Pearson plc Preliminary Results LONDON, March 1
/PRNewswire-FirstCall/ -- 12 months ended 31 December 2003 2003
2003 2002 2002 (in pounds) (in pounds) Sales 4,048m $7,246m 4,320m
$7,733m Business performance* Operating profit 490m $877m 493m
$882m Profit before tax 410m $734m 399m $714m Adjusted earnings per
share 32.0p 57.3 cents 30.3p 54.2 cents Operating free cash flow
210m $376m 305m $546m Free cash flow 192m $344m 215m $385m
Operating margin 12.1% 11.4% Return on invested capital 6.3% 6.0%
Statutory results Operating profit 226m $405m 143m $256m Profit/
(loss) before tax 152m $272m (25)m $(45)m Basic earnings/ (loss)
per share 6.9p 12.4 cents (13.9)p (24.9) cents Dividend per share
24.2p 43.3 cents 23.4p 41.9 cents Net borrowings 1,361m $2,436m
1,408m $2,520m Change - Change - Change - underlying constant
headline currency Sales (4)% (2)% (6)% Business performance*
Operating profit 0% 5% (1)% Profit before tax 8% 3% Adjusted
earnings per share 11% 6% Operating free cash flow (31)% Free cash
flow (11)% Operating margin Return on invested capital Statutory
results Operating profit 58% Profit/ (loss) before tax -- Basic
earnings/ (loss) per share -- Dividend per share 3% Net borrowings
(3)% * Continuing operations before goodwill (2003: (264)m pounds
sterling ($(473)m; 2002: (340)m pounds ($(609)m), integration costs
(2003: nil pounds ($nil); 2002: (10)m pounds ($(18)m), non
operating items (2003: 6m pounds ($11m); 2002: (37)m pounds
($(66)m) and net finance costs (2003: nil pounds ($nil); 2002:
(37)m pounds ($(66)m). Constant currency growth rates are
calculated using constant 2002 exchange rates. In 2003, currency
movements reduced revenues by 181m pounds ($324m) and profits by
27m pounds ($48m). Underlying growth rates exclude the impact of
currency movements and portfolio changes. In 2003, portfolio
changes increased revenues by 89m pounds ($159m) and profits by 24m
pounds ($43m). Throughout this statement, we refer to business
performance measures and growth rates on an underlying basis unless
otherwisestated. 2003: market share and efficiency gains bring
improvements in operating margin, adjusted earnings per share and
return on invested capital; 2004: underlying progress on earnings,
cash and returns expected, despite a weak school calendar and
investments to gain share and accelerate organic growth; 2005:
acceleration in earnings, cash and returns, with the strengthening
of the US School industry, $1bn of multi-year contract wins in 2003
and lower costs in advertising and technology-related businesses.
Marjorie Scardino, chief executive, said: "In the face of a tough
business environment over the past few years we have improved our
market positions through operating efficiency and product quality.
We are now leaner, stronger and more ready for the better
conditions we're beginning to see ahead. "In 2004 we expect to make
further underlying progress toward our financial goals, and in 2005
we see a very strong performance from our whole company. That will
be underpinned by US school publishing and the contracts we already
have in-house. Any recovery in our cyclical businesses would be a
further benefit." 2003 highlights: strong competitive performances
and further efficiency gains -- School sales up 1% and profit up
13%. US basal publishing up 4% (against market growth of 1%);
digital learning business returns to profit despite lower sales;
testing business wins $300m of new contracts; -- Higher Education
sales up 6% and profit up 11%. US Higher Education business up 6%
(against market up 3%) in fifth straight year of market share
gains; -- Professional sales and profits lower due to impact of the
2002 TSA contract. Technology publishing business maintains margins
and gains share in a declining market; Professional Testing and
Government Solutions win $800m of new long-term contracts; -- FT
Group profits up 8% despite tough market for businessadvertising;
first signs of improvements in advertising trends in the second
half of the year. IDC increases profits by 18% and business
newspapers invest to strengthen competitive positions; -- Penguin
increases revenues and profits by 2% for another record year.
