UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark One)
| ¨ | ||
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the fiscal year ended December 31, 2012
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
or
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
Date of event requiring this shell company report
Commission file number 1-16055
PEARSON PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
80 Strand
London, England WC2R 0RL
(Address of principal executive offices)
Stephen Jones
Telephone: +44 20 7010 2000
Fax: +44 20 7010 6060
80 Strand
London, England WC2R 0RL
(Name, Telephone,E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Class | ||
Name of Each Exchange on Which Registered | ||
| *Ordinary Shares, 25p par value | New York Stock Exchange | |
| American Depositary Shares, each | New York Stock Exchange | |
| Representing One Ordinary Share, 25p per Ordinary Share |
| * | Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:
Ordinary Shares, 25p par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þx No o¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o¨ No þx
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þx No o¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o¨ No o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated file” and “large accelerated filer”, in Rule 12b-2 of the Exchange Act. (Check one):
x Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing
¨ US GAAP | ||||
| by the |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17¨ Item 18 ¨
|
2
3
We have prepared the financial information contained in this Annual Report in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) which in respect of the accounting standards applicable to the Group do not differ from IFRS as adopted by the European Union (“EU”). Unless we indicate otherwise, any reference in this Annual Report to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report.
We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this Annual Report:
references to “sterling”, “pounds”, “pence” or “£” are to the lawful currency of the United Kingdom,
references to “euro” or “€” are to the euro, the lawful currency of the participating Member States in the Third Stage of the European Economic and Monetary Union of the Treaty Establishing the European Commission, and
references to “US dollars”, “dollars”, “cents” or “$” are to the lawful currency of the United States.
For convenience and except where we specify otherwise, we have translated some sterling figures into US dollars at the rate of £1.00 = $1.54,$1.63, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2010, the last business day of 2010.2012. We do not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. On February 28, 20112013 the noon buying rate for sterling was £1.00 = $1.62.
The Group currently consists of three major worldwide businesses, Pearson Education, Thethe FT Group (“FT”) and the Penguin Group (“Penguin”). See “Item 4. Information on the Company — Overview of operating divisions”.
You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”, contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:
operations and prospects, | ||
4
funding needs and financing resources,
expected financial position,
market risk,
currency risk,
US federal and state spending patterns,
debt levels, and
general market and economic conditions.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In evaluating them, you should consider various factors, including the risks outlined under “Item 3. Key Information — Risk Factors”, which may cause actual events or our industry’s results to differ materially from those expressed or implied by any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
5
| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
| ITEM 3. | KEY INFORMATION |
Following the publication of SEC Release No33-8879 “Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP”, the Group no longer provides a reconciliation between IFRS and U.S. GAAP. The table below shows selected consolidated financial data under IFRS as issued by the IASB. The selected consolidated profit and loss account data for the years ended December 31, In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction is expected to complete in 2013 and, at that point, Pearson will no longer control the Penguin Group of companies but will account for its 47% associate interest on an equity basis. The anticipated loss of control results in the Penguin business being classified as held for sale on the Pearson balance sheet at December 31, 2012 and the results of The results of the Interactive Data The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations. For convenience, we have translated the 2010, 20092012, 2011 and 20082010 and the selected consolidated balance sheet data as at December 31, 20102012 and 20092011 have been derived from our audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report.the Interactive Data business (disposed in July 2010)Penguin have been included in discontinued operations for all the years to 2010. through 2012.Management business (disposedCorporation (Interactive Data) in February 2008) have been includedwhich Pearson held a 61% interest and which was disposed in discontinued operations for all years to 2008. The results of Government Solutions (disposed in February 2007) and Les Echos (disposed in December 2007)July 2010, have been included in discontinued operations for all the years to 2007.20102012 amounts into US dollars at the rate of £1.00 = $1.54,$1.63, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 31, 2010. Year Ended December 31 2010 2010 2009 2008 2007 2006 $ £ £ £ £ £ (In millions, except for per share amounts) Total sales 8,721 5,663 5,140 4,405 3,818 3,658 Total operating profit 1,144 743 619 564 484 440 Profit after taxation from continuing operations 807 524 377 344 274 405 Profit for the financial year 2,002 1,300 462 323 310 469 Basic earnings per equity share(1) $ 2.49 161.9p 53.2p 36.6p 35.6p 55.9p Diluted earnings per equity share(2) $ 2.49 161.5p 53.1p 36.6p 35.6p 55.8p Basic earnings from continuing operations per equity share(1) $ 1.02 66.0p 47.0p 42.9p 34.1p 50.6p Diluted earnings from continuing operations per equity share(2) $ 1.01 65.9p 47.0p 42.9p 34.1p 50.5p Dividends per ordinary share $ 0.60 38.7p 35.5p 33.8p 31.6p 29.3p Total assets (non-current assets plus current assets) 16,429 10,668 9,412 9,896 7,292 7,213 Net assets 8,632 5,605 4,636 5,024 3,874 3,644 Long-term obligations(3) (4,344 ) (2,821 ) (3,051 ) (2,902 ) (1,681 ) (1,853 ) Capital stock 313 203 203 202 202 202 Number of equity shares outstanding (millions of ordinary shares) 813 813 810 809 808 806 6
| Year Ended December 31 | ||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| $ | £ | £ | £ | £ | £ | |||||||||||||||||||
| (In millions, except for per share amounts) | ||||||||||||||||||||||||
Consolidated Income Statement data | ||||||||||||||||||||||||
Total sales | 8,246 | 5,059 | 4,817 | 4,610 | 4,138 | 3,502 | ||||||||||||||||||
Total operating profit | 839 | 515 | 1,118 | 638 | 536 | 473 | ||||||||||||||||||
Profit after taxation from continuing operations | 466 | 286 | 885 | 455 | 319 | 274 | ||||||||||||||||||
Profit for the financial year | 536 | 329 | 956 | 1,300 | 462 | 323 | ||||||||||||||||||
Consolidated Earnings data per share | ||||||||||||||||||||||||
Basic earnings per equity share(1) | $ | 0.66 | 40.5 | p | 119.6 | p | 161.9 | p | 53.2 | p | 36.6 | p | ||||||||||||
Diluted earnings per equity share(2) | $ | 0.66 | 40.5 | p | 119.3 | p | 161.5 | p | 53.1 | p | 36.6 | p | ||||||||||||
Basic earnings from continuing operations per equity share(1) | $ | 0.57 | 35.2 | p | 110.7 | p | 57.4 | p | 39.8 | p | 34.3 | p | ||||||||||||
Diluted earnings from continuing operations per equity share(2) | $ | 0.57 | 35.1 | p | 110.5 | p | 57.3 | p | 39.7 | p | 34.2 | p | ||||||||||||
Dividends per ordinary share | $ | 0.73 | 45.0 | p | 42.0 | p | 38.7 | p | 35.5 | p | 33.8 | p | ||||||||||||
Consolidated Balance Sheet data at period end | ||||||||||||||||||||||||
Total assets (non-current assets plus current assets) | 18,497 | 11,348 | 11,244 | 10,668 | 9,412 | 9,896 | ||||||||||||||||||
Net assets | 9,307 | 5,710 | 5,962 | 5,605 | 4,636 | 5,024 | ||||||||||||||||||
Long-term obligations(3) | (5,175 | ) | (3,175 | ) | (3,192 | ) | (2,821 | ) | (3,051 | ) | (2,902 | ) | ||||||||||||
Capital stock | 333 | 204 | 204 | 203 | 203 | 202 | ||||||||||||||||||
Number of equity shares outstanding (millions of ordinary shares) | 817 | 817 | 816 | 813 | 810 | 809 | ||||||||||||||||||
Notes:
| (1) | Basic earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period. | |
| (2) | Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options. | |
| (3) | Long-term obligations comprise any liabilities with a maturity of more than one year, including medium and long-term borrowings, derivative financial instruments, pension obligations and deferred income tax liabilities. |
We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. Our board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. Our board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders’ approval at our annual general meeting. At our annual general meeting on April The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated, and is translated into cents per ordinary share at the noon buying rate in The City of New York on each of the respective payment dates for interim and final dividends. The final dividend for the 28, 201126, 2013 our shareholders will be asked to approve a final dividend of 25.7p30.0p per ordinary share for the year ended December 31, 2010.20102012 fiscal year will be paid on May 6, 2011. Interim Final Total Interim Final Total (Pence per ordinary share) (Cents per ordinary share) 13.0 25.7 38.7 20.3 39.6 * 59.9 2009 12.2 23.3 35.5 19.8 34.3 54.1 2008 11.8 22.0 33.8 21.6 33.2 54.8 2007 11.1 20.5 31.6 22.4 39.9 62.3 2006 10.5 18.8 29.3 20.0 31.4 51.4
Fiscal year | Interim | Final | Total | Interim | Final | Total | ||||||||||||||||||
| (Pence per ordinary share) | (Cents per ordinary share) | |||||||||||||||||||||||
2012 | 15.0 | 30.0 | 45.0 | 24.3 | 48.9 | * | 73.2 | |||||||||||||||||
2011 | 14.0 | 28.0 | 42.0 | 22.1 | 45.2 | 67.3 | ||||||||||||||||||
2010 | 13.0 | 25.7 | 38.7 | 20.3 | 42.2 | 62.5 | ||||||||||||||||||
2009 | 12.2 | 23.3 | 35.5 | 19.8 | 34.3 | 54.1 | ||||||||||||||||||
2008 | 11.8 | 22.0 | 33.8 | 21.6 | 33.2 | 54.8 | ||||||||||||||||||
| * | As the |
Future dividends will be dependent on our future earnings, financial condition and cash flow, as well as other factors affecting the Group.
The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period and on the last day of each month during an annual period. On December 31, 20102012 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.54.$1.63. On February 28, 20112013 the noon buying rate for sterling was £1.00 = $1.62. High Low February 2011 $ 1.62 $ 1.60 January 2011 $ 1.60 $ 1.55 December 2010 $ 1.59 $ 1.54 November 2010 $ 1.63 $ 1.56 October 2010 $ 1.60 $ 1.57 September 2010 $ 1.59 $ 1.53 7
Month | High | Low | ||||||
February 2013 | $ | 1.58 | $ | 1.51 | ||||
January 2013 | $ | 1.63 | $ | 1.57 | ||||
December 2012 | $ | 1.63 | $ | 1.60 | ||||
November 2012 | $ | 1.61 | $ | 1.58 | ||||
October 2012 | $ | 1.62 | $ | 1.59 | ||||
September 2012 | $ | 1.63 | $ | 1.59 | ||||
Year Ended December 31 | Average rate | |||
2012 | $ | 1.59 | ||
2011 | $ | 1.61 | ||
2010 | $ | 1.54 | ||
2009 | $ | 1.57 | ||
2008 | $ | 1.84 | ||
Year Ended December 31 | Average rate | |||
| 2010 | $ | 1.54 | ||
| 2009 | $ | 1.57 | ||
| 2008 | $ | 1.84 | ||
| 2007 | $ | 2.01 | ||
| 2006 | $ | 1.84 | ||
You should carefully consider the risk factors described below, as well as the other information included in this Annual Report. Our business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that we presently cannot identify.
Global economic conditions may adversely impact our financial performance.
With the continued pressure on the worldwide economies during 2012, there is a continuing risk of a further weakening in trading conditions in 2013 which could adversely impact our financial performance. The effect of continued deterioration or lack of recovery in the global economy will vary across our different businesses and will depend on the depth, length and severity of any economic downturn. Specific economic risks by business are described more fully in the other risk factors below.
A significant deterioration in Group profitability and/or cash flow caused by prolonged economic instability could reduce our liquidity and/or impair our financial ratios, and trigger a need to raise additional funds from the capital markets and/or renegotiate our banking covenants.
To the extent the economic difficulties continue, or worldwide economic conditions materially deteriorate, the Group’s revenues, profitability and cash flows could be significantly reduced as customers would be unable to purchase products and services in the expected quantities and/or pay for them within normal agreed terms. A liquidity shortfall may delay certain development initiatives or may expose the Group to a need to negotiate further funding. While we anticipate that our existing cash and cash equivalents, together with availability under our existing credit facility, cash balances and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all.
If the global economy weakens further and/or the global financial markets collapse, whether in general or as a result of specific factors, such as the current European sovereign debt crisis, we may not have access to or could lose our bank deposits. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
Our education, business information and book publishing businesses will be impacted by the rate of and state of technological change, including the digital evolutionrevolution and other disruptive technologies.
A common trend facing all our businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. The digital migration brings the need for change in product distribution, consumers’ perception of value and the publisher’s position between retailers and authors, which affects managing stock levels.authors. The trend toe-books ebooks has created contraction in the consumer books retail market which increases the risk of bankruptcy of a major retail customer; thiscustomer. This could disrupt short-term product supply to the market as well as could result in a large debt write off.
We face competitive threats both from large media players and from smaller businesses, online and mobile portals and news redistributors operating in the digital arena and providing alternative sources of news and information. New distribution channels, e.g. digital format, the internet, online retailers, growing delivery platforms (e.g., e-readers), combined with the concentration of retailer power pose both threats and opportunities to our traditional consumer publishing models, potentially impacting both sales volumes and pricing.
If we do not adapt rapidly to these changes we may lose business to ‘faster’ more ‘agile’ competitors, who increasingly are non-traditional competitors, i.e. technology companies, making their identification all the more difficult. We may be required to invest significant resources to further adapt to the changing competitive environment.
Investment returns outside our traditional core US and UK markets may be lower than anticipated.
The results and growth of our US educational solutions and assessment businesses are dependent on the level of federal and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. State, local and municipal finances have been adversely affected by the US recession and the unknown timing of economic recovery. Funding pressures remain, with competition from low price and disruptive new business models and promotion of open source to keep costs down. The current challenging environment could impact our ability to collect on education-related debt.
Government changes can also affect the funding available for educational expenditure, which include the impact of education reform, such as the reauthorization of the Elementary and Secondary Education Act, the introduction of the Common Core and Race to the Top funding.reform. Similarly, changes in the state
8
There are multiple competing demands for educational funds and there is no guarantee that states will fund new textbooks or testing or training programs will be funded, or that we will win this business.
If we do not adequately protect our intellectual property and proprietary rights our competitive position and results may be adversely affected and limit our ability to grow.
Our products and services largely comprise intellectual property delivered through a variety of media, including newspapers, books, the internet and other growing delivery platforms. We rely on trademark, copyright and other intellectual property laws to establish and protect our proprietary rights in these products and services.
Our intellectual property rights in countries such as the US and the UK, jurisdictions covering the largest proportion of our operations, are well established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect our future growth. We cannot guarantee that our intellectual property rights will provide competitive advantages to us; our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; any of the intellectual property rights that we may employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; or that we will not lose the ability to assert our intellectual property rights against others. Moreover, despite trademark and copyright protection, third parties may copy, infringe or otherwise profit from our proprietary rights without our authorization. The loss or diminution in value of these proprietary rights or our intellectual property could have a material adverse effect on our business and financial performance.
A control breakdown or service failure in our school assessment businesses could result in financial loss and reputational damage.
There are inherent risks associated with our school assessment businesses, both in the US and the UK. A service failure caused by a breakdown in our testing and assessment processes could lead to a mis-grading of student testsand/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contractsand/or the suspension or withdrawal of our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contractsand/or obtain new customers.
Our education technology and assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed.
Our education technology and assessment businesses are characterized by multi-million pound sterling contracts spread over several years. As in any contracting business, there are inherent risks associated with the bidding process, start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our financial performance and/or reputation. Failure to retain these contracts at the end of the contract term could adversely impact our future revenue growth. At Edexcel, our UK Examination board and testing business, any change in UK Government policy to examination marking could have a significant impact on our present business model.
Our investment into inherently riskier emerging markets is growing and the returns may be lower than anticipated.
To take advantage of international growth opportunities and to reduce our reliance on our core US and UK markets we are increasing our investments in a number of emerging markets, some of which are inherently more risky than our traditional markets. Political, regulatory, economic and legal systems in emerging markets may be less predictable than in countries with more developed institutional structures. Political, regulatory, economic, currency, reputational and corporate governance risks (including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.
Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions and joint ventures could lead to goodwill and intangible asset impairments.
We continually acquire and dispose of businesses to achieve our strategic objectives. In 2012 we acquired Certiport, GlobalEnglish, Author Solutions Inc, Wall Street Indonesia, Wall Street Brazil, Inframation Group, EmbanetCompass and several other small acquisitions. Acquired goodwill and intangible assets could be impaired if we are unable to generate the anticipated revenue growth, synergies and/or cost savings associated with these or other acquisitions.
In October 2012, we entered into an agreement with Bertelsmann to combine our respective consumer publishing businesses in a newly-created combination named Penguin Random House in which we will hold a 47% equity interest. The combination is subject to customary regulatory and other approvals and is expected to complete in the second half of 2013.
We operate in markets which are dependent on Information Technology (IT) systems and technological change.
All our businesses, to a greater or lesser extent, are dependent on information technology. We either provide software and/or internet services to our customers or we use complex IT systems and products to support our business activities, particularly in business information publishing, back-office processing and infrastructure. We face several technological risks associated with software product development and service delivery in our educational businesses, information technology security (including virus and hacker attacks), e-commerce, enterprise resource planning system implementations and upgrades. Although plans and procedures are in place to reduce such risks, from time to time we have experienced verifiable attacks on our systems by unauthorized parties. To date such attacks have not resulted in any material damage to us, but our businesses could be adversely affected if our systems and infrastructure experience a significant failure or interruption.
Failure to comply with data privacy regulations and standards or weakness in internet security could result in a major data privacy breach causing reputational damage to our brands and financial loss.
Across our businesses we hold large volumes of personal data including that of employees, customers and, in our assessment and information technology businesses, students and citizens. Despite our implementation of security measures, individuals may try to gain unauthorized access to our data in order to misappropriate such information for potentially fraudulent purposes. Any perceived or actual unauthorized disclosure of personally-identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract and retain our customers, or subject us to claims or litigation arising from damages suffered by individuals, and thereby harm our business and operating results. Failure to adequately protect personal data could lead to penalties, significant remediation costs, reputational damage, potential cancellation of some existing contracts and inability to compete for future business. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information.
Our reported earnings and cash flows may be adversely affected by changes in our pension costs and funding requirements.
We operate a number of pension plans throughout the world, the principal ones being in the UK and the US. The major plans are self-administered with the plans’ assets held independently of the Group. Regular valuations,
conducted by independent qualified actuaries, are used to determine pension costs and funding requirements. As these assets are invested in the capital markets, which are often volatile, the plans may require additional funding from us, which could have an adverse impact on our results.
It is our policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. Our earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in our defined benefit plans. Our greatest exposure relates to our UK defined benefit pension plan, which is valued once every three years. Pension fund deficits may arise because of inadequate investment returns, increased member life expectancy, changes in actuarial assumptions and changes in pension regulations, including accounting rules and minimum funding requirements.
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.
9
Across all our businesses, we manage complex operational and logistical arrangements including distribution centers, data centers and large office facilities as well as relationships with third party print sites. We have also outsourced some support functions, including information technology and warehousing, to third party providers. The failure of third parties to whom we have outsourced business functions could adversely affect our reputation and financial condition. Failure to recover from a major disaster, (e.g. fire, flood etc) at a key facility or the disruption of supply from a key third party vendor or partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily business activities.
Changes in students’ buying and distribution behaviour put downward pressure on price.
Students are seeking cheaper sources of content, e.g. online discounters, file sharing, use of pirated copies, and rentals, along with open source. This change in behaviour along with the move from professor-centric decision-making, puts downward pressure on textbook prices in our major markets.
The pace and testing business, any change in UK Government policy to examination marking (e.g. price capping) could have a significant impact on our present business model.
10
In parallel with the business transformation as we respond to the digital revolution and shift from a substantial finance transformation programme based around sharedproduct to a services business, we will continue to look at opportunities to develop new business models and common processesenhance organization structures. The increased pace and services, includingscope of change increases the outsourcingrisk that not all of financial transaction processing, which isthese changes will deliver the expected tobenefits within anticipated timeframes. In addition, as a result in significant cost savings in future years. The programme may take longer than planned, cost more than planned, and may cause disruption to our business. There is no assurance that the full extent of the anticipated benefits will be realisedincreased pressure of transformational change, our business as usual activities may not perform in the timeline envisaged.
Changes in our tax position can significantly affect our reported earnings and cash flows.
Changes in corporate tax ratesand/or other relevant tax laws in the UKand/or the US could have a material impact on our future reported tax rateand/or our future tax payments.
We generate a substantial proportion of our revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuations could adversely affect our earnings and the strength of our balance sheet.
As with any international business our earnings can be materially affected by exchange rate movements. We are particularly exposed to movements in the US dollar to sterling exchange rate as approximately 60% of our total revenue is generated in US dollars. In addition, we are increasingly exposed to a range of international currencies, most of which weakened against sterling in 2012. Sales for 2010,2012, translated at 20092011 average rates, would have been £128m£29m or 2% lower.
The inherent volatility of advertising could adversely affect the profitability of our newspaper business.
Advertising revenue is susceptible to fluctuations in economic cycles. Certain of our products, such as theFinancial Timesnewspaper, are more advertising-driven than our other products. Consequently, these products are more affected by decreases in advertising revenue. As the internet continues to grow as a global medium for information, communication and commerce, advertisers are increasingly shifting advertising dollars from print to online media. Any downturn in corporate and financial advertising spend due to the economic slowdown will negatively impact the results.
A significant deterioration in Group profitability and/or cash flow caused by a severe economic depression could reduceIf we fail to attract and retain appropriately skilled employees, our liquidity and/or impairbusiness may be harmed.
Our success depends on the skill, experience and dedication of our financial ratios, and trigger a need to raise additional funds from the capital markets and/or renegotiate our banking covenants.
11
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:include journalistic/author integrity, ethical business behaviour, intellectual copyright protection, compliance with UN Global Compact standards, environmental impact, people and data privacy.
Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our business.
We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting and enhancing the Pearson brand is critical to expanding our business and will depend largely on our ability to maintain our customers’ trust in our solutions and in the quality and integrity of our products and services. If we do not successfully maintain a strong brand, our business could be harmed.
The settlement of legal actions against Penguin over agency arrangements for selling eBooks might impact Penguin’s business.
Penguin has settled a civil lawsuit brought in April 2012 by the Antitrust Division of the United States Department of Justice (the “DOJ”) with respect to agency arrangements for selling eBooks by agreeing, along with other publishers, to a consent order that requires that the agency selling arrangements be discontinued. In addition, Penguin is in discussions with the Canadian Competition Bureau and the European Competition Commission to settle similar investigations by those entities. Penguin’s discontinuation of agency selling arrangements for eBooks could have an adverse impact on its future sales. Penguin is also subject to civil proceedings related to eBooks agency selling arrangements brought by state attorneys general in the United States as well as private plaintiffs in the United States and Canada. Settlement discussions are ongoing, but at this juncture there is no assurance that Penguin can reach a settlement of these cases to avoid trial. Moreover, if Penguin is able to conclude a settlement, it will involve Penguin’s payment of monetary damages.
The effects of a recent decision by the US Supreme Court interpreting US copyright law may have an adverse impact on our sales.
In a recent case, the US Supreme Court, reversing decisions by the District Court and Court of Appeals, held that the “first sale” doctrine of United States Copyright Law applied to copies of US copyrighted material printed outside of the United States. The decision would allow third parties to import into the United States for resale international editions of our US textbooks that the United States publisher or its affiliate or other authorized publisher published abroad. These international editions are often available in the countries of publication at prices significantly below those of the US editions. While the international editions may not substitute for the US editions, any widespread importation and resale in the United States of the lower cost international editions of our textbooks could adversely impact overall revenues.
| ITEM 4. | INFORMATION ON THE COMPANY |
Pearson plc, (Pearson) is an international media and education company with its principal operations in the education, business information and consumer publishing markets. We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers and online services. We increasingly offer services as well as content, from test creation, administration and processing to teacher development and school software. Though we operate in more than 70 countries around the world, today our largest markets are the US Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company and re-registered under the UK Companies Act as a public limited company in 1981. We conduct our operations primarily through our subsidiaries and other affiliates. Our principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 (0) 20 7010 2000).(59%(55% of sales) and Europe (21%(22% of sales) on a continuing basis.
Pearson currently consists of three major worldwide businesses: Pearson Educationis a leading provider of educational materials and learning technologies. It provides test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. It publishes across the curriculum and provides a range of education services including teacher development, educational software and system-wide The FT Groupprovides business and financial news, data, comment and analysis, in print and online, to the international business community. The FT Group includes theFinancial Timesnewspaper and FT.com website, a range of specialist financial magazines and online services, and Mergermarket, which provides proprietary forward-looking insights and intelligence to businesses and financial institutions. The Penguin Groupis one of the world’s leading consumer publishing businesses and an iconic global brand. We publish the works of many authors in an extensive portfolio of fiction, non-fiction and reference titles under imprints including Penguin, Hamish Hamilton, Putnam, Berkley, and Dorling Kindersley.solutions.solutions, and also owns and operates schools. In 2010,2012, Pearson Education operated through three worldwide segments, which we refer to as “North American Education”, “International Education” and “Professional”:During the year Pearson sold its 61% interest in Interactive Data, previously part of the FT Group. also has a 50% ownership stake in both The Economist Group. During 2010 Interactive Data, in which Pearson held a 61% interest and which was part of the FT Group andwas sold. In addition, during 2011 the FT Group sold its 50% ownership stake in FTSE International.
Pearson’s goal is More recently, we have achieved particularly rapid growth in digital products and Looking ahead, we see considerable growth opportunities in education, driven by trends including rapid growth of the global middle class, adoption of learning technologies, the connection between education and career prospects and increasing consumer spend on education, especially in emerging economies. We are therefore planning to significantly accelerate our push into digital learning, education services and emerging markets. For some time we have been focusing our acquisition and organic investment in these areas; we now intend a further significant reallocation of resources to these activities. We are making a restructuring investment across three areas: the creation of Penguin Random House; the separation of Penguin from Pearson and the transformation of our education company. We are focusing our resources and capital on being an education services company that is We First, we are Second, we are applying a rigorous framework to prioritise geographic markets and to evaluate where we offer global products and services; where we customise for local needs; and where we require a fully local approach. This will involve focusing investment on a small group of markets where we see our biggest growth opportunities; and reducing local infrastructure and investment in a ‘long tail’ of smaller markets. Third, we are channeling our investment into four business models: direct to consumer; ‘Pearson Inside’ (our comprehensive institutional services); assessment and certification; and learning services. Running throughout this strategy is a process to ensure that our products and services deliver demonstrable learning outcomes to the student or the institution. We have therefore developed the Pearson efficacy framework: a unique, rigorous and scalable quality assurance system that checks that the necessary conditions are in place for an education programme to deliver intended learning outcomes. We now require that all Pearson acquisitions and all product investments over $3m go through the Pearson efficacy framework and set out a plan to implement its recommendations before approval. Pearson Education Pearson Education is one of the We report Pearson Education’s performance in the three segments: North American Education, International Education, and Professional. In North American Education Our North American Education business serves educators and students in the USA and Canada from early education through elementary, middle and high schools and into higher education with a wide range of products and services: curriculum textbooks and other learning materials; student assessments and testing services; and education technologies. Pearson has a leading position in each of these areas and a distinctive strategy of connecting those parts to support institutions and personalize learning. We have now integrated our North American School and Higher Education companies, which we believe will bring significant opportunities to develop growth businesses, to share investments and technologies and to gain further efficiencies. Our North American School business contains a unique mix of publishing, testing and technology products for the elementary and secondary school markets, which are increasingly integrated. The major customers of this business are state education boards and local school districts. The business publishes high quality curriculum programmes for school students, at both elementary and secondary level, under a number of imprints including Pearson Scott Foresman and Pearson Prentice Hall. We also provide digital instructional solutions under Pearson Digital Learning, such as enVisionMATH and Miller-Levine Biology. The business also provides student information, assessment, reporting and business solutions (Pearson School Systems), which enables elementary and secondary schools and school districts to record and manage information about student attendance and Our North American Assessment and Information business provides educational assessment services and solutions in the US, developing, scoring and processing a large volume of student tests each year, for US states and the federal government. We also develop clinical assessments for the professional practice areas of psychology, speech, language, hearing, occupational and physical therapy; global talent assessment and learning assessment. See “Item International Education Our International Education business covers all educational publishing and related services outside North America. Our International schools business publishes educational materials in local languages in a number of Our International higher education business adapts our textbooks and technology services for individual markets, and we have a growing local publishing program, with our key markets including the UK, Benelux, Mexico, Germany, Hong Kong, Korea, Taiwan, Singapore, Japan and Malaysia. We are also a leading provider of testing, assessment and qualification services in a number of key markets including the UK, under the brand name Edexcel, Australia, New Zealand, South Africa, Hong Kong and the Middle East. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, Professional Our Professional education business is focused on publishing, training, testing and certification for professionals. Over the past five years we have significantly re-orientated our professional publishing business towards long-term growth markets and built professional testing into a profitable industry leader. Our Professional education business publishes under the following imprints: Addison Wesley Professional, Prentice Hall and Cisco Press (for IT professionals); Peachpit Press and New Riders (for graphics and design professionals); Que and Sams (consumer and professional imprint); and Financial Times-Prentice Hall (for the business education market). Our professional testing business, Pearson VUE, manages major long-term contracts to provide qualification and assessment services through its network of test centers around the world. Key customers include major technology companies, the Graduate Management Admissions Council, See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, The FT Group The FT Group provides a broad range of data, analysis and services through a growing number of print, digital and mobile channels, to an audience of internationally-minded business people and financial institutions. In FT Group comprises theFinancial Times, FT.com website, and a portfolio of financial magazines and online financial information companies. During The FT Group has significantly shifted its business towards digital, subscription and content revenues and has continued to invest in talent and in services in faster growing emerging markets. TheFinancial Timesis one of the world’s leading international daily business newspapers, with five editions in the UK, Continental Europe, FT Business publishes specialist information on the retail, personal and institutional finance industries through titles includingInvestors Chronicle,Money Management,Financial AdviserandThe Banker. Mergermarket, our online financial data and intelligence provider, provides early stage proprietary intelligence to financial institutions and corporates. Its key products includeMergermarket,Debtwire,dealReporter,Wealthmonitor,and See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, Joint Ventures and Associates The FT Group also has a number of associates and joint ventures, including: 50% interest in The Economist Group, publisher of one of the world’s leading weekly business and current affairs magazines. 50% interest inBusiness DayandFinancial Mail, publishers of one of South Africa’s leading financial newspapers and magazines. 33% interest inVedomosti,a leading Russian business newspaper. On The Penguin Group Penguin is one of the most famous brands in book publishing. It publishes over 4,000 fiction and non-fiction books each year, on paper, screens and in audio formats for readers of all ages, and has an extensive range of backlist and frontlist titles including top literary prize winners, classics, reference volumes and children’s titles. Penguin operates around the world through a series of connected national publishing houses. It publishes under a number of well known imprints including Putnam, Viking, Allen Lane, Hamish Hamilton, Berkley, Dorling Kindersley, Puffin and Ladybird. Penguin combines a longstanding commitment to local publishing with a Penguin sells directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. It also sells through online retailers such as Amazon.com, as well as Penguin’s own In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction is expected to complete in 2013 and, at that point, Pearson will no longer control the Penguin Group of companies but will hold a 47% equity interest in the combined Penguin Random House. Pearson will account for this 47% equity interest under the equity method. The impending loss of control results in the Penguin business being classified as held for sale on the Pearson balance sheet at December 31, 2012 and the results for all years through 2012 have been included in discontinued operations. In 2012, Penguin had sales of £1,053m, representing 17% of Pearson’s total continuing and discontinued sales (18% in 2011) and had operating profits of £62m. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, Pearson determines a normal operating cycle separately for each entity/cash generating unit within the Group with distinct economic characteristics. The “normal operating cycle” for each of the Group’s education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs. Particularly for the North American Education businesses, there are well established cycles operating in the market: The School market is primarily driven by an adoption cycle in which major state education boards ‘adopt’ programs and provide funding to schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of the subsequent 5 years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle. The Higher Education market has a similar pattern, with colleges and professors typically refreshing their courses and selecting revised programs on a regular basis, often in line with the release of new editions or new technology offerings. The Company renews its pre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows that the average life cycle of Higher Education content is up to 5 years. Again the operating cycle mirrors the market cycle. A development phase of typically 12 to 18 months for Higher Education and up to 24 months for School precedes the period during which the Company receives and delivers against orders for the products it has developed for the program. The International Education markets operate in a similar way although often with less formal ‘adoption’ processes. The operating cycles in respect of Professional and the Penguin segment are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training, IT and travel sectors). Nevertheless, in these markets, there is still a regular cycle of product renewal, in line with demand which management monitor. Typically the life cycle is 5 years for Professional content and up to 4 years for Penguin content. Elsewhere in the Group operating cycles are typically less than one year. All of Pearson’s businesses operate in highly competitive environments. Pearson Education competes with other publishers and creators of educational materials and services. These companies include large international companies, such as McGraw-Hill and Houghton Mifflin Harcourt, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology. The FT Group competes with newspapers and other information sources, such as The Wall Street Journal, by offering timely and expert journalism and market intelligence. It competes for advertisers with other forms of media based on the ability to offer an effective means for advertisers to reach their target audience. The Penguin Group competes with other publishers of fiction and non-fiction books. Principal competitors include Random House, HarperCollins, and Hachette Group. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers. Our principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly theFinancial Timesand the various imprints of Penguin and Pearson Education, as well as all copyrights for our content and our patents held in the testing business in the name of Pearson NCS. We believe we have taken all appropriate available legal steps to protect our intellectual property in all relevant jurisdictions. Paper is the principal raw material used by each of Pearson Education, the FT Group and the Penguin Group. We purchase most of our paper through our Global Sourcing department located in the United States. We have not experienced and do not anticipate difficulty in obtaining adequate supplies of paper for our operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we have not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, we have a number of alternatives to minimize the impact on our operating margins, including modifying the grades of paper used in production. The manufacture of certain of our products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Our operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conduct these operations maintain controls on the repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to us. Accordingly, these controls have not significantly affected our international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe, however, that in light of the nature of our business the risk of these sanctions does not represent a material threat to us. The US Iran Threat Reduction and Syria Human Rights Act of 2012 requires US-listed companies to disclose information relating to certain transactions with Iran, even when such transactions were in accordance with applicable laws. In 2012, certain non-US Group companies in compliance with applicable law provided a subscription to the Financial Times to an Iranian individual, accepted advertising in an FT Group publication from several Iranian banks, and sold English language Penguin Group imprint books to Iranian wholesalers and retailers. The gross revenues to the Group from these activities were approximately £75,500, and we estimate the net profit was approximately £8,000. In addition, a non-US Group company in compliance with applicable law issued credits in the amount of £53,000 in respect of returns of educational materials from prior years. The Group may undertake similar activities in future periods in accordance with applicable law. We are not dependent upon any particular licenses, patents or new manufacturing processes that are material to our business or profitability. Likewise, we are not materially dependent upon any contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature. We and our subsidiaries are from time to time the subject of legal proceedings incidental to the nature of our and their operations. These may include private litigation or arbitrations, governmental proceedings and investigations by regulatory bodies. We do not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries. In April 2012, the Antitrust Division of the United States Department of Justice (the “DOJ”) and the attorneys general of several U.S. states (the “State AGs”) commenced civil proceedings against Penguin, other major publishers and Apple Inc. with respect to agency arrangements for selling eBooks. The lawsuits alleged that the parties had conspired to end retailers’ control of eBooks pricing and to raise eBooks prices. Penguin has settled the DOJ lawsuit by agreeing, along with the other publishers, to a consent order that did not require any payments, but requires that the agency selling arrangements be discontinued. In addition, Penguin is in discussions with the Canadian Competition Bureau and the European Competition Commission to settle similar investigations by those entities. The lawsuits filed by the State AGs, as well as similar lawsuits by various private plaintiffs in the United States and Canada, seek monetary damages, and Penguin is in discussion to settle these claims. In January 2013, the Group Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of our significant subsidiaries as at December 31, Name Country of incorporation/residence Pearson Education Pearson Education Inc. Pearson Education Ltd. NCS Pearson Inc. FT Group The Financial Times Ltd. Mergermarket Ltd. The Penguin Group Penguin Group (USA) Inc. The Penguin Publishing Co Ltd. Dorling Kindersley Holdings Ltd Our headquarters are located at leasehold premises in London, England. We own or lease approximately The properties owned and leased by us consist mainly of offices, distribution centers and computer testing/teaching centers. The vast majority of our printing is carried out by third party suppliers. We operate a small digital print operation as part of our Pearson Assessment & Testing businesses which provides short-run andprint-on-demand products, typically custom client applications. We own the following principal properties at December 31, General use of property Location Warehouse/Office Warehouse/Office Office Warehouse/Office Warehouse/Office Office Office Printing General use of property Location Warehouse/Office Warehouse/Office Warehouse/Office Warehouse/Office Office Warehouse/Office Office Office Warehouse/Office Warehouse/Office Office Warehouse/Office Warehouse/Office Office Warehouse/Office Warehouse/Office Office Warehouse/Office Office Office Office Office Warehouse/Office Office Office Warehouse Office Warehouse Call See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure. The Company has not received, 180 days or more before the end of the The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS as issued by the IASB. Where this discussion refers to constant currency comparisons, these are estimated by re-calculating the current year results using the exchange rates prevailing for the prior period. The increase or reduction in the value calculated is the estimate of impact of exchange rates. We believe this presentation provides a more useful period to period comparison as changes due solely to changes in exchange rates are eliminated. Introduction Sales from continuing operations increased from Profit before taxation in In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction is expected to complete in 2013 and, at that point, Pearson will no longer control the Penguin Group of companies but will hold a 47% equity interest in the combined Penguin Random House, which will be accounted for under the equity method. The impending loss of control results in the Penguin business being classified as held for sale on the Pearson balance sheet at 31 December 2012 and the results for 2012, 2011 and 2010 have been included in discontinued operations. In July 2010, Pearson sold its 61% share of Interactive Net cash generated from Outlook The external environment is likely to remain challenging for our developed world and publishing businesses in 2013 owing to a combination of cyclical and structural factors: pressures on education budgets and college enrollments; retail consolidation; the In order to reshape the We expect this transformation programme to generate approximately £100m of Pearson Education In offset by growth in FT Group We expect the FT Group to benefit from continued growth in digital and subscription revenues in 2013 but advertising to remain weak and volatile with profits reflecting further actions to accelerate the shift from print to digital. Mergermarket will benefit from its The Penguin Group As announced in The following table shows sales information for each of the past three years by operating division: Education: North American International Professional FT Group Total continuing operations Discontinued operations Total Sales information by geographic market supplied The following table shows sales information for each of the past three years by geographic region: Continuing operations European countries North America Asia Pacific Other countries Total continuing operations Discontinued operations European countries North America Asia Pacific Other countries Total discontinued operations Total Exchange rate fluctuations We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was £1:$1.59 in 2012, £1:$1.60 in 2011 and £1:$1.54 in Our consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements. Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are described in note 1a(3) in “Item 18. Financial Statements”. Year ended December 31, Consolidated results of operations Sales Our total sales from continuing operations increased by Pearson Education increased sales by The US higher education publishing market declined by 6% net in 2012, according to the Association of American Publishers. Total US College enrollments were lower in 2012 than 2011, affected by rising employment rates, state budget pressures and regulatory change affecting the for-profit sector. In a difficult trading environment Pearson gained share for the 14th consecutive year, again benefitting from our lead in technology and customization. The US school textbook publishing market declined 15% in 2012, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $380m in 2012 against $650m in 2011) and delays in purchasing decisions during the transition to the new Common Core standards. Pearson gained share in tough market conditions, taking an estimated 31% of new adoptions where we competed. State funding pressures and the transition to Common Core assessments also made market conditions tough for our state assessment and teacher testing businesses; these were offset by good growth in secure online testing and in the clinical assessments business. Our businesses in emerging markets continued to perform strongly, supported by good enrollment trends and sustained investment. Our UK business made solid progress during the year despite significant regulatory and policy changes across vocational and general qualifications, apprenticeships and higher education. In the rest of the world, a recovery in Japan following the 2011 tsunami and a strong competitive performance in Italy more than offset weak market conditions in Spain. After excluding the effect of acquisitions we estimate that there was growth of 13% at constant 2011 exchange rates in the International Education business. Professional sales increased in 2012 by 2%; the UK training business was weak but other parts of the professional division performed well. FT Group sales were 4% ahead of last year driven by good underlying growth at both the Financial Times and Mergermarket. Growth at the Financial Times was driven by increases in digital readership and subscriptions, although advertising remained weak and volatile. Mergermarket grew well, despite challenging markets. FT Group sales accounted for 8% of our continuing business sales in 2012 and 9% in 2011. Cost of goods sold and operating expenses The following table summarizes our cost of sales and net operating expenses: Cost of goods sold Distribution costs Administration and other expenses Other operating income Total Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges and the cost of service provision in the assessment and testing business. Our cost of sales increased by Distribution costs. Distribution costs consist primarily of shipping costs, postage and Administration and other expenses. Our administration and other expenses increased by Other operating income. Other operating income mainly consists of freight recharges,sub-rights and licensing income and distribution commissions together with income from the sale of assets. Other operating income decreased Loss on closure of subsidiary The charge of £113m relates to the loss on the closure of the Pearson in Practice business. Profit on sale of associate On 16 December 2011 the FT Group completed the disposal of its 50% stake in FTSE International Limited (FTSE) realizing a profit on sale of £412m. This profit has been disclosed separately on the face of the income statement. Share of results of joint ventures and associates The contribution from our joint ventures and associates Operating profit The total operating profit Operating profit attributable to Pearson Education Net finance costs Net finance costs Also included in net finance costs are finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. In 2012 the total of these items was a loss of £29m compared to a loss of £19m in 2011. The Taxation The total tax charge in Non-controlling interest In 2012 there are Discontinued operations In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction is expected to complete in Profit for the year The profit for the financial year in Earnings per ordinary share The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was The diluted earnings per ordinary share of Exchange rate fluctuations The Sales and operating profit by division The following tables summarize our sales and operating profit for each of Pearson’s business segments. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of “Item 18. Financial Statements”. In our adjusted operating profit we have excluded other net gains and losses, acquisition costs and amortization and impairment of acquired Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below: £m Sales Total operating profit Add back: Other net gains and losses Acquisition costs Intangible charges Adjusted operating profit: continuing operations Adjusted operating profit: discontinued operations Total adjusted operating profit £m Sales Total operating profit Add back: Other net gains and losses Acquisition costs Intangible charges Adjusted operating profit: continuing operations Adjusted operating profit: discontinued operations Total adjusted operating profit North American Education sales In 2012, our strength in digital and services businesses and tight cost control enabled us to perform ahead of our more traditional print publishing markets, which declined by 10% for the industry as a whole and were adversely affected by state budget pressures and declines in college enrolments. In US School, the textbook publishing market declined by 15% in 2012, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $380m in 2012 against $650m in 2011) and delays in purchasing decisions during the transition to the new Common Core standards. Pearson gained share in very tough market conditions, taking an estimated 31% of new adoptions where we competed. enVision Math continued to perform strongly, with a recentWhat Works Clearing House study showing that students using the programme out-performed peers by between six and eight percentiles in math across a broad range of student populations. iLit, our new digital reading intervention programme, was successfully implemented in 20 districts with early results showing strong reading gains. Connections Education, which operates online K-12 schools in 22 states and a nationwide charter programme, served more than 43,000 students in 2012, up 31% from 2011 and broadened its product offering to include virtual classrooms for public school campuses. Connections Academy Schools have consistently high performance ratings, particularly in states focused on measuring growth in student learning. At our Assessment and Information business, revenues were flat in 2012. State funding pressures and the transition to Common Core assessments continued to make market conditions tough for our state assessment and teacher testing businesses. We continued to produce strong growth in secure online testing and we increased online testing volumes by more than 10m, delivering 6.5 million state accountability tests, 4.5 million constructed response items and 2 1million spoken tests. We now assess oral proficiency in English, Spanish, French, Dutch, Arabic and Chinese. We also launched the Online Assessment Readiness Tool for the PARCC and the Smarter Balance Assessment Consortium (SBAC) Common Core consortia to help 45 states prepare for the transition to online assessments. We won new state contracts in Colorado and Misouri and a new contract with the College Board to deliver ReadiStep, a middle school assessment that measures and tracks college readiness skills. We extended our contract with the College Board to deliver the ACCUPLACER assessment, a computer-adaptive diagnostic, placement and online intervention system that supports 1,300 institutions and 7 million students annually. We won five Race To The Top state deals (Kentucky, Florida, Colorado, North Carolina and New York) led by Schoolnet. PowerSchool won three state/province-level contracts (North Carolina, New Brunswick and Northwest Territories). We launched our mobile PowerSchool applications and grew our third party partner ecosystems to over 50 partners. PowerSchool supports more than 12 million students up more than 20% on 2011 while Schoolnet supports 8.3 million students, up almost 160% on 2011. Our clinical assessment business was boosted by strong growth at AIMSweb, our progress monitoring service which enables early intervention and remediation for struggling students. AIMSweb delivered 58 million assessments in 2012, up 12%. In Higher Education, the publishing market declined 6% net in 2012, according to the Association of American Publishers. Total US College enrolments were 2% lower in 2012 than in 2011, affected by rising employment rates, state budget pressures and regulatory change affecting the for-profit sector. In a difficult trading environment Pearson gained share for the 14th consecutive year, again benefitting from our lead in technology and customization. Student registrations at e-College grew 3% to 8.7 million, despite pressure in the for-profit college market. We won new online enterprise learning contracts with California Sate University and Rutgers University. Our strong managed enrolment services and student marketing product offering, coupled with continued strong growth at Arizona State University, helped our online enterprise learning business to grow 150% to almost 44,000 enrolments. During the year we acquired EmbanetCompass which provides a full range or services targeted towards online graduate programmes. Pearson’s pioneering ‘My Lab’ digital learning, homework and assessment programmes grew well with student registrations in North America up 11% to almost 10 million with strong usage growth with graded submissions up 12% to almost 320 million across the globe. OpenClass, Pearson’s free learning management system, has been installed by almost 1,300 K-12 and College institutions in the US and now serves approximately 100,000 users. During 2012 we launched Project Blue Sky, a cloud-based content service that allows college instructors to combine Open Educational Resources with instructor-created and Pearson content. We also launched Pearson Workforce Education which delivers more than 60 online courses in high demand occupational training areas from IT and Healthcare to management and soft skills courses; and Propero, which combines on-demand tutoring, student support and online courses to expand access to higher education and support degree completion. Overall adjusted operating margins in the North American Education business were higher at 20.2% in 2012 compared to 19.1% in 2011 with the majority of the increase attributable to further cost efficiencies and the continued success of higher margin digital products. International Education International Education sales increased by £144m, or 10%, to £1,568m in 2012, from £1,424m in 2011 and adjusted operating profit increased by £20m, or 10%, to £216m in 2012 from £196m in 2011. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales of Our businesses in emerging markets continued to perform strongly, supported by good enrolment trends and sustained investment. Our UK business was In English Language Learning, Wall Street English, Pearson’s worldwide chain of English language centres for In the UK, In China, student enrolments at Wall Street English increased 15% to almost 61,000, boosted by good underlying demand and the launch of ten new centres taking the total to 66. Our students rapidly acquire high-level English skills with average grade levels achieved rising 8% during 2012. Enrolments at Global Education, our test preparation services for English language qualifications, increased 16% to more than 1 million, through 73 owned and 372 franchised learning centres. In South Africa we held share in school publishing in market conditions which were tougher than expected despite a year of major curriculum reform. Student enrolments grew strongly at CTI, our South African University, up 19% to more than 10,000. We partnered with UNISA, South Africa’s largest university and the largest distance learning provider in Africa, to provide 30,000 students with access to our MyLabs software, digital resources and customized eBooks. In Brazil we ended 2012 with 533,000 students in our public and private sistemas (or learning systems) and added 24,000 students in our two largest private sistemas, COC and Dom Bosco, up 8% on 2011. Our public sistema, NAME, includes the top performing lower secondary school in Brazil and test scores for our public school students are, on average, 20% above the 2011 national IDEB standard for 4th and 8th grade students. In Mexico, we partnered with local curriculum and technology experts INITE to launch UTEL, a new In India, TutorVista is now managing 35 schools and its multimedia teaching solution Digiclass is installed in approximately 17,000 classrooms. ActiveTeach, our digital learning platform for schools, was adopted by 200 schools serving approximately 100,000 students. In the Middle East, the Abu Dhabi Education Council purchased our print and digital Math and Science resources for all schools from grades 6 to 10, the American University of Sharjah adopted MyLabs for four mathematics courses and three science courses, and we are providing access to digital course content for 5,000 students at Abu Dhabi’s Higher Colleges of Technology through our Pearson e-texts iPad app. In Italy, 6,000 students registered for MyEnglishLab Italiano, our new digital curriculum, helping us gain share in upper secondary adoptions and to see good growth overall. Overall adjusted operating margins in the International Education business remained constant at 13.8% in both 2011 and 2012. Professional Professional sales increased by £8m, or 2%, to £390m in 2012 from £382m in 2011. Adjusted operating profit decreased by £29m or 44% to £37m in 2012, from £66m in 2011. The UK Professional training was very weak with Within professional training, TQ however continues to make significant progress in the direct delivery of training services overseas. In Professional publishing grew modestly with good profit growth. In the US, the growth of eBook sales and Professional Overall adjusted operating margins in the Professional business were FT Group Sales at FT Group increased by Within the Advertising was generally weak and volatile with poor visibility but the FT FT Live, our events business, continued to grow strongly and launch new events, including the Global Commodities Summit, delivering more than 200 events that attracted over 17,000 delegates. We launched a digital portal that offers on-demand webinars, live-streamed events and social media tools. Educational services are an important area of expansion. The FT Non-Executive Director Certificate (in partnership with Pearson Learning Studio and Edexcel) was attended by over 150 candidates across five intakes. FT Newslines, an annotations tool on Money-Media revenues and profits continued to grow well boosted by a strong subscription performance, with the Mergermarket grew well, despite challenging markets, due to a good performance from Debtwire, mergermarket, Xtract and Remark underpinned by a strong offering following investment in its product breadth, strong editorial analysis and global presence. We launched several new products and services, including a new mergermarket Android app, a Debtwire Analytics platform in Europe and Policy and Regulatory Report (PaRR), a global intelligence, analysis and proprietary data product focused on competition law, IP and trade law, and sector-specific regulatory change. We also expanded our In Overall adjusted operating margins at FT Group decreased from 17.8% in 2011 to 11.1% in 2012 as the effect of the FTSE disposal in 2011 impacted 2012. The Penguin Group Penguin sales increased by £8m or 1%, from £1,045m in 2011 to £1,053m in 2012 as the business faced tough conditions in the physical book market and adjusted operating profit was down 12% to £98m in 2012 from £111m in 2011. These results are included as part of reported discontinued operations. In market conditions that remained challenging, Penguin had a solid year with momentum and share improving in the second half of the year. It also made several moves to offer a broader range of services to more authors across more platforms in more markets. In the United States, we published 255New York Times best sellers (254 in 2011) includingNo Easy Day: The Firsthand Account of the Mission that Killed Osama bin Laden by Mark Owen,Bared to You by Sylvia Day and Nate Silver’sThe Signal and the Noise as well as new titles from bestselling authors including Ken Follett, Nora Roberts, Tom Clancy and Harlen Coben. In the UK, we published 90 Bookscan bestsellers, our best year on record (compared to 78 in 2011) including Sylvia Day’sBared to You; Jamie Oliver’s15 Minute Meals; Clare Balding’sMy Animals and Other Family and Daniel Kahneman’sThinking Fast and Slow. eBook revenue grew strongly in 2012 and accounted for 17% of Penguin’s global revenue (12% in 2011), and almost 30% in the US (20% in 2011). We continued to invest in digital publishing programmes, making eBooks available in new markets including Australia, India, Brazil and China; launching a number of digital-only imprints around the world and expanding our eSpecials list. Global app sales grew by more than 200% driven by brands including Wreck this App, Mad Libs, Moshi Monsters and LEGO®. DK was Apple’s only trade publisher launch partner for the January launch of the iBooks Author 2 platform and now has more than 50 interactive titles available. In Brazil, we acquired 45% of Companhia das Letras, a leading trade book publisher, and in India we launched a local eBook programme and enjoyed considerable success in commercial fiction with bestselling authors including Ravinder Singh and Shobhaa De. In China, we expanded our local publishing programmes in both Chinese and English with more than 100 titles now available, including its first local language top ten title, tennis player Li Na’s autobiography and launched its first list of eBooks. DK performed strongly and grew share globally led by our LEGO® publishing list. In the UK, DK celebrated a number one bestseller withMary Berry’s Complete Cookbook, which has sold more than one million copies worldwide. BradyGames had best sellers withBorderlands 2, Skylanders Giants andCall of Duty: Black Ops II.Author Solutions, which we acquired in July 2012 had a good start. It is the world’s leading provider of professional self-publishing services and broadens our expertise in online marketing, consumer analytics, professional services and user-generated content. Penguin adjusted operating margins reduced from 10.6% in 2011 to 9.3% in 2012. Year ended December 31, 2011 compared to year ended December 31, 2010 Consolidated results of operations Sales Our total sales from continuing operations increased by £207m, or 4%, to £4,817m in 2011, from £4,610m in 2010. The increase reflected growth, on a constant exchange rate basis, at all of our businesses together with additional contributions from acquisitions made in both 2010 and 2011. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2011 sales, translated at 2010 average exchange rates, would have been £4,862m. Pearson Education increased sales by £183m or 4% from £4,207m to £4,390m. The International and Professional businesses both contributed to the increase and were helped by acquisitions made in 2010 and 2011. The North American business saw a sales decline of 2% at reported exchange rates although, in US dollar terms, 2011 sales were ahead of 2010. We estimate that after excluding acquisitions and the negative impact of exchange, Pearson Education sales growth was flat in 2011 compared to 2010. Pearson Education, our largest business sector, accounted for 91% of our continuing business sales in each of 2011 and 2010. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 54% in 2011 and 57% in 2010. The US higher education publishing market was broadly level with 2010, according to the Association of American Publishers, with solid growth in public colleges offset by enrolment declines in for-profit colleges following changes in Federal regulations. Pearson gained share, benefiting from its lead in technology and customization, and has now grown faster than the US higher education industry for 13 consecutive years. The US school textbook publishing market declined 9% in 2011, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $650m in 2011 against $800m in 2010) and delays in purchasing decisions during the transition to the new Common Core standards. Pearson gained share with a strong adoption performance boosted by our blended print-and-digital programs and we took an estimated 37% of new adoptions competed for (or 31% of the total new adoption market). State funding pressures and the transition to Common Core assessments also made market conditions tough for our state assessment and teacher testing businesses; these were offset by good growth in diagnostic and clinical assessments and revenues at our Assessment and Information division grew modestly in 2011. In 2011, we continued to make significant organic investments in the International Education business expanding the footprint of Wall Street English in China and rolling out our school services business in India whilst incurring significant charges from the integration of acquisitions, most notably of Sistema Educacional Brasiliero (SEB) in Brazil. After excluding the effect of acquisitions we estimate that there was growth of 4% at constant 2010 exchange rates in the International Education business. Professional sales increased in 2011 by 15% although much of this increase was acquisition related mainly due to the full year contribution from Pearson in Practice (formerly known as Melorio), the UK vocational training business acquired in June 2010 and other smaller acquisitions in 2011. In terms of constant last year exchange rates and after taking out the acquisitions there was still good growth in both the professional testing and professional publishing businesses. FT Group sales were 6% ahead of last year driven by good underlying growth at both the Financial Times and Mergermarket. Growth at the Financial Times was driven by increases in digital readership and subscriptions, although advertising remained weak and volatile. Mergermarket continued to benefit from its global presence and product breadth which helped to increase usage, grow new sales and produce strong renewal rates. FT Group sales accounted for 9% of our continuing business sales in each of 2011 and 2010. Cost of goods sold and operating expenses The following table summarizes our cost of sales and net operating expenses: Cost of goods sold Distribution costs Administration and other expenses Other operating income Total Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges and the cost of service provision in the assessment and testing business. Our cost of sales increased by £73m, or 4%, to £2,072m in 2011, from £1,999m in 2010. The increase corresponds to the increase in sales but is a lower percentage of sales as efficiencies and a mix effect has improved gross margins. Cost of sales at 43.0% of sales in 2011 compares to 43.3% in 2010. Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing. An increase in costs is in line with an increase in sales revenues. Administration and other expenses. Our administration and other expenses increased by £80m, or 4%, to £1,999m in 2011, from £1,919m in 2010. As a percentage of sales they remained consistent at approximately 41% in 2011 and 42% in 2010. Other operating income. Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from the sale of assets. Other operating income increased to £117m in 2011 compared to £79m in 2010 largely due to the inclusion in 2011 of a £29m gain on the sale of an investment and an £8m gain on a stepped acquisition in the International Education business. Profit on sale of associate On 12 December 2011 the FT Group completed the disposal of its 50% stake in FTSE International Limited (FTSE) realizing a profit on sale of £412m. This profit has been disclosed separately on the face of the income statement. Share of results of joint ventures and associates The contribution from our joint ventures and associates decreased from £41m in 2010 to £33m in 2011. The 2010 result included a one off profit relating to a stepped acquisition at FTSE of £12m. The majority of the remainder of the profit comes from our 50% interest in the Economist. Operating profit The total operating profit increased by £480m, or 75%, to £1,118m in 2011 from £638m in 2010. 2011 operating profit, includes the profit on sale of FTSE of £412m and after excluding this item operating profit in 2011 increased by £68m or 11%. Operating profit attributable to Pearson Education increased by £63m, or 11%, to £639m in 2011, from £576m in 2010. The increase was attributable to a good performance across all the Education businesses and a contribution from acquisitions. Operating profit attributable to the FT Group after taking out the profit on sale of FTSE increased by £5m, or 8%, to £67m in 2011, from £62m in 2010. The increase reflects the improved profitability from digital businesses despite a weak advertising market and the absence of the £12m one off profit recorded by FTSE in 2010. Net finance costs Net finance costs decreased from £73m in 2010 to £71m in 2011. Net interest payable was £55m, down from £73m in 2010. Although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from low average US dollar and sterling interest rates during the year. Year-on-year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars and sterling at each year end) fell by 0.1% to 0.3%. This reduction in floating market interest rates helped drive the Group’s lower interest charge. These low rates, coupled with interest income on deposits in higher yielding currencies created a decrease in the Group’s average net interest payable from 7.9% to 6.5%. The Group’s average net debt fell by £82m, reflecting the timing of the reinvestment of the Interactive Data proceeds during 2011. Finance income relating to post-retirement plans was £3m in 2011 compared to a charge of £12m in 2010. Also included in net finance costs are finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. In 2011, the total of these items was a charge of £19m compared to a profit of £12m in 2010. The majority of the loss in 2011 relates to foreign exchange differences on a proportion of the unhedged US dollar proceeds from the Interactive Data sale. In 2010 the gain arose largely from foreign exchange on US dollar denominated debt. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”. Taxation The total tax charge in 2011 of £162m represents 15% of pre-tax profits compared to a charge of £110m or 19% of pre-tax profits in 2010. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK (which had an effective statutory rate of 26.5% in 2011 and 28% in 2010). The reduction in the tax rate in 2011, however, is largely due to the low tax charge on the gain on disposal of FTSE together with the effect of the prior year adjustments arising from settlements with tax authorities. In total these two items outweighed the favourable effect in 2010 from recognition of tax losses and credits utilised in connection with the Interactive Data sale. The tax charge relating to that sale in July 2010 is included in the loss on discontinued businesses. Non-controlling interest In 2011 there are non-controlling interests in the Group’s businesses in South Africa, China and India although none of these are material to the Group numbers. The non-controlling interest in the Group’s Brazilian business, SEB, was bought out in the first half of 2011. The non-controlling interest in 2010 comprises mainly the publicly-held share of Interactive Data for the period to disposal in July 2010. Discontinued operations The results of the Penguin Group have been classified as discontinued in 2011 and 2010. Discontinued operations in 2010 also relate to Interactive Data Corporation. On July 29, 2010, Interactive Data, in which Pearson held a 61% interest, was sold. (Pearson’s share of the sale proceeds was $2bn). The results of Interactive Data have been included as discontinued operations up to July 29, 2010. Included in discontinued operations in 2010 is Interactive Data’s results for the seven months to the date of sale, the gain on sale of £1,037m and the attributable tax charge of £306m. Profit for the year The profit for the financial year in 2011 was £956m compared to a profit in 2010 of £1,300m. The 2010 profit included the contribution from discontinued businesses of £776m (including the gain on sale of Interactive Data) which more than offset the gain on sale of FTSE and improved operating performance from continuing businesses in 2011. Earnings per ordinary share The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 119.6p in 2011 compared to 161.9p in 2010 based on a weighted average number of shares in issue of 800.2m in 2011 and 801.2m in 2010. The decrease in earnings per share was due to the decrease in profit for 2011 described above and was not significantly affected by the movement in the weighted average number of shares. The diluted earnings per ordinary share of 119.3p in 2011 and 161.5p in 2010 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant. Exchange rate fluctuations The weakening of the US dollar and other currencies against sterling on an average basis had an adverse impact on reported sales and profits in 2011 compared to 2010. 2011 sales, translated at 2010 average exchange rates, would have been higher by £105m and operating profit, translated at 2010 average exchange rates, would have been higher by £10m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our management of exchange rate risks. Sales and operating profit by division The following tables summarize our sales and operating profit for each of Pearson’s business segments. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of “Item 18. Financial Statements”. In our adjusted operating profit we have excluded amortization of acquired intangibles and acquisition costs. The amortization of acquired intangibles is the amortization of intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither of these charges are considered to be fully reflective of the underlying performance of the Group. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as they distort the performance of the Group. Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below: £m Sales Total operating profit Add back: Other net gains and losses Acquisition costs Intangible charges Adjusted operating profit: continuing operations Adjusted operating profit: discontinued operations Total adjusted operating profit £m Sales Total operating profit Add back: Other net gains and losses Acquisition costs Intangible charges Adjusted operating profit: continuing operations Adjusted operating profit: discontinued operations Total adjusted operating profit North American Education North American Education sales declined by £56m, or 2%, to £2,584m in 2011, from £2,640m in 2010 and adjusted operating profit increased by £24m, or 5%, to £493m in 2011 from £469m in 2010. The results were affected by the relative weakness of the US dollar, which we estimate decreased sales by £91m and adjusted operating profit by £18m when compared to the equivalent figures at constant 2010 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying decline in sales of 1% and increase in profits of 8%. Sales growth in the US higher education and assessment and information businesses was offset by a weakness in US school publishing. The US school textbook publishing market declined 9% in 2011, according to the Association of American Publishers. There were several pressures on the industry including weakness in state budgets, a lower new adoption opportunity (total opportunity of $650m in 2011 against $800m in 2010) and delays in purchasing decisions during the transition to the new Common Core standards. Pearson gained share with a strong adoption performance boosted by our blended print-and-digital programs including Writing Coach, Prentice Hall Math and enVisionMATH. We took an estimated 37% of new adoptions competed for (or 31% of the total new adoption market). During 2011, we acquired Connections Education which operates online K-12 schools in 21 states and a nationwide charter school program. It served 33,200 students in 2011. Connections Academy Schools have consistently high performance ratings, particularly in states focused on measuring growth in student learning. SuccessNet, our online learning platform for school teachers and students, generated more than six million registrations in 2011, up 5% on 2010. The number of assessments taken through SuccessNet increased by 32% to more than 11 million. We continue to develop digital programs, platforms and apps to boost achievement, access and affordability. We launched two major new school programs aimed at meeting rising literacy standards under the Common Core: i-lit and Pearson English Learning System. i-lit is a personalized digital reading program combining our proven literacy model (with many students making two years of literacy growth in a single year), automated assessment capabilities and compelling literature from Penguin and Dorling Kindersley, all delivered through iPads. Pearson English Learning System benchmarks, monitors and tracks both student progress and teacher best practice to boost English language skills. Poptropica is one of the largest virtual worlds for young children in the US and was named by Time as one of ‘The 50 Best Websites of 2011’. Poptropica has up to 9.7 million monthly unique visitors from more than 130 countries. Revenues at our Assessment and Information division grew modestly in 2011. State funding pressures and the transition to Common Core assessments continued to make market conditions tough for our state assessment and teacher testing businesses; these were offset by good growth in diagnostic and clinical assessments. We signed several important contracts including state-wide student assessment contracts in New York, Kentucky and Arizona; Race to the Top Florida formative assessment; Indiana educator licensing and Ohio pre-service teacher assessment. We also renewed three important contracts, extending our relationships with Virginia and Maryland for state-wide student assessments and with ETS to service state-wide assessments for California. We signed an agreement with Stanford University to provide the capability to deliver the Teacher Performance Assessment (TPA) — a nationally available, web-based performance assessment for measuring the effectiveness of teacher candidates nationally. We delivered 13 million secure online tests in 2011 with strong growth in automated written and spoken assessment scoring volumes. We won the Online Assessment Readiness Tool contract from both the PARCC and SBAC Common Core consortia to help the 45 states prepare for the transition to online assessments. PowerSchool supported more than ten million students, up 6% on 2010, and developed its platform to enable 18 additional languages to be used on the PowerSchool parent portal. Our clinical assessment business grew well boosted by strong growth at AIMSweb, our progress monitoring service which enables early intervention and remediation for struggling students. Usage of AIMSweb increased dramatically with 47 million assessments delivered in 2011, up more than 40%. During 2011, we acquired Schoolnet, a fast-growing and innovative education technology company that aligns assessment, curriculum and other services to help individualise instruction and improve teacher effectiveness. Schoolnet serves more than five million US pre K-12 students through partnerships with districts and states, supporting about one-third of America’s largest cities. The US higher education publishing market was broadly level with 2010, according to the Association of American Publishers, with solid revenue growth in public colleges offset by enrolment declines in for-profit colleges following changes in Federal regulations. Pearson gained share, benefiting from its lead in technology and customisation, and has now grown faster than the US higher education industry for 13 consecutive years. The pioneering ‘MyLab’ digital learning, homework and assessment programmes grew strongly with student registrations in North America up 22% to almost nine million. Usage continued to grow strongly with graded submissions up 39% to almost 250 million across the globe. Evaluation studies show that the use of MyLab programmes can significantly improve student test scores and institutional efficiency. We developed a new model of enterprise-wide support for online higher education with Arizona State University Online and Ocean Community College. Through these long-term partnerships, Pearson runs the full online learning programmes for these institutions and earns revenues based on the success of the institution and its students. Pearson LearningStudio increased fully-online student enrolments by 20% to ten million. Renewal rates remain high at more than 80% by value with fewer large accounts up for renewal in the year. Overall adjusted operating margins in the North American Education business were higher at 19.1% in 2011 compared to 17.8% in 2010 with the majority of the increase attributable to further cost efficiencies and the continued success of higher margin digital products. International Education International Education sales increased by £190m, or 15%, to £1,424m in 2011, from £1,234m in 2010 and adjusted operating profit increased by £25m, or 15%, to £196m in 2011 from £171m in 2010. The sales results benefited from acquisitions in 2011 and a full year contribution from acquisitions made in 2010. Our International Education company is active in more than 70 countries. It is a major focus of our strategy, and sales and profits have broadly doubled since 2007. Our strategy is to combine educational content, assessment, technologies and related services to help educational institutions become more effective and their students more successful. We expect to benefit from a series of powerful long-term global trends: increasing public and private spending on education (despite current pressures on public spending in developed markets); growing participation rates; the demand for assessment to provide measures of achievement; the growing technology infrastructure in educational institutions; and the rise of English as a global language. In 2011, we continued to make significant organic investments in expanding the footprint of Wall Street English in China and the roll-out of our school services business in India as well as incurring significant charges from the integration of acquisitions, most notably the school systems business of SEB in Brazil. Wall Street English, Pearson’s worldwide chain of English language centres for professionals, increased student numbers by 9% to more than 190,000. We opened 19 new centres around the world, bringing the total number close to 450. More than 0.9 million students registered for our MyLab digital learning, homework and assessment programs, an increase of 36%. They included more than 150,000 MyEnglishLab registrations, up 70%, and 28,000 registrations for our high school mathematics program MathXL, a 54% increase. Our Fronter learning management system grew strongly with new contracts won in Malta, Tasmania and Poland. Active users rose by 18% to 1.3 million and their logins by 11% to 154 million. Student test volumes for the Pearson Test of English Academic saw robust growth supported by recognition from almost 1,900 institutions including the Australian Department of Immigration & Citizenship and 95% of UK Universities. The Organisation for Economic Co-operation and Development chose Pearson to develop a competency and assessment framework for the 2015 cycle of The Programme of International Student Assessment (PISA) tests, one of the world’s most prestigious programmes of international tests. In China, student enrolments at our Wall Street English centres increased 25% to 53,000, boosted by strong underlying demand and the launch of 11 new centres. In December 2011, we acquired Global