IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
Selected consolidated financial data
Following the publication of SEC Release No 33-8879
Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP, the Group no longer provides a reconciliation between IFRS
and U.S. GAAP.
The table below shows selected consolidated financial data under IFRS as issued by the
IASB. The selected consolidated profit and loss account data for the years ended December 31, 2011, 2010 and 2009 and the selected consolidated balance sheet data as at December 31, 2011 and 2010 have been derived from our audited
consolidated financial statements included in Item 18. Financial Statements in this Annual Report.
The results of the Interactive Data Corporation (Interactive Data) in which Pearson held a 61% interest and which was disposed in July 2010, have been included in discontinued operations for all the
years to 2010.
The selected consolidated financial information should be read in conjunction with
Item 5. Operating and Financial Review and Prospects and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the
results that may be expected from future operations.
For convenience, we have translated the 2011 amounts into US dollars at the
rate of £1.00 = $1.55, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2011.
Year Ended December 31
(In millions, except for per share amounts)
Consolidated Income Statement data
Total operating profit
Profit after taxation from continuing operations
Profit for the financial year
Consolidated Earnings data per share
Basic earnings per equity share(1)
Diluted earnings per equity share(2)
Basic earnings from continuing operations per equity share(1)
Diluted earnings from continuing operations per equity share(2)
Dividends per ordinary share
Consolidated Balance Sheet data at period end
Total assets (non-current assets plus current assets)
Number of equity shares outstanding (millions of ordinary shares)
Basic earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the
Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares
in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options.
Long-term obligations comprise any liabilities with a maturity of more than one year, including medium and long-term borrowings, derivative
financial instruments, pension obligations and deferred income tax liabilities.
We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the
guidelines of the London Stock Exchange. Our board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. Our board of directors normally recommends a final dividend following the end of
the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders approval at our annual general meeting. At our annual general meeting on April 27, 2012 our shareholders will be asked to approve a
final dividend of 28.0p per ordinary share for the year ended December 31, 2011.
The table below sets forth the amounts of interim, final and total dividends
paid in respect of each fiscal year indicated, and is translated into cents per ordinary share at the noon buying rate in The City of New York on each of the respective payment dates for interim and final dividends. The final dividend for the 2011
fiscal year will be paid on May 4, 2012.
(Pence per ordinary share)
(Cents per ordinary share)
As the 2011 final dividend had not been paid by the filing date, the dividend has been translated into cents using the noon buying rate for sterling
at December 31, 2011.
Future dividends will be dependent on our future earnings,
financial condition and cash flow, as well as other factors affecting the Group.
Exchange rate information
The following table sets forth, for the periods indicated, information concerning the noon buying rate for
sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period and on the last day of each month during an annual period. On
December 31, 2011 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.55. On February 29, 2012 the noon buying rate for
sterling was £1.00 = $1.60.
You should carefully consider the risk factors described below, as well as the other information included in this
Annual Report. Our business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that we presently cannot identify.
Global economic conditions may adversely impact our financial performance.
With the continued pressure on the worldwide economies, especially the Eurozone, during 2011, there is an increased risk
of a further weakening in trading conditions in 2012 which could adversely impact our financial performance. The effect of continued deterioration in the global economy will vary across our different businesses and will depend on the depth, length
and severity of any economic downturn. Specific economic risks by business are described more fully in the other risk factors below.
A significant deterioration in Group profitability and/or cash flow caused by prolonged economic instability could reduce our liquidity and/or impair our financial ratios, and trigger a need to
raise additional funds from the capital markets and/or renegotiate our banking covenants.
extent the economic difficulties continue, or worldwide economic conditions materially deteriorate, the Groups revenues, profitability and cash flows could be significantly reduced as customers would be unable to purchase products and services
in the expected quantities and/or pay for them within normal agreed terms. A liquidity shortfall may delay certain development initiatives or may expose the Group to a need to negotiate further funding. While we anticipate that our existing cash and
cash equivalents, together with availability under our existing credit facility, cash balances and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund
operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding
to competitive pressures, capital may not be available on favorable terms or may not be available at all.
the global economy weakens further and/or the global financial markets collapse, whether in general or as a result of specific factors, such as the current European sovereign debt crisis, we may not have access to or could lose our bank deposits.
Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute
our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new
Our education, business information and book publishing businesses will be impacted by the rate of and
state of technological change, including the digital evolution and other disruptive technologies.
common trend facing all our businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. The digital migration brings the need for
change in product distribution, consumers perception of value and the publishers position between retailers and authors. The trend to ebooks has created contraction in the consumer books retail market which increases the risk of
bankruptcy of a major retail customer. This could disrupt short-term product supply to the market as well as result in a large debt write off.
We face competitive threats both from large media players and from smaller businesses, online and mobile portals and news redistributors operating in the digital arena and providing alternative sources of
news and information. New distribution channels, e.g. digital format, the internet, online retailers, growing delivery platforms (e.g. e-readers), combined with the concentration of retailer power pose both threats and opportunities to our
traditional consumer publishing models, potentially impacting both sales volumes and pricing.
If we do not adapt rapidly to these changes we may lose business to
faster more agile competitors, who increasingly are non-traditional competitors, i.e. technology companies, making their identification all the more difficult. We may be required to invest significant resources to further
adapt to the changing competitive environment.
Our US educational solutions and assessment businesses and our UK
training businesses may be adversely affected by changes in government funding resulting from either general economic conditions, changes in government educational funding, programs, policy decisions, legislation and/or changes in the procurement
The results and growth of our US educational solutions and assessment businesses are
dependent on the level of federal and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. State, local and municipal finances have been adversely
affected by the US recession and the unknown timing of economic recovery. Funding pressures remain, with competition from low price and disruptive new business models and promotion of open source to keep costs down. The current challenging
environment could impact our ability to collect on education-related debt.
Government changes can also affect
the funding available for educational expenditure, which include the impact of education reform. Similarly changes in the government procurement process for textbooks, learning material and student tests, and vocational training programs can also
affect our markets. Changes in curricula, delays in the timing of the adoptions and changes in the student testing process can all affect these programs and therefore the size of our market in any given year. Also, changes in the UK government
approach to training and apprentice program policy and funding could affect the business model for these businesses.
There are multiple competing demands for educational funds and there is no guarantee that new textbooks or testing or training programs will be funded, or that we will win this business.
If we do not adequately protect our intellectual property and proprietary rights our competitive position and results may be
adversely affected and limit our ability to grow.
Our products and services largely comprise
intellectual property delivered through a variety of media, including newspapers, books, the internet and other growing delivery platforms. We rely on trademark, copyright and other intellectual property laws to establish and protect our proprietary
rights in these products and services.
Our intellectual property rights in countries such as the US and the
UK, jurisdictions covering the largest proportion of our operations, are well established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain, and this
uncertainty could affect our future growth. We cannot guarantee that our intellectual property rights will provide competitive advantages to us; our intellectual property rights will be enforced in jurisdictions where competition may be intense or
where legal protection may be weak; any of the intellectual property rights that we may employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; or that we will not lose the ability to assert our intellectual
property rights against others. Moreover, despite trademark and copyright protection, third parties may copy, infringe or otherwise profit from our proprietary rights without our authorization. The loss or diminution in value of these proprietary
rights or our intellectual property could have a material adverse effect on our business and financial performance.
control breakdown or service failure in our school assessment businesses could result in financial loss and reputational damage.
There are inherent risks associated with our school assessment businesses, both in the US and the UK. A service failure caused by a breakdown in our testing and assessment processes could lead to a
mis-grading of student tests and/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contracts and/or the suspension or withdrawal of
our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contracts and/or obtain new customers.
Our education technology and assessment businesses involve complex contractual
relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly
These businesses are characterized by multi-million pound sterling contracts spread over
several years. As in any contracting business, there are inherent risks associated with the bidding process, start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our financial performance
and/or reputation. Failure to retain these contracts at the end of the contract term could adversely impact our future revenue growth. At Edexcel, our UK Examination board and testing business, any change in UK Government policy to examination
marking (e.g. price capping) could have a significant impact on our present business model.
Our investment into
inherently riskier emerging markets is growing and the returns may be lower than anticipated.
advantage of international growth opportunities and to reduce our reliance on our core US and UK markets we are increasing our investments in a number of emerging markets, some of which are inherently more risky than our traditional markets.
Political, regulatory, economic and legal systems in emerging markets may be less predictable than in countries with more developed institutional structures. Political, regulatory, economic, currency, reputational and corporate governance risks
(including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.
Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions could lead to goodwill and intangible asset impairments.
We continually acquire and dispose of businesses to achieve our strategic objectives. In 2011 we acquired TutorVista, CTI
Education, Schoolnet, EDI, Stark Holding, TQ, Connections Education, Global Education and several other small acquisitions, and we sold our stake in FTSE International. Acquired goodwill and intangible assets could be impaired if we are unable to
generate the anticipated revenue growth, synergies and/or cost savings associated with these or other acquisitions.
operate in markets which are dependent on Information Technology (IT) systems and technological change.
All our businesses, to a greater or lesser extent, are dependent on information technology. We either provide software
and/or internet services to our customers or we use complex IT systems and products to support our business activities, particularly in business information publishing, back-office processing and infrastructure. We face several technological risks
associated with software product development and service delivery in our educational businesses, information technology security (including virus and hacker attacks), e-commerce, enterprise resource planning system implementations and upgrades.
Although plans and procedures are in place to reduce such risks, our businesses could be adversely affected if our systems and infrastructure experience a significant failure or interruption.
Failure to comply with data privacy regulations and standards or weakness in internet security result in a major data privacy
breach causing reputational damage to our brands and financial loss.
Across our businesses we hold
large volumes of personal data including that of employees, customers and, in our assessment and information technology businesses, students and citizens. Despite our implementation of security measures, individuals may try to gain unauthorized
access to our data in order to misappropriate such information for potentially fraudulent purposes. Any perceived or actual unauthorized disclosure of personally-identifiable information, whether through breach of our network by an unauthorized
party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract and retain our customers, or subject us to claims or litigation arising from damages suffered by individuals, and thereby harm our business
and operating results. Failure to adequately protect personal data could lead to penalties, significant remediation costs, reputational damage, potential cancellation of some existing contracts
and inability to compete for future business. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information.
Our reported earnings and cash flows may be adversely affected by changes in our pension costs and funding requirements.
We operate a number of pension plans throughout the world, the principal ones being in the UK and the
US. The major plans are self-administered with the plans assets held independently of the Group. Regular valuations, conducted by independent qualified actuaries, are used to determine pension costs and funding requirements. As these assets
are invested in the capital markets, which are often volatile, the plans may require additional funding from us, which could have an adverse impact on our results.
It is our policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future
liabilities. Our earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in our defined benefit plans. Our greatest exposure relates to our UK defined benefit pension plan, which
is valued once every three years. Pension fund deficits may arise because of inadequate investment returns, increased member life expectancy, changes in actuarial assumptions and changes in pension regulations, including accounting rules and minimum
Operational disruption to our business caused by our third party providers, a major disaster
and/or external threats could restrict our ability to supply products and services to our customers.
Across all our businesses, we manage complex operational and logistical arrangements including distribution centers, data
centers and large office facilities as well as relationships with third party print sites. We have also outsourced some support functions, including information technology and warehousing, to third party providers. The failure of third parties to
whom we have outsourced business functions could adversely affect our reputation and financial condition. Failure to recover from a major disaster, (e.g. fire, flood etc) at a key facility or the disruption of supply from a key third party vendor or
partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily
Changes in students buying and distribution behaviour put downward pressure on price.
Students are seeking cheaper sources of content, e.g. online discounters, file sharing, use of pirated copies, and
rentals, along with open source. This change in behaviour puts downward pressure on textbook prices in our major markets, and this could adversely impact our results.
Expected benefits from our finance transformation programme initiatives may not be realised.
We have entered into a substantial finance transformation programme based around shared and common processes and services, including the outsourcing of financial transaction processing, which is expected
to result in significant cost savings in future years. The programme may take longer than planned, cost more than planned, and may cause disruption to our business. There is no assurance that the full extent of the anticipated benefits will be
realised in the timeline envisaged.
Changes in our tax position can significantly affect our reported earnings and cash flows.
Changes in corporate tax rates and/or other relevant tax laws in the UK and/or the US could have a
material impact on our future reported tax rate and/or our future tax payments. We have been subject to audit by tax authorities. Although we believe our tax provision is reasonable, the final determination of our tax liability could be materially
different from our historical income tax provisions, which could have a material effect on our financial position, results of operations or cash flows.
We generate a substantial proportion of our revenue in foreign currencies,
particularly the US dollar, and foreign exchange rate fluctuations could adversely affect our earnings and the strength of our balance sheet.
As with any international business our earnings can be materially affected by exchange rate movements. We are particularly exposed to movements in the US dollar to sterling exchange rate as approximately
60% of our revenue is generated in US dollars. Sales for 2011, translated at 2010 average rates, would have been £122m or 2% higher.
The inherent volatility of advertising could adversely affect the profitability of our newspaper business.
Advertising revenue is susceptible to fluctuations in economic cycles. Certain of our products, such as the
newspaper, are more advertising-driven than our other products. Consequently, these products are more affected by decreases in advertising revenue. As the internet continues to grow as a global medium for information, communication and
commerce, advertisers are increasingly shifting advertising dollars from print to online media. Any downturn in corporate and financial advertising spend due to the economic slowdown will negatively impact the results.
If we fail to attract and retain appropriately skilled employees, our business may be harmed.
Our success depends on the skill, experience and dedication of our employees. If we are unable to retain and attract
sufficiently experienced and capable personnel, especially in technology, product development, sales and management, our business and financial results may suffer. When talented employees leave, we may have difficulty replacing them, and our
business may suffer. There can be no assurance that we will be able to successfully retain and attract the personnel that we need.
Social, environmental and ethical risks may also adversely impact our business.
We consider social, environmental and ethical (SEE) risks no differently to the way we manage any other business risk.
These include journalistic/author integrity, ethical business behaviour, intellectual copyright protection, compliance with UN Global Compact standards, environmental impact, people and data privacy.
Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain
or expand our business.
We have developed a strong brand that we believe has contributed significantly
to the success of our business. Maintaining, protecting and enhancing the Pearson brand is critical to expanding our business and will depend largely on our ability to maintain our customers trust in our solutions and in the quality and
integrity of our products and services. If we do not successfully maintain a strong brand, our business could be harmed.
Government investigations of Penguin and other major publishers over agency arrangements for selling ebooks will likely result in
formal legal actions and/or negotiated agreements that, along with private litigation, might impact Penguins business.
Government investigations of Penguin and other major publishers over agency arrangements for selling ebooks will likely result in formal legal actions and/or negotiated agreements that, along with private
litigation, might impact Penguins business. These investigations are ongoing and Penguin is cooperating. Penguin is defending itself in these actions and believes that it is fully compliant with all applicable laws. See Item 4.
Information on the Company Legal Proceedings for more information.
Pearson plc, (Pearson) is an international media and education company with its principal operations in the education, business information and consumer publishing markets. We create and manage
intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers and online
services. We increasingly offer services as well as content, from test creation, administration and processing to teacher development and school software. Though we operate in more than 70 countries around the world, today our largest markets are
the US (57% of sales) and Europe (23% of sales) on a continuing basis.
Pearson was incorporated and
registered in 1897 under the laws of England and Wales as a limited company and re-registered under the UK Companies Act as a public limited company in 1981. We conduct our operations primarily through our subsidiaries and other affiliates. Our
principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 (0) 20 7010 2000).
Pearson consists of three major worldwide businesses:
is a leading provider of educational materials and learning technologies. It
provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. It publishes across the curriculum and provides a range of education services including
teacher development, educational software and system-wide solutions, and also owns and operates schools. In 2011, Pearson Education operated through three worldwide segments, which we refer to as North American Education,
International Education and Professional.
The FT Group
provides business and
financial news, data, comment and analysis, in print and online, to the international business community. The FT Group includes the
newspaper and FT.com website, a range of specialist financial magazines and online services,
and Mergermarket, which provides proprietary forward-looking insights and intelligence to businesses and financial institutions. The FT Group has a 50% ownership stake in The Economist Group. During 2010 Interactive Data, in which Pearson held a 61%
interest and which was part of the FT Group was sold. In addition, during the year the FT Group sold its 50% ownership stake in FTSE International.
The Penguin Group
is one of the worlds leading consumer publishing businesses and an iconic global brand. We publish the works of many authors in an extensive portfolio of fiction,
non-fiction and reference titles under imprints including Penguin, Hamish Hamilton, Putnam, Berkley, and Dorling Kindersley.
Our goal is to be the worlds leading learning company, and to help
people make progress in their lives through learning, wherever and whenever they are learning young or old; at home, school or at work; and through whatever medium and style of learning is most effective.
We aim to produce consistent growth on three key financial measures earnings per share, cash flow and return on
invested capital which we believe are, together, good indicators that we are building the long-term value of Pearson.
To achieve this goal, our strategy has four parts, common to all our businesses:
Investment: We are a long-term investor in our business. This year we made £0.5bn of organic investment in new learning programmes and
technologies, new authors, and in taking our assets into new markets.
Over the past five years we have invested £2.5bn in acquisitions, all of which have been additions or fill-ins to build our existing business. Our strong balance sheet allows us to
contemplate further investment should the opportunities arise.
Technology: Pearson today is a technology company as much as a newspaper or book publishing company. Digital business will this year contribute
about one-third of our sales, or almost £2bn in total. Five years ago digital business was about 20% of our sales, and this represents a fundamental shift in our business, culture and growth opportunities.
Fast-growing markets: Pearson has market leading positions in major developed economies, particularly the US, UK and Western Europe. We are
investing to become a much larger global company, and have market-leading businesses in China, India, Brazil and Southern Africa. 11% of our sales and 22% of our people in 2011 are from the Emerging markets, as we generate rapid growth
in these areas.
Efficiency and scale: While we have grown we have also focused on steady efficiency gains. Our margins reached an all time high of 16.1% this year,
and our cash generation, as for the past 5 years, has been more than 100% of profits. However we still see more to go, especially as we accelerate our transition from traditional print-based activities to digital and service models.
Pearson Education is one of the leading providers of educational materials and learning technologies. We provide test development, processing and scoring services to governments, educational institutions,
corporations and professional bodies around the world. We publish across the curriculum and provide a range of education services including teacher development, educational software and system-wide solutions.
We report Pearson Educations performance in the three segments: North American Education, International Education,
and Professional. In 2011, Pearson Education had sales of £4,390m or 75% (74% in 2010) of Pearsons total continuing sales. Pearson Education generated 52% of Pearsons continuing operating profit.