Strong publishing offsets industry-wide backlist softness. Outlook
At this early stage in the year, we continue to expect further
underlying progress on earnings, cash and returns in 2004. Pearson
generates approximately two thirds of its revenues in the US and a
five cent change in the average exchange rate for the full year
(which in 2003 was 1 pound:$1.63) will have an impact of
approximately 1p (1.8�) on adjusted earnings per share. Our outlook
is: -- Weexpect revenues at our School business to be broadly in
line with 2003, as growth in testing and digital learning offset
lower sales in US school publishing, where we expect the industry
to decline in the mid-single digits. We expect our US publishing
margins to ease by 1 - 2% points but expect margin progress
elsewhere in the School business. We are continuing to invest in
our programmes in key subjects and in 2005, based on the current
adoption schedule, we expect revenues at our US School publishing
business to grow in double digits, with a margin recovery. Full
implementation of No Child Left Behind from 2005 and improving
state budgets should benefit our testing and digital learning
businesses; -- In 2004, we expect our US Higher Education business
to grow in the 4-6% range, gaining share with a strong publishing
schedule, our online services and custom publishing; -- We expect
our Professional businesses to show revenue and profit growth in
2004, even as we invest in our new professional testing centres; --
Penguin faces tough revenue and profit comparisons after another
record year in 2003, but we expect to grow faster than the consumer
publishing market with another strong publishing schedule. This
year, Penguin will increase investment in its publishing and in
initiatives to reach new readers. -- We expect Penguin to deliver a
good cash performance, even though its publishing schedulewill
again be concentrated in the fourth quarter; Advertising trends at
our business newspapers have continued to improve in the first two
months of the year. Advertising revenues at the Financial Times,
which were 18% lower in the first half of 2003 and 12% lower in the
second half, are 4% lower in the year to date. Forward bookings are
running a little ahead of last year at all our business newspapers.
Although the outlook for our business newspapers remains uncertain,
we expect the cost actionswe have taken to reduce losses at the
Financial Times by approximately 20m pounds ($36m) this year even
without any advertising recovery. Once again, we expect IDC to
deliver good results, with profit growth 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 0930
(GMT) and available for replay from 12 noon (GMT) via
http://www.pearson.com/. We will also be holding a conference call
for US investors at 1000 (EST)/1500 (GMT) To participate in the
conference call or to listen to the audiocast, please register at
http://www.pearson.com/. Video interviews with Marjorie Scardino,
chief executive, and Rona Fairhead, chief financial officer, are
also available at http://www.pearson.com/. High resolution
photographs are available for the media at
http://www.newscast.co.uk/. For the complete release including all
financial detail, please access http://www.pearson.com/ Throughout
this statement (unless otherwise stated): 1. Adjusted figures are
stated before goodwill, integration costs and non operating items.
Goodwill is amortised over no more than 20 years; 2. The 'business
performance' measures, which Pearson uses alongside other measures
to track performance, are non-GAAP measures for both US and UK
reporting. Reconciliations of operating profit, adjusted earnings
per share and operating free cash flow to the equivalent statutory
heading under UK GAAP are included in notes 2, 5 and 10. 3. All US
dollar equivalents have been converted at a rate of $1.79:1
poundfor illustrative purposes only. Operating review 2003 overview
In 2003, sales declined by 4%. Strong competitive performances in
our book businesses could not offset the absence of the one-off
Transportation Security Administration (TSA) contract, which
contributed some 250m pounds to our sales in 2002, and tough
trading conditions for our advertising and technology-related
businesses. The impact of the 272m pounds sales decline was almost
entirely offset by cost reductions, so that operating profit was 3m
pounds lower at 490m pounds and profit before tax improved to 410m
pounds (399m pounds in 2002). Operating margins improved from 11.4%
to 12.1%. Adjusted earnings per share grew to 32.0p, an increase of
6%. Operating free cash flow was 210m pounds (305m pounds in 2002)
and free cash flow was 192m pounds (215m pounds in 2002). Two major
factors, both timing-related, masked an otherwise strong
