodwill operating
operations amortisation profit
Business sectors
Pearson Education 313 (207) 106
FT Group 58 (30) 28
The Penguin Group 91 (21) 70
--------------------------- ----- --------- ---------- --------
Continuing operations 462 (258) 204
Discontinued operations 28 (6) 22
--------------------------- ----- --------- ---------- --------
490 (264) 226
Geographical markets supplied
United Kingdom (46) (31) (77)
Continental Europe 1 (4) (3)
North America 466 (218) 248
Asia Pacific 33 (5) 28
Rest of World 8 - 8
--------------------------- ----- --------- ---------- --------
Continuing operations 462 (258) 204
Discontinued operations 28 (6) 22
--------------------------- ----- --------- ---------- --------
490 (264) 226
Notes to the 2004 results continued
for the year ended 31 December 2004
2c. Share of operating profit/(loss) of joint ventures
2004
all figures in GBP millions results from goodwill operating
operations amortisation profit
Business sectors
Pearson Education - - -
FT Group (8) - (8)
The Penguin Group 1 - 1
Continuing operations (7) - (7)
2003
all figures in GBP millions results from goodwill operating
operations amortisation profit
Business sectors
Pearson Education - - -
FT Group (11) - (11)
The Penguin Group 1 - 1
Continuing operations (10) - (10)
2d. Share of operating profit of associates
2004
all figures in GBP millions results from goodwill operating
operations amortisation profit
Business sectors
Pearson Education 1 - 1
FT Group 14 - 14
The Penguin Group - - -
Continuing operations 15 - 15
Discontinued operations 2 - 2
17 - 17
2003
all figures in GBP millions results from goodwill operating
operations amortisation profit
Pearson Education 1 - 1
FT Group 14 (7) 7
The Penguin Group - - -
Continuing operations 15 (7) 8
Discontinued operations 2 - 2
17 (7) 10
Notes to the 2004 results continued
for the year ended 31 December 2004
3a. Profit/(loss) on sale of fixed assets and investments
all figures in GBP millions 2004 2003
Net loss on sale of property (4) (1)
Net profit/(loss) on sale of investments 16 (1)
Continuing operations 12 (2)
3b. Profit /(loss) on sale of subsidiaries and associates
all figures in GBP millions 2004 2003
Net loss on sale of subsidiaries and associates (3) (4)
Continuing operations (3) (4)
Discontinued operations (Profit on sale of Unidesa) - 12
(3) 8
4. Net finance costs
------------------------------ ---------- ----------
all figures in GBP millions 2004 2003
------------------------------ ---------- ----------
Net interest payable:
Group (70) (81)
Associates 1 1
------------------------------ ---------- ----------
(69) (80)
5. Profit before taxation
------------------------------ ---------- ----------
all figures in GBP millions 2004 2003
------------------------------ ---------- ----------
Profit before taxation 171 152
Goodwill amortisation 224 264
Non operating items (9) (6)
------------------------------ ---------- ----------
Adjusted profit before taxation 386 410
Notes to the 2004 results continued
for the year ended 31 December 2004
6. Earnings per share
In order to show results from operating activities on a consistent basis, an
adjusted earnings per share is presented which excludes 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.
------------------------------ ---------- ----------
all figures in GBP millions 2004 2003
------------------------------ ---------- ----------
Profit for the financial period 88 55
Adjustments:
- Non operating items (9) (6)
- Goodwill amortisation 224 264
Taxation on above items (55) (53)
Minority interest share of above items (9) (6)
------------------------------ ---------- ----------
Adjusted earnings 239 254
Weighted average number of shares (millions)
- for earnings and adjusted earnings 795.6 794.4
Effect of dilutive share options 1.1 0.9
Weighted average number of shares (millions)
- for diluted earnings 796.7 795.3
Adjusted earnings per share 30.0p 32.0p
Basic earnings per share 11.1p 6.9p
Diluted earnings per share 11.0p 6.9p
Notes to the 2004 results continued
for the year ended 31 December 2004
7. Taxation
The tax rate provided in the profit and loss account is analysed as follows:
------------------------------ ---------- ----------
all figures in percentages 2004 2003
------------------------------ ---------- ----------
UK tax rate 30.0 30.0
Effect of overseas tax rates 1.4 1.3
Other items (1.1) (0.1)
------------------------------ ---------- ----------
Tax rate reflected in adjusted earnings 30.3 31.2
The taxation charge is analysed as follows:
---------- ----------
all figures in GBP millions 2004 2003
------------------------------ ---------- ----------