North American Education
Our North American Education business serves educators and students in the USA and Canada from early education through elementary, middle and high schools and into higher education with a wide range of
products and services: curriculum textbooks and other learning materials; student assessments and testing services; and education technologies. Pearson has a leading position in each of these areas and a distinctive strategy of connecting those
parts to support institutions and personalize learning. We have now integrated our North American School and Higher Education companies, which we believe will bring significant opportunities to develop growth businesses, to share investments and
technologies and to gain further efficiencies.
Our North American School business contains a unique mix of
publishing, testing and technology products for the elementary and secondary school markets, which are increasingly integrated. The major customers of this business are state education boards and local school districts. The business publishes high
quality curriculum programmes for school students, at both elementary and secondary level, under a number of imprints including Pearson Scott Foresman and Pearson Prentice Hall. We also provide digital instructional solutions under Pearson Digital
Learning, such as enVisionMATH and Miller-Levine Biology. The business also provides student information, assessment, reporting and business solutions (Pearson School Systems), which enables elementary and secondary schools and school districts to
record and manage information about student attendance and performance, and instructional improvement systems (Schoolnet) that allow for data-driven personalized instruction and teacher support.
Our North American Higher Education business is the largest publisher of textbooks and related course materials for
colleges and universities in the US. We publish across all of the main fields of study with imprints
such as Pearson Prentice Hall, Pearson Addison Wesley, Pearson Allyn & Bacon, Pearson Benjamin Cummings and Pearson Longman. Typically, professors or other instructors select or
adopt the textbooks and online resources they recommend for their students, which students then purchase either in a bookstore or online. Today the majority of our textbooks are accompanied by online services which include homework and
assessment tools, study guides and course management systems that enable professors to create online courses. We have also introduced new formats such as downloadable audio study guides and electronic textbooks which are sold on subscription. In
addition, we have a fast-growing custom publishing business which works with professors to produce textbooks and online resources specifically adapted for their particular course.
Our North American Assessment and Information business provides educational assessment services and solutions in the US,
developing, scoring and processing a large volume of student tests each year, for US states and the federal government.
See Item 5. Operating and Financial Review and Prospects Results of Operations Year ended December 31, 2011 compared to year ended December 31, 2010 Sales and
operating profit by division North American Education for a discussion of developments during 2011 with respect to this division.
Our International Education
business covers all educational publishing and related services outside North America. Our portfolio includes innovative text books, digital learning solutions, online testing and assessments and a suite of integrated services.
Our International schools business publishes educational materials in local languages in a number of countries. We are
one of the worlds leading providers of English Language Teaching (ELT) materials for children and adults, published under the well-known Longman imprint. In 2010, we continued to strengthen our position further in international markets through
the acquisition of Wall Street Institute, providing premium spoken English training for adults in 25 territories across Asia, Europe, the Middle East and Latin America, and Sistema Educacional Brasileiros schools learning systems business. In
2011 we acquired TutorVista, a school tutoring services business in India.
Our International higher education
business adapts our textbooks and technology services for individual markets, and we have a growing local publishing program, with our key markets including the UK, Benelux, Mexico, Germany, Hong Kong, Korea, Taiwan, Singapore, Japan and Malaysia.
We are also a leading provider of testing, assessment and qualification services in a number of key markets
including the UK, under the brand name Edexcel, Australia, New Zealand, South Africa, Hong Kong and the Middle East. In 2011 we acquired Global Education, a leading provider of test preparation services for English language and other professional
qualifications in China.
See Item 5. Operating and Financial Review and Prospects Results
of Operations Year ended December 31, 2011 compared to year ended December 31, 2010 Sales and operating profit by division International Education for a discussion of developments during 2011 with respect to this
Our Professional education business is focused on publishing, training, testing and certification for professionals. Over the past five years we have significantly re-orientated our professional
publishing business towards long-term growth markets and built professional testing into a profitable industry leader.
Our Professional education business publishes under the following imprints: Addison Wesley Professional, Prentice Hall and Cisco Press (for IT professionals); Peachpit Press and New Riders (for graphics
and design professionals); Que and Sams (consumer and professional imprint); and Financial Times-Prentice Hall (for the business education market).
Our professional testing business, Pearson VUE, manages major long-term
contracts to provide qualification and assessment services through its network of test centers around the world. Key customers include major technology companies, the Graduate Management Admissions Council, the National Council of State Boards of
Nursing, the Financial Industry Regulatory Authority and the UKs Driving Standards Agency.
professional training business has developed over the past two years with the acquisition of Melorio plc, a vocational training group in 2010, and TQ Holdings Ltd in 2011. This business provides technical education and training services with
particular expertise in skills related to defense, engineering, oil and gas and construction sectors.
Item 5. Operating and Financial Review and Prospects Results of Operations Year ended December 31, 2011 compared to year ended December 31, 2010 Sales and operating profit by
division Professional for a discussion of developments during 2011 with respect to this division.
The FT Group provides a broad range of data, analysis and services through a growing number
of print, digital and mobile channels, to an audience of internationally-minded business people and financial institutions. In 2011, the FT Group had sales of £427m, or 7% of Pearsons total continuing sales (7% in 2010), and contributed
39% of Pearsons operating profit from continuing operations, taking into account the one-off gain on sale of FTSE International.
FT Group comprises the
, FT.com website, and a portfolio of financial magazines and online financial information companies. During 2010 Interactive Data, our 61%-owned financial
information company was sold and has been reclassified as a discontinued operation for all periods to the date of disposal.
The FT Group has significantly shifted its business towards digital, subscription and content revenues and has continued to invest in talent and in services in faster growing emerging markets.
is one of the worlds leading international daily business newspapers, with five editions
in the UK, Continental Europe, the US, Asia-Pacific and the Middle East. Its main sources of revenue are from sales of the newspaper, (both in print and online), advertising and conferences. The
is complemented by FT.com which
sells content and advertising online, and which charges subscribers for detailed industry news, comment and analysis, while providing general news and market data to a wider audience.
FT Business publishes specialist information on the retail, personal and institutional finance industries through titles
Mergermarket, our online financial data and intelligence provider, provides early stage proprietary intelligence to
financial institutions and corporates. Its key products include
See Item 5. Operating and Financial Review and Prospects Results of Operations Year
ended December 31, 2011 compared to year ended December 31, 2010 Sales and operating profit by division FT Group for a discussion of developments during 2011 with respect to this division.
Joint Ventures and Associates
The FT Group also has a number of associates and joint ventures, including:
50% interest in The Economist Group, publisher of one of the worlds leading weekly business and current affairs magazines.
50% interest in
, publishers of one of South Africas leading financial newspapers and magazines.
33% interest in
a leading Russian business newspaper.
On December 16, 2011, the FT Group sold its 50% interest in FTSE International to the London Stock Exchange, the
owner of the remaining 50%.
The Penguin Group
Penguin is one of the most famous brands in book publishing. It publishes over 4,000 fiction and non-fiction books each
year, on paper, screens and in audio formats for readers of all ages, and has an extensive range of backlist and frontlist titles including top literary prize winners, classics, reference volumes and childrens titles.
Penguin operates around the world through a series of connected national publishing houses. It publishes under a number
of well known imprints including Putnam, Viking, Allen Lane, Hamish Hamilton, Berkley, Dorling Kindersley, Puffin and Ladybird. Penguin combines a longstanding commitment to local publishing with a determination to benefit from its worldwide scale,
a globally recognized brand and growing demand for books in emerging markets. Its largest businesses are in the US, the UK, Australia, Canada, Ireland, India, New Zealand and South Africa.
In 2011, Penguin had sales of £1,045m, representing 18% of Pearsons total continuing sales (19% in
2010) and contributed 9% of Pearsons operating profit from continuing operations. Its largest market is the US, which generated around 58% of Penguins sales in 2011. Penguin earned around 12% of its revenues from the sale of ebooks
Penguin sells directly to bookshops and through wholesalers. Retail bookshops normally maintain
relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. It also sells through online retailers such as Amazon.com, as well as Penguins own website. Penguin also sells
direct to the customer via digital sales agents.
See Item 5. Operating and Financial Review and
Prospects Results of Operations Year ended December 31, 2011 compared to year ended December 31, 2010 Sales and operating profit by division The Penguin Group for a discussion of
developments during 2011 with respect to this division.
Pearson determines a normal operating cycle separately for each entity/cash generating unit within the Group with distinct
economic characteristics. The normal operating cycle for each of the Groups education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes
account of the time it takes to produce the educational programs.
Particularly for the North American
Education businesses, there are well established cycles operating in the market:
The School market is primarily driven by an adoption cycle in which major state education boards adopt programs and provide funding to
schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of
the subsequent 5 years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle.
The Higher Education market has a similar pattern, with colleges and professors typically refreshing their courses and selecting revised programs on
a regular basis, often in line with the release of new editions or
new technology offerings. The Company renews its pre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows
that the average life cycle of Higher Education content is up to 5 years. Again the operating cycle mirrors the market cycle.
A development phase of typically 12 to 18 months for Higher Education and up to 24 months for School precedes the period during which the Company receives and delivers against orders for the
products it has developed for the program.
The International Education markets operate in a similar way
although often with less formal adoption processes.
The operating cycles in respect of
Professional and the Penguin segment are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training, IT and travel sectors). Nevertheless, in these markets, there
is still a regular cycle of product renewal, in line with demand which management monitor. Typically the life cycle is 5 years for Professional content and up to 4 years for Penguin content. Elsewhere in the Group operating cycles are
typically less than one year.
All of Pearsons businesses operate in highly competitive environments.
Pearson Education competes with other publishers and creators of educational materials and services. These companies
include large international companies, such as McGraw-Hill and Houghton Mifflin Harcourt, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology. Competition is based on the ability to
deliver quality products and services that address the specified curriculum needs and appeal to the school boards, educators and government officials making purchasing decisions.
The FT Group competes with newspapers and other information sources, such as The Wall Street Journal, by offering timely
and expert journalism and market intelligence. It competes for advertisers with other forms of media based on the ability to offer an effective means for advertisers to reach their target audience.
The Penguin Group competes with other publishers of fiction and non-fiction books. Principal competitors include Random
House, HarperCollins, and Hachette Group. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers.
principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly the
and the various imprints of Penguin and Pearson Education, as well as all copyrights for our content and
our patents held in the testing business in the name of Pearson NCS. We believe we have taken all appropriate available legal steps to protect our intellectual property in all relevant jurisdictions.
Paper is the principal raw material used by each of Pearson Education, the FT Group and the Penguin Group. We purchase most of our paper through our Global Sourcing department located in the United
States. We have not experienced and do not anticipate difficulty in obtaining adequate supplies of paper for our operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we
have not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, we have a number of alternatives to minimize the impact on our operating margins, including modifying the grades of paper
used in production.
The manufacture of certain of our products in various markets is subject to governmental regulation relating to the
discharge of materials into the environment. Our operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conduct these operations maintain controls on the
repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to us. Accordingly, these controls have not
significantly affected our international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe, however, that in light of the nature of our business the risk of these sanctions does not represent
a material threat to us.
Licenses, patents and contracts
We are not dependent upon any particular licenses, patents or new manufacturing processes that are material to our
business or profitability. Likewise, we are not materially dependent upon any contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature.
We and our
subsidiaries are from time to time the subject of legal proceedings incidental to the nature of our and their operations. These may include private litigation or arbitrations, governmental proceedings and investigations by regulatory bodies. We do
not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had such effect in the
recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material
interest adverse to us or any of our subsidiaries.
During the year various government bodies in the US and
Europe have been in the process of investigating Penguin and other major publishers over the agency arrangements for selling e-books. These investigations are ongoing and Penguin is cooperating and believes that it was fully compliant with all
applicable laws. However, while the group cannot predict the final outcome or the impact on Penguin, it currently expects that these investigations will likely result in formal legal actions by the governmental bodies and/or negotiated agreements.
At the same time beginning in August 2011, Penguin and various other book publishers and book retailers have been sued in a number of private consumer class action law suits in the US and Canada which allege violation of the anti-trust and unfair
competition laws by the defendants in connection with the adoption of the agency selling model for e-books. The complaints generally seek treble damages, injunctive relief and attorneys fees, and in certain instances seek punitive damages,
injunctive relief and attorneys fees, as well as compensatory damages. Penguin is defending itself in those actions and believes that it was fully compliant with all applicable laws.
been no significant post balance sheet events.
Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates
throughout the world. Below is a list of our significant subsidiaries as at December 31, 2011, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.
Country of incorporation/residence
Pearson Education Inc.
United States (Delaware)
Pearson Education Ltd.
England and Wales
England and Wales
NCS Pearson Inc.
United States (Minnesota)
The Financial Times Ltd.
England and Wales
England and Wales
The Penguin Group
Penguin Group (USA) Inc.
United States (Delaware)
The Penguin Publishing Co Ltd.
England and Wales
Dorling Kindersley Holdings Ltd
England and Wales
Property, plant and equipment
Our headquarters are located at leasehold premises in London, England. We own or lease approximately 1,100 properties,
including approximately 600 testing/teaching centers in more than 70 countries worldwide, the majority of which are located in the United Kingdom and the United States.
The properties owned and leased by us consist mainly of offices, distribution centers and computer testing/teaching
The vast majority of our printing is carried out by third party suppliers. We operate a small
digital print operation as part of our Pearson Assessment & Testing businesses which provides short-run and print-on-demand products, typically custom client applications.
We own the following principal properties at December 31, 2011:
We lease the following principal properties at December 31, 2011:
General use of property
Area in square feet
Lebanon, Indiana, USA
Cranbury, New Jersey, USA
Indianapolis, Indiana, USA
San Antonio, Texas, USA
Upper Saddle River, New Jersey, USA
New York City, New York, USA
Newmarket, Ontario, Canada
Boston, Massachusetts, USA
Austin, Texas, USA
Scoresby, Victoria, Australia
Glenview, Illinois, USA
Bloomington, Minnesota, USA
Uttar Pradesh, India
Boston, Massachusetts, USA
Chandler, Arizona, USA
Cedar Rapids, Iowa, USA
New York City, New York, USA
San Antonio Zomeyucan, Mexico
Lawrence, Kansas, USA
See Item 5. Operating and Financial Review and Prospects Liquidity and Capital Resources for
description of the Companys capital expenditure.
UNRESOLVED STAFF COMMENTS
The Company has not received, 180 days or more before the end of the 2011 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the
Exchange Act which remain unresolved.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis is based on and should be read in conjunction with the consolidated financial
statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS as issued by the IASB.
Where this discussion refers to constant currency comparisons, these are estimated by re-calculating the current year
results using the exchange rates prevailing for the prior period. The increase or reduction in the value calculated is the estimate of impact of exchange rates. We believe this presentation provides a more useful period to period comparison as
changes due solely to changes in exchange rates are eliminated.
Sales from continuing operations increased from £5,663m in 2010 to £5,862m in 2011, an increase of 4%. The year on year growth was impacted by exchange rates, in particular the US dollar. The
average US dollar exchange rate in 2011 weakened in comparison to sterling in 2010, which had the effect of reducing reported sales in 2011 by £122m when compared to the equivalent figure at constant 2010 rates. When measured at constant 2010
exchange rates, all our businesses contributed to the growth. The Education businesses all benefited from the additional contribution from acquisitions made in 2010 and 2011.
Reported operating profit increased by 65% from £743m in 2010 to £1,226m in 2011. Operating profit in 2011
includes the £412m profit on sale of our 50% interest in FTSE International Limited (FTSE) and after excluding this item the year on year growth was 10%. All of the businesses contributed to this growth through increased sales and further cost
efficiencies. This growth would have been higher but for the relative weakness of the US dollar and we estimate that operating profit would have been approximately £13m higher if translated at constant 2010 exchange rates.
Profit before taxation in 2011 of £1,155m compares to a profit before taxation of £670m in 2010. The increase
of £485m includes the FTSE sale but also reflects the improved operating performance and a slight reduction in net finance costs. Net finance costs reduced from £73m in 2010 to £71m in 2011. The Groups net interest payable
decreased by £18m in 2011 as the reduction in floating market interest rates on US dollar and sterling borrowings, interest income on deposits in higher yielding currencies and the effect of lower average levels of net debt following the
receipt of proceeds from the sale of Interactive Data all contributed to the lower interest charge. Financing related exchange losses of £11m in 2011 compare to a net exchange gain of £9m in 2010. The majority of the loss in 2011 relates
to foreign exchange differences on a proportion of the unhedged US dollar proceeds from the Interactive Data sale. In 2010 the gain arose largely from foreign exchange on US dollar denominated debt. Finance income relating to post-retirement plans
of £3m in 2011 compares to a charge of £12m in 2010.
In July 2010, Pearson sold its 61%
share of Interactive Data Corporation for $2bn. The results of Interactive Data have been included as discontinued operations for the period to 29 July 2010 and in prior periods. Included in discontinued operations in 2010 is the gain on sale
of Interactive Data of £1,037m and the attributable tax charge of £306m.
Net cash generated from
operations decreased to £1,093m in 2011 from £1,169m in 2010. Cash collections were particularly strong at the end of 2010 and this impacted on collections in early 2011. Cash generation was still strong in 2011 and continues to be
helped by our transition to a more digital and service based business where the cash flow profile is more favourable. This transition is also helping to reduce our working capital and on an average basis, the ratio of working capital to sales
improved from 20.1% to 16.9%, also reflecting tight working capital management and the favourable working capital profile of acquisitions in 2010 and 2011. Average working capital comprises the average of the monthly carrying values over the
relevant 12 month period for inventory, pre-publication costs, debtors and creditors. Net interest paid at £60m in 2011 was £8m below the previous year, reflecting the overall fall in net interest and the timing of interest payments
on the bond portfolio. Tax paid excluding the amounts paid on the Interactive Data disposal in 2010 increased to £151m in 2011 compared to £85m in 2010. The increase is due to higher payments in the US following the use of the remaining
available losses in 2010 and settlements in the year. Net capital expenditure on property, plant and equipment after proceeds from sales decreased to £58m in 2011 from £76m in 2010. The net cash outflow in respect of businesses and
investments acquired was £800m in 2011 and £564m in 2010 whilst the sale of FTSE generated £428m and the sale of Interactive Data in 2010 raised proceeds of £734m net of tax paid. Dividends from joint ventures and associates
increased to £30m in 2011 from £23m in 2010. Dividends paid of £298m in 2010 (including £6m paid to non-controlling interests) compares to £319m in 2011 (including £1m paid to non-controlling interests). Overall
net borrowings increased by £69m from £430m at the end of 2010 to £499m at the end of 2011 largely due to good cash generation from operations and the proceeds from the FTSE sale which largely offset expenditure on acquisitions,
routine capital expenditure, dividend, tax and interest payments.