Education and Technology Group, a leading provider of test preparation services for English Language and other professional qualifications. Global Education has approximately 450 (115 owned and 335 franchised) learning centres in 150 cities across China. In South Africa we gained share in school publishing, but market conditions were tougher than expected during a year of major curriculum reform. Student enrolments grew strongly at CTI, up 13% to 8,700, which continued to deliver significantly better completion rates than its peers and strong job placement rates of 70%. We delivered half a million secondary textbooks for Physics, Biology and History to all government secondary schools in Uganda, one million Junior African Writer readers to the Ministry of Education in Sierra Leone and almost two million textbooks in five subjects to secondary schools in Zimbabwe. In Brazil, we successfully completed the first stage of the SEB Pearson Sistemas integration with major investments and improvements across the business. Our Virtual Library grew strongly and now reaches two million students across 100 universities, and we entered the K-12 publishing market. In Colombia, we implemented a bilingual teacher training program in several states and in Chile we won a contract to evaluate the national college admissions test. In India, we incurred costs related to the acquisition of TutorVista and invested to grow the business. We have doubled the number of schools managed by TutorVista to 24 and the installations of its multimedia teaching tool Digiclass to approximately 10,000. Vocational and Professional enrolments at our IndiaCan joint venture grew more than 50% to 86,000, with particular strength in spoken English, Chartered Accountancy, Engineering and MBA qualifications. In the Middle East, our performance was boosted by sales of Reading Street and Scott Foresman Math in Saudi Arabian schools; Giancoli Physics and Thomas Calculus along with strong MyLabs uptake in Turkish colleges; and Haeussler Mathematics and Hubert Engineering along with strong MyLab redemptions in Egypt. Our UK business made solid progress during the year despite significant regulatory and policy changes in its markets, most notably in vocational and general qualifications, apprenticeships and in higher education. We marked more than 5.7 million GCSE, A/AS Level and other examinations with 90% using onscreen technology. We marked more than 3.8 million test scripts for over half a million pupils taking National Curriculum Tests at Key Stage Two in 2011 and have been selected to mark tests in 2012. Our Bug Club digital reading programme for primary schools combines engaging phonics-based books with games, assessments and teacher diagnostic tools to boost reading enjoyment and comprehension. In 2011, more than 145,000 online users in almost 900 schools subscribed to Bug Club online. We acquired EDI plc, a leading provider of education and training qualifications and assessment services, with a strong reputation for the use of information technology to administer learning programmes and deliver on-screen assessments. Registrations for our own BTEC Apprenticeships more than doubled to 80,000 students. In Australia, we launched our pioneering US digital maths curriculum, enVisionMATH. And we have more local versions in development to bring high quality digital curriculum to new markets across the globe. In Italy, our new digital curriculum helped us gain significant share in lower secondary adoptions and to see good growth overall. In Germany, we acquired Stark Holding, a leading provider of education materials including test preparation resources for pupils and teachers. In Japan, we faced major disruption following the March 2011 tsunami but maintained operations and achieved notable successes, particularly with the Versant Test of Communicative English and the launch of BTEC. International Education adjusted operating margins declined slightly from 13.9% in 2010 to 13.8% in 2011 as the business incurred additional integration costs from acquisitions. Professional Professional sales increased by £49m, or 15%, to £382m in 2011 from £333m in 2010. Adjusted operating profit increased by £15m or 29% to £66m in 2011, from £51m in 2010. Sales growth in the assessment and training businesses was strong and benefited from a full year contribution from the acquisition of Melorio (now Pearson in Practice) in June 2010. We continued to see good revenue and profit growth at Pearson VUE, which administered more than seven million tests during the year, benefiting from sales of additional services to customers and contractual fee increases. We won a number of new contracts including the Construction Industry Training Board in the UK, the National Council of Examiners for Engineering and Surveying in the US, and the HP certification examination worldwide. We formed a joint venture with the American Council on Education to develop an online General Educational Development (GED) test aligned with new Common Core standards. The GED test measures an adults’ high school level knowledge and skills in math, reading, writing, science and social science. We launched a new touch-screen theory driving test for the Roads and Transport Authority for Dubai. The test is delivered in Arabic, English and Urdu. The new test follows the opening last year of a new Pearson VUE office in Dubai to meet the Middle East’s demand for computer-based testing. Despite significant regulatory and policy changes in the apprenticeship market, Pearson in Practice successfully graduated its largest IT cohort and launched or enhanced several new apprenticeship programmes in logistics, construction, management and customer service, business and health. We acquired TQ Holdings Ltd which provides technical education and training services to governments, institutions and corporations around the world with particular expertise in skills related to the defense, engineering, oil and gas and construction sectors. In professional publishing, our resilient performance in the US benefited from the breadth of our publishing and range of revenue streams, from online retail through digital subscriptions. As a result, digital products and services now account for more than 25% of our professional publishing revenues in the US. In some International markets such as Japan, professional publishers continued to face very challenging trading conditions. In the US, we launched MyGraphicsLab which integrates 50 hours of videos, 250 creative projects, 50 presentations and 1,000 quiz questions with real-world assignments to prepare students for the job market. Overall adjusted operating margins in the Professional business were higher at 17.3% in 2011 compared to 15.3% in 2010 as margins improved following the integration of Melorio in 2010 and continued efficiencies in the Professional publishing business. FT Group Sales at FT Group increased by £24m or 6%, from £403m in 2010 to £427m in 2011. Adjusted operating profit increased by £16m, from £60m in 2010 to £76m in 2011. The sales and profit increase is mainly due to increased demand for digital products and was in spite of weakness in the advertising market in the year. The Economist and other joint ventures and associates also contributed to the profit growth. The FT produced strong and accelerating growth in its digital readership with online subscriptions up 29% to 267,000, 2,000 direct corporate licences and FT.com registered users up 33% to more than four million. Combined paid print and digital circulation reached 600,000 in 2011, the highest circulation in the history of the FT. At the end of 2011, digital subscribers exceeded print circulation in the US for the first time. The Average Daily Global Audience across print and online grew 3% to 2.2 million people worldwide, our largest audience ever. Readership continued to migrate online and to mobile, which now generates 19% of traffic to FT.com. We launched FT web apps optimised for iPad and Android devices including a custom app for India. The web apps provide FT subscribers access to our content online and through mobile devices with a single subscription and data analytics allow us to better serve our customers. Advertising was generally weak and volatile with poor visibility. Growth in online advertising and the luxury category was offset by weakness in corporate advertising. FT Conferences had a very strong year, operating 75 events in 37 cities worldwide. Almost 9,000 senior executives from around the world attended these events. We launched the FT Non-Executive Certificate (in partnership with Pearson LearningStudio and Edexcel) in April 2011, enrolling more than 100 students. The certificate is designed to aid the professionalisation of the sector and increase diversity on UK boards. It is the first fully accredited formal education product for non-executive directors. We extended the breadth and depth of the FT’s premium subscription services through the launch of Brazil Confidential, extending our successful China Confidential franchise into another growth market. Medley Global Advisors (MGA) grew modestly despite challenging conditions for its customers due to new contract wins. Money-Media grew strongly fuelled by an increase in subscriptions and advertising. Mergermarket’s strong editorial analysis continued to benefit from its global presence and product breadth. Usage increased, new sales grew and renewal rates were strong. Continued volatility in debt markets helped sustain the strong performance of Debtwire whilst volatile equity markets benefited dealReporter’s event-driven strategy. Mergermarket saw strong growth in Asia-Pacific and the Americas while MergerID continued to benefit from a broadening network of users and strong growth in transaction matches. We launched a large number of new products, extending our reach into new geographies (US wealthmonitor, ABS Europe, dealReporter Middle East, dealReporter Russia Desk), new strategies (multi-strategy products), new coverage areas (municipal bonds, dividend arbitrage) and new platforms (mergermarket iPad app). The Economist, in which Pearson owns a 50% stake, increased global weekly circulation by Overall adjusted operating margins at FT Group The Penguin Group Penguin sales Market conditions in 2011 were tough following the collapse of two major customers: Borders in the US and the REDGroup in Australia and New Zealand. Despite this, Penguin achieved robust sales and ebook revenues doubled on the previous year and accounted for 12% of Penguin revenues worldwide, and more than 20% in the US, Group have totalled approximately 50 million. Penguin continued to invest in digital innovation, launching more than 100 apps and enhanced ebooks, includingWreck this App,On the In the US Penguin Penguin adjusted operating margins Cash flows and financing Net cash generated from operations Net Capital expenditure on property, plant and equipment and software intangibles was The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £755m in 2012 against £788m in 2011 and £557m in The sale of subsidiaries and associates produced a net cash The cash outflow from financing of Capital resources Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available for the Group’s present requirements, with an appropriate level of headroom given our portfolio of businesses and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this12-month period will depend on many factors, including the rate, if any, at which our cash flow At December 31, The following table summarizes the maturity of our borrowings, our obligations under non-cancelable leases, and pension funding obligations, exclusive of anticipated interest payments. Gross borrowings: Bank loans, overdrafts and commercial paper Bonds Finance lease obligations Operating lease obligations UK Pension funding obligations Total At December 31, In 2010, the Group negotiated a new $1,750m committed revolving credit facility which matures in November 2015. The Group is committed to an annual fee of 0.2625% payable quarterly, on the unused amount of this facility. Off-Balance sheet arrangements The Group does not have any off-balance sheet arrangements, as defined by the SEC Final Rule 67 (FR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations. Borrowings The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. We have in place a committed revolving credit facility of $1.75bn, which matures in November 2015. At December 31, We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at no less than 3:1; and We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1. “EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We are currently in compliance with these covenants. See note 18 of “Item 18. Financial Statements” for information on our longer term loans from banks and capital markets. Treasury policy Our treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of our borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”. Related parties There were no significant or unusual related party transactions in For a description of our principal accounting policies used refer to note 1 in “Item 18. Financial Statements”. We are managed by a board of directors and a chief executive who reports to the board and manages through a management committee. We refer to the board of directors and the chairman of the board of directors as our “senior management”. The following table sets forth information concerning senior management, as of March Name Glen Moreno John Fallon David Arculus Vivienne Cox Will Ethridge Rona Fairhead Robin Freestone Susan Fuhrman Ken Hydon Josh Lewis John Makinson Marjorie Scardino was Chief Executive and a member of the board of directors through to December 31, 2012. Glen Moreno Appointed on October 1, Glen has more than three decades of experience in business and finance, and is currently deputy chairman of The Financial Reporting Council Limited in John Fallon Appointed on October 3, 2012. Member of the nomination committee. John became Pearson’s chief executive on 1 January 2013. Since 2008 he had been responsible for the company’s education businesses outside North America, and a member of the Pearson He joined Pearson in David Arculus Appointed on February 28, 2006. Chairman of David has experience in banking, telecommunications and publishing in a long career in business. Currently he is Vivienne Cox Appointed on January 1, 2012. Member of the audit, remuneration Vivienne has wide experience in energy, natural resources and business innovation. She worked for BP plc for 28 years, in Britain and continental Europe, in posts including executive vice president and chief executive of BP’s Gas, Power & Renewables business and its Alternative Energy unit. She is also non-executive director of mining company Rio Tinto plc, energy company BG Group plc, and Vallourec, which supplies tubular systems for the Will Ethridge Appointed on May 1, 2008. Will has three decades of experience in education and educational publishing, including nearly a decade and a half at Pearson where he formerly headed our Higher Education, International Rona Fairhead Appointed on June 1, 2002. Rona, who has headed the Financial Times Group since 2006 and is a former finance director of Pearson, will step down from the Pearson board and leave the company at the annual general meeting in Robin Freestone Appointed on June 12, 2006. Robin’s experience in management and accounting includes a previous role as group financial controller of Amersham plc (now part of General Electric) and senior financial positions with ICI plc, Zeneca and Henkel UK. He joined Pearson in 2004 as deputy chief financial officer and became chief financial officer in June Susan Fuhrman Appointed on July 27, 2004. Member of the audit and nomination committees. Susan’s extensive experience in education includes her current role as president of Teachers College at Columbia University, America’s oldest and largest graduate school of Ken Hydon Appointed on February 28, 2006. Chairman of Ken’s experience in Josh Lewis Appointed on March 1, 2011. Member of the audit Josh’s experience spans finance, education and the development of digital enterprises. He is John Makinson Appointed on March John’s diverse background spans business, consultancy, financial journalism and publishing. He was finance director It is the role of the remuneration committee (the committee) to approve the remuneration and benefits packages of the executive directors Remuneration policy Our starting point continues to be that total remuneration Our goal as a company 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. We believe those are, in concert, good indicators that we Total remuneration is made up of fixed and performance-linked elements, with each element supporting different objectives. Base salary helps to recruit, reward and retain people and reflects competitive market level, role, skills, experience and individual contribution. Allowances and benefits help to recruit and retain people and reflect the local competitive market. Retirement benefits help to recruit and retain people and recognize their long-term commitment to the company. Annual incentives motivate the achievement of annual strategic Base salary Base salaries are normally reviewed annually for the following year, taking into account general economic and market conditions, the level of increases made across the company as a whole, the remuneration Allowances and benefits includes inter alia cash allowances and non-cash benefits such as health and welfare and car benefits. Allowances and benefits do not form part of pensionable earnings. The provision and level of allowances and benefits are competitive and appropriate in the context of the local Retirement benefits New employees in the UK are eligible to join the Money Purchase 2003 section of the Pearson Group Pension plan. New employees in the US are eligible to join the 401(k) plan. Under the Money Purchase 2003 section of the Pearson Group Pension Plan in the UK, normal retirement is age 62 but, subject to company consent, retirement is currently possible from age 55 or earlier in the event of ill-health. During service, the company and the employee make contributions into a pension fund. Company contributions amount to up to 16% of pensionable salary (double the amount of the employee contribution, which is limited according to certain age bands). Account balances are used to provide benefits at retirement. Pensions for a member’s spouse, dependent children and/or nominated financial dependants are payable on death. Under the 401(k) plan in the US, which is a defined contribution plan, account balances will be used to provide benefits at retirement. Company contributions amount to 100% of the first 3% of eligible compensation contributed by the employee and 50% of the next 3%, plus a basic annual company contribution of 1.25% of eligible compensation. Pearson Inc. pension Plan participants who were at least age 40 at December 31, 2001 can receive an additional 0.5% – 1.5% of pay. In the event of death before retirement, the account balances will be used to provide benefits for designated beneficiaries. Longer serving directors with legacy arrangements may participate in the defined benefit Pearson Inc. Pension plan in the US or the Final Pay section of the Pearson Group Pension Plan in the UK, which are closed to new members. Under the Final Pay section of the Pearson Group Pension Plan in the UK, normal retirement age is 62, but subject to company consent, retirement is currently possible from age 55 or earlier in the event of ill-health. During service, the employee makes a contribution of 5% of pensionable salary and the pension fund builds up based on final pensionable salary and pensionable service. The accrued pension is reduced on retirement prior to age 60. Pensions for a member’s spouse, dependent children and/or nominated financial dependants are payable on death. In the US, the defined benefit Pearson Inc. Pension Plan provides a lump sum benefit that is convertible to an annuity on retirement. The lump sum benefit accrued at an age dependent percentage of capped compensation until December 31, 2001 when further benefit accruals ceased for most employees. Employees who satisfied criteria of age and service as of November 30, 1998 continue to earn benefits under an alternative formula that provides for 1.5% of final average earnings, adjusted for US Social Security. The benefit paid to these employees is the maximum of the lump sum benefit converted to an annuity and the benefit earned under the alternative final average earnings formula. Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at April 6, 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ‘cap’, which will increase annually in line with the UK Government’s Index of Retail Prices (All Items). The cap was £137,400 as at April 6, 2012. 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 cost neutral to the company. Effective from April 6, 2011, the annual allowance (i.e. the maximum amount of pension saving that benefits from tax relief each year) reduced from £255,000 to £50,000. Effective April 6, 2012, the lifetime allowance (i.e. the maximum amount of pension and/or lump sum that can benefit from tax relief) reduced from £1.8m to £1.5m. The pension entitlements of each director and Scardino Ethridge Fairhead Fallon Freestone Makinson 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. Up to 90% of Annual incentives are subject to the For the chief executive, Name Operating company Marjorie Scardino Will Ethridge Rona Fairhead 50% (Professional Assessment & Training) 10% (FT Publishing) John Fallon Robin Freestone John Makinson 50% (Penguin Group) 10% (India) For Pearson plc, the performance measures were sales, earnings per share growth, average working capital to sales ratio and operating cash flow. Sales and operating cash flow were below threshold. Underlying growth in adjusted earnings per share at constant exchange rates was between threshold and target. Average working capital to sales ratio was between target and maximum. For Pearson North America, the performance measures were sales, operating profit, average working capital For For FT Publishing, the performance measures were sales, operating profit and operating cash flow. For Pearson For Penguin Group, the performance measures were sales, operating profit, Bonus share matching The annual bonus share matching plan Senior managers across the company are invited to invest up to 50% of The maximum matching award is equal to the number of shares that could have been acquired with the amount of pre-tax annual bonus invested in Pearson shares (i.e. one matching share for every one invested share, grossed up for tax). The maximum matching award is achieved if the company’s earnings per share increase in real terms by 5% per annum compound over the three-year performance period. 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 same period. Matching shares are calculated on a straight-line basis for performance between threshold and maximum. Earnings per share growth is calculated using the point-to-point method, which 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). Long-term incentives The long-term incentive plan Awards for executive directors 75% of the 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 We set the level of individual awards by taking into account: the face value of individual awards at the time of grant, assuming that performance targets are met in full; market practice for comparable companies and market assessments of total remuneration from our independent advisers; individual roles and responsibilities; and company and individual performance. All employees (including executive directors) are also eligible to 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. Executive directors are expected to build up a substantial shareholding in the company in line with the policy of encouraging widespread employee ownership. Service agreements The policy on executive directors’ service agreements was reviewed in 2008, 2010 and again in 2012. 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 company may terminate Our policy is that executive directors may, by agreement with the board, serve as non-executives of other companies and retain any fees payable for their services. 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. Following the committee’s last review in 2010, the chairman’s remuneration 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 Pearson’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 Pearson) and do not participate in Pearson’s equity-based incentive plans. With effect from July 1, 2010, the structure and fees are as follows: Non-executive director fee Chairmanship of audit committee Chairmanship of remuneration committee Membership of audit committee Membership of remuneration committee Senior independent director A minimum of 25% of the basic fee is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships. Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships. Remuneration of senior management Excluding contributions to pension funds and related benefits, senior management remuneration for Non-executive Chairman Glen Moreno Executive directors Marjorie Scardino Will Ethridge Rona Fairhead John Fallon (appointed 3 October 2012) Robin Freestone John Makinson Senior management as a group Notes: This table sets forth for each director the number of share options held as of December 31, Director Marjorie Scardino Total John Fallon Total Robin Freestone Total Notes: The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at February 28, As at February 28, 2013 Glen Moreno John Fallon David Arculus Vivienne Cox Will Ethridge Rona Fairhead Robin Freestone Susan Fuhrman Ken Hydon Josh Lewis John Makinson Notes: Worldwide save for shares and US employee share purchase plans In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee’s participation in the plan. In the United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson’s listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the Our board currently comprises the chairman, to have been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their appointment. However Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, we are required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on our website any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and recommends corporate governance principles. The board of directors has established the following formal committees, all of which report to the board. Each committee has its own written terms of reference setting out Audit committee This committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Ken Hydon chairs this committee and its other members are David Arculus, Remuneration committee This committee meets regularly to decide the remuneration and benefits of the executive directors and the Nomination committee This committee meets from time to time as necessary to consider the appointment of new directors. The committee is chaired by Glen Moreno and comprises The average number of persons employed by us in continuing operations during each of the three fiscal years ended 42,980 in fiscal 2012, 37,964 in fiscal 2011, and 32,847 in fiscal 2010. The table set forth below shows for Average number employed North American Education International Education Professional FT Group Other Continuing operations The average number employed in discontinued operations was As at February 28, Name of shareholder BlackRock, Inc. Legal & General Group plc Libyan Investment Authority On February 28, Loans and equity advanced to joint ventures and associates during the year and as at December 31, The financial statements filed as part of this Annual Report are included on pages F-1 through Other than those events described in note Our policy with respect to dividend distributions is described in response to “Item 3. Key Information” above. The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York Mellon, as depositary. We established this facility in March 1995 and amended it in August 2000 in connection with our New York Stock Exchange listing. Each ADS represents one ordinary share. The ADSs trade on the New York Stock Exchange under the symbol “PSO”. The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange: on an annual basis for our five most recent fiscal years, on a quarterly basis for our most recent quarter and two most recent fiscal years, and on a monthly basis for the six most recent months. Reference period Five most recent fiscal years 2012 2011 2010 2009 2008 Most recent quarter and two most recent fiscal years 2012 Fourth quarter Third quarter Second quarter First quarter 2011 Fourth quarter Third quarter Second quarter First quarter Most recent six months February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 We summarize below the material provisions of our articles of association, as amended, which have been filed as an exhibit to our annual report onForm 20-F for the year ended December 31, Directors’ powers Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association or by any directions given by the Company by special resolution, to be exercised in a general meeting. Interested directors For the purposes of section 175 of the Companies Act 2006 the board may authorize any matter proposed to it which would, if not so authorized, involve a breach of duty by a Director under that section, including, without limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorization will be effective only if: The board may (whether at the time of the giving of the authorization or subsequently) make any such authorization subject to any limits or conditions it expressly imposes but such authorization is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorization at any time. Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office: A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate: nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act. A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest Where the existence of a Director’s relationship with another person has been approved by the board and his relationship with that person gives rise to a conflict of interest or possible conflict of interest, the Director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he: Except as stated below, a Director shall not vote in respect of any contract or arrangement or any other proposal whatsoever in which he has an interest which is, to his knowledge, a material interest, otherwise than by virtue of his interests in shares or debentures or other securities of or otherwise in or through the Company. A Director shall not be counted in the quorum at a meeting of the Board in relation to any resolution on which he is debarred from voting. Notwithstanding the foregoing, a director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters: the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiaries; the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security; any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a Director is to participate; any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company; any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors. Where proposals are under consideration concerning the appointment of two or more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the provisions of the eighth paragraph before this one, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment. The board of directors may exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of our or any third party’s debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by us (and any of our subsidiaries), but excluding any intra-group debts, shall not at any time (without the previous sanction of the Company in the form of an ordinary resolution) exceed a sum equal to twice the aggregate of the adjusted capital and reserves. Other provisions relating to directors Under the articles of association, directors are paid out of our funds for their services as we may from time to time determine by ordinary resolution and, in the case of non-executive directors, up to an aggregate of £750,000 or such other amounts as resolved by the shareholders at a general meeting. Directors currently are not required to hold any share qualification. Annual general meetings In every year the Company must hold an annual general meeting (‘AGM’) (within a period of not more than 15 months after the date of the preceding approving final dividends; consideration of the accounts and balance sheet; ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet; as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise; appointment or reappointment of, and determination of the remuneration of, the auditors; and the renewal, limitation, extension, variation or grant of any authority to the board in relation to the allotment of securities. The board may call a general meeting whenever it thinks fit. If at any time there are not within the United Kingdom sufficient directors capable of acting to form a quorum, any director or any two members may convene a general meeting in the same manner as nearly as possible as that in which meetings may be convened by the board. No business shall be dealt with at any general meeting unless a quorum is present when the meeting proceeds to business. Three members present in person and entitled to vote shall be a quorum for all purposes. A corporation being a member shall be deemed to be personally present if represented by its duly authorized representative. If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting. Share Every person whose name is entered as a member in the Company’s Register of Members shall be entitled to one certificate in respect of each class of shares held. (The law regarding this does not apply to stock exchange Share capital Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders’ vote in general meeting. Subject to the Companies Act 2006, any shares may be issued on terms that they are, or at our or the shareholders’ option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may determine by special resolution of the shareholders. There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares. Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him. Changes in capital We may from time to time, by ordinary resolution: consolidate and divide our share capital into shares of a larger amount than its existing shares; or sub-divide all of or any of our existing shares into shares of smaller amounts, subject to the Companies Act 2006; or cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of our share capital by the amount of the shares so cancelled. We may, from time to time, by ordinary resolution increase our share capital and, subject to the consents and incidents required by the Companies Act 2006, may by special resolution decrease our share capital, capital redemption reserve fund and any share premium account in any way. Voting rights Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded before the declaration of the results of a show of hands. A poll may be demanded by: the chairman of the meeting; at least three shareholders present in person or by proxy and entitled to vote; any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right. Dividends Holders of ordinary shares are entitled to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us. The directors may, with the sanction of an ordinary resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend. The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to us on account of calls or otherwise in relation to our shares. Liquidation rights In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them. Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders of three-fourths of the issued shares of the class or with the sanction of a special resolution passed at a separate meeting of these holders. In the event that a shareholder or other person appearing to the board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 820 of the Companies Act 2006, we may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with our information request. If the shares described in the default notice represent at least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares: we will not pay dividends (or issue shares in lieu of dividends); and we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association. No provision of our articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under a material interest in our voting share capital equal to or in excess of 3% a non-material interest equal to or in excess of 10%, comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a person’s notifiable interests fall below the notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases. Limitations affecting holders of ordinary shares or Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals. With respect to the items discussed above, applicable UK law is not materially different from applicable US law. Pearson has not entered into any contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report. Executive employment contracts We have entered into agreements with each of our executive directors pursuant to which such executive director is employed by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See “Item 6. Directors, Senior Management and Employees — Compensation of Senior Management”. Each agreement may be terminated by us on 12 months’ notice or by the executive director on six months’ notice. In the event we terminate any executive director There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is: an individual citizen or resident of the US, or a corporation created or organized in or under the laws of the US or any of its political subdivisions, or an estate or trust the income of which is This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as: dealers or traders in securities or currencies, financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income, insurance companies, tax-exempt entities, persons acquiring shares or ADSs in connection with employment, US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position, US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock, US holders that have a principal place of business or “tax home” outside the United States, or US holders whose “functional currency” is not the US dollar. For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs. In addition, the following discussion assumes that The Bank of New York will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements. Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state and local, UK and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. UK income taxation of distributions The UK does not impose dividend withholding tax on dividends paid by the Company. A US holder that is not resident in the UK for UK tax purposes and does not carry on a trade, profession or vocation in the UK through a branch or agency (or in the case of a company a permanent establishment) to US income taxation of distributions Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary Dividends that we pay will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code. In the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year. A distribution by the Company to noncorporate shareholders UK A US holder that is not A US holder who is an individual and who has ceased to be resident or ordinarily resident for tax purposes in the UK The concept of ordinary residence is proposed to be abolished with effect from 6 April 2013. US income taxation of capital gains Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder’s adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated as US-source gain or loss for US foreign tax credit purposes. Estate and gift tax The current Estate and Gift Tax Convention, or the Convention, between the US and the UK generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of Stamp duty No stamp duty or stamp duty reserve tax (SDRT) will generally be payable in the UK on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the UK and that the instrument or written agreement of transfer is not executed in the UK. Subject to the following paragraph, UK legislation does however provide for SDRT or (in the case of transfers) stamp duty Following A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the Close company status We believe that the close company provisions of the UK Corporation Tax Act 2010 do not apply to us. Copies of our Memorandum and Articles of Association Our principal market risks are changes in interest rates and currency exchange rates. Following an evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks is the responsibility of the chief financial officer, who acts pursuant to policies approved by the board of directors. The Audit Committee receives regular reports on our treasury activities. We have formulated policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although a proportion of our derivative contracts were transacted without regard to existing IFRS requirements on hedge accounting, during The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk. The Group’s financial exposure to interest rates arises primarily from its borrowings. The Group manages its exposure by borrowing at fixed and variable rates of interest, and by entering into derivative transactions. Objectives approved by the board concerning the proportion of debt outstanding at fixed rates govern the use of these financial instruments. The Group’s objectives are applied to core net debt, which is measured at the year-end and comprises borrowings net of cash and other liquid funds. Our objective is to maintain a proportion of forecast core net debt in fixed or capped form for the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% each year. The principal method of hedging interest rate risk is to enter into an agreement with a bank counterparty to pay a fixed rate and receive a variable rate, known as a swap. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of the Group’s swap contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month or six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. Management believes that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings. In addition, from time to time, the Group issues bonds or other capital market instruments to refinance existing debt. To avoid the fixed rate on a single transaction unduly influencing our overall net interest expense, our typical practice has been to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to a variable interest rate. In some cases, the bond issue is denominated in a different currency to the Group’s desired borrowing risk profile and the Group enters into a related cross currency interest rate swap in order to maintain this risk profile, which is predominantly borrowings denominated in US dollars. The Group’s accounting objective in its use of interest rate derivatives is to minimize the impact on the income statement of changes in themark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces significantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimized. Although the Group is based in the UK, it has significant investments in overseas operations. The most significant currency in which the Group trades is the US dollar. The Group’s policy is to align approximately the currency composition of its core net borrowings with its forecast operating profit before depreciation and amortization. This policy aims to soften the impact of changes in foreign exchange rates on consolidated interest cover and earnings. This policy applies only to currencies that account for more than 15% of group operating profit, which currently At December 31, The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of reporting under IFRS. Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, although they do not give rise to any realized gain or loss, nor to any currency cash flows. The Group is also exposed to currency exchange rates in its cash transactions and its investments in overseas operations. Cash transactions — typically for purchases, sales, interest or dividends — require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that the Group pays or receives. The Group sometimes uses forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. The Group’s policy is to effect routine transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate. The Group seeks to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, its debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require using short-dated foreign exchange swaps between currencies. Although the Group prepares its consolidated financial statements in sterling, significant sums have been invested in overseas assets, particularly in the US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and to a lesser extent between the euro and sterling, are likely to affect shareholders’ funds and other accounting values. Under IFRS, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in the fair value of derivatives that the Group has designated and that qualify as effective hedges are either recorded in reserves or are offset in earnings by the corresponding movement in the fair value of the underlying hedged item. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings. In In line with the Group’s treasury policy, none of these instruments were considered trading instruments and each instrument was transacted solely to match an underlying financial exposure. The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 19 of “Item 18. Financial Statements”. Our ordinary shares trade in the United States under a sponsored ADR facility with The Bank of New York Mellon as depositary. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. The following table summarizes various fees currently charged by The Bank of New York Mellon: Person depositing or withdrawing shares the depositary: For: $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property • Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates $.02 (or less) per ADS • Any cash distribution to ADS registered holders • Distribution of securities by the depositary to ADS registered holders of deposited securities • Depositary services • Transfer and registration of shares on the share register to or from the name of the depositary or its agent when shares are deposited or withdrawn • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) • Converting foreign currency to U.S. dollars • As necessary • As necessary From January 1, The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. None. None. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has assessed the effectiveness of internal control over financial reporting, as at December 31, PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Company for the year ended December 31, During the period covered by this Annual Report onForm 20-F, Pearson has made no changes to its internal controls over financial reporting that have materially affected or are reasonably likely to materially affect Pearson’s internal control over financial reporting. The members of the Board of Directors of Pearson plc have determined that Ken Hydon is an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. Pearson has adopted a code of ethics (the Pearson code of In line with best practice, our relationship with PricewaterhouseCoopers LLP (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 authorized by the chief financial officer up to £100,000 per project, subject to a cumulative limit of £500,000 per annum; 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, such as due diligence, irrespective of value, must be approved by the audit committee. Where appropriate, services will be tendered prior to awarding this work to the auditor. The following table sets forth remuneration paid to PwC for Auditors’ Remuneration Audit fees Tax fees All other fees Audit fees include £35,000 Fees for the audit of the effectiveness of the Group’s internal control over financial reporting are allocated to audit fees paid. Tax services include services related to tax planning and various other tax advisory services. Not applicable. Period June 1, 2011 – June 30, 2011 August 1, 2011 – August 31, 2011 Purchases of shares were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None of the foregoing share purchases was made as part of a publicly announced plan or program. Not applicable. Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, we are required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on our website any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and recommends corporate governance principles. Not applicable. Not applicable. The financial statements filed as part of this Annual Report are included on pages F-1 through To the Board of Directors and Shareholders of Pearson plc In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, The Group’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Annual Report on Internal Control Over Financial Reporting” appearing under Item 15 of thisForm 20-F. Our responsibility is to express opinions on these financial statements and on the Group’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/PricewaterhouseCoopers LLP London United Kingdom March All figures in £ millions Sales Cost of goods sold Gross profit Operating expenses Profit on sale of associate Loss on closure of subsidiary 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 Profit for the year from discontinued operations Profit for the year Attributable to: Equity holders of the company Non-controlling interest Earnings per share for profit from continuing and discontinued operations attributable to 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 equity holders of the company during the year(expressed in pence per share) – basic – diluted Consolidated statement of comprehensive income All figures in £ millions Profit for the year Net exchange differences on translation of foreign operations Currency translation adjustment disposed – subsidiaries Actuarial (losses)/gains on retirement benefit obligations – Group Actuarial (losses)/gains on retirement benefit obligations – associate Tax on items recognised in other comprehensive income Other comprehensive (expense)/income for the year Total comprehensive income for the year Attributable to: Equity holders of the company Non-controlling interest 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 Trade and 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) Assets classified as held for sale 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 Liabilities directly associated with assets classified as held for sale Total liabilities Net assets Equity Share capital Share premium Treasury shares Translation reserve Retained earnings Total equity attributable to equity holders of the company Non-controlling interest Total equity /s/Robin FreestoneChief financial officer Consolidated statement of changes in equity All figures in £ millions At 1 January 2012 Profit for the year Other comprehensive expense Equity-settled transactions Tax on equity-settled transactions Issue of ordinary shares under share option schemes Purchase of treasury shares Release of treasury shares Put options over non-controlling interest Changes in non-controlling interest Dividends At 31 December 2012 All figures in £ millions At 1 January 2011 Profit for the year Other comprehensive expense Equity-settled transactions Tax on equity-settled transactions Issue of ordinary shares under share option schemes Purchase of treasury shares Release of treasury shares Put options over non-controlling interest Changes in non-controlling interest Dividends At 31 December 2011 All figures in £ millions At 1 January 2010 Profit for the year Other comprehensive income Equity-settled transactions Tax on equity-settled transactions Issue of ordinary shares under share option schemes Purchase of treasury shares Release/cancellation of treasury shares Changes in non-controlling interest Dividends At 31 December 2010 Consolidated cash flow statement 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 Purchase of intangible assets Disposal of subsidiaries, net of cash disposed Proceeds from sale of associates Proceeds from sale of investments Proceeds from sale of property, plant & equipment Proceeds from sale of intangible assets Proceeds from the sale of liquid resources Investment in liquid resources Tax paid on disposal of subsidiaries 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 Proceeds from the sale of liquid resources Liquid resources acquired Repayment of borrowings Finance lease principal payments Dividends paid to company’s shareholders Dividends paid to non-controlling interest Transactions with non-controlling interest Net cash used in financing activities Effects of exchange rate changes on cash and cash equivalents Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The consolidated cash flow statement includes discontinued operations (see note 3). 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 public limited The company has its primary listing on the London Stock Exchange and is also listed on the New York Stock Exchange. These consolidated financial statements were approved for issue by the board of directors on 7 March 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 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 1. Interpretations and amendments to published standards effective 2012 The following amendments and interpretations were adopted in Amendments to IAS 12 ‘Income Taxes’. 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: Amendments to IAS 19 ‘Employee Benefits (2011)’, effective for annual reporting periods beginning on or after 1 January 2013. The amendments include the elimination of the corridor approach, changes to the calculation of the net interest and service cost components and changes to disclosure. If the 2012 accounts had been prepared using IAS 19 (2011) the service cost would have been £4m higher and the net interest income would have been £15m lower. IFRS 9 ‘Financial Instruments’, effective for annual reporting periods beginning on or after 1 January 2015. The new standard details the requirements for the classification and measurement of financial assets and liabilities. 1. Accounting policies continued a. Basis of preparation continued The IASB issued a ‘package of five’ new and amended standards together. IFRS 10 ‘Consolidated Financial IFRS 13 ‘Fair Value Measurement’, effective for annual reporting periods beginning on or after 1 January 2013. The standard defines fair value and provides guidance on its determination, and introduces disclosure requirements on fair value measurements. Amendments to IAS 1 ‘Presentation of Financial Statements’ – Presentation of Items and Other Comprehensive Income, effective for annual reporting periods beginning on or after 1 July 2012. The amendments require the grouping of items in other comprehensive income into those that may be reclassified to profit or loss in subsequent periods, and those that will not. With the exception of IAS 19 ‘Employee Benefits (2011)’, the changes in new pronouncements applicable from 1 January 2013 are not expected to have a material impact on the consolidated financial statements. 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: Goodwill Intangible assets: Pre-publication assets Royalty advances Taxation Employee benefits: Pension obligations Revenue recognition b. Consolidation 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 consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. Notes to the consolidated financial statements continued 1. Accounting policies continued b. Consolidation continued See note 1e(1) for the accounting policy on goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, in the case of a bargain purchase, the difference is recognised directly in the income statement. On anacquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. 2. Subsidiaries 3. Transactions with non-controlling interests 4. Joint ventures and associates 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 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. c. Foreign currency translation 2. Transactions and balances Notes to the consolidated financial statements continued 1. Accounting policies continued c. Foreign currency translation continued 3. Group companies 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. The principal overseas currency for the Group is the US dollar. The average rate for the year against sterling was 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: The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. e. Intangible assets 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. Notes to the consolidated financial statements continued 1. Accounting policies continued e. Intangible assets continued Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations before the date of transition to IFRS. 2. Acquired software 3. Internally developed software 4. Acquired intangible assets 5. Pre-publication assets 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. Notes to the consolidated financial statements continued 1. Accounting policies continued 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. 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 on 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 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. Notes to the consolidated financial statements continued 1. Accounting policies continued 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. 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. Notes to the consolidated financial statements continued 1. Accounting policies continued n. Taxation continued 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. o. Employee benefits 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 3. Share-based payments 1. Accounting policies continued 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 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. Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of 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 1. Accounting policies continued r. Leases continued allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. 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. 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). 2. Segment information The Group is organised into Continuing operations: North American Education International Education Professional FT Group Discontinued operations: Penguin 2. Segment information continued In October 2012, Pearson and Bertelsmann entered into an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction is expected to complete in 2013 and, at that point, Pearson will no longer control the Penguin group of companies but will hold a 47% equity interest in the combined Penguin Random House. This equity interest will be accounted for under the equity method. The impending loss of control results in the Penguin business being classified as held for sale in the Pearson balance sheet at December 2012 and the results for 2010, 2011 and 2012 have been included in discontinued operations. For more detail on the services and products included in each business segment refer to the business review. All figures in £ millions Continuing operations Sales (external) Sales (inter-segment) Adjusted operating profit Intangible charges Acquisition costs Other net gains and losses 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 Pre-publication investment Depreciation Amortisation 2. Segment information continued All figures in £ millions Continuing operations Sales (external) Sales (inter-segment) Adjusted operating profit Intangible charges Acquisition costs Other net gains and losses 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 Pre-publication investment Depreciation Amortisation Notes to the 2. Segment information continued All figures in millions Continuing operations Sales (external) Sales (inter-segment) Adjusted operating profit Amortisation of acquired intangibles Acquisition costs Other net gains and losses Operating profit Finance costs Finance income Profit before tax Income tax Profit for the year from operations Segment assets Joint ventures Associates Total assets Other segment items Share of results of joint ventures and associates Capital expenditure Pre-publication investment Depreciation Amortisation In Included in other net gains and losses in 2012 in the Professional segment is the loss on closure of Pearson in Practice (£113m) and an impairment loss on a joint venture (£10m). In 2011 other net gains and losses includes a gain on sale of FTSE International (£412m) in the FT Group, a gain on the sale of investments in the North American Education business (£29m) and a net loss of £6m on acquisition and disposal transactions in the International Education business. Corporate costs are allocated to business segments including discontinued operations 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, deferred taxation and other financial assets 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 software (see notes 10 and 11). Notes to the consolidated financial statements continued 2. Segment information continued Property, plant and equipment and intangible assets acquired through business combination were 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 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. Notes to the consolidated financial statements continued 3. Discontinued operations An analysis of the results and cash flows of discontinued operations is as follows: All figures in £ millions Sales Operating profit Profit before tax Attributable tax expense Profit after tax Profit on disposal of discontinued operations before tax Attributable tax expense Profit for the year from discontinued operations Operating cash flows Investing cash flows Financing cash flows Total cash flows Included in operating profit in 2012 are costs associated with the formation of Penguin Random House of £32m, including a provision for the settlement of litigation associated with the agency arrangement for eBooks. 4. Operating expenses All figures in £ millions By function: Cost of goods sold Operating expenses Distribution costs Administrative and other expenses Other income Total net operating expenses Total Notes to the 4. Operating expenses continued Included in other income in 2011 is a profit of £29m on the sale of an investment and a gain of £8m on a stepped acquisition. Both these items are excluded from adjusted earnings. 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 Acquisition costs Employee benefit expense Operating lease rentals Other property costs Royalties expensed Advertising, promotion and marketing Information technology costs Other costs Other income Total During the year the Group obtained the following services from the Group’s auditors: All figures in £ millions The audit of parent company and consolidated financial statements The audit of the company’s subsidiaries Total audit fees Other assurance services Total assurance services Tax compliance services Tax advisory services Total tax services Corporate finance services not covered above Total non-audit 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. 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 Total 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 Group Other Continuing operations The employee benefit expense relating to discontinued operations was £211m (2011: £205m; 2010: £294m) and the average number employed All figures in £ millions Interest payable Net finance costs in respect of retirement benefits Finance cost of put options, deferred consideration associated with acquisitions and other interest charges related to transactions 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 Net finance income in respect of retirement benefits Net foreign exchange gains Other gains on financial instruments in a hedging relationship: – fair value hedges Other gains on financial instruments not in a hedging relationship: – amortisation of transitional adjustment on bonds – derivatives Finance income Net finance costs Notes to the 6. Net finance costs continued The All figures in £ millions Current tax Charge in respect of current year 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 All figures in £ millions Profit before tax Tax calculated at UK rate (2012: 24.5%, 2011: 26.5%, 2010: 28%) Effect of overseas tax rates Joint venture and associate income reported net of tax Net (expense)/income not subject to tax (Loss)/gain on sale of businesses not subject to tax Utilisation of previously unrecognised tax losses and credits Unutilised tax losses Adjustments in respect of prior years Total tax charge UK Overseas Total tax charge Tax rate reflected in earnings The tax benefit/(charge) All figures in £ millions Pension contributions and actuarial gains and losses Net investment hedges and other foreign exchange gains and losses A tax benefit of Notes to the consolidated financial statements continued 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 Non-controlling interest Earnings from continuing operations Profit for the year from discontinued operations Non-controlling interest 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 Diluted 9. Dividends All figures in £ millions Final paid in respect of prior year 28.0p (2011: 25.7p; 2010: 23.3p) Interim paid in respect of current year 15.0p (2011: 14.0p; 2010: 13.0p) 10. Property, plant and equipment All figures in £ millions Cost At 1 January 2011 Exchange differences Additions Disposals Acquisition through business combination Disposal through business disposal Reclassifications At 31 December 2011 Exchange differences Additions Disposals Acquisition through business combination Disposal through business disposal Reclassifications Transfer from/(to) software Transfer from pre-publication Transfer to assets held for sale At 31 December 2012 All figures in £ millions Depreciation At 1 January 2011 Exchange differences Charge for the year Disposals Acquisition through business combination Disposal through business disposal Reclassifications At 31 December 2011 Notes to the 10. Property, plant and equipment continued All figures in £ millions Exchange differences Charge for the year Disposals Acquisition through business combination Disposal through business disposal Reclassifications Transfer (from)/to software Transfer to assets held for sale At 31 December 2012 Carrying amounts At 1 January 2011 At 31 December 2011 At 31 December 2012 Depreciation expense of 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 All figures in £ millions Cost At 1 January 2011 Exchange differences Additions – internal development Additions – purchased Disposals Acquisition through business combination Disposal through business disposal At 31 December 2011 Exchange differences Additions – internal development Additions – purchased Disposals Acquisition through business combination Disposal through business disposal Transfer from PPE Transfer to assets held for sale At 31 December 2012 Notes to the 11. Intangible assets continued All figures in £ millions Amortisation At 1 January 2011 Exchange differences Charge for the year Disposals Acquisition through business combination Disposal through business disposal At 31 December 2011 Exchange differences Charge for the year Disposals Acquisition through business combination Disposal through business disposal Transfer from PPE Transfer to assets held for sale At 31 December 2012 Carrying amounts At 1 January 2011 At 31 December 2011 At 31 December 2012 Goodwill The goodwill carrying value of Other intangible assets Other intangibles acquired include content, technology, contracts and software rights. Intangible assets are valued separately for each acquisition and the primary method of valuation used is the discounted cash flow method. The majority of acquired intangibles are amortised using the unit of production method which is based on the pattern of benefits embodied in the asset. Amortisation of Notes to the consolidated financial statements continued 11. Intangible assets continued Other intangible assets continued The range of useful economic lives for each major class of intangible asset (excluding goodwill and software) is shown below: 2012 Class of intangible asset Useful economic life Acquired customer lists and relationships Acquired trademarks and brands Acquired publishing rights Other intangibles acquired The expected amortisation profile of acquired intangible assets is shown below: All figures in £ millions Class of intangible asset Acquired customer lists and relationships Acquired trademarks and brands Acquired publishing rights Other intangibles acquired 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. All figures in £ millions US Education Publishing US School Assessment and Information Canada International – Emerging Markets International – UK International – Rest Of World Professional Publishing Professional Assessment and Training Pearson Education total Financial Times Mergermarket FT Group total Continuing operations Goodwill in respect of discontinued operations is £364m (2011: £315m). Notes to the 11. Intangible assets continued Impairment tests for 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. In 2011, following a reorganisation within the International Education business the CGUs were re-analysed into Emerging Markets, UK and Rest Of World to align with the management and reporting structure. The goodwill was reallocated accordingly using a relative value approach except where goodwill is directly attributable to one of the new CGUs, in which case the goodwill was specifically allocated to the relevant CGU. 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 Perpetuity growth rates 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 any of these assumptions is unlikely to cause an impairment in any of the CGUs. 12. Investments in joint ventures and associates Joint ventures All figures in £ millions At beginning of year Exchange differences Share of loss after tax Dividends Additions and further investment Goodwill impairment At end of year The goodwill impairment charge relates to the write down of the Group’s investment in a joint venture in India. Notes to the consolidated financial statements continued 12. Investments in joint ventures and associates continued Investments in joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. The total goodwill recorded on acquisition of joint ventures at 31 December 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 Non-current liabilities Current liabilities Net assets Income Expenses Loss after tax All figures in £ millions At beginning of year Exchange differences Share of profit after tax Dividends Additions Disposals Actuarial losses on retirement benefit obligations Transfer to subsidiary Transfer to assets held for sale At end of year In addition to the amounts disclosed above, FTSE International Ltd paid royalties of Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The total goodwill recorded on acquisition of associates at 31 December Notes to the consolidated financial statements continued 12. Investments in joint ventures and associates continued The Group’s interests in its All figures in £ millions The Economist Newspaper Ltd Other continuing operations Discontinued operations Total All figures in £ millions The Economist Newspaper Ltd FTSE International Ltd* Other Total The interests held in associates are equivalent to voting rights. Gain on sale of FTSE International Ltd All figures in £ millions Proceeds Disposal costs Net assets disposed Gain on sale 13. All figures in £ millions Deferred income tax assets Deferred income tax liabilities Net deferred income tax Substantially all of the deferred tax assets are expected to be recovered 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 of Notes to the consolidated financial statements continued 13. Deferred income tax continued 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 Disposal through business disposal Tax charge to other comprehensive income or equity Transfer to assets held for sale At end of year Included in the income statement charge above for 2012 is a £5m All figures in £ millions Deferred income tax assets At 1 January 2011 Exchange differences Acquisition through business combination Income statement benefit/(charge) Tax (charge)/benefit to other comprehensive income or equity At 31 December 2011 Exchange differences Acquisition through business combination Income statement charge Tax benefit/(charge) to other comprehensive income or equity Transfer to assets held for sale At 31 December 2012 Notes to the consolidated financial statements continued 13. Deferred income tax continued 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 2011 Exchange differences Acquisition through business combination Disposal through business disposal Income statement benefit Tax benefit to other comprehensive income or equity At 31 December 2011 Exchange differences Acquisition through business combination Disposal through business disposal Income statement charge Tax benefit to other comprehensive income or equity Transfer to assets held for sale At 31 December 2012 Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances. All figures in £ millions Investments in unlisted securities – continuing operations Investments in unlisted securities classified within assets held for sale Cash and cash equivalents – continuing operations Cash and cash equivalents classified within assets held for sale Marketable securities Derivative financial instruments Trade receivables – continuing operations Trade receivables classified within assets held for sale Total financial assets 14. Classification of financial instruments continued All figures in £ millions Trade payables – continuing operations Trade payables classified within liabilities held for sale Other financial liabilities – put options over non-controlling interest Bank loans and overdrafts –continuing operations Bank loans and overdrafts classified within liabilities held for sale Borrowings due within one year Borrowings due after more than one year Total financial liabilities All figures in £ millions 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 options over non-controlling interest Bank loans and overdrafts Borrowings due within one year Borrowings due after more than one year Total financial liabilities Notes to the consolidated financial statements continued 14. Classification of financial instruments continued Certain of the Group’s derivative financial instruments are classified as 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. All figures in £ millions At beginning of year Exchange differences Acquisition of investments Disposal of investments Transfer to assets held for sale At end of year Notes to the consolidated financial statements continued 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 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 The fixed interest rates on outstanding rate derivative contracts at the end of 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. 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. Notes to the consolidated financial statements continued 17. Cash and cash equivalents (excluding overdrafts) All figures in £ millions Cash at bank and in hand Short-term bank deposits Continuing operations Cash at bank and in hand classified within assets held for sale Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates. At the end of 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 – continuing operations Cash at bank and in hand classified within assets held for sale Bank overdrafts – continuing operations Bank overdrafts classified within liabilities held for sale 18. Financial The Group’s current and non-current borrowings are as follows: All figures in £ millions Non-current 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) 4.0% US Dollar Notes 2016 (nominal amount $350m) 6.25% Global Dollar Bonds 2018 (nominal amount $550m) 4.625% US Dollar Notes 2018 (nominal amount $300m) 3.75% US Dollar Notes 2022 (nominal amount $500m) Bank loans and overdrafts Finance lease liabilities Current Due within one year or on-demand: 5.5% Global Dollar Bonds 2013 (nominal amount $350m) Bank loans and overdrafts Finance lease liabilities Total borrowings – continuing operations Bank overdrafts classified within liabilities held for sale Total borrowings Included in the non-current borrowings above is 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 18. Financial The carrying amounts and market values of borrowings are as follows: All figures in £ millions Bank loans and overdrafts 5.5% Global Dollar Bonds 2013 5.7% US Dollar Bonds 2014 7.0% Sterling Bonds 2014 6.0% Sterling Bonds 2015 4.0% US Dollar Notes 2016 6.25% Global Dollar Bonds 2018 4.625% US Dollar Notes 2018 3.75% US Dollar Notes 2022 Finance lease liabilities Continuing operations Bank overdrafts classified within liabilities held for sale The market values stated above 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 Other 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 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. 18. Financial 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 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 of its financial instruments 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 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. Notes to the consolidated financial statements continued 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 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 themark-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 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 19. Financial 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 Continuing operations Cash & cash equivalents classified within assets held for sale Bank loans, overdrafts and loan notes classified within liabilities held for sale Net debt 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 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 As at 31 December All figures in £ millions Re-pricing profile of borrowings Effect of rate derivatives Total 19. Financial Analysis of Group debt, including the impact of derivatives continued The maturity of contracted cash flows associated with the Group’s financial liabilities 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 Trade payables 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: Bonds Rate derivatives – inflows Rate derivatives – outflows Trade payables Total 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. Any 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. 19. Financial 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 Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account the effect of 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 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). 19. Financial Financial instruments – fair value measurement continued All figures in £ millions Financial assets at fair value Derivative financial assets Marketable securities Available for sale financial assets Investments in unlisted securities – continuing operations Investments in unlisted securities classified within assets held for sale Financial liabilities at fair value Derivative financial liabilities Other financial liabilities – put options over non-controlling interest Total The following table analyses the movements in level 3 fair value measurements: All figures in £ millions At beginning of year Exchange differences Additions Fair value movements Transfer to assets classified as held for sale Disposals At end of year 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. 19. Financial Financial instruments As at 31 December All figures in £ millions Investments in unlisted securities – continuing operations Investments in unlisted securities classified within assets held for sale Cash and cash equivalents – continuing operations Cash and cash equivalents classified within assets held for sale Marketable securities Derivative financial instruments Bonds Other borrowings – continuing operations Other borrowings classified within liabilities held for sale Put options over non-controlling interest Other net financial assets – continuing operations Other net financial assets classified within assets and liabilities held for sale Total financial instruments 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, 20. Intangible assets – Pre-publication All figures in £ millions Cost At beginning of year Exchange differences Additions Disposals Acquisition through business combination Transfer to property, plant and equipment Transfer to assets classified as held for sale At end of year Amortisation At beginning of year Exchange differences Charge for the year Disposals Acquisition through business combination Transfer to assets classified as held for sale At end of year Carrying amounts At end of year Included in the above are pre-publication assets amounting to 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 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 22. Trade and other receivables All figures in £ millions Current Trade receivables Royalty advances Prepayments and accrued income Other receivables Non-current Trade receivables Royalty advances Prepayments and accrued income Other receivables 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 Disposal through business disposal Transfer to assets classified as held for sale At end of year Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed. 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 sales returns Net trade receivables 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. Notes to the consolidated financial statements continued 23. Provisions for other liabilities and charges All figures in £ millions At 1 January 2012 Exchange differences Charged to income statement Released to income statement Deferred consideration on acquisition Acquisition through business combination Utilised Transfer to liabilities held for sale At 31 December 2012 Analysis of provisions: All figures in £ millions Current Non-current Current Non-current Deferred consideration primarily relates to the 24. Trade and other liabilities All figures in £ millions Trade payables Social security and other taxes Accruals Deferred income Interest payable Put options over non-controlling interest Other liabilities Less: non-current portion Accruals Deferred income Put options over non-controlling interest Interest payable Other liabilities Current portion Notes to the 24. Trade and other liabilities continued The carrying value of the Group’s trade and other liabilities approximates its fair value. The deferred income balance comprises principally: multi-year obligations to deliver workbooks to adoption customers in school businesses; advance payments in assessment, testing and The put 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. At 31 December 2012 the UK Group plan has approximately 27,000 members, analysed in the following table: % Defined benefit Defined contribution Total The other major defined benefit plans are based in the US. 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. 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 Notes to the consolidated financial statements continued 25. Retirement benefit and other post-retirement obligations continued Assumptions continued The UK discount rate is based on the annualised yield on the iBoxx over15-year AA-rated corporate bond index, adjusted to reflect the duration of liabilities. The US discount rate is set by reference to a US bond portfolio matching model. The inflation rate for the UK Group plan of 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, plus a diversification premium. The expected rate of increase in salaries has been set at For the UK For the US plans, the 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 Group plan and US Male Female 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 Notes to the consolidated financial statements continued 25. Retirement benefit and other post-retirement obligations continued Financial statement information The amounts recognised in the income statement are as follows: All figures in £ millions Current service cost Total operating expense Expected return on plan assets Interest on plan liabilities Net finance (income)/expense Net income statement charge Actual return on plan assets All figures in £ millions Current service cost Total operating expense Expected return on plan assets Interest on plan liabilities Net finance (income)/expense Net income statement charge Actual return on plan assets All figures in £ millions Current service cost Curtailments Total operating expense Expected return on plan assets Interest on plan liabilities Net finance expense Net income statement charge Actual return on plan assets Included within the 2012 results are discontinued operations consisting of a £4m charge (2011: £4m charge; 2010: £7m charge) relating to defined benefit schemes and a £7m charge (2011: £7m charge; 2010: £6m charge) relating to defined contribution schemes. Also included in 2010 results are discontinued operations of £5m relating to the curtailment 25. Retirement benefit and other post-retirement obligations continued Financial The amounts recognised in the balance sheet are as follows: All figures in £ millions Fair value of plan assets Present value of defined benefit obligation Net pension asset/(liability) Other post-retirement medical benefit obligation Other pension accruals Net retirement benefit obligations Analysed as: Retirement benefit assets Retirement benefit obligations Included within the 2012 retirement benefit obligation is a liability of £26m which relates to Penguin and is classified as held for sale. The following 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 The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group. 25. Retirement benefit and other post-retirement obligations continued Financial The table below further disaggregates the UK Group plan assets into additional categories and those assets which have a quoted market price in an active market and those that do not: % UK equities Non-UK equities Fixed-interest securities Index-linked securities Property Other Total The liquidity profile of the UK Group plan assets is as follows: % Liquid – call <1 month Less liquid – call 1– 3 months Illiquid – call > 3 months 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/(losses) Contributions by employer Contributions by employee Benefits paid Acquisition through business combination Closing fair value of plan assets Present value of defined benefit obligation Opening defined benefit obligation Exchange differences Current service cost Interest cost Actuarial losses Contributions by employee Benefits paid Acquisition through business combination Closing defined benefit obligation Notes to the consolidated financial statements continued 25. Retirement benefit and other post-retirement obligations continued Financial statement information 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 Interest cost Actuarial losses Benefits paid Closing defined benefit obligation 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 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 most recent triennial actuarial valuation for funding purposes was completed as at 1 January The Group expects to contribute Notes to the consolidated financial statements continued 25. Retirement benefit and other post-retirement obligations continued Future benefit payments The following table shows the expected benefit payments from the defined benefit plans over the next ten years. These use actuarial assumptions as at 31 December 2012. These represent payments from the pension funds to pensioners and others entitled to benefits, and are not an indication of payments from the company. For company funding requirements, refer to the prior section. All figures in £ millions Expected future benefit payments: 2013 2014 2015 2016 2017 2018 to 2022 combined 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 of aggregate of service cost and interest cost – UK Group plan (Decrease)/increase in defined benefit obligation – US plan The effect of members living one year more or one year less on the defined benefit obligation 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 All figures in £ millions Effect on: Increase/(decrease) in post-retirement medical benefit obligation Increase/(decrease) of aggregate of service cost and interest cost 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 Share-based The Group operates the following equity-settled employee option and share plans: Worldwide Save for Shares Plan Employee Stock Purchase Plan Long-Term Incentive Plan 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 marketand/or non-market performance criteria. Restricted shares awarded to senior management in Annual Bonus Share Matching Plan 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 Notes to the consolidated financial statements continued 26. Share-based payments continued Options were exercised regularly throughout the year. The weighted average share price during the year was 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 In Fair value Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Expected dividend yield Forfeiture rate 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 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. Notes to the consolidated financial statements continued 26. Share-based payments continued experience, to account for 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 27. Share capital and share premium At 1 January 2011 Issue of ordinary shares – share option schemes At 31 December 2011 Issue of ordinary shares – share option schemes At 31 December 2012 The ordinary shares have a par value of 25p per share 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 2011 Purchase of treasury shares Release of treasury shares At 31 December 2011 Purchase of treasury shares Release of treasury shares At 31 December 2012 Notes to the consolidated financial statements continued 28. Treasury shares continued The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26). These shares, representing The nominal value of Pearson plc treasury shares amounts to At 31 December All figures in £ millions Net exchange differences on translation of foreign operations Actuarial losses on retirement benefit obligations – Group Actuarial losses on retirement benefit obligations – associate Tax on items recognised in other comprehensive income Total other comprehensive expense for the year All figures in £ millions Net exchange differences on translation of foreign operations Actuarial gains on retirement benefit obligations – Group Actuarial gains on retirement benefit obligations – associate Tax on items recognised in other comprehensive income Total other comprehensive expense for the year All figures in £ millions Net exchange differences on translation of foreign operations Currency translation adjustment disposed – subsidiaries Actuarial gains on retirement benefit obligations – Group Actuarial gains on retirement benefit obligations – associate Tax on items recognised in other comprehensive income Total other comprehensive income for the year Notes to the 30. Business combinations On 16 May 2012 the Professional business acquired Certiport, Inc. Certiport is based in the US and is a leading provider of certification and assessment programmes in IT and digital literacy. On 5 July 2012 the International Education business completed the purchase of GlobalEnglish Corporation, a leading provider of cloud-based, on-demand business English learning, assessment and performance support software. On 19 July 2012 Penguin announced the acquisition of Author Solutions, Inc., the world’s leading provider of professional self-publishing services and on 21 November 2012 the North American Education business acquired EmbanetCompass, a leading provider of technology enabled online learning solutions. The Group acquired a 100% interest in all of the investments noted above. 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: All figures in £ millions Property, plant and equipment Intangible assets Intangible assets – Pre-publication Inventories Trade and other receivables Cash and cash equivalents (excluding overdrafts) Financial liabilities – Borrowings Net deferred income tax liabilities Retirement benefit obligations Provisions for other liabilities and charges Trade and other liabilities Current income tax liabilities Non-controlling interest Net assets acquired at fair value Goodwill Fair value of previously held interest arising on stepped acquisition Total Satisfied by: Cash Deferred consideration Net prior year adjustments Total consideration 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. Intangible assets in other acquisitions includes £69m relating to prior year acquisitions. Notes to the consolidated financial statements continued 30. Business combinations continued The fair value of trade and other receivables is A provisional value of Intangible assets acquired in All figures in £ millions Cash flow on acquisitions Cash – Current year acquisitions Deferred payments for prior year acquisitions and other items Cash and cash equivalents acquired Acquisition costs and other acquisition liabilities paid Net cash outflow If the acquisitions had completed on 1 January All figures in £ millions Disposal of subsidiaries Property, plant and equipment Intangible assets Other financial assets Inventories Trade and other receivables Cash and cash equivalents (excluding overdrafts) Net deferred income tax liabilities Retirement benefit obligations Trade and other liabilities Current income tax liabilities Non-controlling interest Attributable goodwill Cumulative translation adjustment Net assets disposed Cash received Costs (Loss)/profit on disposal Notes to the 31. Disposals including business closures continued All figures in £ millions Cash flow from disposals Cash Cash and cash equivalents disposed Costs paid Pension contribution paid on disposal Net cash outflow The disposal in 32. Held for sale Assets classified as held for sale relate to Penguin as a result of the announcement by Pearson and Bertelsmann to combine Penguin and Random House. All figures in £ millions Property, plant and equipment Intangible assets Investments in joint ventures and associates Deferred income tax assets Other financial assets Trade and other receivables Intangible assets – Pre-publication Inventories Cash and cash equivalents (excluding overdrafts) Assets classified as held for sale Financial liabilities – Borrowings Deferred income tax liabilities Retirement benefit obligations Provisions for other liabilities and charges Trade and other liabilities Liabilities directly associated with assets classified as held for sale Net assets classified as held for sale 33. Transactions with non-controlling interest In 2012 the Group increased its investments in its subsidiaries in China at a cost of £4m. In 2011 the remaining non-controlling interest in Sistema Educacional Brasileiro was acquired for £108m. In 2010 the transactions with non-controlling interests (£7m) comprise the acquisition of the remaining non-controlling interest in our Italian Education business and the Notes to the 34. Cash generated from operations All figures in £ millions Profit Adjustments for: Income tax Depreciation Intangible charges Amortisation of other intangible assets Loss on sale of property, plant and equipment Net finance costs Share of results of joint ventures and associates Profit on disposal of discontinued operations Loss/(profit) on disposals Acquisition costs Costs on formation of Penguin Random House 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 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. All figures in £ millions Net book amount Loss on sale of property, plant and equipment Proceeds from sale of property, plant and equipment The principal other non-cash transactions are movements in finance lease obligations of 35. 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, joint ventures and associates. In addition there are contingent liabilities of the Group in respect of legal claims, contract disputes, royalties, copyright fees, permissions and Notes to the consolidated financial statements continued 36. 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: Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in note 12. There are no material amounts falling due from joint ventures and associates. 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 There were no other material related party transactions. No guarantees have been provided to related parties. In February 2013 the Group SIGNATURES The registrant hereby certifies that it meets the requirements for filing on Form 20-F and that it has caused and authorized the undersigned to sign this annual report on its /s/ Robin Freestone Date: March Our to be the world’s leading ‘learning’ company, and to help people make progress in their lives through learning, whereverlearning. Over the past 15 years, through a major programme of organic investment and whenever they are learning — young or old; at home, school or at work;acquisitions, Pearson has become the leading education company in the world, with unique geographic reach, product breadth and through whatever mediumprofessional depth.stylein education services businesses, which together now account for half our sales, and in emerging economies, which now make up 16% of sales on a continuing basis. At the same time, structural trends have placed some pressure on parts of our business including book publishing and financial advertising.most effective.aimare therefore developing a new strategic framework to produce consistent growth on three key financial measures — earnings per share, cash floworganise Pearson, to analyse opportunities, to allocate investment capital, to develop world-class products and return on invested capital — which we believe are, together, good indicators thatservices and to drive performance.building long-term valuefocusing on four global businesses: school, higher education, English and business education. We are taking an increasingly global view of Pearson.educational needs, consumer trends and product development for these businesses;12