Parent and subsidiaries (59) (70)
Joint ventures and associates (3) (5)
------------------------------ ---------- ----------
(62) (75)
8. Dividends
-------------------2004------------------ ---------------------2003-------------------
Pence per share GBP million Pence per share GBP million
Interim paid 9.7 76 9.4 73
Final proposed 15.7 125 14.8 119
---------------- -------- -------- --------- ---------
Dividends for
the year 25.4 201 24.2 192
9. 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:
------------------------------ ---------- ----------
2004 2003
------------------------------ ---------- ----------
Average rate for profits 1.83 1.63
Period end rate 1.92 1.79
Notes to the 2004 results continued
for the year ended 31 December 2004
10. Note to consolidated statement of cash flows
--------------------2004--------------------- ----------------2003 restated---------
all figures in GBP continuing discontinued Total continuing discontinued Total
millions
Reconciliation of
operating profit to
net cash inflow
from operating
activities
Total
operating
profit 218 13 231 204 22 226
Share of
operating
profit of
joint ventures
and associates (8) (2) (10) 2 (2) -
Depreciation
charges 95 7 102 104 7 111
Subsidiary
goodwill
amortisation 215 9 224 251 6 257
Increase in
stocks (26) (1) (27) (8) - (8)
Increase in
debtors (10) (5) (15) (93) (3) (96)
Increase
/(decrease) in
creditors 47 3 50 (71) 3 (68)
Decrease in
operating
provisions (15) - (15) (20) - (20)
Other and
non-cash items (10) - (10) (44) 1 (43)
Net cash
inflow from
operating
activities 506 24 530 325 34 359
Dividends from
joint ventures
and associates 9 1 10 8 1 9
Purchase of
tangible fixed
assets (118) (7) (125) (94) (11) (105)
Capital
element of
finance lease
rentals (2) - (2) (3) - (3)
Proceeds from
sale of
tangible fixed
assets 4 - 4 8 - 8
Add back: Cash
received
relating to
acquired
deferred
income - - - 42 - 42
Add back: Non
operating
expenditure on
fixed assets 1 - 1 2 - 2
Add back: Cash
spent against
integration
and fair value
provisions 4 - 4 8 - 8
Pearson
operating
cashflow 404 18 422 296 24 320
Operating tax
paid (43) (12) (55) (11) (23) (34)
Operating
finance
charges (88) 3 (85) (79) 3 (76)
Operating free
cashflow 273 9 282 206 4 210
Non operating
tax
received/(paid) 10 - 10 (10) - (10)
Integration
and fair value
spend (4) - (4) (8) - (8)
Total free
cashflow 279 9 288 188 4 192
Dividends paid
(including
minorities) (196) (1) (197) (189) (18) (207)
Net movement
of funds from
operations 83 8 91 (1) (14) (15)
Acquisitions
of businesses
and
investments (45) (1) (46) (108) (3) (111)
Disposals of
businesses,
investments
and property 18 24 42 (4) 56 52
New equity 4 - 4 5 - 5
Purchase of
own shares (10) - (10) (1) - (1)
Other non
operating
items (1) - (1) - - -
Net movement
of funds 49 31 80 (109) 39 (70)
Exchange
movements on
net debt 78 (3) 75 104 13 117
Total movement
in net debt 127 28 155 (5) 52 47
Notes to the 2004 results continued
for the year ended 31 December 2004
11. UITF 38 and revision to UITF 17
UITF Abstract 38 'Accounting for ESOP trusts' and the revision of UITF Abstract
17 'Employee share schemes' were issued on 15 December 2003 and these revisions
have been applied for the first time in 2004. Under UITF 38 own shares held in
treasury or through an ESOP trust are recorded at cost and shown as a deduction
in arriving at shareholders' funds. Previously these shares were recorded at
cost less provision for impairment and shown as a fixed asset investment with
impairment charges being taken to the profit and loss account. Under the revised
UITF 17, employee share scheme charges to the profit and loss account are now
always calculated as the intrinsic value of the award and spread over the
performance period. The intrinsic value is the difference between the fair value
of shares at the date of grant and the amount paid by the employee to exercise
the rights to those shares irrespective of the cost of shares purchased to fund
the award.
The reclassification of own shares from fixed asset investments to equity has
reduced net assets by GBP59 million at 31 December 2003 (1 January 2003 GBP62
million). The reversal of prior year impairments taken on the cost of shares
held in trust (GBP37 million) has been shown as a prior year adjustment in the
statement of total recognised gains and losses. The amendment to UITF 17 in
respect of the calculation of share scheme charges has had no material effect on
the profit and loss account.
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: 28 February 2005
By: /s/ STEPHEN JONES
-----------------------
Stephen Jones
Deputy Secretary