The external environment is likely to remain challenging in 2012 in the face of turbulent macroeconomic conditions and
rapid structural change in our industries. However, we will once again make progress on our strategic goals of making Pearson more digital, more exposed to fast-growing markets and more directly engaged in helping students succeed. Our 2012
financial results will reflect the sale of our 50% stake in FTSE International (which contributed no sales and £20m of operating profit in 2011) and higher tax rates (after one-off benefits in 2011).
In Education, we expect to achieve continued growth in 2012. In North America, we anticipate modest growth in higher Education as rapid take-up of our technology and services is partially offset by lower
college enrolments and challenging conditions in the market for printed textbooks. We expect our Assessment and Information business to remain resilient as it prepares for the transition to next-generation Common Core assessments. We expect good
growth in digital school programs and services, but another tough year for the School textbook publishing industry, which will continue to be affected by pressure on state budgets and delays in purchasing decisions during the transition to the new
Common Core standards.
We expect our International education business to show good growth. Austerity measures
will continue to affect education spending in much of the developed world, but we see significant opportunity in emerging markets in China, south-east Asia, Latin America, the Middle East and Sub-Saharan Africa which together
accounted for more than 40% of our International education revenues in 2011. Across our education company, we will be integrating acquisitions made in 2011 (and expensing the costs) and making a series of organic investments in fast-growing segments
including digital learning, English language teaching and institutional services.
We expect our Professional
education business to grow again, benefiting from the continued strength of our worldwide professional testing business. In the UK, government funding pressures and policy change relating to apprenticeships are creating a tough trading environment
in professional training.
The FT Groups profits will be lower in 2012 than in 2011, reflecting the sale of our 50% stake in FTSE International
and further actions weighted towards the first half of the year to accelerate the shift from print to digital. The Financial Times and The Economist Group (in which Pearson owns a 50% stake) are predicting weak advertising markets but strong growth
in digital subscription revenues. Mergermarket will benefit from its high subscription renewal rates, although the outlook for merger and acquisition activity remains uncertain.
The Penguin Group
Penguin has performed strongly in recent years in the context of rapid structural change in the consumer publishing industry. We expect it to perform in line with the overall industry this year, facing
tough conditions in the physical bookstore channel but helped by its strong position in digital. ebook revenues accounted for 12% of Penguin revenues worldwide in 2011, up from 6% in 2010, and we expect this percentage to increase significantly
again in 2012.
The following table shows sales information for each of the past three years by operating division:
Year Ended December 31
Sales information by geographic market supplied
The following table shows sales information for each of the past three years by geographic region:
Year Ended December 31
Exchange rate fluctuations
We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and
profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was £1:$1.60 in 2011, £1:$1.54 in 2010 and £1:$1.57 in 2009. Fluctuations in exchange rates
can have a significant impact on our reported sales and profits. In 2011, Pearson generated 57% of its sales in the US (2010: 59%; 2009: 61%). In 2011 we estimate that a five cent change in the average exchange rate between the US dollar and
sterling would have had an impact on our reported earnings per share of 1.3p and a five cent change in the closing exchange rate between the US dollar and sterling would have had an impact on shareholders funds of approximately £140m.
See Item 11. Quantitative and Qualitative Disclosures about Market Risk for more information. The year-end US dollar rate for 2011 was £1:$1.55 compared to £1:$1.57 for 2010. In terms of the year end rate, the weakening
of sterling in comparison to the US dollar in 2011 was less significant than in the previous year and had only a relatively small impact on shareholders funds. The net effect of movement in all currencies in 2011 was a decrease in our
shareholders funds of £44m. The year-end rate for the US dollar in 2010 was £1:$1.57 compared to £1:$1.61 for 2009. The comparative strength of the US dollar, contributed to an overall increase in shareholders funds due
to exchange movements of £173m in 2010.
Critical accounting policies
Our consolidated financial statements, included in Item 18. Financial Statements, are prepared based on
the accounting policies described in note 1 to the consolidated financial statements.
Certain of our accounting policies require the application of management
judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are
described in note 1a(3) in Item 18. Financial Statements.
Results of operations
Year ended December 31, 2011 compared to year ended December 31, 2010
Consolidated results of operations
Our total sales from continuing operations
increased by £199m, or 4%, to £5,862m in 2011, from £5,663m in 2010. The increase reflected growth, on a constant exchange rate basis, at all of our businesses together with additional contributions from acquisitions made in both
2010 and 2011. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2011 sales, translated at 2010 average exchange rates, would have been £5,984m.
Pearson Education increased sales by £183m or 4% from £4,207m to £4,390m. The International and
Professional businesses both contributed to the increase and were helped by acquisitions made in 2010 and 2011. The North American business saw a sales decline of 2% at reported exchange rates although, in US dollar terms, 2011 sales were ahead of
2010. We estimate that after excluding acquisitions and the negative impact of exchange, Pearson Education sales growth was flat in 2011 compared to 2010.
The US higher education publishing market was broadly level with 2010, according to the Association of American Publishers, with solid growth in public colleges offset by enrolment declines in for-profit
colleges following changes in Federal regulations. Pearson gained share, benefiting from its lead in technology and customization, and has now grown faster than the US higher education industry for 13 consecutive years. The US school textbook
publishing market declined 9% in 2011, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $650m in 2011
against $800m in 2010) and delays in purchasing decisions during the transition to the new Common Core standards. Pearson gained share with a strong adoption performance boosted by our blended print-and-digital programs and we took an estimated 37%
of new adoptions competed for (or 31% of the total new adoption market). State funding pressures and the transition to Common Core assessments also made market conditions tough for our state assessment and teacher testing businesses; these were
offset by good growth in diagnostic and clinical assessments and revenues at our Assessment and Information division grew modestly in 2011.
In 2011, we continued to make significant organic investments in the International Education business expanding the footprint of Wall Street English in China and rolling out our school services business
in India whilst incurring significant charges from the integration of acquisitions, most notably of Sistema Educacional Brasiliero (SEB) in Brazil. After excluding the effect of acquisitions we estimate that there was growth of 4% at constant 2010
exchange rates in the International Education business. Professional sales increased in 2011 by 15% although much of this increase was acquisition related mainly due to the full year contribution from Melorio, the UK vocational training business
acquired in June 2010 and other smaller acquisitions in 2011. In terms of constant last year exchange rates and after taking out the acquisitions there was still good growth in both the professional testing and professional publishing businesses.
FT Group sales were 6% ahead of last year driven by good underlying growth at both the Financial Times and
Mergermarket. Growth at the Financial Times was driven by increases in digital readership and subscriptions, although advertising remained weak and volatile. Mergermarket continued to benefit from its global presence and product breadth which helped
to increase usage, grow new sales and produce strong renewal rates.
Penguin achieved robust sales and profits in this challenging and
rapidly-changing industry environment and gained market share in each of its major markets the US, the UK and Australia. Market conditions were tough in 2011 following the collapse of two major customers: Borders in the US and the REDGroup in
Pearson Education, our largest business sector, accounted for 75% of our continuing business sales
in 2011 and 74% in 2010. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 60% in 2011 and 63% in 2010.
Cost of goods sold and operating expenses
The following table summarizes our cost of sales and net operating expenses:
Year Ended December 31
Cost of goods sold
Administration and other expenses
Other operating income
Cost of goods sold.
Cost of sales consists of costs for raw materials,
primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges and the cost of service provision in the assessment and testing business. Our cost of sales increased by £36m, or 1%, to £2,624m in 2011,
from £2,588m in 2010. The increase corresponds to the increase in sales but is a lower percentage of sales as efficiencies and a mix effect has improved gross margins. Cost of sales at 44.8% of sales in 2011 compares to 45.7% in 2010.
Distribution costs consist primarily of shipping costs, postage and packing.
A reduction in costs in 2011 reflects the change in product mix with digital and services businesses incurring less distribution expense.
Administration and other expenses.
Our administration and other expenses increased by £152m, or 7%, to £2,342m in 2011, from £2,190m in 2010. As a percentage of sales they
remained consistent at approximately 40% in 2011 and 39% in 2010.
Other operating income.
operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from the sale of assets. Other operating income increased to £158m in 2011 compared to £115m in 2010
largely due to the inclusion in 2011 of a £29m gain on the sale of an investment and an £8m gain on a stepped acquisition in the International Education business.
Profit on sale of associate
On 12 December
2011 the FT Group completed the disposal of its 50% stake in FTSE International Limited (FTSE) realizing a profit on sale of £412m. This profit has been disclosed separately on the face of the income statement.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates decreased from £41m in 2010 to £33m in 2011. The 2010
result included a one off profit relating to a stepped acquisition at FTSE of £12m. The majority of the remainder of the profit comes from our 50% interest in the Economist.
The total operating profit increased by £483m, or 65%, to £1,226m in 2011 from £743m in 2010. 2011
operating profit, includes the profit on sale of FTSE of £412m and after excluding this item operating profit in 2011 increased by £71m or 10%.
Operating profit attributable to Pearson Education increased by £63m, or 11%, to £639m in 2011, from £576m in 2010. The increase was attributable to a good performance across all the
Education businesses and a contribution from acquisitions. Operating profit attributable to the FT Group after taking out the profit on sale of FTSE increased by £5m, or 8%, to £67m in 2011, from £62m in 2010. The increase reflects
the improved profitability from digital businesses despite a weak advertising market and the absence of the £12m one off profit recorded by FTSE in 2010. Operating profit attributable to Penguin showed a small increase of £3m, or 3%, to
£108m in 2011, from £105m in 2010.
Net finance costs
Net finance costs decreased from £73m in 2010 to £71m in 2011. Net interest payable was £55m, down from
£73m in 2010. Although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from low average US dollar and sterling interest rates during the year. Year-on-year, average three month LIBOR
(weighted for the Groups net borrowings in US dollars and sterling at each year end) fell by 0.1% to 0.3%. This reduction in floating market interest rates helped drive the Groups lower interest charge. These low rates, coupled with
interest income on deposits in higher yielding currencies created a decrease in the Groups average net interest payable from 7.9% to 6.5%. The Groups average net debt fell by £82m, reflecting the timing of the reinvestment of the
Interactive Data proceeds during 2011. Finance income relating to post-retirement plans was £3m in 2011 compared to a charge of £12m in 2010.
Also included in net finance costs are finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. In 2011, the total of these items
was a charge of £19m compared to a profit of £12m in 2010. The majority of the loss in 2011 relates to foreign exchange differences on a proportion of the unhedged US dollar proceeds from the Interactive Data sale. In 2010 the gain arose
largely from foreign exchange on US dollar denominated debt. For a more detailed discussion of our borrowings and interest expenses see Liquidity and Capital Resources Capital Resources and
Borrowings below and Item 11. Quantitative and Qualitative Disclosures about Market Risk.
The total tax charge in 2011 of
£199m represents 17% of pre-tax profits compared to a charge of £146m or 22% of pre-tax profits in 2010. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK (which had an
effective statutory rate of 26.5% in 2011 and 28% in 2010). The reduction in the tax rate in 2011, however, is largely due to the low tax charge on the gain on disposal of FTSE together with the effect of the prior year adjustments arising from
settlements with tax authorities. In total these two items outweighed the favourable effect in 2010 from recognition of tax losses and credits utilised in connection with the Interactive Data sale. The tax charge relating to that sale in July 2010
is included in the loss on discontinued businesses.
In 2011 there are non-controlling interests in the Groups businesses in South Africa, China and India although none
of these are material to the Group numbers. The non-controlling interest in the Groups Brazilian business, SEB, was bought out in the first half of 2011. The non-controlling interest in 2010 comprises mainly the publicly-held share of
Interactive Data for the period to disposal in July 2010.
There are no discontinued operations in 2011. Discontinued operations in 2010 relate to Interactive Data Corporation. On
July 29, 2010, Interactive Data, in which Pearson held a 61% interest, was sold. (Pearsons share of the sale proceeds was $2bn).
The results of Interactive Data have been included as discontinued operations up to the date of sale on July 29, 2010. Included in discontinued operations in 2010 is Interactive Datas results
for the seven months to the date of sale, the gain on sale of £1,037m and the attributable tax charge of £306m.
Profit for the year
The profit for the financial year in 2011 was £956m compared to a profit in 2010 of £1,300m. The 2010 profit included the contribution from discontinued businesses of £776m (including
the gain on sale of Interactive Data) which more than offset the gain on sale of FTSE and improved operating performance from continuing businesses in 2011.
Earnings per ordinary share
The basic earnings per
ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 119.6p in 2011 compared to 161.9p in 2010 based on a weighted average number of shares in issue of 800.2m in 2011
and 801.2m in 2010. The decrease in earnings per share was due to the decrease in profit for 2011 described above and was not significantly affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share of 119.3p in 2011 and 161.5p in 2010 was not significantly different from the
basic earnings per share in those years as the effect of dilutive share options was again not significant.
The weakening of the US dollar and other currencies against sterling on an average
basis had an adverse impact on reported sales and profits in 2011 compared to 2010. 2011 sales, translated at 2010 average exchange rates, would have been higher by £122m and operating profit, translated at 2010 average exchange rates, would
have been higher by £13m. See Item 11. Quantitative and Qualitative Disclosures about Market Risk for a discussion regarding our management of exchange rate risks.
Sales and operating profit by division
The following tables summarize our sales and operating profit for each of Pearsons business segments. Adjusted
operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of Item 18. Financial
In our adjusted operating profit we have excluded amortization of acquired intangibles and
acquisition costs. The amortization of acquired intangibles is the amortization of intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither of these charges are
considered to be fully reflective of the underlying performance of the Group. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from
adjusted operating profit as they distort the performance of the Group.
Adjusted operating profit enables management to more easily track the
underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
North American Education sales declined by £56m, or 2%, to £2,584m in 2011, from £2,640m in 2010 and
adjusted operating profit increased by £24m, or 5%, to £493m in 2011 from £469m in 2010. The results were affected by the relative weakness of the US dollar, which we estimate decreased sales by £91m and adjusted
operating profit by £18m when compared to the equivalent figures at constant 2010 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there
was underlying decline in sales of 1% and increase in profits of 8%. Sales growth in the US higher education and assessment and information businesses was offset by a weakness in US school publishing.
The US school textbook publishing market declined 9% in 2011, according to the Association of American Publishers. There
were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $650m in 2011 against $800m in 2010) and delays in purchasing decisions during the transition to the new Common Core
standards. Pearson gained share with a strong adoption performance boosted by our blended print-and-digital programs including Writing Coach, Prentice Hall Math and enVisionMATH. We took an estimated 37% of new adoptions competed for (or 31% of the
total new adoption market). During 2011, we acquired Connections Education which operates online K-12 schools in 21 states and a nationwide charter school program. It served 33,200 students in 2011. Connections Academy Schools have consistently high
performance ratings, particularly in states focused on measuring growth in student learning. SuccessNet, our online learning platform for school teachers and students, generated more than six million registrations in 2011, up 5% on 2010. The number
of assessments taken through SuccessNet increased by 32% to more than 11 million. We continue to develop digital programs, platforms and apps to boost achievement, access and affordability. We launched two major new school programs aimed at meeting
rising literacy standards under the Common Core: i-lit and Pearson English Learning System. i-lit is a personalized digital reading program combining our proven literacy model (with many students making two years of literacy growth in a single
year), automated assessment capabilities and compelling literature from Penguin and Dorling Kindersley, all delivered through iPads. Pearson English Learning System benchmarks, monitors and tracks both student progress and teacher best practice to
boost English language skills. Poptropica is one of the largest virtual worlds for young children in the US and was named by Time as one of The 50 Best Websites of 2011. Poptropica has up to 9.7 million monthly unique visitors from
more than 130 countries.
Revenues at our Assessment and Information division grew modestly in 2011. State
funding pressures and the transition to Common Core assessments continued to make market conditions tough for our state assessment and teacher testing businesses; these were offset by good growth in diagnostic and clinical assessments. We signed
several important contracts including state-wide student assessment contracts in New York, Kentucky and Arizona; Race to the Top Florida formative assessment; Indiana educator licensing and Ohio pre-service teacher assessment. We also renewed three
important contracts, extending our relationships with Virginia and Maryland for state-wide student assessments and with ETS to service state-wide assessments for California. We signed an agreement with Stanford University to provide the capability
to deliver the Teacher Performance Assessment (TPA) a nationally available, web-based performance assessment for measuring the effectiveness of teacher candidates nationally. We delivered 13 million secure online tests in 2011 with
strong growth in automated written and spoken assessment scoring volumes. We won the Online Assessment Readiness Tool contract from both the PARCC and SBAC Common Core consortia to help the 45 states prepare for the transition to online assessments.
PowerSchool supported more than ten million students, up 6% on 2010, and developed its platform to enable 18 additional languages to be used on the PowerSchool parent portal. Our clinical assessment business grew well boosted by strong growth at
AIMSweb, our progress monitoring service which enables early intervention and remediation for struggling students. Usage of AIMSweb increased dramatically with 47 million assessments delivered in 2011, up more than 40%. During 2011, we acquired
Schoolnet, a fast-growing and innovative education technology company that aligns assessment, curriculum and other services to help individualise instruction and improve teacher effectiveness. Schoolnet serves more than five million US pre K-12
students through partnerships with districts and states, supporting about one-third of Americas largest cities.
The US higher education publishing market was broadly level with 2010, according to the Association of American Publishers, with solid revenue growth in public colleges offset by enrolment declines in
for-profit colleges following changes in Federal regulations. Pearson gained share, benefiting from its lead in technology and customisation, and has now grown faster than the US higher education industry for 13 consecutive years. The pioneering
MyLab digital learning, homework and assessment programmes grew strongly with student
registrations in North America up 22% to almost nine million. Usage continues to grow strongly with graded submissions up 39% to almost 250 million across the globe. Evaluation studies show
that the use of MyLab programmes can significantly improve student test scores and institutional efficiency. We developed a new model of enterprise-wide support for online higher education with Arizona State University Online and Ocean Community
College. Through these long-term partnerships, Pearson runs the full online learning programmes for these institutions and earns revenues based on the success of the institution and its students. Pearson LearningStudio increased fully-online student
enrolments by 20% to ten million. Renewal rates remain high at more than 80% by value with fewer large accounts up for renewal in the year.