Through this process, we are accelerating the work that is already under way to transform Pearson from the world’s most international education publishing company to the world’s leading global learning services business. We believe it will provide Pearson with a larger market opportunity, sharper focus on the fastest-growing markets, stronger financial returns and a greater impact on educational outcomes.To achieve this goal, our strategy has four parts, common to all our businesses:• Long-term organic investment in content: We invest steadily in content such as new education programmes, new and established authors for Penguin and the FT Group’s journalism. We believe that this constant investment is critical to the quality and effectiveness of our products and services.• Digital products and services businesses: Our strategy centers on adding services to our content, usually enabled by technology, to make the content more useful, personal and valuable. These digital and services businesses give us access to new sources of revenues to sustain growth. We now receive close to one-third of our annual sales from digital products and services which is more than double the total five years ago.• International expansion: Pearson has market leading positions in major developed economies, particularly the US, UK and Western Europe. We are already present in more than 70 countries and we are investing to become a much larger global company, with particular emphasis on emerging markets, such as China, India, Africa and Latin America. Over the past 5 years our ‘international’ (meaning ‘outside North America’) education business has grown sales at an average annual rate of 18% through strong organic growth and acquisitions.• Efficiency: The businesses of Pearson have a lot in common, in costs, assets, and activities. Pooling those makes the company stronger and more efficient. It also allows our businesses to learn from each other and to collaborate to save money. On that basis we have invested for efficiency through savings in our individual businesses and through a strong centralized operations structure. We are integrated in many areas where our businesses share the same needs — purchasing, warehousing, distribution, facilities and real estate, project management, people resources, finance and accounting, and transactions. Over the past five years, we have increased our adjusted operating profit margins from 12.7% to 15.1% and reduced average working capital as a percentage of sales from 26.3% to 20.1%. Adjusted operating profit is a key financial measure used by management to evaluate performance and allocate resources to our business segments. See “Item 5. Operating and Financial Review and Prospects”.largest publishersleading providers of textbooks and online teachingeducational materials and providerlearning technologies. We provide test development, processing and scoring services to governments, educational institutions, corporations and professional bodies around the world. We publish across the curriculum and provide a range of assessment services. It serves the growing demands of teachers, students, parentseducation services including teacher development, educational software and professionals throughout the world for stimulating and effective education programs in print and online.2010,2012, Pearson Education had sales of £4,207m£4,616m or 74% (74%91% (91% in 2009)2011) of Pearson’s total continuing sales. Pearson Education generated 78%92% of Pearson’s continuing operating profit.performance.13Our school testing business is the leading provider of test development, processing and scoring services to US states and the federal government. Its capabilities have been further enhanced through the integration of the Harcourt Assessment business.55. Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 20102012 compared to year ended December 31, 20092011 — Sales and operating profit by division — North American Education” for a discussion of developments during 20102012 with respect to this division.countries.countries, and is taking an active role in teaching. We are one of the world’s leading providers of English Language Teaching (ELT) materials for children and adults, published under the well-known Longman imprint. In 2009 we strengthenedWe are also teaching the English language in our position further in international markets through the acquisition of Wall Street English a chaingroup of premium English language schools in China, and investment in vocational training and online learning in India, and in 2010 through the acquisition of Wall Street Institute, providing premium spoken English training for adults in 25 territories across Asia, Europe, the Middle East and Latin America, and Sistema Educacional Brasileiro’s schools learning systems business.20102012 compared to year ended December 31, 20092011 — Sales and operating profit by division — International Education” for a discussion of developments during 20102012 with respect to this division.NCLEX, the Financial Industry Regulatory AuthorityNational Council of State Boards of Nursing, and the UK’s Driving Standards Agency.14developed overexperienced a dramatic fall in demand as a result of changes to the year with the acquisition of Melorio plc, a vocational training group.20102012 compared to year ended December 31, 20092011 — Sales and operating profit by division — Professional” for a discussion of developments during 20102012 with respect to this division.2010,2012, the FT Group had sales of £403m,£443m, or 7%9% of Pearson’s total continuing sales (7%(9% in 2009)2011), and contributed 8% of Pearson’s operating profit from continuing operations.the year2010 Interactive Data, our 61%-owned financial information company was sold and has been reclassified as a discontinued operation. Middle East and Africa, the US, Asia-Pacific and Asia.PharmawireBioPharm Insight..20102012 compared to year ended December 31, 20092011 — Sales and operating profit by division — FT Group” for a discussion of developments during 20102012 with respect to this division. • 50% interest in The Economist Group, publisher of one of the world’s leading weekly business and current affairs magazines. • 50% interest in FTSE International, a joint venture with the London Stock Exchange, which publishes a wide range of global indices, including the FTSE index.• • March 27, 2008, Financial Times International Publishing LtdDecember 16, 2011, the FT Group sold its 50% partnership interest in Financial Times Deutschland GmbH & Co KGFTSE International to Gruner & Jahr AG & Co KG.15Africa and New Zealand.In 2010, Penguin had sales of £1,053m, representing 19% of Pearson’s total continuing sales (19% in 2009) and contributed 14% of Pearson’s operating profit from continuing operations. Its largest market is the US, which generated around 59% of Penguin’s sales in 2010. Penguin earns around 93% of its revenues from the sale of hard cover and paperback books. The balance comes from audio books ande-books.website.websites. Penguin also sells direct to the customer via digital sales agents.20102012 compared to year ended December 31, 20092011 — Sales and operating profit by division — The Penguin Group” for a discussion of developments during 20102012 with respect to this division.• The School market is primarily driven by an adoption cycle in which major state education boards ‘adopt’ programs and provide funding to schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of the subsequent 5 years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle.• The Higher Education market has a similar pattern, with colleges and professors typically refreshing their courses and selecting revised programs on a regular basis, often in line with the release of new editions or new technology offerings. The Company renews its pre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows that the average life cycle of Higher Education content is up to 5 years. Again the operating cycle mirrors the market cycle.16On November 22, 2010,announcedcompleted the proposed acquisitionpurchase of a 75% stake5% equity investment in CTI Education Group,NOOK Media, LLC for $89.5m. NOOK Media is a leading South African educationnew company for £31m. As atconsisting of Barnes & Noble’s digital businesses including its NOOK e-reader and tablets, the end of December 2010 this acquisition had not been completed but is expected to complete in the first half of 2011.17On January 18, 2011,In February 2013, the Group announced that it had agreed to increase it shareholdingcompleted the purchase of the remaining minority interest in Tutorvista,TutorVista, the Bangalore based tutoring services company to a controlling 76% stake for a consideration of $127m.On March 7, 2011, the Group and Education Development International plc (EDI) announced that they had reached agreement on the terms of a recommended cash offer to be made by Pearson for the entire issued share capital of EDI. The offer values EDI at approximately £112.7m. EDI is a leading provider of education and training qualifications and assessment services, with a strong reputation for the use of information technology to administer learning programmes and deliver on-screen assessments.2010,2012, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held. Percentage
interest/voting
power Percentageinterest/votingNameCountry of incorporation/residencepowerPearson Education United States (Delaware) 100 % England and Wales 100 % EdexcelUnited States (Minnesota) 100 % England and Wales 100 % NCS Pearson Inc. United States (Minnesota)100%FT GroupThe Financial Times Limited England and Wales 100 % MergermarketUnited States (Delaware) 100 % England and Wales 100 % The Penguin GroupPenguin Group (USA) Inc. United States (Delaware)100%The Penguin Publishing Co Ltd. England and Wales 100 % Dorling Kindersley Holdings LtdEngland and Wales100%1,0001,200 properties, including approximately 550600 testing/teaching centers in more than 70 countries worldwide, the majority of which are located in the United Kingdom and the United States.2010: Area in square feet General use of propertyLocationArea in square feet Kirkwood, New York, USA 524,000 Pittston, Pennsylvania, USA 406,000 Iowa City, Iowa, USA 310,000312,760 Old Tappan, New Jersey, USA 210,112212,041 Cedar Rapids, Iowa, USA 205,000 Southwark, London, UK 155,000 Hadley, Massachusetts, USA 137,070 Owatonna, Minnesota, USA 128,000 182010: Area in square feet General use of propertyLocationArea in square feet Lebanon, Indiana, USA 1,091,435 Cranbury, New Jersey, USA 886,747 Indianapolis, Indiana, USA 737,850 San Antonio, Texas, USA 559,258 Upper Saddle River, New Jersey, USA 474,801 Rugby, UK 446,077 New York City, New York, USA 443,229435,799 London, UK 282,923 Newmarket, Ontario, Canada 278,912 Melbourne, Victoria, Australia 197,255 Boston, Massachusetts, USA 234,745 Austin, Texas, USA 226,076 Boston, Massachusetts, USA225,299WarehouseScoresby,Melbourne, Victoria, Australia 197,255251,732 Glenview, Illinois, USA 187,500 Bedfordshire, UK 186,570 Cape Town, South Africa 160,387 Bloomington, Minnesota, USA 153,240 Uttar Pradesh, India 145,041 Manchester, UK 139,680 Boston, Massachusetts, USA 138,112 Harlow, UK 137,857 Chandler, Arizona, USA 135,460 Cedar Rapids, Iowa, USA 119,682 Centennial, Colorado, USA 117,554 New York City, New York, USA 117,478 San Antonio Zomeyucan,Naucalpan, Mexico 113,638 London, UK 112,000 Sao Paulo, Brazil 108,843 CenterCenter/Office Lawrence, Kansas, USA 105,000 ITEM 4A. UNRESOLVED STAFF COMMENTS 20102012 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the Exchange Act which remain unresolved.ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS £5,140m£4,817m in 20092011 to £5,663m£5,059m in 2010,2012, an increase of 10%5%. The year on year growth was not materially impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate in 2010 strengthened in comparison to sterling in 2009, whichcurrency movements. In 2012 currency movements had the effect of increasingreducing reported sales in 2010 by £128m£29m when compared to the equivalent figurefigures at constant 20092011 rates. When measured at constant 20092011 exchange rates, our sales grew 6%. The Education businesses all our businesses contributed tobenefited from the growth. The International Education business in particular, benefitedadditional contribution from acquisitions made in 20092011 and 2010.19increased(from continuing operations) decreased by 20%54% from £619m£1,118m in 20092011 to £743m£515m in 2010. The relative strength2012. Operating profit in 2011 included the £412m profit on sale of our 50% interest in FTSE International Limited (FTSE) which is absent in 2012. In addition in 2012 a £113m loss has been recognised on the closure of the US dollar contributed to this increasePearson in Practice business. Currency movements also adversely affected operating profit, and we estimate that operating profit would have been approximately £37m lower£7m higher if translated at constant 20092011 exchange rates. Again, when measured at constant rates, we saw contributions to the growth in operating profit from all our businesses as we benefited from the improved sales performance and cost efficiencies.20102012 of £670m compares£434m compared to a profit before taxation of £523m£1,047m in 2009.2011. The increasedecrease of £147m£613m includes the Pearson in Practice closure costs in 2012 and the FTSE sale gain recorded in 2011 but also reflects the improved operating performance and a reductionslight increase in net finance costs. Net finance costs reducedincreased from £96m£71m in 20092011 to £73m£81m in 2010.2012. The Group’s net interest payable decreased by £13mincreased from £55m in 2010 as we benefited from a fall2011 to £65m in average2012, reflecting an increase in floating market interest rates on our floating-rate US dollar debt and a decrease in our overall levelborrowings combined with the effect of higher average levels of net debt followingresulting from the receiptGroup’s acquisition activity during 2012. Also included in net finance costs are finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. In 2012 the total of these items was a loss of £29m compared to a loss of £19m in 2011. The majority of the loss in 2012 relates to movements in the valuation of put options associated with acquisitions. In 2011 the loss relates mainly to foreign exchange differences on a proportion of the unhedged US dollar proceeds from the Interactive Data sale in 2010.Data. Exchange losses of £7m in 2009 compare to a net exchange gain of £9m in 2010. The gain in 2010 mainly relates to exchange on new US borrowing raised in the year. In 2009, the charge mainly related to losses on cross currency swaps. The finance charge relating to post-retirement plans of £12m in 2010 was the same as that in 2009.On 29 July 2010, Pearson’s 61% share in Interactive Data Corporation was sold to Silver Lake Technology Management LLC (Silver Lake) and Warburg Pincus LLC (Warburg Pincus) for $2bn. The results of Interactive Data have been included as discontinued operations for the period to 29 July 2010 and in prior periods.2010. Included in discontinued operations in 2010 is the gain on sale of Interactive Data of £1,037m and the attributable tax charge of £306m. On February 22, 2008 the Group completed the sale of its Data Management business and this business has been included in discontinued operations for the period to February 22 in 2008, and in prior periods.operations increasedoperating activities decreased to £1,169m£916m in 20102012 from £1,012m£1,093m in 2009.2011. The improvedprincipal reasons for the reduced cash generationflow were a reduction in 2010 was due to strongthe level of cash collections, particularlycollection at the end of the year together with continuing investment in our education businessespre-publication and was helped by our transition to a more digitaltechnology and service based business. This transition is also helping to reduce our working capital and on an adverse impact from currency fluctuation. Our average basis, the ratio of working capital to sales ratio improved from 25.1%by a further 0.4 percentage points to 20.1%, also13.8% reflecting tight working capital managementthe benefits of our shift to more digital and the favourable working capital profile of 2009 and 2010 acquisitions.service-orientated businesses. Average working capital comprises the average of the monthly carrying values over the relevant 12 month period for inventory, pre-publication costs, debtors and creditors. Net interest paid at £68m£66m in 20102012 was £19m below£6m more than the previous year, as areflecting the overall increase in net interest. Tax paid in 2012 was £65m compared to £151m in 2011. The reduction in 2012 tax paid is largely the result of the fall in overall net interest and to the timingpermitted deferral of interestUS tax payments on the bond portfolio. Tax paid excluding the amounts paid on the Interactive Data disposal in 2010 decreased to £85m compared to £103m in 2009 as Interactive Data itself had been a significant tax payer.into 2013 following Hurricane Sandy. Net capital expenditure on property, plant and equipment after proceeds from sales increased to £76m£77m in 20102012 from £61m£58m in 2009.2011. The net cash outflow in respect of businesses and investments acquired increased from £208mwas £765m in 2009 to £535m2012 and £800m in 20102011 whilst the Interactive Data sale of FTSE generated £428m in 2010 raised proceeds of £734m net of tax paid. There were no disposals in 2009.2011. Dividends from joint ventures and associates were broadly flat year on year at £23mdecreased from £30m in 2010 against £22m2011 to £27m in 2009.2012 partly as a result of the FTSE disposal. Dividends paid of £293m£348m in 20092012 (including £20m£2m paid to non-controlling interests) compares to £298m£319m in 20102011 (including £6m£1m paid to non-controlling interests). Overall net borrowings decreasedincreased by £662m£419m from £1,092m£499m at the end of 20092011 to £430m£918m at the end of 2010 largely due2012. In 2012 the cash we invested in new acquisitions together with tax and dividend payments was enough to offset cash generated from operating activities.proceedsshift in our business model from print sales to digital subscriptions; changing consumer behaviour and a dynamic competitive landscape. In general, we expect market conditions to remain favourable for our businesses in developing economies and in education software and services.Interactive Data sale and the strong cash collections.OutlookOver the past five years Pearson has producedcompany to take advantage of significant growth opportunities, we will expense approximately £150m of re-structuring costs in earnings and cash flow. We sustained our growth even2013 (the restructuring cost will be approximately £100m net of cost savings achieved in the faceyear). This investment has two objectives: to accelerate our transition from print to digital business models and from developed to developing economies; and to separate Penguin activities from Pearson central services and operations, and to reduce fixed cost infrastructure in Pearson, in preparation for the Penguin Random House merger.very tough economic and market conditionsannual cost savings from 2014. In 2014, we intend to reinvest the cost savings in recent years. We are planning for somethe organic development of our fast-growing digital, services and emerging markets businesses and further restructuring, including the Penguin Random House integration. We expect these businesses to remain weak in 2011, particularly those thatcontribute to faster organic growth, improving margins and improved cash flow and capital intensity from 2015. The precise phasing of restructuring costs and benefits will depend on government spendingtiming of completion of the Penguin Random House combination, which remains subject to regulatory approval and traditional print publishing business models. In addition,which we face tough comparatives (especiallyexpect to complete in the firstsecond half of the year) after our particularly strong competitive and financial performance in 2010.Even so, we have built a series of competitive advantages which should help us deliver another good year in 2011. These advantages include our sustained investment, digital leadership, educational effectiveness, positions in fast-growing economies and operating efficiency.education,Education we expect to achieve continuedmodest revenue growth in 2011.2013 with margins similar to 2012. In North America, we seeanticipate modest growth with challenging cyclical and structural market conditions in publishinghigherdigital and services. We expect our International education (despite slower enrolment rates)business to show good growth. Austerity measures will continue to affect education spending in much of the developed world and assessment more than offsettingwe expect a slower year for UK examinations and qualifications. However, we see significant opportunity in emerging markets in Asia, Latin America, the school publishing industry (the resultMiddle East and Sub-Saharan Africa — which together accounted for 45% of our International education revenues in 2012. Our Professional education business will reflect the lower new adoption opportunityclosure of our UK professional training business and pressure on state budgets). Our International Education businesscontinued growth from our professional certification business.rapidly-growing positionhigh subscription renewal rates, with market activity likely to boost its core product offerings.services, technology2012, subject to regulatory approval, we expect Penguin’s combination with Random House to be completed in the second half of 2013. We believe that the combined organisation will have a stronger platform and developing economies, enabling itgreater resources to grow again despite the weak public spendinginvest in rich content, new digital publishing models and high-growth emerging markets. The organisation will generate synergies from shared resources such as warehousing, distribution, printing and central functions. We expect market conditions to remain similar to 2012 with a tough environment in some markets.20FT GroupAt the FT Group, we are rapidly shifting our business model towards digital and subscription revenues. Advertising revenues remain unpredictable, but we see healthy demand for the FT’s premium content, especially in digital formats, and a recovery in business conditions for Mergermarket.The Penguin GroupPenguin will face another year of fast-changing industry conditions, driven by the rapid growth of both digital sales channels and digital books, and by the resulting pressures on physical bookstores. After a particularly strong competitive performance and financial results in 2010, we expect Penguin to perform in line with the overall consumer publishing industry this year, while we continue to adapt the business to these industry changes. Year Ended December 31 2010 2009 2008 £m £m £m Education: North American 2,640 2,470 2,002 International 1,234 1,035 866 Professional 333 275 244 FT Group 403 358 390 Penguin 1,053 1,002 903 Total 5,663 5,140 4,405 Year Ended December 31 2012 2011 2010 £m £m £m 2,658 2,584 2,640 1,568 1,424 1,234 390 382 333 443 427 403 5,059 4,817 4,610 1,053 1,045 1,349 6,112 5,862 5,959 Year Ended December 31 2010 2009 2008 £m £m £m European countries 1,205 1,081 1,092 North America 3,589 3,344 2,761 Asia Pacific 577 497 403 Other countries 292 218 149 Total 5,663 5,140 4,405 Year Ended December 31 2012 2011 2010 £m £m £m 1,096 1,107 977 2,945 2,857 2,912 647 514 450 371 339 271 5,059 4,817 4,610 238 229 307 659 665 875 139 132 145 17 19 22 1,053 1,045 1,349 6,112 5,862 5,959 2010, £1:$1.57 in 2009 and £1:$1.85 in 2008.2010. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2010,2012, Pearson generated 59%55% of its continuing sales in the US (2009: 61%(2011: 56%; 2008: 59%2010: 60%). In 20102012 we estimate that a five cent change in the average exchange rate between the US dollar and sterling would have had an impact on our reported earnings per share of 1.3p1.4p and a five cent change in the closing exchange rate between the US dollar and sterling would have had an impact on shareholders’ funds of approximately £115m.£143m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for more information. The year-end US dollar rate for 20102012 was £1:$1.571.63 compared to £1:$1.611.55 for 2009.2011. The impact on shareholders funds was a loss of £238m in 2012 compared to a loss of £44m in 2011. In terms of the year end rate, the weakening of sterling in comparison to2011 the US dollar in 2010 was lessstrengthened only slightly, and other currency movements were relatively more significant, thancausing the strengthening of sterling compared tosmall loss. In 2012 the US dollar inhas weakened and was the previous year whenmost significant contributor to the relatively weak value of the US dollar had the effect of reducing shareholders’ funds. The net effect of movement in all currencies in 2010 was an increase in our shareholders’ funds of £173m. The year-end rate for the US dollar in 2009 was £1:$1.61 compared to £1:$1.44 for212008. The comparative weakness of the US dollar, contributed to an overall reduction in shareholders’ funds due to exchange movements of £388m in 2009.20102012 compared to year ended December 31, 20092011£523m,£242m, or 10%5%, to £5,663m£5,059m in 2010,2012, from £5,140m£4,817m in 2009.2011. The increase reflected growth, on a constant exchange rate basis at all of our businesses5% together with additional contributions from acquisitions made in both 20092011 and 2010.2012. The year on year growth waswasn’t significantly impacted by movements in exchange rates particularly in the US dollar. 2010and 2012 sales, translated at 20092011 average exchange rates, would have been £5,535m.£427m£226m or 11%5% from £3,780m£4,390m to £4,207m.£4,616m. The North American,America, International and Professional businesses all contributed to the increase although the International Education business wasand were helped by acquisitions made in 20092011 and 2010 and the Professional business benefited from the acquisition of Melorio in 2010. A high proportion of the increase was also due to exchange.2012. We estimate that after excluding acquisitions and the negative impact of exchange, Pearson Education saw sales growth of 5% at constant last year exchange rates. The North American business saw strong growthwas flat in Higher Education which again out-performed the market which grew at 7.3% in 2010, according2012 compared to the Association of American Publishers after benefiting from healthy enrolment growth and good demand for instructional materials. The North American publishing business also gained share in the US school curriculum market as this market returned to growth, benefiting from the stronger new adoption opportunity and in spite of the fact that state budgets remained under pressure. The US school publishing market grew 3.2% according to the Association of American Publishers. Revenues at the US Assessment and Information division were broadly level against 2009. State funding issues produced tough market conditions for our state assessment and teacher licensure testing businesses. This was offset by good growth in clinical and diagnostic assessments. International Education sales also benefited from exchange and a contribution from the acquisitions of Sistema Educacional Brasileiro and Wall Street Institute in 2010 and a full year contribution from the 2009 acquisitions of Wall Street English and Fronter and the increased shareholdings in Longman Nigeria and Maskew Miller Longman. After excluding the effect of acquisitions we estimate that there was growth of 6% at constant last year exchange rates in the International Education business. Professional sales increased in 2010 by 21% although much of this increase was due to the contribution from Melorio, the UK vocational training business acquired in June 2010. In terms of constant last year exchange rates and after taking out the acquisition of Melorio there was still good growth in professional testing and modest growth in the professional publishing business.FT Group sales were 13% ahead of last year driven by strong growth at theFinancial Timeswith growth in digital readership and subscriptions, helped by good advertising growth in 2010. Mergermarket continued to benefit from an improvement in market conditions and its flexibility in adapting to new client investment strategies which supported a recovery in renewal rates and growth in new business revenues. An increase in global merger and acquisition activity benefited Mergermarket and dealReporter and continued volatility in debt markets helped sustain the strong performance of DebtWire.Penguin’s sales were up 5% in 2010 and it gained share in its three largest markets, the US, UK and Australia. Growth was also due to the very strong growth in ebooks which now account for 6% of Penguin revenues worldwide.2274%91% of our continuing business sales in 20102012 and 2009.91% in 2011. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 63%58% in 20102012 and 65%59% in 2009. Year Ended December 31 2010 2009 £m £m Cost of goods sold 2,588 2,382 Distribution costs 298 275 Administration and other expenses 2,190 2,014 Other operating income (115 ) (120 ) Total 2,373 2,169 Year Ended December 31 2012 2011 £m £m 2,224 2,072 177 190 2,111 1,999 (72 ) (117 ) 2,216 2,072 £206m,£152m, or 9%7%, to £2,588m£2,224m in 2010,2012, from £2,382m£2,072m in 2009.2011. The increase corresponds to the increase in sales, with cost of sales at 45.7%44.0% of sales in 2010 compared2012 compares to 46.3%43.0% in 2009.packingpacking. A reduction in costs in 2012 reflects the change in product mix with digital and remain a fairly constant percentage of sales.£176m,£112m, or 9%6%, to £2,190m£2,111m in 2010,2012, from £2,014m£1,999m in 2009.2011. As a percentage of sales they remained consistent at 39%approximately 42% in 20102012 and 2009.slightly to £115m£72m in 20102012 compared to £120m£117m in 2009.increaseddecreased from £30m£33m in 20092011 to £41m£9m in 2010. The 2010 result included2012. Included in the 2011 figure were the results of the FTSE up to its disposal, which are not in the 2012 figures. In addition in 2012 there is a one off profitwrite down of £10m of goodwill relating to a stepped acquisition at FTSE of £12m. The majority of the remainder of the profit comes from our 50% interestjoint venture in the Economist.increaseddecreased by £124m,£603m, or 20%54%, to £743m£515m in 20102012 from £619m£1,118m in 2009. 20102011. 2011 operating profit, translated at 2009 average exchange rates, would have been £37m lower.increaseddecreased by £71m,£165m, or 14%26%, to £576m£474m in 2010,2012, from £505m£639m in 2009.2011. The increasedecrease was largely attributable to a strong performancethe £113m closure charge, together with intangible impairments and the weakness in trading of Pearson in Practice over the US Higher Education business and in the International businesses and due to the positive impact of exchange and a contribution from acquisitions.year. Operating profit attributable to the FT Group increasedafter taking out the profit on sale of FTSE decreased by £31m,£26m, or 100%39%, to £62m£41m in 2010,2012, from £31m£67m in 2009. The increase reflects2011. In 2011 the improved profitabilityshare of profit from digital businesses and the pick up in advertisingFTSE investment together with the one off profit recorded byroyalties received from FTSE referred to above. Operating profit attributable to Penguin increased by £22m, or 27%, to £105m in 2010, from £83m in 2009. This increase was due to the improved sales performanceincluded within FT Group’s operating profits, and improved margins partly due to charges relating to the reorganisation of the business in the UK in 2009.decreasedincreased from £96m£71m in 20092011 to £73m£81m in 2010.2012. Net interest payable increased from £55m in 2010 was £73m, down from £86m2011 to £65m in 2009. The Group’s net interest payable decreased by £13m2012, reflecting an increase in 2010, mainly due to a reduction in averagefloating market interest rates on our floating US dollar debt andborrowings combined with the effect of lowerhigher average levels of net debt following the receipt of proceedsresulting from the saleGroup’s acquisition activity during 2012. Although our fixed rate policy reduces the impact of Interactive Data. Year on year,changes in market interest rates, we were still able to benefit from low average US dollar and sterling interest rates during the year. Year-on-year, average three month LIBOR (weighted for the23fellrose by 0.3%0.2% to 0.4%0.5%. This reductionincrease in floating market interest rates drovecombined with an increase in the Group’s loweraverage net debt helped drive the Group’s higher interest charge. However the low ratesThese factors combined with a decrease in interest income on deposited funds coupled with the impact on the calculation of significantly lower net debt,deposits created an increase in the Group’s average net interest payable from 6.5% to 7.0%. Overall net borrowings increased by £419m from £499m at the end of 5.3%2011 to 7.9%.£918m at the end of 2012. In 2012 we invested £759m in new acquisitions and that together with tax and dividend payments was enough to offset cash generated from operating activities.Group’s average net debt fell by £681m, reflectingmajority of the impactloss in 2012 relates to movements in the valuation of put options associated with acquisitions. In 2011 the loss relates mainly to foreign exchange differences on a proportion of the unhedged US dollar proceeds from the Interactive Data disposal. Finance charges relating to post-retirement plans were £12msale in both 2010 and 2009.Other net finance costs relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £7m in 2009 compared to a gain of £9 in 2010. In 2009 the loss mainly relates to losses on cross currency swaps and in 2010 the gain relates to exchange on new US dollar borrowing raised in the year. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.20102012 of £146m£148m represents 22%34% of pre-tax profits compared to a charge of £146m£162m or 28%16% of pre-tax profits in 2009.2011. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK corporation tax rate (which had an effective statutory rate of 28%24.5% in 20102012 and 26.5% in 2009)2011). HigherThe increase in the tax rates were partly offset byrate in 2012 is largely due to the recognitionlack of tax losses and creditsrelief on the loss on closure of Pearson in the year including pre-acquisition and capital losses that were utilised in connectionPractice together with the Interactive Data sale. Theeffect of a low tax charge relating to that sale in July 2010 is included in2011 on the profitgain on discontinued businesses.The non-controlling interest in the income statement comprises mainly the publicly-held share of Interactive Data for the period to disposal in July 2010. There also non-controlling interests in the Group’s businesses in South Africa, Nigeria, China and India although none of these are material to the Group numbers. The non-controlling interest in the Group’s newly acquired Brazilian business, Sistema Educacional Brasileiro, is expected to beSEB, was bought out in the first half of 2011.On 29 July 2010, Pearson’s 61% shareInteractive Data Corporation was sold to Silver Lake2013 and, Warburg Pincusat that point, Pearson will no longer control the Penguin Group of companies but will hold a 47% equity interest in the combined Penguin Random House, which will be accounted for $2bn.under the equity method. The impending loss of control results of Interactive Datain the Penguin business being classified as held for sale on the Pearson balance sheet at December 31, 2012 and the results for all years through 2012 have been included as discontinued operations up to the date of sale on 29 July 2010. Included in discontinued operations in 2010 is Interactive Data’s results for the seven months to the date of sale, the gain on sale of £1,037m and the attributable tax charge of £306m. The total profit from discontinued operations, after taking account of the above items, was £776m in 2010 compared to £85m in 2009.20102012 was £1,300m£329m compared to a profit in 20092011 of £462m.£956m. The overall increase2011 profit included the contribution from the FTSE disposal of £838m was mainly due£412m, and 2012 included costs relating to the gain on salebusiness closures of Interactive Data but also due to the improved operating performance and decrease in net finance costs.161.9p40.5p in 20102012 compared to 53.2p119.6p in 20092011 based on a weighted average number of shares in issue of 801.2m804.3m in 20102012 and 799.3m800.2m in 2009.2011. The increasedecrease in earnings per share was due to the increasedecrease in profit for 20102012 described above and was not significantly affected by the movement in the weighted average number of shares.161.5p40.5p in 20102012 and 53.1p119.3p in 20092011 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.strengtheningweakening of thenon- US dollar and other currenciescurrency against sterling on an average basis had a positivean adverse impact on reported sales and profits in 20102012 compared to 2009. 20102011. 2012 sales, translated at 20092011 average exchange rates, would have been lowerhigher by £128m£29m and operating profit, translated at 20092011 average exchange rates, would have24lowerhigher by £37m.£7m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our management of exchange rate risks.intangibles and acquisition costs.intangibles. The amortization of acquired intangibles is the amortization ofintangible charges relate to intangible assets acquired through business combinations and acquisition costs are the direct costs of acquiring those businesses. Neither of these charges are considered to be fully reflective of the underlying performance of the Group. Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are also excluded from adjusted operating profit as they distort the performance of the Group. Year Ended December 31, 2010 North American International FT Interactive Education Education Professional Group Data Penguin Total Sales 2,640 1,234 333 403 — 1,053 5,663 47% 22% 6% 7% — 18% 100% Total operating profit 415 119 42 62 — 105 743 56% 16% 6% 8% — 14% 100% Add back: Other net gains and losses — 10 — (12) — — (2) Acquisition costs 1 7 2 1 — — 11 Amortization of acquired intangibles 53 35 7 9 — 1 105 Adjusted operating profit: continuing operations 469 171 51 60 — 106 857 Adjusted operating profit: discontinued operations — — — — 81 — 81 Total adjusted operating profit 469 171 51 60 81 106 938 50% 18% 5% 6% 9% 12% 100% 25 Year Ended December 31, 2012 North American
Education International
Education Professional FT
Group Continuing Discontinued Total 2,658 1,568 390 443 5,059 1,053 6,112 53 % 31 % 7 % 9 % 100 % 463 135 (124 ) 41 515 62 577 90 % 26 % (24 )% 8 % 100 % — — 123 — 123 32 155 7 8 1 4 20 1 21 66 73 37 4 180 3 183 536 216 37 49 838 — 838 — — — — — 98 98 536 216 37 49 838 98 936 57 % 23 % 4 % 5 % 89 % 11 % 100 % Year Ended December 31, 2011 North American
Education International
Education Professional FT
