Operating review Financial review


Operating review
Financial review
Overview
Financial statements
Other financial items
Managing our financial risks




Financial statements

goodwill amortisation

Goodwill is a balance sheet item which 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 the estimated useful life of the acquisition, or a period of 20 years whichever is the shorter. The goodwill amortisation charge fell by 45m last year to 330m mainly due to the disposal of the RTL Group.

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 2002 we took a 10m impairment charge, relating to a subsidiary of Recoletos in Argentina.

integration costs

Integration costs are the one-off costs of integrating significant recent acquisitions into our existing businesses. In 2002 3m was incurred in integrating Dorling Kindersley into the Penguin Group (compared to 45m in 2001) and 7m related to the integration of NCS into Pearson Education (compared to 29m in 2001). This expenditure was in line with our forecasts at the time of the transactions and there will be no further charges in respect of these acquisitions in 2003. All other restructuring and related costs are expensed through the profit and loss account as part of the ongoing operations of our businesses.

non-operating items

In 2002, we took a charge of 37m for non-operating items relating to losses on the sale or closure of businesses and fixed assets. The principal items are a profit of 18m relating to the completion of the sale of RTL in January 2002 and a provision of 40m for the loss on sale of our Forum business, which completed in January 2003. This provision largely relates to unamortised goodwill at the balance sheet date. Other items include a loss on sale of PH Direct of 8m, a profit of 3m on finalisation of the sale of Journal of Commerce by the Economist and various smaller losses on investments and property.

amounts written off investments

In 2002, we continued to review our fixed asset investments and concluded that there have been no further material impairments. This compares to a charge of 92m taken in 2001 relating to the carrying value of Pearson shares held to secure employee share option plans and equity investments in a number of internet businesses.

interest

Net interest fell by 75m to 94m, with average net debt decreasing by 748m following the receipt of proceeds from the RTL disposal. 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 160 basis points, or 1.6%. The effect of these falls was mitigated by our existing portfolio of interest rate swaps, which converted over half our variable rate commercial paper and bank debt to a fixed rate basis. As a result, the Group's net interest rate payable averaged approximately 5.0%, falling 1.4% from the previous year. During 2002 we took an additional one-off charge of 37m for cancellation of certain swap contracts and the early repayment of debt following re-balancing of the group's debt portfolio on the receipt of the RTL proceeds.

INTEGRATION COSTS 2002   2001   2000   1999  
SIMON & SCHUSTER - - - - 9m $14m 95m $153m
NCS 7m $11m 29m $47m 4m $6m - -
DK 3m $5m 45m $72m 27m $44m - -
TOTAL 10m $16m 74m $119m 40m $64m 95m $153m


taxation

The Group recorded a total pre-tax loss of 25m in 2002 but there was a tax charge for the year of 64m. This situation reflects the fact that there is only limited tax relief available for the goodwill amortisation charged in the accounts. The total tax charge was in fact reduced by a non-operating credit of 45m attributable to the resolution of the tax position on the disposal of the group's remaining interest in BSkyB.

The tax charge reflects the adoption of FRS 19 'Deferred Tax'. FRS 19 requires full provisioning for deferred tax and this has had a significant effect on Pearson's effective tax rate. This is mainly because Pearson has recognised a deferred tax asset in respect of US tax losses and other timing differences. Previously the tax benefit of US tax losses was accounted for as the losses were utilised.

The tax rate on adjusted earnings, after restating for FRS 19, decreased from 34.0% to 32.8%. The decrease was attributable to two main factors. There was a more favourable mix of profits between higher and lower tax regimes than in 2001; in addition there was a benefit from prior year adjustments.

minority interests

Minority Interests include a 40% minority share in IDC and a 21% minority share in Recoletos.

dividends

The dividend payment of 187m which we are recommending in respect of 2002 represents 23.4p per share - a 5% increase on 2001. The dividend is covered 1.3 times by adjusted earnings, and 1.6 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. While this commitment remains unchanged, we believe that the income requirements of our shareholders should take priority over reinvestment this year.


Dividend Per Share


 
 
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We are the world?s biggest book publisher and we are beginning to make that scale count in our favour. We have combined our book businesses in Australia and Canada and we are moving to share back office operations such as warehousing and distribution in the UK and New Zealand.

   
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