Overall adjusted operating margins in the North American Education business were higher at 19.1% in 2011 compared to 17.8% in 2010 with the majority of the increase attributable to further cost
efficiencies and the continued success of higher margin digital products.
International Education sales increased by £190m, or 15%, to £1,424m in 2011, from £1,234m in 2010 and
adjusted operating profit increased by £25m, or 15%, to £196m in 2011 from £171m in 2010. The sales results benefited from acquisitions in 2011 and a full year contribution from acquisitions made in 2010.
Our International Education company is active in more than 70 countries. It is a major focus of our strategy, and sales
and profits have broadly doubled since 2007. Our strategy is to combine educational content, assessment, technologies and related services to help educational institutions become more effective and their students more successful. We expect to
benefit from a series of powerful long-term global trends: increasing public and private spending on education (despite current pressures on public spending in developed markets); growing participation rates; the demand for assessment to provide
measures of achievement; the growing technology infrastructure in educational institutions; and the rise of English as a global language. In 2011, we continued to make significant organic investments in expanding the footprint of Wall Street English
in China and the roll-out of our school services business in India as well as incurring significant charges from the integration of acquisitions, most notably the school systems business of SEB in Brazil.
Wall Street English, Pearsons worldwide chain of English language centres for professionals, increased student
numbers by 9% to more than 190,000. We opened 19 new centres around the world, bringing the total number close to 450. More than 0.9 million students registered for our MyLab digital learning, homework and assessment programs, an increase of
36%. They included more than 150,000 MyEnglishLab registrations, up 70%, and 28,000 registrations for our high school mathematics program MathXL, a 54% increase. Our Fronter learning management system grew strongly with new contracts won in Malta,
Tasmania and Poland. Active users rose by 18% to 1.3 million and their logins by 11% to 154 million. Student test volumes for the Pearson Test of English Academic saw robust growth supported by recognition from almost 1,900 institutions
including the Australian Department of Immigration & Citizenship and 95% of UK Universities. The Organisation for Economic Co-operation and Development chose Pearson to develop a competency and assessment framework for the 2015 cycle of The
Programme of International Student Assessment (PISA) tests, one of the worlds most prestigious programmes of international tests.
In China, student enrolments at our Wall Street English centres increased 25% to 53,000, boosted by strong underlying demand and the launch of 11 new centres. In December 2011, we acquired Global
Education and Technology Group, a leading provider of test preparation services for English Language and other professional qualifications. Global Education has approximately 450 (115 owned and 335 franchised) learning centres in 150 cities across
China. In South Africa we gained share in school publishing, but market conditions were tougher than expected during a year of major curriculum reform. Student enrolments grew strongly at CTI, up 13% to 8,700, which continues to deliver
significantly better completion rates than its peers and strong job placement rates of 70%. We delivered half a million secondary textbooks for Physics, Biology and History to all government secondary schools in Uganda, one million Junior African
Writer readers to the Ministry of Education
in Sierra Leone and almost two million textbooks in five subjects to secondary schools in Zimbabwe. In Brazil, we successfully completed the first stage of the SEB Pearson Sistemas integration
with major investments and improvements across the business. Our Virtual Library grew strongly and now reaches two million students across 100 universities, and we entered the K-12 publishing market. In Colombia, we implemented a bilingual teacher
training program in several states and in Chile we won a contract to evaluate the national college admissions test. In India, we incurred costs related to the acquisition of TutorVista and invested to grow the business. We have doubled the number of
schools managed by TutorVista to 24 and the installations of its multimedia teaching tool Digiclass to approximately 10,000. Vocational and Professional enrolments at our IndiaCan joint venture grew more than 50% to 86,000, with particular strength
in spoken English, Chartered Accountancy, Engineering and MBA qualifications. In the Middle East, our performance was boosted by sales of Reading Street and Scott Foresman Math in Saudi Arabian schools; Giancoli Physics and Thomas Calculus along
with strong MyLabs uptake in Turkish colleges; and Haeussler Mathematics and Hubert Engineering along with strong MyLab redemptions in Egypt.
Our UK business made solid progress during the year despite significant regulatory and policy changes in its markets, most notably in vocational and general qualifications, apprenticeships and in higher
education. We marked more than 5.7 million GCSE, A/AS Level and other examinations with 90% using onscreen technology. We marked more than 3.8 million test scripts for over half a million pupils taking National Curriculum Tests at Key
Stage Two in 2011 and have been selected to mark tests in 2012. Our Bug Club digital reading programme for primary schools combines engaging phonics-based books with games, assessments and teacher diagnostic tools to boost reading enjoyment and
comprehension. In 2011, more than 145,000 online users in almost 900 schools subscribed to Bug Club online. We acquired EDI plc, a leading provider of education and training qualifications and assessment services, with a strong reputation for the
use of information technology to administer learning programmes and deliver on-screen assessments. Registrations for our own BTEC Apprenticeships more than doubled to 80,000 students.
In Australia, we launched our pioneering US digital maths curriculum, enVisionMATH. And we have more local versions in
development to bring high quality digital curriculum to new markets across the globe. In Italy, our new digital curriculum helped us gain significant share in lower secondary adoptions and to see good growth overall. In Germany, we acquired Stark
Holding, a leading provider of education materials including test preparation resources for pupils and teachers. In Japan, we faced major disruption following the March 2011 tsunami but maintained operations and achieved notable successes,
particularly with the Versant Test of Communicative English and the launch of BTEC.
adjusted operating margins declined slightly from 13.9% in 2010 to 13.8% in 2011 as the business incurred additional integration costs from acquisitions.
Professional sales increased by £49m,
or 15%, to £382m in 2011 from £333m in 2010. Adjusted operating profit increased by £15m or 29% to £66m in 2011, from £51m in 2010. Sales growth in the assessment and training businesses was strong and benefited from a
full year contribution from the acquisition of Melorio in June 2010.
We continued to see good revenue and
profit growth at Pearson VUE, which administered more than seven million tests during the year, benefiting from sales of additional services to customers and contractual fee increases. We won a number of new contracts including the Construction
Industry Training Board in the UK, the National Council of Examiners for Engineering and Surveying in the US, and the HP certification examination worldwide. We formed a joint venture with the American Council on Education to develop an online
General Educational Development (GED) test aligned with new Common Core standards. The GED test measures an adults high school level knowledge and skills in math, reading, writing, science and social science. We launched a new touch-screen
theory driving test for the Roads and Transport Authority for Dubai. The test is delivered in Arabic, English and Urdu. The new test follows the opening last year of a new Pearson VUE office in Dubai to meet the Middle Easts demand for
Despite significant regulatory and policy changes in the apprenticeship
market, Pearson in Practice successfully graduated its largest IT cohort and launched or enhanced several new apprenticeship programmes in logistics, construction, management and customer service, business and health. We acquired TQ Holdings Ltd
which provides technical education and training services to governments, institutions and corporations around the world with particular expertise in skills related to the defence, engineering, oil and gas and construction sectors.
In professional publishing, our resilient performance in the US benefited from the breadth of our publishing and range of
revenue streams, from online retail through digital subscriptions. As a result, digital products and services now account for more than 25% of our professional publishing revenues in the US. In some International markets such as Japan, professional
publishers continued to face very challenging trading conditions. In the US, we launched MyGraphicsLab which integrates 50 hours of videos, 250 creative projects, 50 presentations and 1,000 quiz questions with real-world assignments to prepare
students for the job market.
Overall adjusted operating margins in the Professional business were higher at
17.3% in 2011 compared to 15.3% in 2010 as margins improved following the integration of Melorio in 2010 and continued efficiencies in the Professional publishing business.
Sales at FT Group increased by £24m or 6%,
from £403m in 2010 to £427m in 2011. Adjusted operating profit increased by £16m, from £60m in 2010 to £76m in 2011. The sales and profit increase is mainly due to increased demand for digital products and was in spite
of weakness in the advertising market in the year. The Economist and other joint ventures and associates also contributed to the profit growth.
The FT produced strong and accelerating growth in its digital readership with online subscriptions up 29% to 267,000, 2,000 direct corporate licences and FT.com registered users up 33% to more than four
million. Combined paid print and digital circulation reached 600,000 in 2011, the highest circulation in the history of the FT. At the end of 2011, digital subscribers exceeded print circulation in the US for the first time. The Average Daily Global
Audience across print and online grew 3% to 2.2 million people worldwide, our largest audience ever. Readership continues to migrate online and to mobile, which now generates 19% of traffic to FT.com. We launched FT web apps optimised for iPad
and Android devices including a custom app for India. The web apps provide FT subscribers access to our content online and through mobile devices with a single subscription and data analytics allow us to better serve our customers. Advertising was
generally weak and volatile with poor visibility. Growth in online advertising and the luxury category was offset by weakness in corporate advertising. FT Conferences had a very strong year, operating 75 events in 37 cities worldwide. Almost 9,000
senior executives from around the world attended these events. We launched the FT Non-Executive Certificate (in partnership with Pearson LearningStudio and Edexcel) in April 2011, enrolling more than 100 students. The certificate is designed to aid
the professionalisation of the sector and increase diversity on UK boards. It is the first fully accredited formal education product for non-executive directors. We extended the breadth and depth of the FTs premium subscription services
through the launch of Brazil Confidential, extending our successful China Confidential franchise into another growth market. Medley Global Advisors (MGA) grew modestly despite challenging conditions for its customers due to new contract wins.
Money-Media grew strongly fuelled by an increase in subscriptions and advertising.
editorial analysis continued to benefit from its global presence and product breadth. Usage increased, new sales grew and renewal rates were strong. Continued volatility in debt markets helped sustain the strong performance of Debtwire whilst
volatile equity markets benefited dealReporters event-driven strategy. Mergermarket saw strong growth in Asia-Pacific and the Americas while MergerID continued to benefit from a broadening network of users and strong growth in transaction
matches. We launched a large number of new products, extending our reach into new geographies (US wealthmonitor, ABS Europe, dealReporter Middle East, dealReporter Russia Desk), new strategies (multi-strategy products), new coverage areas (municipal
bonds, dividend arbitrage) and new platforms (mergermarket iPad app).
The Economist, in which Pearson owns a 50% stake, increased global weekly
circulation by 1% to 1.49 million (for the July December 2011 ABC period) with an additional digital circulation in excess of 100,000. Total annual online visits increased to 165 million, up 39% on 2010. Business Day and Financial
Mail (BDFM), our 50% owned joint venture in South Africa with Avusa, improved profitability with revenue increasing by 10%. The business benefited from growth in advertising and circulation revenues. In December 2011, we sold our 50% stake in FTSE
International to the London Stock Exchange for net proceeds of £428m in December 2011: it contributed £20m to Pearsons operating profit in 2011.
Overall adjusted operating margins at FT Group increased from 14.9% in 2010 to 17.8% in 2011 as efficiencies and changing
product mix helped improvements.
The Penguin Group
Penguin sales declined by £8m or 1%, to £1,045m in 2011 from £1,053m in 2010 as the business faced tough
conditions in the physical book market but adjusted operating profit was up 5% to £111m in 2011 from £106m in 2010.
Market conditions in 2011 were tough following the collapse of two major customers: Borders in the US and the REDGroup in Australia and New Zealand. Despite this, Penguin achieved robust sales and profits
and gained market share in each of its major markets the US, the UK and Australia. There was a strong and consistent publishing performance across imprints and territories which produced market share gains in our major markets in a very
challenging retail environment with the closure of more than 750 stores. Growth in developing markets was boosted by the strength of the direct marketing channel and strong publishing in India, including its first 100,000 copy bestseller (Ravinder
Can Love Happen Twice?
). Global publishing properties such as LEGO
, Wimpy Kid, Jamie Oliver
and Kathryn Stocketts
sold in significant numbers in multiple markets.
doubled on the previous year and accounted for 12% of Penguin revenues worldwide, and more than 20% in the US, in 2011. Since the beginning of 2008, digital downloads of apps and ebooks across the Group have totalled approximately 50 million.
Penguin continued to invest in digital innovation, launching more than 100 apps and enhanced ebooks, including
Wreck this App
On the Road
, and a new global digital-only publishing program,
. DK launched its first non-travel apps including the award-winning
DK Human Body
. In January 2012 DK became the first consumer publisher to publish four iBooks2 titles using Apples new authoring tool. Penguin continued to
invest in direct-to-consumer initiatives including new digital platforms for readers, specifically aNobii in the UK and Bookish in the US. In Australia Penguin acquired the REDGroups online business. Penguin also signed its first author
through its new self-publishing platform BookCountry. Its websites and social media channels around the world now have a global following of more than 11 million. Penguin continued to leverage Pearson-wide digital platforms to transform its internal
publishing processes, enabling faster product development and greater re-use of content.
In the US Penguin published a record 254
Times bestsellers including some of its
repeat bestselling authors such as Tom Clancy, Patricia Cornwell, Ken Follett, Nora Roberts and Clive Cussler, as well as new talent such as Deborah Harkness, Amor Towles and Eleanor Brown. Kathryn Stocketts
was the bestselling
title across the US industry selling five million copies in print and digital in its third year since publication. The Young Readers division had another strong year achieving a high of 41
New York Times
bestsellers. Penguin UK
published 78 top ten bestsellers, an increase of 15 on 2010, including two of the top five industry titles with Jamie Olivers
and Dawn Frenchs
A Tiny Bit Marvellous
, and a robust performance by Penguin
Childrens who were named Childrens Publisher of the Year in 2011. For a second consecutive year, Jamie Oliver secured the coveted Christmas number one slot with
Jamies Great Britain
. Jeff Kinneys new
sold 300,000 copies and was the fastest selling book of 2011. DKs bestseller success continued in 2011 with its LEGO
titles dominating the bestseller charts including
Ideas Book, LEGO
Star Wars Visual Dictionary
Titles from authors such as Annabel Karmel, Karl Pilkington and Mary Berry and the
titles also performed strongly. In Australia, Penguin had the two top-selling titles across
the industry with Jamies
and Jeff Kinneys
and hit number one 24 times through the course of the year.
Penguin adjusted operating margins improved again in 2011 to 10.6% from 10.1% in 2010.
Year ended December 31, 2010 compared to year ended December 31, 2009
Consolidated results of operations
Our total sales from continuing operations increased by £523m, or 10%, to £5,663m in 2010, from £5,140m
in 2009. The increase reflected growth, on a constant exchange rate basis, at all of our businesses together with additional contributions from acquisitions made in both 2009 and 2010. The year on year growth was impacted by movements in exchange
rates, particularly in the US dollar. 2010 sales, translated at 2009 average exchange rates, would have been £5,535m.
Pearson Education increased sales by £427m or 11% from £3,780m to £4,207m. The North American, International and Professional businesses all contributed to the increase although the
International Education business was helped by acquisitions made in 2009 and 2010 and the Professional business benefited from the acquisition of Melorio in 2010. A high proportion of the increase was also due to exchange. We estimate that after
excluding acquisitions, Pearson Education saw sales growth of 5% at constant last year exchange rates. The North American business saw strong growth in Higher Education which again out-performed the market which grew at 7.3% in 2010, according to
the Association of American Publishers after benefiting from healthy enrolment growth and good demand for instructional materials. The North American publishing business also gained share in the US school curriculum market as this market returned to
growth, benefiting from the stronger new adoption opportunity and in spite of the fact that state budgets remained under pressure. The US school publishing market grew 3.2% according to the Association of American Publishers. Revenues at the US
Assessment and Information division were broadly level against 2009. State funding issues produced tough market conditions for our state assessment and teacher licensure testing businesses. This was offset by good growth in clinical and diagnostic
assessments. International Education sales also benefited from exchange and a contribution from the acquisitions of Sistema Educacional Brasileiro and Wall Street Institute in 2010 and a full year contribution from the 2009 acquisitions of Wall
Street English and Fronter and the increased shareholdings in Longman Nigeria and Maskew Miller Longman. After excluding the effect of acquisitions we estimate that there was growth of 6% at constant last year exchange rates in the International
Education business. Professional sales increased in 2010 by 21% although much of this increase was due to the contribution from Melorio, the UK vocational training business acquired in June 2010. In terms of constant last year exchange rates and
after taking out the acquisition of Melorio there was still good growth in professional testing and modest growth in the professional publishing business.
FT Group sales were 13% ahead of last year driven by strong growth at the
with growth in digital readership and subscriptions, helped by good advertising growth in 2010.
Mergermarket continued to benefit from an improvement in market conditions and its flexibility in adapting to new client investment strategies which supported a recovery in renewal rates and growth in new business revenues. An increase in global
merger and acquisition activity benefited Mergermarket and dealReporter and continued volatility in debt markets helped sustain the strong performance of DebtWire.
Penguins sales were up 5% in 2010 and it gained share in its three largest markets, the US, UK and Australia.
Growth was also due to the very strong growth in ebooks which accounted for 6% of Penguin revenues worldwide in 2010.
Pearson Education, our largest business sector, accounted for 74% of our continuing business sales in 2010 and 2009. North America continued to be the most significant source of our sales and as a
proportion of total continuing sales contributed 63% in 2010 and 65% in 2009.
The following table summarizes our cost of sales and net operating expenses:
Year Ended December 31
Cost of goods sold
Administration and other expenses
Other operating income
Cost of goods sold.
Cost of sales consists of costs for raw materials,
primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges and the cost of service provision in the assessment and testing business. Our cost of sales increased by £206m, or 9%, to £2,588m in
2010, from £2,382m in 2009. The increase corresponds to the increase in sales with cost of sales at 45.7% of sales in 2010 compared to 46.3% in 2009.
Distribution costs consist primarily of shipping costs, postage and packing and remain a fairly constant percentage of sales.
Administration and other expenses.
Our administration and other expenses increased by £176m, or 9%, to
£2,190m in 2010, from £2,014m in 2009. As a percentage of sales they remained consistent at 39% in 2010 and 2009.
Other operating income.
Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from the sale of assets.
Other operating income decreased slightly to £115m in 2010 compared to £120m in 2009.
Share of results of
joint ventures and associates
The contribution from our joint ventures and associates increased from
£30m in 2009 to £41m in 2010. The 2010 result included a one off profit relating to a stepped acquisition at FTSE of £12m. The majority of the remainder of the profit comes from our 50% interest in the Economist.
