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Learn more about how we educate,
entertain and inform at pearson.com
and pearson.com/pearsonville
Annual report and accounts 2009
Always learning
Principal offices worldwide
Pearson is a world-leading ‘education’ company, in the broadest
sense of that word. We have a very simple goal: to help people
get on in their lives through education. We aim to serve the citizens
of our brain-based global economy wherever and whenever they
are learning – old or young, at home or school or work, in any
pursuit, anywhere.
Have you tried learning about Pearson online?
Visit the all-new www.pearson.com
Browse, download or print our interactive online annual report at
www.pearson.com/investor/ar2009
Take a virtual tour at www.pearson.com/pearsonville
1
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Notes
Reliance on this document
Our Business Review on pages 8 to 43 has been prepared
in accordance with the Directors’ Report Business Review
Requirements of section 417 of the Companies Act 2006.
It also incorporates much of the guidance set out in the
Accounting Standards Board’s Reporting Statement on
the Operating and Financial Review.
The intention of this document is to provide information to
shareholders and is not designed to be relied upon by any
other party or for any other purpose.
Forward-looking statements
This document contains forward-looking statements which
are made by the directors in good faith based on information
available to them at the time of approval of this report. In
particular, all statements that express forecasts, expectations
and projections with respect to future matters, including
trends in results of operations, margins, growth rates, overall
market trends, the impact of interest or exchange rates,
the availability of financing, anticipated costs savings
and synergies and the execution of Pearson’s strategy, are
forward-looking statements. By their nature, forward-looking
statements involve risks and uncertainties because they
relate to events and depend on circumstances that will occur
in the future. There are a number of factors which could
cause actual results and developments to differ materially
from those expressed or implied by these forward-looking
statements, including a number of factors outside Pearson’s
control. Any forward-looking statements speak only as of the
date they are made, and Pearson gives no undertaking to
update forward-looking statements to reflect any changes
in its expectations with regard thereto or any changes to
events, conditions or circumstances on which any such
statement is based.
Pearson (UK)
80 Strand, London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
firstname.lastname@pearson.com
www.pearson.com
Pearson (US)
1330 Avenue of the Americas,
New York City, NY 10019, USA
T +1 212 641 2400
F +1 212 641 2500
firstname.lastname@pearson-inc.com
www.pearson.com
Pearson Education
One Lake Street,
Upper Saddle River,
NJ 07458, USA
T +1 201 236 7000
F +1 201 236 3222
firstname.lastname@pearsoned.com
www.pearsoned.com
Financial Times Group
Number One Southwark Bridge,
London SE1 9HL, UK
T +44 (0)20 7873 3000
F +44 (0)20 7873 3076
firstname.lastname@ft.com
www.ft.com
The Penguin Group (UK)
80 Strand, London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
firstname.lastname@uk.penguingroup.com
www.penguin.co.uk
The Penguin Group (US)
375 Hudson Street, New York City,
NY 10014, USA
T +1 212 366 2000
F +1 212 366 2666
firstname.lastname@us.penguingroup.com
us.penguingroup.com
Pearson plc
Registered number 53723 (England)
Design and Production: Radley Yeldar (London) ry.com
Print: Beacon Press
Pearson has supported the planting of 1,750m2 of new native woodland with the Woodland Trust, helping to capture and store
70 tonnes of carbon dioxide emissions generated by the production of this report.
The cover of this report has been printed on Cocoon Silk 100 which is FSC certified and contains 100% recycled de-inked waste
paper. The text pages are printed on Cocoon Offset which is also made from 100% recycled fibres. This report was printed using
vegetable oil based inks and 100% renewable energy by a CarbonNeutral® printer certified to ISO 14001 environmental
management system and registered to EMAS the Eco Management Audit Scheme.
Pearson plc Annual report and accounts 2009
Section 1 Introduction
01
What’s inside this report?
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Introduction
A summary of who we are and what we do,
including highlights of the operating and
financial performance for the year.
02 Pearson at a glance
04 Financial highlights
06 Chairman’s statement
Our strategy
An analysis of our business strategy and
the key areas of investment and focus.
08 Chief Executive’s strategic overview
Our performance
An in-depth analysis of how we performed
in 2009. Also looks at the outlook for 2010
and the principal risks and uncertainties
affecting our businesses.
Our impact on society
Explains what corporate responsibility
means at Pearson, giving a summary of
our work in 2009 and our plans for 2010.
14 Our performance
16 Education
24 FT Group
North America
International
Professional
FT Publishing
Interactive Data
28 Penguin
30 Other financial information
33 Principal risks and uncertainties
Introduction
36
36 Product quality and impact
38 Valuing our people
39 Sustainable business practice
40 Active citizenship
41 Progress and plans
Governance
Provides details of the board, its policies
and procedures and the report on directors’
remuneration.
44 Board of directors
46 Board governance
56 Report on directors’ remuneration
6
Financial statements
Detailed financial statements for both the
Group and the parent company, including
an analysis of the key measures used by the
Group in its management of the business.
Independent auditors’ report
79 Group accounts
84
148 Parent company accounts
157 Principal subsidiaries
158 Five year summary
160 Corporate and operating measures
163 Shareholder information
ibc Principal offices worldwide
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Pearson plc Annual report and accounts 2009
Pearson at a glance
Pearson is an international company with market-leading
businesses in education, business information and consumer
publishing. We are 37,000 people in more than 60 countries,
helping children and adults to learn, business people to make
informed decisions and readers of all ages to wind down or wise
up with a good book.
Overview
Education
Pearson is the world’s leading education
company. We provide learning materials,
technologies, assessments and services
to teachers and students of all ages and
in more than 60 countries.
People
Proportion of Pearson revenue
27,000
US 16,400
UK 3,000
RoW 7,600
67%
North America £2,470m
International £1,035m
Professional £275m
Business information
The FT Group provides news, data,
comment and analysis to the international
business community. It is known around
the world for its independent and
authoritative information.
4,800
US 1,900
UK 2,000
RoW 900
15%
FT Publishing £358m
Interactive Data £484m
Consumer publishing
Penguin publishes more than 4,000
fiction and non-fiction books each year –
on paper, on screens and in audio formats
– for readers of all ages. It is one of the
world’s leading consumer publishing
businesses and an iconic global brand.
4,200
US 1,900
UK 800
RoW 1,500
18%
Penguin £1,002m
Section 1 Introduction
03
i
Learn more at
www.pearson.com/aboutus
Businesses
Markets
We are a leading provider of educational
material and learning technologies.
We provide test development, processing
and scoring services to educational
institutions, corporations and professional
bodies around the world. We publish across
the curriculum under a range of respected
imprints including: Scott Foresman,
Prentice Hall, Addison-Wesley, Allyn and
Bacon, Benjamin Cummings and Longman.
For some years, Pearson has been
a leader in education, with leading
positions in large developed markets
and local publishing centres in more
than 30 countries. More recently we have
significantly accelerated our international
expansion, investing in new education
operations in countries including China,
India, Southern Africa and Latin America.
FT Publishing includes: the Financial Times
and FT.com; a range of specialist financial
magazines and online services; and
Mergermarket.
Interactive Data is Pearson’s 61%-owned
provider of specialist financial data to
financial institutions and retail investors.
The FT Group also has a stake in a number
of joint ventures, including those with FTSE
International, Vedomosti in Russia, BDFM
in South Africa and a 50% stake in
The Economist Group.
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, the
Penguin Press, Puffin and Dorling Kindersley.
i
See more on page 16 and at pearsoned.com
The Financial Times has a network of
approximately 600 journalists in 40
countries and a unique model of producing
distinctive newspaper editions for Europe,
the UK, the US, Asia and the Middle East.
FT.com, with nine million unique users
and 1.8 million registered users around
the world, makes the FT even more widely
available.
i
See more on page 24 and at ft.com
Penguin combines a longstanding
commitment to local publishing with
a determination to benefit from its
worldwide scale, a globally recognised
brand and growing demand for books
in emerging markets. Its largest
businesses are in the US, the UK,
Australia, Canada, Ireland, India,
South Africa and New Zealand.
i
See more on page 28 and at penguin.com
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Pearson plc Annual report and accounts 2009
Financial highlights
In financial terms, Pearson’s goal is to achieve sustainable
growth on three key financial goals – earnings, cash
and return on invested capital – and reliable cash returns
to our investors through healthy and growing dividends.
In 2009, we reported underlying growth in sales and
operating profit, in spite of the exceptionally difficult
macroeconomic environment and against record
2008 results. We achieved significant profit growth in
education, helping us to grow even though our markets
in US school publishing, financial advertising and
consumer books were especially challenging.
2009 Sales
£5.6bn
+4%
2009
£m
2008
£m
Headline
growth
CER
growth
Underlying
growth
Business performance
Sales
Adjusted operating profit
Adjusted profit before tax
5,624
4,811
858
761
762
674
Adjusted earnings per share 65.4p
57.7p
Operating cash flow
Total free cash flow
Total free cash flow
per share
913
723
796
631
90.5p
79.2p
14%
4%
4%
2%
2%
17%
13%
13%
13%
15%
15%
2009 Adjusted operating profit
£858m
+4%
Return on invested capital
8.9% 9.2% (0.3)%pts
Net debt
1,092
1,460
25%
Statutory results
Operating profit
Profit before tax
Basic earnings
per share – continuing
Cash generated
from operations
755
660
676
585
12%
13%
53.2p
47.9p
11%
1,012
894
13%
Dividend per share
35.5p
33.8p
5%
Note Throughout this document (unless otherwise stated), sales and adjusted operating profit growth
rates are stated on a constant exchange rate (CER) basis. Where quoted, underlying growth rate exclude
both currency movements and portfolio changes. The ‘business performance’ measures are non-GAAP
measures and reconciliations to the equivalent statutory heading under IFRS are included in notes 2, 8
and 31 to the annual report. Adjusted operating profit is stated on a continuing basis.
Our record
Average annual growth in headline terms
2004-2009
Sales
+11%
+19%
Adjusted operating profit
Section 1 Introduction
05
4%
65%
9%
2009 by region
North America £3,663m
Europe £1,222m
Asia £519m
RoW £220m
22%
5%
74%
7%
2009 by region
North America £637m
Europe £118m
Asia £58m
RoW £45m
14%
67%
2009 by business
Education £3,780m
FT Group £842m
Penguin £1,002m
18%
15%
10%
68%
2009 by business
Education £587m
FT Group £187m
Penguin £84m
22%
Sales £m
Adjusted operating profit £m
6,000
5,000
4,000
3,000
2,000
1,000
Pearson
(continuing operations)
Education
Penguin
FT Group
1,000
800
600
400
200
Pearson
(continuing operations)
Education
FT Group
Penguin
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Our record
2004-2009
Average annual growth in headline terms
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6
Pearson plc Annual report and accounts 2009
Pearson plc Annual report and accounts 2009
Chairman’s statement
Glen Moreno Chairman
Twelve months ago I wrote to you with
this very sober assessment:
“None of us is under any illusion: the
short-term outlook is tough and 2009 will
be a difficult year. All kinds of companies,
including our own, will be affected.”
In the event, economic conditions were
every bit as bad as we feared. But in that
challenging environment, Pearson turned
in an excellent performance by any
measure. I attribute this to two things:
Our people, who stayed close to their
customers, anticipated significant changes
in our markets and worked their socks off;
Our strategy, which we have patiently
developed, implemented and invested
in over a number of years.
It is worth recalling that, only a decade ago, Pearson
was a completely different company. We were the
publisher of general interest and sports newspapers
in Spain; we were the TV production company behind
The Price is Right and Baywatch; we were a part-owner
of the Lazard banking houses. Marjorie and her
colleagues had just begun the major move into the
global education industry, but had barely articulated
the strategy of investing in testing and technology
to make learning more personal and more effective.
That year, a ‘boom’ period in the industry, our
operating profits were £490m and our education
revenues a little over £2bn; last year, in a deep
recession, our operating profits were £858m and our
education revenues approaching £4bn. The scale of
our transformation is striking. It shows that
sometimes it pays to take a long-term view.
But more important than our scale alone, we have
once again demonstrated our credentials as both
a durable company and a growth company.
The financial results for 2009 that are set out
elsewhere in this report paint a picture of remarkable
performance and resilience in an extremely difficult
economic environment.
There is evidence that those qualities were recognised
by the market over the course of the past year, and
that those who held their Pearson shares through
a turbulent period were rewarded. Our shares began
2009 at 641p, and ended the year 39% higher, at close
to nine pounds. That increase was well ahead of both
the major market indices (the FTSE 100 was up 22%)
and the media sector (FTSE All-Share Media index up
29% and DJ Stoxx 600 Media up 20%).
The second element of our return to shareholders –
the dividend – was further increased in 2009. So our
total shareholder return (which combines both the
share price movement and dividends paid) was up
46%. Again, this was significantly ahead of the FTSE
100 (up 27%), the DJ Stoxx 600 Media (up 26%) and
the FTSE media sector (up 34%).
Our decade-long transformation was partly the result
of some extensive portfolio changes. Over those
ten years, we made $4.1bn of disposals and $6.3bn
of acquisitions. But underneath those very visible
changes, there were some deeply held principles
at work. Those are important to understand, because
they tell you as much about our future as they do
about our past.
Share price performance – 1 year % change
01.01.09 – 31.12.09
Pearson 39.0%
FTSE 100 22.1%
FTSE All-Share Media 29.2%
DJ Stoxx 600 Media 19.8%
Share price performance – 3 year % change
01.01.07 – 31.12.09
Pearson 15.5%
-13.0% FTSE 100
-16.3% FTSE All-Share Media
-29.7% DJ Stoxx 600 Media
Total shareholder return – 1 year % change
01.01.09 – 31.12.09
Pearson 46.0%
FTSE 100 27.3%
FTSE All-Share Media 34.1%
DJ Stoxx 600 Media 26.1%
Total shareholder return – 3 year % change
01.01.07 – 31.12.09
Pearson 31.9%
-2.0%
FTSE 100
-7.5% FTSE All-Share Media
-19.94% DJ Stoxx 600 Media
Source: Datastream
First, every part of Pearson has a relentless focus
on the value we provide to our customers – the learner,
the teacher, the reader, the investor, the business
person. We know that the ultimate measure of our
performance is shareholder value; but we understand
we can best deliver shareholder value through
helping our customers make progress in their lives.
Second, one driver of our transformation has been
to make Pearson a reliable and resilient company.
Proud as we are of our performance in 2009,
what’s even more important to us is the long-term
consistency of our growth. For each of the past six
years, we have delivered growth in sales, earnings
and cash, through both good markets and bad.
Section 1 Introduction
07
Third, companies can sometimes be defined by what
they don’t do: by what they choose to avoid. Because
our strategy is about long-term value creation for
customers and shareholders, Pearson did not engage
in short-term financial engineering. During the credit
bubble, we resisted calls to load up our balance
sheet with cheap debt and reduce our equity
capital. I believe you can attribute a good deal of
our financial stability and competitive strength to
our determination to stick to the fundamentals and
to take a long-term view.
Fourth, that long-term view is accompanied by
a commitment to constant innovation and change.
As you’ll read elsewhere in this report, Pearson has
become a major innovator and investor in digital
technologies – new reading experiences, new learning
platforms, applications for new devices, new ways
of communicating with and selling to our customers.
This represents a profound and disruptive structural
change in all our industries; we are encouraged by our
progress so far but if we are to remain successful in
this new world, we will need to continue to transform
ourselves. And we will.
So, the story of 2009 is of a strong business,
resolutely pursuing a successful strategy through
tough markets and disruptive change.
My personal view is that the prospects for a sustained
economic recovery remain fragile. We have to expect
a prolonged period of severely restrained government
and consumer spending. It’s going to be a battle, but
one we intend to keep fighting and winning. Pearson
is prepared for it, and ready to help people carry on
learning whatever the economic weather.
For that, I have to thank our people for their dedication
and ingenuity; and our investors for their commitment
to the company. As always, I look forward to seeing
many of you at our annual meeting.
Glen Moreno Chairman
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Pearson plc Annual report and accounts 2009
Pearson’s strategy: Marjorie Scardino, chief executive
The Education of Pearson
“Anyone who stops learning is old,
whether twenty or eighty.”
In that powerful sentence Henry Ford,
one of the great innovators of the
20th century, captured perfectly our
attitude to the 21st – we’re trying to
make sure we’re always learning.
Marjorie Scardino Chief executive
As a company, we learned a lot in 2009. We started
the year facing a ragged array of challenges.
The threat of a full financial meltdown looked less
seismic, but the aftershocks of recession were
rippling out to just about every one of our markets.
At the same time, the gathering pace of disruptive
technological change was testing the strategy and
imagination of every media company.
So we reviewed the lessons we’d learned in previous
years – keep our eyes on our goal; keep investing;
keep people working; change, change, change.
And in spite of the challenges, we can now look
back on 2009 as Pearson’s best year yet.
To achieve that in any market would be a cause
for modest pride. To achieve it in the most difficult
trading conditions I’ve seen in my time at the
company puts me in awe of my colleagues here.
It’s a testament to their talent, ingenuity and sheer
bloody-minded grit, for which I’m grateful every day.
And it’s a just reward for our long-term shareholders
who had confidence in our vision for Pearson when
confidence was a scarce commodity. We thank you
sincerely for your trust in us.
Adjusted earnings per share pence
+13%
Operating cash flow £m
+15%
09 65.4p
08 57.7p
07 46.7p
06 43.1p
05 34.1p
09 £913m
08 £796m
07 £684m
06 £575m
05 £570m
Adjusted operating profit £m
+4%
Return on invested capital %
-0.3%
09 £858m
08 £762m
07 £619m
06 £552m
05 £470m
09 8.9%
08 9.2%
07 8.9%
06 8.1%
05 7.3%
Section 2 Our strategy
09
The 2009 lessons
Our approach to 2009 and the global economic
downturn was aggressive. We saw an opportunity,
not to ease off the gas but to accelerate, to invest
both money and imagination in the fast-growing
digital, services and international markets that have
given us our impetus. We reckoned that in the short
term we could pull further away from our competitors,
and that in the long term we simply could not afford to
pause for rest on the journey from publisher to digital
services company that has been our goal for some
years now.
I’m happy to say that, though we did not by any
means get everything exactly right, that reckoning
was true. It showed up in our financial results:
– Sales of £5.6bn, against £4.8bn in 2008, an
increase of 4% at constant exchange rates;
– Profits of £858m, up 4% from £762m in 2008;
– Adjusted earnings per share of 65.4p, up from 57.7p
in 2008 and well ahead of our expectations at the
start of the year;
– A dividend increase of 5%, underlining our conviction
that the dividend is both a reliable cash distribution to
shareholders and a signal of the board’s confidence
and determination about the future.
The lessons of our strategy also showed in some
remarkably strong competitive performances:
In North America, we pulled further away from our
traditional education competitors. In School and
Higher Education we grew 5%, a full five percentage
points faster than the industry. In testing, we won
60% of the state and national contracts that were
up for bid during the year.
The world's leading education companies
Education revenues $bn
Pearson $5.8bn
Apollo Group $3.3bn
McGraw-Hill $2.6bn
Kaplan (Washington Post) $2.3bn
Education Media & Publishing $2.0bn
Career Education Corp $1.7bn
Cengage Learning $1.4bn
Corinthian Colleges $1.2bn
Lagardere Education $0.9bn
Santillana (Prisa) $0.9bn
ETS $0.9bn
Infinitas Learning $0.5bn
Scholastic $0.4bn
Sanoma Education $0.4bn
New Oriental $0.3bn
2008 data
Dividend per share paid in fiscal year pence
40
35
30
25
20
15
25.4
27.0
23.4
24.2
18.8
21.4
22.3
16.1
20.1
17.4
35.5
33.8
29.3
31.6
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Pearson plc Annual report and accounts 2009
Pearson’s strategy: Marjorie Scardino, chief executive
continued
– In International education, we chalked up another
year of good growth and at the same time built the
foundations for faster progress in dynamic markets
like China, India and Southern Africa.
– At the FT Group, we produced healthy profits in
spite of a precipitous fall in business advertising.
This was possible because of our continued shift
towards subscription and digital revenues.
Technology and services
FT Group revenue mix %
Print
72%
27%
73%
Content and subscriptions
48%
81%
52%
00
09
00
09
Digital
28%
Advertising
19%
– And in Penguin we had another solid year of financial
results and of great books while doing the things that
will allow the publisher who invented the paperback
to take its rightful place as a leader in the age of
digital readers – both people and devices.
Trade publishing trends: digital
Penguin eBooks sold by month
2005 – 2009, US
Amazon
Kindle 2
Sony
Reader
Amazon
Kindle
1 Jan 2005
1 Jan 2006
1 Jan 2007
1 Jan 2008
1 Jan 2009
Dec 2009
(In some ways, those competitive performances are
even more important than the financial results they
make possible. They show that our customers are
choosing Pearson’s products and services – finding
something more valuable or compelling or alluring in
what we do. Those customers are the ultimate arbiters
of whether our strategy is working.)
Our strategy 1
Our strategy 2
Long-term organic investment in content:
Digital and services businesses:
Over the past five years, we have invested £2.3bn
in content: new education programmes; new and
established authors for Penguin; the FT’s journalism.
In 2009, that investment reached an all-time high
of £500m. We believe that this constant investment
is critical to the quality and effectiveness of our
products and services; and that it has helped us
gain share in many of our markets.
Our strategy centres on adding services to our content,
usually enabled by technology, to make the content
more useful, more personal, more valuable. These digital
products and services give us access to new, bigger and
faster growing sources of revenue to sustain our growth.
In 2009, digital products accounted for £1.7bn in revenues
– close to one-third of Pearson’s total sales – and more
than double the total five years ago.
Education and Penguin pre-publication
expenditure and author’s advances $m
Pearson’s digital revenues
% of sales
09 794
08 775
07 741
06 657
05 642
09 31%
08 29%
07 27%
06 24%
05 21%
Section 2 Our strategy
11
Our world in 2010
Last year we faced down tougher markets – in some
cases, much tougher. And we expect many to remain
tough through this year. Some of our markets have
‘cyclical challenges’, and all our industries are going
through a period of significant structural change.
So naturally, the question we’ve asked ourselves
is: “Can we continue our record of performance in
unpredictable markets and contracting economies?”
To answer, we’ve had to stop and review our
assumptions and revisit our plans. But our conclusion
is a simple truth about demand: No matter what,
people will still go to school; still need information
about markets; still want to escape from their present
into someone else’s story. Those are the things we do.
And there is still much to do to further them. There
are still 72 million children who don’t go to school at
all; still 30 million people who will enter university
this year and not ever graduate; still a complex world
of business, finance and politics to illuminate and
explain; still buyers for some $70bn worth of books
this year (and less than 2% of those are eBooks).
So much to do.
Our approach to the task and our business is to stick
with our strategy and to take a long-term view.
That may seem obvious, but don’t take it as a ‘business
as usual’ approach. We’re making it ambitious and
aggressive at every level.
Our goal is unchanged: To help people make progress
in their lives and to thrive in a brain-based economy
through learning. We’re reaching for a wide definition
of ‘learning’, though: one not constrained by age or
circumstance or confined to a classroom. We think
learning never stops: it’s happening all the time,
all around us. And we’re setting out to prove it.
Our basic strategy to achieve that grand goal is
pursued by all Pearson’s businesses in some shape
or form and has four fundamental parts:
1. To develop high-quality, compelling, trustworthy
content that customers deem worth paying for;
2. To serve it up not just naked, but with services,
mostly delivered by technology, to make it more
useful, more valuable, more personal;
3. To work in selected geographic markets that are
growing and have strong demand for our services;
4. To reap cost savings and competitive advantages
from Pearson’s global scale and the similarities of its
businesses and processes through efficiencies in our
central services.
Our strategy 3
International expansion:
Our strategy 4
Efficiency:
Pearson has market-leading positions in major developed
economies – particularly the US, UK and Western Europe.
We are already present in more than 60 countries and we
are investing to become a much larger global education
company, with particular emphasis on fast-growing
markets in China, India, Africa and Latin America. Over the
last five years, our international education business has
grown headline sales at an average annual rate of 17%,
becoming a £1bn business in 2009.
Our investments in content, services and new geographic
markets are fuelled by steady efficiency gains, often
generated through Pearson’s overall scale. Since 2005,
our operating profit margins have increased from 12.8%
to 15.3% and our ratio of average working capital to
sales has improved from 27.4% to 25.1%. In 2009 our
margins fell slightly compared to 2008 due to a decline
in advertising, restructuring charges at Penguin and
transactional exchange losses.
International revenues
(outside USA and Canada) £bn
09 £1.9bn
08 £1.8bn
07 £1.6bn
06 £1.4bn
05 £1.3bn
Pearson margins %
09 15.3%
08 15.8%
07 14.9%
06 13.8%
05 12.8%
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Pearson plc Annual report and accounts 2009
Pearson’s strategy: Marjorie Scardino, chief executive
continued
Who are we now?
Based on that goal and strategy, you should look
out for many things that will continue to change in
Pearson: our focus on consumers; our participation
in more links of the chain of formal learning; our
interest in training not only the minds of citizens, but
also the skills of 21st-Century workers; our take-up of
opportunities all over the world.
The 2009 results written up in this report are already
just footnotes to history. Perhaps more important to
you as you think about Pearson’s future should be
those things that are changing, because I believe
Pearson today may not be quite the company that
you think we are.
We’re still a publishing company – and convinced
that quality content is valuable. But today we’re
also a digital services company, and that change
is responsible for our market share and efficiency
as well as our growth opportunities.
In 2009, about a third of our sales came from digital
products and services. Over the past five years, our
digital revenues have grown at an average annual
rate of 19%. Seven years ago, our testing and
qualifications businesses (a good example of our
providing education services, rather than ‘products’)
had sales of less than £200m. This past year, they
produced more than £1bn.
We’re still proud to have strong roots in the UK, our
historic ‘home’ market, and in North America, home
to our largest concentration of business and people.
But Pearson is becoming an ever more international
company – in our mix of business and (maybe more
importantly) in our attitude. Even though we’ve
been growing well in the US, over the past five years
Pearson’s sales outside America have grown 11% per
year on average and our profits outside America
now amount to more than £250m, one-third of our
operating profit.
Growth in services businesses
Pearson worldwide testing revenues $m
09 $1,641m
08 $1,578m
07 $1,247m
06 $1,039m
05 $837m
For some years now, our strategy has been yielding
a virtuous circle of competitive advantage, strong
financial results and heavy investment in new
products. For now we believe that circle is spinning,
but we can’t count on its continuing. That’s why we
have to keep making changes of emphasis.
Rapid growth in emerging markets
Pearson revenues $m
09
08
07
06
05
$513m
$471m
$348m
$304m
$648m
Middle East
Central/Latin America
Africa
India
China/Hong Kong
Section 2 Our strategy
13
We’re certainly proud of 2009, but we’re much more
pleased about the foundations we’ve laid out for our
next chapter. Our approach to that next chapter is
based on a fundamental truth: We’re always learning.
But the experience of learning is different for every
person. That’s why we’ve been talking about and
working on ‘personalizing learning’ long enough
for it to become a buzz word.
So now we’re trying to take it to a new level that
still uses our strategy of content + services +
internationalism + efficiency but is:
– more thoroughly involved in the whole process
of education;
– more service-oriented than ever;
– more indifferent to medium;
– as interested in informal, consumer learning as
in institutional learning and
– moving more deeply into the developing world.
The road ahead
As we plunge out into 2010, we’re clear that in
macroeconomic terms the world is by no means a
slick superhighway. We’re expecting many of our
markets to remain slow and subdued this year, and
perhaps into the next one as well.
But we’re anything but subdued. We have a
successful strategy, one that’s been producing
consistent growth and high performance for some
years now. We believe in it, and we’re pushing ahead
with it – with some bold changes.
Our strong performance – both financial and
competitive – is largely the result of our having had
the strategy and made the investment over the last
decade to make Pearson a unified, digital, services-
based, global education company. That strategy and
investment will help us remain the innovator and
the scale player in our industries, and remain both
a durable company, and a long-term growth company,
but not if we don’t keep changing, keep learning.
We’ve made a good start on building the world’s
leading learning company. Our financial results say
we’re making progress. But we know that, to make
more and faster progress, more and more of our
customers have to see that we are also helping them
make progress in their lives. That’s our goal.
That’s why this 160-year-old company tries to be
always learning. Like many students, we’re finding
that the learning itself can be as stimulating as the
results. And all the time, that’s making this company
– one I hope you’d like to continue to call “your
company” – stronger and stronger.
Marjorie Scardino Chief Executive
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Pearson plc Annual report and accounts 2009
Our performance: 2009 financial overview
In 2009, Pearson’s sales increased 4%
at constant exchange rates to £5.6bn and
adjusted operating profit 4% to £858m.
Portfolio changes contributed 2% to
sales and 2% to operating profit, largely
in our education company. In underlying
terms (ie, stripping out the benefit of
both portfolio changes and currency
movements), sales and operating profits
increased by 2%.
Currency movements had a significant impact on
reported results in 2009, adding £640m to sales and
£69m to operating profit and contributing to headline
sales and operating profit growth of 17% and 13%
respectively. The currency impact was largely the result
of the strengthening of the US dollar against sterling:
we generated approximately 60% of our sales and
profits in US dollars and the average exchange rate
strengthened from £1:$1.85 in 2008 to £1:$1.57 in 2009.
Sales growth £m
08 4,811
+4%
74 Organic growth
9 North American Education
Acquisitions/(Disposals)
75 International Education
15 Other portfolio
640 F/X
09 5,624
Profit growth £m
08 762
+4%
Acquisitions/(Disposals)
09 858
13 Organic growth
7 Education
7 Other
69 F/X
Adjusted earnings per share were 65.4p, up 13% on
a headline basis.
Balance sheet strength
Net debt/EBITDA
Interest cover
8.8x
10
8
6
4
2
1.1x
00
01
02
03
04
05
06
07
08
09
Average working capital/sales %
09 25.1%
08 26.1%
07 25.6%
06 26.3%
05 27.4%
10
8
6
4
2
3.9x
3.1x
Operating cash flow increased by £117m to £913m
(headline growth of 15%) and total free cash flow by
£92m to £723m, or 90.5p per share (headline growth
of 14%). Cash conversion was once again strong at
106% of operating profit and our ratio of average
working capital to sales improved by a further 1.0%
point. Our tax rate in 2009 was 25.5%, a little lower
than in 2008.
Our return on average invested capital showed a
headline reduction of 0.3% points to 8.9%, largely
due to the impact of transaction foreign exchange on
earnings. ROIC remains above our weighted average
cost of capital.
Statutory results show an increase of £79m in
operating profit to £755m (£676m in 2008). Basic
earnings per share for continuing businesses were
53.2p in 2009, up from 47.9p in 2008.
Net debt was £368m lower at £1,092m (£1,460m in
2008). Since 2000, Pearson’s net debt/EBITDA ratio
has fallen from 3.9x to 1.1x and our interest cover has
increased from 3.1x to 8.8x.
Dividend. The board is proposing a dividend increase
of 5.0% to 35.5p, subject to shareholder approval. 2009
will be Pearson’s 18th straight year of increasing our
dividend above the rate of inflation. Over the past five
years we have increased our dividend at a compound
annual rate of 6%. Our dividend cover is now 1.8x.
Section 3 Our performance
15
We expect Penguin to post another good competitive
performance in the context of a consumer books
market that we expect to remain broadly level in 2010.
Penguin will benefit from its leading position in the
emerging market for eBooks and from the efficiency
actions taken in 2009.
Interest and tax. In 2010, we expect our interest
charge to adjusted earnings to be broadly level with
2009. We expect our P&L tax charge to be in the
25% to 27% range. We expect our cash tax rate to be
around 15%.
Exchange rates. Pearson generates approximately
60% of its sales in the US. In 2009, a 5 cent move in
the average £:$ exchange rate for the full year (which
in 2009 was £1:$1.57) had an impact of approximately
1.3p on adjusted earnings per share.
Outlook: 2010
Pearson reported underlying growth
in sales and operating profit in 2009,
in spite of the exceptionally difficult
macroeconomic environment and against
record 2008 results. We achieved strong
growth in education, helping us to make
good financial progress even though our
markets in US school publishing, financial
advertising and consumer books were
especially challenging.
Trading conditions in those tough markets began
to ease towards the end of the year, but we are
planning on the basis that some of our markets
remain subdued throughout 2010. Even so, we
expect Pearson to produce another year of underlying
profit growth, helped by the overall resilience of
our company and good growth prospects for our
businesses in digital, services and emerging markets.
In Education, we believe that our sustained
investment in content and our leadership position
in learning services and technologies will enable us
to build on our strong market positions. We expect
to gain further share in the US School market which
will benefit from a stronger adoption opportunity
($850m – $900m) and new federal funds, broadly
offset by continued pressure on education funding at
the state level. In Higher Education and International
Education, we expect to produce further underlying
growth and share gains.
At FT Publishing, we expect to sustain good renewal
rates in our subscription businesses and healthy
margins. Advertising revenues (which in 2009
accounted for less than 3% of total Pearson revenues)
remain highly unpredictable but we expect to see
some stabilisation after the sharp declines across
the industry in 2009. Interactive Data Corporation
expects 2010 revenues to range between $810m to
$830m and healthy margins in the 25% to 26% range
(guidance under US GAAP). As previously announced,
the Board of Interactive Data Corporation is currently
undertaking a preliminary review of strategic
alternatives for the company.
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Pearson plc Annual report and accounts 2009
North American Education
North American Education is Pearson’s
largest business, with 2009 sales of £2.5bn
and operating profit of £403m. Over the
past five years, it has increased both sales
and profits at a compound annual growth
rate of 8%. Building on our roots as a
leading publisher of educational materials
and provider of assessment services, we
have made significant investments and
change to transform Pearson into a world-
leading provider of learning technologies
for students and enterprise technologies
for educational institutions.
These technology services – including eCollege
(3.5m student users in 2009), PowerSchool (8.5m),
the MyLabs (6m) and Edustructures (8.1m) – are the
backbone of our strategy to help educators raise
student performance and institutions to become
more effective. We are currently developing a new
generation of powerful technologies to integrate
student information, assessment, instruction
and performance data into connected learning
environments, for students and institutions at all
levels of education.
In 2009, our combined US school curriculum
and higher education businesses grew 5% on an
underlying basis, once again outperforming the
industry which was flat, according to the Association
of American Publishers. We also achieved good
margin improvement, benefiting from the growth
of our higher education business and the successful
integration of the Harcourt Assessment business
acquired in 2008.
North American Education: Key performance indicators
£ millions
Sales
Adjusted
operating profit
2009
2008 Headline
growth
CER
growth
Underlying
growth
2,470 2,002 23% 5%
5%
403
303 33% 13%
13%
US combined school and
college sales growth vs industry
Pearson %
09 4.9%
08 1.8%
Industry %
09 (0.2)%
08 (0.2)%
Pearson’s total year-on-year sales growth in school and college products
in the US versus the year on year sales growth of the total US industry.
Adoption cycle win rates
Win rate %
09 37%
08 31%
Pearson’s market share by value of new business in the US adoption states.
Market share is quoted as a percentage of the total value of adoptions that
we participated in.
State and national testing contract win rates
Win rate %
09 60%
08 47%
The lifetime value of US school testing contracts won by Pearson this year
as a percentage of the total lifetime value of contracts bid for this year.
Online learning users
Registrations no.
09 5,551,215
08 4,040,370
The number of registrations by students to access one of our US online
learning programmes.
Section 3 Our performance
17
Our sustained investment in content and technology
continues to grow existing franchises and build
new ones. In Engineering Mechanics, our market
leading textbook Hibbeler’s Statics and Dynamics
12th Edition gained an additional four percentage
points of market share with the addition of our newly
launched MasteringEngineering digital learning and
assessment platform. Pearson became market leader
in psychology supported by the recently launched
textbook Psychology 2nd Edition by Cicarelli with
MyPsychLab.
Custom Solutions grew strongly across both bespoke
books and customised services including content
creation, technology, curriculum, assessments and
courseware. We partnered with the Kentucky Virtual
Learning Initiative, for example, to deliver personalised
mathematics instruction mapped to state college entry
standards and have begun to extend this programme
into transitional English and Reading.
eCollege
eCollege, our platform for fully-online distance
learning in higher education, increased online
enrolments by 36% to 3.5m and benefited from
continued strong renewal rates of approximately
95% by value, new contract wins and strong growth
in the usage of the platform, particularly by US for-
profit colleges.
Thirteen Pearson higher education and school
products in ten categories were nominated as
America's best educational software products in the
Software & Information Industry Association’s 25th
Annual CODiE Awards. They include MyMathLab,
Miller & Levine Biology, PowerSchool, Prentice Hall
Literature, myWorld Geography, MyWritingLab,
CourseConnect and eCollege.
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The education publishing industry is going through
a period of significant structural change driven by
the demand for high educational standards and
accountability, the shift from print to digital products
and a rapidly changing competitive environment.
Though the current economic climate has placed
considerable pressure on state and local tax receipts
– and therefore education funding – raising student
achievement remains a key priority across the
political spectrum in the US. In particular, the federal
government’s education reform proposals contain a
range of measures designed to raise standards; use
student data to improve classroom instruction; boost
the quality of teachers and school leaders; and turn
around the lowest-performing schools.
Higher Education Highlights in 2009 include:
The US Higher Education publishing market grew
11.5% in 2009, according to the Association of
American Publishers. The industry benefited from
strong enrolment growth and federal government
action to support student funding.
Pearson grew faster than the industry and outperformed
the market for the eleventh straight year, continuing to
see strong demand for instructional materials enhanced
by technology and customisation.
The MyLabs
Pearson’s ‘MyLab’ digital learning, homework
and assessment programmes again grew strongly.
Our MyLab products saw more than 6m student
registrations globally, 39% higher than in 2008.
In North America, student registrations grew 37%
to more than 5.6m. Evaluation studies show that
the use of the MyLab programmes can significantly
improve student test scores and institutional
productivity.
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See more at www.mymathlab.com
18
Pearson plc Annual report and accounts 2009
North American Education
continued
Assessment and Information
Highlights in 2009 include:
Significant profit increase in Assessment and
Information, benefiting from the successful
integration of the Harcourt Assessment business
acquired in 2008.
Our National Services assessment business renewed
its contract with the College Board, worth $210m over
10 years, to process and score the SAT and contracts
to support the College Board’s new Readi-Step and
ACCUPLACER diagnostics programmes.
Our State Services business won a number of
significant new contracts including new programmes
in Florida and Arizona. We continue to gain share,
winning 60% of the contracts bid for by value, and
to be a leader in online testing, delivering 9 million
secure online assessments in 2009, up more than
100% on 2008.
Our Evaluation Systems teacher certification business
secured contract extensions in California, Illinois,
Arizona and Washington; won re-bids in Michigan
and New York, each for five years; and added new
contracts in California and Minnesota.
In Clinical Assessments, our AIMSWeb response-
to-intervention data management and progress
monitoring service for children who are having
difficulty learning, continued to grow and now has
more than 3 million students on the system.
Our Edustructures business, which provides
interoperable systems to support data collection
and reporting between school districts and state
governments, doubled the number of students
served to 8 million.
Our Student Information Systems (SIS) business
continued to grow strongly, benefiting from strong
demand for its services that help teachers automate
and manage student attendance records, gradebooks,
timetables and the like. It supports more than
12 million students – 8 million of them through its
flagship PowerSchool product which is now available
in more than 50 countries. In 2009 it won contracts
for new school districts including Nova Scotia
Department of Education (133,000 students), Newark,
NJ (45,000 students), and the Hamilton County DOE,
TN (40,000 students).
School Curriculum Highlights in 2009 include:
The US School publishing market declined 13.8%
in 2009, according to the Association of American
Publishers. State budget pressures and a slower new
adoption year caused particular weakness in the
basal publishing market.
US School publishing
Though Pearson’s US School publishing sales
declined, we significantly outperformed the
industry and took an estimated 37% of new
adoptions competed for (our highest market
share for a decade) and 32% of the total new
adoption market.
Pearson’s enVisionMATH, an integrated print-
and-digital programme, was the top-selling basal
programme in the US in 2009. It helped Pearson to
a market-leading 46% share of all maths adoptions
and sold strongly across the open territories.
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Section 3 Our performance
19
Poptropica
Poptropica became one of the largest virtual worlds
for young children in the US, with unique visitors
growing by more than 100%, to almost 70 million,
and the numbers of characters they have created
approaching 200m, up 150% on 2008.
We successfully launched new blended digital
curriculum programmes for the 2010 adoption
campaign:
i
Interactive Science www.interactivescience.com
Prentice Hall Mathematics www.poweralgebra.com/
www.powergeometry.com
Prentice Hall Literature www.pearsonschool.com/live/
customer_central/microsite/connectedsampling/
overview/nat/lit/player.html
Successnet, our online learning platform for teachers
and students which supports Pearson’s digital
instruction, assessment and remedial programmes,
grew strongly, achieving more than 4 million
registrations in 2009.
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Pearson plc Annual report and accounts 2009
International Education
Pearson is the world leader in education
publishing and related services outside
North America. Over the past five years,
this has been Pearson’s fastest-growing
business, increasing sales at a headline
compound annual growth rate of 17%
(from £559m in 2005 to £1,035m in 2009)
and operating profit almost three-fold
(from £51m in 2005 to £141m in 2009).
The business has achieved strong organic
growth and successfully integrated a
number of acquisitions including Edexcel,
Harcourt International and PBM. In 2009
we further extended our international scale,
acquiring Wall Street English, a chain of
premium English language training centres
in China; and investing in vocational
training and online learning in India.
Our 2009 results reflect good organic growth,
continued investment in bolt-on acquisitions
(Maskew Miller Longman, Longman Nigeria and
Fronter announced in 2008 and Wall Street English
in 2009) and currency movements. Our International
Education business operates in 67 countries across
the globe and has significant exposure to a wide
range of currencies including the US dollar and the
euro. In 2009, currency movements boosted revenues
by £60m but reduced adjusted operating profits by
£17m compared to 2008.
Looking ahead, we expect our International Education
businesses to continue to benefit from a series of
powerful growth trends: increasing public and private
spending on education; growing participation rates
in elementary, secondary and higher education;
the demand for assessment to provide measures of
achievement; the growing technology infrastructure
in educational institutions; and the rise of English
and other international languages.