performance. Penguin's publishing schedule was particularly
concentrated in the fourth quarter, pushing collections into 2004,
and the TSA has not yet paid some $151m relating to the 2002
contract. We held capital expenditure below the level of
depreciation and, stripping out the TSA impact, average use of
working capital improved slightly on2002, even as we increased
investment in new authors, titles and programmes. We reduced our
cash spend on integration, finance charges and tax from 240m pounds
in 2002 to 128m pounds in 2003. On a statutory basis, Pearson
reported a profit before taxfor the year of 152m pounds (a 25m
pounds loss in 2002) and generated earnings per share of 6.9p (a
loss per share of 13.9p in 2002). Net borrowings fell a further 3%
to end the year at 1,361m pounds. The board is recommending a 3.4%
increase in the dividend to 24.2p per share. Pearson Education
millions pounds 2003 2002 Change - Change - constant Change -
underlying currency headline Sales School 1,176 1,151 1% 8% 2%
Higher Education 772 775 6% 6% 0% Professional 503 784 (30)% (32)%
(36)% FT Knowledge -- 46 -- -- -- Pearson Education 2,451 2,756
(6)% (5)% (11)% Operating profit School 127 115 13% 17% 10% Higher
Education 148 142 11% 11% 4% Professional 38 81 (51)% (52)% (53)%
FT Knowledge -- (12) -- -- -- Pearson Education 313 326 (2)% 2%
(4)% Sales at Pearson Education were 6% lower than in 2002, as good
growth in our School and Higher Education businesses could not fill
the gap left by the absence of the 250m pounds TSA contract.
Profits were 2% lower, as progress in School and Higher Education
largely offset a 51% decline in our Professional operations.
Margins improved as we benefited from sales growth, operating
efficiencies and the 2002 disposal of FT Knowledge. In our School
business, sales were 1% higher and operating profits up 13%. In the
US, our textbook publishing business grew 2% as our basal imprints
Scott Foresman and Prentice Hall increased revenues by 4% against
basal market growth of some 1%. Our new elementary social studies
programme took a market share of more than 50% in adoption states,
helping Pearson to take the leading position in new adoptions with
a share of approximately 29%. Sales at our supplementary publishing
business were lower than in 2002 as we discontinued some
unprofitable product lines and were affected byindustry- wide
weakness in state budgets. Although the same pressures reduced
sales at our School digital learning business, strong cost
management enabled it to return to a small profit. In School
testing, 2003 revenues were a little ahead of the previous year and
we won more than $300m worth of new multi-year contracts which will
boost sales from 2005, when the Federal Government's No Child Left
Behind accountability measures become mandatory. Outside the US,
revenues were up 7% with good growth in English Language Teaching
and in our School publishing operations in Hong Kong, South Africa,
the UK and the Middle East. Our UK testing business, London
Qualifications, contributed revenues of 89m pounds. Our Higher
Education business increased revenues by 6% and operating profits
by 11%. In the US the Higher Education publishing business grew its
revenues by 6%. Excluding Pearson, the market grew by 3%. This
comes on top of 14% revenue growth in 2002 and marks our fifth
straight year of market share gains. Though industry growth slowed
a little in 2003, the long-term fundamentals of growing enrolments,
a boom in community colleges and a strong demand for post-secondary
qualifications more than offset the impact of state budget
weaknesses and rising tuition fees. Our business benefited from a
strong schedule of first editions including Faigley's Penguin
Handbook in English Composition, Wood & Wood's Mastering World
Psychology and Jones & Wood's Created Equal in American
History. The use of technology continues to distinguish our
learning programmes, with almost one million students now following
their courses through our paid-for online sites, an increase of 30%
on last year, and a further 1.4 million using our free online
services. Ourmarket-leading custom publishing business, which
creates personalised textbooks and online packages for individual
professors and faculties, grew revenues by 35%, with sales
exceeding $100m for the first time. Outside the US, our Higher
Education imprints grew 7%, helped by strong growth in key markets
including Europe and Canada, solid local publishing and the
introduction of our custom publishing model. Revenues and profits
were significantly lower in our Professional business, caused by
both theabsence of the TSA contract and the associated close-out
costs. The $151m receivable from the TSA remains outstanding, and
we are discussing with the TSA the post-contract audit and payment.