The total operating profit increased by £124m, or 20%, to £743m in 2010 from £619m in 2009. 2010 operating profit, translated at 2009 average exchange rates, would have been £37m
Operating profit attributable to Pearson Education increased by £71m, or 14%, to £576m in
2010, from £505m in 2009. The increase was attributable to a strong performance in the US Higher Education business and in the International businesses and due to the positive impact of exchange and a contribution from acquisitions. Operating
profit attributable to the FT Group increased by £31m, or 100%, to £62m in 2010, from £31m in 2009. The increase reflects the improved profitability from digital businesses and the pick up in advertising together with the one off
profit recorded by FTSE referred to above. Operating profit attributable to Penguin increased by £22m, or 27%, to £105m in 2010, from £83m in 2009. This increase was due to the improved sales performance and improved margins partly
due to charges relating to the reorganisation of the business in the UK in 2009.
Net finance costs decreased from £96m in 2009 to £73m in 2010. Net interest payable in 2010 was £73m,
down from £86m in 2009. The Groups net interest payable decreased by £13m in 2010, mainly due to a reduction in average interest rates on our floating US dollar debt and the effect of lower average levels of net debt following the
receipt of proceeds from the sale of Interactive Data. Year on year, average three month LIBOR (weighted for the Groups net borrowings in US dollars and sterling at each year end) fell by 0.3% to 0.4%. This reduction in floating market
interest rates drove the Groups lower interest charge. However the low rates on deposited funds coupled with the impact on the calculation of significantly lower net debt, created an increase in the Groups average net interest payable of
5.3% to 7.9%. The Groups average net debt fell by £681m, reflecting the impact of the Interactive Data disposal. Finance charges relating to post-retirement plans were £12m in both 2010 and 2009.
Other net finance costs relating to foreign exchange and short-term fluctuations in the market value of financial
instruments included a net foreign exchange loss of £7m in 2009 compared to a gain of £9m in 2010. In 2009 the loss mainly related to losses on cross currency swaps and in 2010 the gain related to exchange on new US dollar borrowing
raised in the year. For a more detailed discussion of our borrowings and interest expenses see Liquidity and Capital Resources Capital Resources and Borrowings below and Item 11. Quantitative
and Qualitative Disclosures about Market Risk.
The total tax charge in 2010 of £146m represents 22% of pre-tax profits compared to a charge of £146m or 28%
of pre-tax profits in 2009. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than the UK corporation tax rate (which had an effective statutory rate of 28% in 2010 and in 2009). Higher tax rates were
partly offset by the recognition of tax losses and credits in the year including pre-acquisition and capital losses that were utilised in connection with the Interactive Data sale. The tax charge relating to that sale in July 2010 is included in the
profit on discontinued businesses.
The non-controlling interest in the income statement comprises mainly the publicly-held share of Interactive Data for the
period to disposal in July 2010. There are also non-controlling interests in the Groups businesses in South Africa, Nigeria, China and India although none of these are material to the Group numbers. The non-controlling interest in the
Groups Brazilian business, SEB was bought out in the first half of 2011.
On July 29, 2010, Interactive Data, in which Pearson held a 61% interest was sold. (Pearsons
share of the sale proceeds was $2bn.) The results of Interactive Data have been included as discontinued operations up to the date of sale on July 29, 2010. Included in discontinued operations in 2010 is Interactive Datas results for the seven
months to the date of sale, the gain on sale of £1,037m and the attributable tax charge of £306m. The total profit from discontinued operations, after taking account of the above items, was £776m in 2010 compared to £85m in
Profit for the year
The profit for the financial year in 2010 was £1,300m compared to a profit in 2009 of £462m. The overall
increase of £838m was mainly due to the gain on sale of Interactive Data but also due to the improved operating performance and decrease in net finance costs.
Earnings per ordinary share
The basic earnings per
ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 161.9p in 2010 compared to 53.2p in 2009 based on a weighted
average number of shares in issue of 801.2m in 2010 and 799.3m in 2009. The increase in earnings per share was due to the increase in profit for 2010 described above and was not significantly
affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share of
161.5p in 2010 and 53.1p in 2009 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.
Exchange rate fluctuations
The strengthening of the US dollar and other currencies against sterling on an average basis had a positive impact on reported sales and profits in 2010 compared to 2009. 2010 sales, translated at 2009
average exchange rates, would have been lower by £128m and operating profit, translated at 2009 average exchange rates, would have been lower by £37m. See Item 11. Quantitative and Qualitative Disclosures about Market
Risk for a discussion regarding our management of exchange rate risks.
Sales and operating profit by division
The following tables summarize our sales and operating profit for each of Pearsons business
segments. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of Item 18.
In our adjusted operating profit we have excluded amortization of acquired
intangibles and acquisition costs. The amortization of acquired intangibles is the amortization of intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither of these
charges are considered to be fully reflective of the underlying performance of the Group. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are excluded
from adjusted operating profit as they distort the performance of the Group.
Adjusted operating profit
enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
North American Education sales increased by £170m, or 7%, to £2,640m in 2010, from £2,470m in 2009 and
adjusted operating profit increased by £66m, or 16%, to £469m in 2010 from £403m in 2009. The results were affected by the relative strength of the US dollar, which we estimate increased sales by £53m and adjusted operating
profit by £10m when compared to the equivalent figures at constant 2009 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales of 4% and profits of 12%. Growth
was driven by the US Higher Education business.
The US School publishing market grew 3.2% in 2010, according
to the Association of American Publishers. State budgets continue to be under pressure but the industry returned to growth, benefiting from the stronger new adoption opportunity this year (total opportunity of $800m in 2010 against $500m in 2009).
The US School curriculum business gained share with a strong performance from enVisionMATH, our digital math curriculum. Successnet, our online learning platform for teachers and students which supports Pearsons digital instruction, assessment
and remediation programs, grew strongly, achieving almost 6 million registrations in 2010, up 33% on 2009, with the number of assessments taken through the system rising 53% to more than 8m. We continued to develop digital programs, platforms
and mobile apps to boost achievement and to increase access and affordability. We successfully launched three major new school programs: digits, our digital middle school math program, which provides services for teachers including embedded
assessment, differentiation of students and automation of administrative tasks; Writing Coach which is a blended print and online program that helps middle and high school students in writing and grammar with personalized assignments and grading;
and Online Learning Exchange which is an open education resource that allows teachers to create personalized digital learning programs using standards-based Pearson content as well as teacher-generated material. Poptropica is the largest virtual
world for young children in the US with average monthly unique visitors growing by 40% to 8.1m from more than 100 countries and speaking more than 70 languages. Poptropica launched seven new islands and was the fifth most searched-for video
game on Google.com in 2010. In September 2010 we acquired Americas Choice to boost Pearsons services in school reform, a major focus of the US education department. Americas Choice brings together instruction, assessment,
leadership development, professional development, coaching and ongoing consulting services.
Revenues at our US Assessment & Information division were broadly
level against 2009. State funding pressures produced tough market conditions for our state assessment and teacher licensure testing businesses. This was offset by good growth in clinical and diagnostic assessments. We saw good profit growth at
Assessment and Information as we benefited from a shift to premium products and further efficiencies generated from the integration of the Harcourt Assessment business. We renewed two important contracts, extending our long-standing relationships
with the College Board to administer the SATs and with the Texas Education Agency to administer state-wide student assessments. We continued to achieve strong growth in secure online testing, delivering 13.3 million secure online tests in 2010,
up 41% over 2009. Our market leading student information systems business in the US continued to achieve rapid organic growth further boosted by the acquisition of Administrative Assistants Limited in 2010. We now support almost 16 million US
students, an increase of 49% over 2009. We achieved strong growth with AIMSWEB, our progress monitoring service which enables early intervention and remediation for struggling students. AIMSWEB supported almost four million students, an increase of
more than 20% in 2010.
The US Higher Education publishing market grew 7.3% in 2010, according to the
Association of American Publishers with the industry benefiting from healthy enrolment growth and good demand for instructional materials. Pearson gained share from its lead in technology and customisation. Our US Higher Education business has now
grown faster than its industry for 12 consecutive years. The pioneering MyLab digital learning, homework and assessment programs again grew strongly with student registrations up 32% to more than 7.3m in North America. We launched
LearningStudio which provides a broad suite of learning management technologies including eCollege and Fronter. LearningStudio increased fully online enrolments by 54% to 8.3m in North America. Renewal rates remained high at approximately 90% by
Overall adjusted operating margins in the North American Education business were higher at 17.8% in
2010 compared to 16.3% in 2009 with the majority of the increase attributable to cost efficiencies and the relative success of higher margin digital products.
International Education sales
increased by £199m, or 19%, to £1,234m in 2010, from £1,035m in 2009 and adjusted operating profit increased by £30m, or 21%, to £171m in 2010 from £141m in 2009. The sales results benefit from exchange gains and
a full year contribution from acquisitions made in 2009.
The International Education business was active in
more than 70 countries in 2010. More than 670,000 students outside America used our MyLab digital learning, homework and assessment programs, an increase of more than 40%. They included 150,000 users of our online English-language products
MyEnglishLabs and MyNorthStarLab, a 170% increase. Our eCollege learning management system won new contracts in Malaysia and Colombia. Our Fronter learning management system continued to grow strongly with unique registration rising more than 20% to
1.1 million students in more than 8,700 schools, colleges and universities around the world. Pearson Learning Solutions, which combines products and services from across Pearson to deliver a systematic approach to improving student performance,
won new contracts in South Africa, Malta, Vietnam and the UK. During the year, the International Education business acquired Wall Street Institute (WSI), which provides premium spoken English training for adults, for $101m in cash. In 2010 WSI had
about 340 franchised learning centers in 25 territories in Asia, Europe, the Middle East and Africa. The acquisition reunites Wall Street Institute with Wall Street English, the Chinese arm of the company acquired by Pearson in 2009.
In the UK, BTEC, our flagship vocational qualification, attracted more than 1.4 million student registrations, up
28% on 2009. Registrations for our NVQ work-based learning qualification grew 45% to more than 165,000, and we introduced the BTEC Apprenticeship to serve the work-based learning market. We marked more than 5.4 million A/AS Level and GCSE and
Diploma scripts in the 2009-2010 academic year, with 90% now marked onscreen. Pearson marked and delivered 3.4 million tests in six weeks for the National Curriculum Tests at Key Stage 2. We established a new school improvement business in the
UK, which will work with schools to help them train teachers, improve strategic planning and structure teaching methods.
In Italy, adoption of our Linx digital secondary science program increased
three-fold, helping Pearson to grow strongly and become joint market leader for combined lower and upper secondary education. Linx is built around content from our North American science programs customized for the Italian market. We began to
develop a broader range and depth of digital products and services, including teacher training, to personalize learning and increase educational effectiveness. In the Netherlands, we launched iPockets, the first fully digital Early English course
for 4-8 year-olds in Primary Education. The course is 100% digital and subscription based and customized for the Dutch market.
In South Africas Western Cape province, we won a three-year contract to prepare, administer and report all Grade 9 student assessments. The tests focus on both individual student results and the
systemic performance of schools and districts. Pearson won new national contracts in Ethiopia, to supply 2.9 million Biology, Physics and English learning materials for Senior Secondary Grades 9 to 12. In Zimbabwe, we were awarded a contract by
UNICEF to deliver 13.5 million textbooks to children in Grades 1 to 7 in Mathematics, Environmental Science, English, Shona and Ndebele.
We generated strong growth in the Gulf region in higher education with integrated technology products in Business & Economics and Science. Student enrolments at our Wall Street English schools in
China increased by 27% and we announced plans to open 50 new English language centers in China over the next three to five years, adding to the 66 centers and schools already operating under the Wall Street English and Longman English brands
Pearson announced its strategic partnership with SEB in Brazil to provide services to its educational
institutions and to acquire its school learning systems (sistema) business for $517m. A sistema is an integrated learning system incorporating curriculum design, teacher support and training, print and digital content, technology
platforms, assessment and other services. In 2010 SEBs sistemas served more than 450,000 students across both private and public schools. Our School Curriculum business grew strongly, particularly in Mexico, Colombia, Chile and Peru, as we
continued to build our locally developed materials as well as Spanish language adaptations of US school programmes. There was strong growth of English Language Teaching materials across Latin America underpinned by performance in Brazil, Colombia,
Argentina, Chile, Dominican Republic and Peru.
International Education adjusted operating margins improved
slightly from 13.6% in 2009 to 13.9% in 2010.
Professional sales increased by £58m, or 21%, to £333m in 2010 from £275m in 2009. Adjusted operating
profit increased by £8m or 19% to £51m in 2010, from £43m in 2009. Sales growth in the assessment and training businesses was strong and benefited from the acquisition of Melorio in June 2010.
In professional testing we continued to see good growth at Pearson VUE which administered more than 8 million tests
in 2010, up 3% on 2009. Average revenues per test increased in 2010 as we develop a broader range of services and enhance our systems and assessments to meet our customers needs. Pearson VUE renewed a number of major contracts including the
Driving Standards Agency (DSA) of Great Britain and the Driver & Vehicle Agency (DVA) of Northern Ireland; Cisco; and Colorado Department of Regulatory Agencies. We also won a number of new contracts to deliver computer-based tests in the
US, UK, UAE, Saudi Arabia, Egypt and Bahrain, covering the real estate, accountancy, legal, healthcare, skills and finance sectors.
In professional training, we acquired Melorio plc, one of the UKs leading vocational training groups, for £98m, supporting our vocational education strategy by combining Melorios
training delivery skills with our existing complementary strengths in educational publishing, technology and assessments. Melorio traded well in the second half of the year securing a number of large key contracts for training delivery, and
successfully graduating and placing the largest IT graduate cohort in the history of the business. Our investment in systems, streamlining the course offering and training centres and back office integration are all on track.
Our Professional publishing business was level in 2010 with steady margins
as strong growth in digital products and services offset continued challenging trading conditions in the retail market and a planned reduction in the number of print titles published. We launched online learning products with customisable content,
assessment and personalised study paths and also delivered 450 hours of technical training through online subscriptions for the IT certification market. We developed applications for social networks and mobile devices to extend the reach and
accessibility of our content and videos available within our Safari Books Online platform.
operating margins in the Professional business were slightly lower at 15.3% in 2010 compared to 15.6% in 2009 as margins were impacted by the acquisition of Melorio.
Sales at FT Group increased by £45m or 13%,
from £358m in 2009 to £403m in 2010. Adjusted operating profit increased by £21m, from £39m in 2009 to £60m in 2010. The sales and profit increase is mainly from the
which saw increased demand for
digital products and a pick up in advertising in the year. The Economist and other joint ventures and associates also contributed to the profit growth.
saw strong and accelerating growth in digital readership with digital subscriptions up over 50% to 207,000, more than 1,000 direct corporate customers and registered users up
79% to more than 3 million. It generated over 900,000 downloads of FT apps on mobile phones and tablet devices and won a prestigious Apple Design Award for its iPad app. The FTs combined paid print and digital circulation reached 597,000
in the fourth quarter of 2010. After weak advertising markets in 2009, we saw good advertising growth in 2010 although the visibility for advertising revenues is poor. We extended the breadth and depth of FTs premium subscription services
through the launch of FT Tilt, focused on emerging markets; the launch of MandateWire US, extending the reach of this successful European brand into new markets; and the acquisition of Medley Global Advisors, a premier provider of macro policy
Mergermarket benefited from improving market conditions and its flexibility in adapting to new
client investment strategies, which supported stronger renewal rates and new business revenues. An increase in global merger and acquisition activity benefited Mergermarket and dealReporter; while continued volatility in debt markets helped sustain
the strong performance of DebtWire. We saw strong growth in developing markets supported by new product launches including our first local language version of Mergermarket in China. In March 2010 we acquired Xtract research, which provides bond
covenant data to allow investors to understand how covenants might impact on valuation.
in which Pearson owns a 50% stake, increased global weekly circulation by 3.7% to 1.47 million (for the July-December 2010 ABC period) and total annual online visits increased to 118 million, up 21% on 2009. FTSE, our 50% owned joint
venture with the London Stock Exchange, increased revenues by 20% and acquired the remaining 50% of FXI, FTSEs joint venture with Xinhua Finance in China. Business Day and Financial Mail (BDFM), our 50% owned joint-venture in South Africa with
Avusa, returned to profitability with revenue increasing by 5%. The business benefited from a recovery in advertising and the closure of non-profitable operations.
Overall adjusted operating margins at FT Group increased from 10.9% in 2009 to 14.9% in 2010 as advertising revenue fell
through to the bottom line.
The Penguin Group
Penguin sales increased by £51m or 5%, to £1,053m in 2010 from £1,002m in 2009 and adjusted operating
profit was up 26% to £106m in 2010 from £84m in 2009. Both sales and adjusted operating profit were affected by the stronger US dollar which we estimate increased sales by £32m and adjusted operating profit by £13m when
compared to the equivalent figures at constant 2009 exchange rates. In 2010, Penguin benefited from a
series of organisational changes in the UK made in 2009. These were designed to strengthen its publishing, reduce costs and accelerate the transition to digital production, sales channels and
formats and to lower cost markets for design and production. Penguins 2009 results include approximately £9m of charges relating to these organisational changes.
Penguin saw a strong and consistent publishing performance across imprints and territories producing market share gains
in the US, UK and Australia, our three largest markets. Strong growth in developing markets was boosted by the launch of new imprints and the increasing breadth and depth of our local publishing programs in India, China and South Africa. There was
continued investment in global publishing with the launch of Penguins Classics in Portuguese and Arabic, joining existing Mandarin and Korean editions, the launch in India of a new imprint in partnership with bestselling author Shobhaa De, and
the continued international roll-out of our non-fiction imprint Allen Lane in Canada.
ebook sales were up
182% on the previous year and in 2010 accounted for 6% of Penguin revenues worldwide. We accelerated our investment in digital products and innovation with new app releases in the childrens market including Spot, Peppa Pig, The Little Engine
That Could, Ladybirds Babytouch and the Mad Libs app, which was named one of the best apps at the 2010 E-Book Summit. For adults, we launched the groundbreaking myFry app; published the amplified ebook of Ken Folletts international
The Pillars of the Earth
, featuring video, art and music from the original TV series; and we introduced ten DK Eyewitness Top Ten Travel Guides apps. Penguin continued to invest to transform its internal publishing processes
onto Pearson-wide digital platforms enabling faster product development and more efficient creation and re-use of content.