International Education: Key performance indicators
£ millions
Sales
Adjusted
operating profit
2009
2008 Headline
growth
CER
growth
Underlying
growth
1,035
866 20% 13%
4%
141
135
4% 19%
14%
Online learning users
Registration no.
09 474,068
08 301,931
The number of registrations by students and professors to access one of our
International Education online learning programmes.
Online results logins
Logins no.
09 79,751
08 55,244
Number of logins by users of International Education’s online results service.
Global Highlights in 2009 include:
‘MyLab’ digital learning, homework and assessment
programmes were used internationally by more than
470,000 students, up almost 60% on 2008, and are
now sold in more than 200 countries worldwide.
Pearson Test of English
We launched the Pearson Test of English, our
new test of Academic English which will be
delivered in up to 200 Pearson VUE testing centres
in 37 countries. Approximately 1,000 academic
programmes worldwide now recognise, or are in the
process of recognising, the Pearson Test of English.
Section 3 Our performance
21
Our eCollege learning management system is
growing rapidly in international markets, winning
new contracts in Australia, Brazil, Mexico, Colombia,
Puerto Rico and Saudi Arabia.
Fronter
The Fronter learning management system continued
to grow very strongly with more than 6 million
students in more than 8,000 schools, colleges and
Universities around the world.
In South Africa, Pearson launched Platinum, the first
blended print and online course developed for the
South African National Curriculum. 7,000 students
registered for MyMathLab+, at the University of
Witwatersrand, helping raise student pass rates in
its initial phase from 31% in the first semester to 60%
in the second semester.
Asia and Pacific Highlights in 2009 include:
English language teaching
We acquired Wall Street English, China’s leading
provider of premium English language training to
adults, for $145m. The combination of Longman
Schools and Wall Street English gives Pearson a
leading position in the English language teaching
market in China, serving students from elementary
school to professional levels.
Our new Pearson Learning Solutions business won its
first contracts in the UK, the Gulf and Africa. It combines
a broad range of products and services from across
Pearson to deliver a systematic approach to improving
student performance.
Africa and the Middle East Highlights in 2009 include:
Pearson successfully implemented the Abu Dhabi
Education Council’s External Measurement of Student
Achievement programme covering English, Arabic,
Maths and Science in April 2009 and was also
contracted by the United Arab Emirates Ministry of
Education to deliver the programme in the northern
emirates.
We stepped up our presence in the Indian education
market with two investments totalling $30m: a 50:50
joint-venture with Educomp, called IndiaCan, to offer
vocational and skills training through 120 training
centres across the country; and a 17.2% stake in
TutorVista, which provides online tutoring for K-12
and college students.
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Pearson plc Annual report and accounts 2009
International Education
continued
Continental Europe Highlights in 2009 include:
United Kingdom Highlights in 2009 include:
We received over 3.7 million registrations for
vocational assessment and general qualifications.
We marked 4.5 million ‘A’-level and GCSE scripts
on-screen and successfully delivered the 2009
National Curriculum test series and were awarded the
contract to administer the 2010 National Curriculum
Tests at Key Stage 2.
Our qualifications
We made significant investments in supporting
the new Diploma qualification for 14-19 year-olds;
the IGCSE qualifications to meet the needs of
International schools and colleges; and BTEC, our
flagship vocational qualification. BTEC registrations
totalled more than 1 million for the first time and
were up almost 30% on 2008.
The launch of our digi libre (Content Plus) products
helped us to gain share in the lower and upper
secondary markets in Italy and positions us well for
major curriculum reforms planned for 2010.
In Spain, our sales were down sharply with pressures
on central and regional government spending and a
worsening retail environment.
Our ELT sales continued to grow in Poland, and across
central and Eastern Europe we saw good demand for
our publishing and digital resources and our fledgling
Language Learning Solutions activities.
Latin America Highlights in 2009 include:
New editions of the proven bestsellers, BackPack and
Pockets, along with the successful launch of two new
courses, CornerStone and KeyStone, helped to deliver
strong growth in the sales of ELT materials across
Latin America.
In Brazil, which has one of Latin America’s largest and
fastest-growing university populations, our virtual
library now supports 30 post-secondary institutions.
And, in Panama, 75,000 high school students are now
learning Biology and Chemistry, using Prentice Hall
Virtual Labs.
Our Higher Education business grew strongly, helped
by the success of new first editions, the rapid take
up of MyLabs adapted to meet local requirements,
and the growing popularity of custom publishing.
Sales of UK primary resources fell, on the back
of minimal curriculum change and some signs of
schools managing their budgets more tightly.
Section 3 Our performance
23
Professional Education: Key performance indicators
£ millions
Sales
Adjusted
operating profit
2009
2008 Headline
growth
CER
growth
Underlying
growth
275
244 13% (1)%
(1)%
43
36 19% 8%
8%
Professional publishing Highlights in 2009 include:
Our Professional education business experienced
tough trading conditions in the retail market but
benefited from the increased breadth of its publishing
and range of revenue streams, from online retail
through digital subscriptions.
A best-selling product in 2009 was CCNA Network
Simulator, which are digital networking labs
designed, developed and published by Pearson,
to help candidates successfully pass the Cisco CCNA
certification exam.
Pearson launched new learning solutions for IT
Professionals preparing for certification accreditation.
Cert Flash Card applications were launched for students
studying for Cisco CCNA, CompTIA and Microsoft
certification exams and are accessible through web
browsers and iPhone and iPod Touch devices.
FT Press launched a new e-publishing imprint, FT Press
Delivers, providing essential insights from some of
its leading business authors including Jim Champy,
Brian Solis, Mark Zandi, Jon M. Huntsman, John Kao,
Michael Abrashoff, and Seth Goldman.
Professional Education
Our Professional Education business is
focused on testing and certifying adults to
become professionals; and on publishing
and other learning programmes for
professionals in business and technology.
Over the past five years, we have increased
sales in this division at a compound annual
rate of 8% and operating profit from a
profit of £2m in 2005 to a profit of £43m
in 2009. Over that period, we significantly
re-oriented our professional publishing
businesses towards digital products and
sales channels and built professional
testing into a profitable industry leader.
We expect these businesses to benefit
from rising demand for work-related skills
and qualifications in both developed
and developing markets; and from close
connections with professional content
and customers in other parts of Pearson.
Professional testing and certification
Highlights in 2009 include:
In the UK, we extended our contract with the Driving
Standards Agency to deliver the UK drivers theory
test until 2014. With the Graduate Management
Admissions Test and the recent contract extension
for the NCLEX nursing examination, our three largest
professional testing contracts now run to 2013 or
after. More than seven million secure online tests
were delivered in more than 4,000 test centres
worldwide in 2009, an increase of 9% over 2008.
Registration volumes for the Graduate Management
Admissions Council test rose 8% worldwide in 2009,
including a 16% increase outside the US.
In the US, Pearson VUE won a number of new
contracts with organisations including Oracle, Citrix,
Novell, VMWare, and Adobe, the National Registry of
Food Safety Professionals and the National Institute
for Certification in Engineering Technologies.
Pearson VUE extended its international reach, signing
an agreement with the Dubai Road and Transport
Authority to deliver a new, high-tech Driver Testing
System and launching the Law School Admission Test
in India.
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Pearson plc Annual report and accounts 2009
FT Group
The FT Group is a leading provider of
essential information in attractive niches
of the global business information market.
These include insight and analysis through
the Financial Times, FT.com, Money-Media
and The Economist, and intelligence,
valuations and indices through Mergermarket,
Interactive Data and FTSE.
In recent years, the FT Group has significantly shifted
its business towards digital and subscription revenues.
We have sold our largely print and advertising-based
national media companies (Recoletos in Spain,
Les Echos in France, FT Deutschland in Germany);
acquired digital businesses with international
opportunities (Mergermarket, Exec-Appointments.
com, Money-Media, Mandate Wire and Medley Global
Advisors); and invested steadily in our global and
digital businesses including the Financial Times,
FT.com and Interactive Data.
As a result of this strategy, in 2009 digital products
and services accounted for 73% of FT Group revenues,
up from 28% in 2000; and in 2009 advertising
accounted for 19% of FT Group revenues, down from
52% in 2000. On a continuing business basis, FT
Group sales have increased at a headline compound
average growth rate of 11% (from £546m in 2005
to £842m in 2009) and profits by 18% (from £97m
to £187m).
Looking ahead, we believe that the FT Group’s
premium and global positions, combined with our
digital and subscription businesses, put us in a good
position to weather tougher economic conditions.
FT Group: Key performance indicators
£ millions
Sales
FT Publishing
Interactive Data
Total
Adjusted
operating profit
FT Publishing
Interactive Data
Total
2009
2008 Headline
growth
CER
growth
Underlying
growth
358
484
842
39
148
187
390
406
(8)%
19%
(12)%
5%
(12)%
2%
796
6% (3)%
(5)%
74
121
(47)%
22%
(42)%
7%
(42)%
2%
195 (4)% (12)% (14)%
FT circulation revenue growth
Growth %
09 14%
08 16%
The FT Newspaper’s year-on-year growth in circulation revenue.
The average monthly number of unique users
of FT.com for the year
No. millions
09 9.2
08 7.2
The average monthly number of unique users of FT.com for the year.
Mergermarket renewal rates
Mergermarket %
09 75.2%
08 107.0%
Debtwire %
09 85.5%
08 91.5%
The current year value of sales to existing customers as a percentage of their
spend in the previous year.
Interactive Data customer retention
Retention %
09 93%
08 95%
The number of customers renewing contracts as a percentage of total
customer base.
Section 3 Our performance
25
FT Publishing Highlights in 2009 include:
Digital publishing
FT Publishing’s margins sustained at more than 10%,
despite double digit revenue declines caused by
tough market conditions for financial and corporate
advertising. FT Publishing revenues declined 12% as
the impact of advertising revenue declines was partly
mitigated by growth in content revenues and the
resilience of our subscription businesses.
We continued to invest in fast-growing digital
formats. We launched a new luxury lifestyle website,
to complement our existing How To Spend It
magazine; a new iPhone application which has
received more than 200,000 downloads; and,
in association with Longman, Lexicon, an online
glossary of economic, financial and business terms.
A growing audience
We continued to see good demand for high-quality
analysis of global business, finance, politics and
economics resulting in:
A 15% increase in FT.com’s paying online
subscribers to more than 126,000, and 750 direct
corporate licences.
Registered users on FT.com up 85% to 1.8m and
up 12% to 1.4m on FTChinese.com.
i
See more at www.howtospendit.com
While Financial Times worldwide circulation was 7%
lower at 402,799 (for the July – December 2009 ABC
period), subscription circulation grew modestly.
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Pearson plc Annual report and accounts 2009
FT Group
continued
Mergermarket faced challenging conditions in some
of its markets with reduced Mergers and Acquisition
activity impacting the merger arbitrage sector serviced
by dealReporter whilst Debtwire benefited from an
increased focus on distressed debt.
Mergermarket
Mergermarket continued to launch new products
and expand globally. Our newest product, MergerID,
launched in September 2009, provides a secure
online environment for principals and professionals
to post and view M&A opportunities globally and
has secured over 1,500 active users in more than
450 companies across the globe.
The Economist, in which Pearson owns a 50% stake,
increased global weekly circulation by 2.2% to 1.42m
(for the July – December 2009 ABC period).
FTSE, our 50% owned joint-venture with the London
Stock Exchange, increased revenues 17% and made
a strong improvement in profits.
Interactive Data Highlights in 2009 include:
Interactive Data revenues up 5% and operating
profit up 7% to £148m (£121m in 2008) driven by its
Institutional Services segment, despite difficult market
conditions in the financial services industry. In the
fourth quarter we began to see continued signs of
trading conditions easing in certain markets that were
difficult earlier in the year, principally in our new sales.
Interactive Data continued to benefit from growth
trends including: heightened scrutiny around the
valuation of securities; increasing regulation and
related investment in compliance and risk management
processes; increasing adoption of low latency data
for algorithmic trading; and continuing need to cost-
effectively differentiate wealth management offerings
with bespoke web-based client solutions.
Pricing and Reference Data (66% of Interactive Data
revenues) continued to generate good growth in North
America and Europe. Growth was primarily organic
and also benefited from bolt-on acquisitions, most
recently NDF, a leading provider of financial pricing
and services in Japan, and Kler’s Financial Data
Service, a leading provider of reference data to the
Italian financial industry.
Real-Time Services (19% of Interactive Data revenues)
faced challenging market conditions as solid demand
for web-based Managed Solutions was more than
offset by higher cancellations of real-time market
data services. In December 2009, we formed the Real-
Time Market Data and Trading Solutions Group which
combines the resources of our eSignal, Managed
Solutions and Real-Time Services businesses
into a single organisation. This initiative supports
plans to integrate the company’s suite of real-time
market data and innovative, hosted technology
services and solutions to more effectively capitalize
on opportunities in the wealth management and
electronic trading sectors. In addition, Interactive Data
recently completed two acquisitions, 7ticks and the
data and tools assets of Dow Jones’ Online Financial
Solutions business, that help further strengthen its
real-time capabilities in the wealth management and
electronic trading sectors.
Section 3 Our performance
27
Interactive Data’s full year earnings announcement
and outlook for 2010 is available at:
www.interactivedata-rts.com
On 15 January 2010, Pearson and Interactive Data
announced that Interactive Data’s Board of Directors
is conducting a preliminary review of strategic
alternatives for the Company. As previously stated,
there can be no assurance on the potential outcome
or timing of this review process.
Interactive Data continued to invest in expanding
the breadth and depth of the data covered and
products offered. Pricing and Reference Data added
new information resources, transparency tools, and
broader coverage of hard-to-value instruments.
It also introduced new services such as the Business
Entity Service and Options Volatility Service aimed
at helping firms address risk management and
compliance challenges. In Real-Time Services,
investments were aimed at expanding market
coverage to include a broader range of emerging
markets, level 2 data for a variety of global exchanges,
and multi-lateral trading facilities. New product
launches in this business included PlusBook™,
a new consolidated order book service for the
European financial industry, and enhancements
to the PrimePortal product, which are used to create
customised Web solutions for wealth management
and infomedia applications. eSignal introduced new
services and enhanced existing offerings such as
its Market-Q browser-based workstation, which has
been well received in the North American wealth
management market.
Interactive Data made a number of bolt-on
acquisitions in late 2009 and into early 2010
including: the data and tools assets of Dow Jones and
Company’s OFS business, which expands the growing
web-based solutions business in North America;
Dubai-based Telerate Systems Limited (completed on
14 January 2010), a long-time eSignal sales agent; and
7ticks (completed on 15 January 2010), an innovative
provider of very fast electronic trading networks and
managed services.
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Penguin Group: Key performance indicators
£ millions
Sales
Adjusted
operating profit
2009
2008 Headline
growth
CER
growth
Underlying
growth
1,002
903
11% (1)%
(2)%
84
93 (10)% (17)% (19)%
US bestsellers
Bestsellers no.
09 243
08 231
The number of Penguin books entering the Top Ten bestseller lists in the
US (New York Times).
UK bestsellers
Bestsellers no.
09 46
08 67
The number of Penguin books entering the Top Ten bestseller lists in the
UK (Neilson BookScan Top Ten).
eBook sales
Sales %
09 2.3%
08 0.5%
Penguin global eBook sales as a percentage of Penguin Group net sales.
28
Pearson plc Annual report and accounts 2009
Penguin
Penguin is one of the most famous
brands in book publishing, known around
the world for the quality of its publishing
and its consistent record of innovation.
Over the past five years, Penguin’s sales
have increased at an average rate of 2%
and profits at 5% – the result of a plan to
generate significant margin improvement.
That plan has four major parts:
1. Investing consistently and in a disciplined way in
author and product development;
2. Developing a globally co-ordinated publishing
organisation, benefiting from worldwide scale and
rapid rates of growth in literacy, education and
demand for books in emerging markets;
3. Innovating with digital technologies to provide new
reading experiences, new ways to market, new sales
channels, and more efficient means of production,
storage and distribution of content;
4. Becoming a more efficient organisation, focusing
on margin progression, working capital discipline
and cash generation. In 2009, Penguin successfully
implemented a series of organisational changes
in the UK 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. Penguin’s
2009 results include approximately £9m of charges
relating to these organisational changes.
Penguin operates in 15 countries across the globe and
has significant exposure to a wide range of currencies
including the US and Australian dollars. In 2009,
currency translation boosted revenues by £109m
and adjusted operating profits by £13m compared
to 2008. Adjusted operating profits were reduced
by a transaction exchange loss of £6m.
Looking ahead, Penguin’s strategy involves further
investment in publishing in both established and
emerging markets, in continued digital innovation
and in efficiency improvements, as it seeks to build
on its strong competitive position and accelerate
sales growth.
Penguin Highlights in 2009 include:
ebooks
eBook sales grew fourfold
on the previous year.
14,000 eBook titles are now
available. eBook sales are
expected to grow rapidly in
2010, benefiting from the
popularity of e-readers such
as Amazon’s Kindle, the
Sony Reader and Barnes
and Noble’s nook as well
as new devices such as
Apple’s iPad.
2009 bestsellers
In the US, Penguin had 30 #1 New York Times
bestsellers, Penguin’s most ever, and placed 243
bestsellers on New York Times lists. Bestsellers
included debut novels such as Kathryn Stockett’s
The Help and Janice Y.K. Lee’s The Piano Teacher,
along with books by established authors such as
Charlaine Harris and Nora Roberts.
Section 3 Our performance
29
In Australia, Penguin was named Publisher of the
Year for the second year running at the Australian
Book Industry Awards. #1 bestselling authors included
Bryce Courtenay, Tom Winton, Clive Cussler and
Richelle Mead.
In Canada, top-selling local authors included Joseph
Boyden and Alice Munro, who was awarded the
International Man Booker prize, and our international
authors Greg Mortenson and Elizabeth Gilbert led the
paperback non-fiction category.
In India, Penguin is the largest English language trade
publisher, with bestselling authors in 2009 including
Narayana Murthy and Nandan Nilekani.
In South Africa, top-selling Penguin authors included
John van de Ruit and Justin Bonello.
2010 highlights
In 2010, Penguin will publish major books including
Our Kind of Traitor by John le Carre, two books
from chef Jamie Oliver ( Jamie Does and 20 Minute
Meals), A Passion for Design by Barbra Streisand,
The Weekend That Changed Wall Street by CNBC’s
Maria Bartiromo, and a new series of paperbacks
entitled Penguin Decades as part of Penguin’s
75th birthday celebration. Penguin China’s English
language publishing programme will launch in
2010, with books including Shanghai: A History in
Photographs 1842 – Today.
In the UK, top-selling titles included Marian Keyes’
This Charming Man, Malcolm Gladwell’s Outliers,
Ant and Dec’s Ooh! What a Lovely Pair and Antony
Beevor’s D-Day. Penguin Children’s list had a very
strong year with standout performances from brands
such as The Very Hungry Caterpillar (which celebrated
its 40th anniversary) and Peppa Pig. Through an
iPhone app, consumers were offered a try-before-you-
buy model of Paul Hoffman’s The Left Hand of God,
providing free downloads of the first three chapters.
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Pearson plc Annual report and accounts 2009
Other financial information
Net finance costs
£ millions
Net interest payable
Net foreign exchange losses
reflected in adjusted earnings
Finance (costs)/income in respect
of employee benefit plans
Net finance costs reflected
in adjusted earnings
Other net finance income/(costs)
Total net finance costs
2009
(85)
–
(12)
(97)
2
(95)
2008
(89)
(7)
8
(88)
(3)
(91)
Net finance costs reported in our adjusted earnings
comprise net interest payable, net finance costs
relating to employee benefit plans and certain foreign
exchange gains and losses.
Net interest payable in 2009 was £85m, down from
£89m in 2008. Although our fixed rate policy reduces
the impact of changes in market interest rates,
we were still able to benefit from a fall in average
US dollar and sterling interest rates during the year.
Year-on-year, average three month LIBOR (weighted for
the Group’s net borrowings in US dollars and sterling
at each year end) fell by 2.4% to 0.7%. This reduction
in floating market interest rates was partially offset by
higher fixed bond coupons prevailing at the time of our
2009 bond issue. The overall result was a decrease in
the Group’s average net interest rate payable by 0.6%
to 5.3%. The Group’s average net debt rose by £90m,
reflecting the impact of acquisitions and disposals
and the weakening of average year-on-year sterling
exchange rates relative to the US dollar, in which the
majority of our debt is denominated.
Finance charges relating to post-retirement plans were
£12m in 2009 compared to an income of £8m in 2008
as a result of lower returns on plan assets. Exchange
losses reported in adjusted earnings in 2008 of
£7m related to retranslation of foreign currency bank
overdrafts. There were no equivalent exchange gains
or losses in 2009.
Also included in the statutory definition of net finance
costs are foreign exchange and other gains and losses.
These are excluded from adjusted earnings as they
represent short-term fluctuations in market value and
are subject to significant volatility. These other gains
and losses may not be realised in due course as it is
normally the intention to hold the related instruments
to maturity. In 2009 the total of these items excluded
from adjusted earnings was a profit of £2m compared
to a loss of £3m in 2008.
Funding position and liquid resources
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.
Our objective is to secure continuity of funding at a
reasonable cost from diverse sources and with varying
maturities. The Group does not use off-balance sheet
special purpose entities as a source of liquidity or for
any other financing purposes.
The net debt position of the Group is set out below.
Net debt
£ millions
Cash and cash equivalents
Marketable securities
Net derivative assets
Bonds
Bank loans and overdrafts
Finance leases
Net debt
2009
2008
750
63
103
685
54
164
(1,923)
(2,128)
(70)
(15)
(228)
(7)
(1,092)
(1,460)
Reflecting the geographical and currency split of
our business, a large proportion of our debt is
denominated in US dollars (see note 19 for our policy).
The strengthening of sterling against the US dollar
during 2009 (from $1.44 to $1.61:£1) is a significant
contributor to the decrease in our reported net debt.
The Group’s credit ratings remained unchanged
during the year. The long-term ratings are Baa1 from
Moody’s and BBB+ from Standard & Poor’s, and
the short-term ratings are P2 and A2 respectively.
The Group’s policy is to strive to maintain a rating
of Baa1/BBB+ over the long term.
In March 2009, the Group accessed the capital
markets, raising £300m through the sale of notes
maturing in 2015 and bearing interest at 6%. Of the
£300m issued, £200m was swapped into US dollars
for the life of the bond to conform with the policy
described in note 19. The proceeds were used to
repay floating rate amounts outstanding under our
revolving credit facility, as described below.
The Group has in place a $1,750m committed
revolving credit facility, of which $92m matures in
May 2011 and the balance of $1,658m matures in May
2012. At 31 December 2009 the facility was undrawn.
The facility is intended to be used for short-term
drawings and providing refinancing capabilities,
including acting as a back-up for our US commercial
paper programme. This programme is primarily used
to finance our US working capital requirements, in
particular our US educational businesses which have
a peak borrowing requirement in July. At 31 December
2009, no commercial paper was outstanding.
The Group also maintains other committed and
uncommitted facilities to finance short-term working
capital requirements in the ordinary course of business.
Further details of the Group’s approach to the
management of financial risks are set out in note 19
to the financial statements.
Taxation
The effective tax rate on adjusted earnings in 2009
was 25.5% which compares to an effective rate
of 26.4% for 2008. Our overseas profits, which
arise mainly in the US are largely subject to tax at
higher rates than the UK corporation tax rate (an
effective rate of 28% in 2009 compared to 28.5%
in 2008). Higher tax rates were more than offset by
amortisation-related tax deductions and releases
from provisions reflecting continuing progress in
agreeing our tax affairs with the authorities.
The reported tax charge on a statutory basis was
£198m (30.0%) compared to a charge of £172m
(29.4%) in 2008. The tax charge relating to the sale
of the Data Management business in February 2008
is included in the loss on discontinued businesses.
A charge arose on this disposal as although there is
a book loss there is a gain for tax purposes. Tax paid
in 2009 was £103m compared to £89m in 2008.
Discontinued operations
Discontinued operations in 2008 relates to Data
Management business that were sold on
22 February 2008.
Minority interests
Minority interests comprise mainly the 39% share
of Interactive Data Corporation, a US listed business.
Section 3 Our performance
31
Other comprehensive income
Included in other comprehensive income are the
net exchange differences on translation of foreign
operations. The loss on translation of £388m in
2009 compares to a gain in 2008 of £1,125m and
is principally due to movements in the US dollar.
A significant proportion of the Group’s operations
are based in the US and the US dollar strengthened
in 2008 from an opening rate of £1:$1.99 to a closing
rate at the end of that year of £1:$1.44. At the end of
2009 the US dollar had weakened in comparison to
the opening rate moving from £1:$1.44 to £1:$1.61.
Dividends
The dividend accounted for in our 2009 financial
statements totalling £273m represents the final
dividend in respect of 2008 (22.0p) and the interim
dividend for 2009 (12.2p). We are proposing a final
dividend for 2009 of 23.3p, bringing the total paid
and payable in respect of 2009 to 35.5p, a 5.0%
increase on 2008. This final 2009 dividend was
approved by the board in February 2010, is subject to
approval at the forthcoming AGM and will be charged
against 2010 profits. For 2009 the dividend is covered
1.8 times by adjusted earnings.
We seek to maintain a balance between the
requirements of our shareholders for a rising stream
of dividend income and the reinvestment opportunities
which we identify around the Group. The board expects
to raise the dividend more in line with earnings growth,
above inflation while building our dividend cover
towards two times earnings.
Pensions
Pearson operates a variety of pension plans. Our
UK Group plan has by far the largest defined benefit
section. We have some smaller defined benefit sections
in the US and Canada but outside the UK, most of our
companies operate defined contribution plans.
The income statement expense for defined benefit
plans is determined using annually derived
assumptions as to discount rates, investment returns
and salary inflation, based on prevailing conditions
at the start of the year. The assumptions for 2009
are disclosed in note 25 to our accounts, along with
the year end surpluses and deficits in our defined
benefit plans.
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Pearson plc Annual report and accounts 2009
Other financial information
continued
The charge to profit in respect of worldwide pensions
and post-retirement benefits amounted to £94m
in 2009 (2008: £76m) of which a charge of £82m
(2008: £84m) was reported in operating profit and
the net finance cost of £12m (2008 benefit: £8m)
was reported against net finance costs.
The overall surplus on the UK Group plan of £49m
at the end of 2008 has become a deficit of £189m at
31 December 2009. This is mainly due to an increase
in liabilities as a result of an increase in the expected
rate of future inflation, strengthening of mortality
assumptions and a decrease in the discount rate
used to value the liabilities.
Acquisitions
On 15 April 2009 the Group acquired Wall Street
English, China’s leading provider of premium English
language training to adults. On 15 July 2009 the Group
completed the purchase of an additional stake in
Maskew Miller Longman, its South African publishing
business.
Net cash consideration for all acquisitions made
in the year ended 31 December 2009 was £201m
and provisional goodwill recognised was £205m.
In total, acquisitions completed in the year
contributed an additional £88m of sales and £10m
of operating profit.
Return on invested capital (ROIC)
Our ROIC is calculated as adjusted operating profit
less cash tax, expressed as a percentage of average
gross invested capital. ROIC declined by 0.3%
from 9.2% in 2008 to 8.9% in 2009. Transactional
exchange gains, reported in adjusted operating profit
and caused by the relative weakness of sterling in
2008, helped our ROIC by 0.2% in that year. In 2009
these transactional exchange gains became losses,
as sterling strengthened for much of the year,
negatively impacting our ROIC by 0.1%. The majority
of transactional exchange gains and losses are in
our International Education business and to a lesser
extent it also impacts Penguin and the FT Group.
The movements predominantly arise in trading
companies that have significant revenues in multiple
currencies. In 2009 transactional exchange recorded
in operating profit was £27m lower than in 2008.
Capital expenditure
Net capital expenditure in the year on property,
plant equipment and software amounted to £126m.
The analysis of capital expenditure and details of
capital commitments are shown in notes 10, 11 and
33 of the financial statements.
Transactions with related parties
Transactions with related parties are shown in note 34
of the financial statements.
Post balance sheet events
During January 2010, the Group announced that
Interactive Data was undertaking a preliminary
review of strategic alternatives for its business.
At the date of this report, the outcome of the review
is still uncertain.
On 3 February 2010 the FT Publishing business
announced the acquisition of Medley Global Advisors
LLC a premier provider of macro policy intelligence to
the world’s top investment banks, hedge funds and
asset managers for $15.5m.
Supplier payment policy
Operating companies are responsible for agreeing
the terms and conditions under which business
transactions with their suppliers are conducted.
These supplier payment terms vary by operating
company reflecting the different industries and
countries in which they operate. It is company policy
that suppliers are aware of such terms of payment
and that payments to them are made in accordance
with these, provided that the supplier is also
complying with all the relevant terms and conditions.
Group trade creditors at 31 December 2009 were
equivalent to 32 days of purchases during the year
ended on that date. The company does not have any
significant trade creditors and therefore is unable to
disclose average supplier payment terms.
Principal risks and uncertainties: Group
Section 3 Our performance
33
We conduct regular risk reviews to identify risk
factors which may affect our business and financial
performance. Our Group internal audit function
facilitates risk reviews with each business, shared
service operations and corporate functions, identifying
measures and controls to mitigate these risks.
Management is responsible for considering and
executing the appropriate action to mitigate these
risks whenever possible. It is not possible to identify
every risk that could affect our businesses, and the
actions taken to mitigate the risks described below
cannot provide absolute assurance that a risk will not
materialise and/or adversely affect our business or
financial performance
As the current economic environment remains dynamic
and challenging, the risk of weak trading conditions
continues in 2010 which could adversely impact the
company’s financial performance. The outlook for the
company for 2010 is set out on page 15. The effect of a
continued deterioration in the global economy will vary
across our businesses and will depend on the depth,
length and severity of any economic downturn.
Our principal risks and uncertainties are outlined below.
Risk
Mitigating factors
Principal risks and uncertainties
A significant deterioration in Group profitability
and/or cash flow caused by a severe economic
depression 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.
The Group’s approach to funding is described on
page 30 and the Group’s approach to the management
of financial risks is set out in note 19 to the financial
statements.
Our US educational solutions and assessment
businesses may be adversely affected by changes
in state and local educational funding resulting
from either general economic conditions, changes
in government educational funding, programme and
legislation (both at the federal and state level), and/
or changes in the state procurement process.
Our customer relationship teams have detailed
knowledge of each state market. We are investing in
new and innovative ways to expand and combine our
product and services to provide a superior customer
offering when compared to our competitors, thereby
reducing our reliance on any particular funding stream
in the US market.
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.
Our intellectual property and proprietary rights may
not be adequately protected under current laws in
some jurisdictions and that may adversely affect our
results and our ability to grow.
Our reported earnings and cash flows may be
adversely affected by changes in our pension costs
and funding requirements.
We operate in a highly competitive environment that
is subject to rapid change and we must continue to
invest and adapt to remain competitive.
The Group’s policy on managing foreign currency risk
is described in note 19 to the financial statements.
We seek to mitigate this type of risk through general
vigilance, co-operation with other publishers and
trade associations, advances in technology, as well
as recourse to law as necessary. We take steps to
challenge illegal distribution sources.
We review our funding arrangements every three years
and will take steps to ensure pension funding plans
are sufficient to meet future liabilities without unduly
affecting the development of the company.
To remain competitive we continue to invest in our
authors, products, services, technology and people
to take advantage of these opportunities. There is no
guarantee that these investments will generate the
anticipated returns or protect us from being placed
at a competitive disadvantage with respect to scale,
resources and our ability to develop and exploit
opportunities.
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Pearson plc Annual report and accounts 2009
Principal risks and uncertainties: Group
continued
Risk
Mitigating factors
Principal risks and uncertainties (continued)
A major data privacy breach may cause reputational
damage to our brands and financial loss.
Other risks and uncertainties
At Penguin, changes in product distribution channel
and/or customer bankruptcy may restrict our ability
to grow and affect our profitability.
Reductions in advertising revenues and/or circulation
will adversely affect the profitability of our newspaper
business.
Operational disruption to our business caused by a
major disaster and/or external threats could restrict
our ability to supply products and services to our
customers.
A control breakdown or service failure in our school
assessment businesses could result in financial loss
and reputational damage.
Failure to generate anticipated revenue growth,
synergies and/or cost savings from acquisitions could
lead to goodwill and intangible asset impairments.
Through our global security office under the direction of
our Chief Security Officer, we have established various
data privacy and security programmes. We constantly
test and re-evaluate our data security procedures and
controls across all our businesses with the aim of
ensuring personal data is secured and we comply with
relevant legislation and contractual requirements.
We develop new distribution channels by adapting
our product offering and investing in new formats.
The application of strict credit control policies is used
to monitor customer debt and we work with industry
groups to minimise exposures (e.g. through retention
of title claims) in the event of default.
The diversification of the FT Group into other business
models and revenue streams, e.g. subscription based
businesses, digital revenues, business to business
products, conferences, in addition to its global reach,
offsets reliance on newspaper print advertising and
circulation revenue streams.
We have developed business continuity
arrangements, including IT disaster recovery plans
and back-up delivery systems, to minimise any
business disruption in the event of a major disaster.
The governance structure, overseen by a global
coordinator, provides the capability to centrally
monitor all related activities. A concerted effort
was undertaken to facilitate creation of pandemic
plans throughout Pearson. Insurance coverage may
minimise any losses in certain circumstances.
We seek to minimise the risk of a breakdown in
our student marking with the use of robust testing
procedures and controls, combined with our
investment in technology, project management
and skills development of our people.
We perform pre-acquisition due diligence and
closely monitor the post-integration performance
to ensure we are meeting operational and financial
targets. Any divergence from these plans will result
in management action to improve performance and
minimise the risk of any impairments. Executive
management and the board receive regular reports
on the status of acquisition performance.
Section 3 Our performance
35
Risk
Mitigating factors
Other risks and uncertainties (continued)
Changes in our tax position can significantly affect
our reported earnings and cash flows.
We employ internal tax professionals in the UK and
the US who review all significant arrangements around
the world and respond to changes in tax legislation.
They work closely with local management and external
tax advisors.
Our professional services and school 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 managed.
In addition to the internal business procedures and
controls implemented to ensure we successfully
deliver on our contractual commitments, we also seek
to develop and maintain good relationships with our
customers to minimise associated risks. We also look
to diversify our portfolio to minimise reliance on any
single contract.
We operate in markets which are dependent
on Information Technology (IT) systems and
technological change.
Investment returns outside our traditional core US
and UK markets may be lower than anticipated.
Social, environmental and ethical risk
We mitigate these IT risks by establishing strong IT
policies and operational controls, employing project
management techniques to manage new software
developments and/or system implementations and
have implemented an array of security measures to
protect our IT assets from attacks or failures that could
impact the confidentiality, availability or integrity of
our systems.
We draw on our experience of developing businesses
outside our core markets and our existing
international infrastructure to manage specific country
risks. We have strengthened our financial control
and managerial resources in these markets to mange
expansion. The diversification of our international
portfolio, and relative size of ‘emerging markets’ in
relation to the Group, further minimises the effect any
one territory could have on the overall Group results.
We consider social, environmental and ethical (SEE)
risks no differently to the way we manage any other
business risk. Our 2009 risk assessment did not
identify any significant under-managed SEE risks,
nor have any of our most important SEE risks, many
concerned with reputational risks, changed year-on-
year. These are: journalistic/author integrity, ethical
business behaviour, intellectual copyright protection,
compliance with UN Global Compact standards,
environmental impact, people and data privacy.
For more information, see the Pearson corporate
responsibility report Always learning: Our impact on
society. The web link is available at www.pearson.com/
responsibility/cr_report2009
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Pearson plc Annual report and accounts 2009
Our impact on society
At the end of 2009, Sir David Bell retired
as Pearson’s director for people and also
as the board director with oversight of
corporate responsibility. In his 39 years at
the company David did a huge amount to
define what corporate responsibility means
for Pearson and I am very pleased to take on
the role and to try to continue David’s work
in this field. It has always struck me that the
idea of being a responsible business – one
that makes a positive contribution to society
through effective learning, great books and
powerful journalism – is in many ways the
essence of Pearson.
Our strategy: Four key areas
1 Product quality and impact
2 Valuing our people
3 Sustainable business practice
4 Active citizenship
We report each year in conjunction with our annual
financial results, so that our people and our other
stakeholders can review our activity across the
company and all over the world. You’ll find a table
of last year’s targets and the new ones for 2010 at
the end of this section and a fuller overview of our
work over last year in our Always learning: Our impact
on society 2009 report. Our corporate website will
also be updated throughout the year if you’d like
to read more about our work and projects in detail,
and our Facebook page is regularly refreshed with
examples of our CR and sustainability work from
our businesses all over the world.
Please feel free to share any comments and suggestions
with me at robin.freestone@pearson.com
Robin Freestone
It starts with being a values-based organisation
(in our words, one that is ‘brave, imaginative and
decent’). It is not about what we say but about how
we behave across our large, complex and diverse
organisation. The kinds of businesses that we’re
in and the products that we make depend on our
earning (and constantly re-earning) the trust of our
readers, teachers and students for quality, accuracy
and independence. We are proud of Pearson’s long
history as a responsible business, but we always
feel that there is much more for us to do.
Pearson will continue to be that values-led company,
placing enormous importance on the impact
we have on the world through our products and
services. We are as determined to enhance the
learning experiences of our students (of all ages and
walks of life) as we are to reduce our impact on the
environment. Our goal remains simple: to be a socially
responsible company that has a positive impact on
society. We focus on our impact in four key areas:
Robin Freestone Chief financial officer
Board member responsible
for corporate responsibility
Our strategy
1 Product quality and impact
Across Pearson, our brands have a hard-won
reputation for quality: whether that is the FT for
accurate, insightful and independent business
journalism; Penguin for high-quality books of fiction
and non-fiction; or our education company for
effective learning materials.
We are a major investor in new content, new
services, new technologies: in 2009, we invested
approximately $800m in product development.
We adhere to external codes like those upheld by
the Press Complaints Commission, supplemented
by our own internal standards, and our editors and
Section 4 Our impact on society
37
journalists have freedom to make their own content
choices within those frameworks. We partner with
independent research agencies to measure the
effectiveness of our educational products in raising
student performance and institutional productivity,
and we have a range of processes for engaging with
our customers and other stakeholders to gain their
insights into how we can serve them better.
At the same time, we want to ensure that people
can access our books, newspapers and services in
whatever way suits them best and we work hard to
make that happen. For example, we have become
a major provider of technology services, with digital
revenues of £1.7bn in 2009. That transformation has
made our content and technology much more widely
available and accessible – for example through
the 1.8m registered users of FT.com; the millions of
buyers of Penguin eBooks; the 8.5m college students
using our online homework programmes.
2009 highlights include:
Education:
– We have been working to connect our products and
services to provide integrated learning platforms,
systems that make teaching more efficient and
learning more personal. In the US, our recently-
launched Project Tapestry is allowing teachers
to ‘connect the dots’ between student data,
analytics, content and curriculum. Educators can
view up-to-the-minute snapshots and in-depth
analysis of each student’s progress. This is the first
connected learning environment built specifically
for the US school market, the product of Pearson’s
collaboration with over 500 key education partners.
– In response to the alarming school drop-out
problem in the US, we also launched Prevent, a
software programme which aggregates the most
relevant and predictive student information data
to pinpoint which students are most likely to drop
out of school. This early warning system helps
teachers determine where best to prioritise their
time to prevent students leaving school without
a qualification.
– We are continuing to take highly effective learning
programmes and apply them around the world.
Our online homework and assessment services for
college students, the MyLabs, are now used by 6
million college students in America and close to
500,000 in more than 60 countries. In South Africa,
for example, our longitudinal study to determine
the impact of MyMathLab at the University of
Witwatersrand showed that the Lab has improved
results of 7,000 students from an average score
of 35% in the first semester to 65% in the second.
Pearson Southern Africa’s Maskew Miller Longman
Foundation is also working with the Ministry of
Education in four provinces, identifying ten of the
poorest schools in the country to support intensively
over the next three years with textbook provision
and teacher coaching.
Business information: The Financial Times newspaper
and FT.com continue to adhere to high standards of
ethical and professional journalism. The FT’s code
of practice for financial and business journalism goes
beyond the standards set by Britain’s Press Complaint
Commission, and compliance with the code is an
obligation for all FT staff. This year, the FT has sought
to further embrace the shift to digital rather than
paper-based media, now used by many of our readers
across the globe. In 2000, around two-thirds of the FT
Group businesses were print-focused. In 2009, digital
businesses represented over 73%. Since launching
on Amazon’s Kindle, the FT has seen steady growth
in subscriptions and remains one of the top selling
newspapers on the mobile device. The FT Facebook
page has also gone from strength to strength, with
‘Fans’ of the page numbering well over 21,000 across
all continents.
Consumer publishing: Penguin’s long and proud
history of championing free speech runs from our
1960’s publication of Lady Chatterley’s Lover right
through to our more recent publication of Professor
Deborah Lipstadt’s Denying the Holocaust. In 2009,
continuing this tradition, Penguin became a Silver
PEN partner in the UK and was the proud sponsor
of the 2009 PEN World Voices festival in New York,
the world’s oldest international literary and human
rights organisation. We adhere to high standards of
publishing around the world, taking care to protect
the efforts of our authors and our copyright and
trademarks. Penguin Group continues to support
authors and publish books that raise awareness
of environmental themes and global crises. One
important book this year was Rough Guide’s Clean
Breaks: 500 new ways to see the world by Richard
Hammond, (founder of greentraveller.co.uk) and
Jeremy Smith (former editor of The Ecologist), winner
of Planeta.com’s Book of the Year award 2009.
This book is the result of over a decade of travel,
researching holidays that have less of an impact
on the environment and genuinely give something
back to the destination, through conservation and/or
supporting local economies.
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Pearson plc Annual report and accounts 2009
Our impact on society
continued
2 Valuing our people
We work hard to attract and retain the most talented,
diverse workforce we can in all parts of Pearson.
Our people are the source of many of our best ideas
and we’re getting better at enabling the cross-
fertilisation of ideas across our business groups
and departments via social media and other means.