Group Continuing Discontinued Total 2,584 1,424 382 427 4,817 1,045 5,862 53 % 30 % 8 % 9 % 100 % 463 121 55 479 1,118 108 1,226 41 % 11 % 5 % 43 % 100 % (29 ) 6 — (412 ) (435 ) — (435 ) 2 9 — 1 12 — 12 57 60 11 8 136 3 139 493 196 66 76 831 — 831 — — — — — 111 111 493 196 66 76 831 111 942 52 % 21 % 7 % 8 % 88 % 12 % 100 % Year Ended December 31, 2009 North American International FT Interactive Education Education Professional Group Data Penguin Total Sales 2,470 1,035 275 358 — 1,002 5,140 48% 20% 6% 7% — 19% 100% Total operating profit 354 109 42 31 — 83 619 57% 18% 7% 5% — 13% 100% Add back: Amortization of acquired intangibles 49 32 1 8 — 1 91 Adjusted operating profit: continuing operations 403 141 43 39 — 84 710 Adjusted operating profit: discontinued operations — — — — 148 — 148 Total adjusted operating profit 403 141 43 39 148 84 858 47% 16% 5% 5% 17% 10% 100% increasedgrew by £170m,£74m, or 7%3%, to £2,640m£2,658m in 2010,2012, from £2,470m£2,584m in 20092011 and adjusted operating profit increased by £66m,£43m, or 16%9%, to £469m£536m in 20102012 from £403m£493m in 2009.2011. The results were affected by the relative strength of the USaverage dollar rate strengthened slightly from 2011 to 2012 which we estimate increased sales by £53m£19m and adjusted operating profit by £10m£5m when compared to the equivalent figures at constant 20092011 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying decline in sales of 4% and increase in profits of 3%.4%7% and an increase in profits of 12%11%. Growthdriven byresilient during the US Higher Education business.The US School publishing market grew 3.2%year despite significant regulatory and policy changes across vocational and general qualifications, apprenticeships and higher education. In the rest of the world, a recovery in 2010, according toJapan following the Association of American Publishers. State budgets continue to be under pressure but the industry returned to growth, benefiting from the stronger new adoption opportunity this year (total opportunity of $800m in 2010 against $500m in 2009). The US School curriculum business gained share with2011 tsunami and a strong competitive performance from enVisionMATH, our digital math curriculum. Successnet, our online learning platformin Italy more than offset weak market conditions in Spain.teachers and students which supports Pearson’s digital instruction, assessment and remediation programs, grew strongly, achieving almost 6 million registrations in 2010, up 33% on 2009, withprofessionals, opened a net of 11 new centres around the world, bringing the total number of assessments taken through the system rising 53%to 460. Student numbers fell by 2% to more than 8m.191,000, primarily due to the closure of a large franchise centre in Chile with approximately 7,000 students. MyEnglishLabs enrolments grew 60% to 263,000 supported by the launch of our next generation platform which supports 12 languages and 43 new courses. We continue to develop digital programs, platforms and mobile apps to boost achievement and to increase access and affordability. We successfully launched three major new school programs: digits(http://bit.ly/i9NcId), our digital middle school math program, which provides services for teachers including embedded assessment, differentiation of students and automation of administrative tasks; Writing Coach(http://www.phwritingcoach.com/)acquired Global English during the year which is a blended print and online program that helps middle and high school students in writing and grammar with personalized assignments and grading; and Online Learning Exchange (www.onlinelearningexchange.com) which is an open education resource that allows teachers to create personalized digitalleading provider of cloud-based, on-demand Business English learning, programs using standards-based Pearson content as well as teacher-generated material. Poptropica (www.poptropica.com) is the largest virtual world for young children in the US with average monthly unique visitors growing by 40% to 8.1m from more than 100 countries and speaking more than 70 languages. Poptropica launched seven new islands and was the fifth most searched-for video game on Google.com in 2010. In September 2010 we acquired America’s Choice to boost Pearson’s services in school reform, a major focus of the US education department. America’s Choice brings together instruction, assessment, leadership development, professional development, coaching and ongoing consulting services.Revenues at our US Assessment & Information division were broadly level against 2009. State funding pressures produced tough market conditions for our state assessment and teacher licensure testing businesses. This was offset by good growth in clinical and diagnostic assessments. We saw good profit growth at Assessment and Information as we benefited from a shift to premium products and further efficiencies generated from the integration of the Harcourt Assessment business. We renewed two important contracts, extending our long-standing relationships with the College Board to administer the SATs and with the Texas Education Agency to26administer state-wide student assessments. We continue to achieve strong growth in secure online testing, delivering 13.3 million secure online tests in 2010, up 41% over 2009. Our market leading student information systems business in the US continued to achieve rapid organic growth further boosted by the acquisition of Administrative Assistants Limited in 2010. We nowperformance support almost 16 million US students, an increase of 49% over 2009. We achieved strong growth with AIMSWEB, our progress monitoring service which enables early intervention and remediation for struggling students. AIMSWEB now supports almost foursoftware. More than 1.1 million students an increase of more than 20%.The US Higher Education publishing market grew 7.3% in 2010, according to the Association of American Publishers with the industry benefiting from healthy enrolment growth and good demandregistered for instructional materials. Pearson gained share from its lead in technology and customisation. Our US Higher Education business has now grown faster than its industry for 12 consecutive years. The pioneering ‘MyLab’ digital learning, homework and assessment programs again grew strongly with student registrations up 32% to more than 7.3m in North America. We launched LearningStudio which provides a broad suite of learning management technologies including eCollege and Fronter. LearningStudio increased fully online enrolments by 54% to 8.3m in North America. Renewal rates remained high at approximately 90% by value.Overall adjusted operating margins in the North American Education business were higher at 17.8% in 2010 compared to 16.3% in 2009 with the majority of the increase attributable to cost efficiencies and the relative success of higher margin digital products.International EducationInternational Education sales increased by £199m, or 19%, to £1,234m in 2010, from £1,035m in 2009 and adjusted operating profit increased by £30m, or 21%, to £171m in 2010 from £141m in 2009. The sales results benefit from exchange gains and a full year contribution from acquisitions made in 2009.The International Education business is active in more than 70 countries. More than 670,000 students outside America used our MyLab digital learning, homework and assessment programs,programmes, an increase of more than 40%. They included 150,000 users of our onlineEnglish-language products MyEnglishLabs18%, with good growth in school, ELT and MyNorthStarLab, a 170% increase. Our eCollege learning management system won new contractsinstitutional selling in Malaysia and Colombia. Our Fronter learning management system continued to grow strongly with unique registration rising more than 20% to 1.1 million students in more than 8,700 schools, colleges and universities around the world. Pearson Learning Solutions, which combines products and services from across Pearson to deliver a systematic approach to improving student performance, won new contracts in South Africa, Malta, Vietnam and the UK. During the year, the International Education business acquired Wall Street Institute (WSI), which provides premium spoken English training for adults, for $101m in cash. WSI has about 340 franchised learning centers in 25 territories in Asia, Europe, the Middle East and Africa. The acquisition reunites Wall Street Institute with Wall Street English, the Chinese arm of the company acquired by Pearson in 2009.BTEC, our flagship vocational qualification, attractedwe market more than 1.46.3 million student registrations, up 28% on 2009. Registrations for our NVQ work-based learning qualification grew 45% toGCSE, A/AS level and other examinations with 90% using onscreen technology and more than 165,000, and we introduced the BTEC Apprenticeship to serve the work-based learning market. We marked more than 5.43.8 million A/AS Level and GCSE and Diplomatest scripts in the2009-2010 academic year, with 90% now marked onscreen. Pearson marked and delivered 3.4for over half a million tests in six weeks for thepupils taking National Curriculum Tests at Key Stage 2.Two in 2012. We establishedlaunched our Next Generation BTECs which are now the leading vocational qualification on the new funding and accountability frameworks in schools. Our Vocational qualifications business grew well with the continued popularity of BTEC amongst employers and universities and a strong performance in work-based learning (with registrations now up to 170,000) further boosted by a good performance from EDI, our provider of education and training qualifications and assessment services.school improvement businessuniversity enabling Mexicans to enroll in online degree courses in management, IT, marketing, engineering and computer science. UTEL enrolled 2,500 undergraduate students and 4,000 learners in shorter corporate training or continuing professional education courses. UTEL’s services arm, Scala, signed its first contract to provide online learning services to an existing higher education institution.which will worktraining business Pearson in Practice had a significant negative impact on the 2012 performance, while other parts of the professional division performed well.schoolsour UK adult training business Pearson in Practice, facing a dramatic fall in demand as a result of changes to help them train teachers, improve strategic planningthe apprenticeships programme. Pearson believes that this business no longer has a sustainable model and structure teaching methods.Italy, adoptionSaudi Arabia, we extended the contract to operate the Saudi Petroleum Services Institute for five years and won a five-year contract to run a new Institute at Al Khafji. In Oman, a TQ-led consortium won the bid to provide training to BP, including a wide range of our Linx digital secondary science program increased three-fold, helping Pearsontechnical and English language training for BP workers as they prepare to grow stronglyopen up the Khazzan oilfield for full scale production in 2016.become joint market leader for combined lower and upper secondary education. Linx is built around content from our North American science programs customized for the Italian market. We began to develop a broader range and depth ofother digital products and services including teacher training,continued to personalize learning and increase educational effectiveness. In the Netherlands, we launched iPockets, the first fully digital Early English course for 4-8 year-olds in Primary Education. The course is 100% digital and subscription based and customized for the Dutch market.In South Africa’s Western Cape province, we won a three-year contract to prepare, administer and report all Grade 9 student assessments. The tests focus on both individual student results and the systemic performance of27schools and districts. Pearson won new national contracts in Ethiopia, to supply 2.9 million Biology, Physics and English learning materials for Senior Secondary Grades 9 to 12. In Zimbabwe, we were awarded a contract by UNICEF to deliver 13.5 million textbooks to children in Grades 1 to 7 in Mathematics, Environmental Science, English, Shona and Ndebele.We generated strong growthoutpace ongoing challenges in the Gulf region in higher education with integrated technology products in Business & Economics and Science. Student enrolments at our Wall Street English schools in China increased by 27% and we announced plans to open 50 new English language centers in China over the next three to five years, adding to the 66 centers and schools already operating under the Wall Street English and Longman English brandsPearson announced a strategic partnership with Sistema Educacional Brasileiro (SEB) in Brazil to provide services to its educational institutions and to acquire its school learning systems (“sistema”) business for $517m. A sistema is an integrated learning system incorporating curriculum design, teacher support and training, print and digital content, technology platforms, assessment and other services. SEB’s sistemas serve more than 450,000 students across both private and public schools. Our School Curriculum business grew strongly, particularly in Mexico, Colombia, Chile and Peru, as we continued to build our locally developed materials as well as Spanish language adaptations of US school programmes. There was strong growth of English Language Teaching materials across Latin America underpinned by performance in Brazil, Colombia, Argentina, Chile, Dominican Republic and Peru.International Education adjusted operating margins improved slightly from 13.6% in 2009 to 13.9% in 2010.Professionalsales increased by £58m, or 21%, to £333m in 2010 from £275m in 2009. Adjusted operating profit increased by £8m or 19% to £51m in 2010, from £43m in 2009. Sales growth in the assessment and training businesses was strong and benefited from the acquisition of Melorio in June 2010.In professional testing we continued to see good revenue and profit growth with test volumes at Pearson VUE which administered more thanup 7% on 2011 to almost 8 million with Certiport adding an additional 2.3 million tests, in 2010, up 3%13% on 2009. Average revenues per test are increasing as we develop a broader range2011. There were key renewals of servicesthe National Council of State Boards of Nursing contract running until 2019 and enhance our systems and assessments to meet our customer’s needs.the Computing Technology Industry Association contract was secured with Pearson VUE renewed a number of major contracts includingas the Driving Standards Agency (DSA) of Great Britain and the Driver & Vehicle Agency (DVA) of Northern Ireland; Cisco; and Colorado Department of Regulatory Agencies.single vendor running through to 2017. We also won a number of new contracts including a 10 year contract to deliver computer-basedadminister all computer and paper based tests infor the US, UK, UAE,Australia CPA Professional exams and five year contracts with the National Center for Assessment in Saudi Arabia Egypt and Bahrain, covering the real estate, accountancy, legal, healthcare, skills and finance sectors.In professional training, we acquired Melorio plc, oneNational Council of State Boards of Nursing to provide the UK’s leading vocational training groups,NCLEX-RN in Canada beginning in 2015 for £98m, supporting our vocational education strategy by combining Melorio’s training delivery skillsten Canadian registered nurse regulatory bodies. The partnership with our existing complementary strengthsthe American Council on Education to develop an online General Educational Development (GED) test aligned with new Common Core standards has now launched computer based testing in educational publishing, technology and assessments. Melorio traded well in the second half of the year securing a number of large key contracts for training delivery, and successfully graduating and placing the largest IT graduate cohort in the history of the business. Our investment in systems, streamlining the course offering and training centres and back office integration are all on track.Our Professional publishing business was level in 2010 with steady margins as strong growth in digital products and services offset continued challenging trading conditions in the retail market and a planned reduction in the number of print titles published. We launched online learning products with customisable content, assessment and personalised study paths and also delivered 450 hours of technical training through online subscriptions for the IT certification market. We developed applications for social networks and mobile devices to extend the reach and accessibility of our content and videos available within our Safari Books Online platform.slightlysignificantly lower at 15.3%9.5% in 20102012 compared to 15.6%17.3% in 20092011 as margins were impacted byfell due to the acquisition of Melorio.£45m£16m or 13%4%, from £358m£427m in 20092011 to £403m£443m in 2010.2012. Adjusted operating profit increaseddecreased by £21m,£27m, from £39m£76m in 20092011 to £60m£49m in 2010. The sales2012. Included in the 2011 figure is the share of profit from the investment in FTSE together with royalties received from FTSE prior to the date of sale. Together these totaled £20m and profit increase is mainly fromwere included in adjusted operating profit.Financial Timeswhich saw increased demand FT Group, digital and service revenues accounted for digital products50% of revenues, compared with 31% in 2008. Content comprised 61% of revenues and a pick up inadvertising accounted for 39%; these compare to 48% for content and 52% advertising in the year. The Economist and other joint ventures and associates also contributed to the profit growth.28saw strong and accelerating growth in (FT) digital readership continues to grow strongly with digital subscriptions up over 50%increasing 18% to 207,000,almost 316,000 and with 3.5 million FT Web App users. The FT’s total paid circulation was more than 1,000602,000 across print and online, modestly up on 2011, with digital subscriptions exceeding print circulation for the first time. Mobile devices now account for 30% of FT.com traffic and 15% of new subscriptions. The FT now has almost 2,800 direct corporate customerslicenses, up 40% on 2011. We continued to invest in new products and registered users up 79%innovation, including launching a Windows 8 app and the FT Web App on Chrome for Android; a bespoke web app for Latin America; a re-brand of the conferences division, FT Live, with the introduction of live streaming at key events; and the launch of GatekeeperIQ, a new subscription service to more than 3 million. It generated over 900,000 downloads oftrack large, retail investment platforms.apps ongrew market share with mobile, phonesluxury and tablet devices and won a prestigious Apple Design Award for its iPad app. The FT’s combined paid print and digital circulation reached 597,000 in the fourth quarter of 2010. After weak advertising markets in 2009, we sawbusiness education showing good advertising growth in 2010 although the visibility for advertisinggrowth. Digital revenues is poor. We extended the breadth and depth of FT’s premium subscription services throughbenefited from the launch of FT Tilt, focusedSmartMatch, which automatically puts client content such as articles, white papers and videos in front of FT.com users while they are reading related FT new stories.emerging markets;FT.com that allows students and faculties from around the launchworld to create and share annotations on FT articles, is now being used at many business schools. The new FTChinese MBA Gym App, which features tailored training courses categorized by topic, has ranked among the top paid-for education apps on the iTunes Store and was recognized as one of MandateWire US, extending the reach‘App Store Best of this successful European brand into new markets;2012’ by Apple in China.acquisitionnumber of Medley Global Advisors, a premier provider of macro policy intelligence.Mergermarket benefited from improving market conditionsindividual users growing 6% year on year to 220,000, and its flexibility in adapting to new client investment strategies, which supported stronger renewal rates and new business revenues. An increase in global merger and acquisition activity benefited Mergermarket and dealReporter; while continued volatility in debt markets helped sustain the strong performance of DebtWire. We saw strong growth in developing markets supported by new product launches, including Ignites Retirement Research which broadens Money-Media’s product offering into the investment industry research sector.first local language version of Mergermarketcoverage in China. faster growth markets such as Latin America, China and the Middle East, generating new business and extending our international reach.March 2010 we acquired Xtract research, which provides bond covenant data to allow investors to understand how covenants might impact on valuation.Thethe Economist Group, in which Pearson owns a 50% stake, increased global weekly circulation by 3.7% to 1.47 million (for the July-December 2010 ABC period) and total annual online visits increased to 118 million, up 21% on 2009. FTSE, our 50% owned joint venture with the London Stock Exchange, increased revenues by 20% and acquired the remaining 50% of FXI, FTSE’s joint venture with Xinhua Finance in China. Business Day and Financial Mail (BDFM), our 50% owned joint-venture in South Africa with Avusa, returned to profitability with revenue increasing by 5%. The business benefited from a recovery in advertising and the closure of non-profitable operations.Overall adjusted operating margins at FT Publishing increased from 10.9% in 2009 to 14.9% in 2010 as advertising revenue fell through to the bottom line.The Penguin GroupPenguin sales increased by £51m or 5%, to £1,053m in 2010 from £1,002m in 2009 and adjusted operating profit was up 26% to £106m in 2010 from £84m in 2009. Both sales and adjusted operating profit were affected by the stronger US dollar which we estimate increased sales by £32m and adjusted operating profit by £13m when compared to the equivalent figures at constant 2009 exchange rates. In 2010, Penguin benefited from a series of organisational changes in the UK made in 2009. These were designed to strengthen its publishing, reduce costs and accelerate the transition to digital production, sales channels and formats and to lower cost markets for design and production. Penguin’s 2009 results include approximately £9m of charges relating to these organisational changes.Penguin saw a strong and consistent publishing performance across imprints and territories producing market share gains in the US, UK and Australia, our three largest markets. Strong growth in developing markets was boosted by the launch of new imprints and the increasing breadth and depth of our local publishing programs in India, China and South Africa. There was continued investment in global publishing with the launch of Penguin’s Classics in Portuguese and Arabic, joining existing Mandarin and Korean editions, the launch in India of a new imprint in partnership with bestselling author Shobhaa De, and the continued international roll-out of our non-fiction imprint Allen Lane in Canada.eBook sales were up 182% on the previous year and now account for 6% of Penguin revenues worldwide. We accelerated our investment in digital products and innovation with new app releases in the children’s market including Spot, Peppa Pig, The Little Engine That Could, Ladybird’s Babytouch and the Mad Libs app, which was named one of the best apps at the 2010E-Book Summit. For adults, we launched the groundbreaking myFry app; published the amplified ebook of Ken Follett’s international bestselling novelThe Pillars of the Earth, featuring video, art and music from the original TV series; and we introduced ten DK Eyewitness Top Ten Travel Guides apps with more to follow in 2011. Penguin continued to invest to transform its internal publishing processes onto Pearson-wide digital platforms enabling faster product development and more efficient creation and re-use of content.29Penguin performed strongly in the US with a broad range of number one bestsellers from repeat authors such as Charlaine Harris, Nora Roberts, Tom Clancy, Ken Follett and Patricia Cornwell. Kathryn Stockett’sThe Helpstayed on theNew York Timesbestseller list for the whole of 2010 and has sold more than three million copies to date. Our outstanding performance in the UK, resulting in our market share rising two percentage points to 10%, was led by Jamie Oliver’s30 Minute Meals. It sold 1.2 million copies to become the UK’s biggest selling non-fiction title of the last decade. Major bestsellers included Stephen Fry’sThe Fry Chronicles, Kathryn Stockett’sThe Help, andThe History of the World in 100 Objects(published in partnership with the BBC and the British Museum), as well as thePercy JacksonandDiary of a Wimpy Kidseries. DK produced a very good year thanks in part to its top-performing franchise LEGO (Lego Star Wars Visual Dictionarywas on theNew York Timesbestseller list for the whole of 2010 with 18 weeks at number one). Other bestselling titles includedThe Masterchef Cookbook,Complete Human BodyandNatural History. DK continues to benefit from the organisation changes made in 2009 as well as the ongoing development of its publishing centre in India. Penguin Children’s had an excellent year in both the US, with Penguin Young Readers Group achieving a record 39New York Timesbestsellers, and in the UK, where we reclaimed our position as the number one children’s publisher with significant market share gains.Penguin adjusted operating margins improved in 2010 to 10.1% from 8.4% in 2009.Year ended December 31, 2009 compared to year ended December 31, 2008Consolidated results of operationsSalesOur total sales from continuing operations increased by 735m, or 17%, to £5,140m in 2009, from £4,405m in 2008. The increase reflected growth, on a constant exchange rate basis, at our North American Education and International Education businesses together with additional contributions from acquisitions made in both 2008 and 2009. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2009 sales, translated at 2008 average exchange rates, would have been £4,558m.Pearson Education increased sales by £668m or 21% from £3,112m to £3,780m. The North American business was the major contributor to the increase although a high proportion of that increase was due to exchange. We estimate that after excluding acquisitions, Pearson Education saw sales growth of 4% at constant last year exchange rates. The North American Education business grew ahead of the market in its US Curriculum and Higher Education businesses which together grew at 5% compared to the industry which remained flat according to the Association of American Publishers. There was also a strong performance in the US Assessment and Information division which benefited from the successful integration of the Harcourt Assessment business acquired at the start of 2008. In International Education sales also benefited from exchange and a contribution from the acquisitions of Wall Street English and Fronter (a European online learning company based in Oslo) and the increased shares of Longman Nigeria and Maskew Miller Longman (MML), our publishing businesses in West Africa and South Africa respectively, which were all acquired in 2009. After excluding the effect of acquisitions we estimate that there was growth of 4% at constant last year exchange rates in the International Education business. Professional sales increased in 2009 by 13% although all of this increase was due to exchange and in terms of constant last year exchange rates there was a small decline in sales of 1%. This decline was entirely due to weakness in the professional publishing market which has offset growth in the professional testing and certification businesses.FT Group sales were 8% behind last year or 12% after excluding the effect of exchange rates with adverse variances at theFinancial Times. FT Group’s sales decline mainly reflects tough market conditions for financial and corporate advertising. The impact of advertising revenue declines was partially mitigated by growth in content revenues, the resilience of our subscription businesses and an increase in paying online subscribers at FT.com.Penguin’s sales were up 11% in 2009 but this represents a 2% decline at constant last year exchange rates and before the effect of portfolio changes. Much of the underlying decline was due to a fall in sales of illustrated reference books which offset good performances in other categories.Pearson Education, our largest business sector, accounted for 74% of our continuing business sales in 2009 compared to 71% in 2008. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 65% in 2009 and 63% in 2008.30Cost of goods sold and operating expensesThe following table summarizes our cost of sales and net operating expenses: Year Ended December 31 2009 2008 £m £m Cost of goods sold 2,382 2,046 Distribution costs 275 235 Administration and other expenses 2,014 1,687 Other operating income (120 ) (102 ) Total 2,169 1,820 Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs, royalty charges and the cost of service provision in our assessment and testing businesses. Our cost of sales increased by £336m, or 16%, to £2,382m in 2009, from £2,046m in 2008. The increase corresponds to the increase in sales with cost of sales at 46.3% of sales in 2009 compared to 46.4% in 2008.Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing and remain a fairly constant percentage of sales.Administration and other expenses. Our administration and other expenses increased by £327m, or 19%, to £2,014m in 2009, from £1,687m in 2008. As a percentage of sales they remained consistent at 38% in 2008 and 39% in 2009.Other operating income. Other operating income mainly consists of freight recharges,sub-rights and licensing income and distribution commissions together with income from the sale of assets. Other operating income increased to £120m in 2009 compared to £102m in 2008 although much of this increase can be ascribed to exchange.Share of results of joint ventures and associatesThe contribution from our joint ventures and associates increased from £25m in 2008 to £30m in 2009. The majority of the profit comes from our 50% interest in the Economist.Operating profitThe total operating profit increased by £55m, or 10%, to £619m in 2009 from £564m in 2008. 2009 operating profit, translated at 2008 average exchange rates, would have been £40m lower.Operating profit attributable to Pearson Education increased by £99m, or 24%, to £505m in 2009, from £406m in 2008. The increase was attributable to strong performances in the US Higher Education business and both the US and International Assessments businesses and due to the positive impact of exchange. Operating profit attributable to the FT Group decreased by £36m to £31m in 2009, from £67m in 2008. The decrease reflects the decline in profitability at theFinancial Times, as they faced tough conditions in the advertising market. Operating profit attributable to the Penguin Group decreased by £8m, or 9%, to £83m in 2009, from £91m in 2008. This decrease was principally due to charges relating to reorganisation of the business in the UK.Net finance costsNet finance costs increased from £95m in 2008 to £96m in 2009. Net interest payable in 2009 was £86m, down from £93m in 2008. The Group’s net interest payable decreased by £7m in 2009 as we benefited from a fall in average interest rates on our floating US dollar debt and a decrease in our overall level of average net debt. 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%. In 2009 the net finance income relating to post-retirement plans was a charge of £12m compared to an income of £8m in the previous year reflecting lower returns on plan assets.31Other net finance costs relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £7m in 2009 compared to a loss of £11m in 2008. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. In 2009 the loss mainly relates to losses on cross currency swaps. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.TaxationThe total tax charge in 2009 of £146m represents 28% of pre-tax profits compared to a charge of £125m or 27% of pre-tax profits in 2008. Our overseas profits, which arise mainly in the US are largely subject to tax at higher rates than the UK corporation tax rate (28% in 2009 compared to 28.5% in 2008). Higher tax rates were partly offset by releases from provisions reflecting continuing progress in agreeing our tax affairs with the authorities.Non-controlling interestThis comprises mainly the non-controlling interest in Interactive Data. Our share of Interactive Data was 61% in 2009, compared to 62% in 2008.Discontinued operationsOn 29 July 2010, Pearson’s 61% share in Interactive Data Corporation was sold to Silver Lake and Warburg Pincus for $2bn. The results of Interactive Data have been included as discontinued operations in both 2009 and 2008. Discontinued operations in 2008 also relate to the disposal of the Data Management business (in February 2008). The results of the Data Management business were included in discontinued operations to the date of disposal in 2008. The loss before tax on disposal in 2008 was £53m, mainly relating to the cumulative translation adjustment. There was a tax charge of £37m on the sale.Profit for the yearThe profit for the financial year in 2009 was £462m compared to a profit in 2008 of £323m. The overall increase of £139m was mainly due to the absence of the loss on discontinued operations in 2009 but also benefited from the improved operating performance offset by a small increase in net finance costs.Earnings per ordinary shareThe basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 53.2p in 2009 compared to 36.6p in 2008 based on a weighted average number of shares in issue of 799.3m in 2009 and 797.0m in 2008. The increase in earnings per share was due to the increase in profit for 2009 described above and was not significantly affected by the movement in the weighted average number of shares.The diluted earnings per ordinary share of 53.1p in 2009 and 36.6p in 2008 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.Exchange rate fluctuationsThe strengthening of the US dollar and other currencies against sterling on an average basis had a positive impact on reported sales and profits in 2009 compared to 2008. 2009 sales, translated at 2008 average exchange rates, would have been lower by £582m and operating profit, translated at 2008 average exchange rates, would have been lower by £40m. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our management of exchange rate risks.Sales and operating profit by divisionThe following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by32management to evaluate performance and allocate resources to business segments. See also note 2 of “Item 18. Financial Statements”.In our adjusted operating profit we have excluded amortization of acquired intangibles. The amortization of acquired intangibles is the amortization of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group.Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below: Year Ended December 31, 2009 North American International FT Interactive Education Education Professional Group Data Penguin Total Sales 2,470 1,035 275 358 — 1,002 5,140 48% 20% 6% 7% — 19% 100% Total operating profit 354 109 42 31 — 83 619 57% 18% 7% 5% — 13% 100% Add back: Amortization of acquired intangibles 49 32 1 8 — 1 91 Adjusted operating profit: continuing operations 403 141 43 39 — 84 710 Adjusted operating profit: discontinued operations — — — — 148 — 148 Total adjusted operating profit 403 141 43 39 148 84 858 47% 16% 5% 5% 17% 10% 100% Year Ended December 31, 2008 North American International FT Interactive Education Education Professional Group Data Penguin Total Sales 2,002 866 244 390 — 903 4,405 45% 20% 6% 9% — 20% 100% Total operating profit 258 113 35 67 — 91 564 46% 20% 6% 12% — 16% 100% Add back: Amortization of acquired intangibles 45 22 1 7 — 2 77 Adjusted operating profit: continuing operations 303 135 36 74 — 93 641 Adjusted operating profit: discontinued operations — — — — 121 — 121 Total adjusted operating profit 303 135 36 74 121 93 762 40% 17% 5% 10% 16% 12% 100% 33North American EducationNorth American Education sales increased by £468m, or 23%, to £2,470m in 2009, from £2,002m in 2008 and adjusted operating profit increased by £100m, or 33%, to £403m in 2009 from £303m in 2008. The results were significantly affected by the relative strength of the US dollar, which we estimate increased sales by £365m and adjusted operating profit by £60m when compared to the equivalent figures at constant 2008 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales of 5% and profits of 13%. Although the contribution from the US school curriculum business declined due to State budget pressures and a fall in the adoption market there were strong contributions from the US Higher Education, US Assessment and Information and Canadian businesses.In the US school market, the Association of American Publishers’ estimated that there was an overall decrease for the industry in 2009 of 13.8% as state budget pressures and a slower new adoption year caused particular weakness in the basal publishing market. Though Pearson’s US School publishing sales declined we attained an estimated 37% of new adoptions we competed for (our highest market share for a decade) and 32% of the total new adoption market. Pearson’s enVisionMATH (www.envisionmath.com), an integratedprint-and-digital program, was the top-selling basal program in the United States in 2009. It helped the School Curriculum business to an estimated 46% share of all math adoptions and sold strongly across the open territories. Successnet, the online learning platform for teachers and students which supports all Pearson’s digital instruction, assessment and remedial programs, also grew strongly achieving more than 4 million registrations in 2009.The US Assessment and Information business saw significant profit improvement in 2009, 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 programs. Our State Services business won a number of significant new contracts including new programs in Florida and Arizona. We continued 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 AIMSWebresponse-to-intervention data management and progress monitoring service for children who are having difficulty learning, continued to grow and had more than 3 million students on the system at the end of 2009. 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 grew strongly, benefiting from strong demand for its services that help teachers automate and manage student attendance records, gradebooks, timetables and the like. It supported more than 12 million students — 8 million of them through its flagship PowerSchool product which was 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).The US Higher Education publishing market grew 11.5% in 2009, according to the Association of American Publishers, benefiting from strong enrolment growth and federal government action to support student funding. Our US Higher Education business 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 customization. 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 Statistics 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. The ‘MyLab’ digital learning, homework and assessment programs again grew strongly. Our MyLab products saw more than 6 million student registrations globally, 39% higher than in 2008. In North America, student registrations grew 37% to more than 5.6 million. Custom Solutions grew strongly across both bespoke books and customized services including content creation, technology, curriculum, assessments and courseware. We partnered with the Kentucky Virtual Learning Initiative, for example, to deliver personalized mathematics instruction mapped to state college entry standards and have begun to extend this program into transitional English and Reading. eCollege, our platform for fully-online34distance learning in higher education, increased online enrolments by 36% to 3.5 million and benefited from continued strong renewal rates of 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.Overall adjusted operating margins in the North American Education business were higher at 16.3% in 2009 compared to 15.1% in 2008 with the majority of the increase attributable to the Harcourt Assessment integration costs that were charged in 2008.International EducationInternational Education sales increased by £169m, or 20%, to £1,035m in 2009, from £866m in 2008 and adjusted operating profit increased by £6m, or 4%, to £141m in 2009 from £135m in 2008. The sales results benefit from exchange gains and a full year contribution from acquisitions made in 2009. At the adjusted operating profit level the 2008 results benefited from transactional exchange gains that were not repeated in 2009.In the UK, 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. We made significant investments in supporting the new Diploma qualification for14-19 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. Our UK 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.In Continental Europe, the launch of our digi libre (Content Plus) products helped us to gain share in the lower and upper secondary markets in Italy and positioned us well for major curriculum reforms in 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. 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 at the end of 2009.In the Middle East we successfully implemented the Abu Dhabi Education Council’s (ADEC) External Measurement of Student Achievement (EMSA) program covering English, Arabic, Math and Science in April 2009. In South Africa, we launched Platinum, the first blended print and online course developed for the South African National Curriculum. In addition 7,000 students registered for MyMathLab+ at the University of Witwatersrand in 2009.In China, we acquired Wall Street English, the leading provider of premium English language training to adults, for £101m. 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. 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.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 supported 30 post-secondary institutions. And, in Panama, 75,000 high school students were learning Biology and Chemistry, using Prentice Hall Virtual Labs.On a global basis our ‘MyLab’ digital learning, homework and assessment programmes were used by more than 470,000 students, up almost 60% on 2008, and are now sold in more than 200 countries. In 2009, we launched the Pearson Test of English, our new test of Academic English which will be delivered in up to 200 Pearson VUE testing centers in 37 countries. Approximately 1,000 academic programs worldwide now recognise, or are in the35process of recognising, the Pearson Test of English. Our eCollege learning management system is growing rapidly in international markets, winning new contracts in Australia, Brazil, Mexico, Colombia, Puerto Rico and Saudi Arabia in 2009. 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.International Education adjusted operating margins declined from 15.6% in 2008 to 13.6% in 2009 as the benefit from transactional exchange gains at the profit level in 2008 weren’t repeated in 2009.ProfessionalProfessional sales increased by £31m, or 13%, to £275m in 2009 from £244m in 2008. Adjusted operating profit increased by £7m or 19% to £43m in 2009, from £36m in 2008. The sales growth was entirely due to exchange rates which increased sales by £33m when compared to the equivalent figures at constant 2008 exchange rates.In Professional testing and certification in the UK, we extended our contract with the Driving Standards Agency to deliver the UK drivers theory test until 2014. More than seven million secure online tests were delivered in more than 4,000 test centers 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 organizations 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.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 newe-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.Overall adjusted operating margins in the Professional business continued to improve and were higher at 15.6% in 2009 compared to 14.8% in 2008 as margins improved again in both the testing and professional publishing businesses.FT GroupSales at FT Group decreased by £32m or 8%, from £390m in 2008 to £358m in 2009. Adjusted operating profit decreased by £35m, from £74m in 2008 to £39m in 2009. The sales and profit decrease is mainly from the FT Newspaper business which faced tough market conditions for financial and corporate advertising. The impact of advertising revenue declines was partially mitigated by growth in content revenues, the resilience of our subscription businesses and early actions to manage our cost base tightly.We continued to see good demand in 2009 for high-quality analysis of global business, finance, politics and economics which resulted in a 15% increase in paying online subscribers to more than 126,000 with registered users on FT.com up 85% to 1.8 million and users up 12% to 1.4 million on FTChinese.com.Financial Timesworldwide newspaper circulation was 7% lower at 402,799 (for the July-December 2009 ABC period) although subscription circulation grew modestly. We continued to invest in fast-growing digital formats. We launched a new luxury lifestyle website, to complement our existingHow To Spend Itmagazine; 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.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 an36increased focus on distressed debt. Mergermarket continued to launch new products and expand globally. MergerID was launched in September 2009, providing a secure online environment for principals and professionals to post and view merger and acquisition opportunities globally and by the end of 2009 had secured over 1,500 active users in more than 450 companies across the globe. Year Ended December 31 2011 2010 £m £m 2,072 1,999 190 174 1,999 1,919 (117 ) (79 ) 2,072 2,014 Year Ended December 31, 2011 North American
Education International
Education Professional FT
Group Continuing Discontinued Total 2,584 1,424 382 427 4,817 1,045 5,862 53 % 30 % 8 % 9 % 100 % 463 121 55 479 1,118 108 1,226 41 % 11 % 5 % 43 % 100 % (29 ) 6 — (412 ) (435 ) — (435 ) 2 9 — 1 12 — 12 57 60 11 8 136 3 139 493 196 66 76 831 — 831 — — — — — 111 111 493 196 66 76 831 111 942 52 % 21 % 7 % 8 % 88 % 12 % 100 % Year Ended December 31, 2010 North American
Education International
Education Professional FT