Penguin performed strongly in the US with a broad range of number one bestsellers from repeat authors such as Charlaine Harris, Nora Roberts, Tom Clancy, Ken Follett and Patricia Cornwell. Kathryn
stayed on the
New York Times
bestseller list for the whole of 2010 and has sold more than three million copies to date. Our outstanding performance in the UK, resulting in our market share in 2010 rising two
percentage points to 10%, was led by Jamie Olivers
30 Minute Meals
. It sold 1.2 million copies to become the UKs biggest selling non-fiction title of the last decade. Major bestsellers included Stephen Frys
, Kathryn Stocketts
The History of the World in 100 Objects
(published in partnership with the BBC and the British Museum), as well as the
Diary of a Wimpy Kid
DK produced a very good year thanks in part to its top-performing franchise LEGO (
Lego Star Wars Visual Dictionary
was on the
New York Times
bestseller list for the whole of 2010 with 18 weeks at number one). Other bestselling
The Masterchef Cookbook
Complete Human Body
. DK continued to benefit from the organisation changes made in 2009 as well as the ongoing development of its publishing centre in India. Penguin
Childrens had an excellent year in both the US, with Penguin Young Readers Group achieving a record 39
New York Times
bestsellers, and in the UK, where we reclaimed our position as the number one childrens publisher with
significant market share gains.
Penguin adjusted operating margins improved in 2010 to 10.1% from 8.4% in
Liquidity and capital resources
Cash flows and financing
Net cash generated from operations decreased by £76m (or 7%), to £1,093m in 2011 from £1,169m in 2010. Cash flows are translated at an exchange rate approximating to the rate at the date
of cash flow. The decrease in net cash generated from operations in 2011 compared to 2010 reflected a lower year end contribution from working capital movements as pre-publication expenditure matched pre-publication amortization in 2011. In 2010, a
strong school adoption year, pre-publication amortization exceeded expenditure. In 2011, the average working capital to sales ratio for our book publishing businesses over the whole year improved to 16.9% from 20.1% in 2010, reflecting the financial
characteristics of the ongoing portfolio shift to more digital and service-
orientated businesses. Average working capital is the average month end balance in the year of inventory (including pre-publication), receivables and payables. Net cash generated from operations
increased by £157m (or 16%), to £1,169m in 2010 from £1,012m in 2009. This increase reflected strong cash contributions, particularly from our education businesses and higher pre-publication amortization relative to expenditure in
a strong school adoption year. In 2010, the average working capital to sales ratio for our book publishing businesses improved to 20.1% from 25.1% in 2009, reflecting tight working capital management and the financial impact of the shift to more
digital and service-orientated products and businesses.
Net interest paid decreased to £60m in 2011
from £68m in 2010 in line with lower average net debt following receipt of the proceeds from the sale of Interactive Data. Net interest paid decreased to £68m in 2010 from £87m in 2009. The decrease reflects the repayment of a
US Dollar bond in 2009 and lower variable interest rates.
Capital expenditure on property, plant and
equipment and software intangibles was £144m in 2011, £132m in 2010 and £120m in 2009. Expenditure has been prioritized towards information technology and software to further enhance the digital capability of the Group.
The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £788m in 2011
against £557m in 2010 and £222m in 2009. The increase reflects the re-shaping of the portfolio following the sale of Interactive Data. The principal acquisitions in 2011 were of Schoolnet for £141m, Education Development
International for £108m, Connections Education for £244m, Global Education for £97m and TutorVista for £75m. The principal acquisitions in 2010 were of Sistema Educacional Brasileiro for £228m, Melorio for £97m,
Wall Street Institute for £64m and Americas Choice for £53m.
The sale of subsidiaries and
associates produced a net cash inflow of £422m in 2011 against £734m in 2010 and £nil in 2009. The proceeds in 2011 relate to the sale of the Groups 50% holding in FTSE International. The proceeds in 2010 relate to the sale
of Interactive Data, with proceeds received being £984m and tax paid relating to this disposal of £250m.
The cash outflow from financing of £790m reflects the repayment of a $500m bond, a further 9% increase in the dividend and the final payment of £108m in the stepped acquisition of Sistema
Educacional Brasileiro. The cash outflow from financing of £92m in 2010 reflects a further increase in the group dividend and the purchase of treasury shares, with some offset from a $350m US Dollar Note issued in the year. The cash
outflow from financing of £366m in 2009 reflects the repayment of one $350m bond, the repayment of borrowings under the Groups committed borrowing facility and an increase of the dividend in line with earnings. Offsetting this, the Group
issued £300m of sterling bonds in the year.
Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements in the
educational materials business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital
requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available for the Groups present requirements, with an appropriate level of headroom given our portfolio of businesses
and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this 12-month period will depend on many factors, including the rate, if any, at which our cash flow
changes and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all.
At December 31, 2011, our net debt was £499m compared to net debt of £430m at
December 31, 2010. Net debt is defined as all short-term, medium-term and long-term borrowing (including finance leases), less all cash,
cash equivalents and liquid resources. Cash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-term deposits with maturities of
more than 90 days and other marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £2,051m at December 31, 2011, compared to £2,312m at
December 31, 2010 reflecting the repayment of the $500m bond in the year and a slight weakening of sterling against the US dollar. At December 31, 2011, cash and liquid resources were £1,369m, compared to £1,736m at
December 31, 2010. This decrease is due to the re-investment of the proceeds from the sale of Interactive Data via the various acquisitions above, with some offset from receipt of the proceeds from the sale of FTSE International.
The following table summarizes the maturity of our borrowings, our obligations under non-cancelable leases, and pension funding obligations, exclusive of anticipated interest payments.
At December 31, 2011
Bank loans, overdrafts and commercial paper
Finance lease obligations
Operating lease obligations
UK Pension funding obligations
At December 31, 2011 the Group had capital commitments for fixed assets, including
finance leases already under contract, of £18m (2010: £13m). There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to
subsidiaries and associates. In addition there are contingent liabilities in respect of legal and royalty claims. None of these claims or guarantees is expected to result in a material gain or loss.
In 2010, the Group negotiated a new $1,750m committed revolving credit facility which matures in November 2015. The Group
is committed to an annual fee of 0.2625% payable quarterly, on the unused amount of this facility.
The Group does not have any off-balance sheet arrangements, as defined by the SEC Final
Rule 67 (FR-67), Disclosure in Managements Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, that have or are reasonably likely to have a material current or future effect on
the Groups financial position or results of operations.
The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and
commercial paper markets, and longer term loans from banks and capital markets.
We have in place a committed revolving credit facility of $1.75bn, which
matures in November 2015. At December 31, 2011, the full $1.75bn was available under this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at no less
than 3:1; and
We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no
more than 4:1.
EBITDA refers to earnings before interest, taxes, depreciation and amortization.
We are currently in compliance with these covenants.
Our treasury policy is described in note 19 of Item 18. Financial Statements. For a more detailed
discussion of our borrowing and use of derivatives, see Item 11. Quantitative and Qualitative Disclosures about Market Risk.
There were no significant or
unusual related party transactions in 2011, 2010 or 2009. Refer to note 36 in Item
18. Financial Statements.
For a description of our principal accounting policies used refer to note 1 in Item 18. Financial
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and senior management
We are managed by a board of directors and a chief executive who reports to the board and manages through a management
committee. We refer to the board of directors and the chairman of the board of directors as our senior management.
The following table sets forth information concerning senior management, as of March 2012.
Senior Independent Director
Chief Executive, Pearson North American Education
Chairman and Chief Executive, The Financial Times Group
Chief Financial Officer
Chairman and Chief Executive, The Penguin Group
Appointed on October 1, 2005. Chairman of the nomination committee and member of the remuneration committee.
Glen has more than three decades of experience in business and finance, and
is currently deputy chairman of The Financial Reporting Council Limited in the U.K., deputy chairmen and senior independent director at Lloyds Banking Group plc, and non-executive director of Fidelity International Limited. Previously, Glen was
senior independent director of Man Group plc and acting chairman of UK Financial Investments Limited, the company set up by HM Treasury to manage the governments shareholdings in British banks.
Appointed on January 1, 1997. Member of the nomination committee.
Marjorie brings a range of business, legal and publishing experience to Pearson. Before becoming Pearson CEO, she was chief executive of The Economist Group. Trained as a lawyer, she was a partner in a
Savannah, Georgia, law firm and at the same time founded with her husband the Pulitzer Prize-winning
newspaper. Marjorie is a director of Nokia Corporation, on the non-profit boards of Oxfam and the MacArthur Foundation. In
2003 she was made a Dame of the British Empire and in 2010 was named a fellow of the American Academy of Arts and Sciences.
Appointed on February 28, 2006. Chairman of the remuneration committee and member of the audit and nomination committees.
David has experience in banking, telecommunications and publishing in a long career in business. Currently he is chairman
of Aldermore Bank plc, Numis Corporation plc, and the Advisory Board of the British Library and a non-executive director of Telefonica S.A. Davids previous roles include the chairmanship of 02 plc, Severn Trent plc and IPC Group, as well as
chief operating officer of United Business Media plc and group managing director of EMAP plc. David served from 2002 to 2006 as chairman of the British governments Better Regulation Task Force, which worked on reducing burdens on business.
Appointed on April 1, 2002. Member of the audit, remuneration and nomination committees.
Patrick brings to Pearson more than 35 years global business experience in finance, consumer products, retailing and developing and emerging markets. He is the senior independent director of Tesco plc,
Britains largest retailer, a director of France-based INSEAD, the Business School for the World, and IAG, the International Consolidated Airlines Group, S.A., parent company of British Airways and Spains Iberia. He was previously group
chief executive of Unilever, the global consumer-goods company whose brands are known throughout the world. Patrick is a trustee of the Leverhulme Trust and chairman of the St. Jude Children Charity. In 2005 he was awarded the Légion
dHonneur, the highest decoration bestowed by France.
Appointed on January 1, 2012. Member of the audit, remuneration and nomination committees.
Vivienne has wide experience in energy, natural resources and business innovation. She worked for BP plc for 28 years, in
Britain and continental Europe, in posts including executive vice president and chief executive of BPs Gas, Power & Renewables business and its Alternative Energy unit. She is also non-executive director of mining company Rio Tinto
plc, energy company BG, the U.K. Department for International Development, and Vallourec, which supplies tubular systems for the energy industry. Vivienne also sits on the board of INSEAD.
Will has three decades of experience in education and educational publishing, including nearly a decade and a half at Pearson where he formerly headed our Higher Education, International and Professional
Publishing business. Prior to joining Pearson in 1998, Will was a senior executive at Prentice Hall and Addison Wesley, and before that an editor at Little, Brown and Co where he published in the fields of economics and politics. Will is a board
member and former chairman of the Association of American Publishers (AAP) and board chairman of CourseSmart, a consortium of electronic textbook publishers.
Appointed on June 1, 2002.
Rona has wide experience in business, finance, services and manufacturing. She was Pearsons chief financial officer
before beginning her current role in 2006. In addition to the FT Group, Rona heads Pearsons professional and careers business that includes Pearson VUE (our electronic testing and certification business) and various skills and professional
training businesses. She previously held senior management roles at specialty chemicals company ICI plc, and in aerospace with Bombardier/Shorts. She has an MBA from Harvard Business School. Rona currently serves as non-executive director of The
Cabinet Office of UK Government and of HSBC Holdings plc, where she chairs the risk committee. She is also a member of the Cambridge University Library Visiting Committee. She was made a Commander of the British Empire in 2012.
Appointed on June 12, 2006.
Robins experience in
management and accounting includes a previous role as group financial controller of Amersham plc (now part of General Electric) and senior financial positions with ICI plc, Zeneca and Henkel UK. He joined Pearson in 2004 as deputy chief financial
officer and became chief financial officer in June 2006. Robin qualified as a chartered accountant with Touche Ross (now Deloitte), and is currently a non-executive director and founder shareholder of eChem Limited. Robin sits on the Institute of
Chartered Accountants (ICAEW) Financial Reporting Committee and is deputy chairman of the Hundred Group of Finance Directors.
Appointed on July 27, 2004. Member of the audit and nomination committees.
Susans extensive experience in education includes her current role as president of Teachers College at Columbia University, Americas oldest and largest graduate school of education. She is
president of the National Academy of Education, and was previously dean of the Graduate School of Education at the University of Pennsylvania and on the board of trustees of the Carnegie Foundation for the Advancement of Teaching.
Appointed on February 28, 2006. Chairman of the audit committee and member of the remuneration and nomination committees.
Kens experience in finance and business includes roles in electronics, consumer products and healthcare. He is a
non-executive director of Reckitt Benckiser Group plc, one of the worlds leading manufacturers and marketers of branded products in household cleaning and health and personal care, retailer Tesco plc and the Royal Berkshire NHS Foundation
Trust. Previously, Ken was finance director of Vodafone Group plc and of subsidiaries of Racal Electronics.
Appointed on March 1, 2011. Member of the audit and nomination committees.
Joshuas experience spans finance, education and the development of digital enterprises. He is founder of Salmon
River Capital LLC, a New York-based private equity/venture capital firm focused on technology-enabled businesses in education, financial services and other sectors. Over a 25 year private equity/venture capital career, he has been involved in a
broad range of successful companies, including several pioneering enterprises in the education sector. In addition he has long been active in the non-profit education sector, with associations including New Leaders and the Bill & Melinda
Appointed on March 15, 1996.
Johns diverse background spans business, consultancy, financial journalism and publishing. He was finance director
of Pearson before heading Penguin, and previously served as managing director of the
newspaper, where he had earlier served as editor of the popular Lex column. John co-founded Makinson Cowell, an international financial
consultancy, and was vice chairman of the U.S. holding company of advertising firm Saatchi & Saatchi. John is chairman of the National Theatre and a trustee of the Institute for Public Policy Research.
Compensation of senior management
It is the role of the remuneration committee (the committee) to approve the remuneration and benefits packages of the
executive directors and other members of the Pearson Management Committee. The committee also takes note of the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company.
Our starting point continues to be that total remuneration should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional
Our goal as a company is to make an impact on peoples lives and on society through
education and information. Our strategy to achieve that goal is pursued by all Pearsons businesses in some shape or form and has four parts: long-tern investment in our business; technology; working in fast-growing markets around the world;
and efficiency and scale.
An important measure of our strategy is, of course, financial performance. In
financial terms, Pearsons goal is to achieve sustainable growth in three key financial goals earnings, cash and return on invested capital and reliable cash returns to our investors through healthy and growing dividends. We
believe those are, in concert, good indicators that we are building the long-term value of Pearson. So those measures (or others that contribute to them, such as sales, profit and working capital) form the basis of our annual budgets and plans,
and the basis for bonuses and long-term incentives.
Total remuneration is made up of fixed and
performance-linked elements, with each element supporting different objectives. Base salary reflects competitive market level, role and individual contribution. Annual incentives motivate the achievement of annual strategic goals. Bonus share
matching encourages executive directors and other senior executives to acquire and hold Pearson shares and aligns executives and shareholders interests. Long-term incentives drive long-term earnings and share price growth and value
creation and align executives and shareholders interests.
Consistent with its policy, the committee places considerable emphasis on
the performance-linked elements i.e. annual incentives, bonus share matching and long-term incentives. The committee will continue to review the mix of fixed and performance-linked remuneration on an annual basis, consistent with its overall
We want our executive directors remuneration to be competitive with those of directors and
executives in similar positions in comparable companies. For benchmarking purposes we review remuneration by reference to the UK and US market depending on the relevant market or markets for particular jobs. We look separately at three comparator
First, we use a select peer group of FTSE 100 companies with very substantial overseas
operations. These companies are of a range of sizes around Pearson, but the method our independent advisers use to make comparisons on remuneration takes this variation in size into account. Secondly, for the US, we use a broad media industry group.
And thirdly, we look at the FTSE 20-50, excluding financial services. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable
if our remuneration was not competitive.
Our normal policy is to review salaries annually, consistent with the way we benchmark pay and taking into account the
approach to pay across the company as a whole.
Allowances and benefits
It is the companys policy that benefit programs should be competitive in the context of the local labour market, but
as an international company we require executives to operate worldwide and recognize that recruitment also operates worldwide.
The committee establishes the annual incentive plans for the executive directors and the chief executives of the companys principal operating companies, including performance measures and targets.
These plans then become the basis of the annual incentive plans below the level of the principal operating companies, particularly with regard to the performance measures used and the relationship between the relevant business unit operating plans
and the incentive targets.
The committee will continue to review the annual incentive plans each year and to
revise the performance measures, targets and individual incentive opportunities in light of current conditions.
Annual incentive payments do not form part of pensionable earnings.
The financial performance measures relate to the companys main drivers of business performance at both the corporate, operating company and business unit level. Performance is measured separately
for each item. For each performance measure, the committee establishes threshold, target and maximum levels of performance for different levels of payout.
A proportion (which for 2012 may be up to 30%) of the total annual incentive opportunity for the executive directors and other members of the Pearson Management Committee is based on performance
against personal objectives as agreed with the chief executive (or in this case the chief executive, the chairman). These comprise functional, operational, strategic and non-financial objectives relevant to the executives specific areas of
may include objectives relating to environmental, social and governance issues.
For 2012 the principle financial performance measures for Pearson plc are
sales, operating profit (for the operating companies) and growth in underlying earnings per share for continuing operations at constant exchange rates (for Pearson plc), average working capital as a ratio to sales and operating cash flow. The
selection and weighting of the performance measures takes into account the strategic objectives and the business priorities relevant to each operating company and to Pearson overall each year.
The individual annual incentive opportunities for the executive directors other than the chief executive are expressed as
% of base salary. The committee with the advice of the chief executive determines the aggregate level of annual incentives and individual incentive opportunities taking into account all relevant factors. These factors may include the profitability
of the company, individual roles and responsibilities, market annual incentive levels, and the level of stretch in the performance targets.
For 2012, there are no changes to the target and maximum annual incentive opportunities for the chief executive which remain at 100% and 180% respectively, of base salary (as in 2011).
For the other members of the Pearson Management Committee, individual incentive opportunities take into account their
membership of that committee and the contribution of their respective businesses or role to Pearsons overall financial goals. In the case of the executive directors, the target individual incentive opportunity for 2012 is in a range from 80%
to 87.5% of base salary (as in 2011). The maximum opportunity remains at twice target (as in 2011).
annual incentive plans are discretionary and the committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments
although no such payments were awarded in respect of 2011.
For Pearson plc, the performance measures were sales, earnings per share growth, average
working capital to sales ratio and operating cash flow. Sales were between threshold and target. Underlying growth in adjusted earnings per share at constant exchange rates and operating cash flow were between target and maximum. Average working
capital to sales ratio was above maximum.
For Pearson Education North America, the performance measures were
sales, operating profit, and average working capital as a ratio to sales and operating cash flow. Sales were between threshold and target. Operating profit was between target and maximum. Average working capital to sales ratio and operating cash
flow were above maximum.
For FT Publishing, the performance measures were sales, operating profit and
operating cash flow. Sales were between target and maximum. Operating profit and operating cash flow were above maximum.