Our People departments have focused particularly on
the professional development, health and wellbeing
of Pearson people this year, with several businesses
highlighting Pearson-subsidised promotions and
opportunities available to staff. We have a Group level
health and safety policy, with numerous awareness
days and other good practice examples at work across
our offices. We have also paid particular attention
to developing emerging leaders in our developing
markets, running more training and leadership events
and courses in Asia and India in 2009, including our
new Emerging Leaders Programme this year. We are
further developing our communications programme
to include greater interactivity and collaboration
between our global staff through online meetings
and webinars, to add to the suite of large-scale
presentations from senior managers to staff around
the world and informal talks and seminars from
colleagues around the business.
The following table shows for 2009 and 2008 the
average number of people employed in each of our
operating divisions.
Average number employed
2009
2008
Pearson Education North America
15,606
15,412
Pearson Education International
8,899
5,718
Professional
FT Group
Penguin
Corporate
Continuing businesses
Discontinued businesses
Total
2009 highlights include:
2,662
2,641
4,787
4,792
4,163
1,047
4,112
909
37,164 33,584
96
37,164 33,680
0
Diversity and inclusion: We try hard to reflect the
societies in which we operate and while we don’t set
specific targets, we strive to have as diverse a pool
of applicants for our jobs and suppliers as we can.
We will always seek the best candidates for a role
without regard for race, gender, age, physical ability,
religion or sexual orientation, and have targets
for tracking our progress on specific elements of
that aim. We will make reasonable adjustment to
premises or employment arrangements if these
substantially disadvantage a disabled current or
prospective member of staff, and make every effort
to locate a suitable alternative role and/or training
for people unable to continue in their existing role
due to disability. Our diversity and inclusion teams
on both sides of the Atlantic continue to develop
our internship programmes for minority groups,
winning the Gold Standard in the 2009 Race for
Opportunity Benchmarking survey on race equality
in UK organisations. We continue to improve on
our recruitment and promotion of executives
from minority backgrounds to middle and senior
management levels, and feel that we still have much
to achieve in this area.
Health and wellbeing: Our company can only be as
healthy as our people, and we encourage our people
to stay fit, eat well and balance their professional
and personal lives. Pearson Benefits in the US
sponsored National Employee Health and Fitness
Day in May 2009. All US facilities with 50 or more
people participated in on-site biometric screenings.
The results were available immediately and over
2,300 staff had an opportunity to participate and
discuss their numbers with onsite nurse educators.
At Pearson in the UK, additional benefits will be in
place for 2010 including a Weightwatchers programme
in the workplace, health assessments and two online
health management programmes to help anyone
seeking to reduce high blood pressure, combat raised
cholesterol or manage their health more effectively.
People for the future: We have a lot of talented
people at every level of our company and we strive
to identify, nurture and promote them in a number
of ways. Our annual Forum brings together more
than 100 of our newest and brightest managers from
all over the world for a three-day session with the
Pearson Management Committee and other senior
managers, working on product innovation and
better integration of the content and assets across
the company. We launched our Emerging Leaders
Programme in 2009, bringing together people from
different businesses within one region to address
organisational and team challenges. 72 Pearson
people completed this programme in London, New
York, Hong Kong and Minnesota and in total, we ran
589 personal days of leadership development in 2009.
Section 4 Our impact on society
39
3 Sustainable business practice
Pearson undertook in 2007 to become a climate
neutral company by the end of 2009. We have reached
our target through a series of direct actions, including:
energy purchase and usage, investment in our
buildings, communications and transport, and in the
purchase of offset activity related to trees, the main
raw material for our books and newspapers.
We continue to work on our supply chain to find the
most environmentally-friendly way of producing the
books and newspapers we print, actively seeking an
FSC chain of custody for our paper supplies in the US for
next year. We have been included in FTSE4Good indices
since their inception and place great importance on
not compromising our standards of quality or causing
harm to our suppliers and their workers, wherever they
may be in the world. We are committed to complying
with the laws and regulations in all countries in which
we operate, and work hard to build local partnerships
as an active corporate citizen in emerging markets.
In this year’s global analysis of corporate sustainability
leadership by investment company SAM, Pearson was
rated as the lead company of the Media supersector
for the third year running as part of the Dow Jones
Sustainability World Index. We were also classified as
one of 100 Brand Emissions Leaders out of 600 brands
surveyed by Environmental Data Services magazine,
citing our ambitious carbon reduction targets and
strong disclosure. Our chief financial officer now has
board responsibility for matters relating to corporate
responsibility.
2009 highlights include:
Reducing our impact: In 2009, Pearson signed up to
the Copenhagen Communiqué1, pledging to reduce our
environmental impact while lobbying governments to
create an effective international climate framework.
Our formal environmental policy has been reviewed
and updated a number of times since its launch in
1992, most recently in 2008, which you can read in full
at www. pearson.com/environment. We completed the
switch to the international environmental management
standard ISO 14001 for all operating businesses
in the UK, and our businesses in Australia aim to
achieve certification in 2010. We committed to the
Carbon Standard as part of our response to the Carbon
Reduction Commitment, and have reduced our paper
requirements at both Pearson North America and
the FT. At Old Tappan, New Jersey – our first on-site
renewable energy project for Pearson worldwide – the
installation of solar panels is expected to reduce our
electricity use at Old Tappan by 295,000 KwH each
year, the equivalent of planting about 125,000 trees
over the 25-year life of the panels.
Developing our emerging markets: By sharing best
practice across Pearson, we can be more effective
in our actions as a good corporate citizen in our
developing markets. Penguin India has taken a
number of freight initiatives which have saved a
significant amount of fuel expenditure, increasing
the number of books printed in India on behalf of
Penguin UK, Penguin USA, Sterling and Bloomsbury to
avoid the carbon emissions from moving 95 tonnes of
books from the UK/USA to India. Penguin India is also
forming an association with other companies in the
community in Panchsheel to lobby government bodies
to resolve issues such as poor parking facilities, faulty
drainage and generators adding to the pollution and
health and safety concerns in the area. The formation
of Pearson Southern Africa – bringing together our
education businesses in the region – means our
company is now active in 12 developing countries
in the region and employs, trains and develops
local staff in each. By underpinning our educational
and commercial imperative, with respect for the
African environment, we can use our position as
market leader to promote education in local cultures
and languages to maintain a sustainable, socially
responsible business.
Staff activity: Green Teams of volunteers are growing
in size, structure and activity at various Pearson
offices in India, the US, Australia, the UK, Canada and
now South Africa. Several teams have also named
specific Green Champions within their areas, tasking
colleagues to help each other understand the small
steps they can each take to make a big difference to
reducing the environmental impact of their department
or building. Planet Pearson – a cross-company
environmental intranet site launched in 2008 as a pilot
in the US – continues to expand in usage across our
businesses in the US and Canada. The site serves as a
communications hub where Pearson people can share
ideas, resources and suggestions on the many eco-
friendly initiatives taking place around the company.
It has already helped significantly to raise awareness
– Pearson North America’s recent ‘Go Green Survey’
showed that 95% of respondents think it is important
to work for a ‘Green’ employer, and 80% were aware
of the company goal to be climate neutral by the end
of 2009.
1 The Copenhagen Communiqué was a short statement from the global
business community to international governments, synthesising
some of the key thinking that has come from business over the last
two years.
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Pearson plc Annual report and accounts 2009
Our impact on society
continued
4 Active citizenship
Pearson’s people are some of the most active citizens
you will meet. We match their fundraising wherever
we can and run a number of volunteer schemes for
staff to give some of their working day to community
programmes. Everything the Pearson Foundation, our
charitable arm, does promotes literacy and education
on a global scale, working with partner organisations
to help level the playing field for those without ready
access to education. In 2009, Pearson’s charitable
giving totalled £10.5m (2008: £7.7m). We give in a
variety of ways, including provision of in-kind support
such as books, website hosting, digital solutions and
publishing expertise, as well as providing opportunities
for staff to support their personal choice of charity
through payroll giving schemes.
2009 highlights include:
The Pearson Foundation: Our Foundation allows
us to promote education on an international level,
partnering with other leading businesses and not-for-
profit organisations to extend educational opportunity.
We bring together experts to share good practice, to
foster innovation and try to find workable solutions to
the educational disadvantage facing millions of young
people and adults across the globe.
In 2009, we continued our sponsorship of the
annual Citi-FT Financial Education Summit, held in
Singapore this year, and we organised the second
Pearson International Education Summit in Helsinki, in
conjunction with the US Council of Chief State School
Officers. Our US flagship literacy campaign, Jumpstart’s2
Read for the Record continued to expand in 2009, as
Pearson people around the world helped once again
break our own record for the world’s largest shared
reading experience and raise funds for early education
in low-income communities. More than two million
participants read Eric Carle’s classic The Very Hungry
Caterpillar at organised events across the US, Brazil,
and Europe, with Pearson donating over 275,000
Penguin books to children in need, and raising more
than $1.5m to support Jumpstart’s work.
2 Jumpstart for Young Children is a national non-profit based out
of Boston, Massachusetts after being founded in Yale University
in 1993 to help prepare pre-school children to succeed in their
primary education.
3 Booktime was launched by Pearson in association with independent
charity Booktrust, to promote the pleasure of reading and encourage
parents and carers to read aloud with their children.
Pearson people power: Our staff are passionate about
volunteering, with many taking part in the organised
reading schemes and other community programmes
we offer at company level, in partnership with local
organisations. This year, more than 200 Pearson UK
people volunteered in schools local to our offices,
reading with primary school children once a week as
part of Booktime3. In 2008/09, our Booktime volunteers
gave over 4,000 hours of their time to help children
enjoy reading. We held our Pearson Community
Awards under the chairmanship of our new director
for people, Robin Baliszewski, and learned of the
hundreds of people across our company taking on
charitable endeavours in their spare time. The variety
of activities included running winter clothing drives
for the homeless, delivering emergency veterinary
care for abandoned animals, performing as a clown in
public hospitals and teaching at a community project
for young refugees and migrants. We celebrated seven
of those volunteers through our annual awards, making
a donation of $2,000 to their chosen charity and giving
certificates of Special Commendation to three other
volunteer groups.
Corporate engagement: Each operating company
has a number of different initiatives they’re involved
in, each promoting literacy in one way or another.
We support local schools and colleges, promote or
sponsor conferences, and form partnerships with other
organisations with similar aims. In partnership with
UK charity Booktrust and the Department for Children,
Schools and Families, Pearson gave out 750,000 free
Booktime book packs to every child starting school
in England, Scotland and Northern Ireland this year,
each containing Ed Vere’s Mr Big. Children in England
also received a copy of the Booktime Book of Fantastic
First Poems, edited by June Crebbin. Building on the
success of last year’s UK event, the Penguin Group
staged its first global Penguin Walk, involving over
1,000 staff members around the world to raise funds
for the UN Environmental Programme’s ‘Plant a Billion
Trees’ campaign and develop our 96-acre Penguin
Wood in the UK. The FT launched its annual seasonal
appeal to support Room to Read, which works with
local communities in the developing world to provide
schools, libraries and educational scholarships for
girls. By the end of 2010, it aims to provide over 11,000
communities access to their first library and has a
long-term goal of reaching 10 million children in the
developing world by 2020. Running from November
to January each year, the FT’s annual appeal includes
editorial reports about the charity, and print and online
marketing that encourages readers to donate. In the
previous three years, the seasonal appeal has raised
nearly £2.4m for WaterAid and Camfed International.
Our impact on society: Progress and plans
Section 4 Our impact on society
41
1 Product quality and impact
Target 2009
Progress
Plan 2010
Continue and expand the Pearson
Foundation/Council of Chief State
School Officers (CCSSO) Educational
Summit to include a focus on teacher
quality and training, one of the key
learnings of the Singapore convening.
Extend the Pearson Professional
Development Program for African
educators to involve education
leaders in a cross-country dialogue
addressing key education needs
and solutions.
2 Valuing our people
Achieved. In September 2009,
CCSSO and the Pearson Foundation
welcomed more than 40 international
education leaders to the second
annual Pearson Foundation/CCSSO
International Conference on Education
in Helsinki, Finland. The aim was
for the international delegation to
learn from Finland’s own success
in preparing its K-12 and university
educators to meet the demands of
an increasingly inter-connected and
technologically advanced workforce.
Achieved. This programme has now
run for the second year, spearheaded
by the Pearson Foundation and
Pearson Southern Africa teams.
The 2009 programme included
training teachers in Literacy and
Numeracy, ECD and Technology
in Botswana, South Africa, Zambia,
Namibia and Tanzania.
Continue the summit at an event in
London in 2010 to include a focus
on ICT in education, a key concern
for educators in the classroom and
for administrators hoping to improve
academic systems, assessments
and reporting.
Continue to provide professional
development for educators and
administrators in Southern Africa
and to integrate this programming
with educational programming that
is based on the Bridgeit model first
introduced in Tanzania in 2009.
Target 2009
Progress
Plan 2010
Focus our international moves to
develop our rising stars and create
assignments that even more closely
match our corporate priorities.
Show evidence of progress in
retention of people with diverse
backgrounds for both entry level and
management positions by tracking
the success of women, people from
minority ethnic backgrounds and
those with a disability within Pearson.
Develop more programmes and
relationships to attract talented
people from the above groups into
our business.
Target ongoing
Target achieved
New target for 2010
Ongoing. The NewDirections team
has now aligned the initiative with
our annual talent review process and
worked hard to create greater synergy
between NewDirections placements
and the business needs of Pearson
in each of the regions.
Achieved. We have maintained the
segment of our UK workforce from
a minority ethnic background (14%)
and minority representation in the
US workforce now stands at 20.6%,
up from 19.9% in 2008. Minority
managers still make up 12% of the
US management team. About 60% of
Pearson UK staff are female (compared
with 51% of the UK population) and
62% of Pearson UK’s managers are
female. Pearson wide, 27% of Pearson
top 100 managers are female.
In the UK, Pearson was awarded
Gold Standard in the 2009 Race for
Opportunity Benchmarking survey on
race equality in UK organisations, and
our UK diversity summer internship
programme was shortlisted for the
Race for Opportunity Widening the
Talent Pool Award for work to increase
the diversity of our workforce.
Continue to develop our emerging
leaders through international
experience and support Pearson’s
needs in our developing markets.
Continue to show evidence of
progress in retention of people
with diverse backgrounds for
both entry level and management
positions by tracking the success
of women, people from minority
ethnic backgrounds and those
with a disability within Pearson.
Continue to develop programmes
and relationships to attract talented
people from the above groups into
our business.
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Pearson plc Annual report and accounts 2009
Our impact on society: Progress and plans
continued
2 Valuing our people continued
Target 2009
Progress
Plan 2010
Increase our capacity to combine
training opportunities for our staff
with opportunities to partner with
schools, colleges and not-for-profits.
Continue to develop our capacity to
combine training opportunities for our
staff with opportunities to partner with
schools, colleges and not-for-profits.
Ongoing. Edexcel staff in London
have partnered with a nearby school
to provide career coaching and
mentoring to students. Students in
the UK now benefit from a Pearson
Student Advisory Board, mirroring the
established PSAB in the US to provide
student feedback and input to Pearson,
while offering mentoring and internship
opportunities to talented students.
3 Sustainable business practice
Continue to expand our network of
environmental teams across our
businesses. Directly involving many
more of our people.
Ongoing. Our Green Teams are now
flourishing in Pearson facilities across
the UK, the US, Canada, Australia, India
and Southern Africa.
Continue to expand and consolidate
our network of environmental teams
across our businesses.
Hold training refresher seminars
with key Pearson production
departments on labour standards
and environmental issues.
Achieved. We are working with
relevant production staff at the
Financial Times to review processes
and environmental concerns.
Continue the process of becoming
a climate neutral company
Achieved. Pearson reached climate
neutrality at the end of 2009 following
a two-year programme of investment
and offset activity.
Programmes of activity include:
Highlights include:
Extend Planet Pearson, a new website
designed by Pearson staff in the US,
to be available internationally.
Continue programme to ensure our
key buildings are energy efficient.
International roll-out of Planet Pearson
is ongoing, but the site is now
available to staff in Canada and at
many locations in the US.
Carried out substantial investment
in server virtualisation across US,
Australia and the UK. Completed the
ISO 14001 environmental management
system for businesses in the UK.
Having completed our 2007
commitment, we are considering our
next steps and will communicate
our longer term environmental
commitment later this year.
Programmes of activity will include:
Further development of the Planet
Pearson website by Pearson staff.
Continuation of our programme
to make our key buildings energy
efficient.
FT newspaper to assess feasibility of
setting up its own offset programme.
FT newspaper successfully set up its
own offset programme by developing
the FT Rainforest in Costa Rica.
Completing the ISO 14001
environmental management system
for our business in Australia.
Purchase ‘green’ energy where
available and affordable.
Shifting to purchase green electricity
wherever possible in the UK and US,
equivalent to 100,000 metric tonnes
of CO2.
Generating renewable electricity via
the solar panels on the roof of our
Old Tappan site in New Jersey, US.
Continue to work with industry
partners to establish a methodology
to assess the carbon footprint of
a book.
Ongoing. Penguin UK has now
measured the carbon footprint of a
medium size paperback book, and this
is in progress at Pearson Education.
Continue to work with industry
partners to establish a methodology
to assess the carbon footprint of
a textbook.
Section 4 Our impact on society
43
3 Sustainable business practice continued
Target 2009
Progress
Plan 2010
Maintain our position in the key
indices of social responsibility.
Achieved. Pearson retained its
position as Global Leader for the
Media Sector in the Dow Jones
Sustainability Indices and its
Platinum rating in the Business in the
Community Responsibility Index.
Maintain our position in the key
indices of social responsibility.
New target Establish a total carbon
footprint identification initiative for
our company.
New target Establish FSC chain of
custody certification for our paper use
in our North American businesses.
4 Active citizenship
Target 2009
Progress
Plan 2010
Increase the number of children
reached through these campaigns,
expanding Booktime once again and
rolling out Jumpstart’s Read for the
Record programme internationally.
Increase the number of interventions
we make to facilitate constructive
debate on key contemporary issues
Achieved. Booktime: 750,000 book
packs donated to children in schools
across England, Scotland and
Northern Ireland.
Read for the Record: Pearson people
around the world again helped set a
new world record for the largest ‘shared
reading experience’ for Jumpstart’s
2009 campaign. Shared more than
two million books and raised $1.5m
for Jumpstart’s year-round operations,
helping to draw national attention to
the US early education crisis.
Achieved. The FT held its first
conference on corporate responsibility
and investing in March 2009 – the FT
Sustainable Business and Responsible
Investing Conference in New York.
Plans are underway for a live panel
debate at Pearson’s London head office
on the responsibility priorities for a
21st century media organisation, to be
streamed in real-time via an interactive
social media platform.
Target ongoing
Target achieved
New target for 2010
Increase the impact on children
and adults reached through these
campaigns, focusing Booktime
funds more strategically and rolling
out Jumpstart's Read for the Record
programme further internationally.
Increase the number of interventions
we make to facilitate constructive
debate on key contemporary issues
New target Launch the Pearson
Prize in the US, identifying students
currently in a two- or four-year
college/university who are working
on specific projects that support their
institution and/or local communities,
and providing a package of financial
and in-kind support to help these
students finish their college careers.
i
For a more in-depth look back over our activity as a corporate citizen in 2009, please go to our
Always learning: Our impact on society 2009 report www.pearson.com/responsibility/cr_report2009
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Pearson plc Annual report and accounts 2009
Board of directors
Chairman
Executive directors
Marjorie Scardino, • chief
executive, aged 63, joined
the Pearson board in January
1997. She trained and
practised as a lawyer, and
was chief executive of
The Economist Group from
1993 until joining Pearson.
She is also vice chairman of
Nokia Corporation and on the
boards of several charitable
organisations.
Will Ethridge, chief executive,
Pearson North American
Education, aged 58, joined
the Pearson board in May
2008, having held a number
of senior positions within
Pearson Education, including
CEO of the International and
Higher Education divisions.
He is chairman of
CourseSmart, a publishers’
digital retail consortium and
chairman of the Association
of American Publishers.
Glen Moreno, †• chairman,
aged 66, was appointed
chairman of Pearson on
1 October 2005 and is
chairman of the nomination
committee. He is a director of
Fidelity International Limited
and effective 1 March 2010,
was appointed a non-executive
director of Lloyds Banking
Group plc and became their
senior independent director.
He was previously 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
government’s shareholdings
in UK banks.
Non-executive directors
Patrick Cescau,*• aged 61,
is a non-executive director
of Tesco plc and joined the
board of directors of INSEAD,
the Business School for the
World, in June 2009. He was
previously group chief
executive of Unilever.
He became a non-executive
director of Pearson in
April 2002.
David Arculus,*†• aged 63,
is a non-executive director
of Telefónica SA and was
appointed chairman of
Numis Corporation plc in
May 2009. His previous roles
include chairman of O2 plc,
Severn Trent plc and IPC
Group, chief operating officer
of United Business Media plc
and group managing director
of EMAP plc. He became a
non-executive director of
Pearson in February 2006
and is chairman of the
personnel committee.
Terry Burns,†• aged 65,
is chairman of Santander UK
and Glas Cymru Limited and
is a non-executive director of
Banco Santander SA. He was
recently appointed chairman
of the Channel 4 Television
Corporation. He was previously
chairman of Marks and
Spencer Group plc. He was
the UK government’s chief
economic adviser from 1980
until 1991 and Permanent
Secretary of HM Treasury from
1991 until 1998. He was
appointed a non-executive
director of Pearson in May
1999 and senior independent
director in February 2004.
Executive directors
Section 5 Governance
45
Non-executive directors
* A member of the audit committee.
† A member of the personnel
committee.
• A member of the nomination
committee.
Rona Fairhead, chairman
and chief executive of The
Financial Times Group, aged
48, joined the Pearson board
in June 2002 as chief
financial officer. She was
appointed chief executive of
The Financial Times Group
in June 2006 and became
responsible for Pearson VUE
in March 2008. From 1996
until 2001, she served as
executive vice president,
group control and strategy at
ICI. She is also chairman of
Interactive Data, a non-
executive director of HSBC
Holdings plc and chairs the
HSBC audit committee.
Robin Freestone, chief
financial officer, aged 51,
joined Pearson in 2004 as
deputy chief financial officer
and became chief financial
officer in June 2006, when
he also joined the Pearson
board. He was previously
group financial controller
of Amersham plc (now part
of GE). He qualified as a
chartered accountant with
Touche Ross (now Deloitte).
He is also a non-executive
director and founder
shareholder of eChem
Limited.
John Makinson, chairman
and chief executive of The
Penguin Group, aged 55,
joined the Pearson board in
March 1996 and was finance
director until June 2002.
He was appointed chairman
of The Penguin Group in May
2001. He is also chairman of
the Institute for Public Policy
Research, director of The
Royal National Theatre and
trustee of The International
Rescue Committee (UK).
Susan Fuhrman,*• aged 65,
is president of Teachers
College at Columbia
University, America’s oldest
and largest graduate school
of education and president
of the National Academy
of Education. She 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.
She became a non-executive
director of Pearson in
July 2004.
Ken Hydon,*†• aged 65,
is a non-executive director
of Reckitt Benckiser Group
plc, Royal Berkshire NHS
Foundation Trust and
Tesco plc. He was previously
financial director of
Vodafone Group plc and
of subsidiaries of Racal
Electronics. He became a
non-executive director of
Pearson in February 2006
and is chairman of the
audit committee.
CK Prahalad, • aged 68,
is a distinguished university
professor of corporate
strategy and international
business at The University
of Michigan Business School.
He is a non-executive
director of NCR Corporation
and Hindustan Unilever
Corporation and director of
the World Resources Institute
and The Indus Entrepreneurs.
He became a non-executive
director of Pearson in
May 2008.
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t
s
46 Pearson plc Annual report and accounts 2009
Board governance
Directors
The present members of the board, together with their
biographical details, are shown on pages 44 and 45.
The chairman was appointed to the board of Lloyds
Banking Group plc, effective 1 March 2010. Given his
retirement from two major boards in 2009, both the
chairman and the Pearson board are confident that he
can carry out his new role without diluting his time
commitment to Pearson.
Details of directors’ remuneration, interests and dealings
in ordinary shares and options of the company are
contained in the report on directors’ remuneration
on pages 56 to 78.
In accordance with good corporate governance, the
board has resolved that all directors should offer
themselves for re-election on an annual basis at the
company’s Annual General Meeting (AGM). Accordingly,
all eligible directors will offer themselves for re-election
at the forthcoming AGM on 30 April 2010.
Details of directors’ service agreements can be found on
pages 66 and 67.
Corporate governance
Introduction
The board believes that the company is in full
compliance with Section 1 of the Combined Code 2008
(The Code). A detailed account of the provisions of the
Code can be found on the company website at
www.pearson.com/investors/shareholder-
i
information/governance
Composition of the board
The board consists of the chairman, Glen Moreno,
five executive directors including the chief executive,
Marjorie Scardino, and six independent non-executive
directors. Terry Burns, Pearson’s senior independent
director, will be retiring at the forthcoming AGM and
will not offer himself for re-election. The nomination
committee is currently recruiting an independent
non-executive director to replace Terry.
Senior independent director
Terry Burns was appointed senior independent
director in 2004. His role includes being available to
shareholders if they should have concerns that have
not been addressed through the normal channels, and
attending meetings with shareholders in order to gain a
balanced understanding of any concerns that they might
have. The senior independent director also meets with
the non-executive directors at least once a year in order
to appraise the performance of the chairman, and
would be expected to chair the nomination committee
in the event that it was considering succession to the
role of chairman of the board. Following Terry’s
retirement, Patrick Cescau will be appointed senior
independent director.
Independence of directors
The board reviews the independence of each of the
non-executive directors annually. This includes
reviewing their external appointments and any
potential conflicts of interest as well as assessing
their individual circumstances.
Although Terry Burns has served on the board for more
than nine years, the board believes that due to his
experience, knowledge and objectivity, he continued to
be a highly effective non-executive director throughout
the year.
All of the other non-executive directors, including
the chairman, were considered by the board to be
independent for the purposes of the Code during the
year ended 31 December 2009.
Conflicts of interest
From October 2008, directors have had a statutory
duty under the Companies Act 2006 (the Act) to avoid
conflicts of interest with the company. As permitted
by the Act, the company adopted new Articles of
Association at its AGM in 2008 to allow the directors
to authorise conflicts of interest. The company has
established a procedure to identify actual and potential
conflicts of interest, including all directorships or other
appointments to companies which are not part of the
Pearson Group and which could give rise to actual or
potential conflicts of interest. Such conflicts are then
considered for approval by the board. The potential
conflicted director cannot vote on an authorisation
resolution or be counted in the quorum. The board
reviews on an annual basis any authorisations granted.
Section 5 Governance
47
Board meetings
The board meets six times a year and at other times as appropriate. The following table sets out the attendance of
the company’s directors at board and committee meetings during 2009:
Chairman
Glen Moreno
Executive directors
Marjorie Scardino
David Bell•
Will Ethridge
Rona Fairhead
Robin Freestone
John Makinson
Non-executive directors
David Arculus
Terry Burns
Patrick Cescau
Susan Fuhrman
Ken Hydon
CK Prahalad
• Resigned from the board on 1 May 2009.
The role and business of the board
The formal matters reserved for the board’s decision and
approval include:
The company’s strategy and review of performance
against it;
Major changes to the company’s corporate structure;
Approval of all shareholder documents;
Acquisitions, disposals and capital expenditure projects
above certain thresholds;
All guarantees over £10m;
Treasury policies;
The interim and final dividends and the financial
statements;
Borrowing powers;
Ensuring adequate succession planning for the board
and senior management;
Appointments to the board; and
The appointment and removal of the company secretary.
Board
meetings
(maximum 6)
Audit
committee
meetings
(maximum 4)
Personnel
committee
meetings
(maximum 4)
Nomination
committee
meetings
(maximum 2)
6/6
6/6
2/2
6/6
6/6
6/6
5/6
6/6
6/6
6/6
5/6
6/6
5/6
–
–
–
–
–
–
–
4/4
–
4/4
3/4
4/4
–
4/4
2/2
–
–
–
–
–
–
4/4
4/4
–
–
4/4
–
2/2
–
–
–
–
–
2/2
2/2
2/2
2/2
2/2
2/2
The board receives timely, regular and necessary
financial, management and other information to fulfil its
duties. Directors can obtain independent professional
advice at the company’s expense in the performance of
their duties as directors. All directors have access to the
advice and services of the company secretary.
We endeavour to give non-executive directors access
to the senior managers of the business via involvement
at both formal and informal meetings. In this way we
hope that the experience and expertise of the
non-executive directors can be utilised for the benefit
of the company. At the same time, this practice enables
the non-executive directors to develop an understanding
of the abilities of senior management which will help
them judge the company’s prospects and plans
for succession.
Board evaluation
For the review of 2008, conducted early in 2009, the
chairman asked the directors to complete an evaluation
questionnaire which was targeted specifically around
issues of strategy and risk management. Responses to
this questionnaire and from face-to-face meetings with
the chairman were gathered and communicated to the
board at the May 2009 board meeting.
48 Pearson plc Annual report and accounts 2009
Board governance continued
This process reinforced the view that strategy remained
a key focus for the board in 2009. As a direct result of
these discussions, strategic reviews of International
Education and Education Technology were held in June
and October respectively and the Pearson strategic plan
was reviewed and updated in December.
The evaluation of 2009 is currently underway.
The chairman is conducting detailed interviews with
all directors to ensure the board is effectively focused
on its agreed priorities: governance; strategy; business
performance and people. The outcome of this review will
be discussed at the April 2010 board meeting. The board
anticipates using an external advisor for its 2010 review.
In addition, during the course of the year the executive
directors were evaluated by the chief executive on
their performance against personal objectives under
the company’s standard appraisal mechanism.
The chairman leads the assessment of the chief
executive and the senior independent director conducts
a review of the chairman’s performance.
Directors’ training
Directors receive a significant bespoke induction
programme and a range of information about Pearson
when they join the board.
This includes background information on Pearson and
details of board procedures, directors’ responsibilities
and various governance-related issues, including
procedures for dealing in Pearson shares and their legal
obligations as directors. The induction also includes
a series of meetings with members of the board,
presentations regarding the business from senior
executives and a briefing on Pearson’s investor relations
programme. We supplement the existing directors’
training programme through continuing presentations
at board meetings about the company’s operations,
by holding board meetings at overseas locations and by
encouraging the directors to visit operating companies
and local management as and when their schedule
allows. Externally run courses are also made available
should directors wish to make use of them.
Directors’ indemnities
In accordance with section 232 of the Companies Act
2006 (the Act), the company grants an indemnity to all
of its directors. The indemnity relates to costs incurred
by them in defending any civil or criminal proceedings
and in connection with an application for relief under
sections 661(3) and (4) or sections 1157(1)-(3) of the
Act, so long as it is repaid not later than when the
outcome becomes final if: (i) they are convicted in the
proceedings; (ii) judgment is given against them; or
(iii) the court refuses to grant the relief sought.
The company has purchased and maintains directors’
and officers’ insurance cover against certain legal
liabilities and costs for claims in connection with any
act or omission by such directors and officers in the
execution of their duties.
Dialogue with institutional shareholders
There is an extensive programme for the chairman, CEO,
executive directors and senior managers to meet with
institutional shareholders. The non-executive directors
meet informally with shareholders both before and
after the AGM, and respond to shareholder queries and
requests. The chairman and senior independent director
make themselves available to meet any significant
shareholder as required. Makinson Cowell and the
company’s investor relations department report to the
board on the results of a comprehensive survey on major
shareholders’ views.
Furthermore, reports on changes in shareholder
positions and views are given to the directors at every
board meeting.
Board committees
The board has established three committees:
the audit committee, the personnel committee and the
nomination committee. Chairmen and members of
these committees are appointed by the board on the
recommendation (where appropriate) of the nomination
committee and in consultation with each requisite
committee chairman.
Audit committee report
Ken Hydon audit committee chairman
Members Ken Hydon, David Arculus, Patrick Cescau
and Susan Fuhrman
All of the audit committee members are independent
non-executive directors and have financial and/or
related business experience due to the senior positions
they hold or held in other listed or publicly traded
companies and/or similar public organisations.
Ken Hydon, chairman of the committee, is the
company’s designated financial expert. He is a fellow
of the Chartered Institute of Management Accountants,
the Association of Chartered Certified Accountants
and the Association of Corporate Treasurers. He also
serves as audit committee chairman for Tesco plc,
Reckitt Benckiser Group plc and Royal Berkshire NHS
Foundation Trust.
The qualifications and experience of the other committee
members are detailed on pages 44 and 45.
Section 5 Governance
49
The committee has written terms of reference which
clearly set out its authority and duties. These are
reviewed annually and can be found on the company
website at www.pearson.com/investors/
shareholder-information/governance
i
The committee has been established by the board
primarily for the purpose of overseeing the accounting,
financial reporting, internal control and risk management
processes of the company and the audits of the financial
statements of the company.
The committee is responsible for assisting the board’s
oversight of the quality and integrity of the company’s
external financial reporting and statements and
the company’s accounting policies and practices.
The Group’s internal and external auditors have direct
access to the committee to raise any matter of concern
and to report on the results of work directed by the
committee. The committee reports to the full board on a
regular basis but no less frequently than at every board
meeting immediately following a committee meeting.
It also reviews the independence of the external
auditors, including services supplied, and ensures that
there is an appropriate audit relationship. Based on
management’s recommendations, the committee
reviews the proposal to reappoint the external auditors.
The committee evaluated the performance of the
external auditors during the year and remains satisfied
with their effectiveness. The committee will continue to
review the performance of the external auditors on an
annual basis and will consider their independence and
objectivity, taking account of all appropriate guidelines.
There are no contractual obligations restricting the
committee’s choice of external auditors. In any event, the
external auditors are required to rotate the audit partner
responsible for the Group audit every five years.
The current lead audit partner has been in place
for two years.
The committee receives regular technical updates as
well as specific or personal training as required.
The committee met four times during the year with the
chief financial officer, head of Group internal audit,
members of the senior management team and the
external auditors in attendance. The committee also met
regularly in private with the external auditors and the
head of Group internal audit. Some members of the
committee attended site visits to a number of overseas
locations in order to better understand how Group
policies are embedded in operations.
At every meeting, the committee considered reports on
the activities of the internal audit function, including
the results of internal audits, risk reviews, project
assurance reviews, and fraud and whistleblowing
reports. The committee also monitored the company’s
financial reporting, internal controls and risk
management procedures and considered any significant
legal claims and regulatory issues in the context of their
impact on financial reporting.
Specifically, the committee considered the following
matters during the course of the year:
The annual report and accounts: preliminary
announcement and trading update;
The Group accounting policies;
Compliance with the Combined Code;
The Form 20-F and related disclosures including the
annual Sarbanes-Oxley Act 404 attestation of financial
reporting internal controls;
Receipt of external auditor report on Form 20-F and on
the year end audit;
Assessment of the effectiveness of the company’s
internal control environment;
Reappointment of external auditor;
Appointment of new head of Group internal audit
function;
Review of the interim management statement;
Review of the effectiveness of the audit committee and a
review of both the internal and external auditors;
Annual approval of the internal audit mandate;
Compliance with SEC & NYSE requirements including
Sarbanes Oxley;
Review of interim financial statements and
announcement;
Approval of external audit engagement, scope and fees;
Approval of external audit policy;
Review of committee’s terms of reference;
Review of link between Pearson and IDC’s audit
committees;
Annual internal audit plan including resourcing of the
internal audit function;
Review of company risk returns including Social, Ethical
and Environmental (SEE) risks; and
Annual review of treasury policy.
50
Pearson plc Annual report and accounts 2009
Board governance continued
Personnel committee report
David Arculus personnel committee chairman
The committee has written terms of reference which
clearly set out its authority and duties. These can be
found on the company website at www.pearson.com/
investors/shareholder-information/governance
i
Members David Arculus, Terry Burns, Ken Hydon
and Glen Moreno
Internal control
The personnel committee has responsibility for
determining the remuneration and benefits packages
of the executive directors, the chief executives of the
principal operating companies and other members of the
management committee, as well as recommending the
chairman’s remuneration to the board for its decision.
The committee takes independent advice from
consultants when required. No director takes part
in any discussion or decision concerning their own
remuneration. The committee reports to the full board
and its report on directors’ remuneration, which has
been considered and adopted by the board, is set out
on pages 56 to 78.
The committee met three times during the year, and
has written terms of reference which clearly set out
its authority and duties. These can be found on the
company website at www.pearson.com/investors/
shareholder-information/governance
i
On Terry Burns’ retirement from the board, Patrick
Cescau will join the personnel committee.
Nomination committee report
Glen Moreno nomination committee chairman
Members Glen Moreno, Marjorie Scardino, David Arculus,
Terry Burns, Patrick Cescau, Susan Fuhrman, Ken Hydon
and CK Prahalad
The nomination committee meets as and when required.
The committee primarily monitors the composition and
balance of the board and its committees, and identifies
and recommends to the board the appointment of
new directors.
When considering the appointment of a new director
the committee reviews the current balance of skills and
experience of the board.
Whilst the chairman of the board chairs this committee,
he is not permitted to chair meetings when the
appointment of his successor is being considered
or during a discussion regarding his performance.
During 2009 the committee met to review succession
planning for non-executive and executive board
positions, as well as board committee assignments.
The board of directors has overall responsibility for
Pearson’s system of internal control, which is designed
to manage the risks facing the Group, safeguard assets
and provide reasonable, but not absolute, assurance
against material financial misstatement or loss.
In accordance with the provisions of the Code,
the directors confirm that they have reviewed the
effectiveness of the Group’s internal control system.
They also confirm that there is an ongoing process
allowing for the identification, evaluation and
management of significant business risks. This ongoing
process accords with the revised Turnbull guidance and
has been in place throughout 2009 and up to the date of
approval of this annual report.
The Group’s internal control framework covers financial,
operational and compliance risks. Its main features are
described below:
i. Board
The board of directors exercises its control through an
organisational structure with clearly defined levels of
responsibility and authority and appropriate reporting
procedures. To maintain effective control over strategic,
financial, operational and compliance matters the board
meets regularly, and has a formal schedule of matters
that is brought to it, or its duly authorised committees,
for attention. Responsibility for monitoring financial
management and reporting, internal control and risk
management has been delegated to the audit committee
by the board. At each meeting, the audit committee
considers reports from management, internal audit
and the external auditors, with the aim of reviewing the
effectiveness of the internal financial and operating
control environment of the Group.
ii. Operating company controls
The identification and mitigation of major business risks
is the responsibility of operating company management.
Each operating company, including the corporate
centre, maintains internal controls and procedures
appropriate to its structure and business environment,
whilst complying with Group policies, standards and
guidelines. These controls include those over external
financial reporting which are documented and tested in
accordance with the requirements of section 404 of the
Sarbanes-Oxley Act, which is relevant to our US listing.
Section 5 Governance
51
The head of Group internal audit is jointly responsible
with the Group legal counsel for monitoring compliance
with our Code of Conduct, and investigating any reported
incidents including fraud allegations.
vi. Treasury management
The treasury department operates within policies
approved by the board and its procedures are reviewed
regularly by the audit committee. Major transactions
are authorised outside the department at the requisite
level, and there is an appropriate segregation of duties.
Frequent reports are made to the chief financial officer
and regular reports are prepared for the audit committee
and the board.
vii. Insurance
Insurance is provided through Pearson’s insurance
subsidiary or externally, depending on the scale of the
risk and the availability of cover in the external market,
with the objective of achieving the most cost-effective
balance between insured and uninsured risks.
Going concern
Having reviewed the Group’s liquid resources and
borrowing facilities and the Group’s 2010 and 2011 cash
flow forecasts, the directors believe that the Group has
adequate resources to continue as a going concern.
For this reason, the financial statements have, as usual,
been prepared on that basis.
Shareholder communication
Pearson has an extensive programme of communication
with all of its shareholders – large and small,
institutional and private. We also make a particular effort
to communicate regularly with our employees, a large
majority of whom are shareholders in the company.
We post all company announcements on our website,
www.pearson.com, as soon as they are released, and
i
major shareholder presentations are made accessible
via webcast or conference call. Our website contains a
dedicated investor relations section with an extensive
archive of past announcements and presentations,
historical financial performance, share price data and a
calendar of events. It also includes information about all
of our businesses, links to their websites and details of
our corporate responsibility policies and activities.
We have an established programme of educational
seminars for our institutional shareholders focusing on
individual parts of Pearson. These seminars are available
to all shareholders via webcast on www.pearson.com
i
iii. Financial reporting
There is a comprehensive strategic planning, budgeting
and forecasting system with an annual operating plan
approved by the board of directors. Monthly financial
information, including trading results, balance sheets,
cash flow statements and indebtedness, is reported
against the corresponding figures for the plan and prior
years, with corrective action outlined by operating
company executives as appropriate. Group senior
management meet, on a quarterly basis, with operating
company management to review their business and
financial performance against plan and forecast.
Major business risks relevant to each operating
company as well as performance against the stated
strategic objectives are reviewed in these meetings.
In addition, the chief executive prepares a report
for the board, 11 times a year, on key developments,
performance and issues in the business.
iv. Risk management
Operating companies undertake formal, semi-annual
risk reviews to identify new or potentially under-
managed risks. Throughout the year, risk sessions
facilitated by the head of Group internal audit are held
with operating company management to identify key
risks, assess the probability and impact of those risks
and document the actions being taken to manage those
risks. The Pearson Management Committee reviews the
output of these sessions, focusing on the significant
risks facing the business. Management has the
responsibility to consider and execute appropriate action
to mitigate these risks whenever possible. The results of
these reviews are summarised by Group internal audit
for evaluation and onward reporting to the board, in
summary, and in more detail via the audit committee.
v. Group internal audit
The Group internal audit function is responsible for
providing independent assurance to management on the
effectiveness of internal controls. The annual internal
audit plan, derived from a risk model, is approved by
the audit committee. Recommendations to improve
internal controls and to mitigate risks, or both, are
agreed with operating company management after each
audit. Formal follow-up procedures allow Group internal
audit to monitor operating companies’ progress in
implementing its recommendations and to resolve any
control deficiencies. The Group internal audit function
also has a remit to monitor significant Group projects,
in conjunction with the central project management
office, to provide assurance that appropriate project
governance and risk management strategies are in place.
Regular reports on the work of Group internal audit are
provided to executive management and, via the audit
committee, to the board.
52
Pearson plc Annual report and accounts 2009
Board governance continued
Our AGM – which will be held on 30 April this year – is
an opportunity to meet the company’s managers, hear
presentations about Pearson’s businesses and the
previous year’s results as well as to conduct general
AGM business.