We expect this process to be completed in 2004, and that we will
receive payment of the amount due, although the timing of the
receipt remains uncertain. TSA apart, our Government Solutions
business grew by 39%, benefiting from new contracts with the
Department of Health and the USAC. The Professional Testing
business, which had revenues of approximately $100m in 2003, 51%
higher than in 2002 excluding TSA, won more than $600m of new
long-term contracts. These include testing learner drivers for the
UK's Driving Standards Agency, business school applicants for the
Graduate Management Admissions Test and securities professionals
for the National Association of Securities Dealers. In 2004 we will
invest in the expansion of our international network of testing
centres to support these contracts, from which we expect to
generate significant revenue and profit growth from 2005. Our
worldwide technology publishing operations maintained margins
despite a 12% drop in revenues. After a severe three-year
technology recession, in which our publishing revenues have fallen
by 36%, the rate of decline now appears to be slowing, particularly
in the US. The Penguin Group millions pounds 2003 2002 Change -
Change - constant Change - underlying currency headline Sales 840
838 2% 4% 0% Operating profit 91 87 2% 8% 5% Note: At the beginning
of 2003 we transferred our Alpha consumer technology publishing
business from Pearson Education's Professional division to Penguin.
Our calculation of Penguin's underlying growth includes Alpha for
both 2002 and 2003. Penguin increased revenues and profits by 2%.
In the US, our largest market, accounting for around two-thirds of
sales, our best ever schedule of new titles enabled Penguin to grow
ahead of the industry despite tough conditions for backlist
publishing. In the UK our backlist performed well, helped by the
relaunch of Penguin Classics and BBC's The Big Read. Penguin's
best-selling books included Sue Monk Kidd's debut novel The Secret
Life of Bees (2.3m copies sold) John Steinbeck's East of Eden
(1.5m), Al Franken's Lies and the Lying Liars Who Tell Them (1.1m),
Scott Berg's Kate Remembered (0.5m), Paul Burrell's A Royal Duty
(0.9m), Madonna's The English Roses and Mr Peabody's Apples (0.9m)
and Michael Moore's Stupid White Men (0.8m). Dorling Kindersley
faced a tough backlist market but benefited from three major new
titles: America 24/7, Tom Peters' Re-Imagine! and an e-
Encyclopaedia published in association with Google. We increased
spending on authors' advances as we invested in a number of new
imprints including Portfolio (business books), Gotham
(non-fiction), and The Penguin Press (non-fiction), which has
already signed almost 100 authors, including Alexandra Fuller, Ron
Chernow and John Berendt. We signed new multi- book deals with a
number of our most successful authors includingCatherine Coulter
and Nora Roberts, whose books have spent a total of 71 weeks at
number one on the New York Times bestseller list. In the year ahead
we will also be investing in channel initiatives to build the
Penguin and DK brands and to reach new consumers. These include
Penguin TV, which will commission non- fiction and children's
programmes based on DK and Penguin books, and a pilot direct
selling programme in the US. Pearson is the world's largest book
publisher and last year we continued to integrate our book
publishing operations around the world. In Australia and Canada,
the first two markets where we combined Penguin and Pearson
Education into one company, profits were up 17% and 12%
respectively. In the UK, we are shortly to move thetwo businesses
to a single shared warehousing and distribution centre and in the
US we have begun to consolidate central functions. The costs of
these integration moves were absorbed in the operating profits of
Pearson Education and Penguin in 2002 and2003, and we continue to
expect them to deliver some 20m pounds of annual cost savings from
2005. Financial Times Group millions pounds 2003 2002 Change -
Change - constant Change - underlying currency headline Sales
Financial Times 203 224 (9)% (9)% (9)% Other FT publishing 112 105
(7)% 0% 7% Recoletos 169 148 4% 4% 14% IDC 273 249 2% 15% 10% Total
757 726 (3)% 3% 4% Operating profit / (loss) Financial Times (32)
(23) (37)% (37)% (39)% Other FT publishing 6 10 (42)% (45)% (40)%
Associates & Joint Ventures 3 (6) -- -- -- Recoletos 28 29
(11)% (11)% (3)% IDC 81 70 18% 24% 16% Total 86 80 8% 13% 8% The
Financial Times Group increased profits by 8% despite a 3% revenue
decline as IDC, our asset pricing business, posted an 18% profit
increase (before the benefits of Comstock, acquired last January).