For Professional Assessment and Training, the performance measures were sales, operating profit and operating cash flow. Sales were between threshold and target. Operating profit was below threshold and
operating cash flow was between target and maximum.
For Penguin Group, the performance measures were sales,
operating profit, operating margin, average working capital as a ratio to sales and operating cash flow. Sales and operating profit were between target and maximum. Operating margin was between threshold and target. Average working capital to sales
ratio and operating cash flow were above maximum.
In 2008, shareholders approved the renewal of the annual bonus share matching plan, which permits executive directors and
senior executives around the company to invest up to 50% of any after-tax annual bonus in Pearson shares.
the participants invested shares are held, they are matched subject to earnings per share growth over the three-year performance period on a gross basis i.e. the maximum number of matching shares is equal to the number of shares that could
have been acquired with the amount of the pre-tax annual bonus taken in invested shares.
share for every two invested shares held i.e. 50% of the maximum matching award, will be released if the companys adjusted earnings per share increase in real terms by 3% per annum compound over the three-year performance period. One
matching share for every one invested share held i.e. 100% of the maximum matching award, will be released if the companys adjusted earnings per share increase in real terms by 5% per annum compound over the same period.
For real growth in adjusted earnings per share of between 3% and 5% per annum compound, the rate at which the
participants invested shares will be matched will be calculated according to a straight-line sliding scale.
Real growth is calculated by reference to the UK Governments Index of Retail Prices (All Items). We choose to test our earnings per share growth against UK inflation over three years to measure the
companys financial progress over the period to which the entitlement to matching shares relates.
matching shares vest in accordance with the plan, participants will also receive additional shares representing the gross value of dividends that would have been paid on the matching shares during the performance period and re-invested.
At the AGM in 2011, shareholders approved the renewal of the long-term incentive plan. The plan enables the company to recruit and retain the most able managers worldwide and to ensure their long-term
incentives encourage outstanding performance and are competitive in the markets in which we operate.
the plan, executive directors, senior executives and other managers can participate in this plan which can deliver restricted stock and/or stock options. Approximately 6% of the companys employees currently hold awards under this plan.
The aim is to give the committee a range of tools with which to link corporate performance to
managements long-term reward in a flexible way. It is not the committees intention to grant stock options in 2012 or for the foreseeable future.
Restricted stock granted to executive directors vests only if stretching corporate performance targets over a specified
period have been met. Awards vest on a sliding scale based on performance over the period. There is no retesting. The committee determines the performance measures and targets governing an award of restricted stock prior to grant.
The performance measures that will apply for the executive directors for awards in 2012 and subsequent years will
continue to be focused on delivering and improving returns to shareholders. These measures, which have applied since 2004, are relative total shareholder return (TSR), return on invested capital (ROIC) and earnings per share (EPS) growth.
Restricted stock may be granted without performance conditions to satisfy
recruitment and retention objectives. Restricted stock awards that are not subject to performance conditions will not be granted to any of the current executive directors.
Pearsons approach to the level of individual awards takes into account a number of factors. First, we take into
account the face value of individual awards at the time of grant assuming that the performance targets are met in full. Secondly, we take into account the assessments by our independent advisers of market practice for comparable companies and of
directors total remuneration relative to the market. And thirdly, we take into account individual roles and responsibilities, and company and individual performance.
For 2012, we reviewed award levels taking into account the value of individual awards and market practice and, as a
consequence, reduced the number of shares awarded to executive directors and other members of the Pearson Management Committee compared to practice in recent years.
Where shares vest, in accordance with the plan, participants receive additional shares representing the gross value of
dividends that would have been paid on these shares during the performance period and reinvested.
wishes to encourage executives and managers to build up a long-term holding of shares so as to demonstrate their commitment to the company. To achieve this, for awards of restricted stock that are subject to performance conditions over a three-year
period, a percentage of the award (normally 75%) vests at the end of the three-year period. The remainder of the award (normally 25%) only vests if the participant retains the after-tax number of shares that vest at year three for a further two
There are limits on the amount of new-issue equity we can use. In any rolling ten-year period, no more
than 10% of Pearson equity will be issued, or be capable of being issued, under all Pearsons share plans, and no more than 5% of Pearson equity will be issued, or be capable of being issued, under executive or discretionary plans. In addition,
for existing shares no more than 5% of Pearson equity may be held in trust at any time.
The committee expects executive directors to build up a substantial shareholding in the company in
line with the policy of encouraging widespread employee ownership. To complement the operation of the companys long-term incentive arrangements, we will in future, operate formal shareholding guidelines for executive directors. The target
holding is 2 times salary for the chief executive and 1.25 times salary for the other executive directors consistent with median practice in FTSE 100 companies that operate such arrangements.
In accordance with long established policy, all continuing executive directors have rolling service agreements under which, other than by termination in accordance with the terms of these agreements,
employment continues until retirement.
The committee reviewed the policy on executive service agreements in
2008 and again in 2010. Future executive director service agreements should provide that the company may terminate these agreements by giving no more than 12 months notice. As an alternative, the company may at its discretion pay in lieu
of that notice. Payment in lieu of notice may be made in instalments and may be subject to mitigation. In the case of the longer serving directors with legacy employment agreements, the compensation payable in circumstances where the company
terminates the agreements without notice or cause takes the form of liquidated damages.
There are no special
provisions for notice, pay in lieu of notice or liquidated damages in the event of termination of employment in the event of a change of control of Pearson. On termination of employment, executive directors entitlements to any vested or
unvested awards under Pearsons discretionary share plans are treated in accordance with the terms of the relevant plan.
Executive directors participate in the pension arrangements set up for Pearson employees. Marjorie Scardino, Will
Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also have other retirement arrangements because of the cap on the amount of benefits that can be provided from the pension arrangements in the US and the UK.
The differences in the arrangements for the current executive directors reflect the different arrangements in the UK and
the US and the changes in pension arrangements generally over the periods of their employment. Executive directors are entitled to life insurance cover while in employment, and to a pension in the event of ill-health or disability. A pension for
their spouse and/or dependants is also available on death.
In the US, the defined benefit arrangement is the
Pearson Inc. Pension Plan. This plan provides a lump sum convertible to an annuity on retirement. The lump sum accrued at 6% of capped compensation until December 31, 2001 when further benefit accruals ceased. Normal retirement age is 65
although early retirement is possible subject to a reduction for early payment. No increases are guaranteed for pensions in payment. There is a spouses pension on death in service and the option to provide a death in retirement pension by
reducing the members pension.
The defined contribution arrangement in the US is a 401(k) plan. At
retirement, the account balances will be used to provide benefits. In the event of death before retirement, the account balances will be used to provide benefits for dependants.
In the UK, the pension plan is the Pearson Group Pension Plan and executive directors participate in either the Final Pay
or the Money Purchase 2003 section. Normal retirement age is 62, but, subject to company consent, retirement is currently possible from age 55. In the Final Pay section, the accrued pension is reduced on retirement prior to age 60.
Pensions in payment are guaranteed to increase each year at 5% or the rise in inflation each year, if lower. Pensions for a members spouse, dependant children and/or nominated financial dependant are payable in the event of death. In the Money
Purchase 2003 section the account balances are used to provide benefits at retirement. In the event of death before retirement pensions for a members spouse, dependant children and/or nominated financial dependant are payable.
Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be
used for pension purposes, known as the earnings cap. This limit, £108,600 as at April 6, 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own cap, which will increase
annually in line with the UK Governments Index of Retail Prices (All Items). The cap was £129,600 as at April 6, 2011.
As a result of the UK Governments A-Day changes effective from April 2006, UK executive directors and other members of the Pearson Group Pension Plan who are, or become, affected by the lifetime
allowance are provided with a cash supplement as an alternative to further accrual of pension benefits on a basis that is broadly cost neutral to the company.
Effective from 6 April 2011, the annual allowance (i.e. the maximum amount of pension saving that benefits from tax relief each year) reduced from £225,000 to £50,000. Effective
6 April 2011, the lifetime allowance (i.e. the maximum amount of pension and/ or lump sum that can benefit from tax relief) reduced from £1.8million to £1.5million.
Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.
Since 2010, additional pension benefits are provided through: a taxable and non-pensionable cash supplement in place of the unfunded plan; a funded defined contribution plan approved by HM Revenue and
Customs (HMRC) as a corresponding plan; and amounts in the legacy unfunded plan. In aggregate, the cash supplement and contributions to the funded plan are based on a percentage of salary and a
fixed cash amount index-linked to inflation. The notional cash balance of the legacy unfunded plan increases annually by a specified notional interest rate. The unfunded plan also provides the opportunity to convert a proportion of this notional
cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion.
Will Ethridge is a member of the Pearson Inc. Pension Plan and the approved 401(k) plan. He also participates in an unfunded, non-qualified Supplemental Executive Retirement Plan (SERP) that provides an
annual accrual of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Plan and US Social Security. Additional defined contribution benefits are provided through a funded, non-qualified Excess Plan.
Rona Fairhead is a member of the Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary per annum, restricted to the plan earnings cap. Until April 2006, the company
also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on her behalf. Since April 2006, she has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
Robin Freestone is a member of the Money Purchase 2003 section of the Pearson Group Pension Plan. Company contributions are 16% of pensionable salary per annum, restricted to the plan earnings cap. Until
April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on his behalf. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
John Makinson is a member of the Pearson Group Pension Plan under which his pensionable salary is restricted to the plan earnings cap. The company ceased contributions on December 31, 2001 to
his FURBS arrangement. During 2002 it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pension payable from the Pearson Group Pension Plan and the closed FURBS to target a pension of two-thirds of a
revalued base salary on retirement at age 62. The revalued base salary is defined as £450,000 effective at June 1, 2002, increased at January 1, each year by reference to the increase in the UK Governments Index
of Retail Prices (All Items). In the event of his death a pension from the Pearson Group Pension Plan, the FURBS and the UURBS will be paid to his spouse or nominated financial dependant. Early retirement is currently possible from age 55, with
The pension is reduced to reflect the shorter service, and before age 60, further
reduced for early payment.
Executive directors non-executive directorships
Our policy is that executive directors may, by agreement with the board, serve as non-executives of other companies and
retain any fees payable for their services.
The following executive directors served as non-executive
directors elsewhere and received fees or other benefits for the period covered by this report as follows: Marjorie Scardino (Nokia Corporation and MacArthur Foundation); Rona Fairhead (HSBC Holdings plc).
Our policy is that the chairmans pay should be set at a level that is competitive with those of chairmen in similar
positions in comparable companies. He is not entitled to any annual or long-term incentive, retirement or other benefits.
The committee reviewed the chairmans remuneration in 2010. In the light of this review, the board approved the committees recommendation that the chairmans remuneration be increased
to £500,000 per year with effect from 1 April 2011. The next review will take place in 2014.
Fees for non-executive directors are determined by the full board having regard to market practice and within the restrictions contained in Pearsons Articles of Association. Non-executive directors
receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of Pearson) and do not participate in Pearsons equity-based incentive plans.
With effect from July 1, 2010, the structure and fees are as follows:
Fees payable from
Non-executive director fee
Chairmanship of audit committee
Chairmanship of remuneration committee
Membership of audit committee
Membership of remuneration committee
Senior independent director
A minimum of 25% of the basic fee is paid in Pearson shares that the non-executive
directors have committed to retain for the period of their directorships.
Non-executive directors serve
Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships.
Remuneration of senior management
contributions to pension funds and related benefits, senior management remuneration for 2011 was as follows:
Senior management as a group
Allowances for Marjorie Scardino include £47,120 in respect of housing costs and a US payroll supplement of £12,551. John Makinson is
entitled to a location and market premium in relation to the management of the business of the Penguin Group in the US and received £210,464 for 2011.
Benefits include company car, car allowance and UK health care premiums. US health and welfare benefits for Marjorie Scardino and Will Ethridge are
self-insured and the company cost, after employee contributions, is tax free to employees. For Marjorie Scardino, benefits include £33,310 for pension planning and financial advice. Marjorie Scardino, Rona Fairhead and John Makinson have the
use of a chauffeur.
No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.
Share options of senior management
This table sets forth for each director the number of share options held as of December 31, 2011 as well as the
exercise price, rounded to the nearest whole pence/cent, and the range of expiration dates of these options.
No variations to the terms and conditions of share options were made during the year.
The plan is described below.
Worldwide save for shares The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a
Marjorie Scardino contributes US$1,000 per month (the maximum allowed) to the US employee stock purchase plan. The terms of this plan allow
participants to make monthly contributions for 6 month periods and to acquire shares twice annually at the end of these periods at a price that is the lower of the market price at the beginning or the end of each period, both less 15%.
The market price on December 31, 2011 was 1,210p per share and the range during the year was 983p to 1,222p.
Share ownership of senior management
The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at
February 29, 2012. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in Remuneration of Senior Management and Share Options of Senior Management. The total
number of ordinary shares held by senior management as of February 29, 2012 was 3,127,095 representing less than 1% of the issued share capital on February 29, 2012.
Ordinary shares include both ordinary shares listed on the London Stock Exchange and American Depositary Receipts (ADRs) listed on the New York
Stock Exchange. The figures include both shares and ADRs acquired by individuals investing part of their own after-tax annual bonus in Pearson shares under the annual bonus share matching plan.
From 2004, Marjorie Scardino is also deemed to be interested in a further number of shares under her unfunded pension arrangement described in this
report, which provides the opportunity to convert a proportion of her notional cash account into a notional share account reflecting the value of a number of Pearson shares.
The register of directors interests (which is open to inspection during normal office hours) contains full details of directors
shareholdings and options to subscribe for shares. The market price on December 31, 2011 was 1,210p per share and the range during the year was 983p to 1,222p.
At December 31, 2011, Patrick Cescau held 168,000 Pearson bonds.
Ordinary shares do not include any shares vested but held pending release under a restricted share plan.
Employee share ownership plans
Worldwide save for shares and US employee share purchase plans
In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three, five or seven
years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employees participation in the
In the United States, this plan operates as a stock purchase plan under Section 423 of the US
Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearsons listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the
option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.
currently comprises the chairman, who is a part-time non-executive director, five executive directors and six non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors, or
the number nearest to one-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible for re-election. If at any
annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed to have been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a
resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their
However in accordance with the UK Corporate Governance Code, the board has resolved that all
directors should offer themselves for re-election on an annual basis at the companys annual general meeting. Accordingly, all of the directors will offer themselves for re-election, (or re-appointment in the case of directors who were
appointed since the last meeting), at the forthcoming annual general meeting on 27 April 2012.
is listed on the New York Stock Exchange (NYSE). As a listed non-US issuer, we are required to comply with some of the NYSEs corporate governance rules, and otherwise must disclose on our website any significant ways in which our
corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects
with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and
recommends corporate governance principles.
The board of directors has established the following committees,
all of which report to the board. Each committee has its own written terms of reference setting out their authority and duties. These can be found on our website (www.pearson.com/investors/shareholder-information/governance).
This committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Ken Hydon chairs this
committee and its other members are David Arculus, Patrick Cescau, Susan Fuhrman, Joshua Lewis and Vivienne Cox. Ken Hydon is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US
Securities and Exchange Commission. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee.
This committee meets regularly to decide the remuneration and benefits of the executive directors and the chief executives of our three operating divisions. The committee also recommends the
chairmans remuneration to the board of directors for its decision and reviews management development and succession plans. David Arculus chairs this committee and its other members are Patrick Cescau, Glen Moreno, Ken Hydon and Vivienne Cox.
This committee meets from time to time as necessary to consider the appointment of new directors. The committee is chaired by Glen Moreno and comprises Marjorie Scardino and all of the non-executive
The average number of persons employed by us in continuing operations during each of the three fiscal years ended 2011
were as follows:
41,521 in fiscal 2011,
36,317 in fiscal 2010, and
34,705 in fiscal 2009.
We, through our subsidiaries, have entered into collective bargaining agreements with employees in various locations. Our management has no reason to believe that we would not be able to renegotiate any
such agreements on satisfactory terms. We encourage employees to contribute actively to the business in the context of their particular job roles and believe that the relations with our employees are generally good.
The table set forth below shows for 2011, 2010 and 2009 the average number
of persons employed in each of our operating divisions.
Average number employed
North American Education
The average number employed in discontinued operations was 2,459 in 2009.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
As at February 29, 2012, the company had been notified under the Financial Services Authoritys Disclosure and
Transparency Rules of the following significant voting rights in its shares:
Name of shareholder
Number of ordinary
% of outstanding
number of shares
Legal & General Group plc
Libyan Investment Authority
On February 29, 2012, record holders with registered addresses in the United States
held 39,150,685 ADRs, which represented 4.8% of our outstanding ordinary shares. Some of these ADRs are held by nominees and so these numbers may not accurately represent the number of beneficial owners in the United States.
Loans and equity advanced to joint ventures and associates during the year and as at December 31, 2011 are shown in
note 12 in Item 18. Financial Statements. Dividends receivable from joint ventures and associates are set out in note 12 in Item 18. Financial Statements. There were no other related party transactions in
The financial statements filed as part of this Annual Report are included on pages F-1 through F-68 hereof.
Other than those events described in note 37 in Item 18. Financial Statements of this Form 20-F and seasonal fluctuations in borrowings, there has been no significant change to
our financial condition or results of operations since December 31, 2011. Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or
disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December.
Our policy with respect to dividend distributions is described in response to Item 3. Key Information above.
THE OFFER AND LISTING
The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the
United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York Mellon, as depositary. We established this facility in March 1995 and amended it in August 2000 in connection with our New York Stock
Exchange listing. Each ADS represents one ordinary share.
The ADSs trade on the New York Stock Exchange under the symbol
The following table sets forth the highest and lowest middle market quotations, which
represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange:
on an annual basis for our five most recent fiscal years,
on a quarterly basis for our most recent quarter and two most recent fiscal years, and
on a monthly basis for the six most recent months.
Five most recent fiscal years
Most recent quarter and two most recent fiscal years
2011 Fourth quarter
2010 Fourth quarter
Most recent six months
Articles of association
We summarize below the material provisions of our articles of association, as
amended, which have been filed as an exhibit to our annual report on Form 20-F for the year ended December 31, 2011. The summary below is qualified entirely by reference to the Articles of Association. We have multiple business objectives
and purposes and are authorized to do such things as the board may consider fit to further our interests or incidental or conducive to the attainment of our objectives and purposes.
Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association or by any directions given by the
Company by special resolution, to be exercised in a general meeting.