Share capital
Details of share issues are given in note 27 to the
accounts on page 140. The company has a single class
of shares which is divided into ordinary shares of
25p each. The ordinary shares are in registered form.
As at 31 December 2009, 810,799,351 ordinary shares
were in issue. At the AGM held on 1 May 2009, the
company was authorised, subject to certain conditions,
to acquire up to 80 million of its ordinary shares by
market purchase. Shareholders will be asked to renew
this authority at the AGM on 30 April 2010.
As at 26 February 2010, the company had been notified
of the following substantial shareholdings in the capital
of the company.
Legal & General Group plc
Number of shares
32,300,784
Percentage
3.98%
Annual General Meeting (AGM)
The notice convening the AGM to be held at 12 noon
on Friday, 30 April 2010 at The Queen Elizabeth II
Conference Centre, Broad Sanctuary, Westminster,
London SW1P 3EE, is contained in a circular to
shareholders to be dated 25 March 2010.
Registered auditors
In accordance with section 489 of the Companies Act
2006 a resolution proposing the reappointment of
PricewaterhouseCoopers LLP (PwC) as auditors to the
company will be proposed at the AGM, at a level of
remuneration to be agreed by the directors.
Auditor independence
In line with best practice, our relationship with PwC
is governed by our external auditor policy, which is
reviewed and approved annually by the audit committee.
The policy establishes procedures to ensure the
auditors’ independence is not compromised as well
as defining those non-audit services that PwC may or
may not provide to Pearson. These allowable services
are in accordance with relevant UK and US legislation.
The audit committee approves all audit and non-audit
services provided by PwC. Certain categories of
allowable non-audit services have been pre-approved
by the audit committee subject to the authorities below:
Pre-approved non-audit services can be authorised by
the chief financial officer up to £100,000 per project,
subject to a cumulative limit of £500,000 per annum;
Acquisition due diligence services up to £100,000 per
transaction;
Tax compliance and related activities up to the greater
of £1,000,000 per annum or 50% of the external audit
fee; and
For forward-looking tax planning services we use the
most appropriate advisor, usually after a tender process.
Where we decide to use our independent auditor,
authority, up to £100,000 per project subject to a
cumulative limit of £500,000 per annum, has been
delegated by the audit committee to management.
Services provided by PwC above these limits and all
other allowable non-audit services, irrespective of
value, must be approved by the audit committee.
Where appropriate, services will be tendered prior
to awarding work to the auditor.
In 2007, Interactive Data appointed Ernst & Young LLP
(Ernst & Young) as its independent auditor. To maintain
Ernst & Young’s independence we have restricted the
services that Ernst & Young can provide to Pearson and
its subsidiaries, similar to those restrictions which we
place on PwC.
Section 5 Governance
53
The directors are responsible for the maintenance
and integrity of the company’s website. Legislation in
the United Kingdom governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the directors, whose names and functions
are listed on pages 44 and 45, confirm that to the best of
their knowledge and belief:
The Group financial statements, prepared in accordance
with IFRSs as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit of
the Group and company; and
The directors’ report contained in the annual report
includes a fair review of the development and
performance of the business and the position of the
company and Group, together with a description
of the principal risks and uncertainties that they face.
The directors also confirm that, for all directors in office
at the date of this report:
a) so far as the directors are aware, there is no relevant
audit information of which the company’s auditors are
unaware; and
b) they have taken all the steps that they ought to have
taken as directors in order to make themselves aware of
any relevant audit information and to establish that the
company’s auditors are aware of that information.
Approved by the board on 10 March 2010 and signed on
its behalf by
Philip Hoffman Secretary
The audit committee receives regular reports
summarising the amount of fees paid to the auditor.
A full statement of the fees for audit and services is
provided in note 4 to the accounts on page 99.
Statement of directors’ responsibilities
Company law requires the directors to prepare financial
statements for each financial year. Under that law the
directors have prepared the Group and parent company
financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the
European Union. Under company law the directors must
not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the company and the Group and of the profit or
loss of the Group for that period.
In preparing these financial statements, the directors are
required to:
Select suitable accounting policies and then apply
them consistently;
Make judgments and accounting estimates that are
reasonable and prudent;
State that the financial statements comply with IFRSs
as adopted by the European Union or disclose and
explain any material departures; and
Prepare the financial statements on a going concern
basis, unless it is inappropriate to presume that the
company and/or the Group will continue in business.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the company and the Group. This enables them to
ensure that the financial statements and the report on
directors’ remuneration comply with the Companies
Act 2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation. They are also responsible
for safeguarding the assets of the company and the
Group and hence for taking reasonable steps for
the prevention and detection of fraud and other
irregularities.
54
Pearson plc Annual report and accounts 2009
Board governance continued
Additional information for shareholders
Amendment to Articles of Association
Any amendments to the Articles of Association (the
Articles) of the company may be made in accordance
with the provisions of the Companies Act 2006 (the Act)
by way of a special resolution.
Rights attaching to shares
The rights attaching to the ordinary shares are defined
in the company’s Articles. A shareholder whose name
appears on the company’s register of members can
choose whether his/her shares are evidenced by share
certificates (i.e. in certificated form) or held electronically
(i.e. uncertificated form) in CREST (the electronic
settlement system in the UK).
Subject to any restrictions below, shareholders may
attend any general meeting of the company and,
on a show of hands, every shareholder (or his/her
representative) who is present at a general meeting has
one vote on each resolution for every ordinary share of
which they are the registered holder. A resolution put to
the vote at a general meeting is decided on a show of
hands unless before, or on the declaration of the result
of, a vote on a show of hands, a poll is demanded. A poll
can be demanded by the chairman of the meeting, or by
at least three shareholders (or their representatives)
present in person and having the right to vote, or
by any shareholders (or their representatives) present
in person having at least 10% of the total voting rights
of all shareholders, or by any shareholders (or their
representatives) present in person holding ordinary
shares on which an aggregate sum has been paid up
of at least 10% of the total sum paid up on all
ordinary shares.
At this year’s AGM voting will be conducted on a poll.
Shareholders can declare a final dividend by passing
an ordinary resolution but the amount of the dividend
cannot exceed the amount recommended by the board.
The board can pay interim dividends on any class of
shares of the amounts and on the dates and for the
periods they decide, provided the distributable profits
of the company justify such payment. The board may, if
authorised by an ordinary resolution of the shareholders,
offer any shareholder the right to elect to receive new
ordinary shares, which will be credited as fully paid,
instead of their cash dividend.
Any dividend which has not been claimed for 12 years
after it became due for payment will be forfeited and
will then belong to the company, unless the directors
decide otherwise.
If the company is wound up, the liquidator can, with the
sanction of a special resolution passed by the
shareholders, divide among the shareholders all or any
part of the assets of the company and he/she can value
assets and determine how the division shall be carried
out as between the members or different classes of
members. The liquidator can also transfer the whole or
any part of the assets to trustees upon any trusts for the
benefit of the members.
Voting at general meetings
Any form of proxy sent by the company to shareholders
in relation to any general meeting must be delivered to
the company, whether in written or electronic form, not
less than 48 hours before the time appointed for holding
the meeting or adjourned meeting at which the person
named in the appointment proposes to vote.
No shareholder is, unless the board decides otherwise,
entitled to attend or vote either personally or by proxy at
a general meeting or to exercise any other right conferred
by being a shareholder if he/she or any person with an
interest in shares has been sent a notice under section
793 of the Act (which confers upon public companies the
power to require information with respect to interests in
their voting shares) and he/she or any interested person
failed to supply the company with the information
requested within 14 days after delivery of that notice.
The board may also decide, where the relevant
shareholding comprises at least 0.25% of the nominal
value of the issued shares of that class, that no dividend
is payable in respect of those default shares and that no
transfer of any default shares shall be registered.
Pearson operates two employee benefit trusts to hold
shares, pending employees becoming entitled
to them under the company’s employee share plans.
There were 9,664,922 shares so held as at 31 December
2009. Each trust has an independent trustee which has
full discretion in relation to the voting of such shares.
A dividend waiver operates on the shares held in
these trusts.
Pearson also operates a nominee shareholding
arrangement known as Sharestore which holds shares
on behalf of employees. There were 2,747,925 shares so
held as at 31 December 2009. The trustees holding these
shares seek voting instructions from the employee as
beneficial owner, and voting rights are not exercised if no
instructions are given.
Transfer of shares
The board may refuse to register a transfer of a
certificated share which is not fully paid, provided that
the refusal does not prevent dealings in shares in the
company from taking place on an open and proper basis.
The board may also refuse to register a transfer of a
certificated share unless (i) the instrument of transfer is
lodged, duly stamped (if stampable), at the registered
Section 5 Governance
55
office of the company or any other place decided by the
board, and is accompanied by the certificate for the
share to which it relates and such other evidence as the
board may reasonably require to show the right of the
transferor to make the transfer; (ii) it is in respect of only
one class of shares; and (iii) it is in favour of not more
than four transferees.
Transfers of uncertificated shares must be carried out
using CREST and the board can refuse to register a
transfer of an uncertificated share in accordance with
the regulations governing the operation of CREST.
Variation of rights
If at any time the capital of the company is divided into
different classes of shares, the special rights attaching
to any class may be varied or revoked either:
(i) with the written consent of the holders of at least 75%
in nominal value of the issued shares of the class; or
(ii) with the sanction of a special resolution passed at a
separate general meeting of the holders of the shares
of the class.
Without guidance to any special rights previously
conferred on the holders of any existing shares or class
of shares, any share may be issued with such preferred,
deferred, or other special rights, or such restrictions,
whether in regard to dividend, voting, return of capital
or otherwise as the company may from time to time by
ordinary resolution determine.
Appointment and replacement of directors
Directors shall number no less than two. Directors may
be appointed by the company by ordinary resolution or
by the board. A director appointed by the board shall
hold office only until the next AGM and shall then be
eligible for reappointment, but shall not be taken into
account in determining the directors or the number of
directors who are to retire by rotation at that meeting.
The board may from time to time appoint one or more
directors to hold executive office with the company for
such period (subject to the provisions of the Act) and
upon such terms as the board may decide and may
revoke or terminate any appointment so made.
At every AGM of the company, one third of the directors
shall retire by rotation (or, if their number is not a
multiple of three, the number nearest to one third).
The first directors to retire by rotation shall be those
who wish to retire and not offer themselves for re-
election. Any further directors so to retire shall be those
of the other directors subject to retirement by rotation
who have been longest in office since they were last re-
elected but, as between persons who became or were
last re-elected on the same day, those to retire shall
(unless they otherwise agree among themselves) be
determined by lot. In addition, any director who would
not otherwise be required to retire shall retire by rotation
at the third AGM after they were last re-elected.
However, although not required by the Articles, the
board has resolved that for this year, and in future years,
all directors offer themselves for re-election annually,
in accordance with good corporate governance.
The company may by ordinary resolution remove any
director before the expiration of his/her term of office.
In addition, the board may terminate an agreement
or arrangement with any director for the provision of
his/her services to the company.
Powers of the directors
Subject to the company’s Articles, the Act and any
directions given by special resolution, the business of
the company will be managed by the board who may
exercise all the powers of the company, including
powers relating to the issue and/or buying back of
shares by the company, (subject to any statutory
restrictions or restrictions imposed by shareholders
in general meeting).
Significant agreements
The following significant agreements contain provisions
entitling the counterparties to exercise termination
or other rights in the event of a change of control of
the company:
Under the $1,750,000,000 revolving credit facility
agreement dated July 2004 (as amended) of which
$92,000,000 matures in May 2011 and the balance
of $1,658,000,000 matures in May 2012 between,
amongst others, the company, HSBC Bank plc (as facility
agent) and the banks and financial institutions named
therein as lenders (together, the Credit Facilities), the
facility agent must, upon a change of control, cancel
the total commitments of the lenders under such Credit
Facilities and declare all outstanding advances, together
with accrued interest and any other amounts payable
in respect of such Credit Facilities, to be immediately due
and payable. For these purposes, a ‘change of control’
occurs if the company becomes a subsidiary of any
other company or one or more persons acting either
individually or in concert, obtains control (as defined
in Section 840 of the Income and Corporation Taxes
Act 1988) of the company.
Shares acquired through the company’s employee share
plans rank pari passu with shares in issue and have no
special rights. For legal and practical reasons, the rules
of these plans set out the consequences of a change of
control of the company.
56
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration
The board presents its report on directors’ remuneration
to shareholders. This report complies with Schedule 8
of the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 and was
approved by the board of directors on 10 March 2010.
The committee believes that the company has complied
with the provisions regarding remuneration matters
contained within the UK Combined Code.
We will put a resolution to shareholders at the Annual
General Meeting (AGM) on 30 April 2010 inviting them
to consider and approve this report.
The personnel committee
David Arculus chaired the personnel committee for
the year 2009; the other members were Terry Burns,
Ken Hydon and Glen Moreno. David Arculus, Terry Burns
and Ken Hydon are independent non-executive directors.
Glen Moreno, chairman of the board, is a member of
the committee as permitted under the Combined Code.
Marjorie Scardino, chief executive, David Bell, director
for people, Robin Baliszewski (who replaced David Bell
as director for people on 1 September 2009),
Robert Head, compensation and benefits director, and
Stephen Jones, deputy company secretary, provided
material assistance to the committee during the year.
They attended meetings of the committee, although no
director was involved in any decisions relating to his or
her own remuneration.
To ensure that it receives independent advice, the
committee has appointed Towers Perrin (now Towers
Watson) to supply survey data and to advise on
market trends, long-term incentives and other general
remuneration matters. Towers Perrin also advised the
company on health and welfare benefits in the US and
provided consulting advice directly to certain Pearson
operating companies.
The committee’s principal duty is to determine and
regularly review, having regard to the Combined
Code and on the advice of the chief executive, the
remuneration policy and the remuneration and benefits
packages of the executive directors, the chief executives
of the principal operating companies and other members
of the Pearson Management Committee who report
directly to the chief executive. This includes base salary,
annual and long-term incentive entitlements and
awards, and pension arrangements.
The committee’s terms of reference are available on the
company’s website.
The committee met four times during 2009. The matters
discussed and actions taken were as follows:
20 and 27 February 2009
Reviewed and approved 2008 annual incentive
plan payouts
Reviewed and approved 2006 long-term incentive
plan payouts
Approved vesting of 2004 and 2006 annual bonus share
matching awards
Reviewed and approved 2009 Pearson and operating
company annual incentive plan targets
Reviewed and approved 2009 individual annual
incentive opportunities for Pearson Management
Committee
Reviewed and approved 2009 long-term incentive
awards and associated performance conditions for
Pearson Management Committee
Reviewed and approved 2008 report on directors’
remuneration
Reviewed strategy on 2009 long-term incentive awards
for executives and managers
Noted company’s use of equity for employee share plans
Reviewed and approved treatment of David Bell’s
outstanding share awards on his retirement from the
company on 31 December 2009
23 July 2009
Approved 2009 long-term incentive awards for
executives and managers
Reviewed committee’s charter and terms of reference
11 December 2009
Reviewed status of outstanding long-term incentive
awards
Considered return on invested capital targets for
long-term incentive plan
Reviewed 2010 annual incentive plan metrics
Considered Towers Perrin’s report on remuneration for
Pearson Management Committee for 2010
Section 5 Governance
57
Summary of policy changes in 2009
There were no changes to remuneration policy that took
effect during 2009.
Remuneration policy
This report sets out the company’s policy on directors’
remuneration that applies to executive directors for
2010 and, so far as practicable, for subsequent years.
The committee considers that a successful remuneration
policy needs to be sufficiently flexible to take account of
future changes in the company’s business environment
and in remuneration practice. Future reports, which will
continue to be subject to shareholder approval, will
describe any changes in this policy.
Pearson’s goal remains unchanged: to help people
make progress in their lives and thrive in a brain-based
economy through learning. The basic strategy to achieve
that goal is pursued by all Pearson’s businesses in some
shape or form and has four fundamental parts: long-term
organic growth investment in content; adding services to
our content; international expansion; and efficiency.
One of the most important measures of our strategy
is, of course, financial performance. Here, our goal is
to produce consistent growth in three key financial
measures – adjusted earnings per share, cash flow
and return on invested capital. 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 operating
margins and working capital) form the basis of our
annual budgets and plans, and the basis for bonuses
and long-term incentives.
The performance conditions that we select for the
company’s various performance-related annual or
long-term incentive plans are therefore linked to the
company’s strategic objectives set out above and
aligned with the interests of shareholders. We determine
whether or not targets have been met under the
company’s various performance-related annual or
long-term incentive plans based on relevant internal
information and input from external advisers.
In light of the prevailing economic conditions and the
impact of these on the company’s objectives and
strategy, we continue to keep our remuneration policy
under review particularly with regard to its approach to
annual and long-term incentives.
Our starting point continues to be that total
remuneration (base compensation plus annual and
long-term incentives) should reward both short- and
long-term results, delivering competitive rewards for
target performance, but outstanding rewards for
exceptional company performance.
Generally speaking, we have concluded that no
fundamental changes are required to the performance
measures used in the company’s annual and long-term
incentive plans.
We will however continue to give careful consideration to
the selection and weighting of these measures and the
targets that apply taking into account the company’s
short- and longer term strategy and risk and the impact
on the sustainability and future development of
the company.
58 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Main elements of remuneration
Total remuneration is made up of fixed and performance-linked elements, with each element supporting
different objectives.
Element
Base salary
(see page 59)
Objective
Reflects competitive market
level, role and individual
contribution
Annual incentives
(see page 59)
Motivates achievement of
annual strategic goals
Bonus share
matching
(see page 61)
Long-term
incentives
(see page 62)
Encourages executive directors
and other senior executives to
acquire and hold Pearson shares.
Aligns executives’ and
shareholders’ interests
Drives long-term earnings
and share price growth
and value creation.
Aligns executives’ and
shareholders’ interests
Performance conditions
Performance period
Not applicable Normally reviewed annually taking into
account the remuneration of directors
and executives in similar positions in
comparable companies, individual
performance and the approach to pay
across the company as a whole
Subject to achievement of targets for sales,
earnings per share or profit, working capital
and cash
Subject to achievement of target for earnings
per share growth
Three years
One year
Three years
Subject to achievement of targets for relative
total shareholder return, return on invested
capital and earnings per share growth
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. Our assessment of the
relative importance of fixed and performance-related
remuneration for each of the directors based on our
policy and the data set out in this report is as follows:
Proportion of total compensation
Marjorie Scardino
39.3%
32.7%
28.0%
Will Ethridge
Robin Freestone
Rona Fairhead
John Makinson
43.4%
40.6%
43.0%
35.4%
21.2%
33.8%
25.6%
34.1%
22.9%
49.5%
30.7%
19.8%
Base salary and other Æ xed remuneration including retirement beneÆ ts
Annual incentive and bonus share matching
Long(cid:173)term incentives
Note The method for valuing the different elements of remuneration is
summarised in the table on page 59.
We will continue to review the mix of fixed and
performance-linked remuneration on an annual basis,
consistent with our overall philosophy.
Benchmarking
The committee wants our executive directors’
remuneration to be competitive with those of directors
and executives in similar positions in comparable
companies.
The policy is that target total direct compensation (base
salary plus annual and long-term incentives) should be
set by reference to the UK and US mid-market depending
on the relevant market or markets for particular jobs.
We use a range of UK companies in different sectors
including the media sector. Some are of a similar size to
Pearson, while others are larger, but the method which
our independent advisers use to make comparisons on
remuneration takes this into account. All have very
substantial overseas operations. We also use selected
media companies in North America.
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.
Market assessments against the two groups take
account of those factors which Towers Perrin’s research
shows differentiate remuneration for jobs of a similar
nature, such as sales, board membership, reporting
relationships and international activities.
Section 5 Governance
59
For benchmarking purposes, the main elements of
remuneration are valued as follows:
Element of remuneration
Base salary
Annual incentive
Bonus share matching Expected value of matching
Valuation
Actual base salary
Target level of annual incentive
Long-term incentive
Pension and benefits
Total remuneration
award based on 50% of target
level of annual incentive
Expected value of long-term
incentive award
Cost to company of providing
pension and other benefits
Sum of all elements
of remuneration
Expected value means the net present value of awards
taking into account the vesting schedule, risk of
forfeiture and the probability that any performance
target will be met.
Base salary
The committee’s normal policy is to review salaries
annually taking into account the remuneration
arrangements and the level of increases applicable to
employees across the rest of the company as a whole.
For 2010, the company is reviewing salaries for
employees taking into account the location and
economic conditions of each business. For executive
directors, and other members of the Pearson
Management Committee, we have reviewed base
salaries in line with the general level of increases
elsewhere. Full details of the executive directors’
remuneration for 2010 will be set out in the report on
directors’ remuneration for 2010.
The committee reviewed executive directors’ base
salaries for 2009 at the end of 2008. In light of the then
prevailing economic conditions and consistent with the
action taken across the company to control costs and
minimise job losses, there were no increases in base
salary for the executive directors and other members
of the Pearson Management Committee for 2009.
Full details of the executive directors’ 2009 remuneration
are set out in table 1 on page 71.
Allowances and benefits
The company’s policy is that benefit programmes should
be competitive in the context of the local labour market,
but as an international company we require executives to
operate worldwide and recognise that recruitment also
operates worldwide.
Annual incentives
The committee establishes the annual incentive plans
for the executive directors and the chief executives of
the company’s 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 incentive plan
targets and the relevant business unit operating plans.
We 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. We will continue to disclose details of
the operation of the annual incentive plans in the report
on directors’ remuneration each year.
Annual incentive payments do not form part of
pensionable earnings.
Performance measures
The financial performance measures relate to the
company’s 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 2010 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 the case of the chief executive, the
chairman). These comprise functional, operational,
strategic and non-financial objectives relevant to the
executives’ specific areas of responsibility and inter alia
may include objectives relating to environmental, social
and governance issues.
For 2010, the principal financial performance measures
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
performance measures takes into account the strategic
objectives and the business priorities relevant to each
operating company and to Pearson overall each year.
Incentive opportunities
In each year’s report on directors’ remuneration,
we describe any changes to target and maximum
incentive opportunities for the chief executive and the
other executive directors for the year ahead.
60 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
For 2010, there is no change to the target annual
incentive opportunity for the chief executive which
remains at 100% of base salary. We reviewed the chief
executive’s maximum opportunity in light of competitive
market data and practice elsewhere in the company and
have increased it to 180% of base salary (150% in 2009).
For the other members of the Pearson Management
Committee, we have reviewed individual incentive
opportunities taking into account their membership of
that committee and the contribution of their respective
businesses or role to Pearson’s overall financial goals.
In the case of the executive directors, the target
individual incentive opportunity is in a range up to 87.5%
of base salary. The maximum opportunity remains at
twice target (as in 2009).
The 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 2009.
For 2009, total annual incentive opportunities were
based on Pearson plc and operating company financial
performance and performance against personal
objectives as follows:
Name
Marjorie Scardino
David Bell
Will Ethridge
Rona Fairhead
Robin Freestone
John Makinson
Pearson plc
100%
75%
30%
30%
90%
30%
Operating
company/
companies
–
–
60%
60%
–
60%
Personal
objectives
–
25%
10%
10%
10%
10%
2009 performance
Performance in 2009 against the relevant incentive plans was as follows:
Incentive plan
Pearson plc
Pearson Education
North America
FT Publishing
Pearson VUE
Penguin Group
Performance measure
Sales
Underlying growth in adjusted earnings
per share at constant exchange rates
Average working capital to sales ratio
Operating cash flow
Sales
Operating profit
Average working capital to sales ratio
Operating cash flow
Sales
Operating profit
Operating cash flow
Sales
Operating profit
Average working capital to sales ratio
Operating cash flow
Sales
Operating profit
Operating margin
Average working capital to sales ratio
Operating cash flow
Details of actual payouts for 2009 are set out in table 1 on page 71.
Below
threshold
Between
threshold
and target
Performance against incentive plan
Between
target and
maximum
Above
maximum
Section 5 Governance
61
Bonus share matching
In 2008, shareholders approved the renewal of the
annual bonus share matching plan first approved by
shareholders in 1998.
Invested and matching shares
The plan permits executive directors and senior
executives around the company to invest up to 50%
of any after-tax annual bonus in Pearson shares.
If the participant’s 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.
50% of the maximum matching award is released if
the company’s adjusted earnings per share increase
in real terms by 3% per annum compound over the
three-year performance period. 100% of the maximum
matching award is released if the company’s 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 matching award is released is calculated
according to a straight-line sliding scale.
Real earnings per share
growth per annum
Less than 3%
3%
Between 3% and 5%
5% or more
Proportion of maximum matching
award released
0%
50%
Sliding scale between
50% and 100%
100%
Performance condition
Earnings per share growth is calculated using the
point-to-point method. This method compares the
adjusted earnings per share in the company’s accounts
for the financial year ended prior to the grant date with
the adjusted earnings per share for the financial year
ending three years later and calculates the implicit
compound annual growth rate over the period.
Real growth is calculated by reference to the UK
Government’s Retail Prices Index (All Items). We choose
to test our earnings per share growth against UK inflation
over three years to measure the company’s financial
progress over the period to which the entitlement to
matching shares relates.
Dividend shares
Where matching shares vest in accordance with the
plan, a participant also receives ‘dividend’ shares
representing the gross value of dividends that would
have been paid on the matching shares during the
holding period and reinvested.
62 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Outstanding awards
Details of awards made, outstanding, held or released under the annual bonus share matching plan are as follows
(subject to audit):
Share price on
date of award
Date of award
16 April 2009 670.0p
4 June 2008
670.7p
22 May 2007 899.9p
12 April 2006 776.2p
15 April 2005 631.0p
16 April 2004 652.0p
Vesting
16 April 2012
4 June 2011
50% on
22 May 2010
100% on
22 May 2012
50% on
12 April 2009
100% on
12 April 2011
100% on
2 March 2010
100% on
16 April 2009
Status of award
Outstanding subject to 2008 to 2011 performance
Outstanding subject to 2007 to 2010 performance
Performance condition met. Real compound annual
growth in earnings per share for 2006 to 2009 of 12.2%
against target of 3.0%
Outstanding subject to participants not electing to
call for 50% of shares that vest on 22 May 2010 and
subject to 2006 to 2011 performance
Target met as reported in report on directors’ remuneration
for 2008. Shares held pending release on 12 April 2011
Outstanding subject to 2005 to 2010 performance
Performance condition met. Increase in adjusted earnings
per share for 2004 to 2009 of 137.8% against target of 29.8%.
Shares held pending release on 2 March 2010
Target met as reported in report on directors’ remuneration
for 2008. Shares released on 16 April 2009
Note For awards made prior to 2008, the annual bonus share matching plan operated on the basis of a 50% match after three years and 100% match
after five years, subject to the earnings per share growth targets being met over the relevant performance periods.
All of the executive directors hold or held awards under this plan in 2009. Details are set out in table 4 on pages
74 to 76 and itemised as a or a*.
Long-term incentives
At the Annual General Meeting in April 2006,
shareholders approved the renewal of the long-term
incentive plan first introduced in 2001.
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 company’s 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 management’s
long-term reward in a flexible way. It is not the
committee’s intention to grant stock options in 2010.
Restricted stock granted to executive directors vests
only when 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.
Performance measures
The committee determines the performance measures
and targets governing an award of restricted stock prior
to grant.
The performance measures that have applied since 2006
and that will apply for 2010 and subsequent awards for
the executive directors are focused on delivering and
improving returns to shareholders. These are relative
total shareholder return (TSR), return on invested capital
(ROIC) and earnings per share (EPS) growth.
Total shareholder return is the return to shareholders
from any growth in Pearson’s share price and reinvested
dividends over the performance period. For long-term
incentive awards, TSR is measured relative to the
constituents of the FTSE World Media Index over a
three-year period. Companies that drop out of the index
are normally excluded i.e. only companies in the index
for the entire period are counted.
Section 5 Governance
63
Share price is averaged over 20 days at the start and
end of the performance period, commencing on the
date of Pearson’s results announcement in the year of
grant and the year of vesting. Dividends are treated
as reinvested on the ex-dividend date, in line with the
Datastream methodology.
The vesting of shares based on relative TSR is subject
to the committee satisfying itself that the recorded
TSR is a genuine reflection of the underlying financial
performance of the business.
The committee chose TSR relative to the constituents
of the FTSE World Media Index because, in line with
many of our shareholders, it felt that part of executive
directors’ rewards should be linked to performance
relative to the company’s peers.
Return on invested capital is adjusted operating
profit less cash tax expressed as a percentage of
gross invested capital (net operating assets plus
gross goodwill).
We chose ROIC because, over the past few years, the
transformation of Pearson has significantly increased
the capital invested in the business (mostly in the form
of goodwill associated with acquisitions) and required
substantial cash investment to integrate those
acquisitions.
Earnings per share is calculated by dividing the profit
attributable to equity shareholders of the company by
the weighted average number of ordinary shares in
issue during the year, excluding any ordinary shares
purchased by the company and held as treasury shares
(note 8 of the financial statements).
For 2008 and subsequent awards, EPS growth is
calculated using the point-to-point method. This method
compares the adjusted EPS in the company’s accounts
for the financial year ended prior to the grant date with
the adjusted EPS for the financial year ending three years
later and calculates the implicit compound annual
growth rate over the period.
We chose EPS growth because strong bottom-line growth
is imperative if we are to improve our TSR and our ROIC.
Pearson’s reported financial results for the relevant
periods are used to measure performance.
The committee has discretion to make adjustments
taking into account exceptional factors that distort
underlying business performance. In exercising such
discretion, the committee is guided by the principle
of aligning shareholder and management interests.
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.
Performance targets
We will set stretching targets for the 2010 awards that
are consistent with the company’s strategic objectives
over the period to 2012. Full details of the targets and
individual awards will be set out in the report on
directors’ remuneration for 2010.
Value of awards
Our independent advisers verify each year the expected
value of awards i.e. their net present value after taking
into account the vesting schedule, risk of forfeiture and
the probability that any performance targets will be met.
The level of individual awards takes into account three
factors: their expected values; the assessments by our
independent advisers of market practice for comparable
companies and of directors’ total remuneration relative
to the market; and the face value of individual awards
and their potential value should the performance targets
be met in full.
Dividends
Where shares vest, participants receive additional
shares representing the gross value of dividends that
would have been paid on these shares during the
performance period and reinvested. The expected value
of awards made on this basis takes this into account.
Retention period
We 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, 75% of the award vests at the end of the
three-year period. The remaining 25% of the award only
vests if the participant retains the after-tax number of
shares that vest at year three for a further two years.
64 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Outstanding awards
Details of awards made, outstanding, vested and held or released under the long-term incentive plan are as follows
(subject to audit):
Date
of award
Share
price on
date of
award
Vesting
date
Performance
measures
(award split
equally across
three measures)
Performance
period
Payout at
threshold
Payout at
maximum
Actual
performance
% of
award
vested
Status of
award
03/03/09
654.0p
03/03/12
Relative TSR 2009 to
2012
ROIC
2011
EPS growth 2011
compared to
2008
04/03/08
649.5p
04/03/11
Relative TSR 2008 to
2011
ROIC
2010
EPS growth 2010
compared to
2007
30/07/07
778.0p
02/03/10
Relative TSR 2007 to
2010
ROIC
2009
EPS growth 2007
to 2009
compared
to 2006
(see note 2)
30% at
median
25% for
ROIC of
8.5%
30%
for EPS
growth of
6.0%
30% at
median
25% for
ROIC of
8.5%
30%
for EPS
growth of
6.0%
30% at
median
100% at
upper
quartile
100% for
ROIC of
10.5%
100% for
EPS growth
of 12.0%
100% at
upper
quartile
100% for
ROIC of
10.5%
100% for
EPS growth
of 12.0%
100% at
upper
quartile
25% for
ROIC of
8.5%
100% for
ROIC of
10.5%
30%
for EPS
growth of
6.0%
100% for
EPS growth
of 12.0%
–
–
–
–
–
–
–
–
–
–
–
–
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
94th
percentile
(6th out of 85
companies)
100% Vested and
remain held
pending release
8.9%
40%
Vested and
remain held
pending release
14.3%
100% Vested and
remain held
pending release
Section 5 Governance
65
Date
of award
Share
price on
date of
award
Vesting
date
Performance
measures
(award split
equally across
three measures)
Performance
period
Payout at
threshold
Payout at
maximum
Actual
performance
13/10/06
767.5p
13/10/09
Relative TSR 2006 to
2009
ROIC
2008
EPS growth 2006
to 2008
compared to
2005
(see note 2)
90th
percentile
(10th out
of 95
companies)
9.2%
18.3%
30% at
median
100% at
upper
quartile
25% for
ROIC of
8.0%
100% for
ROIC of
10.0%
30%
for EPS
growth of
5.0%
100% for
EPS growth
of 12.0%
% of
award
vested
100%
50%
(see
note 1)
100%
Status of
award
83.3% of shares
vested. Three-
quarters
released on
13 October 2009. If
after tax number
of shares are
retained for
a further two
years, the
remaining
quarter will
be released on
13 October 2011
Note 1 In relation to the award made on 13 October 2006, the committee noted the change in the calculation of return in invested capital and the
resulting figure of 9.2% for 2008. The committee agreed with the rationale for the change but considered that, given that the new basis of calculation
differed from that used at the time the award was made, it would not be appropriate simply to use this basis for the purposes of determining payout on
this element. The payout of 50% of shares originally awarded reflects the committee’s judgement on this point.
Note 2 For awards prior to 2008, EPS growth is calculated using the aggregate method that sums the results for each year and calculates the compound
aggregate average annual growth assuming a constant increase on the base year throughout the period.
All of the executive directors hold awards under the
long-term incentive plan. Details are set out in table 4
on pages 74 to 76 and itemised as b or b*.
All-employee share plans
Executive directors can participate in the company’s
all-employee share plans on the same terms as
other employees.
These plans comprise savings-related share acquisition
programmes in the UK and the US.
These plans operate within specific tax legislation
(including a requirement to finance acquisition of shares
using the proceeds of a monthly savings contract)
and the acquisition of shares under these plans is not
subject to the satisfaction of a performance target.
Dilution and use of equity
We can use existing shares bought in the market,
treasury shares or newly-issued shares to satisfy
awards under the company’s various stock plans.
For restricted stock awards under the long-term incentive
plan and matching share awards under the annual
bonus share matching plan, we would normally expect
to use existing shares.
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 Pearson’s share plans, and no more
than 5% of Pearson equity will be issued, or be capable
of being issued, under executive or discretionary plans.
At 31 December 2009, stock awards to be satisfied by
new-issue equity granted in the last ten years under
all employee share plans amounted to 3.6% of the
company’s issued share capital and under executive
or discretionary plans amounted to 2.0%.
In addition, for existing shares no more than 5%
of Pearson equity may be held in trust at any time.
Against this limit, shares held in trust at 31 December
2009 amounted to 1.7% of the company’s issued
share capital.
The headroom available for all employee plans,
executive or discretionary plans and shares held
in trust is as follows:
Headroom
All employee plans
Executive or
discretionary plans
Shares held in trust
2009
6.4%
3.0%
3.3%
2008
6.2%
2.8%
3.3%
2007
6.0%
2.3%
3.4%
66 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Shareholding of executive directors
The committee expects executive directors to build up a
substantial shareholding in the company in line with the
policy of encouraging widespread employee ownership
and describes separately here both the number of
shares that the executive directors hold and the value
expressed as a percentage of base salary.
The current value of the executive directors’ own shares
based on the middle market value of Pearson shares
of 912.0p on 26 February 2010 (which is the latest
practicable date before the results announcement)
against annual base salaries in 2009 is as follows:
Own shares
Marjorie Scardino
Will Ethridge
Rona Fairhead
Robin Freestone
John Makinson
Number of
shares
824,124
262,988
270,982
118,996
474,581
Value (% of
base salary)
791%
375%
488%
241%
824%
In addition, the executive directors have prospective
holdings as a result of restricted shares that have vested
and are held pending release. The current value of these
shares before any withholdings is as follows:
Restricted shares
Marjorie Scardino
Will Ethridge
Rona Fairhead
Robin Freestone
John Makinson
Number of
shares
640,590
183,938
233,298
130,113
181,169
Value (% of
base salary)
615%
263%
420%
264%
315%
The size of these holdings, the volatility of the stock
market and the share retention features that already
exist in our long-term incentive plans means that we do
not prescribe a particular relationship of shareholding
to salary.
No executive director sold shares during the year other
than to satisfy income tax liability on the release of
restricted shares.
Service agreements
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
employment agreements in 2008 and again in 2010.
Our policy is that for future executive directors 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.
We will keep the application of the policy on executive
employment agreements, including provisions for
payment in lieu of notice, under review, particularly
with regard to the arrangements for any new
executive directors.
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
Pearson’s discretionary share plans are treated in
accordance with the terms of the relevant plan.
Section 5 Governance
67
We summarise the service agreements that applied during 2009 and that continue to apply for 2010 as follows:
Name
Glen Moreno
Date of agreement
29 July 2005
Marjorie
Scardino
27 February 2004
Notice periods
12 months from the director;
12 months from the company
Six months from the director;
12 months from the company
David Bell
(stepped down
on 1 May 2009)
(see note)
Will Ethridge
15 March 1996
Six months from the director;
12 months from the company
26 February 2009
Six months from the director;
12 months from the company
Rona Fairhead 24 January 2003
Six months from the director;
12 months from the company
Robin Freestone 5 June 2006
John Makinson 24 January 2003
Six months from the director;
12 months from the company
Six months from the director;
12 months from the company
Compensation on termination by the
company without notice or cause
100% of annual fees at the date
of termination
100% of annual salary at the date
of termination, the annual cost of
pension and all other benefits
and 50% of potential annual incentive
100% of annual salary at the date
of termination, the annual cost of
pension and all other benefits and
50% of potential annual incentive
100% of annual salary at the date
of termination, the annual cost of
pension and all other benefits
and target annual incentive
100% of annual salary at the date
of termination, the annual cost of
pension and all other benefits
and 50% of potential annual incentive
No contractual provisions
100% of annual salary at the date
of termination, the annual cost of
pension and all other benefits
and 50% of potential annual incentive
Note No compensation was paid to David Bell when he retired from the company on 31 December 2009.
Retirement benefits
We describe the retirement benefits for each of the
executive directors. Details of directors’ pension
arrangements are set out in table 2 on page 72 of
this report.
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.
The pension arrangements for all the executive directors
include life insurance cover while in employment, and
entitlement 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 a pension on retirement. The lump
sum accrued at 6% of capped compensation until
31 December 2001 when further benefit accruals ceased
for most employees. Employees who satisfied criteria of
age and service at that time continued to accrue benefits
under the plan. Will Ethridge is included in this group
and continues to accrue benefits under this plan.
Marjorie Scardino is not and her benefit accruals under
this plan ceased at the end of 2001.
68 Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
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 after age 50
(age 55 from April 2010). 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 increase in the Index of Retail
Prices, if lower. Pensions for a member’s 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 member’s
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 6 April 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 Government’s Index of Retail Prices (All Items).
The cap was £123,600 as at 6 April 2009.
As a result of the UK Government’s 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. In 2009, the only
executive director to whom this was applicable was
David Bell. He was offered the allowance alternative but
declined and continued as an active member of the plan.
With his retirement there are no executive directors who
received the offer of an allowance alternative.
Marjorie Scardino
Marjorie Scardino participates in the Pearson Inc.
Pension Plan and the approved 401(k) plan.
Additional pension benefits are provided through an
unfunded unapproved defined contribution plan.
Notional annual contributions to this plan are based on
a percentage of salary and a fixed cash amount index-
linked to inflation and the notional cash balance of this
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. Part of the unfunded plan is replaced
by a funded defined contribution plan approved by
HM Revenue and Customs as a corresponding plan.
David Bell
David Bell is drawing his pension from the Pearson
Group Pension Plan. He began to receive his pension
effective 30 September 2008 on attainment of Normal
Retirement Age.
Will Ethridge
Will Ethridge is a member of the Pearson Inc. Pension
Plan and the approved 401(k) plan. He also participates
in an unfunded, unapproved 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, unapproved 401(k) excess plan.
Rona Fairhead
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
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.
Section 5 Governance
69
Non-executive directors
Fees for non-executive directors are determined by the
full board having regard to market practice and within
the restrictions contained in the company’s Articles of
Association. Non-executive directors receive no other
pay or benefits (other than reimbursement for expenses
incurred in connection with their directorship of the
company) and do not participate in the company’s
equity-based incentive plans.
There were no changes in the structure and level of
non-executive directors’ fees in 2009. With effect from
1 July 2007, these were as follows:
Non-executive director
Chairmanship of audit committee
Chairmanship of personnel committee
Membership of audit committee
Membership of personnel committee
Senior independent director
Fees payable
from 1 July 2007
£60,000
£20,000
£15,000
£10,000
£5,000
£15,000
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.
Terry Burns also receives a fee in respect of his
non-executive directorship of Edexcel which is included
in the figure shown in table 1 on page 71.
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.
John Makinson
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 31 December 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 1 June 2002, increased
at 1 January each year by reference to the increase in
the UK Government’s 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 possible from age 50 (age 55 from
April 2010), with company consent.
The pension is reduced to reflect the shorter service,
and before age 60, further reduced for early payment.
Executive directors’ non-executive directorships
The committee’s 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
Rona Fairhead
Company
Nokia Corporation
MacArthur
Foundation
HSBC Holdings plc
Spencer Stuart
Advisory Board
Fees/benefits
€150,000
$24,000
£135,000
£10,000
Other executive directors served as non-executive
directors elsewhere but did not receive fees.
Chairman’s remuneration
The committee’s policy is that the chairman’s 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.
There were no changes in the chairman’s remuneration
in 2009. With effect from 1 January 2007, his
remuneration was £450,000 per year.
180
160
140
120
100
80
70
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Total shareholder return performance
Below we set out Pearson’s total shareholder return
on three bases. Pearson is a constituent of all the
indices shown.
First, we set out Pearson’s total shareholder return
performance relative to the FTSE All-Share index on an
annual basis over the five-year period 2004 to 2009.
We have chosen this index, and used it consistently in
each report on directors’ remuneration since 2002, on
the basis that it is a recognisable reference point and an
appropriate comparator for the majority of our investors.