For our business newspapers, 2003 was the third year of a savage
corporate advertising recession which has seen advertising volumes
at the Financial Times fall almost two-thirds since their peak in
2000. Over the same period, we have reduced the FT's cost base by
more than 100 million pounds. Losses at the Financial Times were 9m
pounds higher than in 2002 as advertising revenues fell by 23m
pounds and we invested some 10m pounds in the newspaper's continued
expansion around the world. Advertising revenues were down 15% as
industry conditions remained tough for the FT's key advertising
categories of corporate finance, technology and business to
business. The advertising declines were significantly worse
immediately before and during the war in Iraq, but the rate of
decline began to narrow towards the end of the year, helped by
growth in US, online and recruitment advertising. The newspaper's
circulation in the six months to January 2004 was 433,000, 4% lower
than in the same period last year, although FT.com's subscribers
are some 50% higher at 74,000. The launch of our Asian edition in
September completed theFT's global network of four regional
newspaper editions, backed up by a single editorial, commercial and
technology infrastructure and by FT.com. Profits at Les Echos were
behind last year, reflecting continuing declines in advertising
revenues and investment in the newspaper's relaunch. Average
circulation for the year was down 4% to 116,400, but the September
relaunch generated a positive response, with newsstand sales in the
final quarter up 4% against a market decline of 6%. Despite a
continued decline in the advertising market, FT Business posted
profit growth, due to tight cost management. The FT's associates
and joint ventures returned to profit (6m pounds loss in 2002) with
good progress at FT Deutschland, our joint venture with Gruner +
Jahr, and at the Economist Group, in which Pearson owns a 50%
interest. FT Deutschland's average circulation for 2003 was 92,000,
an increase of 9% on the previous year and advertising revenues
increased in a declining market. The Economist Group increased its
operating profit despite further revenue declines, reflecting
additional measures to reduce costs. The Economist's circulation
growth continued, with average weekly circulation 3% higher at
908,000. Revenues at Recoletos (Bolsa Madrid: REC), our 79%-owned
Spanish media group, were up 4% as its consumer titles, including
sports newspaper Marca, performed strongly, more than offsetting
further advertising revenue decline at business newspaper
Expansi�n. Profits were 11% lower as Recoletos invested in existing
and new titles. Average circulation at Marca increased 3% to
391,000, and at Expansi�n fell 3% to 46,000. Interactive Data
Corporation (NYSE:IDC), our 61%-owned asset pricing business, grew
its underlying revenues in a declining market for the fourth
consecutive year. Revenues increased by 2% and profits by 18%,
despite continuing weakness in the market for financial services as
institutions focused on containing costs. It was helped by strong
institutional renewal rates, which continue to run at more than
95%, the addition of new asset classes to its core pricing
services, and the successful launch of our Fair Value Pricing
service, which is now installed in 35 leading institutions. IDC
continued to extend its range of services through new products such
as e- Finance Solutions, enhancements of existing products such as
BondEdge and eSignal and bolt-on acquisitions including Comstock, a
real-time financial data service, and Hyperfeed Technologies.
Financial review Profit before tax In 2003 we report a profit
before tax of 152m pounds against a loss of 25m pounds in 2002 as
acquisition integration charges ceased and the goodwill
amortisation charge reduced. Goodwill amortisation Goodwill is a
balance sheet itemwhich represents the difference between the price
paid for acquisitions and the fair value of the assets acquired.