For the purposes of section 175 of the Companies Act 2006 the board may authorize any matter proposed to it which
would, if not so authorized, involve a breach of duty by a Director under that section, including, without limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may
conflict, with the interests of the Company. Any such authorization will be effective only if:
any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other
interested Director; and
the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
The board may (whether at the time of the giving of the authorization or subsequently) make any such authorization
subject to any limits or conditions it expressly imposes but such authorization is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorization at any time.
Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office:
may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or
may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to
remuneration for professional services as if he were not a Director;
may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body
corporate in which the Company is otherwise (directly or indirectly) interested.
shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate:
the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which
such approval was subject); or
which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above;
nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act.
A Director shall be under no duty to the Company with respect to any information which he obtains or has
obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest or possible
conflict of interest, which has been approved by the board: the director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he fails:
to disclose any such information to the board or to any Director or other officer or employee of the Company; and/or
to use or apply any such information in performing his duties as a Director of the Company.
Where the existence of a Directors relationship with another person
has been approved by the board and his relationship with that person gives rise to a conflict of interest or possible conflict of interest, the Director shall not be in breach of the general duties he owes to the Company by virtue of
sections 171 to 177 of the Act because he:
absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be
discussed or from the discussion of any such matter at a meeting or otherwise; and/or
makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict
of interest sent or supplied by the Company and/or for such documents and information to be received and read by a professional adviser, for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists.
Except as stated below, a Director shall not vote in respect of any contract or arrangement
or any other proposal whatsoever in which he has an interest which is, to his knowledge, a material interest, otherwise than by virtue of his interests in shares or debentures or other securities of or otherwise in or through the Company. A Director
shall not be counted in the quorum at a meeting of the Board in relation to any resolution on which he is debarred from voting.
Notwithstanding the foregoing, a director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters:
the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of
or for the benefit of the Company or any of its subsidiaries;
the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for
which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;
any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be
entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a Director is to participate;
any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that
term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company;
any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award
him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and
any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including
Where proposals are under consideration concerning the appointment of two or
more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the provisions of the eighth
paragraph before this one, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment.
The board of directors may
exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as
collateral security for any of our or any third partys debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of
undischarged monies borrowed by us (and any of our subsidiaries), but excluding any intra-group debts, shall not at any time (without the previous sanction of the Company in the form of an ordinary resolution) exceed a sum equal to twice the
aggregate of the adjusted capital and reserves.
Other provisions relating to directors
Under the articles of association, directors are paid out of our funds for their services as we may from time to time
determine by ordinary resolution and, in the case of non-executive directors, up to an aggregate of £750,000 or such other amounts as resolved by the shareholders at a general meeting. Directors currently are not required to hold any share
qualification. From April 6, 2007 under the Companies Act 2006, the maximum age limit for directors of PLCs, which was 70, has been removed.
Annual general meetings
In every year the Company
must hold an annual general meeting (AGM) (within a period of not more than 15 months after the date of the preceding AGM) at a place and time determined by the board. The following matters are usually considered at an annual
approving final dividends;
consideration of the accounts and balance sheet;
ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet;
as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the
appointment or election of directors in the place of those retiring by rotation or otherwise;
appointment or reappointment of, and determination of the remuneration of, the auditors; and
the renewal, limitation, extension, variation or grant of any authority to the board in relation to the allotment of securities.
The board may call a general meeting whenever it thinks fit. If at any time there are not
within the United Kingdom sufficient directors capable of acting to form a quorum, any director or any two members may convene a general meeting in the same manner as nearly as possible as that in which meetings may be convened by the board.
No business shall be dealt with at any general meeting unless a quorum is present when the meeting proceeds
to business. Three members present in person and entitled to vote shall be a quorum for all purposes. A corporation being a member shall be deemed to be personally present if represented by its duly authorized representative.
If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed
time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is
not present within fifteen minutes from the time appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board,
will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting.
Every person whose name is entered as a member in the Companys Register of Members shall be entitled to one
certificate in respect of each class of shares held. (The law regarding this does not apply to stock exchange nominees). Subject to the terms of issue of the shares, certificates are issued following allotment or receipt of the form of transfer
bearing the appropriate stamp duty by our registrar, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, United Kingdom, telephone number +44-(0)121-415-7062.
Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders vote in general meeting. Subject to the Companies Act
2006, any shares may be issued on terms that they are, or at our or the shareholders option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may determine by special resolution of the
There are no provisions in the Articles of Association which discriminate against any existing
or prospective shareholder as a result of such shareholder owning a substantial number of shares.
the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share
shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him.
Changes in capital
We may from time to time, by ordinary resolution:
consolidate and divide our share capital into shares of a larger amount than its existing shares; or
sub-divide all of or any of our existing shares into shares of smaller amounts, subject to the Companies Act 2006; or
cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount
of our share capital by the amount of the shares so cancelled.
We may, from time to time,
by ordinary resolution increase our share capital and, subject to the consents and incidents required by the Companies Act 2006, may by special resolution decrease our share capital, capital redemption reserve fund and any share premium account in
Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by
proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded before the declaration of the results of a show of hands. A poll may be
the chairman of the meeting;
at least three shareholders present in person or by proxy and entitled to vote;
any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders
having the right to vote at the meeting; or
any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the
aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right.
Holders of ordinary shares are entitled
to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the
board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends
unclaimed for a period of twelve years after having been declared will be forfeited and revert to us.
directors may, with the sanction of an ordinary resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such
The directors may deduct from any dividend payable to any shareholder all sums of money (if any)
presently payable by that shareholder to us on account of calls or otherwise in relation to our shares.
In the event of our liquidation, after payment of all liabilities, our remaining assets would
be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them.
Other provisions of the articles of association
Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless
otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders of three-fourths of the issued shares of the class or with the sanction of a special resolution passed
at a separate meeting of these holders.
In the event that a shareholder or other person appearing to the
board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 820 of the Companies Act 2006, we may serve
that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has
complied in full with our information request.
If the shares described in the default notice represent at
least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares:
we will not pay dividends (or issue shares in lieu of dividends); and
we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the
transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares
which are being transferred or the transfer is an approved transfer, as defined in our articles of association.
No provision of our articles of association expressly governs the ordinary
share ownership threshold above which shareholder ownership must be disclosed. Under the Companies Act 2006, any person who acquires, either alone or, in specified circumstances, with others:
a material interest in our voting share capital equal to or in excess of 3%; or
a non-material interest equal to or in excess of 10%,
comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a persons notifiable interests fall below the
notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases.
Limitations affecting holders of ordinary shares or ADSs
Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK
residents or nationals.
With respect to the items discussed above, applicable UK law is not materially
different from applicable US law.
Pearson has not entered into any contracts outside the ordinary course of business during the two year period immediately
preceding the date of this annual report.
Executive employment contracts
We have entered into agreements with each of our executive directors pursuant to which such executive director is employed
by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See Item 6. Directors, Senior Management and Employees Compensation of Senior Management. Each agreement may be
terminated by us on 12 months notice or by the executive director on six months notice. In the event we terminate any executive director without giving the full 12 months advance notice, the executive director is entitled
to receive liquidated damages equal to 12
months base salary and benefits together with a proportion of potential bonus.
There are no UK government laws, decrees, regulations or other legislation which restrict or which may
affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under
Tax Considerations below.
The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from
the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is:
an individual citizen or resident of the US, or
a corporation created or organized in or under the laws of the US or any of its political subdivisions, or
an estate or trust the income of which is subject to US federal income taxation regardless of its source.
This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not
address tax considerations applicable to US holders that may be subject to special tax rules, such as:
dealers or traders in securities or currencies,
financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income,
persons acquiring shares or ADSs in connection with employment,
US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one
US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock,
US holders that have a principal place of business or tax home outside the United States, or
US holders whose functional currency is not the US dollar.
For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by
In addition, the following discussion assumes that The Bank of New York will perform its
obligations as depositary in accordance with the terms of the depositary agreement and any related agreements.
Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not
purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state and local, UK and other, including foreign, tax
consequences of investing in the ordinary shares or ADSs. The statements of US and UK tax law set out below are based on the laws and interpretations in force as of the date of this Annual Report, and are subject to any changes occurring after that
date, possibly with retroactive effect.
UK income taxation of distributions
The UK does not impose dividend withholding tax on dividends paid by the Company.
A US holder that is not resident in the UK for UK tax purposes and does not carry on a trade, profession or vocation in
the UK through a branch or agency (or in the case of a company a permanent establishment) to which the ordinary shares or ADSs are attributable will not generally be liable to pay UK tax on dividends paid by the Company.
US income taxation of distributions
Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and
distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed our current and accumulated earnings and profits. The amount of any
distribution will equal the amount of the cash distribution. Distributions, if any, in excess of our current and accumulated earnings and profits will constitute a non-taxable return of capital to a US
holder and will be applied against and reduce the US holders tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its
ordinary shares or ADSs, the excess generally will be treated as capital gain.
Dividends that we pay will not
be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code.
In the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds distributed, determined by reference to the spot currency exchange rate on
the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize
separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US
dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year.
A distribution by the Company to noncorporate shareholders before 2013 will be taxed as net capital gain at a maximum
rate of 15%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under US federal income tax principles.
UK taxation of capital gains
A US holder that is
not resident, and, in the case of an individual, not ordinarily resident, in the UK for UK tax purposes and who does not carry on a trade, profession or vocation in the UK through a branch or agency (or in the case of a company a permanent
establishment) to which the ordinary shares or ADSs are attributable will not generally be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal of the ordinary shares or ADSs.
A US holder who is an individual and who has ceased to be resident or ordinarily resident for tax purposes in
the UK on or after 17 March 1998 or who falls to be regarded as resident outside the UK for the purposes of any double tax treaty (Treaty Non-resident) on or after 16 March 2005 and continues to not be resident or ordinarily
resident in the UK, or continues to be Treaty Non-resident, for a period of less than five complete years of assessment and who disposes of his ordinary shares or ADSs during that period may also be liable on his return to the UK to UK tax on
capital gains, subject to any available exemption or relief, even though he is not resident or ordinarily resident in the UK, or is Treaty Non-resident, at the time of the disposal.
US income taxation of capital gains
Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss
in an amount equal to the difference between the amount realized on the sale or exchange and the US holders adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term
capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of 15%. This long-term capital gain rate is scheduled to
expire in 2013.
Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs
generally will be treated as US-source gain or loss for US foreign tax credit purposes.
Estate and gift tax
The current Estate and Gift Tax Convention, or the Convention, between the US and the UK generally
relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of
ADSs where the transferor is domiciled in the US for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an
individuals permanent establishment in the UK or pertain to the fixed base in the UK of a person providing independent personal services. If no relief is given under the Convention, inheritance tax may be charged on the amount by which the
value of the transferors estate is reduced as a result of any transfer made by way of gift or other gratuitous or undervalue transfer by an individual, in general within seven years of death, or on the death of an individual, and in certain
other circumstances. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the UK to be credited against tax payable in the US or for tax
paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Convention.
No stamp duty or stamp duty reserve tax (SDRT) will generally be payable in the UK on the
purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the UK and that the instrument or written agreement of transfer is not executed in the UK. Subject to
the following paragraph, stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares (rounded up to the next multiple of £5 in
the case of stamp duty), where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person, or issued or transferred to a person whose business is or
includes the provision of clearance services or a nominee or agent for such a person.
Following a decision of
the European Court of Justice in 2009, HM Revenue & Customs (HMRC) has announced that it will not seek to apply the 1.5% SDRT charge when new shares are issued to an EU clearance service or EU depositary receipt system. HMRCs view is
that the 1.5% SDRT charge will continue to apply to transfers of shares into a clearance service or depositary receipt system, and also in respect of issues of shares into non-EU clearance services and non-EU depositary receipt systems, including in
connection with ADSs. HMRCs view is currently being challenged in further litigation, but it is expected that HMRC will continue to impose such charges until further case law or legislation resolves the issue. Accordingly, specific
professional advice should be sought before paying the 1.5% SDRT or stamp duty charge in any circumstances.
transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration (rounded up to the next multiple of £5 in the case of stamp
duty). A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes will not be subject to stamp duty or
Close company status
We believe that the close company provisions of the UK Corporation Tax Act 2010 do not apply to us.
Documents on display
Copies of our Memorandum and Articles of Association and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our
registered office at 80 Strand, London WC2R 0RL (c/o the Company Secretary), or, in the US, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
market risks are changes in interest rates and currency exchange rates. Following an evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest
rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks is the responsibility of the chief financial officer, who acts pursuant to policies approved by the
board of directors. The Audit Committee receives regular reports on our treasury activities.
We have a policy
of not undertaking any speculative transactions, and we do not hold our derivative and other financial instruments for trading purposes.
We have formulated policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although a proportion of our derivative
contracts were transacted without regard to existing IFRS requirements on hedge accounting, during 2011 and 2010 we qualified for hedge accounting under IFRS on a number of our key derivative contracts.
The following discussion addresses market risk only and does not present other risks that we face in the normal course of
business, including country risk, credit risk and legal risk.
The Groups financial exposure to interest rates arises primarily from its borrowings. The Group manages its exposure
by borrowing at fixed and variable rates of interest, and by entering into derivative transactions. Objectives approved by the board concerning the proportion of debt outstanding at fixed rates govern the use of these financial instruments.
The Groups objectives are applied to core net debt, which is measured at the year-end and comprises
borrowings net of cash and other liquid funds. Our objective is to maintain a proportion of forecast core net debt in fixed or capped form for the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% each
The principal method of hedging interest rate risk is to enter into an agreement with a bank
counterparty to pay a fixed rate and receive a variable rate, known as a swap. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated
by reference to an agreed notional principal amount. The majority of the Groups swap contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The
variable rates received are normally based on three-month or six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. Management believes that our portfolio of these types of swaps
is an efficient hedge of our portfolio of variable rate borrowings.
In addition, from time to time, the Group
issues bonds or other capital market instruments to refinance existing debt. To avoid the fixed rate on a single transaction unduly influencing our overall net interest expense, our typical practice has been to enter into a related derivative
contract effectively converting the interest rate profile of the bond transaction to a variable interest rate. In some cases, the bond issue is denominated in a different currency to the Groups desired borrowing risk profile and the Group
enters into a related cross currency interest rate swap in order to maintain this risk profile, which is predominantly borrowings denominated in US dollars.
The Groups accounting objective in its use of interest rate derivatives is to minimize the impact on the income statement of changes in the mark-to-market value of its derivative portfolio as a
whole. It uses duration
calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces
significantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimized.
Currency exchange rates
Although the Group is based in the UK, it has significant investments in overseas operations. The most significant
currency in which the Group trades is the US dollar.
The Groups policy is to align approximately the
currency composition of its core net borrowings with its forecast operating profit before depreciation and amortization. This policy aims to soften the impact of changes in foreign exchange rates on consolidated interest cover and earnings. This
policy applies only to currencies that account for more than 15% of group operating profit, which currently are the US dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital
needs. In addition, the Groups policy does not require existing currency debt to be terminated to match declines in that currencys share of Group operating profit. Also, the chief financial officer may request the inclusion of currencies
that account for less than 15% of Group operating profit before depreciation and amortization in the above hedging process. Only one hedging transaction, denominated in South African rand, has been undertaken under that authority.
At December 31, 2011 the Groups net borrowings/(cash) in our main currencies (taking into account the effect
of cross currency rate swaps) were: US dollar £1,266m, sterling £(185)m, and South African rand £(1)m.
The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the
foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge
(permitting foreign exchange movements on it to be taken to reserves) for the purposes of reporting under IFRS.
Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to
another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, although they do not give rise to any realized gain or loss, nor to any currency cash flows.
The Group is also exposed to currency exchange rates in its cash transactions and its investments in overseas
operations. Cash transactions typically for purchases, sales, interest or dividends require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that the Group pays or receives.
Forward foreign exchange contracts
The Group sometimes uses forward foreign exchange contracts where a specific major project or forecasted cash flow,
including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. The Groups policy is to effect routine transactional conversions between currencies, for example to collect receivables or
settle payables, at the relevant spot exchange rate.
The Group seeks to offset purchases and sales in the
same currency, even if they do not occur simultaneously. In addition, its debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require using short-dated foreign exchange swaps
Although the Group prepares its consolidated financial statements in
sterling, significant sums have been invested in overseas assets, particularly in the US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and to a lesser extent between the euro and sterling, are
likely to affect shareholders funds and other accounting values.
Under IFRS, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not
classified as hedges are adjusted to fair value through earnings. Changes in the fair value of derivatives that the Group has designated and that qualify as effective hedges are either recorded in reserves or are offset in earnings by the
corresponding movement in the fair value of the underlying hedged item. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings.
In 2011 and 2010 the Group met the prescribed designation requirements and hedge effectiveness tests under IFRS for some
of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and reserves respectively by the corresponding movement in the fair value
of the underlying hedged item.
In line with the Groups treasury policy, none of these instruments were
considered trading instruments and each instrument was transacted solely to match an underlying financial exposure.
Quantitative information about market risk
The sensitivity of the Groups derivative portfolio to changes in interest rates is found in note 19 of
Item 18. Financial Statements.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
AMERICAN DEPOSITARY SHARES
Fees paid by ADR holders
Our ordinary shares trade in the United States under a sponsored ADR facility with The Bank of New York Mellon as depositary.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or
surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable
property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The
depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
The following table summarizes various fees currently charged by The Bank of
New York Mellon:
Person depositing or withdrawing shares
must pay to the depositary:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
Issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
$.02 (or less) per ADS
Any cash distribution to ADS registered holders
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs
Distribution of securities by the depositary to ADS registered holders of deposited
$.02 (or less) per ADS per calendar year
Registration of transfer fees
Transfer and registration of shares on the share register to or from the name of the
depositary or its agent when shares are deposited or withdrawn
Expenses of the depositary
Cable, telex and facsimile transmissions (when expressly
provided in the deposit agreement)
Converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding
Any charges incurred by the depositary or its agents for servicing the deposited securities
Fees incurred in past annual period and fees to be paid in the future
From January 1, 2011 to February 29, 2012 the Company received payments from the depositary of $350,000 and
$53,853 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing the annual and interim financial reports, printing and distributing
dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and
The depositary has agreed to reimburse the Company for expenses they incur that are related to
establishment and maintenance expenses of the ADS programme. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs
for the ADRs, which consists of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms,
stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programmes or special investor relations promotional activities. In certain instances, the depositary has
agreed to provide additional payments to
the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the
amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them.
The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary
services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for
those services are paid.