Total shareholder return
Pearson
FTSE All(cid:173)Share
And thirdly, we show Pearson’s total shareholder return
relative to the FTSE All-Share and Media indices on
a monthly basis over 2009, the period to which this
report relates.
Total shareholder return
Pearson
FTSE All(cid:173)Share
FTSE Media
160
140
120
100
Dec
Mar
Jun
Sep
Dec
180
160
140
120
100
80
04
05
06
07
08
09
Secondly, to illustrate performance against our sector,
we show Pearson’s total shareholder return relative to
the FTSE Media index over the same five-year period.
Total shareholder return
Pearson
FTSE Media
180
160
140
120
100
80
04
05
06
07
08
09
Section 5 Governance
71
Items subject to audit
The following tables form the auditable part of the remuneration report.
Table 1: Remuneration of the directors
Excluding contributions to pension funds and related benefits set out in table 2, directors’ remuneration was
as follows:
All figures in £000s
Chairman
Glen Moreno
Executive directors
Marjorie Scardino
David Bell (stepped down 1 May 2009)
Will Ethridge
Rona Fairhead
Robin Freestone
John Makinson
Non-executive directors
David Arculus
Terry Burns
Patrick Cescau
Susan Fuhrman
Ken Hydon
CK Prahalad
Total
Salaries/fees
Annual
incentive
Allowances
Benefits
Total
Total
2009
2008
450
950
154
639
506
450
525
85
83
70
70
85
60
4,127
–
1,301
207
874
570
639
655
–
–
–
–
–
–
4,246
–
56
–
–
–
–
216
–
–
–
–
–
–
272
–
450
450
21
6
–
28
13
29
–
–
–
–
–
–
97
2,328
367
1,513
1,104
1,102
1,425
85
83
70
70
85
60
8,742
2,057
983
1,171
1,036
957
1,240
85
83
70
70
81
40
8,323
Note 1 Allowances for Marjorie Scardino include £44,870 in respect of housing costs and a US payroll supplement of £10,961. 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 £215,594 for 2009.
Note 2 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 £5,317 for pension
planning and financial advice. Marjorie Scardino, Rona Fairhead, David Bell and John Makinson have the use of a chauffeur.
Note 3 There were no increases in base salary for the executive directors for 2009.
Note 4 No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.
Note 5 David Bell stepped down from the board on 1 May 2009. He continued to be entitled to the same base salary and other benefits in accordance
with his service agreement with the company until his retirement from the company on 31 December 2009.
72
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Table 2: Directors’ pensions and other pension-related items
Accrued
pension at
31 Dec 09
£0001
Increase
in accrued
pension over
the period
£0002
Transfer
value at
31 Dec 08
£0003
Transfer
value at
31 Dec 09
£0004
Age at
31 Dec 09
Increase
in transfer
value*
over the
period
£000
Increase/
(decrease)
in accrued
pension†
over the
period
£000
Transfer
value*
of the
increase/
(decrease)
in accrued
pension† at
31 Dec 09
£000
Other
pension
costs to the
company
over the
period
£0005
Other
allowances
in lieu of
pension
£0006
Other
pension
related
benefit
costs
£0007
62
4.5
(0.5)
47.5
44.1
(3.4)
(0.5)
(4.9)
623.7
–
54.5
63
57
236.0
127.0
(76.7) 6,045.5 5456.4
1037.2
853.7
(1.2)
(589.1)
183.5
(76.7) (1,773.3)
(9.8)
(1.2)
–
44.4
–
–
–
2.1
48
32.3
5.0
294.6
466.0
165.5
5.0
66.2
–
128.2
3.4
51
–
–
–
–
–
–
–
18.8
112.1
4.9
55
254.8
18.4 3,532.2 4,897.6 1,359.4
18.4
347.8
–
–
12.4
Directors’ pensions
Marjorie
Scardino
David Bell
(stepped
down 1 May
2009)
Will Ethridge
Rona
Fairhead
Robin
Freestone
John
Makinson
* Less directors’ contributions.
† Net of inflation. An inflation rate of 0% has been used.
Note 1 The accrued pension at 31 December 2009 is that which would become payable from normal retirement age if the member left service at
31 December 2009. For Marjorie Scardino it relates only to the pension from the US Plan. For David Bell this is the pension in payment as at 31 December
2009. For Will Ethridge it relates to his pension from the US Plan and US SERP. For Rona Fairhead it relates to the pension payable from the UK Plan.
For John Makinson it relates to the pension from the UK Plan, the FURBS and the UURBS in aggregate.
Note 2 For Marjorie Scardino and Will Ethridge, the increase in accrued pension figure is negative due to movements in exchange rates over the year.
Note 3 For David Bell, this is the value of his pre-commutation pension at his Normal Retirement Date based on market conditions at 31 December 2008.
Note 4 The UK transfer values at 31 December 2009 are calculated using the assumptions for cash equivalents payable from the UK Plan and are based
on the accrued pension at that date. For David Bell the transfer value has been calculated as the value of the pension in payment at 31 December 2009.
For the US SERP, transfer values are calculated using a discount rate equivalent to current US long-term bond yields. The US Plan is a lump sum plan and
the accrued balance is shown.
Note 5 For UK benefits, this column comprises employer contributions to the Money Purchase 2003 section of the Pearson Group Pension Plan. For US
benefits, it includes company contributions to funded defined contribution plans and notional contributions to unfunded defined contribution plans.
Note 6 This column comprises cash allowances paid in lieu of pension benefits above the plan earnings cap.
Note 7 This column comprises life cover and long-term disability insurance not covered by the retirement plans.
Note 8 David Bell did not receive any cash in lieu of pension benefits in 2009.
Table 3: Interests of directors
Glen Moreno
Marjorie Scardino
David Arculus
David Bell (stepped down 1 May 2009)
Terry Burns
Patrick Cescau
Will Ethridge
Rona Fairhead
Robin Freestone
Susan Fuhrman
Ken Hydon
John Makinson
CK Prahalad
Section 5 Governance
73
Ordinary shares
at 1 Jan 09
Ordinary shares
at 31 Dec 09
210,000 210,000
824,124
632,755
13,044
11,740
253,050
250,348
12,008
10,290
5,356
4,144
128,758 262,988
209,259 270,982
118,996
9,384
9,774
474,581
2,197
44,379
7,365
8,559
397,733
969
Note 1 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.
Note 2 No director sold shares during the year other than to satisfy income tax liability on the release of restricted shares.
Note 3 At 31 December 2009, John Makinson held 1,000 shares in Interactive Data Corporation.
Note 4 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.
Note 5 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 31 December 2009 was 891.0p per share and the range during the year was 578.0p to 892.5p.
Note 6 At 31 December 2009, Patrick Cescau held 168,000 Pearson bonds.
Note 7 There were no movements in ordinary shares between 1 January 2010 and a month prior to the sign-off of this report.
74
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Table 4: Movements in directors’ interests in restricted shares
Restricted shares designated as: a annual bonus share matching plan; b long-term incentive plan; * where shares at
31 December 2009 have vested and are held pending release; and ** where dividend-equivalent shares were added
to the released shares.
Date of award
Marjorie Scardino
a* 22/5/07
22/5/07
a
4/6/08
a
16/12/02
b
b
26/9/03
b* 21/12/04
b* 23/9/05
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
4/3/08
b
b
3/3/09
Total
David Bell
a* 16/4/04
16/12/02
b
b
26/9/03
b* 21/12/04
b* 23/9/05
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
b
4/3/08
Total
1 Jan 09
Awarded
Released
Lapsed
31 Dec 09
Market value
at date
of award
Earliest
release
date
Date of
release
Market value
at date
of release
301,700
30,143
30,144
99,977
301,700
120,200
83,197
97,500
225,000
150,000
0
420,000
400,000
30,143
30,144
99,977
0
120,200
83,197
97,500
56,250
37,500
0
84,000 336,000
400,000
450,000
1,957,861 487,688 318,938 385,700 1,740,911
168,750
112,500
37,688
0 450,000
37,688
899.9p 22/5/10
899.9p 22/5/12
670.7p
4/6/11
638.5p 28/6/05
582.0p 29/9/06
613.0p 21/12/09
655.0p
2/3/10
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
3/3/12
654.0p
4,503
133,065
82,400
33,002
36,833
62,500
41,667
0
100,000
100,000
593,970
4,503
133,065
46,875
31,250
10,469
10,469
20,000
10,469
93,097
153,065
0
0
82,400
33,002
36,833
15,625
10,417
0
80,000
100,000
358,277
652.0p 16/4/09 16/4/09
638.5p 28/6/05
582.0p 29/9/06
613.0p 21/12/09
2/3/10
655.0p
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
791.5p
791.5p
791.5p
670.0p
791.5p
791.5p
791.5p
Section 5 Governance
75
Table 4: Movements in directors’ interests in restricted shares continued
Restricted shares designated as: a annual bonus share matching plan; b long-term incentive plan; * where shares at
31 December 2009 have vested and are held pending release; and ** where dividend-equivalent shares were added
to the released shares.
1 Jan 09
Awarded
Released
Lapsed
31 Dec 09
Market value
at date
of award
Earliest
release
date
Date of
release
Market value
at date
of release
Date of award
Will Ethridge
a* 22/5/07
22/5/07
a
a
16/4/09
b* 23/9/05
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
4/3/08
b
b
3/3/09
Total
Rona Fairhead
a* 16/4/04
a* 15/4/05
a* 12/4/06
12/4/06
a
16/12/02
b
b
26/9/03
b* 21/12/04
b* 23/9/05
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
4/3/08
b
b
3/3/09
Total
1,254
1,254
0
21,017
100,000
66,667
0
150,000
150,000
112,515
75,000
50,000
16,750
16,750
0 175,000
490,192 304,265
141,750
5,146
5,146
19,746
8,050
8,051
133,065
82,400
33,002
43,333
70,000
46,667
0
125,000
125,000
52,500
35,000
11,725
11,725
0 150,000
161,725
699,460
104,371
1,254
1,254
112,515
21,017
25,000
16,667
0
30,000 120,000
150,000
175,000
30,000 622,707
133,065
0
19,746
8,050
8,051
0
82,400
33,002
43,333
17,500
11,667
0
25,000 100,000
125,000
150,000
158,065 598,749
899.9p 22/5/10
899.9p 22/5/12
670.0p 16/4/12
655.0p 23/9/08
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
3/3/12
654.0p
652.0p 16/4/09 16/4/09
2/3/10
631.0p
12/4/11
776.2p
12/4/11
776.2p
638.5p 28/6/05
582.0p 26/9/06
613.0p 21/12/09
2/3/10
655.0p
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
3/3/12
654.0p
791.5p
791.5p
791.5p
670.0p
791.5p
791.5p
791.5p
76
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Table 4: Movements in directors’ interests in restricted shares continued
Restricted shares designated as: a annual bonus share matching plan; b long-term incentive plan; * where shares at
31 December 2009 have vested and are held pending release; and ** where dividend-equivalent shares were added
to the released shares.
Date of award
Robin Freestone
a* 12/4/06
a
12/4/06
a* 22/5/07
a 22/5/07
a 4/6/08
a
16/4/09
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
b 4/3/08
B 3/3/09
Total
John Makinson
b
16/12/02
b 26/9/03
b* 21/12/04
b* 23/9/05
b* 13/10/06
b* 13/10/06
b** 13/10/09
b* 30/7/07
b 4/3/08
b 3/3/09
Total
Total
1 Jan 09
Awarded
Released
Lapsed
31 Dec 09
Market value
at date
of award
Earliest
release
date
Date of
release
Market value
at date
of release
1,717
1,718
2,354
2,354
37,906
0
62,500
41,667
0
125,000
125,000
35,446
10,469
46,875
31,250
10,469
0 150,000
195,915
400,216
88,594
1,717
1,718
2,354
2,354
37,906
35,446
15,625
10,417
0
25,000 100,000
125,000
150,000
25,000 482,537
172,400
172,400
82,400
33,002
39,000
70,000
46,667
0
100,000
125,000
0
82,400
33,002
39,000
17,500
11,667
0
80,000
125,000
150,000
538,569
4,810,168 1,321,787 845,975 944,230 4,341,750
0 150,000
161,725
52,500
35,000
11,725
668,469
192,400
20,000
99,225
11,725
12/4/11
776.2p
776.2p
12/4/11
899.9p 22/5/10
899.9p 22/5/12
670.7p
4/6/11
670.0p 16/4/12
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
3/3/12
654.0p
638.5p 28/6/05
582.0p 26/9/06
613.0p 21/12/09
655.0p
2/3/10
767.5p 13/10/09 13/10/09
767.5p 13/10/09 13/10/09
791.5p 13/10/09 13/10/09
2/3/10
778.0p
4/3/11
649.5p
3/3/12
654.0p
791.5p
791.5p
791.5p
791.5p
791.5p
791.5p
Note 1 The number of shares shown represents the maximum number of shares that may vest, subject to any performance conditions being met.
Note 2 No variations to the terms and conditions of plan interests were made during the year.
Note 3 The performance and other conditions that apply to outstanding awards under the annual bonus share matching plan and the long-term incentive
plan and that have yet to be met were set out in the reports on directors’ remuneration for the years in which they were granted.
Note 4 In the case of the long-term incentive plan awards made on 13 October 2006, we detail separately the part of the award based on ROIC and EPS
growth (two-thirds of total award) and that part based on relative TSR (one-third of total award), because vesting of that part of the awards based on TSR
was not known at the date of the 2008 report.
Note 5 For long-term incentive awards made prior to 2004 the performance condition was the Pearson share price. The award made on 16 December
2002 lapsed as the Pearson share price failed to meet the required hurdle prior to 28 June 2009.
Section 5 Governance
77
Table 5: Movements in directors’ interests in share options
Shares under option are designated as: a executive; b worldwide save for shares; c premium priced; d long-term
incentive; and * where options are exercisable.
Date of grant
Marjorie
Scardino
c 8/6/99
c 8/6/99
d* 9/5/01
d* 9/5/01
d* 9/5/01
d* 9/5/01
Total
David Bell
b 5/5/06
b 4/5/07
c 8/6/99
c 8/6/99
d* 9/5/01
d* 9/5/01
d* 9/5/01
d* 9/5/01
Total
Will Ethridge
c 8/6/99
c 8/6/99
d* 9/5/01
d* 9/5/01
d* 9/5/01
d* 9/5/01
d* 1/11/01
d* 1/11/01
d* 1/11/01
Total
Rona
Fairhead
b 4/5/07
d* 1/11/01
d* 1/11/01
d* 1/11/01
Total
1 Jan 09
Granted
Exercised
Lapsed
31 Dec 09 Option price
Earliest
exercise
date
Expiry date
Date of
exercise
Price on
exercise
Gain on
exercise
37,583
37,583
41,550
41,550
41,550
41,550
241,366
297
821
18,705
18,705
16,350
16,350
16,350
16,350
103,928
10,802
10,802
11,010
11,010
11,010
11,010
14,680
14,680
14,680
109,684
2,371
20,000
20,000
20,000
62,371
37,583
37,583
0 1372.4p 8/6/02 8/6/09
0 1647.5p 8/6/02 8/6/09
9/5/11
9/5/11
9/5/11
9/5/11
41,550 1421.0p 9/5/02
41,550 1421.0p 9/5/03
41,550 1421.0p 9/5/04
41,550 1421.0p 9/5/05
0
0 75,166 166,200
£0
297
0 629.6p 1/8/09 1/2/10 5/8/09 704.0p
£221
18,705
18,705
821 690.4p 1/8/10 1/2/11
0 1372.4p 8/6/02 8/6/09
0 1647.5p 8/6/02 8/6/09
16,350 1421.0p 9/5/02 9/5/11
16,350 1421.0p 9/5/03 9/5/11
16,350 1421.0p 9/5/04 9/5/11
16,350 1421.0p 9/5/05 9/5/11
0
0 37,707 66,221
£221
10,802
10,802
0 1372.4p 8/6/02 8/6/09
0 1647.5p 8/6/02 8/6/09
11,010 $21.00 9/5/02 9/5/11
11,010 $21.00 9/5/03 9/5/11
11,010 $21.00 9/5/04 9/5/11
11,010 $21.00 9/5/05 9/5/11
14,680 $11.97 1/11/02 1/11/11
14,680 $11.97 1/11/03 1/11/11
14,680 $11.97 1/11/04 1/11/11
0
0 21,604 88,080
2,371 690.4p 1/8/12 1/2/13
20,000 822.0p 1/11/02 1/11/11
20,000 822.0p 1/11/03 1/11/11
20,000 822.0p 1/11/04 1/11/11
0
0
0 62,371
£0
£0
78
Pearson plc Annual report and accounts 2009
Report on directors’ remuneration continued
Table 5: Movements in directors’ interests in share options continued
Shares under option are designated as: a executive; b worldwide save for shares; c premium priced; d long-term
incentive; and * where options are exercisable.
Date of grant
Robin
Freestone
b 9/5/08
Total
John
Makinson
b 9/5/03
c 8/6/99
c 8/6/99
d* 9/5/01
d* 9/5/01
d* 9/5/01
d* 9/5/01
Total
Total
1 Jan 09
Granted
Exercised
Lapsed
31 Dec 09 Option price
Earliest
exercise
date
Expiry date
Date of
exercise
Price on
exercise
Gain on
exercise
1,757
1,757
4,178
21,477
21,477
19,785
19,785
19,785
19,785
126,272
645,378
1,757 534.8p 1/8/11
1,757
1/2/12
£0
21,477
21,477
4,178 424.8p 1/8/10 1/2/11
0 1372.4p 8/6/02 8/6/09
0 1647.5p 8/6/02 8/6/09
19,785 1421.0p 9/5/02 9/5/11
19,785 1421.0p 9/5/03 9/5/11
19,785 1421.0p 9/5/04 9/5/11
19,785 1421.0p 9/5/05 9/5/11
0
0
0 42,954 83,318
0 177,431 467,947
£0
£221
Note 1 No variations to the terms and conditions of share options were made during the year.
Note 2 Each plan is described below.
a Executive – The plans under which these options were granted were replaced with the introduction of the long-term incentive plan in 2001.
No executive options have been granted to the directors since 1998.
All options have now lapsed, having been unexercised at the tenth anniversary of the date of grant.
b Worldwide save for shares – The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a
performance target.
David Bell, Rona Fairhead, Robin Freestone and John Makinson hold options under this plan. Details of these holdings are itemised as b.
c Premium priced – The plan under which these options were granted was replaced with the introduction of the long-term incentive plan in 2001.
No Premium Priced Options (PPOs) have been granted to the directors since 1999.
The share price targets for the three-year and five-year tranches of PPOs granted in 1999 have already been met prior to 2009. The share price target for
the seven-year tranche of PPOs granted in 2000 was not met in 2009 and the options lapsed. The secondary real growth in earnings per share target for
any PPOs to become exercisable has already been met prior to 2009.
All PPOs that remain outstanding lapse if they remain unexercised at the tenth anniversary of the date of grant.
Marjorie Scardino, David Bell, Will Ethridge and John Makinson hold PPOs under this plan. Details of these awards are itemised as c.
d Long-term incentive – All options that remain outstanding are exercisable and lapse if they remain unexercised at the tenth anniversary of the date
of grant.
Details of the option grants under this plan for Marjorie Scardino, David Bell, Will Ethridge, Rona Fairhead and John Makinson are itemised as d.
Note 3 In addition, 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 one year and to acquire shares at the end of that period at a price that is the lower of the
market price at the beginning or the end of the period, both less 15%.
Note 4 The market price on 31 December 2009 was 891.0p per share and the range during the year was 578.0p to 892.5p.
Approved by the board and signed on its behalf by
David Arculus Director
10 March 2010
Section 6 Financial statements
79
Consolidated income statement
Year ended 31 December 2009
All figures in £ millions
Continuing operations
Sales
Cost of goods sold
Gross profit
Operating expenses
Share of results of joint ventures and associates
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from continuing operations
Loss for the year from discontinued operations
Profit for the year
Attributable to:
Equity holders of the company
Minority interest
Earnings per share for profit from continuing and discontinued operations
attributable to the equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
Earnings per share for profit from continuing operations attributable to the
equity holders of the company during the year (expressed in pence per share)
– basic
– diluted
Consolidated statement of comprehensive income
Year ended 31 December 2009
All figures in £ millions
Profit for the year
Net exchange differences on translation of foreign operations
Currency translation adjustment disposed – subsidiaries
Currency translation adjustment disposed – joint venture
Actuarial losses on retirement benefit obligations – Group
Actuarial losses on retirement benefit obligations – associate
Net increase in fair values of proportionate holding arising on stepped acquisition
Taxation on items recognised in other comprehensive income
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Attributable to:
Equity holders of the company
Minority interest
Notes
2009
2008
2
4
4
12
2
6
6
7
3
8
8
8
8
Notes
25
12
7
5,624
(2,539)
3,085
(2,360)
30
755
(122)
27
660
(198)
462
–
462
4,811
(2,174)
2,637
(1,986)
25
676
(136)
45
585
(172)
413
(90)
323
425
37
292
31
53.2p
53.1p
36.6p
36.6p
53.2p
53.1p
47.9p
47.9p
2009
462
(388)
–
–
(299)
(3)
18
91
(581)
(119)
(127)
8
2008
323
1,125
49
1
(71)
(3)
–
9
1,110
1,433
1,327
106
80 Pearson plc Annual report and accounts 2009
Consolidated statement of changes in equity
Year ended 31 December 2009
All figures in £millions
At 1 January 2009
Total comprehensive (expense)/income
Equity-settled transactions
Taxation on equity-settled transactions
Issue of ordinary shares under share
option schemes
Purchase of treasury shares
Release of treasury shares
Put option over minority interest
Changes in minority shareholding
Dividends
At 31 December 2009
All figures in £millions
At 1 January 2008
Total comprehensive income
Equity-settled transactions
Taxation on equity-settled transactions
Issue of ordinary shares under share
option schemes
Purchase of treasury shares
Release of treasury shares
Changes in minority shareholding
Dividends
At 31 December 2008
Equity attributable to the equity holders of the company
Share
capital
202
–
–
–
1
–
–
–
–
–
203
Share
premium
2,505
–
–
–
7
–
–
–
–
–
2,512
Treasury
shares
(222)
–
–
–
Translation
reserve
586
(359)
–
–
–
(33)
29
–
–
–
(226)
–
–
–
–
–
–
227
Retained
earnings
1,679
232
37
6
–
–
(29)
(23)
–
(273)
1,629
Total
4,750
(127)
37
6
8
(33)
–
(23)
–
(273)
4,345
Minority
Total
interest
equity
274 5,024
(119)
37
6
8
–
–
8
–
(33)
–
–
–
(23)
–
24
24
(15)
(288)
291 4,636
Equity attributable to the equity holders of the company
Share
Share
capital
premium
202 2,499
–
–
–
–
–
–
Treasury
shares
(216)
–
–
–
Translation
reserve
(514)
1,100
–
–
–
–
–
–
–
202
6
–
–
–
–
2,505
–
(47)
41
–
–
(222)
–
–
–
–
–
586
Retained
earnings
1,724
227
33
(7)
–
–
(41)
–
(257)
1,679
Total
3,695
1,327
33
(7)
6
(47)
–
–
(257)
4,750
Minority
interest
Total
equity
179 3,874
1,433
106
33
–
(7)
–
–
6
–
(47)
–
–
6
6
(274)
(17)
274 5,024
The translation reserve includes exchange differences arising from the translation of the net investment in
foreign operations and of borrowings and other currency instruments designated as hedges of such investments.
Consolidated balance sheet
As at 31 December 2009
All figures in £ millions
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Deferred income tax assets
Financial assets – Derivative financial instruments
Retirement benefit assets
Other financial assets
Other receivables
Current assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Financial assets – Derivative financial instruments
Financial assets – Marketable securities
Cash and cash equivalents (excluding overdrafts)
Total assets
Liabilities
Non-current liabilities
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Deferred income tax liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Other liabilities
Current liabilities
Trade and other liabilities
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Current income tax liabilities
Provisions for other liabilities and charges
Total liabilities
Net assets
Section 6 Financial statements
81
Notes
2009
2008
10
11
12
13
16
25
15
22
20
21
22
16
14
17
18
16
13
25
23
24
24
18
16
23
388
5,129
30
387
112
–
62
112
6,220
650
445
1,284
–
63
750
3,192
9,412
(1,934)
(2)
(473)
(339)
(50)
(253)
(3,051)
(1,467)
(74)
(7)
(159)
(18)
(1,725)
(4,776)
4,636
423
5,353
23
372
181
49
63
152
6,616
695
501
1,342
3
54
685
3,280
9,896
(2,019)
(15)
(447)
(167)
(33)
(221)
(2,902)
(1,429)
(344)
(5)
(136)
(56)
(1,970)
(4,872)
5,024
82 Pearson plc Annual report and accounts 2009
Consolidated balance sheet continued
All figures in £ millions
Equity
Share capital
Share premium
Treasury shares
Translation reserve
Retained earnings
Total equity attributable to equity holders of the company
Minority interest
Total equity
Notes
2009
2008
27
27
28
203
2,512
(226)
227
1,629
4,345
291
4,636
202
2,505
(222)
586
1,679
4,750
274
5,024
These financial statements have been approved for issue by the board of directors on 10 March 2010 and signed
on its behalf by
Robin Freestone Chief financial officer
Section 6 Financial statements
83
Consolidated cash flow statement
Year ended 31 December 2009
All figures in £ millions
Cash flows from operating activities
Net cash generated from operations
Interest paid
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Acquisition of joint ventures and associates
Purchase of investments
Purchase of property, plant and equipment (PPE)
Proceeds from sale of investments
Proceeds from sale of PPE
Purchase of intangible assets
Disposal of subsidiaries, net of cash disposed
Interest received
Dividends received from joint ventures and associates
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Purchase of treasury shares
Proceeds from borrowings
Liquid resources acquired
Repayment of borrowings
Finance lease principal payments
Dividends paid to company’s shareholders
Dividends paid to minority interest
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Notes
2009
2008
31
29
31
30
27
9
17
1,012
(90)
(103)
819
(208)
(14)
(10)
(62)
–
1
(58)
14
3
22
(312)
8
(33)
296
(13)
(343)
(2)
(273)
(20)
(380)
(36)
91
589
680
894
(87)
(89)
718
(395)
(5)
(1)
(75)
5
2
(45)
111
11
23
(369)
6
(47)
455
–
(275)
(3)
(257)
(28)
(149)
(103)
97
492
589
84 Pearson plc Annual report and accounts 2009
Independent auditors’ report to the members of Pearson plc
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements
are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether
the accounting policies are appropriate to the Group’s
and the company’s circumstances and have been
consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates
made by the directors; and the overall presentation of
the financial statements.
Opinion on statements
In our opinion:
The financial statements give a true and fair view of the
state of the Group’s and of the company’s affairs as at
31 December 2009 and of the Group’s profit and Group’s
and company’s cash flows for the year then ended;
The consolidated financial statements have been
properly prepared in accordance with IFRS as adopted by
the European Union;
The company financial statements have been properly
prepared in accordance with IFRS as adopted by the
European Union and as applied in accordance with the
provisions of the Companies Act 2006; and
The financial statements have been prepared in
accordance with the requirements of the Companies Act
2006 and, as regards the consolidated financial
statements, Article 4 of the lAS Regulation.
We have audited the consolidated and company
financial statements (together the ‘financial statements’)
of Pearson plc for the year ended 31 December 2009.
The consolidated financial statements comprise the
consolidated income statement, the consolidated
balance sheet, the consolidated statement of
comprehensive income, the consolidated statement of
changes in equity, the consolidated cash flow statement
and the related notes to the consolidated financial
statements. The company financial statements comprise
the company statement of comprehensive income, the
company statement of changes in equity, the company
balance sheet, the company cash flow statement and
the related notes to the company financial statements.
The financial reporting framework that has been applied
in their preparation is applicable law and International
Financial Reporting Standards (IFRS) as adopted by the
European Union and, as regards the company financial
statements, as applied in accordance with the provisions
of the Companies Act 2006.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors’
responsibilities set out in the Governance section of
the directors’ report, the directors are responsible for
the preparation of the financial statements and for
being satisfied that they give a true and fair view.
Our responsibility is to audit the financial statements
in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors.
This report, including the opinions, has been prepared
for and only for the company’s members as a body in
accordance with Chapter 3 of Part 16 of the Companies
Act 2006 and for no other purpose. We do not, in giving
these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report
is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Section 6 Financial statements
85
Under the Listing Rules we are required to review:
The directors’ statement set out in the Governance
section of the directors’ report in relation to going
concern; and
The parts of the corporate governance statement relating
to the company’s compliance with the nine provisions of
the June 2008 Combined Code specified for our review.
Ranjan Sriskandan (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
10 March 2010
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
The part of the report on directors’ remuneration to be
audited has been properly prepared in accordance with
the Companies Act 2006;
The information given in the directors’ report for the
financial year for which the financial statements are
prepared is consistent with the financial statements; and
The information given in the corporate governance
statement set out in the Governance section of the
directors’ report with respect to internal control and risk
management systems and about share capital structures
is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
Adequate accounting records have not been kept by
the company, or returns adequate for our audit have
not been received from branches not visited by us; or
The company financial statements and the information
in the report on directors’ remuneration that is described
as having been audited are not in agreement with the
accounting records and returns; or
Certain disclosures of directors’ remuneration specified
by law are not made; or
We have not received all the information and
explanations we require for our audit; or
A corporate governance statement has not been
prepared by the company.
86 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements
General information
Pearson plc (the company) and its subsidiaries
(together the Group) are international media
businesses covering education, business information
and consumer publishing.
The company is a limited liability company incorporated
and domiciled in England. The address of its registered
office is 80 Strand, London WC2R 0RL.
The company has its primary listing on the London
Stock Exchange but is also listed on the New York
Stock Exchange.
These consolidated financial statements were approved
for issue by the board of directors on 10 March 2010.
1. Accounting policies
The principal accounting policies applied in the
preparation of these consolidated financial statements
are set out below.
a. Basis of preparation
These consolidated financial statements have been
prepared in accordance with International Financial
Reporting Standards (IFRS) and International
Financial Reporting Interpretations Committee (IFRIC)
interpretations as adopted by the European Union (EU)
and with those parts of the Companies Act 1985 and/or
the Companies Act 2006 (as applicable) applicable to
companies reporting under IFRS. These consolidated
financial statements are also prepared in accordance
with IFRS as issued by the International Accounting
Standards Board (IASB). In respect of the accounting
standards applicable to the Group there is no difference
between EU-adopted and IASB-adopted IFRS. The Group
transitioned from UK GAAP to IFRS on 1 January 2003.
These consolidated financial statements have been
prepared under the historical cost convention as
modified by the revaluation of financial assets and
liabilities (including derivative financial instruments)
to fair value.
1. Interpretations and amendments to published
standards effective in 2009
IAS 1 (Revised) ‘Presentation of Financial Statements’,
effective for annual reporting periods beginning on or
after 1 January 2009. The amendments require a number
of presentational changes including the requirement to
present a statement of changes in equity as a primary
statement and the introduction of the statement of
comprehensive income, which presents all items
of recognised income and expense, either in one
statement or in two linked statements. Management
have elected to present two statements.
Amendments to IAS 23 ‘Borrowing Costs’, effective for
annual reporting periods beginning on or after 1 January
2009. The amendment requires capitalisation of
borrowing costs that relate to qualifying assets (ones
that take a substantial amount of time to get ready for
use or sale, with the exception of assets measured at
fair value or inventories manufactured in large quantities
or on a repetitive basis). Management have assessed
that this amendment has no impact on the Group’s
financial statements as there are currently no material
qualifying assets.
Amendments to IFRS 7 ‘Financial Instruments:
Disclosures’, effective for annual reporting periods
beginning on or after 1 January 2009. The amendments
require additional disclosures about fair value
measurement and liquidity risk. For financial instruments
measured at fair value in the balance sheet disclosure is
required, based on observability of inputs, into a three
level fair value hierarchy. In addition, a reconciliation
between the opening and closing balance for level 3 fair
value measurements must be presented, along with
significant transfers between the levels of the hierarchy.
The amendments also clarify the scope of liquidity risk
disclosures. Fair value measurement and liquidity risk
disclosures are detailed in note 19.
Amendments to IFRS 2 ‘Share-based Payment’, effective
for annual reporting periods beginning on or after
1 January 2009. The amendment clarifies that only
service and performance conditions are vesting
conditions and that all cancellations, whether Group
or counterparty, should be accounted for the same way.
Management have determined that this does not have
any impact on the financial statements for the Group.
Section 6 Financial statements
87
In the 2008 accounts the Group early adopted IFRS 8
‘Operating Segments’, effective for annual reporting
periods beginning on or after 1 January 2009.
The standard requires a management approach to
reporting segmental information and six reporting
segments have been identified under IFRS 8 as detailed
in note 2.
IFRIC 13 ‘Customer Loyalty Programmes’, effective for
annual reporting periods beginning on or after 1 July
2008. IFRIC 13 explains how entities that grant loyalty
award credit to customers should account for their
obligations to provide free or discounted goods or
services to customers who redeem award credits. As no
Group entities operate a customer loyalty programme
management have assessed that IFRIC 13 is not relevant
to the Group.
IFRIC 15 ‘Agreements for the Construction of Real Estate’,
effective for annual reporting periods beginning on or
after 1 January 2009. IFRIC 15 addresses the accounting
by entities that undertake the construction of real estate
with guidance on determining whether an agreement for
the construction of real estate falls within the scope of
IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As no
Group entities undertake the construction of real estate
management have assessed that IFRIC 15 is not relevant
to the Group.
IFRIC 16 ‘Hedges of a Net Investment in Foreign
Operations’, effective for annual reporting periods
beginning on or after 1 October 2008. IFRIC 16 provides
guidance on net investment hedging including which
foreign currency risks within the Group qualify for
hedging and where the hedging investments can be held
within the Group. Management have assessed that this
has no impact on the Group’s financial statements.
1. Accounting policies continued
a. Basis of preparation continued
1. Interpretations and amendments to published
standards effective in 2009 – continued
Amendments to IAS 32 ‘Financial Instruments:
Presentation’ and IAS 1 ‘Presentation of Financial
Statements’ – Puttable Financial Instruments and
Obligations Arising on Liquidation, effective for annual
reporting periods beginning on or after 1 January 2009.
The amendments require puttable financial instruments
or investments that impose on the entity an obligation to
another party in respect of a share of net assets only on
liquidation to be classified as equity. Management have
determined that this has no impact on the financial
statements of the Group.
Amendments to IFRIC 9 ‘Reassessment of Embedded
Derivatives’ and IAS 39 ‘Financial Instruments:
Recognition and Measurement’, effective for annual
reporting periods ending on or after 30 June 2009.
The amendments clarify the position on embedded
derivatives following the earlier amendments to IAS 39
regarding reclassification. The amendment to IFRIC 9
requires an entity to assess whether an embedded
derivative must be separated from a host contract when
the entity reclassifies a hybrid financial asset out of the
fair value through profit or loss category. IAS 39 now
states that if an embedded derivative cannot be reliably
measured, the entire hybrid instrument must remain
classified as at fair value through profit and loss.
Management have determined this has no impact on the
financial statements of the Group.
‘Improvements to Financial Reporting Standards 2008’,
mostly effective for annual reporting periods beginning
on or after 1 January 2009. This is the first standard
published under the IASB’s annual improvements
process which is designed to deal with non-urgent minor
amendments to standards. Of the 35 amendments
issued, the adoption of the following amendment
resulted in a change to accounting policy but did not
have any significant impact on the Group’s financial
position or performance.
Amendments to IAS 38 ‘Intangible Assets’ require
expenditure on advertising and promotional activities to
be recognised as an expense when the Group either has
the right to access the goods or has received the service,
rather than when the Group uses the goods or service.
Other amendments did not have any impact on the
accounting policies or financial statements of the Group.
88 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
IFRS 9 ‘Financial Instruments’, effective for annual
reporting periods beginning on or after 1 January 2013.
The new standard details the requirements for the
classification and measurement of financial assets.
‘Improvements to IFRSs – 2009’ effective dates vary
upon the amendment. This is the second set of
amendments published under the IASB’s annual
improvements process and incorporates minor
amendments to 12 standards and interpretations.
IFRIC 18 ‘Transfers of Assets from Customers’ effective for
transfers of assets from customers received on or after
1 July 2009. IFRIC 18 states that when an item of property,
plant and equipment is received from a customer and it
meets the definition of an asset from the perspective of
the recipient, the recipient should recognise the asset
at its fair value at the date of transfer and recognise the
credit in accordance with IAS 18 ‘Revenue’.
IFRIC 19 ‘Extinguishing Financial Liabilities with Equity
Instruments’, effective for annual reporting periods
beginning on or after 1 July 2010. IFRIC 19 clarifies
accounting by entities issuing equity instruments to
extinguish all or part of a financial liability.
Amendments to IFRIC 14 ‘Prepayments of a Minimum
Funding Requirement,’ effective for annual reporting
periods beginning on or after 1 January 2011.
This amendment remedies a consequence of IFRIC 14
where, in certain circumstances, an entity was not
permitted to recognise prepayments of a minimum
funding requirement as an asset.
Management are currently assessing the impact of these
new standards, interpretations and amendments on the
Group’s financial statements.
In addition, management has assessed the relevance
of the following interpretation with respect to the Group’s
operations:
1. Accounting policies continued
a. Basis of preparation continued
2. Standards, interpretations and amendments to
published standards that are not yet effective
The Group has not early adopted the following new
pronouncements that are not yet effective:
IFRS 3 (Revised) ‘Business Combinations’ and
amendments to IAS 27 ‘Consolidated and Separate
Financial Statements’, effective for annual
reporting periods beginning on or after 1 July 2009.
The amendments affect the accounting for business
combinations, including the requirement to re-measure
the fair value of previously held interests in step
acquisitions with any gain or loss arising being
recognised in the income statement, the requirement
to expense acquisition costs and the requirement to
recognise adjustments to contingent consideration in
the income statement.
Amendments to IAS 39 ‘Financial Instruments:
Recognition and Measurement’, effective for annual
reporting periods beginning on or after 1 July 2009.
These amendments clarify that inflation may only be
hedged where changes in inflation are a specified
portion of cash flows of a financial instrument, and also
clarify hedging with options.
Amendments to IAS 24 ‘Related Parties’, effective for
annual reporting periods beginning on or after 1 January
2011. The amendments simplify disclosure for
government related entities and clarify the definition
of a related party.
Amendments to IFRS 2 ‘Share-based Payment’: Group
cash-settled share-based payment transactions,
effective for annual reporting periods beginning on or
after 1 January 2010. This amendment clarifies the scope
and accounting for group cash-settled share-based
payment transactions.
Amendments to IAS 32 ‘Financial Instruments:
Presentation’ – Classification of Rights, effective for
annual reporting periods beginning on or after 1 February
2010. The amendment clarifies that rights, options or
warrants issued to a acquire a fixed number of an entity’s
own non-derivative equity instruments for a fixed amount
in any currency are classified as equity instruments
provided the offer is made pro-rata to all existing owners
of the same class of the entity’s own non-derivative
equity instruments.
Section 6 Financial statements
89
1. Accounting policies continued
a. Basis of preparation continued
2. Standards, interpretations and amendments to
published standards that are not yet effective – continued
IFRIC 17 ‘Distributions of Non-cash Assets to Owners’,
effective for annual reporting periods beginning on
or after 1 July 2009. IFRIC 17 provides guidance on
the appropriate accounting treatment when an entity
distributes assets other than cash as dividends,
including recognition upon authorisation and
measurement at fair value of assets distributed, with
any difference between fair value and carrying value of
these assets being recognised in the income statement
when an entity settles the dividend payable. This does
not apply to distributions of non-cash assets under
common control. This interpretation will have no impact
on the Group’s financial statements as the Group does
not currently distribute non-cash assets.
3. Critical accounting assumptions and judgements
The preparation of financial statements in conformity
with IFRS requires the use of certain critical accounting
assumptions. It also requires management to exercise
its judgement in the process of applying the Group’s
accounting policies. The areas requiring a higher degree
of judgement or complexity or areas where assumptions
and estimates are significant to the consolidated
financial statements, are discussed in the relevant
accounting policies under the following headings:
Intangible assets:
Intangible assets:
Royalty advances
Taxation
Employee benefits:
Revenue recognition
Goodwill
Pre-publication assets
Pension obligations
b. Consolidation
1. Business combinations The purchase method of
accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is
measured as the fair value of the assets given, equity
instruments issued and liabilities incurred or assumed
at the date of exchange, plus costs directly attributable
to the acquisition.
Where the settlement of consideration payable is
deferred, or contingent on future events, the fair value of
the deferred component is determined by discounting
the amount payable or probable to be paid to its present
value using an appropriate discount rate.
Identifiable assets and contingent assets acquired and
identifiable liabilities and contingent liabilities assumed
in a business combination are measured initially at
their fair values at the acquisition date. For material
acquisitions, the fair value of the acquired intangible
assets is determined by an external, independent valuer.
The excess of the cost of acquisition over the fair value of
the Group’s share of the identifiable net assets acquired
is recorded as goodwill. See note 1e(1) for the accounting
policy on goodwill.
2. Subsidiaries Subsidiaries are entities over which
the Group has the power to govern the financial
and operating policies generally accompanying a
shareholding of more than one half of the voting rights.
Subsidiaries are fully consolidated from the date on
which control is transferred to the Group and are
de-consolidated from the date that control ceases.
3. Transactions with minority interests Transactions
with minority interests are treated as transactions
with shareholders. Any surplus or deficit arising from
disposals to a minority interest is recorded in equity.
For purchases from a minority interest, the difference
between consideration paid and the relevant share
acquired of the carrying value of the subsidiary is
recorded in equity.
4. Joint ventures and associates Joint ventures are
entities in which the Group holds an interest on a long-
term basis and which are jointly controlled, with one or
more other venturers, under a contractual arrangement.
Associates are entities over which the Group has
significant influence but not the power to control the
financial and operating policies, generally accompanying
a shareholding of between 20% and 50% of the voting
rights. Investments in joint ventures and associates are
accounted for by the equity method and are initially
recognised at cost.
The Group’s share of its joint ventures’ and associates’
post-acquisition profits or losses is recognised in the
income statement and its share of post-acquisition
movements in reserves is recognised in reserves.