Group Continuing Discontinued Total 2,640 1,234 333 403 4,610 1,349 5,959 57 % 27 % 7 % 9 % 100 % 415 119 42 62 638 1,215 1,853 65 % 18 % 7 % 10 % 100 % — 10 — (12 ) (2 ) (1,037 ) (1,039 ) 1 7 2 1 11 — 11 53 35 7 9 104 9 113 469 171 51 60 751 — 751 — — — — — 187 187 469 171 51 60 751 187 938 50 % 19 % 5 % 6 % 80 % 20 % 100 % 2.2%1% to 1.421.49 million (for the July — December 20092011 ABC period). FTSE, with an additional digital circulation in excess of 100,000. Total annual online visits increased to 165 million, up 39% on 2010. Business Day and Financial Mail (BDFM), our 50% owned joint-venturejoint venture in South Africa with Avusa, improved profitability with revenue increasing by 10%. The business benefited from growth in advertising and circulation revenues. In December 2011, we sold our 50% stake in FTSE International to the London Stock Exchange increased revenues 17% and made a strong improvementfor net proceeds of £428m in profits.decreasedincreased from 19.0%14.9% in 20082010 to 10.9%17.8% in 20092011 as lost advertising revenue fell through to the bottom line.increaseddeclined by £99m£8m or 11%1%, to £1,002m£1,045m in 20092011 from £903m£1,053m in 20082010 as the business faced tough conditions in the physical book market but adjusted operating profit was down 10%up 5% to £84m£111m in 20092011 from £93m£106m in 2008. Both2010. These results are included as part of reported discontinued operations.adjusted operating profit were affectedprofits and gained market share in each of its major markets — the US, the UK and Australia. There was a strong and consistent publishing performance across imprints and territories which produced market share gains in our major markets in a very challenging retail environment with the closure of more than 750 stores. Growth in developing markets was boosted by the strongerstrength of the direct marketing channel and strong publishing in India, including its first 100,000 copy bestseller (Ravinder Singh’sCan Love Happen Twice?). Global publishing properties such as LEGO®, Wimpy Kid, Jamie Oliver and Kathryn Stockett’sThe Help sold in significant numbers in multiple markets.dollar which we estimate increased sales by £109min 2011. Since the beginning of 2008, digital downloads of apps and adjusted operating profit by £7m when comparedebooks across theequivalent figures at constant 2008 exchange rates.Road andMoshi Monsters, and a new global digital-only publishing program,Penguin Shorts. DK launched its first non-travel apps including the award-winningDK Human Body. In 2009,January 2012 DK became the first consumer publisher to publish four iBooks2 titles using Apple’s new authoring tool. Penguin implemented a series of organisational changescontinued to invest in direct-to-consumer initiatives including new digital platforms for readers, specifically aNobii in the UK designedand Bookish in the US. In Australia Penguin acquired the REDGroup’s online business. Penguin also signed its first author through its new self-publishing platform BookCountry. Its websites and social media channels around the world now have a global following of more than 11 million. Penguin continued to strengthenleverage Pearson-wide digital platforms to transform its internal publishing reduce costsprocesses, enabling faster product development 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 £9mgreater re-use of charges relating to these organisational changes.had 30 number 1published a record 254New YorkTimesbestsellers Penguin’s most ever, and placed 243 bestsellers onNew York Timeslists. Bestsellers included works from debut novelsincluding some of its repeat bestselling authors such as Tom Clancy, Patricia Cornwell, Ken Follett, Nora Roberts and Clive Cussler, as well as new talent such as Deborah Harkness, Amor Towles and Eleanor Brown. Kathryn Stockett’sThe Help was the bestselling title across the US industry selling five million copies in print and Janice Y.K. Lee’sdigital in its third year since publication. The Piano TeacherYoung Readers’ division had another strong year achieving a high of 41New York Times bestsellers. Penguin UK published 78 top ten bestsellers, an increase of 15 on 2010, including two of the top five industry titles with Jamie Oliver’s30-Minute Meals and Dawn French’sA Tiny Bit Marvellous, along with booksand a robust performance by established authors such as Charlaine Harris and Nora Roberts.In the UK, top-selling titles included Marian Keyes’This Charming Man, Malcolm Gladwell’sOutliers, Ant and Dec’sOoh! What a Lovely Pairand Antony Beevor’sD-Day. Penguin Children’s list had a very strong year with standout performances from brands such asThe Very Hungry Caterpillar (which celebrated its 40th anniversary) andPeppa Pig. Through an iPhone app, consumerswho were offered a try-before-you buy model of Paul Hoffman’sThe Left Hand of God, providing free downloads of the first three chapters.In Australia, Penguin was named Children’s Publisher of the Year forin 2011. For a second consecutive year, Jamie Oliver secured the second year running atcoveted Christmas number one slot withJamie’s Great Britain. Jeff Kinney’s newWimpy Kid titleCabin Fever sold 300,000 copies and was the Australianfastest selling book of 2011. DK’s bestseller success continued in 2011 with its LEGO® titles dominating the bestseller charts includingThe LEGO® Ideas Book, Industry Awards. Number 1 bestsellingLEGO® Star Wars Character Encyclopaedia andLEGO® Star Wars Visual Dictionary. Titles from 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.eBook sales grew fourfold on the previous year. 14,000 eBook titles were available at the end of 2009, benefiting from the popularity ofe-readers such as Amazon’s Kindle,Annabel Karmel, Karl Pilkington and Mary Berry and the Sony ReaderMasterChef titles also performed strongly. In Australia, Penguin had the two top-selling titles across the industry with Jamie’s30-Minute Meals and BarnesJeff Kinney’sCabin Fever and Noble’s nook as well as new devices such as Apple’s iPad.Penguin’shit number one 24 times through the course of the year.deterioratedimproved in 2009, dropping2011 to 8.4% from 10.3%10.6% compared to 10.1% in 2008. The main reason for the decline was the charges in 2009 relating to the reorganisation of the UK business.increaseddecreased by £157m£177m (or 16%) to £916m in 2012 from £1,093m in 2011. This decrease in cash generated from operations reflected a later sales profile in the second half of 2012 compared to 2011 (causing the corresponding cash collections to fall into 2013) and increased investment in pre-publication as more of our education programs are updated for digital delivery and adverse currency effects. The average working capital to sales ratio improved to 13.8% in 2012 from 14.2% in 2011 reflecting the more favourable working capital characteristics of digital and service businesses and reduced stock in our print publishing businesses. Net cash generated from operations decreased by £76m (or 7%), to £1,093m in 2011 from £1,169m in 2010. The decrease in net cash generated from operations in 2011 compared to 2010 reflected a lower year end contribution from £1,012mworking capital movements as pre-publication expenditure matched pre-publication amortization in 2009. This increase reflected strong cash contributions, particularly from our education businesses. The exchange rate for translation of dollar cash flows was $1.57 in 2010, $1.61 in 2009 and $1.44 in 2008.2011. In 2010, a strong school adoption year, pre-publication amortization exceeded expenditure. In 2011, the average working capital to sales ratio for our book publishing businesses over the whole year improved to 16.9% from 20.1% from 25.1% in 2009,2010, reflecting tight working capital management and the financial impactcharacteristics of the ongoing portfolio shift to more digital and service-orientated products and businesses. Average working capital is the average month end balance in the year of inventory (including pre-publication), receivables and payables.cash generatedinterest paid increased to £66m in 2012 from operations increased by £118m (or 13%),£60m in 2011 due to £1,012m in 2009higher average net debt following recent acquisitions, with some offset provided from £894m in 2008. This increase reflected strong cash contributions from all businesses,37together with the significant strengtheningreceipt of the US dollar against sterling. In 2009,proceeds from the headline average working capital to sales ratio for our book publishing businesses improved to 25.1% from 26.1% in 2008, reflecting tight working capital management andsale of FTSE International at the favourable working capital profileend of 2009 acquisitions.£87m in 2009. The decrease reflects the repaymentsale of a US Dollar bond in 2009 and lower variable interest rates. Net interest paid increased to £87m in 2009 from £76m in 2008. The increase is due to the timing of payments on bonds issued in 2008 and 2009.£76m£151m in 2010, £62m2012, £144m in 20092011 and £75m£132m in 2008. The increase in 2010 reflects a return2010. Expenditure has been prioritized towards information technology and software to a more normal level of expenditure givenfurther enhance the improved economic environment and exchange rate movements. The reduction in spend in 2009 reflects a more cautious approach to capital investment, given the uncertain economic environment, particularly in the first halfdigital capability of the year.2010 against £222m2010. The increase reflects the re-shaping of the portfolio following the sales of Interactive Data and FTSE International. The principal acquisitions in 20092012 were of EmbanetCompass for £411m, Certiport for £88m, Author Solutions, Inc for £69m and £400mGlobalEnglish Corporation for £63m. The principal acquisitions in 2008.2011 were of Schoolnet for £141m, Education Development International for £108m, Connections Education for £244m, Global Education for £97m and TutorVista for £75m. The principal acquisitions in 2010 were of Sistema Educacional Brasileiro for £228m, Melorio for £98m,£97m, Wall Street Institute for £65m£64m and America’s Choice for £65m. The principal acquisitions in 2009 were of Wall Street English for £101m and a controlling interest in Maskew Miller Longman for £54m, comprising £49m in cash and £5m in other consideration.inflowoutflow of £11m in 2012 against inflows of £422m in 2011 and £734m in 2010 against £nil2010. The cash outflow in 2009 and £99m2012 primarily related to expenses incurred in 2008.advance of the formation of Penguin Random House. The proceeds in 2011 relate to the sale of the Group’s 50% holding in FTSE International. The proceeds in 2010 relate to the sale of Interactive Data, with proceeds received being £984of £984m and tax paid relating to this disposal of £250m. Proceeds£99m£23m in 2008 relate to2012 reflects a further 9% increase in the saledividend, offset by the proceeds from a $500m US Dollar Note issued during the year. The cash outflow from financing of £790m in 2011 reflects the Data Management business. The cash outflow from financing of £366m in 2009 reflects the repayment of one $350m bond, the repayment of borrowings under the Group’s committed borrowing facility and an increase of the dividend in line with earnings. Offsetting this, the Group issued £300m of sterling bonds in the year. The cash outflow from financing of £137m in 2008 reflects the repayment at maturity of one £100m bond, the repayment of borrowings against a short-term bridge financing facility and a further increase in the dividend. Offsetting this, the Group issued $900m of US Dollar bonds.increaseschanges and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all.2010,2012, our net debt was £430m£918m compared to net debt of £1,092m£499m at December 31, 2009.2011. Net debt is defined as all short-term, medium-term and long-term borrowing (including finance leases), less all cash, cash equivalents and liquid resources. Cash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-term deposits with maturities of more than 90 days and other marketable instruments which are readily realizable and held on a short-term basis. Total Short-term, medium-term and long-term borrowing amounted to £2,312m£2,279m at December 31, 2010,2012, compared to £2,008m£2,051m at December 31, 20092011 reflecting the $350mnew $500m US Dollar Notedollar note issued induring the year and the strengthening of sterling relative to the US Dollar.year. At December 31, 2010,2012, total cash and liquid resources were £1,736m,£1,177m, compared to £750m£1,369m at December 31, 2009.2011. This increase in cashdecrease is due to receiptthe continued re-investment of the proceeds from the salesales of Interactive Data only partially re-invested inand FTSE International via the various acquisitions and strong cash generation in our education businesses.38above. At December 31, 2010 Less than One to Two to After five Total one year two years five years years £m £m £m £m £m Gross borrowings: Bank loans, overdrafts and commercial paper 73 73 — — — Bonds 2,226 325 — 1,077 824 Finance lease obligations 13 6 4 3 — Operating lease obligations 1,437 164 151 337 785 UK Pension funding obligations 410 41 41 123 205 4,159 609 196 1,540 1,814 At December 31, 2012 Total Less than
one year One to
two years Two to
five years After five
years £m £m £m £m £m 55 33 22 — — 2,200 219 520 527 934 17 10 4 3 — 1,678 186 174 419 899 205 41 41 123 — 4,155 489 761 1,072 1,833 20102012 the Group had capital commitments for fixed assets, including finance leases already under contract, of £13m (2009: £15m)£17m (2011: £18m). There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal and royalty claims. None of these claims or guarantees is expected to result in a material gain or loss.2010,2012, the full $1.75bn was available under this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:2010, 20092012, 2011 or 2008.2010. Refer to note 3437 in “Item 18. Financial Statements”.39ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 2011*.Age Position NameAgePositionGlen Moreno6769 Chairman Marjorie Scardino 6450 Chief Executive 64Non-executive DirectorPatrick Cescau62Non-executive DirectorWill Ethridge59Chief Executive, Pearson North American EducationRona Fairhead49Chairman and Chief Executive, The Financial Times GroupRobin Freestone52Chief Financial OfficerSusan Fuhrman 66 Non-executive Director Ken Hydon 6653Senior Independent Director 61 Chief Executive, Pearson North American Education 51 Chairman, The Financial Times Group 54 Chief Financial Officer 68 Non-executive Director Joshua Lewis 4868 Non-executive Director John Makinson 5650Non-executive Director 58 Chairman and Chief Executive, The Penguin Group was appointed chairman of Pearson2005 and is chairman2005. Chairman of the nomination committee and member of the remuneration committee. He was appointedNovember 2010. He is also the senior independent director of Lloyds Banking Group plc as well as aU.K and non-executive director of Fidelity International Limited. HePreviously, Glen was previously thedeputy chairman and senior independent director at Lloyds Banking Group plc, 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 UKBritish banks.Marjorie Scardinojoinedboardmanagement committee.January 1997. She trained and practised1997 as a lawyer,director of communications and was chiefappointed president of Pearson Inc., a role he combined with his communications responsibilities, in 2000. In 2003, he was appointed CEO of Pearson’s educational publishing businesses for Europe, Middle East & Africa (EMA) and gradually took on a broader international education brief. Prior to joining Pearson, John was director of corporate affairs at Powergen plc, where he was also a member of the company’s executive committee. Earlier in his career, John held senior public policy and communication roles in UK local government.The Economist Group from 1993 until joining Pearson. Shethe remuneration committee and member of the audit and nomination committees. also vice chairman of Nokia Corporation and on the boards of several charitable organisations. In 2010 she was named a fellow of the American Academy of Arts and Sciences.David Arculusis a non-executive director of Telefónica S.A. He is also chairman ofAldermore Bank plc, Numis Corporation plc, and in October 2010 was appointed chairmanthe Advisory Board of Aldermore Bank plc. Histhe British Library. David’s previous roles include chairmanthe chairmanship of O202 plc, Severn Trent plc and IPC Group, as well as chief operating officer of United Business Media plc and group managing director of EMAP plc. He becameplc and a non-executive director of Pearson in FebruaryTelefonica S.A. David served from 2002 to 2006 and isas chairman of the British government’s Better Regulation Task Force, which worked on reducing burdens on business.committee.Patrick Cescauand nomination committees.seniorenergy industry. She is also lead independent director of Tesco plc and a director of INSEAD,at the Business SchoolUK Department for the World. In September 2010, he joinedInternational Development. Vivienne also sits on the board of IAG,INSEAD and is a commissioner of the Airports Commission, which was set up by the UK government to examine any requirements for additional UK airport capacity.Consolidated Airlines Group, S.A. He was previously group chief executive of Unilever. He became a non-executive director ofand Professional Publishing business. Prior to joining Pearson in April 20021998, Will was a senior executive at Prentice Hall and senior independent directorAddison-Wesley, and before that an editor at Little, Brown and Co where he published in April 2010.Ethridgejoined the Pearsonis a board in May 2008, having held a number of senior positions within Pearson Education, including CEO of the Internationalmember and Higher Education divisions. He is chairman of CourseSmart, a publishers’ digital retail consortium andformer chairman of the Association of American Publishers.joinedJune 2002 as chief financial officer.April 2013. She was appointed chief executive of The Financial Times Group in June 2006 and became responsible for Pearson VUE in March 2008. * Terry Burns retired from the Pearson plc board on April 30, 2010. CK Prahalad passed away on April 16, 2010. Joshua Lewis was appointed to the Pearson plc board effective March 1, 2011.40From 1996 until 2001, she served as executive vice president, group control and strategypreviously held senior management roles at ICI. She is also a non-executive director of HSBC Holdingsspecialty chemicals company ICI plc, and chairs the HSBC audit and risk committees. In December 2010 she was appointedin aerospace with Bombardier/Shorts. She has an MBA from Harvard Business School. Rona currently serves as a non-executive director of The Cabinet Office.2006, when he also joined the Pearson board. He was previously group financial controller of Amersham plc (now part of GE). He2006. Robin qualified as a chartered accountant with Touche Ross (now Deloitte). He, and is alsocurrently a non-executive director and founder shareholder of eChem Limited.iseducation andeducation. She is president of the National Academy of Education. SheEducation, and was previously dean of the Graduate School of Education at the University of Pennsylvania and on the board of trustees of the Carnegie Foundation for the Advancement of Teaching. She became a non-executive directorPearsonthe audit committee and member of the remuneration and nomination committees.July 2004.Ken Hydonfinance and business includes roles in electronics, consumer products and healthcare. He is a non-executive director of Reckitt Benckiser Group plc, Royal Berkshire NHS Foundation Trustone of the world’s leading manufacturers and marketers of branded products in household cleaning and health and personal care. From 2004 to 2013 he was a non-executive director of Tesco plc. HePreviously, Ken was previouslychief financial directorofficer of Vodafone Group plc and financial director of subsidiaries of Racal Electronics. He became a non-executive director of Pearson in February 2006 and is chairmancommittee.Joshua Lewisand nomination committees.managing principalfounder of Salmon River Capital LLC, a New York-based private equity/venture capital investment firm focused on technology-enabled businesses in education, financial services and is also an advisor toother sectors. Over a 25 year career in active, principal investing, he has been involved in a broad range of successful companies, including several pioneering enterprises in the education sector. In addition, he has long been active in the non-profit education sector, with associations including New Leaders, New Classrooms, and the Bill & Melinda Gates Foundation’s Next Generation Learning Challenges programme.Foundation. He was previouslyis also a general partnernon-executive director of eVestment and Axioma, both Warburg Pincusfinancial technology companies, Parchment, an education data company, and Forstmann Little, and served on the board of the Capella Education Company,PeriGen, a pioneering provider of web-based post-secondary education. He was also chair of New Leaders for New Schools, a social enterprise training the next generation of US urban principals, and remains involved with that organisation.joined the Pearson board in199615, 1996.until June 2002. Heof Pearson before heading Penguin, and previously served as managing director of theFinancial Times newspaper, where he had earlier served as editor of the popular Lex column. John co-founded Makinson Cowell, an international financial consultancy, and was appointedvice chairman of The Penguin Group in May 2001. Hethe U.S. holding company of advertising firm Saatchi & Saatchi. John is also chairman of The Royalthe National Theatre and trusteehas been named chairman-designate of Penguin Random House, the Institute for Public Policy Research. the chief executives of the principal operating companies and other members of the Pearson Management Committee. The committee also takes note of the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company.Our goal as a company is to make an impact on people’s lives and on society through education and information. Our strategy to achieve that goal is pursued by all Pearson’s businesses in some shape or form and has four parts: investment in quality content; adding services to this content; working in markets around the world, particularly in the developing world; and efficiency.An important measure of our strategy is financial performance. Our goal is to achieve sustainable growth in three key financial measures — earnings, cash and return on invested capital — and reliable cash returns to our investors through healthy and growing dividends. Therefore 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. (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 performance.performance. The performance conditionsis to be the world’s leading learning company and to help people of all ages make progress in their lives through all kinds of learning. Pearson’s strategy has for some years focused on growth in digital products, educational services and emerging markets. We are now accelerating the implementation of that strategy through: four global businesses, four types of geographic market and four business models.selectare building the long-term value of Pearson. So those measures (or others that contribute to them, such as sales, profit and working capital) form the basis of our annual budgets and plans, and the basis for the company’s various performance related annual orbonuses and long-term incentive plans are linked to the company’s strategic objectives set out above and aligned with the interests of shareholders.goals.goals and personal objectives, provide focus on key financial metrics and reward individual contribution to the success of the company. Long-term incentives help to recruit, reward and retain people, drive long-term earnings and share price growth and value creation, align interests of executives and shareholders, encourage long-term shareholding and commitment to the company and link corporate performance to management’s long-term reward in a flexible way. Bonus share matching encourages executive directors and other senior executives to acquire and hold Pearson shares and aligns executives’the interests of executives and shareholders’41
For benchmarking purposes, we review remuneration by reference to three separate comparator groups. First, we use a select peer group of FTSE 100 companies with very substantial overseas operations, excluding financial services. These companies are of a range of sizes relative to Pearson, but the method our independent advisers, Towers Watson, use to make comparisons on remuneration takes this variation in size into account. Secondly, we look at a broad media industry group of US companies. And thirdly, we look at the FTSE 20-50, excluding financial services. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our remuneration was not competitive.interests. Long-term incentives drive long-term earnings and share price growth and value creation and align executives’ and shareholders’ interests.We want our executive directors’to be competitive with those of directors and executives in similar positions in comparable companies. For benchmarking purposes we review remuneration by reference to the UKcompanies and US market depending on the relevant market or markets for particular jobs. We look separately at three comparator groups:First, we use a select peer group of FTSE 100 companies with very substantial overseas operations. These companies are of a range of sizes around Pearson, but the method our independent advisers use to make comparisons on remuneration takes this variation in size into account; secondly, for the US, we use a broad media industry group; and thirdly, we look at the FTSEindividual performance.20-50, excluding financial services. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our remuneration was not competitive.Base salaryOur normal policy is to review salaries annually, consistent with the way we benchmark pay and taking into account the approach to pay across the company as a whole.It is the company’s policy that benefit programs should belabour market,market.international company we require executivesalternative to operate worldwidefurther accrual of pension benefits on a basis that is broadlyrecognize that recruitment also operates worldwide.Marjorie Member of the Pearson Inc. Pension Plan (under which her benefit accruals ceased at the end of 2001) and the approved 401(k) plan. Until 2010, additional benefits were provided through an unfunded unapproved defined contribution plan. Since 2010, additional pension benefits are provided through a taxable and non-pensionable cash supplement in place of the unfunded plan, a funded defined contribution plan approved by HM Revenue and Customs as a corresponding plan, and amounts in the legacy unfunded plan. In aggregate, the cash supplement and contributions to the funded plan are based on a percentage of salary and a fixed cash amount index-linked to inflation. The notional cash balance of the legacy unfunded plan increases annually by a specified notional interest rate. The unfunded plan also provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion. Will Member of the Pearson Inc. Pension Plan (under which he continues to accrue benefits under the alternative formula because he satisfied criteria of age and service) and the approved 401(k) plan. He also participates in an unfunded, non-qualified Supplemental Executive Retirement Plan (SERP) that provides an annual accrual of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Plan and US Social Security. Additional defined contribution benefits are provided through a funded, non-qualified Excess Plan. Rona 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. John Member of the Pearson Group Pension Plan. His 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 his behalf. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS. Robin Member of the Money Purchase 2003 section of the Pearson Group Pension Plan. Company contributions are 16% of pensionable salary per annum, restricted to the plan earnings cap. Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on his behalf. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS. John 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 and the benefits were withdrawn in 2012, reducing the benefits payable under the UURBS. 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 and the UURBS will be paid to his spouse or nominated financial dependant. Early retirement is currently possible from age 55, with company consent. TheseAnnual incentive plans thenfor the Pearson Management Committee become the basis of the annual incentive plans below the level of the principal operating companies particularly with regard to theand establish performance measures used and standards and set the relationship between the relevant business unit operating plans and the incentive targets.The committee will continue to review the annual incentive plans each year and to revise the performance measures, targets andceiling for individual incentive opportunities in lightopportunities.current conditions.Annual incentive payments do not form part of pensionable earnings.Performance MeasuresThetotal opportunity is based on financial performance measures relate toat the company’s main drivers of business performance at both the corporate operating company and business unit level. PerformanceUp to 50% of total opportunity is measured separately for each item. For eachbased on performance measure, theagainst personal objectives. The committee establishes thresholds,threshold, target and maximum levels of performance for different levels of payout.A proportion (which Performance is measured separately for 2011 may be up to 30%)each item. Annual incentive payments do not form part of the total annual incentive opportunity for the executive directors and other members of the Pearson Management Committee is based on performance against personal objectives as agreed with the chief executive (or in this case the chief executive or chairman). These comprise functional, operational, strategic and non-financial objectives relevantpensionable earnings.executives’ specific areasachievement of responsibility andinter aliamay include objectives relating to environmental, social and governance issues.For 2011 the principle financial performance measurestargets for Pearson plc are sales, operating profit (for the operating companies) and growth in underlying earnings per share for continuing operations at constant exchange rates (for Pearson plc) or operating profit (for the operating companies), average working capital as a ratio to sales, and operating cash flow. The selectionflow and weighting of the performance measures takes into account the strategicpersonal objectives. Personal objectives and the business priorities relevant to each operating company and to Pearson overall each year.42The individual annual incentive opportunities for the executive directors other thanare agreed with the chief executive are expressed as % of base salary. The committee with(or, in the advicecase of the chief executive, determines the aggregate level of annual incentiveschairman) and individual incentive opportunities taking into account all relevant factors. These factors may include the profitability of the company, individual rolesbe functional, operational, strategic and responsibilities, market annual incentive levels,non-financial and the level of stretch in the performance targets.For 2011, there are no changesincludeinter alia objectives relating to the targetenvironmental, social and maximum annual incentive opportunities forgovernance issues.which remain at 100% andmaximum opportunity is 180% respectively, of base salary (as in 2010). the other members of the Pearson Management Committee, individual incentive opportunities take into account their membership of that committee and the relative contribution of their respective businesses or roleroles to Pearson’sthe company’s overall financial goals. Ingoals, with a maximum opportunity of up to 175% of salary. For the casechief executive and other members of the executive directors,Pearson Management Committee, there is normally no payout for performance at threshold. The performance range sets a careful balance between upside opportunity and downside risk and is normally based on targets in accordance with the target individual incentive opportunity for 2011 is in a range from 80% to 87.5% of base salary (as in 2010). The maximum opportunity remains at twice target (as in 2010).The annualoperating plan. Annual incentive plans are discretionary and the committee reserves the right to make adjustments to payoutspayments up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments. Pearson plc Operating company Personal objectives Marjorie Scardino 90 % — 10 % Will Ethridge 30 % 60 % 10 % Rona Fairhead 30 % 60 % 10 % Robin Freestone 80 % — 20 % John Makinson 30 % 60 % 10 % Pearson plc Personal objectives 90 % — 10 % 30 % 60% (Pearson North America) 10 % 30 % 10 % 30 % 60% (Pearson International) 10 % 80 % — 20 % 30 % 10 % as ato sales ratio and operating cash flow. Sales and operating profit were between threshold and target. Average working capital to sales ratio and operating cash flow were all above maximum. Sales were above target but below maximum.North American Education,Professional Assessment and Training, the performance measures were sales, operating profit and average working capital as a ratio to sales and operating cash flow. Average working capital as a ratio to salesSales, operating profit and operating cash flow were above maximum. Sales and operating profit were above target but below maximum.All performance measuresSales and operating profit were between target and maximum. Operating cash flow was above maximum.VUE,International, the performance measures were sales, operating profit, average working capital as a ratio to sales ratio and operating cash flow. Sales and operating profit were above target but below maximum. Performance across all other measuresbetween threshold and target. Average working capital to sales ratio was above maximum.operating margin, average working capital as a ratio to sales ratio and operating cash flow. Sales were between threshold and target. Operating profit, operating margin and average working capital as a ration to sales were all above maximum. Salesratio and operating cash flow were above target but below maximum.In 2008, shareholders approved the renewal of thewhich permits executive directorswas first approved by shareholders in 1998 and senior executives aroundlast approved in 2008.anytheir after-tax annual bonusincentive in Pearson shares.Ifshares and hold these shares for three years, in return for the participant’s investedopportunity to earn additional free matching shares are held, they will be matched subject toand dividend shares, depending on performance against the earnings per share growth over the three-year performance period on a gross basis up to a maximum of one matching share for every one held i.e. the number of matching shares will be equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares.One matching share for every two invested shares held i.e. 50% of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by 3% per annum compound over the three-year performance period. One matching share for every one invested share held i.e. 100% of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by 5% per annum compound over the same period.43For real growth in adjusted earnings per share of between 3% and 5% per annum compound, the rate at which the participant’s invested shares will be matched will be calculated according to a straight-line sliding scale.Real growth is calculated by reference to the UK Government’s Index of Retail Prices (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.in accordance with the plan, a participant willparticipants also receive additional shares representing the gross value of dividends that would have been paid on the matching shares during the performance period and re-invested.By separate resolution, shareholders are being asked to approve the renewal of thefirst introducedwas last approved by shareholders in 2001 and renewed again2011. Awards may be delivered in 2006. The committee has reviewed the operation of this plan in light of the company’s strategic goals. The committee has concluded that the plan is achieving its objectives and, looking forward, will continue to enable the company to recruit and retain the most able managers worldwide and to ensure their long-term incentives encourage outstanding performance and are competitive in the markets in which we operate. We are therefore seeking approval of its renewal on broadly its existing terms.Subject to shareholders’ approval, executive directors, senior executives and other managers can participate in this plan which can deliver restricted stockshares 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 share options, although it is not the committee’s intention to grant stockshare options in 2011.Restricted stock granted tofor the foreseeable future.vests only if stretching corporate performance targets over a specified period have been met. Awardsand other members of the Pearson Management Committee vest on a sliding scale based on performance over the period. There is no retesting.against stretching corporate performance targets, which are relative total shareholder return, return on invested capital and earnings per share growth. The committee determines the performance measures and targets governing an award of restricted stockshares prior to grant.The performance measures that will apply for the executive directors for awards in 2011 and subsequent years will continue to be focused on delivering and improving returns to shareholders. These measures, which have applied since 2004, are relative total shareholder return (TSR), return on invested capital (ROIC) and earnings per share (EPS) growth.stockshares may be granted without performance conditions to satisfy recruitment and retention objectives. Restricted stock awards that areobjectives, but not subject to performance conditions will not be granted to any of the current executive directors.Pearson’s approach tolevelvested award is released at the end of individual awards takes into account athe three-year performance period and the remaining 25% only vests if the participant retains the after-tax number of factors. First, we take into account the face value of individual awards at the time of grant assuming that the performance targets are met in full. Secondly, we take into account the assessments by our independent advisers of market practiceshares for comparable companies and of directors’ total remuneration relative to the market. And thirdly, we take into account individual roles and responsibilities, and company and individual performance.in accordance with the plan, participants also receive additional shares representing the gross value of dividends that would have been paid on these shares during the performance period and reinvested.Pearson wishes Pearson’s reported financial results for the relevant periods are used to encourage executivesmeasure performance.managersmanagement interests. No such adjustments were made for performance periods ending in 2012.build up a long-term holdingparticipate in savings-related share acquisition programmes in the UK, US and rest of shares so as to demonstrate their commitment to the company. To achieve this, for awards of restricted stock thatworld, which are not subject to any performance conditions over a three-year period, a percentage of the award (normally 75%) vests at the end of the three-year period. The remainder of the award (normally 25%) only vests if the participant retains the after-tax number of shares that vest at year three for a further two years. In addition, for existing shares no more than 5% of Pearson equity may be held in trust at any time.44The committee expects executiveTo complementShares that count towards these guidelines include any shares held unencumbered by the operation of the company’s long-term incentive arrangements, we will in future, operate formal shareholding guidelines for executive, directors.their spouse and/or dependent children plus any shares vested but held pending release under a restricted share plan. The target holding will be 200% of theis 2 times salary for the chief executive and 125% of1.25 times salary for the other executive directors, consistent with median practice in FTSE 100 companies that operateoperated such arrangements.The committee reviewed There are no special provisions for notice or compensation in the policy onevent of a change of control of Pearson. On termination of employment, executive service agreementsdirectors’ entitlements to any vested or unvested awards under Pearson’s discretionary share plans are treated in 2008 and again in 2010. Future executive director service agreements should provide thataccordance with the terms of the relevant plan.theseexecutive directors’ service agreements by giving no more than 12 months’ notice. As an alternative, the company may at its discretion pay in lieu of that notice. Payment in lieu of notice may be made in instalments and may be subject to mitigation. In the case of the longerLonger serving directors with legacy employment agreements the compensation payable in circumstances whereare entitled to liquidated damages if the company terminates their agreement without notice or cause. For executive directors whose service will continue throughout 2013, compensation on termination of employment by the agreementscompany 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 termscomprises 100% of the relevant plan.Retirement benefitsExecutive directors participate in the pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also have other retirement arrangements because of the cap on the amount of benefits that can be provided from the pension arrangements in the US and the UK.The differences in the arrangements for the current executive directors reflect the different arrangements in the UK and the US and the changes in pension arrangements generally over the periods of their employment. Executive directors are entitled to life insurance cover while in employment, and to a pension in the event of ill-health or disability. A pension for their spouseand/or dependants is also available on death.In the US, the defined benefit arrangement is the Pearson Inc. Pension Plan. This plan provides a lump sum convertible to an annuity on retirement. The lump sum accrued at 6% of capped compensation until December 31, 2001 when further benefit accruals ceased. Normal retirement age is 65 although early retirement is possible subject to a reduction for early payment. No increases are guaranteed for pensions in payment. There is a spouse’s pension on death in service and the option to provide a death in retirement pension by reducing the member’s pension.The defined contribution arrangement in the US is a 401(k) plan. At retirement, the account balances will be used to provide benefits. In the event of death before retirement, the account balances will be used to provide benefits for dependants.In the UK, the pension plan is the Pearson Group Pension Plan and executive directors participate in either the Final Pay or the Money Purchase 2003 section. Normal retirement age is 62, but, subject to company consent, retirement is currently possible from age 55. In the Final Pay section, the accrued pension is reduced on retirement prior to age 60. Pensions in payment are guaranteed to increase each year at 5% or the rise in inflation each year, if lower. Pensions for a member’s spouse, dependant childrenand/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 childrenand/or nominated financial dependant are payable.Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at April 6, 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ‘cap’, which45will increase annually in line with the UK Government’s Index of Retail Prices (All Items). The cap was £123,600 as at April 6, 2010.As a result of the UK Government’sA-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.Marjorie ScardinoMarjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.Since 2010, additional pension benefits are provided through: a taxable and non-pensionable cash supplement in place of the unfunded plan; a funded defined contribution plan approved by HM Revenue and Customs (HMRC) as a corresponding plan; and amounts in the legacy unfunded plan. In aggregate, the cash supplement and contributions to the funded plan are based on a percentage ofannual salary and a fixed cash amount index-linked to inflation. The notional cash balance of the legacy unfunded plan increases annually by a specified notional interest rate. The unfunded plan also provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion.Will EthridgeWill Ethridge is a member of the Pearson Inc. Pension Plantermination and the approved 401(k) plan. He also participates in an unfunded, non-qualified Supplemental Executive Retirement Plan (SERP) that provides an annual accrualcost of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Planpension and US Social Security. Additional defined contribution benefits are provided through a funded, non-qualified Excess Plan.Rona FairheadRona 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 FreestoneRobin Freestone is a member of the Money Purchase 2003 section of the Pearson Group Pension Plan. Company contributions are 16% of pensionable salary per annum, restricted to the plan earnings cap. Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on his behalf. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.John MakinsonJohn Makinson is a member of the Pearson Group Pension Plan under which his pensionable salary is restricted to the plan earnings cap. The company ceased contributions on December 31, 2001 to his FURBS arrangement. During 2002 it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pension payable from the Pearson Group Pension Plan and the closed FURBS to target a pension of two-thirds of a revalued base salary on retirement at age 62. The revalued base salary is defined as £450,000 effective at June 1, 2002, increased at January 1, each year by reference to the increase in the UK 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 currently possible from age 55, with company consent.The pension is reduced to reflect the shorter service, and before age 60, further reduced for early payment.46; and Rona Fairhead (HSBC Holdings plc and Spencer Stuart Advisory Board)plc).OurThere were no changesin 2010. Withwas increased to its current level with effect from 1 January 2007, his remuneration was £450,000 per year. We reviewed the chairman’s remuneration at the end of 2010 and agreed that this would be increased to £500,000 per year with effect from April 1, 2011. The next review will take place in three years’ time. Fees payable from July 1, 2010 (£) 65,000 25,000 20,000 10,000 5,000 20,000 20102012 was as follows: Salaries/ Annual Fees Incentive Allowances(1) Benefits(2+3) Total £000 £000 £000 £000 £000 Glen Moreno 450 — — — 450 Marjorie Scardino 969 1,606 70 17 2,662 Will Ethridge 661 1,010 — — 1,671 Rona Fairhead 516 826 12 19 1,373 Robin Freestone 460 685 7 6 1,158 John Makinson 536 801 232 6 1,575 3,592 4,928 321 48 8,889 47 Salaries/
Fees Annual
Incentive Allowances(1) Benefits(2) Total £000 £000 £000 £000 £000 500 — — — 500 993 432 60 65 1,550 658 293 — — 951 529 192 — 25 746 146 63 — 4 213 500 252 — 15 767 549 238 211 16 1,014 3,875 1,470 271 125 5,741 Notes:(1) Allowances for Marjorie Scardino include £45,005£49,570 in respect of housing costs and a US payroll supplement of £11,754.£9,985. 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 £218,653£210,937 for 2010.2012.(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 £15,450£48,600 for pension planning and financial advice. Marjorie Scardino, Rona Fairhead and John Makinson have the use of a chauffeur.(3) No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.20102012 as well as the exercise price, rounded to the nearest whole pence/cent, and the range of expiration dates of these options. Number of Exercise Earliest Options (2) Price Exercise Date Expiry Date Marjorie Scardino 1,672 a 547.2p 08/01/12 02/01/13 41,550 b* 1421.0p 05/09/02 05/09/11 41,550 b* 1421.0p 05/09/03 05/09/11 41,550 b* 1421.0p 05/09/04 05/09/11 41,550 b* 1421.0p 05/09/05 05/09/11 167,872 Will Ethridge 11,010 b* $21.00 05/09/02 05/09/11 11,010 b* $21.00 05/09/03 05/09/11 11,010 b* $21.00 05/09/04 05/09/11 11,010 b* $21.00 05/09/05 05/09/11 44,040 Rona Fairhead 2,371 a 690.4p 08/01/12 02/01/13 20,000 b* 822.0p 11/01/02 11/01/11 20,000 b* 822.0p 11/01/03 11/01/11 20,000 b* 822.0p 11/01/04 11/01/11 62,371 Robin Freestone 1,757 a 534.8p 08/01/11 02/01/12 1,757 John Makinson 19,785 b* 1421.0p 05/09/02 05/09/11 19,785 b* 1421.0p 05/09/03 05/09/11 19,785 b* 1421.0p 05/09/04 05/09/11 19,785 b* 1421.0p 05/09/05 05/09/11 79,140 Number of
Options(2)Exercise
PriceEarliest
Exercise DateExpiry Date 1,672 547.2p 08/01/12 02/01/13 1,672 1,930 805.6p 08/01/15 02/01/16 1,930 990 909.0p 08/01/15 02/01/16 990 (1) No variations to the terms and conditions of share options were made during the year. (2) EachThe plan is described below.a 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.condition.b 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.* Where options are exercisable.(3) Marjorie Scardino contributescontributed 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 6six month periods48and to acquire shares twice annually at the end of these periods at a price that is the lower of the market price at the beginning or the end of each period, both less 15%. (4) The market price on December 31, 20102012 was 1,008.0p1,188p per share and the range during the year was 855.0p1,111.0p to 1,051.0p.1,294.0p.2011.2013. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in “Remuneration of Senior Management” and “Share Options of Senior Management”. The total number of ordinary shares held by senior management as of February 28, 20112013 was 2,735,2202,286,433 representing less than 1% of the issued share capital on February 28, 2011. Ordinary Restricted shares(1) shares(2) Glen Moreno 150,000 — Marjorie Scardino 1,107,118 1,641,511 David Arculus 14,053 — Terry Burns (stepped down on April 30, 2010 ) 12,222 — Patrick Cescau 6,282 — Will Ethridge 333,395 665,820 Rona Fairhead 342,669 467,143 Robin Freestone 193,954 560,526 Susan Fuhrman 11,363 — Ken Hydon 10,715 — John Makinson 551,039 446,042 CK Prahalad (deceased April 16, 2010) 2,410 — Ordinary
shares(1) Restricted
shares(2) 150,000 — 218,546 429,718 15,560 — 670 — 505,635 437,118 440,522 408,593 408,814 441,762 14,476 — 17,111 — 4,886 — 510,213 368,593 (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. (2) 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.(3)The register of directors’ interests (which is open to inspection during normal office hours) contains full details of directors’ shareholdings and options to subscribe for shares. The market price on December 31, 20102012 was 1,008.0p1,188p per share and the range during the year was 855.0p1,111.0p to 1,051.0p.1,294.0p.(4)At December 31, 2010, Patrick Cescau held 168,000 Pearson bonds.(5)(3) Ordinary shares do not include any shares vested but held pending release under a restricted share plan. 49 who is a part-time non-executive director, five executive directors and five non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors, or the number nearest to one-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible for re-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed since 2008, in accordance with good corporate governance,the UK Corporate Governance Code, the board has resolved that all directors should offer themselves for re-election on an annual basis at the company’s annual general meeting. Accordingly, all of the directors will offer themselves for re-election, (or re-appointment in the case of directors who were appointed since the last meeting), at the forthcoming annual general meeting on 2826 April 2011.theirits authority and duties. These can be found on our website (www.pearson.com/investors/shareholder-information/governance).Patrick Cescau, Susan Fuhrman, Josh Lewis and Joshua Lewis.Vivienne Cox. Ken Hydon is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee.chief executives of our three operating divisions.executive committee. The committee also recommends the chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans. David Arculus chairs this committee and its other members are Patrick Cescau, Glen Moreno, Ken Hydon and Ken Hydon.Marjorie ScardinoJohn Fallon and all of the non-executive directors.20102012 were as follows:• 36,317 in fiscal 2010,50• 34,705 in fiscal 2009, and• 31,171 in fiscal 2008.2010, 20092012, 2011 and 20082010 the average number of persons employed in each of our operating divisions. 2010 2009 2008 North American Education 14,828 15,606 15,412 International Education 10,713 8,899 5,718 Professional 3,721 2,662 2,641 FT Group 2,557 2,328 2,379 Penguin 3,470 4,163 4,112 Other 1,028 1,047 909 Continuing operations 36,317 34,705 31,171 2012 2011 2010 18,552 16,133 14,828 16,751 13,646 10,713 3,706 4,561 3,721 3,088 2,765 2,557 883 859 1,028 42,980 37,964 32,847 2,4594,542 in 20092012, 3,557 in 2011, and 2,5093,470 in 2008.ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS To our knowledge, as of2011,2013, the beneficial ownerscompany had been notified under the Financial Services Authority’s Disclosure and Transparency Rules of 3% or more of our issued and outstanding ordinary share capital were as follows: % of outstanding ordinary shares represented by Number of ordinary number of shares shares held held Legal & General Group plc 32,300,784 3.98 % Libyan Investment Authority 24,431,000 3.01 % Number of ordinary