Pearson amortises goodwill to the profit and loss account over
whichever is the shorter of the estimated useful life of the
acquisition and a period of 20 years. The goodwill amortisation
charge fell by 66m pounds last year to 264m pounds, mainly due to
Family Education Network and CBS Marketwatch, where the final
amortisation charges were incurred in the first half of 2003.
Goodwill impairment Goodwill is subject to an impairment review at
the end of the first full year following an acquisition and at any
other time if events or changes in circumstances indicate that the
carrying value may not be recoverable. In 2003 no impairment
charges were necessary. Integration costs Integration costs are the
one-off costs of integrating significant recent acquisitions into
our existing businesses. The last of these significant acquisitions
occurred in 2000 and the final costs of integration were incurred
in 2002. In 2003 there were no integration charges and all other
restructuring and related costs have been expensed through the
profit and loss account as part of the ongoing operations of our
businesses. Non operating items Non operating items relate to gains
and losses on the sale or closure of businesses and on the sale of
fixed assets. In 2003 we had an overall profit on non operating
items of 6m pounds, mainly relating to the sale of an associate
investment in Unidesa by Recoletos. Interest Net operating interest
fell by 14m pounds to 80m pounds, with average net debt decreasing
by 157m pounds. Interest was further reduced by the effect of a
general fall in interest rates during the year. The weighted
average three month LIBOR rate, reflecting the Group's borrowings
in US dollars, euros, and sterling, fell by 75 basis points, or
0.75%. The impact of these falls was dampened by our treasury
policy of having 40 - 65% of net debt at fixed interest rates. As a
result, the Group's net interest rate payable averaged
approximately 4.6%, improving from 5.0% in the previous year.
Taxation The tax charge for the year was 75m pounds. As in previous
years, this high rate of tax has come about mainly because there is
only very limited tax relief available for the goodwill
amortisation charged in the accounts. The total tax charge of 75m
pounds includes credits of 56 million pounds relating to prior year
items; these reflect a combination of settlements with Revenue
authorities and changes to deferred tax balances. The tax rate on
adjusted earnings fell from 32.8% in 2002 to 31.2% in 2003. This
decline reflects the factors above, the impact of the dollar
exchange rate, and a more favorable mix of profits between higher
and lower tax rate jurisdictions. Minority interests Minority
interests include a 39% minority share in IDC and a 21% minority
share in Recoletos. Dividends The dividend payment of 192m pounds
which we are recommending in respect of 2003 represents 24.2p per
share - a 3.4% increase on 2002. The dividend is covered 1.3 times
by adjusted earnings, and 1.1 times by operating free cash flow.
The company seeks to maintain a balance between the requirements of
our shareholders, including our many private shareholders, for a
rising stream of dividend income and the re-investment
opportunities that we see across the Group. This balance has been
expressed in recent years as a commitment to increase our annual
dividend faster than the prevailing rate of inflation while
progressively reinvesting a higher proportion of our distributable
earnings in our business. 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. Our most recent full valuation of the UK
Pension Fund was in 2001 and the next full valuation will be
completed during 2004. The pension funding level is kept under
regular review by the company and the Fund trustees. After an
informal indication in 2002, and taking account of current stock
market conditions, the company increased contributions by 5m pounds
to 25m pounds in 2003 and has taken an additional 6m pounds charge
to the profit and loss account, ahead of the full valuation in
2004. The additional contributions were designed to keep the scheme
fully funded and bridge the gap between the 2001 valuation and
current expectations. Except for the historical information
contained herein, the matters discussed in this preliminary
announcement include forward-looking statements that involve risk
and uncertainties that could cause actual results to differ
materially from those predicted by such forward-looking statements.
These risks and uncertainties include international, national and
local conditions, as well as competition. They also include other
risks detailed from time to time in the company's publicly-filed
documents, including the company's Annual Report 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. DATASOURCE: Pearson plc CONTACT: UK: Luke
Swanson or Charlotte Elston, +44-20-7010-2310, or US: analysts and
investors, Jeff Taylor, +1-952-201-6878, or media, David Hakensen,
+1-952-681-3040, all of Pearson Web site: http://www.pearson.com/
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