The Group’s share of its joint ventures’ and associates’
results is recognised as a component of operating profit
as these operations form part of the core publishing
business of the Group and are an integral part of
existing wholly-owned businesses. The cumulative post-
acquisition movements are adjusted against the carrying
amount of the investment. When the Group’s share of
losses in a joint venture or associate equals or exceeds
its interest in the joint venture or associate, the Group
does not recognise further losses, unless the Group has
incurred obligations or made payments on behalf of the
joint venture or associate.
90 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
1. Accounting policies continued
c. Foreign currency translation
1. Functional and presentation currency Items included
in the financial statements of each of the Group’s
entities are measured using the currency of the primary
economic environment in which the entity operates
(the ‘functional currency’). The consolidated financial
statements are presented in sterling, which is the
company’s functional and presentation currency.
2. Transactions and balances Foreign currency
transactions are translated into the functional currency
using the exchange rates prevailing at the dates of
the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions
and from the translation at year end exchange rates of
monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement,
except when deferred in equity as qualifying net
investment hedges.
3. Group companies The results and financial position
of all Group companies that have a functional currency
different from the presentation currency are translated
into the presentation currency as follows:
i) assets and liabilities are translated at the closing rate
at the date of the balance sheet;
ii) income and expenses are translated at average
exchange rates;
iii) all resulting exchange differences are recognised
as a separate component of equity.
On consolidation, exchange differences arising from
the translation of the net investment in foreign entities,
and of borrowings and other currency instruments
designated as hedges of such investments, are taken
to shareholders’ equity. The Group treats specific inter-
company loan balances, which are not intended to
be repaid in the foreseeable future, as part of its net
investment. When a foreign operation is sold, such
exchange differences are recognised in the income
statement as part of the gain or loss on sale.
At the date of transition to IFRS the cumulative
translation differences in respect of foreign operations
have been deemed to be zero.
Any gains and losses on disposals of foreign operations
will exclude translation differences that arose prior to the
transition date.
The principal overseas currency for the Group is the
US dollar. The average rate for the year against sterling
was $1.57 (2008: $1.85) and the year end rate was
$1.61 (2008: $1.44).
d. Property, plant and equipment
Property, plant and equipment are stated at historical
cost less depreciation. Land is not depreciated.
Depreciation on other assets is calculated using the
straight-line method to allocate their cost less their
residual values over their estimated useful lives
as follows:
Buildings (freehold):
Buildings (leasehold):
Plant and equipment:
20–50 years
over the period of the lease
3–10 years
The assets’ residual values and useful lives are reviewed,
and adjusted if appropriate, at each balance sheet date.
The carrying value of an asset is written down to its
recoverable amount if the carrying value of the asset
is greater than its estimated recoverable amount.
e. Intangible assets
1. Goodwill Goodwill represents the excess of the cost
of an acquisition over the fair value of the Group’s share
of the net identifiable assets of the acquired subsidiary,
associate or joint venture at the date of acquisition.
Goodwill on acquisitions of subsidiaries is included in
intangible assets. Goodwill on acquisitions of associates
and joint ventures is included in investments in
associates and joint ventures.
Goodwill is tested annually for impairment and
carried at cost less accumulated impairment losses.
An impairment loss is recognised to the extent
that the carrying value of goodwill exceeds the
recoverable amount. The recoverable amount is the
higher of fair value less costs to sell and value in use.
These calculations require the use of estimates and
significant management judgement. A description of
the key assumptions and sensitivities is included in
note 11. Goodwill is allocated to cash-generating units
for the purpose of impairment testing. The allocation is
made to those cash-generating units that are expected
to benefit from the business combination in which the
goodwill arose.
Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
Section 6 Financial statements
91
1. Accounting policies continued
e. Intangible assets continued
1. Goodwill – continued
IFRS 3 ‘Business Combinations’ has not been applied
retrospectively to business combinations before the
date of transition to IFRS. Subject to the transition
adjustments to IFRS required by IFRS 1, the accounting
for business combinations before the date of transition
has been grandfathered.
2. Acquired software Software separately acquired for
internal use is capitalised at cost. Software acquired
in material business combinations is capitalised at
its fair value as determined by an independent valuer.
Acquired software is amortised on a straight-line basis
over its estimated useful life of between three and
eight years.
3. Internally developed software Internal and external
costs incurred during the preliminary stage of developing
computer software for internal use are expensed as
incurred. Internal and external costs incurred to develop
computer software for internal use during the application
development stage are capitalised if the Group expects
economic benefits from the development. Capitalisation
in the application development stage begins once the
Group can reliably measure the expenditure attributable
to the software development and has demonstrated
its intention to complete and use the software. Internally
developed software is amortised on a straight-line basis
over its estimated useful life of between three
and eight years.
4. Acquired intangible assets Acquired intangible assets
include customer lists and relationships, trademarks
and brands, publishing rights, content and technology.
These assets are capitalised on acquisition at cost and
included in intangible assets. Intangible assets acquired
in material business combinations are capitalised at
their fair value as determined by an independent valuer.
Intangible assets are amortised over their estimated
useful lives of between two and 20 years, using a
depreciation method that reflects the pattern of their
consumption.
5. Pre-publication assets Pre-publication assets
represent direct costs incurred in the development
of educational programmes and titles prior to their
publication. These costs are recognised as current
intangible assets where the title will generate probable
future economic benefits and costs can be measured
reliably. Pre-publication assets are amortised upon
publication of the title over estimated economic lives
of five years or less, being an estimate of the expected
operating life cycle of the title, with a higher proportion
of the amortisation taken in the earlier years.
The investment in pre-publication assets has been
disclosed as part of cash generated from operations in
the cash flow statement (see note 31).
The assessment of the recoverability of pre-publication
assets and the determination of the amortisation profile
involve a significant degree of judgement based on
historical trends and management estimation of future
potential sales. An incorrect amortisation profile could
result in excess amounts being carried forward as
intangible assets that would otherwise have been
written off to the income statement in an earlier period.
Reviews are performed regularly to estimate
recoverability of pre-publication assets. The carrying
amount of pre-publication assets is set out in note 20.
f. Other financial assets
Other financial assets, designated as available for sale
investments, are non-derivative financial assets
measured at estimated fair value. Changes in the fair
value are recorded in equity in the fair value reserve.
On the subsequent disposal of the asset, the net fair
value gains or losses are taken to the income statement.
g. Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined using the first in first
out (FIFO) method. The cost of finished goods and work
in progress comprises raw materials, direct labour,
other direct costs and related production overheads.
Net realisable value is the estimated selling price in
the ordinary course of business, less estimated costs
necessary to make the sale. Provisions are made for
slow moving and obsolete stock.
h. Royalty advances
Advances of royalties to authors are included within
trade and other receivables when the advance is paid
less any provision required to adjust the advance to
its net realisable value. The realisable value of royalty
advances relies on a degree of management judgement
in determining the profitability of individual author
contracts. If the estimated realisable value of author
contracts is overstated, this will have an adverse effect
on operating profits as these excess amounts
will be written off.
The recoverability of royalty advances is based upon an
annual detailed management review of the age of the
advance, the future sales projections for new authors
and prior sales history of repeat authors. The royalty
advance is expensed at the contracted or effective
royalty rate as the related revenues are earned.
Royalty advances which will be consumed within
one year are held in current assets. Royalty advances
which will be consumed after one year are held in
non-current assets.
92 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
1. Accounting policies continued
i. Newspaper development costs
Investment in the development of newspaper titles
consists of measures to increase the volume and
geographical spread of circulation. The measures
include additional and enhanced editorial content,
extended distribution and remote printing. These costs
are expensed as incurred as they do not meet the criteria
under IAS 38 ‘Intangible Assets’ to be capitalised as
intangible assets.
j. Cash and cash equivalents
Cash and cash equivalents in the cash flow statement
include cash in hand, deposits held at call with banks,
other short-term highly liquid investments with original
maturities of three months or less, and bank overdrafts.
Bank overdrafts are included in borrowings in current
liabilities in the balance sheet.
Short-term deposits and marketable securities with
maturities of greater than three months do not qualify
as cash and cash equivalents. Movements on these
financial instruments are classified as cash flows from
financing activities in the cash flow statement as these
amounts are used to offset the borrowings of the Group.
k. Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue
of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds.
Where any Group company purchases the company’s
equity share capital (treasury shares) the consideration
paid, including any directly attributable incremental
costs (net of income taxes) is deducted from equity
attributable to the company’s equity holders until
the shares are cancelled, reissued or disposed of.
Where such shares are subsequently sold or reissued,
any consideration received, net of any directly
attributable transaction costs and the related income
tax effects, is included in equity attributable to the
company’s equity holders.
l. Borrowings
Borrowings are recognised initially at fair value, which
is proceeds received net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost
with any difference between the proceeds (net of
transaction costs) and the redemption value being
recognised in the income statement over the period
of the borrowings using the effective interest method.
Accrued interest is included as part of borrowings.
Where a debt instrument is in a fair value hedging
relationship, an adjustment is made to its carrying
value in the income statement to reflect the hedged risk.
Interest on borrowings is expensed in the income
statement as incurred.
m. Derivative financial instruments
Derivatives are recognised at fair value and re-measured
at each balance sheet date. The fair value of derivatives
is determined by using market data and the use of
established estimation techniques such as discounted
cash flow and option valuation models. The Group
designates certain of the derivative instruments within
its portfolio to be hedges of the fair value of its bonds
(fair value hedges) or hedges of net investments in
foreign operations (net investment hedges).
Changes in the fair value of derivatives that are
designated and qualify as fair value hedges are recorded
in the income statement, together with any changes in
the fair value of the hedged asset or liability that are
attributable to the hedged risk.
The effective portion of changes in the fair value
of derivatives that are designated and qualify
as net investment hedges are recognised in other
comprehensive income. Gains and losses accumulated
in equity are included in the income statement when the
corresponding foreign operation is disposed of. Gains or
losses relating to the ineffective portion are recognised
immediately in finance income or finance costs in the
income statement.
Certain derivatives do not qualify or are not designated
as hedging instruments. Such derivatives are classified
at fair value and any movement in their fair value is
recognised immediately in finance income or finance
costs in the income statement.
n. Taxation
Current tax is recognised on the amounts expected to be
paid or recovered under the tax rates and laws that have
been enacted or substantively enacted at the balance
sheet date.
Deferred income tax is provided, using the liability
method, on temporary differences arising between the
tax bases of assets and liabilities and their carrying
amounts. Deferred income tax is determined using tax
rates and laws that have been enacted or substantively
enacted by the balance sheet date and are expected to
apply when the related deferred tax asset is realised or
the deferred income tax liability is settled.
Deferred tax assets are recognised to the extent that it
is probable that future taxable profit will be available
against which the temporary differences can be utilised.
Deferred income tax is provided in respect of the
undistributed earnings of subsidiaries other than
where it is intended that those undistributed earnings
will not be remitted in the foreseeable future.
Section 6 Financial statements
93
1. Accounting policies continued
n. Taxation continued
Current and deferred tax are recognised in the income
statement, except when the tax relates to items charged
or credited directly to equity or other comprehensive
income, in which case the tax is also recognised in
equity or other comprehensive income.
The Group is subject to income taxes in numerous
jurisdictions. Significant judgement is required in
determining the estimates in relation to the worldwide
provision for income taxes. There are many transactions
and calculations for which the ultimate tax determination
is uncertain during the ordinary course of business.
The Group recognises liabilities for anticipated tax audit
issues based on estimates of whether additional taxes
will be due. Where the final tax outcome of these matters
is different from the amounts that were initially recorded,
such differences will impact the income tax and deferred
tax provisions in the period in which such determination
is made.
Deferred tax assets and liabilities require management
judgement in determining the amounts to be recognised.
In particular, significant judgement is used when
assessing the extent to which deferred tax assets should
be recognised with consideration given to the timing and
level of future taxable income together with any future
tax planning strategies.
o. Employee benefits
1. Pension obligations The retirement benefit asset and
obligation recognised in the balance sheet represents
the net of the present value of the defined benefit
obligation and the fair value of plan assets at the
balance sheet date. The defined benefit obligation is
calculated annually by independent actuaries using the
projected unit credit method. The present value of the
defined benefit obligation is determined by discounting
estimated future cash flows using yields on high
quality corporate bonds which have terms to maturity
approximating the terms of the related liability.
The determination of the pension cost and defined
benefit obligation of the Group’s defined benefit
pension schemes depends on the selection of certain
assumptions, which include the discount rate, inflation
rate, salary growth, longevity and expected return on
scheme assets.
Actuarial gains and losses arising from differences
between actual and expected returns on plan assets,
experience adjustments on liabilities and changes in
actuarial assumptions are recognised immediately in
other comprehensive income.
The service cost, representing benefits accruing over
the year, is included in the income statement as an
operating cost. The unwinding of the discount rate on the
scheme liabilities and the expected return on scheme
assets are presented as finance costs or finance income.
Obligations for contributions to defined contribution
pension plans are recognised as an operating expense
in the income statement as incurred.
2. Other post-retirement obligations The expected costs
of post-retirement healthcare and life assurance benefits
are accrued over the period of employment, using a
similar accounting methodology as for defined benefit
pension obligations. The liabilities and costs relating to
material other post-retirement obligations are assessed
annually by independent qualified actuaries.
3. Share-based payments The fair value of options or
shares granted under the Group’s share and option
plans is recognised as an employee expense after taking
into account the Group’s best estimate of the number
of awards expected to vest. Fair value is measured at
the date of grant and is spread over the vesting period
of the option or share. The fair value of the options
granted is measured using an option model that is
most appropriate to the award. The fair value of shares
awarded is measured using the share price at the date
of grant unless another method is more appropriate.
Any proceeds received are credited to share capital
and share premium when the options are exercised.
The Group has applied IFRS 2 ‘Share-based Payment’
retrospectively to all options granted but not fully
vested at the date of transition to IFRS.
p. Provisions
Provisions are recognised if the Group has a present
legal or constructive obligation as a result of past events,
it is more likely than not that an outflow of resources
will be required to settle the obligation and the amount
can be reliably estimated. Provisions are discounted to
present value where the effect is material.
The Group recognises a provision for deferred
consideration when the payment of the deferred
consideration is probable.
The Group recognises a provision for onerous lease
contracts when the expected benefits to be derived
from a contract are less than the unavoidable costs
of meeting the obligations under the contract.
The provision is based on the present value of
future payments for surplus leased properties under
non-cancellable operating leases, net of estimated
sub-leasing income.
94 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
1. Accounting policies continued
q. Revenue recognition
Revenue comprises the fair value of the consideration
received or receivable for the sale of goods and services
net of value-added tax and other sales taxes, rebates
and discounts, and after eliminating sales within
the Group.
Revenue from the sale of books is recognised when
title passes. A provision for anticipated returns is
made based primarily on historical return rates. If these
estimates do not reflect actual returns in future periods
then revenues could be understated or overstated for
a particular period.
Circulation and advertising revenue is recognised
when the newspaper or other publication is published.
Subscription revenue is recognised on a straight-line
basis over the life of the subscription.
Where a contractual arrangement consists of two or more
separate elements that can be provided to customers
either on a stand-alone basis or as an optional extra,
such as the provision of supplementary materials with
textbooks, revenue is recognised for each element as
if it were an individual contractual arrangement.
Revenue from multi-year contractual arrangements,
such as contracts to process qualifying tests for
individual professions and government departments,
is recognised as performance occurs. The assumptions,
risks, and uncertainties inherent in long-term contract
accounting can affect the amounts and timing of
revenue and related expenses reported. Certain of these
arrangements, either as a result of a single service
spanning more than one reporting period or where the
contract requires the provision of a number of services
that together constitute a single project, are treated
as long-term contracts with revenue recognised on a
percentage of completion basis. Losses on contracts are
recognised in the period in which the loss first becomes
foreseeable. Contract losses are determined to be the
amount by which estimated total costs of the contract
exceed the estimated total revenues that will be
generated by the contract.
On certain contracts, where the Group acts as agent, only
commissions and fees receivable for services rendered
are recognised as revenue. Any third-party costs incurred
on behalf of the principal that are rechargeable under the
contractual arrangement are not included in revenue.
Income from recharges of freight and other activities
which are incidental to the normal revenue generating
activities is included in other income.
r. Leases
Leases of property, plant and equipment where the
Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance
leases are capitalised at the commencement of the lease
at the lower of the fair value of the leased property and
the present value of the minimum lease payments.
Each lease payment is allocated between the liability
and finance charges to achieve a constant rate on the
finance balance outstanding. The corresponding rental
obligations, net of finance charges, are included in
financial liabilities – borrowings. The interest element
of the finance cost is charged to the income statement
over the lease period to produce a constant periodic rate
of interest on the remaining balance of the liability for
each period. The property, plant and equipment acquired
under finance leases are depreciated over the shorter
of the useful life of the asset or the lease term.
Leases where a significant portion of the risks and
rewards of ownership are retained by the lessor
are classified as operating leases by the lessee.
Payments made under operating leases (net of any
incentives received from the lessor) are charged to
the income statement on a straight-line basis over
the period of the lease.
s. Dividends
Dividends are recorded in the Group’s financial
statements in the period in which they are approved
by the company’s shareholders. Interim dividends are
recorded in the period in which they are approved
and paid.
t. Non-current assets and liabilities held for sale
Assets and liabilities are classified as held for sale and
stated at the lower of carrying amount and fair value
less costs to sell if it is intended to recover their carrying
amount principally through a sale transaction rather than
through continuing use. No depreciation is charged in
respect of non-current assets classified as held for sale.
Amounts relating to non-current assets and liabilities
held for sale are classified as discontinued operations
in the income statement where appropriate.
u. Trade receivables
Trade receivables are stated at fair value after provision
for bad and doubtful debts and anticipated future sales
returns (see also note 1q).
Section 6 Financial statements
95
2. Segment information
The Group is organised into six business segments:
North American Education Educational publishing, assessment and testing for the school and higher education
market within the USA and Canada;
International Education Educational publishing, assessment and testing for the school and higher education market
outside of North America;
Professional Business and technology publishing and testing and certification for professional bodies;
FT Publishing Publisher of the Financial Times, business magazines and specialist information;
Interactive Data Provider of financial and business information to financial institutions and retail investors;
Penguin Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking and Dorling Kindersley.
For more detail on the services and products included in each business segment refer to the business review.
North
American
Education
Notes
International
Education Professional
FT
Publishing
Interactive
Data
Penguin
Corporate
Group
2009
2,470
–
403
1,035
–
141
(49)
354
(32)
109
275
7
43
(1)
42
358
–
39
(8)
31
484
–
148
(12)
136
1,002
24
84
(1)
83
–
–
–
–
–
5,624
31
858
(103)
755
(122)
27
660
(198)
462
All figures in £ millions
Continuing operations
Sales (external)
Sales (inter-segment)
Adjusted operating profit
Amortisation of
acquired intangibles
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from
continuing operations
Segment assets
Joint ventures
Associates
Total assets
Other segment items
Share of results of joint
ventures and associates
Capital expenditure
Depreciation
Amortisation
6
6
7
12
12
4,382
13
–
4,395
1,635
–
5
1,640
12
10, 11, 20
10
11, 20
(2)
258
24
274
6
80
16
89
377
1
–
378
1
20
10
13
420
1
7
428
25
15
5
20
471
–
–
471
–
29
21
16
1,173
3
–
1,176
924
–
–
924
9,382
18
12
9,412
–
46
9
42
–
–
–
–
30
448
85
454
96 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
2. Segment information continued
All figures in £ millions
Continuing operations
Sales (external)
Sales (inter-segment)
Adjusted operating profit
Amortisation of
acquired intangibles
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from
continuing operations
Segment assets
Joint ventures
Associates
Total assets
Other segment items
Share of results of joint
ventures and associates
Capital expenditure
Depreciation
Amortisation
6
6
7
12
12
4,952
–
–
4,952
1,358
8
4
1,370
12
10, 11, 20
10
11, 20
–
224
25
219
5
82
12
69
North
American
Education
Notes
International
Education Professional
FT
Publishing
Interactive
Data
Penguin
Corporate
Group
2008
2,002
–
303
(45)
258
866
–
135
(22)
113
244
4
36
(1)
35
390
–
74
(7)
67
406
–
121
(9)
112
903
22
93
(2)
91
–
–
–
–
–
4,811
26
762
(86)
676
(136)
45
585
(172)
413
423
–
–
423
–
22
8
12
482
2
6
490
19
17
13
12
524
–
–
524
–
25
13
12
1,211
3
–
1,214
923
–
–
923
9,873
13
10
9,896
1
51
9
36
–
–
–
–
25
421
80
360
In 2009, sales from the provision of goods were £3,947m (2008: £3,411m) and sales from the provision of services
were £1,677m (2008: £1,400m). Sales from the Group’s educational publishing, consumer publishing and
newspaper business are classified as being from the provision of goods and sales from its assessment and testing,
market pricing and other service businesses are classified as being from the provision of services.
Section 6 Financial statements
97
2. Segment information continued
Corporate costs are allocated to business segments on an appropriate basis depending on the nature of the cost
and therefore the segment result is equal to the Group operating profit. Inter-segment pricing is determined on
an arm’s-length basis. Segment assets consist of property, plant and equipment, intangible assets, inventories,
receivables, retirement benefit assets and deferred taxation and exclude cash and cash equivalents and derivative
assets. Corporate assets comprise cash and cash equivalents, marketable securities and derivative financial
instruments. Capital expenditure comprises additions to property, plant and equipment and intangible assets,
including pre-publication but excluding goodwill (see notes 10, 11 and 20).
Property, plant and equipment and intangible assets acquired through business combination were £153m (2008:
£253m) (see note 29). Capital expenditure, depreciation and amortisation include amounts relating to discontinued
operations. Discontinued operations in 2008 relate to the Data Management business (see note 3).
The Group operates in the following main geographic areas:
All figures in £ millions
Continuing operations
UK
Other European countries
USA
Canada
Asia Pacific
Other countries
Total continuing
Discontinued operations
UK
Other European countries
USA
Canada
Asia Pacific
Other countries
Total discontinued
Total
2009
Sales
2008
Non-current assets
2009
2008
748
474
3,462
201
519
220
5,624
–
–
–
–
–
–
–
5,624
754
463
2,861
167
415
151
4,811
–
–
8
–
–
–
8
4,819
941
242
3,811
204
340
121
5,659
–
–
–
–
–
–
–
5,659
701
224
4,624
209
179
14
5,951
–
–
–
–
–
–
–
5,951
Sales are allocated based on the country in which the customer is located. This does not differ materially from the
location where the order is received. Non-current assets are based on the subsidiary’s country of domicile. This is not
materially different to the location of the assets. Non-current assets comprise property, plant and equipment,
intangible assets, investments in joint ventures and associates and other receivables.
98 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
3. Discontinued operations
There are no discontinued operations in 2009. Discontinued operations in 2008 relate to the Group’s interest in the
Data Management business (sold on 22 February 2008).
An analysis of the results and cash flows of the discontinued operation is as follows:
All figures in £ millions
Sales
Operating profit
Profit before tax
Attributable tax expense
Profit after tax
Loss on disposal of discontinued operations before tax
Attributable tax expense
Loss for the year from discontinued operations
Operating cash flows
Investing cash flows
Financing cash flows
Total cash flows
4. Operating expenses
All figures in £ millions
By function:
Cost of goods sold
Operating expenses
Distribution costs
Administrative and other expenses
Other income
Total operating expenses
Total
2008
Data
Management
8
–
–
–
–
(53)
(37)
(90)
–
–
–
–
2009
2008
2,539
2,174
274
2,206
(120)
2,360
4,899
235
1,853
(102)
1,986
4,160
Section 6 Financial statements
99
Notes
2009
2008
4. Operating expenses continued
All figures in £ millions
By nature:
Utilisation of inventory
Depreciation of property, plant and equipment
Amortisation of intangible assets – Pre-publication
Amortisation of intangible assets – Other
Employee benefit expense
Operating lease rentals
Other property costs
Royalties expensed
Advertising, promotion and marketing
Information technology costs
Other costs
Other income
Total
21
10
20
11
5
843
85
307
147
1,903
171
87
497
297
96
586
(120)
4,899
832
80
244
116
1,553
168
116
415
244
76
418
(102)
4,160
2009
2008
4
2
2
1
9
2009
6
3
9
3
2
2
1
8
2008
5
3
8
During the year the Group obtained the following services from the Group’s auditor:
All figures in £ millions
Fees payable to the company’s auditor for the audit of parent company and
consolidated financial statements
The audit of the company’s subsidiaries pursuant to legislation
Tax services
Other services
Total
Reconciliation between audit and non-audit service fees is shown below:
All figures in £ millions
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act
Non-audit fees
Total
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits
of consolidated and subsidiary accounts.
Tax services include services related to tax planning and various other tax advisory matters. Other services include
due diligence on acquisitions.
100 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
5. Employee information
All figures in £ millions
Employee benefit expense
Wages and salaries (including termination benefits and restructuring costs)
Social security costs
Share-based payment costs
Retirement benefits – defined contribution plans
Retirement benefits – defined benefit plans
Other post-retirement benefits
Notes
2009
2008
1,632
152
37
62
18
2
1,903
1,317
119
33
41
37
6
1,553
26
25
25
25
The details of the emoluments of the directors of Pearson plc are shown in the report on directors’ remuneration.
Average number employed
Employee numbers
North American Education
International Education
Professional
FT Publishing
Interactive Data
Penguin
Other
Continuing operations
Discontinued operations
2009
2008
15,606
8,899
2,662
2,328
2,459
4,163
1,047
37,164
–
37,164
15,412
5,718
2,641
2,379
2,413
4,112
909
33,584
96
33,680
Section 6 Financial statements
101
6. Net finance costs
All figures in £ millions
Interest payable
Finance costs in respect of retirement benefits
Net foreign exchange losses
Other losses on financial instruments in a hedging relationship:
– fair value hedges
Other losses on financial instruments not in a hedging relationship:
– derivatives
Finance costs
Interest receivable
Finance income in respect of retirement benefits
Other gains on financial instruments in a hedging relationship:
– fair value hedges
– net investment hedges
Other gains on financial instruments not in a hedging relationship:
– amortisation of transitional adjustment on bonds
– derivatives
Finance income
Net finance costs
Analysed as:
Net interest payable
Net foreign exchange losses reflected in adjusted earnings
Finance (costs)/income in respect of retirement benefits
Net finance costs reflected in adjusted earnings
Other net finance income/(costs)
Total net finance costs
Notes
25
2009
(92)
(12)
(7)
2008
(106)
–
(11)
(1)
(7)
25
25
(10)
(122)
7
–
4
–
3
13
27
(95)
(85)
–
(12)
(97)
2
(95)
(12)
(136)
17
8
2
1
1
16
45
(91)
(89)
(7)
8
(88)
(3)
(91)
The £3m net gain (2008: £5m net loss) on fair value hedges comprises a £96m gain (2008: £156m loss) on the
underlying bonds offset by a £93m loss (2008: £151m gain) on the related derivative financial instruments.
7. Income tax
All figures in £ millions
Current tax
Charge in respect of current year
Other adjustments in respect of prior years
Total current tax charge
Deferred tax
In respect of temporary differences
Other adjustments in respect of prior years
Total deferred tax charge
Total tax charge
Notes
2009
2008
(156)
9
(147)
(55)
4
(51)
(198)
(89)
10
(79)
(97)
4
(93)
(172)
13
102 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
7. Income tax continued
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the UK tax rate
as follows:
All figures in £ millions
Profit before tax
Tax calculated at UK rate (2009: 28%, 2008: 28.5%)
Effect of overseas tax rates
Joint venture and associate income reported net of tax
Net income/(expense) not subject to tax
Utilisation of previously unrecognised tax losses
Unutilised tax losses
Prior year adjustments
Total tax charge
UK
Overseas
Total tax charge
Tax rate reflected in earnings
The tax rate reflected in adjusted earnings is calculated as follows:
All figures in £ millions
Profit before tax
Adjustments:
Amortisation of acquired intangibles
Other net finance (income)/costs
Adjusted profit before tax – continuing operations
Adjusted profit before tax – discontinued operations
Total adjusted profit before tax
Total tax charge
Adjustments:
Tax benefit on other net gains and losses
Tax benefit on amortisation of acquired intangibles
Tax charge/(benefit) on other finance income
Tax amortisation benefit on goodwill and intangibles
Adjusted income tax charge – continuing operations
Adjusted income tax charge – discontinued operations
Total adjusted income tax charge
Tax rate reflected in adjusted earnings
The tax benefit/(charge) recognised in other comprehensive income is as follows:
All figures in £ millions
Pension contributions and actuarial gains and losses
Net investment hedges and other foreign exchange gains and losses
2009
660
(185)
(40)
8
5
2
(1)
13
(198)
(43)
(155)
(198)
30.0%
2009
660
103
(2)
761
–
761
2008
585
(167)
(23)
7
(7)
4
–
14
(172)
(53)
(119)
(172)
29.4%
2008
585
86
3
674
–
674
(198)
(172)
–
(37)
1
40
(194)
–
(194)
25.5%
(7)
(31)
(1)
33
(178)
–
(178)
26.4%
2009
79
12
91
2008
10
(1)
9
A tax benefit of £6m (2008: tax charge £7m) relating to share-based payments has been recognised directly in equity.
Section 6 Financial statements
103
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company
by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased
by the company and held as treasury shares.
Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take
account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for
any tax consequences that might arise from conversion of those shares.
All figures in £ millions
Profit for the year from continuing operations
Minority interest
Earnings from continuing operations
Loss for the year from discontinued operations
Earnings
Weighted average number of shares (millions)
Effect of dilutive share options (millions)
Weighted average number of shares (millions) for diluted earnings
Earnings per share from continuing and discontinued operations
Basic
Diluted
Earnings per share from continuing operations
Basic
Diluted
Earnings per share from discontinued operations
Basic
Notes
3
2009
462
(37)
425
–
425
799.3
0.8
800.1
53.2p
53.1p
53.2p
53.1p
2008
413
(31)
382
(90)
292
797.0
0.5
797.5
36.6p
36.6p
47.9p
47.9p
–
(11.3p)
Adjusted
In order to show results from operating activities on a consistent basis, an adjusted earnings per share is presented.
The company’s definition of adjusted earnings per share may not be comparable to other similarly titled measures
reported by other companies.
The following items are excluded in the calculation of adjusted earnings:
Other net gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates
and other financial assets that are included within continuing or discontinued operations but which distort the
performance of the Group.
Amortisation of acquired intangibles is the amortisation of intangible assets acquired through business
combinations. The amortisation charge is not considered to be fully reflective of the underlying performance
of the Group.
104 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
8. Earnings per share continued
Other net finance income/costs are foreign exchange and other gains and losses that represent short-term
fluctuations in market value and foreign exchange movements on transactions and balances that are no longer
in a hedge relationship. These gains and losses are subject to significant volatility and may not be realised in
due course as it is normally the intention to hold these instruments to maturity. Other net finance costs of Group
companies are included in finance costs or finance income as appropriate. Other net finance costs of joint ventures
and associates are included within the share of results of joint ventures and associates within operating profit.
Tax on the above items is excluded from adjusted earnings. The Group also adds the benefit of tax amortisation
of goodwill and intangibles as this benefit more accurately aligns the adjusted tax charge with the expected
medium-term rate of cash tax payments.
Minority interest for the above items is excluded from adjusted earnings.
The following tables reconcile statutory earnings to adjusted earnings.
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Minority interest
Earnings
Weighted average number
of shares (millions)
Adjusted earnings per share
Statutory
income
statement
755
(95)
660
(198)
Other net
gains and
losses
–
–
–
–
Amortisation of
acquired
intangibles
103
–
103
(37)
Other net
finance
income/costs
–
(2)
(2)
1
Tax
amortisation
benefit
–
–
–
40
2009
Adjusted
income
statement
858
(97)
761
(194)
462
–
462
(37)
425
–
–
–
–
–
66
–
66
(5)
61
(1)
40
567
–
(1)
–
(1)
–
40
(2)
38
–
567
(44)
523
799.3
65.4p
Section 6 Financial statements
105
Statutory
income
statement
676
(91)
585
(172)
Other net gains
and losses
–
–
–
(7)
Amortisation of
acquired
intangibles
86
–
86
(31)
Other net
finance
income/costs
–
3
3
(1)
Tax
amortisation
benefit
–
–
–
33
413
(90)
323
(31)
292
(7)
90
83
–
83
55
–
55
(3)
52
2
–
2
–
2
33
–
33
(2)
31
2008
Adjusted
income
statement
762
(88)
674
(178)
496
–
496
(36)
460
797.0
57.7p
8. Earnings per share continued
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Loss for the year from
discontinued operations
Profit for the year
Minority interest
Earnings
Weighted average number
of shares (millions)
Adjusted earnings per share
9. Dividends
All figures in £ millions
Final paid in respect of prior year 22.0p (2008: 20.5p)
Interim paid in respect of current year 12.2p (2008: 11.8p)
2009
176
97
273
2008
163
94
257
The directors are proposing a final dividend in respect of the financial year ended 31 December 2009 of 23.3p per
share which will absorb an estimated £187m of shareholders’ funds. It will be paid on 7 May 2010 to shareholders
who are on the register of members on 9 April 2010. These financial statements do not reflect this dividend.
106 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
10. Property, plant and equipment
All figures in £ millions
Cost
At 1 January 2008
Exchange differences
Additions
Disposals
Acquisition through business combination
Reclassifications
At 31 December 2008
Exchange differences
Additions
Disposals
Acquisition through business combination
Reclassifications
At 31 December 2009
All figures in £ millions
Depreciation
At 1 January 2008
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
At 31 December 2008
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
At 31 December 2009
Carrying amounts
At 1 January 2008
At 31 December 2008
At 31 December 2009
Land and
buildings
Plant and
equipment
Assets in
course of
construction
298
54
6
(7)
2
2
355
(21)
14
(2)
1
1
348
622
138
67
(38)
29
21
839
(55)
46
(41)
17
5
811
16
6
6
–
2
(23)
7
(1)
7
–
–
(6)
7
Land and
buildings
Plant and
equipment
Assets in
course of
construction
(126)
(30)
(19)
6
(1)
(170)
11
(17)
2
–
(174)
172
185
174
(455)
(102)
(61)
36
(26)
(608)
42
(68)
39
(9)
(604)
167
231
207
–
–
–
–
–
–
–
–
–
–
–
16
7
7
Total
936
198
79
(45)
33
–
1,201
(77)
67
(43)
18
–
1,166
Total
(581)
(132)
(80)
42
(27)
(778)
53
(85)
41
(9)
(778)
355
423
388
Depreciation expense of £12m (2008: £12m) has been included in the income statement in cost of goods sold,
£7m (2008: £6m) in distribution expenses and £66m (2008: £61m) in administrative and other expenses.
The Group leases certain equipment under a number of finance lease agreements. The net carrying amount
of leased plant and equipment included within property, plant and equipment was £15m (2008: £7m).
Section 6 Financial statements
107
11. Intangible assets
All figures in £ millions
Cost
At 1 January 2008
Exchange differences
Additions – internal development
Additions – purchased
Disposals
Acquisition through business combination
Disposal through business disposal
Transfer to Pre-publication
At 31 December 2008
Exchange differences
Additions – internal development
Additions – purchased
Disposals
Acquisition through business combination
At 31 December 2009
Goodwill
Software
Acquired
customer
lists and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
3,343
1,082
–
–
(8)
153
–
–
4,570
(420)
–
–
(9)
205
4,346
217
71
29
16
(27)
17
(1)
(12)
310
(25)
35
24
(5)
–
339
187
77
–
–
–
77
–
–
341
(32)
–
–
–
38
347
62
24
–
–
–
42
–
–
128
(9)
–
–
–
24
143
136
31
–
–
–
–
(2)
–
165
(5)
–
–
–
55
215
99
62
–
–
–
97
–
–
258
(22)
–
–
–
25
261
Total
4,044
1,347
29
16
(35)
386
(3)
(12)
5,772
(513)
35
24
(14)
347
5,651
108 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
11. Intangible assets continued
All figures in £ millions
Amortisation
At 1 January 2008
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
Disposal through business disposal
Transfer to Pre-publication
At 31 December 2008
Exchange differences
Charge for the year
Disposals
At 31 December 2009
Carrying amounts
At 1 January 2008
At 31 December 2008
At 31 December 2009
Acquired
customer
lists and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Goodwill
Software
–
–
–
–
–
–
–
–
–
–
–
–
3,343
4,570
4,346
(142)
(50)
(30)
27
(13)
1
4
(203)
19
(44)
4
(224)
75
107
115
(28)
(15)
(24)
–
–
–
–
(67)
6
(35)
–
(96)
159
274
251
(4)
(3)
(10)
–
–
–
–
(17)
1
(11)
–
(27)
58
111
116
(32)
(13)
(25)
–
–
1
–
(69)
6
(22)
–
(85)
104
96
130
(24)
(12)
(27)
–
–
–
–
(63)
8
(35)
–
(90)
75
195
171
Total
(230)
(93)
(116)
27
(13)
2
4
(419)
40
(147)
4
(522)
3,814
5,353
5,129
Goodwill
The goodwill carrying value of £4,346m relates to acquisitions completed after 1 January 1998. Prior to 1 January
1998 all goodwill was written off to reserves on the date of acquisition. £3,127m of the carrying value relates to
acquisitions completed between 1 January 1998 and 31 December 2002 and £1,219m relates to acquisitions
completed after 1 January 2003 (the date of transition to IFRS).
For acquisitions completed between 1 January 1998 and 31 December 2002 no value was ascribed to intangibles
other than goodwill and the goodwill on each acquisition was amortised over a period of up to 20 years. On adoption
of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was
frozen (i.e. amortisation ceased). If goodwill had been restated then a significant value would have been ascribed
to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be
significantly lower.
For acquisitions completed after 1 January 2003 value has been ascribed to other intangible assets, which are
amortised, with only the remaining difference between the purchase price and the fair value of net assets acquired
being allocated to goodwill.
Other intangible assets
Other intangibles acquired include content, technology and software rights. Amortisation of £5m (2008: £5m)
is included in the income statement in cost of goods sold and £142m (2008: £111m) in administrative and
other expenses.
Section 6 Financial statements
109
11. Intangible assets continued
Impairment tests for cash-generating units containing goodwill
Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit
tested exceeds its carrying value.
Goodwill is allocated to 14 cash-generating units (CGUs) within the business segments as follows:
All figures in £ millions
US School Curriculum
US School Assessment and Information
US Higher Education
Canada
International Education Publishing
International Education Assessment and Testing
Professional Publishing
Professional Assessment and Testing
Pearson Education total
Financial Times
Mergermarket
Interactive Data
FT Group total
Penguin US
Penguin UK
Pearson Australia
Penguin total
Total goodwill
2009
812
652
1,064
181
468
222
13
226
3,638
43
125
184
352
190
103
63
356
4,346
2008
937
722
1,164
173
315
241
15
254
3,821
46
130
208
384
216
95
54
365
4,570
As highlighted in the 2008 business review, integration of the US School and Higher Education businesses began
in 2008. This integration continued throughout 2009 and has now advanced to a point where, from 1 January 2010,
these companies will be combined into one CGU for impairment review purposes.
The recoverable amount of each CGU is based on value in use calculations. Goodwill is tested for impairment
annually. Other than goodwill there are no intangible assets with indefinite lives. The goodwill is generally
denominated in the currency of the relevant cash flows and therefore the impairment review is not materially
sensitive to exchange rate fluctuations.
Key assumptions
The value in use calculations use cash flow projections based on financial budgets approved by management
covering a five-year period. The key assumptions used by management in the value in use calculations were:
Discount rate The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium
to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific CGU.
The average pre-tax discount rates used are in the range of 10.9% to 11.8% for the Pearson Education businesses
(2008: 10.2% to 11.7%), 12.7% to 18.1% for the FT Group businesses (2008: 10.8% to 20.5%) and 9.5% to 11.4% for
the Penguin businesses (2008: 8.8% to 10.4%).
Perpetuity growth rates The cash flows subsequent to the approved budget period are based upon the long-term
historic growth rates of the underlying territories in which the CGU operates and reflect the long-term growth
prospects of the sectors in which the CGU operates. A perpetuity growth rate of 2.0% was used for all CGUs in 2009
(2008: 2.0%). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.
110 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
11. Intangible assets continued
Cash flow growth rates The cash flow growth rates are derived from management’s latest forecast of sales taking into
consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been
reasonably accurate.
Sensitivities
The Group’s impairment review is sensitive to a change in assumptions used, most notably the discount rates, the
perpetuity growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonably
possible change in the discount rate or perpetuity growth rate could cause an impairment in the US School
Curriculum CGU. Following a restructuring during 2009, the Penguin UK CGU is no longer considered sensitive
to impairment.
The fair value of US School Curriculum is 6%, or approximately £59m, above its carrying value, but an increase of
0.4 percentage points in the discount rate or a reduction of 0.5 percentage points in the perpetuity growth rate would
have caused the value in use to fall below the carrying value.
12. Investments in joint ventures and associates
Joint ventures
All figures in £ millions
At beginning of year
Exchange differences
Share of profit after tax
Dividends
Loan repayment
Additions and further investment
Transfer to subsidiary
At end of year
2009
13
–
4
(3)
(3)
13
(6)
18
2008
11
(4)
6
(5)
–
5
–
13
Investments in joint ventures are accounted for using the equity method of accounting and are initially recognised
at cost. Investments at 31 December 2009 include goodwill of £11m (2008: £nil).
The aggregate of the Group’s share of its joint ventures’ assets (including goodwill) and liabilities, none of which are
individually significant, are as follows:
All figures in £ millions
Assets
Non-current assets
Current assets
Liabilities
Current liabilities
Net assets
Income
Expenses
Profit after income tax
2009
2008
15
11
(8)
18
12
(8)
4
6
21
(14)
13
36
(30)
6
Section 6 Financial statements
111
12. Investments in joint ventures and associates continued
Associates
All figures in £ millions
At beginning of year
Exchange differences
Share of profit after tax
Dividends
Additions
(Reversal of distribution)/Distribution from associate in excess of carrying value
Actuarial losses on retirement benefit obligations
At end of year
2009
10
4
26
(19)
1
(7)
(3)
12
2008
9
(5)
19
(16)
–
6
(3)
10
Investments in associates are accounted for using the equity method of accounting and are initially recognised at
cost. There is no acquisition goodwill relating to the Group’s investments in associates.
The Group’s interests in its principal associates, all of which are unlisted, are as follows:
2009
All figures in £ millions
The Economist Newspaper Ltd
Other
Total
2008
All figures in £ millions
The Economist Newspaper Ltd
Other
Total
Country of
incorporation
England
%
interest held
50
Country of
incorporation
England
%
interest held
50
Assets
116
42
158
Assets
86
35
121
Liabilities
(116)
(30)
(146)
Revenues
161
50
211
Liabilities
(86)
(25)
(111)
Revenues
149
42
191
Profit
22
4
26
Profit
16
3
19
The interests held in associates are equivalent to voting rights.
112 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
13. Deferred income tax
All figures in £ millions
Deferred income tax assets
Deferred income tax assets to be recovered after more than 12 months
Deferred income tax assets to be recovered within 12 months
Deferred income tax liabilities
Deferred income tax liabilities to be settled after more than 12 months
Deferred income tax liabilities to be settled within 12 months
Net deferred income tax
2009
2008
374
13
387
(473)
–
(473)
(86)
341
31
372
(447)
–
(447)
(75)
Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US.
Deferred income tax assets and liabilities may be offset when there is a legally enforceable right to offset current
income tax assets against current income tax liabilities and when the deferred income taxes relate to the same fiscal
authority. The Group has unrecognised deferred income tax assets at 31 December 2009 in respect of UK losses
of £20m (2008: £28m). None of these unrecognised deferred income tax assets have expiry dates associated
with them.
The recognition of the deferred income tax assets is supported by management’s forecasts of the future profitability
of the relevant business units.
The movement on the net deferred income tax account is as follows:
All figures in £ millions
At beginning of year
Exchange differences
Income statement charge
Acquisition through business combination
Tax benefit/(charge) to other comprehensive income or equity
At end of year
Notes
7
29
2009
(75)
10
(51)
(45)
75
(86)
2008
41
(12)
(93)
(4)
(7)
(75)
Section 6 Financial statements
113
13. Deferred income tax continued
The movement in deferred income tax assets and liabilities during the year is as follows:
All figures in £ millions
Deferred income tax assets
At 1 January 2008
Exchange differences
Acquisition through business combination
Income statement (charge)/benefit
Tax benefit/(charge) to other comprehensive
income or equity
At 31 December 2008
Exchange differences
Acquisition through business combination
Income statement (charge)/benefit
Tax benefit to other comprehensive
income or equity
At 31 December 2009
Trading
losses
Goodwill and
intangibles
Returns
provisions
Retirement
benefit
obligations
Other
Total
87
19
2
(35)
–
73
(5)
–
(46)
–
22
20
6
–
(6)
–
20
(2)
–
(7)
–
11
79
28
–
(1)
–
106
(10)
–
(4)
–
92
10
2
–
(8)
3
7
(1)
–
(6)
68
68
132
38
–
5
(9)
166
(17)
–
42
3
194
328
93
2
(45)
(6)
372
(35)
–
(21)
71
387
Other deferred income tax assets include temporary differences on share-based payments, inventory and other
provisions.
All figures in £ millions
Deferred income tax liabilities
At 1 January 2008
Exchange differences
Acquisition through business combination
Income statement charge
Tax charge to other comprehensive income or equity
At 31 December 2008
Exchange differences
Acquisition through business combination
Income statement (charge)/benefit
Tax benefit to other comprehensive income or equity
At 31 December 2009
Goodwill and
intangibles
Other
Total
(214)
(73)
(5)
(26)
–
(318)
30
(41)
10
–
(319)
(73)
(32)
(1)
(22)
(1)
(129)
15
(4)
(40)
4
(154)
(287)
(105)
(6)
(48)
(1)
(447)
45
(45)
(30)
4
(473)
Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.
114 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
14. Classification of financial instruments
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their
fair values, is as follows:
All figures in £ millions
Notes
Available
for sale
Derivatives
deemed held
for trading
Derivatives
in hedging
relationships
Other
liabilities
Loans and
receivables
Other
liabilities
Total carrying
value
Total market
value
Fair value
Amortised cost
2009
Investments in
unlisted securities
Cash and cash
equivalents
Marketable securities
Derivative financial
instruments
Trade receivables
Total financial assets
Derivative financial
instruments
Trade payables
Other financial
liabilities – put option
over minority interest
Bank loans and
overdrafts
Borrowings due
within one year
Borrowings due after
more than one year
Total financial
liabilities
15
17
16
22
16
24
24
18
18
18
62
–
63
–
–
125
–
–
–
–
–
–
–
–
–
–
42
–
42
(9)
–
–
–
–
–
(9)
–
–
–
70
–
70
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(23)
–
–
–
(23)
–
750
–
–
989
1,739
–
–
–
–
–
–
–
–
–
–
–
–
–
62
62
750
63
112
989
1,976
750
63
112
989
1,976
–
(461)
(9)
(461)
(9)
(461)
–
(23)
(23)
(70)
(70)
(70)
(4)
(4)
(4)
(1,934)
(1,934)
(1,969)
(2,469)
(2,501)
(2,536)
Section 6 Financial statements
115
14. Classification of financial instruments continued
All figures in £ millions
Notes
Available
for sale
Derivatives
deemed held
for trading
Derivatives
in hedging
relationships
Loans and
receivables
Other
liabilities
Total carrying
value
Total market
value
Fair value
Amortised cost
2008
Investments in
unlisted securities
Cash and cash
equivalents
Marketable securities
Derivative financial
instruments
Trade receivables
Total financial assets
Derivative financial
instruments
Trade payables
Bank loans and
overdrafts
Borrowings due
within one year
Borrowings due after
more than one year
Total financial
liabilities
15
17
16
22
16
24
18
18
18
63
–
54
–
–
117
–
–
–
–
–
–
–
–
–
23
–
23
(20)
–
–
–
–
(20)
–
–
–
161
–
161
–
–
–
–
–
–
–
685
–
–
1,030
1,715
–
–
–
–
–
–
–
–
–
–
–
63
685
54
184
1,030
2,016
63
685
54
184
1,030
2,016
–
(450)
(20)
(450)
(20)
(450)
(228)
(228)
(228)
(248)
(248)
(247)
(1,887)
(1,887)
(1,620)
(2,813)
(2,833)
(2,565)
Certain of the Group’s derivative financial instruments are deemed to be held for trading either as they do not meet
the hedge accounting criteria specified in IAS 39 ‘Financial Instruments: Recognition and Measurement’ or the Group
has chosen not to seek hedge accounting for these instruments. None of these derivatives are held for speculative
trading purposes. Transactions in derivative financial instruments are only undertaken to manage risks arising from
underlying business activity, in accordance with the Group’s treasury policy as described in note 19.
The Group designates certain qualifying derivative financial instruments as hedges of the fair value of its bonds
(fair value hedges). Changes in the fair value of these derivative financial instruments are recorded in the income
statement, together with any change in the fair value of the hedged liability attributable to the hedged risk.
The Group also designates certain of its borrowings and derivative financial instruments as hedges of its
investments in foreign operations (net investment hedges). Movements in the fair value of these financial
instruments (to the extent they are effective) are recognised in other comprehensive income.
None of the Group’s financial assets or liabilities are designated at fair value through the income statement
upon initial recognition.
More detail on the Group’s accounting for financial instruments is included in the Group’s accounting policies.
The Group’s approach to managing risks in relation to financial instruments is described in note 19.
116 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
15. Other financial assets
All figures in £ millions
At beginning of year
Exchange differences
Acquisition of investments
Disposal of investments
At end of year
2009
63
(6)
10
(5)
62
2008
52
18
1
(8)
63
Other financial assets comprise non-current unlisted securities.
16. Derivative financial instruments
The Group’s approach to the management of financial risks is set out in note 19. The Group’s outstanding derivative
financial instruments are as follows:
All figures in £ millions
Interest rate derivatives –
in a fair value hedge relationship
Interest rate derivatives –
not in a hedge relationship
Cross currency rate derivatives –
in a net investment hedge relationship
Total
Analysed as expiring:
In less than one year
Later than one year and not later
than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2009
2008
1,103
486
220
1,809
238
844
727
1,809
70
13
29
112
–
60
52
112
–
(7)
(2)
(9)
(7)
(2)
–
(9)
1,232
1,033
–
2,265
487
859
919
2,265
161
23
–
184
3
47
134
184
–
(20)
–
(20)
(5)
(15)
–
(20)
The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined
by using market data and the use of established estimation techniques such as discounted cash flow and option
valuation models.
At the end of 2009, the currency split of the mark-to-market values of rate derivatives, including the exchange of
principal on cross currency rate derivatives, was US dollar £(127)m, sterling £252m and South African rand £(22)m
(2008: US dollar £161m, sterling £3m and South African rand £nil).
The fixed interest rates on outstanding rate derivative contracts at the end of 2009 range from 3.65% to 9.28%
(2008: 4.45% to 7.00%) and the floating rates are based on LIBOR in US dollar and sterling.
The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between
transactions within the portfolio and the designation of certain derivatives as hedges significantly reduce the risk
of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19.
Section 6 Financial statements
117
16. Derivative financial instruments continued
Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances,
within credit limits that reflect published credit ratings and by reference to other market measures (e.g. market prices
for credit default swaps) to ensure that there is no significant risk to any one counterparty. No single derivative
transaction had a market value (positive or negative) at the balance sheet date that exceeded 3% of the Group’s
consolidated total equity.
In accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’ the Group has reviewed all of its
material contracts for embedded derivatives that are required to be separately accounted for if they do not meet
certain requirements, and has concluded that there are no material embedded derivatives.
17. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
2009
580
170
750
2008
528
157
685
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2009 the currency split of cash and cash equivalents was US dollar 35% (2008: 36%), sterling 22%
(2008: 22%), euro 18% (2008: 20%) and other 25% (2008: 22%).
Cash and cash equivalents have fair values that approximate to their carrying value due to their short-term nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents
Bank overdrafts
2009
750
(70)
680
2008
685
(96)
589
118 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
18. Financial liabilities – Borrowings
The Group’s current and non-current borrowings are as follows:
All figures in £ millions
Non-current
Bank loans and overdrafts
7.0% Global Dollar Bonds 2011 (nominal amount $500m)
5.5% Global Dollar Bonds 2013 (nominal amount $350m)
5.7% US Dollar Bonds 2014 (nominal amount $400m)
7.0% Sterling Bonds 2014 (nominal amount £250m)
6.0% Sterling Bonds 2015 (nominal amount £300m)
6.25% Global Dollar Bonds 2018 (nominal amount $550m)
4.625% US Dollar notes 2018 (nominal amount $300m)
Finance lease liabilities
Current
Due within one year or on demand:
Bank loans and overdrafts
4.7% US Dollar Bonds 2009 (nominal amount $350m)
Finance lease liabilities
Total borrowings
2009
2008
–
322
226
274
254
297
359
191
11
1,934
70
–
4
74
2,008
132
368
258
322
254
–
445
237
3
2,019
96
244
4
344
2,363
Included in the non-current borrowings above is £12m of accrued interest (2008: £12m). Included in the current
borrowings above is £nil of accrued interest (2008: £1m).
The maturity of the Group’s non-current borrowing is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
2009
327
760
847
1,934
2008
2
759
1,258
2,019
Section 6 Financial statements
119
18. Financial liabilities – Borrowings continued
The carrying amounts and market values of borrowings are as follows:
All figures in £ millions
Bank loans and overdrafts
4.7% US Dollar Bonds 2009
7.0% Global Dollar Bonds 2011
5.5% Global Dollar Bonds 2013
5.7% US Dollar Bonds 2014
7.0% Sterling Bonds 2014
6.0% Sterling Bonds 2015
6.25% Global Dollar Bonds 2018
4.625% US Dollar notes 2018
Finance lease liabilities
Effective
interest rate
n/a
4.86%
7.16%
5.76%
5.88%
7.20%
6.27%
6.46%
4.69%
n/a
2009
2008
Carrying
value
70
–
322
226
274
254
297
359
191
15
2,008
Market value
70
–
331
232
266
276
317
360
176
15
2,043
Carrying
value
228
244
368
258
322
254
–
445
237
7
2,363
Market value
228
243
349
227
262
258
–
352
169
7
2,095
The market values are based on clean market prices at the year end or, where these are not available, on the
quoted market prices of comparable debt issued by other companies. The effective interest rates above relate to
the underlying debt instruments.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
All figures in £ millions
US dollar
Sterling
Euro
2009
1,457
551
–
2,008
2008
2,081
277
5
2,363
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December:
All figures in £ millions
Floating rate
– expiring within one year
– expiring beyond one year
2009
2008
–
1,084
1,084
–
1,085
1,085
In addition to the above facilities, there are a number of short-term facilities that are utilised in the normal course
of business.
All of the Group’s borrowings are unsecured. In respect of finance lease obligations, the rights to the leased asset
revert to the lessor in the event of default.
120 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
18. Financial liabilities – Borrowings continued
The maturity of the Group’s finance lease obligations is as follows:
All figures in £ millions
Finance lease liabilities – minimum lease payments
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
Future finance charges on finance leases
Present value of finance lease liabilities
The present value of finance lease liabilities is as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
2009
2008
4
5
3
3
–
–
–
15
2009
4
11
–
15
4
2
1
–
–
–
–
7
2008
4
3
–
7
The carrying amounts of the Group’s lease obligations approximate their fair value.
19. Financial risk management
The Group’s approach to the management of financial risks together with sensitivity analyses is set out below.
Treasury policy
The Group holds financial instruments for two principal purposes: to finance its operations and to manage the
interest rate and currency risks arising from its operations and its sources of finance. 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. The Group borrows principally in US dollars and
sterling, at both floating and fixed rates of interest, using derivative financial instruments (‘derivatives), where
appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for
this purpose are principally rate swaps, rate caps and collars, currency rate swaps and forward foreign exchange
contracts. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity and
refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the chief financial officer
under policies approved by the board, which are summarised below. All the treasury policies remained unchanged
throughout 2009, apart from a revision to the Group’s bank counterparty limits policy and a minor change applicable
to the authorisation of treasury policy waivers.
The audit committee receives reports on the Group’s treasury activities, policies and procedures. The treasury
department is not a profit centre and its activities are subject to regular internal audit.
Section 6 Financial statements
121
19. Financial risk management continued
Interest rate risk management
The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis
and by entering into rate swaps, rate caps and forward rate agreements. The Group’s policy objective has continued
to be to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate
debt and before certain adjustments for IAS 39 ‘Financial Instruments: Recognition and Measurement’) to be hedged
(i.e. fixed or capped at the year end) over the next four years, subject to a maximum of 65% and a minimum that
starts at 40% and falls by 10% at each year end. At the end of 2009 the fixed to floating hedging ratio, on the above
basis, was approximately 71%. This above-policy level was a result of better than forecast cash collections in
December 2009, resulting in lower than expected net debt. A simultaneous 1% change on 1 January in the Group’s
variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £6m effect
on profit before tax.
Use of interest rate derivatives
The policy described in the section above creates a group of derivatives, under which the Group is a payer of
fixed rates and a receiver of floating rates. The Group also aims to avoid undue exposure to a single interest rate
setting. Reflecting this objective, the Group has predominantly swapped its fixed rate bond issues to floating rate
at their launch. This creates a second group of derivatives, under which the Group is a receiver of fixed rates and a
payer of floating rates. The Group’s accounting objective in its use of interest rate derivatives is to minimise 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 sharply the income statement
impact of changes in the market value of a derivative). The Group then balances the total portfolio between
hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimal.
Liquidity and refinancing risk management
The Group’s objective is to secure continuity of funding at a reasonable cost. To do this it seeks to arrange
committed funding for a variety of maturities from a diversity of sources. The Group’s policy objective has been that
the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity
of the facilities available to refinance them) should be between three and ten years. At the end of 2009 the average
maturity of gross borrowings was 5.1 years of which bonds represented 96% of these borrowings (up from 5.0 years
and up from 90% respectively at the beginning of the year).
The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that
published credit ratings and published financial policies improve such access. All of the Group’s credit ratings
remained unchanged during the year. The long-term ratings are Baa1 from Moody’s and BBB+ from Standard &
Poor’s, and the short-term ratings are P2 and A2 respectively. The Group’s policy is to strive to maintain a rating
of Baa1/BBB+ over the long term. The Group will also continue to use internally a range of ratios to monitor and
manage its finances. These include interest cover, net debt to operating profit and cash flow to debt measures.
The Group also maintains undrawn committed borrowing facilities. At the end of 2009 the committed facilities
amounted to £1,084m and their weighted average maturity was 2.4 years.
122 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
19. Financial risk management continued
Analysis of Group debt, including the impact of derivatives
The following tables analyse the Group’s sources of funding and the impact of derivatives on the Group’s debt
instruments.
The Group’s net debt position is set out below:
All figures in £ millions
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bank loans, overdrafts and loan notes
Bonds
Finance lease liabilities
Net debt
2009
750
63
103
(70)
(1,923)
(15)
(1,092)
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:
All figures in £ millions
Fixed rate
Floating rate
Total
2009
772
320
1,092
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
All figures in £ millions
US dollar
Sterling
Other
Total
2009
1,656
330
22
2,008
2008
685
54
164
(228)
(2,128)
(7)
(1,460)
2008
781
679
1,460
2008
2,081
277
5
2,363
As at 31 December 2009 the exposure of the borrowings of the Group to interest rate changes when the borrowings
re-price is as follows:
All figures in £ millions
Re-pricing profile of borrowings
Effect of rate derivatives
Total
Less than
one year
74
1,289
1,363
One to
five years
1,087
(762)
325
More than
five years
847
(527)
320
Total
2,008
–
2,008
Section 6 Financial statements
123
19. Financial risk management continued
The maturity of contracted cash flows on the Group’s borrowings and all of its derivative financial instruments are
as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Revolving credit facilities and commercial paper
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Revolving credit facilities and commercial paper
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
USD
42
878
739
1,659
–
1,692
(386)
353
1,659
USD
311
884
954
2,149
141
2,237
(392)
163
2,149
GBP
21
313
106
440
–
745
(313)
8
440
GBP
17
65
266
348
–
355
(21)
14
348
Other
2
30
–
32
–
–
–
32
32
Other
–
–
–
–
–
–
–
–
–
2009
Total
65
1,221
845
2,131
–
2,437
(699)
393
2,131
2008
Total
328
949
1,220
2,497
141
2,592
(413)
177
2,497
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are
calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are
based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross,
although the Group net settles these amounts wherever possible.
Amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of
the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity
of the facility.
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover our
total aggregate exposure to a single financial institution. The limits applicable to published credit ratings bands are
approved by the chief financial officer within guidelines approved by the board. Exposures and limits applicable
to each financial institution are reviewed on a regular basis.
124 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
19. Financial risk management continued
Foreign currency risk management
Although the Group is based in the UK, it has its most significant investment in overseas operations. The most
significant currency for the Group is the US dollar. The Group’s policy on routine transactional conversions between
currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these
should be transacted at the relevant spot exchange rate. The majority of the Group’s operations are domestic within
their country of operation. No unremitted profits are hedged with foreign exchange contracts, as the company judges
it inappropriate to hedge non-cash flow translational exposure with cash flow instruments. However, the Group does
seek to create a natural hedge of this exposure through its policy of aligning approximately the currency composition
of its core net borrowings (after the impact of cross currency rate derivatives) with its forecast operating profit before
depreciation and amortisation. This policy aims to dampen the impact of changes in foreign exchange rates on
consolidated interest cover and earnings. The policy above applies only to currencies that account for more than 15%
of Group operating profit before depreciation and amortisation, which currently is only the US dollar. The Group still
borrows small amounts in other currencies, typically for seasonal working capital needs. Our policy does not require
existing currency debt to be terminated to match declines in that currency’s share of Group operating profit before
depreciation and amortisation. In addition, currencies that account for less than 15% of Group operating profit
before depreciation and amortisation can be included in the above hedging process at the request of the chief
financial officer.
Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account
the effect of cross currency swaps) were: US dollar £1,314m, sterling £168m and South African rand £9m.
Use of currency debt and currency derivatives
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 IAS 39.
Financial instruments – fair value measurement
The following table provides an analysis of those financial instruments that are measured subsequent to initial
recognition at fair value, grouped into levels 1 to 3, based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical
assets or liabilities;
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that
are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or
liability that are not based on observable market data (unobservable inputs).
All figures in £ millions
Level 1
Level 2
Level 3
Financial assets at fair value
Derivative financial assets
Marketable securities
Available for sale financial assets
Investments in unlisted securities
Financial liabilities at fair value
Derivative financial liabilities
Other financial liabilities – put option over minority interest
Total
–
–
–
–
–
–
112
63
–
(9)
–
166
–
–
62
–
(23)
39
2009
Total
112
63
62
(9)
(23)
205
Section 6 Financial statements
125
19. Financial risk management continued
The following table analyses the movements in level 3 fair value measurements:
All figures in £ millions
At beginning of year
Exchange differences
Additions
Disposals
At end of year
2009
Investments in
unlisted
securities
63
(6)
10
(5)
62
Other financial
liabilities
–
–
(23)
–
(23)
The fair value of the investments in unlisted securities is determined by reference to the financial performance of
the underlying asset and amounts realised on the sale of similar assets. The fair value of other financial liabilities
represents the present value of the estimated future liability.
Financial instruments – sensitivity analysis
As at 31 December 2009 the sensitivity of the Group’s financial instruments to fluctuations in interest rates and
exchange rates is as follows:
All figures in £ millions
Investments in unlisted securities
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bonds
Other borrowings
Put option over minority interest
Other net financial assets
Total financial instruments
Carrying value
62
750
63
103
(1,923)
(85)
(23)
528
(525)
Impact of 1%
increase in
interest rates
–
–
–
(59)
54
–
–
–
(5)
Impact of 1%
decrease in
interest rates
–
–
–
66
(61)
–
–
–
5
Impact of 10%
strengthening in
sterling
(2)
(47)
(5)
14
118
8
3
(42)
47
Impact of 10%
weakening in
sterling
3
58
7
(17)
(144)
(9)
(3)
52
(53)
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in
either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade assets less
trade liabilities.
The sensitivities of derivative instruments are calculated using established estimation techniques such as
discounted cash flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative
interest rates, these points on the yield curve were adjusted to 0%. A large proportion of the movements shown
above would impact equity rather than the income statement, depending on the location and functional currency
of the entity in which they arise and the availability of net investment hedge treatment. The changes in valuations
are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated
gains or losses.
126 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
20. Intangible assets – Pre-publication
All figures in £ millions
Cost
At beginning of year
Exchange differences
Additions
Disposals
Acquisition through business combination
Transfer from software
Transfer to inventories
At end of year
Amortisation
At beginning of year
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
Transfer from software
At end of year
Carrying amounts
At end of year
2009
2008
1,800
(160)
322
(230)
(1)
–
(4)
1,727
(1,105)
102
(307)
230
3
–
(1,077)
1,264
494
297
(345)
78
12
–
1,800
(814)
(337)
(244)
345
(51)
(4)
(1,105)
650
695
Included in the above are pre-publication assets amounting to £398m (2008: £462m) which will be realised in more
than 12 months.
Amortisation is included in the income statement in cost of goods sold.
21. Inventories
All figures in £ millions
Raw materials
Work in progress
Finished goods
2009
32
23
390
445
2008
31
29
441
501
The cost of inventories relating to continuing operations recognised as an expense and included in the income
statement in cost of goods sold amounted to £843m (2008: £832m). In 2009 £75m (2008: £56m) of inventory
provisions was charged in the income statement. None of the inventory is pledged as security.
22. Trade and other receivables
All figures in £ millions
Current
Trade receivables
Royalty advances
Prepayments and accrued income
Other receivables
Receivables from related parties
Non-current
Royalty advances
Prepayments and accrued income
Other receivables
Section 6 Financial statements
127
2009
2008
989
99
75
121
–
1,284
86
24
2
112
1,030
111
62
135
4
1,342
102
3
47
152
Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales
returns. The movements on the provision for bad and doubtful debts are as follows:
All figures in £ millions
At beginning of year
Exchange differences
Income statement movements
Utilised
Acquisition through business combination
At end of year
2009
(72)
5
(26)
20
(3)
(76)
2008
(52)
(18)
(27)
27
(2)
(72)
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of
customers, who are internationally dispersed.
128 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
22. Trade and other receivables continued
The ageing of the Group’s trade receivables is as follows:
All figures in £ millions
Within due date
Up to three months past due date
Three to six months past due date
Six to nine months past due date
Nine to 12 months past due date
More than 12 months past due date
Total trade receivables
Less: provision for bad and doubtful debts
Less: provision for sales returns
Net trade receivables
2009
1,096
228
51
20
4
20
1,419
(76)
(354)
989
2008
1,110
248
60
21
15
20
1,474
(72)
(372)
1,030
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances
and historic payment profiles. Management believe all the remaining receivable balances are fully recoverable.
23. Provisions for other liabilities and charges
All figures in £ millions
Deferred
consideration
Leases
Other
Total
At 1 January 2009
Exchange differences
Charged to income statement
Released to income statement
Acquisition through business combination – current year
Acquisition through business combination – prior year adjustments
Utilised
At 31 December 2009
43
(2)
3
–
27
(4)
(29)
38
8
–
3
–
–
–
(2)
9
All figures in £ millions
Analysis of provisions
Non-current
Current
Deferred consideration primarily relates to the acquisition of Fronter in 2009.
38
(3)
2
(3)
–
–
(13)
21
89
(5)
8
(3)
27
(4)
(44)
68
2009
2008
50
18
68
33
56
89
24. Trade and other liabilities
All figures in £ millions
Trade payables
Social security and other taxes
Accruals
Deferred income
Interest payable
Dividends payable to minority interest
Put option over minority interest
Other liabilities
Less: non-current portion
Accruals
Deferred income
Interest payable
Put option over minority interest
Other liabilities
Current portion
Section 6 Financial statements
129
2009
461
30
504
487
10
–
23
205
1,720
23
116
–
23
91
253
1,467
2008
450
35
501
444
10
5
–
205
1,650
42
87
1
–
91
221
1,429
The carrying value of the Group’s payables approximates its fair value.
The deferred income balances comprise:
multi-year obligations to deliver workbooks to adoption customers in school businesses;
advance payments in assessment and testing businesses;
subscription income in school, newspaper and market pricing businesses;
advertising income relating to future publishing days in newspaper businesses; and
obligations to deliver digital content in future periods.
The put option over minority interest is the fair value of an option held by the minority interest in our Pearson South
Africa business. The option enables the minority interest to sell their 15% share of Pearson South Africa to Pearson
from 1 January 2012 at a price determined by the future performance of that business.
130 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world.
For the defined benefit plans, benefits are based on employees’ length of service and final pensionable pay.
Defined contribution benefits are based on the amount of contributions paid in respect of an individual member,
the investment returns earned and the amount of pension this money will buy when a member retires.
The largest plan is the Pearson Group Pension Plan (‘UK Group plan’) with both defined benefit and defined
contribution sections. From 1 November 2006, all sections of the UK Group plan were closed to new members
with the exception of a defined contribution section that was opened in 2003. This section is available to all new
employees of participating companies. The other major defined benefit plans are based in the US.
Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific
features of these plans vary in accordance with the regulations of the country in which employees are located.
Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded
but are accounted for and valued similarly to defined benefit pension plans.
Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average
assumptions have been shown for the other plans, which primarily relate to US pension plans.
%
Inflation
Rate used to discount plan liabilities
Expected return on assets
Expected rate of increase in salaries
Expected rate of increase for pensions in
payment and deferred pensions
Initial rate of increase in healthcare rate
Ultimate rate of increase in healthcare rate
UK Group
plan
3.50
5.70
6.03
5.00
2.60
to 4.40
–
–
Other
plans
2.50
5.25
6.75
4.00
–
–
–
2009
PRMB
2.50
5.50
–
–
–
8.50
5.00
UK Group
plan
2.80
6.40
6.33
4.30
2.30
to 4.20
–
–
Other
plans
2.80
6.25
7.60
4.50
–
–
–
2008
PRMB
2.80
6.25
–
–
–
9.00
5.00
The UK discount rate is based on the annualised yield on the iBoxx over 15-year AA-rated corporate bond index,
adjusted to reflect the duration of our liabilities. The US discount rate is set by reference to a US bond portfolio
matching model. The expected return on assets is based on market expectations of long-term asset returns for
the defined portfolio at the end of the year.
The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall
expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in
the plan’s investment portfolio.
The expected rate of increase in salaries has been set at 5.0% for 2009 with a short-term assumption of 3.0% for
three years.
In 2008 the UK mortality assumptions were derived by adjusting standard mortality tables (PMFA 92 tables
projected forward with medium cohort improvement factors). In 2009 the Group changed its mortality assumptions
in the UK. The mortality base table assumptions have been derived from the SAPS ‘all pensioners’ tables for males
and the SAPS ‘normal health pensioners’ tables for females, adjusted to reflect the observed experience of the plan,
with medium cohort improvement factors. In 2008 a 1% improvement floor on the medium cohort was applied. In
2009 this was changed to 1.5% for males and 1.25% for females, with tapering.
For the US plans, the assumptions used were based on standard US mortality tables. In 2008 a switch from GAM94
to RP2000 was made, to reflect the mortality assumption now more prevalent in the US.
Section 6 Financial statements
131
25. Retirement benefit and other post-retirement obligations continued
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the
balance sheet date for the UK and US Group plans is as follows:
Male
Female
2009
22.7
23.5
UK
2008
21.5
21.8
2009
17.6
20.2
US
2008
17.6
20.2
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet
date, for the UK and US Group plans is as follows:
Male
Female
Financial statement information
The amounts recognised in the income statement are as follows:
2009
25.3
25.6
UK
2008
23.3
23.8
2009
17.6
20.2
US
2008
17.6
20.2
All figures in £ millions
Current service cost
Past service cost
Total operating expense
Expected return on plan assets
Interest on plan liabilities
Net finance expense
Net income statement charge
UK Group
plan
14
–
14
(83)
89
6
20
Defined
benefit
other
3
1
4
(5)
8
3
7
Sub-total
17
1
18
(88)
97
9
27
Defined
contribution
62
–
62
–
–
–
62
PRMB
2
–
2
–
3
3
5
2009
Total
81
1
82
(88)
100
12
94
Actual return on plan assets
136
8
144
–
–
144
All figures in £ millions
Current service cost
Past service cost
Total operating expense
Expected return on plan assets
Interest on plan liabilities
Net finance (income)/expense
Net income statement charge
UK Group
plan
33
–
33
(104)
93
(11)
22
Defined
benefit
other
3
1
4
(7)
7
–
4
Sub-total
36
1
37
(111)
100
(11)
26
Defined
contribution
41
–
41
–
–
–
41
PRMB
1
5
6
–
3
3
9
2008
Total
78
6
84
(111)
103
(8)
76
Actual loss on plan assets
(130)
(27)
(157)
–
–
(157)
The total operating charge is included in administrative and other expenses. In 2008 the UK Group plan current
service cost included £14m relating to defined contribution sections. In 2009 the defined contribution section of the
UK Group plan is recorded within the defined contribution expense.
132 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
The amounts recognised in the balance sheet are as follows:
UK Group
plan
1,609
(1,798)
(189)
Other
funded
plans
118
(151)
(33)
Other
unfunded
plans
–
2009
Total
1,727
UK Group
plan
1,478
Other
funded
plans
100
Other
unfunded
plans
–
2008
Total
1,578
(18)
(18)
(1,967)
(240)
(1,429)
49
(149)
(49)
(16)
(16)
(1,594)
(16)
All figures in £ millions
Fair value of plan assets
Present value of defined
benefit obligation
Net pension (liability)/asset
Other post-retirement
medical benefit obligation
Other pension accruals
Net retirement benefit obligations
Analysed as:
Retirement benefit assets
Retirement benefit obligations
(65)
(34)
(339)
–
(339)
The following (losses)/gains have been recognised in other comprehensive income:
All figures in £ millions
Amounts recognised for defined benefit plans
Amounts recognised for post-retirement medical benefit plans
Total recognised in year
Cumulative amounts recognised
The fair value of plan assets comprises the following:
%
Equities
Bonds
Properties
Other
UK Group
plan
27.4
47.2
9.4
10.4
Other
funded
plans
2.4
2.1
0.0
1.1
2009
Total
29.8
49.3
9.4
11.5
UK Group
plan
28.0
40.8
7.4
17.5
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
(68)
(34)
(118)
49
(167)
2008
(74)
3
(71)
53
2008
Total
31.1
43.0
7.5
18.4
2009
(295)
(4)
(299)
(246)
Other
funded
plans
3.1
2.2
0.1
0.9
Section 6 Financial statements
133
25. Retirement benefit and other post-retirement obligations continued
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
All figures in £ millions
Fair value of plan assets
Opening fair value of plan assets
Exchange differences
Expected return on plan assets
Actuarial gains and (losses)
Contributions by employer
Contributions by employee
Benefits paid
Other movements
Closing fair value of plan assets
Present value of defined benefit obligation
Opening defined benefit obligation
Exchange differences
Current service cost
Past service cost
Interest cost
Actuarial gains and (losses)
Contributions by employee
Benefits paid
Other movements
Closing defined benefit obligation
UK Group
plan
1,478
–
83
53
64
3
(72)
–
1,609
(1,429)
–
(14)
–
(89)
(335)
(3)
72
–
(1,798)
Other
plans
100
(6)
5
3
26
–
(10)
–
118
(165)
14
(3)
(1)
(8)
(16)
–
10
–
(169)
2009
Total
1,578
(6)
88
56
90
3
(82)
–
1,727
(1,594)
14
(17)
(1)
(97)
(351)
(3)
82
–
(1,967)
UK Group
plan
1,744
–
104
(234)
54
9
(72)
(127)
1,478
(1,682)
–
(33)
–
(93)
189
(9)
72
127
(1,429)
Other
plans
109
23
7
(34)
3
–
(8)
–
100
(129)
(38)
(3)
(1)
(7)
5
–
8
–
(165)
2008
Total
1,853
23
111
(268)
57
9
(80)
(127)
1,578
(1,811)
(38)
(36)
(1)
(100)
194
(9)
80
127
(1,594)
During 2008 changes made to the administration of the plan assets enabled assets relating to the defined
contribution sections of the UK Group plan to be identified separately from those of the defined benefit section,
for accounting purposes. Defined contribution assets are no longer disclosed as part of the UK Group plan assets.
The other movements in both the change in value of plan assets and liabilities in 2008 represent the separation
out of these defined contribution assets.
134 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Changes in the value of the US PRMB are as follows:
All figures in £ millions
Opening defined benefit obligation
Exchange differences
Current service cost
Past service cost
Interest cost
Actuarial gains and (losses)
Benefits paid
Closing defined benefit obligation
2009
(68)
8
(2)
–
(3)
(4)
4
(65)
2008
(47)
(19)
(1)
(5)
(3)
3
4
(68)
The history of the defined benefit plans is as follows:
All figures in £ millions
Fair value of plan assets
Present value of defined benefit obligation
Net pension (liability)/asset
Experience adjustments on plan assets
Experience adjustments on plan liabilities
2009
1,727
(1,967)
(240)
56
(351)
2008
1,578
(1,594)
(16)
(268)
194
2007
1,853
(1,811)
42
29
50
2006
1,633
(1,810)
(177)
74
28
2005
1,500
(1,803)
(303)
140
(119)
Funding
The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees
of the plan are required to act in the best interest of the plan’s beneficiaries. The plan trustees and the company are
currently finalising the latest triennial valuation for funding purposes as at 1 January 2009. At this point, the Group
has contributed an additional £20m to the plan in 2009. In total the Group contributed £42m (2008: £21m) towards
the funding shortfall and expects to contribute a similar amount in 2010. Regular contributions to the plan are
estimated to be £23m for 2010.
The Group expects to contribute $83m in 2010 and $126m in 2011 to its US pension plans.
Section 6 Financial statements
135
25. Retirement benefit and other post-retirement obligations continued
Sensitivities
The net retirement benefit obligations are calculated using a number of assumptions, the most significant being
the discount rate used to calculate the defined benefit obligation. The effect of a one percentage point increase
and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
All figures in £ millions
Effect on:
(Decrease)/increase in defined benefit obligation – UK Group plan
(Decrease)/increase of aggregate of service cost and interest cost – UK Group plan
(Decrease)/increase in defined benefit obligation – US plan
2009
1% increase
1% decrease
(260.2)
(4.5)
(12.4)
325.4
3.9
14.7
The effect of members living one year more or one year less on the defined benefit obligation and the total pension
expense is as follows:
All figures in £ millions
Effect on:
Increase/(decrease) in defined benefit obligation – UK Group plan
Increase/(decrease) in defined benefit obligation – US plan
1 year
increase
2009
1 year
decrease
50.7
1.3
(49.3)
(1.7)
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:
All figures in £ millions
Effect on:
Increase/(decrease) in post-retirement medical benefit obligation
Increase/(decrease) of aggregate of service cost and interest cost
2009
1% increase
1% decrease
3.1
0.2
(2.7)
(0.2)
136 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
26. Share-based payments
The Group recognised the following charges in the income statement in respect of its equity-settled share-based
payment plans:
All figures in £ millions
Pearson plans
Interactive Data plans
Total share-based payment costs
2009
27
10
37
2008
25
8
33
The Group operates the following equity-settled employee option and share plans:
Worldwide Save for Shares Plan Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees.
In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can 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 time of the commencement of the employee’s participation in the plan. Options that are
not exercised within six months of the end of the savings period lapse unconditionally.
Employee Stock Purchase Plan In 2000, the Group established an Employee Stock Purchase Plan which allows
all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period,
the employee has 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.
Long-Term Incentive Plan This plan was introduced in 2001 and renewed in 2006 and consists of two parts:
share options and/or restricted shares.
Options were last granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not
subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if
they remain unexercised at the tenth anniversary of the date of grant.
The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and
in the case of senior management upon the satisfaction of corporate performance targets over a three-year period.
These targets may be based on market and/or non-market performance criteria. Restricted shares awarded to
senior management in March 2008 and March 2009 vest dependent on relative shareholder return, return on
invested capital and earnings per share growth. The award was split equally across all three measures. Other
restricted shares awarded in 2008 and 2009 vest depending on continuing service over a three-year period.
Annual Bonus Share Matching Plan This plan permits executive directors and senior executives around the Group
to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets
an earnings per share growth target, the company will match them 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.
In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special
Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive
Plan in 2001.
Section 6 Financial statements
137
26. Share-based payments continued
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
Outstanding at beginning of year
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at end of year
Options exercisable at end of year
2009
Weighted
average
exercise
price
£
13.14
5.47
5.91
13.02
5.20
12.78
15.28
2008
Weighted
average
exercise
price
£
13.15
5.35
4.85
11.56
6.06
13.14
14.97
Number of
share
options
000s
16,781
1,437
(683)
(3,082)
(74)
14,379
11,527
Number of
share
options
000s
14,379
1,320
(656)
(2,488)
(68)
12,487
9,264
Options were exercised regularly throughout the year. The weighted average share price during the year was £7.15
(2008: £6.44). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting
and the Group therefore recognises in the income statement the amount that otherwise would have been recognised
for services received over the remainder of the original vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise
prices as follows:
Range of exercise prices
£
0 – 5
5 – 10
10 – 15
15 – 20
20 – 25
>25
2009
Weighted
average
contractual
life
Years
1.07
2.37
1.36
0.75
0.19
0.19
1.57
2008
Weighted
average
contractual
life
Years
1.23
2.84
1.97
0.84
1.19
1.19
2.05
Number of
share
options
000s
453
5,113
5,481
908
350
2,074
14,379
Number of
share
options
000s
172
5,523
4,225
270
344
1,953
12,487
In 2009 and 2008 options were granted under the Worldwide Save for Shares Plan. The weighted average estimated
fair value for the options granted was calculated using a Black-Scholes option pricing model.
138 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
26. Share-based payments continued
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
Fair value
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Forfeiture rate
2009
Weighted
average
£1.69
£7.13
£5.47
27.32%
2008
Weighted
average
£1.67
£6.96
£5.35
21.41%
4.0 years 4.1 years
4.28%
4.54%
3.6%
2.45%
4.74%
3.5%
The expected volatility is based on the historic volatility of the company’s share price over the previous three
to seven years depending on the vesting term of the options.
The following shares were granted under restricted share arrangements:
Long-Term Incentive Plan
Annual Bonus Share Matching Plan
2009
Weighted
average
fair value
£
5.77
6.70
Number of
shares
000s
4,152
253
2008
Weighted
average
fair value
£
5.78
6.73
Number of
shares
000s
4,519
271
The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally is determined using
the share price at the date of grant. Participants of the Long-Term Incentive Plan are entitled to dividends during the
vesting period. The number of shares to vest has been adjusted, based on historical experience, to account for any
potential forfeitures. Restricted shares granted under the Annual Bonus Share Matching Plan are valued using the
share price at the date of grant. Shares granted include the entitlement to dividends during the vesting period and
therefore the share price is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo
model. Restricted shares with a non-market performance condition were fair valued based on the share price at the
date of grant. Non-market performance conditions were considered by adjusting the number of shares expected to
vest based on the most likely outcome of the relevant performance criteria.
Subsidiary share option plans
Interactive Data, a 61% subsidiary of the Group, operates the following share-based payment plans:
2001 Employee Stock Purchase Plan The 2001 Employee Stock Purchase Plan allows all eligible employees
worldwide to purchase stock at a discounted price at specific times.
Section 6 Financial statements
139
26. Share-based payments continued
2000 Long-Term Incentive Plan Under this plan, the Compensation Committee of the Board of Directors can grant
share-based awards representing up to 20% of the total number of shares of common stock outstanding at the date
of grant. The plan provides for the discretionary issuance of share-based awards to directors, officers and employees
of Interactive Data, as well as persons who provide consulting or other services to Interactive Data. The exercise price
for all options granted to date has been equal to the market price of the underlying shares at the date of grant.
Options expire ten years from the date of grant and generally vest over a three to four-year period without any
performance criteria attached.
In addition, grants of restricted stock can be made to certain executives and members of the Board of Directors of
Interactive Data. The awarded shares are available for distribution, at no cost, at the end of a three-year vesting
period. No performance criteria are attached to shares granted under this plan.
Interactive Data employees purchased 234,956 shares (2008: 183,318) under the 2001 Employee Stock Purchase
Plan at an average share price of $19.47 (£12.06) (2008: $22.95; £15.96). The weighted average fair value at the date
of grant was $5.82 (£3.60) (2008: $6.59; £4.58).
The number and weighted average exercise prices of share options granted under the 2000 Long-Term Incentive Plan
are as follows:
Outstanding at beginning of year
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at end of year
Options exercisable at end of year
Number
of share
options
000s
10,264
1,224
(1,493)
(159)
(64)
9,772
6,839
Weighted
average
exercise
price
$
19.38
23.25
14.20
24.44
25.93
20.53
18.92
2009
Weighted
average
exercise
price
£
13.48
14.40
8.79
15.13
16.06
12.71
11.72
Number
of share
options
000s
9,827
1,449
(895)
(99)
(18)
10,264
6,865
Weighted
average
exercise
price
$
18.21
24.95
15.37
22.05
12.17
19.38
16.89
2008
Weighted
average
exercise
price
£
9.15
17.35
10.69
15.34
8.46
13.48
11.75
The options outstanding at the end of the year have a weighted average remaining contractual life and exercise price
as follows:
Range of exercise prices
$
0 – 4.4
4.4 – 7.5
7.5 – 12
12 – 20
> 20
2009
Weighted
average
contractual
life
Years
–
0.3
1.5
3.6
7.5
6.0
2008
Weighted
average
contractual
life
Years
–
1.3
2.4
4.6
8.0
6.2
Number
of share
options
000s
–
47
1,502
2,987
5,728
10,264
Number
of share
options
000s
–
20
909
2,339
6,504
9,772
140 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
26. Share-based payments continued
The fair value of the options granted under the 2000 Long-Term Incentive Plan and of the shares awarded under the
2001 Employee Stock Purchase Plan was estimated using a Black-Scholes option pricing model. The weighted
average estimated fair values and the inputs into the Black-Scholes model are as follows:
Fair value
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Forfeiture rate
Long-Term Incentive Plan
Employee Stock Purchase Plan
2009
2008
2009
2008
Weighted
Weighted
average
average
$5.58
$4.92
$24.95
$23.25
$23.25
$24.95
29.70% 24.20%
5.7 years
5.9 years
1.5%
2.4%
to 3.5%
to 2.6%
2.2%
3.6%
0.0%
0.0%
Weighted
Weighted
average
average
$6.59
$5.82
$22.95
$19.47
$22.95
$19.47
33.70%
48.40%
0.5 years 0.5 years
2.0%
to 2.4%
2.1%
0.0%
0.3%
to 0.4%
3.6%
0.0%
The expected volatility is based on the historic volatility of Interactive Data’s share price over the vesting term of
the options.
During the year Interactive Data granted the following shares under restricted share arrangements:
2000 Long-Term Incentive Plan
Number of
shares
000s
415
Weighted
average
fair value
$
22.92
2009
Weighted
average
fair value
£
14.19
Number of
shares
000s
194
Weighted
average
fair value
$
25.43
2008
Weighted
average
fair value
£
17.69
Shares awarded under the 2000 Long-Term Incentive Plan were valued based on the share price prevailing at the
date of grant.
27. Share capital and share premium
At 1 January 2008
Issue of ordinary shares – share option schemes
At 31 December 2008
Issue of ordinary shares – share option schemes
At 31 December 2009
Number
of shares
000s
808,028
1,248
809,276
1,523
810,799
Ordinary
shares
£m
202
–
202
1
203
Share
premium
£m
2,499
6
2,505
7
2,512
The ordinary shares have a par value of 25p per share (2008: 25p per share). All issued shares are fully paid.
All shares have the same rights.
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while
maximising the return to shareholders through the optimisation of the debt and equity balance.
Section 6 Financial statements
141
27. Share capital and share premium continued
The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and
equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.
The Group reviews its capital structure on a regular basis and will balance its overall capital structure through
payments of dividends, new share issues as well as the issue of new debt or the redemption of existing debt
in line with the financial risk policies outlined in note 19.
28. Treasury shares
At 1 January 2008
Purchase of treasury shares
Release of treasury shares
At 31 December 2008
Purchase of treasury shares
Release of treasury shares
At 31 December 2009
Pearson plc
Interactive Data
Total
Number
of shares
000s
11,761
2,028
(3,341)
10,448
2,200
(2,983)
9,665
Number
of shares
000s
7,229
1,976
–
9,205
1,280
–
10,485
£m
141
12
(41)
112
13
(29)
96
£m
75
35
–
110
20
–
130
£m
216
47
(41)
222
33
(29)
226
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26).
These shares, representing 1.2% (2008: 1.3%) of called-up share capital, are treated as treasury shares for
accounting purposes and have a par value of 25p per share.
Interactive Data hold their own shares in respect of share buy-back programmes. These shares are held as treasury
shares and have a par value of $0.01.
The nominal value of Pearson plc treasury shares amounts to £2.4m (2008: £2.6m). The nominal value of Interactive
Data treasury shares amounts to £0.07m (2008: £0.06m).
At 31 December 2009 the market value of Pearson plc treasury shares was £86.1m (2008: £67.0m) and the market
value of Interactive Data treasury shares was £164.3m (2008: £157.9m).
142 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
29. Business combinations
On 15 April 2009 the Group acquired Wall Street English (WSE), China’s leading provider of premium English
language training to adults. On 15 July 2009 the Group completed the purchase of an additional stake in Maskew
Miller Longman (MML), its South African publishing business. Provisional values for the assets and liabilities arising
from these and other acquisitions completed in the year together with adjustments to prior year acquisitions are
as follows:
2009
2008
All figures in £ millions
Property, plant and equipment
Intangible assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other liabilities
Current income tax liabilities
Net deferred income tax liabilities
Provisions for other liabilities and charges
Retirement benefit obligations
Minority interest
Assets held for sale
Net assets/(liabilities) acquired at fair value
Goodwill
Increase in fair values of proportionate
holding arising on stepped acquisition
Total
Satisfied by:
Cash
Other consideration
Deferred consideration
Net prior year adjustments
Total consideration
Carrying value of net (liabilities)/assets
acquired
Fair value adjustments
Fair value
Notes
10
11
20
13
11
Wall
Street
English
Fair value
6
40
–
1
8
3
(56)
–
(9)
–
–
–
–
(7)
108
–
101
(101)
–
–
–
(101)
(22)
15
(7)
MML
Fair value
1
47
–
12
7
9
(16)
(2)
(12)
–
–
(7)
–
39
38
(23)
54
(49)
(5)
–
–
(54)
5
34
39
Other
Fair value
2
55
2
1
8
17
(19)
(2)
(24)
–
(1)
(9)
–
30
59
–
89
(51)
–
(27)
(11)
(89)
2
28
30
Total
Fair value
9
142
2
14
23
29
(91)
(4)
(45)
–
(1)
(16)
–
62
205
(23)
244
(201)
(5)
(27)
(11)
(244)
(15)
77
62
Total
Fair value
6
220
27
7
54
16
(52)
(3)
(4)
(26)
–
(2)
3
246
153
–
399
(394)
–
–
(5)
(399)
78
168
246
The goodwill arising on these acquisitions results from substantial cost and revenue synergies and from benefits
that cannot be separately recognised, such as the assembled workforce.
Section 6 Financial statements
143
29. Business combinations continued
Wall Street English
All figures in £ millions
Property, plant and equipment
Intangible assets
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other liabilities
Net deferred income tax liabilities
Net liabilities acquired
Goodwill
Total
MML
All figures in £ millions
Property, plant and equipment
Intangible assets
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other liabilities
Current income tax liabilities
Net deferred income tax liabilities
Minority interest
Net assets acquired
Goodwill
Increase in fair values of proportionate holding arising on stepped acquisition
Total
Net cash outflow on acquisition:
All figures in £ millions
Cash – Current year acquisitions
Cash – Acquisitions yet to complete
Deferred payments for prior year acquisitions and other items
Cash and cash equivalents acquired
Cash outflow on acquisition
Carrying
value
6
16
1
8
3
(56)
–
(22)
Fair value
adjustments
–
24
–
–
–
–
(9)
15
Carrying
value
1
–
12
7
9
(16)
(2)
1
(7)
5
Fair value
adjustments
–
47
–
–
–
–
–
(13)
–
34
2009
(201)
(4)
(32)
29
(208)
Fair value
6
40
1
8
3
(56)
(9)
(7)
108
101
Fair value
1
47
12
7
9
(16)
(2)
(12)
(7)
39
38
(23)
54
2008
(394)
(12)
(5)
16
(395)
Wall Street English contributed £29m of sales and £nil to the Group’s profit before tax between the date of
acquisition and the balance sheet date. MML contributed £22m of sales and £4m to the Group’s profit before tax
between the date of acquisition and the balance sheet date. Other businesses acquired contributed £37m to the
Group’s sales and £6m to the Group’s profit before tax between the date of acquisition and the balance sheet date.
If the acquisitions had been completed on 1 January 2009, the Group estimates that sales for the period would have
been £5,658m and profit before tax would have been £662m.
144 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
30. Disposals
All figures in £ millions
Disposal of subsidiaries
Property, plant and equipment
Intangible assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Trade and other liabilities
Minority interest
Attributable goodwill
Cumulative translation adjustment
Net assets disposed
Cash received
Deferred receipts
Costs
Loss on sale
Cash flow from disposals
Cash – Current year disposals
Cash – Transactions with minorities
Costs paid
Net cash inflow
Further details of the Data Management business disposal in 2008 are shown in note 3.
2009
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2008
Total
(7)
(1)
(2)
(7)
(8)
9
–
(99)
(49)
(164)
114
2
(5)
(53)
2009
2008
–
14
–
14
114
12
(15)
111
Section 6 Financial statements
145
31. Cash generated from operations
All figures in £ millions
Net profit
Adjustments for:
Income tax
Depreciation
Amortisation of purchased intangible assets
Amortisation of other intangible assets
Loss on sale of property, plant and equipment
Net finance costs
Share of results of joint ventures and associates
Loss on sale of discontinued operations
Net foreign exchange adjustment from transactions
Share-based payment costs
Pre-publication
Inventories
Trade and other receivables
Trade and other liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Net cash generated from operations
Dividends from joint ventures and associates
Purchase of property, plant and equipment
Purchase of intangible assets
Finance lease principal payments
Proceeds from sale of property, plant and equipment
Operating cash flow
Operating tax paid
Net operating finance costs paid
Total operating and free cash flow
Dividends paid (including to minorities)
Net movement of funds from operations
Acquisitions and disposals
Purchase of treasury shares
New equity
Other movements on financial instruments
Net movement of funds
Exchange movements on net debt
Total movement in net debt
Notes
10
11
11
6
12
3
26
2009
462
198
85
103
44
2
95
(30)
–
(14)
37
(16)
32
(14)
103
(72)
(3)
1,012
22
(62)
(58)
(2)
1
913
(103)
(87)
723
(293)
430
(218)
(33)
8
3
190
178
368
2008
323
209
80
86
30
1
91
(25)
53
105
33
(58)
(12)
(81)
82
(14)
(9)
894
23
(75)
(45)
(3)
2
796
(89)
(76)
631
(285)
346
(285)
(47)
6
8
28
(515)
(487)
146 Pearson plc Annual report and accounts 2009
Notes to the consolidated financial statements continued
31. Cash generated from operations continued
Net cash generated from operations is translated at an exchange rate approximating to the rate at the date
of cash flow. The difference between this rate and the average rate used to translate profit gives rise to
a currency adjustment in the reconciliation between net profit and net cash generated from operations.
This adjustment reflects the timing difference between recognition of profit and the related cash receipts
or payments.
Operating cash flow, operating free cash flow and total free cash flow are non-GAAP measures and have been
disclosed as they are part of Pearson’s corporate and operating measures.
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
All figures in £ millions
Net book amount
Loss on sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
2009
3
(2)
1
2008
3
(1)
2
The principal other non-cash transactions are movements in finance lease obligations of £8m (2008: £2m).
32. Contingencies
There are contingent Group liabilities that arise in the normal course of business 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 of the Group in respect of legal claims. None of these
claims are expected to result in a material gain or loss to the Group.
33. Commitments
There were no commitments for capital expenditure contracted for at the balance sheet date but not yet incurred.
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases
have varying terms and renewal rights. The Group also leases various plant and equipment under operating lease
agreements, also with varying terms. The lease expenditure charged to the income statement during the year is
disclosed in note 4.
The future aggregate minimum lease payments in respect of operating leases are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
2009
153
144
129
114
99
848
1,487
2008
149
138
129
118
108
970
1,612
Section 6 Financial statements
147
34. Related party transactions
Joint ventures and associates
Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in
note 12. Amounts falling due from joint ventures and associates are set out in note 22.
Key management personnel
Key management personnel are deemed to be the members of the board of directors of Pearson plc. It is this
board which has responsibility for planning, directing and controlling the activities of the Group. Key management
personnel compensation is disclosed in the directors’ remuneration report.
There were no other material related party transactions.
No guarantees have been provided to related parties.
35. Events after the balance sheet date
During January 2010, the Group announced that Interactive Data was undertaking a preliminary review of strategic
alternatives for its business. At the date of this report, the outcome of the review is still uncertain.
On 3 February 2010 the FT Publishing business announced the acquisition of Medley Global Advisors LLC, a premier
provider of macro policy intelligence to the world’s top investment banks, hedge funds and asset managers for
$15.5m.
148 Pearson plc Annual report and accounts 2009
Company statement of comprehensive income
Year ended 31 December 2009
All figures in £ millions
Profit for the year
Currency translation differences on fair value hedges
Total comprehensive income for the year
2009
233
–
233
2008
526
(6)
520
Company statement of changes in equity
Year ended 31 December 2009
All figures in £millions
At 1 January 2009
Total comprehensive income
Issue of ordinary shares under
share option schemes
Purchase of treasury shares
Release of treasury shares
Dividends
At 31 December 2009
All figures in £millions
At 1 January 2008
Total comprehensive income
Issue of ordinary shares under
share option schemes
Purchase of treasury shares
Release of treasury shares
Prior year contribution applied to
release of shares
Dividends
At 31 December 2008
Share
capital
202
–
1
–
–
–
203
Share
capital
202
–
–
–
–
–
–
202
Share
premium
2,505
–
7
–
–
–
2,512
Share
premium
2,499
–
6
–
–
–
–
2,505
Equity attributable to equity holders of the company
Special
reserve
447
–
–
–
–
–
447
Retained
earnings
835
233
–
–
(29)
(273)
766
Total
3,926
233
8
(13)
–
(273)
3,881
Equity attributable to equity holders of the company
Special
reserve
447
–
Retained
earnings
603
520
–
–
–
–
–
447
–
–
(31)
–
(257)
835
Total
3,669
520
6
(12)
10
(10)
(257)
3,926
Treasury
shares
(63)
–
–
(13)
29
–
(47)
Treasury
shares
(82)
–
–
(12)
41
(10)
–
(63)
The special reserve represents the cumulative effect of cancellation of the company’s share premium account.
Included within retained earnings is an amount of £131m (2008: £131m) relating to profit on intra-group disposals
that is not distributable.
Company balance sheet
As at 31 December 2009
All figures in £ millions
Assets
Non-current assets
Investments in subsidiaries
Amounts due from subsidiaries
Financial assets – Derivative financial instruments
Other financial assets
Current assets
Amounts due from subsidiaries
Current income tax assets
Cash and cash equivalents (excluding overdrafts)
Financial assets – Derivative financial instruments
Total assets
Liabilities
Non-current liabilities
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Amounts due to subsidiaries
Current liabilities
Current income tax liabilities
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Amounts due to subsidiaries
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Special reserve
Retained earnings
Total equity attributable to equity holders of the company
Section 6 Financial statements
149
Notes
2009
2008
2
6
4
6
5
6
5
6
7
7
8
8,547
464
112
–
9,123
2,151
21
124
–
11,419
(767)
(2)
(3,808)
(4,577)
–
(419)
(7)
(2,535)
(7,538)
3,881
203
2,512
(47)
447
766
3,881
6,912
322
181
6
7,421
2,953
30
57
3
10,464
(991)
(15)
(1,840)
(2,846)
(2)
(352)
(5)
(3,333)
(6,538)
3,926
202
2,505
(63)
447
835
3,926
These financial statements have been approved for issue by the board of directors on 10 March 2010 and signed
on its behalf by
Robin Freestone Chief financial officer
150 Pearson plc Annual report and accounts 2009
Company cash flow statement
Year ended 31 December 2009
All figures in £ millions
Cash flows from operating activities
Net profit
Adjustments for:
Income tax
Net finance costs
Other receivables
Amounts due from subsidiaries
Net cash generated from operations
Interest paid
Tax received
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Interest received
Net cash (used in)/generated from investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Net purchase of treasury shares
Proceeds from borrowings
Repayment of borrowings
Dividends paid to company’s shareholders
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Notes
2009
2008
233
526
(57)
169
–
115
460
(130)
65
395
(1)
–
(1)
8
(13)
–
(131)
(273)
(409)
15
–
(295)
(295)
(37)
98
2
193
782
(209)
52
625
–
2
2
6
(12)
152
(584)
(257)
(695)
(7)
(75)
(220)
(295)
7
4
Notes to the company financial statements
Section 6 Financial statements
151
1. Accounting policies
a. Basis of preparation
The financial statements on pages 148 to 156 comprise the separate financial statements of Pearson plc. As
permitted by section 408 of the Companies Act 2006, only the Group’s income statement has been presented.
The company has no employees.
b. Group accounting policies
The accounting policies applied in the preparation of these company financial statements are the same as those
set out in note 1 to the Group financial statements with the addition of the following:
Investments
Investments in subsidiaries are stated at cost less provision for impairment, with the exception of certain hedged
investments that are held in a foreign currency and revalued at each balance sheet date.
2. Investments in subsidiaries
All figures in £ millions
At beginning of year
Subscription for share capital in subsidiaries
External disposal
Currency revaluations
At end of year
3. Financial risk management
2009
6,912
1,658
(1)
(22)
8,547
2008
6,650
152
–
110
6,912
The company’s financial instruments comprise amounts due to/from subsidiary undertakings, cash and cash
equivalents, derivative financial instruments and current and non-current borrowings. Derivative financial
instruments are held at fair value, with all other financial instruments held at amortised cost. The company’s
approach to the management of financial risks is consistent with the Group’s treasury policy, as discussed in note 19
to the Group’s financial statements. The company believes the value of its financial assets to be fully recoverable.
The company designates certain of its qualifying derivative financial instruments as hedges of the fair value of its
bonds (fair value hedges). Changes in the fair value of these derivative financial instruments are recorded in the
income statement, together with any change in the fair value of the hedged liability attributable to the hedged risk.
The carrying value of the company’s financial instruments is exposed to movements in interest rates and foreign
currency exchange rates (primarily US dollars). The company estimates that a 1% increase in interest rates would
result in a £36m decrease in the carrying value of its financial instruments, with a 1% decrease in interest rates
resulting in a £40m increase in their carrying value. The company also estimates that a 10% strengthening in sterling
would decrease the carrying value of its financial instruments by £110m, while a 10% decrease in the value of sterling
would increase the carrying value by £137m. These increases and decreases in carrying value would be recorded
through the income statement. Sensitivities are calculated using estimation techniques such as discounted cash
flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative interest rates,
these points on the yield curve were adjusted to 0%.
152 Pearson plc Annual report and accounts 2009
Notes to the company financial statements continued
3. Financial risk management continued
The maturity of contracted cash flows on the company’s borrowings and all of its derivative financial instruments are
as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Revolving credit facility and commercial paper
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
USD
(5)
249
324
568
601
(386)
353
568
USD
8
435
178
621
141
709
(392)
163
621
GBP
3
241
(212)
32
337
(313)
8
32
GBP
17
65
266
348
–
355
(21)
14
348
Other
2
30
–
32
–
–
32
32
Other
–
–
–
–
–
–
–
–
–
2009
Total
–
520
112
632
938
(699)
393
632
2008
Total
25
500
444
969
141
1,064
(413)
177
969
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are
calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are
based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross,
although the company net settles these amounts wherever possible.
Amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of
the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity
of the facility.
Section 6 Financial statements
153
4. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
2009
2
122
124
2008
2
55
57
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2009 the currency split of cash and cash equivalents was US dollar 26% (2008: nil), sterling 72%
(2008: 95%) and euro 2% (2008: 5%).
Cash and cash equivalents have fair values that approximate to their carrying amounts due to their short-term
nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents
Bank overdrafts
5. Financial liabilities – Borrowings
All figures in £ millions
Non-current
Bank loans and overdrafts
7.0% Global Dollar Bonds 2011 (nominal amount $500m)
7.0% Sterling Bonds 2014 (nominal amount £250m)
4.625% US Dollar notes 2018 (nominal amount $300m)
Current
Due within one year or on demand:
Bank loans and overdrafts
Total borrowings
Included in the non-current borrowings above is £4m of accrued interest (2008: £5m).
Included in the current borrowings above is £nil of accrued interest (2008: £nil).
2009
124
(419)
(295)
2008
57
(352)
(295)
2009
2008
–
322
254
191
767
132
368
254
237
991
419
419
1,186
352
352
1,343
154 Pearson plc Annual report and accounts 2009
Notes to the company financial statements continued
5. Financial liabilities – Borrowings continued
The maturity of the company’s non-current borrowings is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
2009
322
254
191
767
2008
–
500
491
991
As at 31 December 2009 the exposure to interest rate changes of the borrowings and amounts due to subsidiaries
when the borrowings re-price is as follows:
All figures in £ millions
Re-pricing profile of borrowings
Amounts due to subsidiaries
Effect of rate derivatives
The carrying amounts and market values of borrowings are as follows:
All figures in £ millions
Bank loans and overdrafts
7.0% Global Dollar Bonds 2011
7.0% Sterling Bonds 2014
4.625% US Dollar notes 2018
Effective
interest rate
n/a
7.16%
7.20%
4.69%
One year
419
5,159
1,288
6,866
Carrying
amount
419
322
254
191
1,186
One to
five years
576
517
(762)
331
More than
five years
191
527
(526)
192
2009
Market
value
419
331
276
176
1,202
Carrying
amount
484
368
254
237
1,343
Total
1,186
6,203
–
7,389
2008
Market
value
484
349
258
169
1,260
The market values are based on clean market prices at the year end or, where these are not available, on the quoted
market prices of comparable debt issued by other companies. The effective interest rates above relate to the
underlying debt instruments.
The carrying amounts of the company’s borrowings are denominated in the following currencies:
All figures in £ millions
US dollar
Sterling
Euro
2009
523
648
15
1,186
2008
1,089
254
–
1,343
Section 6 Financial statements
155
6. Derivative financial instruments
The company’s outstanding derivative financial instruments are as follows:
All figures in £ millions
Interest rate derivatives –
in a fair value hedge relationship
Interest rate derivatives –
not in a hedge relationship
Cross currency rate derivatives
Total
Analysed as expiring:
In less than one year
Later than one year and not later
than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2009
2008
360
1,229
220
1,809
238
844
727
1,809
17
66
29
112
–
60
52
112
–
(7)
(2)
(9)
(7)
(2)
–
(9)
398
1,867
–
2,265
487
859
919
2,265
44
140
–
184
3
47
134
184
–
(20)
–
(20)
(5)
(15)
–
(20)
The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined
by using market data and the use of established estimation techniques such as discounted cash flow and option
valuation models.
7. Share capital and share premium
At 1 January 2008
Issue of shares – share option schemes
At 31 December 2008
Issue of shares – share option schemes
At 31 December 2009
Number of
shares
000s
808,028
1,248
809,276
1,523
810,799
Ordinary
shares
£m
202
–
202
1
203
Share
premium
£m
2,499
6
2,505
7
2,512
The ordinary shares have a par value of 25p per share (2008: 25p per share). All issued shares are fully paid.
All shares have the same rights.
156 Pearson plc Annual report and accounts 2009
Notes to the company financial statements continued
8. Treasury shares
At 1 January 2008
Purchase of treasury shares
Release of treasury shares
Prior year contributions applied to release of shares
At 31 December 2008
Purchase of treasury shares
Release of treasury shares
At 31 December 2009
Number
of shares
000s
11,761
2,028
(3,341)
–
10,448
2,200
(2,983)
9,665
£m
82
12
(41)
10
63
13
(29)
47
The company holds its own shares in trust to satisfy its obligations under its restricted share plans. These shares are
treated as treasury shares for accounting purposes and have a par value of 25p per share. The nominal value of the
company’s treasury shares amounts to £2.4m (2008: £2.6m). At 31 December 2009 the market value of the
company’s treasury shares was £86.1m (2007: £67.0m).
9. Contingencies
There are contingent liabilities that arise in the normal course of business in respect of indemnities, warranties
and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries. In addition
there are contingent liabilities in respect of legal claims. None of these claims are expected to result in a material
gain or loss to the company.
10. Audit fees
Statutory audit fees relating to the company were £35,000 (2008: £35,000). Audit-related regulatory reporting fees
relating to the company were £nil (2008: £nil).
11. Related party transactions
Subsidiaries
The company transacts and has outstanding balances with its subsidiaries. Amounts due from subsidiaries and
amounts due to subsidiaries are disclosed on the face of the company balance sheet.
These loans are generally unsecured and interest is calculated based on market rates. The company has interest
payable to subsidiaries for the year of £232m (2008: £214m) and interest receivable from subsidiaries for the year
of £147m (2008: £86m). Management fees payable to subsidiaries in respect of centrally provided services
amounted to £37m (2008: £33m). Dividends received from subsidiaries were £383m (2008: £620m).
Key management personnel
Key management personnel are deemed to be the members of the board of directors of the company. It is this board
which has responsibility for planning, directing and controlling the activities of the company. Key management
personnel compensation is disclosed in the directors’ remuneration report of the Group.
There were no other material related party transactions.
Principal subsidiaries
Section 6 Financial statements
157
The principal operating subsidiaries at 31 December 2009 are listed below. They operate mainly in the countries
of incorporation or registration, the investments are in equity share capital and they are all 100% owned unless
stated otherwise.
Country of incorporation or registration
Pearson Education
Pearson Education Inc.
Pearson Education Ltd
Edexcel Ltd*
NCS Pearson Inc.
FT Group
The Financial Times Ltd
Mergermarket Ltd
Interactive Data Corporation (61%)
The Penguin Group
Penguin Group (USA) Inc.
The Penguin Publishing Co Ltd
Dorling Kindersley Holdings Ltd*
* Direct investment of Pearson plc.
US
England
England
US
England
England
US
US
England
England
158 Pearson plc Annual report and accounts 2009
Five year summary
All figures in £ millions
Sales
North American Education
International Education
Professional
Education
FT Publishing
Interactive Data
FT Group
Penguin
Continuing
Discontinued
Total sales
Adjusted operating profit
North American Education
International Education
Professional
Education
FT Publishing
Interactive Data
FT Group
Penguin
Continuing
Discontinued
Total adjusted operating profit
2005
2006
2007
2008
2009
1,576
559
177
2,312
249
297
546
804
3,662
461
4,123
260
51
2
313
17
80
97
60
470
36
506
1,679
640
211
2,530
280
332
612
848
3,990
433
4,423
280
73
17
370
27
89
116
66
552
40
592
1,667
735
226
2,628
344
344
688
846
4,162
167
4,329
273
92
27
392
56
97
153
74
619
15
634
2,002
866
244
3,112
390
406
796
903
4,811
8
4,819
303
135
36
474
74
121
195
93
762
–
762
2,470
1,035
275
3,780
358
484
842
1,002
5,624
–
5,624
403
141
43
587
39
148
187
84
858
–
858
Operating margin – continuing
12.8%
13.8%
14.9%
15.8%
15.3%
Adjusted earnings
Total adjusted operating profit
Net finance costs
Income tax*
Minority interest
Adjusted earnings*
Weighted average number of shares (millions)
Adjusted earnings per share*
* 2005 not restated for tax deductibility of goodwill and intangible amortisation.
506
(84)
(128)
(22)
272
797.9
34.1p
592
(90)
(130)
(28)
344
798.4
43.1p
634
(85)
(145)
(32)
372
796.8
46.7p
762
(88)
(178)
(36)
460
797.0
57.7p
858
(97)
(194)
(44)
523
799.3
65.4p
All figures in £ millions
Cash flow
Operating cash flow
Operating cash conversion
Operating free cash flow
Operating free cash flow per share
Total free cash flow
Total free cash flow per share
Net assets
Net debt
Return on invested capital (gross basis)
Total adjusted operating profit
Cash tax paid
Return
Average invested capital
Return on invested capital
Section 6 Financial statements
159
2005
2006
2007
2008
2009
570
113%
440
55.1p
431
54.0p
575
97%
434
54.4p
433
54.2p
684
108%
533
66.9p
407
51.1p
796
104%
631
79.2p
631
79.2p
913
106%
723
90.5p
723
90.5p
3,733
3,644
3,874
5,024
4,636
996
1,059
973
1,460
1,092
506
(65)
441
6,060
7.3%
592
(59)
533
6,553
8.1%
634
(61)
573
6,423
8.9%
762
(89)
673
7,337
9.2%
858
(103)
755
8,504
8.9%
Dividend per share
27.0p
29.3p
31.6p
33.8p
35.5p
160 Pearson plc Annual report and accounts 2009
Corporate and operating measures
Sales – underlying and constant exchange rate movement
Sales movement for continuing operations excluding the impact of acquisitions and disposals and movements
in exchange rates.
All figures in £ millions
Underlying increase
Portfolio changes
Exchange differences
Total sales increase
Underlying increase
Constant exchange rate increase
Adjusted income statement
2009
74
99
640
813
2%
4%
Reconciliation of the consolidated income statement to the adjusted numbers presented as non-GAAP measures
in the financial statements.
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Minority interest
Earnings
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Minority interest
Earnings
Statutory
income
statement
Other net
gains and
losses
Amortisation of
acquired
intangibles
Other net
finance
income/costs
Tax amortisation
benefit
755
(98)
660
(198)
462
–
462
(37)
425
–
–
–
–
–
–
–
–
–
103
–
103
(37)
66
–
66
(5)
61
–
(2)
(2)
1
(1)
–
(1)
–
(1)
–
–
–
40
40
–
40
(2)
38
Statutory
income
statement
Other net
gains and
losses
Amortisation of
acquired
intangibles
Other net
finance
income/costs
Tax amortisation
benefit
676
(91)
585
(172)
413
(90)
323
(31)
292
–
–
–
(7)
(7)
90
83
–
83
86
–
86
(31)
55
–
55
(3)
52
–
3
3
(1)
2
–
2
–
2
–
–
–
33
33
–
33
(2)
31
2009
Adjusted
income
statement
858
(97)
761
(194)
567
–
567
(44)
523
2008
Adjusted
income
statement
762
(88)
674
(178)
496
–
496
(36)
460
Section 6 Financial statements
161
Adjusted operating profit – underlying and constant exchange rate movement
Operating profit movement excluding the impact of acquisitions, disposals and movements in exchange rates.
All figures in £ millions
Underlying increase
Portfolio changes
Exchange differences
Total adjusted operating profit increase
Underlying increase
Constant exchange rate increase
Total free cash flow per share
2009
13
14
69
96
2%
4%
Operating cash flow for continuing and discontinued operations before tax and finance charges, divided by the
weighted average number of shares in issue.
All figures in £ millions
Adjusted operating profit
Cash conversion
Operating cash flow
Operating tax paid
Net operating finance costs paid
Total operating and free cash flow
Weighted average number of shares in issue (millions)
Operating free cash flow per share
Total free cash flow per share
Return on invested capital
All figures in £ millions
Total adjusted operating profit
Intangible amortisation
Cash tax paid
Return
Average goodwill and other intangibles
Average net operating assets
Average invested capital
Return on invested capital
2009
858
106%
913
(103)
(87)
723
799.3
90.5p
90.5p
2008
762
104%
796
(89)
(76)
631
797.0
79.2p
79.2p
Net invested capital
Gross invested capital
2009
858
(103)
(103)
652
5,152
1,310
6,462
10.1%
2008
762
(86)
(89)
587
4,352
1,279
5,631
10.4%
2009
858
–
(103)
755
7,194
1,310
8,504
8.9%
2008
762
–
(89)
673
6,058
1,279
7,337
9.2%
Return on invested capital is calculated using two methods:
Gross basis – total adjusted operating profit less operating cash tax paid expressed as a percentage of average gross
invested capital. Gross invested capital includes the original unamortised goodwill and intangibles.
Net basis – total adjusted operating profit less intangible amortisation and operating cash tax paid expressed as a
percentage of average net invested capital. Net invested capital includes the carrying value (after amortisation) of
goodwill and intangibles.
162 Pearson plc Annual report and accounts 2009
Index to the financial statements
Consolidated financial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated balance sheet
Consolidated cash flow statement
Independent auditors’ report to the members of Pearson plc
Notes to the consolidated financial statements
1 Accounting policies
2 Segment information
3 Discontinued operations
4 Operating expenses
5 Employee information
6 Net finance costs
7 Income tax
8 Earnings per share
9 Dividends
10 Property, plant and equipment
11 Intangible assets
12 Investments in joint ventures and associates
13 Deferred income tax
14 Classification of financial instruments
15 Other financial assets
16 Derivative financial instruments
17 Cash and cash equivalents (excluding overdrafts)
18 Financial liabilities – Borrowings
19 Financial risk management
20 Intangible assets – Pre-publication
21 Inventories
22 Trade and other receivables
23 Provisions for other liabilities and charges
24 Trade and other liabilities
25 Retirement benefit and other post-retirement obligations
26 Share-based payments
27 Share capital and share premium
28 Treasury shares
29 Business combinations
30 Disposals
31 Cash generated from operations
32 Contingencies
33 Commitments
34 Related party transactions
35 Events after the balance sheet date
Company financial statements
Company statement of comprehensive income
Company statement of changes in equity
Company balance sheet
Company cash flow statement
Notes to the company financial statements
Principal subsidiaries
Five year summary
Corporate and operating measures
79
79
80
81 – 82
83
84
86 – 94
95 – 97
98
98 – 99
100
101
101 – 102
103 – 105
105
106
107 – 110
110 – 111
112 – 113
114 – 115
116
116 – 117
117
118 – 120
120 – 125
126
126
127 – 128
128
129
130 – 135
136 – 140
140 – 141
141
142 – 143
144
145 – 146
146
146
147
147
148
148
149
150
151 – 156
157
158 – 159
160 – 161
Shareholder information
Section 6 Financial statements
163
Payment of dividends to mandated accounts
Shareholder information online
Dividends are paid through BACS and can be paid
directly into a bank or building society account, with the
tax voucher sent to the shareholder’s registered address.
For more information, please contact our registrar,
Equiniti, Aspect House, Spencer Road, Lancing,
West Sussex BN99 6DA. Telephone 0871 384 2043* or,
for those shareholders with hearing difficulties,
textphone number 0871 384 2255*.
Dividend reinvestment plan (DRIP)
The DRIP gives shareholders the right to buy the
company’s shares on the London stock market with
their cash dividend. For further information, please
contact Equiniti on 0871 384 2268*.
Individual Savings Accounts (ISAs)
Equiniti offers ISAs in Pearson shares. For more
information, please call them on 0871 384 2244*.
Share dealing facilities
Equiniti offers telephone and internet services for
dealing in Pearson shares. For further information,
please contact them on 08456 037 037
(telephone dealing – weekdays only) or log on to
www.shareview.co.uk/dealing (online dealing).
i
You will need your shareholder reference number as
shown on your share certificate.
A postal facility for dealing in Pearson shares is also
available through JPMorgan Cazenove Limited,
20 Moorgate, London EC2R 6DA.
Telephone 020 7588 2828.
An alternative weekly postal dealing service is
available through Equiniti.
Please telephone 0871 384 2248* for details.
ShareGift
Shareholders with small holdings of shares, whose value
makes them uneconomic to sell, may wish to donate
them to ShareGift, the share donation charity (registered
charity number 1052686). Further information about
ShareGift and the charities it has supported may be
obtained from their website, www.ShareGift.org
or by contacting them at 17 Carlton House Terrace,
London SW1Y 5AH.
i
Equiniti provides a range of shareholder information
online. You can check your holding and find practical
help on transferring shares or updating your details at
www.shareview.co.uk. Equiniti can be contacted for
i
information on 0871 384 2233*.
Information about the Pearson share price
The company’s share price can be found on our website
at www.pearson.com. It also appears in the financial
columns of the national press.
i
American Depositary Receipts (ADRs)
Pearson’s ADRs are listed on the New York Stock
Exchange and traded under the symbol PSO. Each ADR
represents one ordinary share. For enquiries regarding
registered ADR holder accounts and dividends,
please contact BNY Mellon Shareowner Services,
PO Box 358516, Pittsburgh, PA 15252-8516, telephone
1 866 259 2289 (toll free within the US)
or 1 201 680 6825 (outside the US). Alternatively,
you may e-mail shrrelations@bnymellon.com,
or log on to www.bnymellon.com/shareowner.
Voting rights for registered ADR holders can be exercised
through The Bank of New York Mellon, and for beneficial
ADR holders (and/or nominee accounts) through your
US brokerage institution. Pearson will file with the
Securities and Exchange Commission a Form 20-F.
i
Share register fraud: protecting your investment
Pearson does not contact its shareholders directly to
provide recommendation advice and neither does it
appoint third parties to do so. As required by law, our
shareholder register is available for public inspection
but we cannot control the use of information obtained
by persons inspecting the register. Please treat any
approaches purporting to originate from Pearson
with caution.
*Calls to these numbers are charged at 8p per minute from a BT landline.
Other provider costs may vary.
164 Pearson plc Annual report and accounts 2009
Shareholder information continued
Tips on protecting your shares
Keep any documentation that contains your shareholder
reference number in a safe place and shred any
unwanted documentation.
Inform the registrar promptly when you change address.
Be aware of dividend payment dates and contact the
registrar if you do not receive your dividend cheque or
better still, make arrangements to have the dividend
paid directly into your bank account.
Consider holding your shares electronically in a CREST
account via a nominee.
For more information, please log on to our website at
www.pearson.com/shareholderfaqs
i
Advisers
Auditors PricewaterhouseCoopers LLP
Bankers HSBC Bank plc
Brokers JPMorgan Cazenove Limited and Citigroup
Financial advisers Goldman Sachs,
JP Morgan Cazenove Limited and Citigroup
Solicitors Freshfields Bruckhaus Deringer, Herbert Smith
and Morgan, Lewis & Bockius
2010 Financial calendar
Ex-dividend date – 7 April
Record date – 9 April
Last date for dividend reinvestment election – 15 April
Annual General Meeting – 30 April
Payment date for dividend and share purchase date for
dividend reinvestment – 7 May
Interim results – 26 July
Payment date for interim dividend – 17 September
Always learning
Principal offices worldwide
Pearson is a world-leading ‘education’ company, in the broadest
sense of that word. We have a very simple goal: to help people
get on in their lives through education. We aim to serve the citizens
of our brain-based global economy wherever and whenever they
are learning – old or young, at home or school or work, in any
pursuit, anywhere.
Have you tried learning about Pearson online?
Visit the all-new www.pearson.com
Browse, download or print our interactive online annual report at
www.pearson.com/investor/ar2009
Take a virtual tour at www.pearson.com/pearsonville
1
2
3
Notes
Reliance on this document
Our Business Review on pages 8 to 43 has been prepared
in accordance with the Directors’ Report Business Review
Requirements of section 417 of the Companies Act 2006.
It also incorporates much of the guidance set out in the
Accounting Standards Board’s Reporting Statement on
the Operating and Financial Review.
The intention of this document is to provide information to
shareholders and is not designed to be relied upon by any
other party or for any other purpose.
Forward-looking statements
This document contains forward-looking statements which
are made by the directors in good faith based on information
available to them at the time of approval of this report. In
particular, all statements that express forecasts, expectations
and projections with respect to future matters, including
trends in results of operations, margins, growth rates, overall
market trends, the impact of interest or exchange rates,
the availability of financing, anticipated costs savings
and synergies and the execution of Pearson’s strategy, are
forward-looking statements. By their nature, forward-looking
statements involve risks and uncertainties because they
relate to events and depend on circumstances that will occur
in the future. There are a number of factors which could
cause actual results and developments to differ materially
from those expressed or implied by these forward-looking
statements, including a number of factors outside Pearson’s
control. Any forward-looking statements speak only as of the
date they are made, and Pearson gives no undertaking to
update forward-looking statements to reflect any changes
in its expectations with regard thereto or any changes to
events, conditions or circumstances on which any such
statement is based.
Pearson (UK)
80 Strand, London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
firstname.lastname@pearson.com
www.pearson.com
Pearson (US)
1330 Avenue of the Americas,
New York City, NY 10019, USA
T +1 212 641 2400
F +1 212 641 2500
firstname.lastname@pearson-inc.com
www.pearson.com
Pearson Education
One Lake Street,
Upper Saddle River,
NJ 07458, USA
T +1 201 236 7000
F +1 201 236 3222
firstname.lastname@pearsoned.com
www.pearsoned.com
Financial Times Group
Number One Southwark Bridge,
London SE1 9HL, UK
T +44 (0)20 7873 3000
F +44 (0)20 7873 3076
firstname.lastname@ft.com
www.ft.com
The Penguin Group (UK)
80 Strand, London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
firstname.lastname@uk.penguingroup.com
www.penguin.co.uk
The Penguin Group (US)
375 Hudson Street, New York City,
NY 10014, USA
T +1 212 366 2000
F +1 212 366 2666
firstname.lastname@us.penguingroup.com
us.penguingroup.com
Pearson plc
Registered number 53723 (England)
Design and Production: Radley Yeldar (London) ry.com
Print: Beacon Press
Pearson has supported the planting of 1,750m2 of new native woodland with the Woodland Trust, helping to capture and store
70 tonnes of carbon dioxide emissions generated by the production of this report.
The cover of this report has been printed on Cocoon Silk 100 which is FSC certified and contains 100% recycled de-inked waste
paper. The text pages are printed on Cocoon Offset which is also made from 100% recycled fibres. This report was printed using
vegetable oil based inks and 100% renewable energy by a CarbonNeutral® printer certified to ISO 14001 environmental
management system and registered to EMAS the Eco Management Audit Scheme.
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Learn more about how we educate,
entertain and inform at pearson.com
and pearson.com/pearsonville
Annual report and accounts 2009