shares held % of outstanding
ordinary shares
represented by
number of shares
held 40,975,445 5.01 % 32,385,175 3.98 % 24,431,000 3.01 % 2011,2013, record holders with registered addresses in the United States held 48,543,47144,297,234 ADRs, which represented 5.97%5.4% of our outstanding ordinary shares. Some of these ADRs are held by nominees and so these numbers may not accurately represent the number of beneficial owners in the United States.20102012 are shown in note 12 in “Item 18. Financial Statements.” Dividends receivable from joint ventures and associates are set out in note 12 in “Item 18. Financial Statements”. There were no other related party transactions in 2010.51ITEM 8. FINANCIAL INFORMATION F-69F-68 hereof.3538 in “Item 18. Financial Statements” of thisForm 20-F and seasonal fluctuations in borrowings, there has been no significant change to our financial condition or results of operations since December 31, 2010.2012. Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December.ITEM 9. THE OFFER AND LISTING Ordinary
shares Average daily
trading volume High Low (In pence) (Ordinary shares) 1294 1111 2,174,000 1222 983 2,012,900 1051 855 2,424,600 893 578 4,030,500 733 519 4,758,300 1255 1168 1,942,100 1294 1162 2,085,800 1266 1111 2,325,300 1255 1155 2,393,700 1222 1069 1,866,800 1207 1038 2,335,900 1176 1087 1,904,400 1105 983 1,929,400 1222 1145 2,635,300 1238 1168 2,530,600 1208 1175 1,705,500 1252 1168 2,063,100 1255 1204 2,048,600 1232 1162 2,486,000 Ordinary shares Average daily High Low trading volume (In pence) (Ordinary shares) 2010 1051 855 2,424,600 2009 893 578 4,030,500 2008 733 519 4,758,300 2007 915 695 6,405,600 2006 811 671 5,004,500 2010 Fourth quarter 1034 926 2,126,500 Third quarter 1029 864 2,167,800 Second quarter 1051 888 2,967,400 First quarter 1037 855 2,466,700 2009 Fourth quarter 893 755 2,777,200 Third quarter 777 578 3,158,500 Second quarter 733 600 4,554,700 First quarter 714 584 5,695,700 February 2011 1064 1013 1,524,200 January 2011 1066 983 2,075,800 December 2010 1034 961 1,673,100 November 2010 974 926 1,909,900 October 2010 1009 948 2,806,800 September 2010 1022 985 1,877,000 52ITEM 10.ADDITIONAL INFORMATION2010.2012. The summary below is qualified entirely by reference to the Articles of Association. We have multiple business objectives and purposes and are authorized to do such things as the board may consider fit to further our interests or incidental or conducive to the attainment of our objectives and purposes. (a) any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and (b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted. (a) may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested; (b) may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; (c) may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body corporate in which the Company is otherwise (directly or indirectly) interested. (a) the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which such approval was subject); or (b) which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above; 53 (a) to disclose any such information to the board or to any Director or other officer or employee of the Company; and/or (b) to use or apply any such information in performing his duties as a Director of the Company. (a) absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or (b) makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Companyand/or for such documents and information to be received and read by a professional adviser, for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists. for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists.• the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiaries;• the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;• any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting orsub-underwriting of which a Director is to participate;• any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Act) representing one per cent or more of either any class of the equity share capital, or the voting rights, in such company;• any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and• any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors.54annual general meeting)AGM) at a place and time determined by the board. The following matters are usually considered at an annual general meeting:• approving final dividends;• consideration of the accounts and balance sheet;• ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet;• the re-appointment or re-election of directors;• appointment or reappointment of, and authorizing the directors to determine the remuneration of, the auditors; and• the renewal, limitation, extension, variation or grant of any authority to the board in relation to the allotment of securities.certificatesCertificates55+44 +44-(0) 121 415 7062.• the chairman of the meeting;• at least three shareholders present in person or by proxy and entitled to vote;• any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or• any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right.56• we will not pay dividends (or issue shares in lieu of dividends); and• we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association.UK regulations,the Companies Act 2006, any person who acquires, either alone or, in specified circumstances, with others anothers: (and each percentage point above it) ; orAmerican Depositary Shares (ADSs)ADSsexcluding the current chief financial officer, without giving the full 12 months’ advance notice, the executive director is entitled to receive payment in lieu of notice (or, in the case of longer serving directors with legacy arrangements, liquidated damagesdamages) equal to 12 months’ base100% of the annual salary at the date of termination and benefits together with a proportionthe annual cost of potential bonus. The chief financial officer has no contractual provisions for compensation on termination by the company without notice or cause.57“Tax“— Tax Considerations” below.a beneficial ownersubject to US federal income taxation regardless of ordinary shares or ADSs who is:its source.• an individual citizen or resident of the US, or• a corporation created or organized in or under the laws of the US or any of its political subdivisions, or• an estate or trust the income of which is subject to US federal income taxation regardless of its source.• dealers or traders in securities or currencies,• financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income,• insurance companies,• tax-exempt entities,• US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position,• US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock,• US holders that have a principal place of business or “tax home” outside the United States, or• US holders whose “functional currency” is not the US dollar.TheExcept where otherwise indicated, the statements of US and UK tax law set out below are based on the laws, interpretations and interpretationstax authority practice in force or applicable as of the date of this Annual Report, and are subject to any changes occurring after that date.US holders.58 before 2013 will be taxed as net capital gain at a maximum rate of 15%20%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under US federal income tax principles. income taxation of capital gainsUnder the Income Tax Treaty, each country generally may tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a a resident, and, in the case of an individual, not ordinarily resident, in the UK for UK tax purposes and who (in the case of an individual) does not carry on a trade, profession or vocation in the UK through a branch or agency or (in(or in the case of a company) does not carry oncompany a trade in the UK through a UK permanent establishment,establishment) to which the ordinary shares or ADSs are attributable will not generally be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal (including redemption) of thesethe ordinary shares or ADSs.on or after 17 March 1988 or who falls to be regarded as resident outside the UK for the purposes of any double tax treaty (“Treaty Non-resident”) on or after 16 March 2005 and continues to not be resident or ordinarily resident in the UK, or continues to be Treaty Non-resident, for a period of less than five complete years of assessment and who disposes of his ordinary shares or ADSs during that period may also be liable on his return to the UK to UK tax on capital gains, subject to any available exemption or relief, even though he is not resident or ordinarily resident in the UK, or is Treaty Non-resident, at the time of the disposal.15%20%. This long-termIn addition, a 3.8% Medicare tax will generally be imposed on the net investment income, which generally would include capital gain rate is scheduled to expire in 2013. ADSs59individual.individual, and in certain other circumstances. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the UK to be credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Convention.The statements below reflect what is understood to be HMRC’s currency practice under existing law.or SDRT is, however, generally payableto be chargeable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares (rounded up to the next multiple of £5 in the case of stamp duty), where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person, or issued or transferred to a person whose business is or includes the provision of clearance services or a nominee or agent for such a person.a decision of the European Court of Justice in 2009, HMRClitigation, HM Revenue & Customs (HMRC) has announcedaccepted that it will notno longer seek to apply the 1.5% SDRT charge when new shares are issued an EUto a clearance service or EU depositary receipt system. It seemssystem on the basis that the charge is not compatible with EU law. HMRC’s view is that the 1.5% SDRT or stamp duty charge will continue to apply to transfertransfers of shares into a clearance service or depositary receipt system, and alsounless they are an integral part of an issue of share capital. This view is currently being challenged in respect of issues of shares into non-EU clearance services and non-EU depositary receipt systems. Arguablyfurther litigation.Accordingly, specific professional advice should be sought before paying the 1.5% SDRT or stamp duty charge in such situations is not consistent with the 2009 decision of the European Court of Justice, although HMRC is likely to impose such charges until further case law or legislation resolves the issue.consideration.consideration (rounded up to the next multiple of £5 in the case of stamp duty). A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes will not be subject to stamp duty or SDRT.A copyisand filed as an exhibitexhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our registered office at 80 Strand, London WC2R 0RL(c/ (c/o the Company Secretary), or, in the US, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable prior request.ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6020102012 and 20092011 we qualified for hedge accounting under IFRS on a number of our key derivative contracts.areonly includes the US dollar and sterling.dollar. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group’s policy does not require existing currency debt to be terminated to match declines in that currency’s share of6120102012 the Group’s net borrowingsborrowings/(cash) in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £683m,£1,354m, sterling £179m,£58m, and South African rand £9m.20102012 and 20092011 the Group met the prescribed designation requirements and hedge effectiveness tests under IFRS for some of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and reserves respectively by the corresponding movement in the fair value of the underlying hedged item.62ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ITEM 12D.AMERICAN DEPOSITARY SHARES
must pay to must pay to the depositary:For: A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs $.02 (or less) per ADS per calendar year Registration of transfer fees Expenses of the depositary Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes Any charges incurred by the depositary or its agents for servicing the deposited securities 20102012 to February 28, 20112013 the Company received payments from the depositary of $350,000 and $38,000$53,853 for continuing annual stock exchange listing fees, standardout-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing the annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.6364ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS ITEM 15. CONTROLS AND PROCEDURES 20102012 was carried out by us under the supervision and with the participation of our management, including the chief executive officer and chief financial officer. Based on that evaluation the chief executive officer and chief financial officer concluded that Pearson’s disclosure controls and procedures have been designed to provide, and arewere effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow such timely decision regarding required disclosures. A controls system, no matter how well designed and operated cannot provide absolute assurance to achieve its objectives.2010,2012, and has concluded that such internal control over financial reporting was effective.2010,2012, has also audited the effectiveness of the Company’s internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report may be found onpage F-2.ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 65ITEM 16B. CODE OF ETHICS business conduct) which applies to all employees including the chief executive officer and chief financial officer and other senior financial management. This code of ethics is available on our website(www.pearson.com/ (www.pearson.com/responsibility/sustainable-business-practice/ethics/values/code-of-conduct/). The information on our website is not incorporated by reference into this report.ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES • Pre-approved non-audit services can be authorized 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.20092011 and 2010: 2010 2009 £m £m Audit fees 6 6 Tax fees 2 2 All other fees 2 1 2012 2011 £m £m 6 6 2 2 1 1 (2009:(2011: £35,000) of audit fees relating to the audit of the parent company.Other services relates mainly to due diligence on acquisitions, notably our Brazilian acquisition, Sistema Educacional Brasileiro where we assessed that our auditors were best qualified and cost effective in taking on this role.ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 66ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES MaximumnumberTotal number ofof shares thatunits purchasedmay yet beas part of publiclypurchased underTotal number ofAverage priceannounced plansthe plans orPeriodshares purchasedpaid per shareor programsprogramsJune 1, 2009 - June 30, 20092,000,000£6.14N/AN/AMay 1, 2010 - May 31, 20103,000,000£9.94N/AN/AJune 1, 2010 - June 30, 20102,000,000£9.17N/AN/AOctober 1, 2010 - October 31, 20101,000,000£9.83N/AN/ANovember 1, 2010 - November 31, 20102,000,000£9.46N/AN/A Total number of
shares purchased Average price
paid per share Total number of
units purchased
as part of publicly
announced plans
or programs Maximum
number
of shares that
may yet be
purchased under
the plans or
programs 1,000,000 £ 11.55 N/A N/A 4,369,406 £ 11.08 N/A N/A ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING AUDITOR ITEM 16G. CORPORATE GOVERNANCE ITEM 16H. MINE SAFETY DISCLOSURE ITEM 17. FINANCIAL STATEMENTS ITEM 18. FINANCIAL STATEMENTS F-70F-68 hereof.ITEM 19. EXHIBITS ITEM 19.EXHIBITS1.1 Articles of Association of Pearson plc. 2.1 Indenture dated June 23, 2003 between Pearson plc and The Bank of New York, as trustee * 2.2 Indenture dated May 25, 2004 among Pearson Dollar Finance plc, as Issuer, Pearson plc, Guarantor, and the Bank of New York, as trustee, Paying Agent and Calculation Agent. # 2.3 Indenture dated June 21, 2001 between Pearson plc and The Bank of New York, as trustee.† 2.4 Indenture dated March 26, 2009 among Pearson Funding One plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C., as trustee.¥ 2.5 Indenture dated May 6, 2008 among Pearson Dollar Finance Two plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York, as trustee, Paying Agent and Calculation Agent.¥ 672.6 Indenture dated October 27, 1999 between Pearson plc, as the Issuer and The Law Debenture Trust Corporation P.L.C., as trustee.¥ 2.7 Indenture dated May 17, 2010 between Pearson Funding Two plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York Mellon, as trustee, Paying Agent and Calculation Agent.l 2.8 Indenture dated May 8, 2012 between Pearson Funding Four plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York Mellon, as trustee, Paying Agent and Calculation Agent. 8.1 List of Significant Subsidiaries. 12.1 Certification of Chief Executive Officer. 12.2 Certification of Chief Financial Officer. 13.1 Certification of Chief Executive Officer. 13.2 Certification of Chief Financial Officer. 15 Consent of PricewaterhouseCoopers LLP. * Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004. # Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2004 and filed June 27, 2005. † Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2001 and filed June 10, 2002. ¥ Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2009 and filed March 31, 2010. 68l Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2010 and filed March 25, 2011. F-2 F-3 F-4 F-5 F-7F-6 F-8 F-9 F-10F-120102012 and December 31, 20092011 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2012, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).. and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.25, 2011F-222, 2013Consolidated Income Statement
Year ended 31 December 2010All figures in £ millions2012 Notes 2010 2009 2008 Sales 2 5,663 5,140 4,405 Cost of goods sold 4 (2,588 ) (2,382 ) (2,046 ) 3,075 2,758 2,359 Operating expenses 4 (2,373 ) (2,169 ) (1,820 ) Share of results of joint ventures and associates 12 41 30 25 2 743 619 564 Finance costs 6 (109 ) (122 ) (136 ) Finance income 6 36 26 41 670 523 469 Income tax 7 (146 ) (146 ) (125 ) 524 377 344 Profit/(loss) for the year from discontinued operations 3 776 85 (21 ) 1,300 462 323 Equity holders of the company 1,297 425 292 Non-controlling interest 3 37 31 — basic 8 161.9p 53.2p 36.6p — diluted 8 161.5p 53.1p 36.6p — basic 8 66.0p 47.0p 42.9p — diluted 8 65.9p 47.0p 42.9P F-3 Notes 2012 2011 2010 2 5,059 4,817 4,610 4 (2,224 ) (2,072 ) (1,999 ) 2,835 2,745 2,611 4 (2,216 ) (2,072 ) (2,014 ) 12 — 412 — (113 ) — 12 9 33 41 2 515 1,118 638 6 (113 ) (96 ) (109 ) 6 32 25 36 434 1,047 565 7 (148 ) (162 ) (110 ) 286 885 455 3 43 71 845 329 956 1,300 326 957 1,297 3 (1 ) 3 8 40.5p 119.6p 161.9p 8 40.5p 119.3p 161.5p 8 35.2p 110.7p 57.4p 8 35.1p 110.5p 57.3p Consolidated Statement of Comprehensive Income
Year ended 31 December 2010All figures in £ millions2012 Notes 2010 2009 2008 Profit for the year 1,300 462 323 Net exchange differences on translation of foreign operations 173 (388 ) 1,125 Currency translation adjustment disposed — subsidiaries 13 — 49 Currency translation adjustment disposed — joint venture — — 1 Actuarial gains/(losses) on retirement benefit obligations — Group 25 70 (299 ) (71 ) Actuarial gains/(losses) on retirement benefit obligations — associate 12 1 (3 ) (3 ) Net increase in fair values of proportionate holding arising on stepped acquisition — 18 — Tax on items recognised in other comprehensive income 7 (41 ) 91 9 216 (581 ) 1,110 1,516 (119 ) 1,433 Equity holders of the company 1,502 (127 ) 1,327 Non-controlling interest 14 8 106 F-4 Notes 2012 2011 2010 329 956 1,300 (238 ) (44 ) 173 — — 13 25 (119 ) (56 ) 70 12 (3 ) (8 ) 1 7 55 3 (41 ) (305 ) (105 ) 216 24 851 1,516 23 858 1,502 1 (7 ) 14 Consolidated Balance Sheet
As at 31 December 2010All figures in £ millions2012 Notes 2010 2009 Property, plant and equipment 10 366 388 Intangible assets 11 5,467 5,129 Investments in joint ventures and associates 12 71 30 Deferred income tax assets 13 276 387 Financial assets��— Derivative financial instruments 16 134 112 Other financial assets 15 58 62 Trade and other receivables 22 129 112 6,501 6,220 Intangible assets — Pre-publication 20 647 650 Inventories 21 429 445 Trade and other receivables 22 1,337 1,284 Financial assets — Derivative financial instruments 16 6 — Financial assets — Marketable securities 14 12 63 Cash and cash equivalents (excluding overdrafts) 17 1,736 750 4,167 3,192 10,668 9,412 F-5 Notes 2012 2011 10 327 383 11 6,218 6,342 12 15 32 13 229 287 16 174 177 25 — 25 15 31 26 22 79 151 7,073 7,423 20 666 650 21 261 407 22 1,104 1,386 16 4 — 14 6 9 17 1,062 1,369 3,103 3,821 32 1,172 — 11,348 11,244 18 (2,010 ) (1,964 ) 16 — (2 ) 13 (601 ) (620 ) 25 (172 ) (166 ) 23 (110 ) (115 ) 24 (282 ) (325 ) (3,175 ) (3,192 ) 24 (1,556 ) (1,741 ) 18 (262 ) (87 ) 16 — (1 ) (291 ) (213 ) 23 (38 ) (48 ) (2,147 ) (2,090 ) 32 (316 ) — (5,638 ) (5,282 ) 5,710 5,962 27 204 204 27 2,555 2,544 28 (103 ) (149 ) 128 364 2,902 2,980 5,686 5,943 24 19 5,710 5,962 Consolidated Balance Sheet (Continued)As at 31 December 2010All figures in £ millions Notes 2010 2009 Financial liabilities — Borrowings 18 (1,908 ) (1,934 ) Financial liabilities — Derivative financial instruments 16 (6 ) (2 ) Deferred income tax liabilities 13 (471 ) (473 ) Retirement benefit obligations 25 (148 ) (339 ) Provisions for other liabilities and charges 23 (42 ) (50 ) Other liabilities 24 (246 ) (253 ) (2,821 ) (3,051 ) Trade and other liabilities 24 (1,605 ) (1,467 ) Financial liabilities — Borrowings 18 (404 ) (74 ) Financial liabilities — Derivative financial instruments 16 — (7 ) Current income tax liabilities (215 ) (159 ) Provisions for other liabilities and charges 23 (18 ) (18 ) (2,242 ) (1,725 ) (5,063 ) (4,776 ) 5,605 4,636 Share capital 27 203 203 Share premium 27 2,524 2,512 Treasury shares 28 (137 ) (226 ) Translation reserve 402 227 Retained earnings 2,546 1,629 5,538 4,345 Non-controlling interest 67 291 5,605 4,636 20112013 and signed on its behalf byF-6Consolidated Statement of Changes in Equity
Year ended 31 December 2010All figures in £ millions2012 Equity attributable to equity holders of the company Non- Share Share Treasury Translation Retained controlling Total capital premium shares reserve earnings Total interest equity At 1 January 2010 203 2,512 (226 ) 227 1,629 4,345 291 4,636 Profit for the year — — — — 1,297 1,297 3 1,300 Other comprehensive income — — — 175 30 205 11 216 Equity-settled transactions — — — — 50 50 — 50 Tax on equity-settled transactions — — — — 4 4 — 4 Issue of ordinary shares under share option schemes — 12 — — — 12 — 12 Purchase of treasury shares — — (77 ) — — (77 ) — (77 ) Release/cancellation of treasury shares — — 166 — (166 ) — — — Changes in non-controlling shareholding — — — — (6 ) (6 ) (231 ) (237 ) Dividends — — — — (292 ) (292 ) (7 ) (299 ) 203 2,524 (137 ) 402 2,546 5,538 67 5,605 Equity attributable to equity holders of the company Non- Share Share Treasury Translation Retained controlling Total capital premium shares reserve earnings Total interest equity At 1 January 2009 202 2,505 (222 ) 586 1,679 4,750 274 5,024 Profit for the year — — — — 425 425 37 462 Other comprehensive expense — — — (359 ) (193 ) (552 ) (29 ) (581 ) Equity-settled transactions — — — — 37 37 — 37 Tax on equity-settled transactions — — — — 6 6 — 6 Issue of ordinary shares under share option schemes 1 7 — — — 8 — 8 Purchase of treasury shares — — (33 ) — — (33 ) — (33 ) Release of treasury shares — — 29 — (29 ) — — — Put option over non-controlling interest — — — — (23 ) (23 ) — (23 ) Changes in non-controlling shareholding — — — — — — 24 24 Dividends — — — — (273 ) (273 ) (15 ) (288 ) At 31 December 2009 203 2,512 (226 ) 227 1,629 4,345 291 4,636 F-7 Equity attributable to equity holders of the company Share
capital Share
premium Treasury
shares Translation
reserve Retained
earnings Total Non-
controlling
interest Total
equity 204 2,544 (149 ) 364 2,980 5,943 19 5,962 — — — — 326 326 3 329 — — — (236 ) (67 ) (303 ) (2 ) (305 ) — — — — 32 32 — 32 — — — — (6 ) (6 ) — (6 ) — 11 — — — 11 — 11 — — — — — — — — — — 46 — (46 ) — — — — — — — 39 39 — 39 — — — — (10 ) (10 ) 6 (4 ) — — — — (346 ) (346 ) (2 ) (348 ) 204 2,555 (103 ) 128 2,902 5,686 24 5,710 Equity attributable to equity holders of the company Share
capital Share
premium Treasury
shares Translation
reserve Retained
earnings Total Non-
controlling
interest Total
equity 203 2,524 (137 ) 402 2,546 5,538 67 5,605 — — — — 957 957 (1 ) 956 — — — (38 ) (61 ) (99 ) (6 ) (105 ) — — — — 40 40 — 40 — — — — 3 3 — 3 1 20 — — — 21 — 21 — — (60 ) — — (60 ) — (60 ) — — 48 — (48 ) — — — — — — — (63 ) (63 ) — (63 ) — — — — (76 ) (76 ) (40 ) (116 ) — — — — (318 ) (318 ) (1 ) (319 ) 204 2,544 (149 ) 364 2,980 5,943 19 5,962 Equity attributable to equity holders of the company Share
capital Share
premium Treasury
shares Translation
reserve Retained
earnings Total Non-
controlling
interest Total
equity 203 2,512 (226 ) 227 1,629 4,345 291 4,636 — — — — 1,297 1,297 3 1,300 — — — 175 30 205 11 216 — — — — 50 50 — 50 — — — — 4 4 — 4 — 12 — — — 12 — 12 — — (77 ) — — (77 ) — (77 ) — — 166 — (166 ) — — — — — — — (6 ) (6 ) (231 ) (237 ) — — — — (292 ) (292 ) (7 ) (299 ) 203 2,524 (137 ) 402 2,546 5,538 67 5,605 Equity attributable to equity holders of the company Non- Share Share Treasury Translation Retained controlling Total capital premium shares reserve earnings Total interest equity At 1 January 2008 202 2,499 (216 ) (514 ) 1,724 3,695 179 3,874 Profit for the year — — — — 292 292 31 323 Other comprehensive income/(expense) — — — 1,100 (65 ) 1,035 75 1,110 Equity-settled transactions — — — — 33 33 — 33 Tax on equity-settled transactions — — — — (7 ) (7 ) — (7 ) Issue of ordinary shares under share option schemes — 6 — — — 6 — 6 Purchase of treasury shares — — (47 ) — — (47 ) — (47 ) Release of treasury shares — — 41 — (41 ) — — — Changes in non-controlling shareholding — — — — — — 6 6 Dividends — — — — (257 ) (257 ) (17 ) (274 ) At 31 December 2008 202 2,505 (222 ) 586 1,679 4,750 274 5,024 F-8Consolidated Cash Flow Statement
Year ended 31 December 2010All figures in £ millions2012 Notes 2010 2009 2008 Net cash generated from operations 31 1,169 1,012 894 Interest paid (78 ) (90 ) (87 ) Tax paid (85 ) (103 ) (89 ) Net cash generated from operating activities 1,006 819 718 Acquisition of subsidiaries, net of cash acquired 29 (535 ) (208 ) (395 ) Acquisition of joint ventures and associates (22 ) (14 ) (5 ) Purchase of investments (7 ) (10 ) (1 ) Purchase of property, plant and equipment (76 ) (62 ) (75 ) Proceeds from the sale of investments — — 5 Proceeds from sale of property, plant and equipment 31 — 1 2 Purchase of intangible assets (56 ) (58 ) (45 ) Disposal of subsidiaries, net of cash disposed 30 984 — 99 Tax paid on disposal of subsidiaries (250 ) — — Interest received 10 3 11 Dividends received from joint ventures and associates 23 22 23 Net cash received from/(used in) investing activities 71 (326 ) (381 ) Proceeds from issue of ordinary shares 12 8 6 Purchase of treasury shares (77 ) (33 ) (47 ) Proceeds from borrowings 241 296 455 Liquid resources acquired — (13 ) — Liquid resources sold 53 — — Repayment of borrowings (13 ) (343 ) (275 ) Finance lease principal payments (3 ) (2 ) (3 ) Dividends paid to company’s shareholders 9 (292 ) (273 ) (257 ) Dividends paid to non-controlling interest (6 ) (20 ) (28 ) Transactions with non-controlling interest (7 ) 14 12 Net cash used in financing activities (92 ) (366 ) (137 ) Effects of exchange rate changes on cash and cash equivalents (1 ) (36 ) (103 ) 984 91 97 Cash and cash equivalents at beginning of year 680 589 492 17 1,664 680 589 Notes 2012 2011 2010 34 916 1,093 1,169 (75 ) (70 ) (78 ) (65 ) (151 ) (85 ) 776 872 1,006 30 (716 ) (779 ) (535 ) (39 ) (9 ) (22 ) (10 ) (12 ) (7 ) (78 ) (67 ) (76 ) (73 ) (77 ) (56 ) 31 (11 ) (6 ) 984 12 — 428 — — 75 — 34 1 9 — 3 3 — 23 — — (19 ) — — — — (250 ) 9 10 10 27 30 23 (883 ) (395 ) 71 27 11 21 12 28 — (60 ) (77 ) 327 — 241 — 2 53 (1 ) — — — (318 ) (13 ) (8 ) (8 ) (3 ) 9 (346 ) (318 ) (292 ) (2 ) (1 ) (6 ) 33 (4 ) (108 ) (7 ) (23 ) (790 ) (92 ) (24 ) (60 ) (1 ) (154 ) (373 ) 984 1,291 1,664 680 17 1,137 1,291 1,664 F-9Consolidated Financial Statementsconsolidated financial statements liability company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R ORL.2011.1. Accounting policiesa. Basis of preparationInternational Financial ReportingIFRS Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) and with those parts of the Companies Act 2006 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.value.2010• 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. The 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. Management have assessed that the amendments have no impact on the Group’s financial statements.• 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. The amendments clarify the scope and accounting for group cash-settled share-based payment transactions. Management have assessed that the amendments have no impact on the Group’s financial statements.• 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. Management have assessed that this interpretation has no impact on the Group’s financial statements as the Group does not currently distribute non-cash assets.F-10Amendments to IFRS 7 ‘Financial Instruments: Disclosures’.NotesAmendments to the Consolidated Financial Statements (Continued)IFRS 1 ‘First-time Adoption’.• 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’. Management have assessed that this interpretation has no impact on the Group’s financial statements as the Group has not received such assets from customers.• ‘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. Management have assessed that these amendments have no impact on the Group’s financial statements.• 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 IAS 32 ‘Financial Instruments: Presentation’ - Classification of Rights, effective for annual reporting periods beginning on or after 1 February 2010. The amendments clarify that rights, options or warrants issued to 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.• IFRS 9 ‘Financial Instruments’• IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’, effective for annual reporting periods beginning on or after 1 July 2010. IFRIC 19 clarifies accounting required 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. The amendments remedy 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.• Amendments to IFRS 7 ‘Financial Instruments: Disclosures’ — Transfers of Financial Assets, effective for annual reporting periods beginning on or after 1 July 2011. The amendments require enhanced disclosure where an asset is transferred but not derecognised, and new disclosure for assets that are derecognised but to which the entity continues to have an exposure.• Amendments to IAS 12 ‘Deferred Tax’ — Recoverability of Underlying Assets, effective for annual reporting periods beginning on or after 1 January 2012. The amendments provide, for certain investment properties, an exception to the principle that the measurement of deferred tax assets and liabilities should reflect the tax consequences that would follow from the manner in which the entity expects to recover the carrying amount of an asset.• ‘Improvements to IFRSs — 2010’, effective dates vary upon the amendment. This is the third set of amendments published under IASB’s annual improvements process and incorporates minor amendments to seven standards and interpretations.Management are currently assessing the impact of these new standards, interpretations and amendments on the Group’s financial statements.F-11Consolidatedconsolidated financial statements continuedStatements (Continued)Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosures of Involvement with Other Entities’ have been issued. IAS 27 ‘Separate Financial Statements’ (Revised 2011) has been amended following the issuance of IFRS 10 and retains the guidance for separate financial statements, IAS 28 ‘Investments in Associates and Joint Ventures’ (Revised 2011) has been amended following the issuance of IFRS 10 and IFRS 11. All three new standards and two amended standards are effective for annual reporting periods beginning on or after 1 January 2013.• Intangible assets:Goodwill• Intangible assets:Pre-publication assets• Royalty advances• Taxation• Employee benefits:Pension obligations• Revenue recognitionb. Consolidation — The acquisition method of accounting is used to account for business combinations of the Group with an acquisition date on or after 1 January 2010. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interest issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. — 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. — Transactions with non-controlling interests are treated as transactions with shareholders. Any surplus or deficit arising from disposals to a non-controlling interest is recorded in equity. For purchases from a non-controlling interest, the difference between consideration paid and the relevant share acquired of the carrying value of the subsidiary is recorded in equity. — 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.F-12Notes to the Consolidated Financial Statements (Continued)c. Foreign currency translation — 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. — 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. — 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: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.$1.54 (2009: $1.57)$1.59 (2011: $1.60) and the year end rate was $1.57 (2009: $1.61)$1.63 (2011: $1.55).d. Property, plant and equipmentBuildings (freehold):20-50 yearsBuildings (leasehold): over the period of the leasePlant and equipment: 3-10 years20–50 years over the period of the lease 3–10 years F-13Notes to the Consolidated Financial Statements (Continued)e. Intangible assets — For the acquisition of subsidiaries made on or after 1 January 2010 goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. For the acquisition of subsidiaries made from the date of transition to IFRS to 31 December 2009 goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets acquired. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets acquired. Goodwill on acquisitions of associates and joint ventures is included in investments in associates and joint ventures. Subject to the transition adjustments to IFRS required by IFRS 1, the accounting for business combinations before the date of transition has been grandfathered. — 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. — 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. — 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 an amortisation method that reflects the pattern of their consumption. — 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.F-14Notes to the Consolidated Financial Statements (Continued)31)34).f. Other financial assetsg. Inventoriesh. Royalty advancesi. Newspaper development costsj. Cash and cash equivalentsaswhere these amounts are used to offset the borrowings of the Group.F-15
k. Share capitalNotes to the Consolidated Financial Statements (Continued)k. Share capitall. Borrowingsm. Derivative financial instrumentsn. TaxationF-16Notes to the Consolidated Financial Statements (Continued)o. Employee benefits— 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 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 significant other post-retirement obligations are assessed annually by independent qualified actuaries.— 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 areF-17Consolidated Financial Statements (Continued)consolidated financial statements continuedexercised. 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. Provisionswhen the payment of the deferred consideration is probable.sub-leasingq. Revenue recognition income.q. Revenue recognitionr. LeasesF-18Consolidated Financial Statements (Continued)consolidated financial statements continuedpayment is -borrowings.– 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.s. Dividendst. Non-current assets and liabilities held for saleu. Trade receivables2. Segment informationfivethe following business segments: — Educational publishing, assessment and testing for the school and higher education market within the USA and Canada; — Educational publishing, assessment and testing for the school and higher education market outside of North America; — Business and technology publishing, training, testing and certification for professional bodies; — Publisher of theFinancial Times, business magazines and specialist information; — PublisherConsumer publisher with brand imprints such as Penguin, Putnam, Berkley, Viking and Dorling Kindersley.F-19Consolidated Financial Statements (Continued)consolidated financial statements continuedThe results of the Interactive Data segment are shown as discontinued. 2010 North American International FT Discontinued Notes Education Education Professional Group Penguin Corporate operations Group All figures in £ millions Sales (external) 2,640 1,234 333 403 1,053 — — 5,663 Sales (inter-segment) — — 5 — 3 — — 8 Adjusted operating profit 469 171 51 60 106 — — 857 Amortisation of acquired intangibles (53 ) (35 ) (7 ) (9 ) (1 ) — — (105 ) Acquisition costs (1 ) (7 ) (2 ) (1 ) — — — (11 ) Other net gains and losses — (10 ) — 12 — — — 2 415 119 42 62 105 — — 743 Finance costs 6 (109 ) Finance income 6 36 670 Income tax 7 (146 ) 524 Segment assets 4,401 2,122 601 447 1,138 1,888 — 10,597 Joint ventures 12 15 — 1 1 1 — — 18 Associates 12 24 6 — 23 — — — 53 4,440 2,128 602 471 1,139 1,888 — 10,668 Share of results of joint ventures and associates 12 (3 ) 1 1 42 — — — 41 Capital expenditure 10,11 45 27 16 17 18 — 21 144 Pre-publication investment 20 215 61 7 — 36 — — 319 Depreciation 10 23 19 9 5 13 — 13 82 Amortisation 11,20 307 111 18 23 43 — 12 514 F-20 2012 Notes North
American
Education International
Education Professional FT
Group Corporate Discontinued
operations Group 2,658 1,568 390 443 — — 5,059 5 1 12 — — — 18 536 216 37 49 — — 838 (66 ) (73 ) (37 ) (4 ) — — (180 ) (7 ) (8 ) (1 ) (4 ) — — (20 ) — — (123 ) — — — (123 ) 463 135 (124 ) 41 — — 515 6 (113 ) 6 32 434 7 (148 ) 286 5,449 2,390 631 445 1,246 1,145 11,306 12 — 7 — 1 — — 8 12 1 4 — 2 — 27 34 5,450 2,401 631 448 1,246 1,172 11,348 12 — (3 ) (11 ) 23 — — 9 10, 11 66 33 16 26 — 11 152 20 250 76 7 — — 31 364 10 41 16 8 8 — 7 80 11, 20 311 142 45 16 — 39 553 Consolidated Financial Statements (Continued)consolidated financial statements continued 2009 North American International Discontinued Notes Education Education Professional FT Group Penguin Corporate operations Group All figures in £ millions Sales (external) 2,470 1,035 275 358 1,002 — — 5,140 Sales (inter-segment) — — 7 — 24 — — 31 Adjusted operating profit 403 141 43 39 84 — — 710 Amortisation of acquired intangibles (49 ) (32 ) (1 ) (8 ) (1 ) — — (91 ) 354 109 42 31 83 — — 619 Finance costs 6 (122 ) Finance income 6 26 523 Income tax 7 (146 ) 377 Segment assets 4,382 1,635 377 420 1,173 924 471 9,382 Joint ventures 12 13 — 1 1 3 — — 18 Associates 12 — 5 — 7 — — — 12 4,395 1,640 378 428 1,176 924 471 9,412 Share of results of joint ventures and associates 12 (2 ) 6 1 25 — — — 30 Capital expenditure 10,11 38 22 12 15 10 — 29 126 Pre-publication investments 20 220 58 8 — 36 — — 322 Depreciation 10 24 16 10 5 9 — 21 85 Amortisation 11,20 274 89 13 20 42 — 16 454 F-21 2011 Notes North
American
Education International
Education Professional FT
Group Corporate Discontinued
operations Group 2,584 1,424 382 427 — — 4,817 3 — 9 — — — 12 493 196 66 76 — — 831 (57 ) (60 ) (11 ) (8 ) — — (136 ) (2 ) (9 ) — (1 ) — — (12 ) 29 (6 ) — 412 — — 435 463 121 55 479 — — 1,118 6 (96 ) 6 25 1,047 7 (162 ) 885 5,198 2,388 626 424 1,555 1,021 11,212 12 — 16 — 1 — 1 18 12 1 8 — 4 — 1 14 5,199 2,412 626 429 1,555 1,023 11,244 12 — (2 ) 1 34 — — 33 10, 11 75 33 17 19 — 12 156 20 237 60 2 — — 32 331 10 36 14 8 4 — 8 70 11, 20 309 128 16 20 — 45 518 Consolidated Financial Statements (Continued)consolidated financial statements continued 2008 North American International Discontinued Notes Education Education Professional FT Group Penguin Corporate operations Group All figures in £ millions Sales (external) 2,002 866 244 390 903 — — 4,405 Sales (inter-segment) — — 4 — 22 — — 26 Adjusted operating profit 303 135 36 74 93 — — 641 Amortisation of acquired intangibles (45 ) (22 ) (1 ) (7 ) (2 ) — — (77 ) 258 113 35 67 91 — — 564 Finance costs 6 (136 ) Finance income 6 41 469 Income tax 7 (125 ) 344 Segment assets 4,952 1,358 423 482 1,211 923 524 9,873 Joint ventures 12 — 8 — 2 3 — — 13 Associates 12 — 4 — 6 — — — 10 4,952 1,370 423 490 1,214 923 524 9,896 Share of results of joint 12 — 5 — 19 1 — — 25 ventures and associates Capital expenditure 10, 11 22 30 15 17 15 — 25 124 Pre-publication investments 20 202 52 7 — 36 — — 297 Depreciation 10 25 12 8 13 9 — 13 80 Amortisation 11, 20 219 �� 69 12 12 36 — 12 360 2010 Notes North
American
Education International
Education Professional FT
Group Corporate Discontinued
operations Group 2,640 1,234 333 403 — — 4,610 — — 5 — — — 5 469 171 51 60 — — 751 (53 ) (35 ) (7 ) (9 ) — — (104 ) (1 ) (7 ) (2 ) (1 ) — — (11 ) — (10 ) — 12 — — 2 415 119 42 62 — — 638 6 (109 ) 6 36 565 7 (110 ) 455 4,401 2,122 601 447 1,888 1,138 10,597 15 — 1 1 — 1 18 24 6 — 23 — — 53 4,440 2,128 602 471 1,888 1,139 10,668 (3 ) 1 1 42 — — 41 45 27 16 17 — 39 144 215 61 7 — — 36 319 23 19 9 5 — 26 82 307 111 18 23 — 55 514 2010,2012, sales from the provision of goods were £4,200m (2009: £3,838m; 2008: £3,374m)£2,946m (2011: £3,009m; 2010: £3,147) and sales from the provision of services were £1,463m (2009: £1,302m; 2008: £1,031m)£2,113m (2011: £1,808m; 2010: £1,463m). 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 and other service businesses are classified as being from the provision of services.£311m (2009: £153m)£296m (2011: £404m) (see note 29)30). Capital expenditure, depreciation and amortisation include amounts relating to discontinued operations.F-22Notes to the Consolidated Financial Statements (Continued) Sales Non-current assets 2010 2009 2008 2010 2009 2008 All figures in £ millions UK 790 694 700 1,031 904 660 Other European countries 415 387 392 237 179 154 USA 3,361 3,146 2,596 3,790 3,607 4,396 Canada 228 198 165 235 204 209 Asia Pacific 577 497 403 364 319 155 Other countries 292 218 149 376 121 14 5,663 5,140 4,405 6,033 5,334 5,588 UK 31 54 55 — 37 41 Other European countries 48 86 71 — 63 70 USA 196 317 272 — 204 228 Canada 2 2 2 — — — Asia Pacific 18 23 12 — 21 24 Other countries 1 2 2 — — — 296 484 414 — 325 363 5,959 5,624 4,819 6,033 5,659 5,951 Sales Non-current assets 2012 2011 2010 2012 2011 2010 705 713 638 803 1,237 1,031 391 394 339 234 225 237 2,800 2,707 2,747 4,496 4,325 3,790 145 150 165 307 226 235 647 514 450 524 570 364 371 339 271 275 325 376 5,059 4,817 4,610 6,639 6,908 6,033 160 152 183 — — — 78 77 124 — — — 603 606 810 — — — 56 59 65 — — — 139 132 145 — — — 17 19 22 — — — 1,053 1,045 1,349 — — — 6,112 5,862 5,959 6,639 6,908 6,033 Non-currentThe geographical split of non-current assets areis 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 trade and other receivables.F-23
3. Discontinued operationsNotes to the Consolidated Financial Statements (Continued)3. Discontinued operations20092012, 2011 and 2010, relate to the Group’s interestPenguin and in 2010 relate also to Interactive Data (sold on 29 July 2010).in 2008 relate to interactive Data and the Data Management business (sold on 22 February 2008). 2010 2009 2008 2008 2008 Interactive Interactive Interactive Data Data Data Data Management Total All figures in £ millions Sales 296 484 406 8 414 Operating profit 73 136 112 — 112 Finance income — 1 4 — 4 73 137 116 — 116 Attributable tax expense (28 ) (52 ) (47 ) — (47 ) 45 85 69 — 69 Profit/(loss) on disposal of discontinued operations before tax 1,037 — — (53 ) (53 ) Attributable tax expense (306 ) — — (37 ) (37 ) 776 85 69 (90 ) (21 ) Operating cash flows 85 132 127 — 127 Investing cash flows (35 ) (23 ) (50 ) — (50 ) Financing cash flows 49 (80 ) (29 ) — (29 ) 99 29 48 — 48 4. Operating expenses 2010 2009 2008 All figures in £ millions 2,588 2,382 2,046 Distribution costs 298 275 235 Administrative and other expenses 2,190 2,014 1,687 Other income (115 ) (120 ) (102 ) 2,373 2,169 1,820 4,961 4,551 3,866 F-24 2012 2011 2010 2010 2010 Penguin Penguin Penguin Interactive
Data Total 1,053 1,045 1,053 296 1,349 62 108 105 73 178 62 108 105 73 178 (19 ) (37 ) (36 ) (28 ) (64 ) 43 71 69 45 114 — — — 1,037 1,037 — — — (306 ) (306 ) 43 71 69 776 845 83 107 82 85 167 (81 ) (13 ) (26 ) (35 ) (61 ) 10 (71 ) (40 ) 49 9 12 23 16 99 115 2012 2011 2010 2,224 2,072 1,999 177 190 174 2,111 1,999 1,919 (72 ) (117 ) (79 ) 2,216 2,072 2,014 4,440 4,144 4,013 Consolidated Financial Statements (Continued)consolidated financial statements continued Notes 2010 2009 2008 All figures in £ millions Utilisation of inventory 21 836 843 832 Depreciation of property, plant and equipment 10 69 64 67 Amortisation of intangible assets — Pre-publication 20 350 307 244 Amortisation of intangible assets — Other 11 152 131 104 Employee benefit expense 5 1,849 1,725 1,392 Operating lease rentals 166 157 156 Other property costs 64 70 102 Royalties expensed 524 479 400 Advertising, promotion and marketing 250 219 238 Information technology costs 78 72 60 Other costs 738 604 373 Other income (115 ) (120 ) (102 ) 4,961 4,551 3,866 Notes 2012 2011 2010 21 512 585 579 10 72 63 56 20 283 292 313 11 230 181 146 20 12 11 5 1,916 1,778 1,675 171 164 147 33 37 37 245 260 270 247 234 208 82 74 74 701 581 576 (72 ) (117 ) (79 ) 4,440 4,144 4,013 2010 2009 2008 All figures in £ millions Fees payable to the company’s auditors for the audit of parent company and consolidated financial statements 4 4 3 The audit of the company’s subsidiaries pursuant to legislation 2 2 2 Tax services 2 2 2 Other services 2 1 1 10 9 8 2012 2011 2010 4 4 4 2 2 2 6 6 6 1 — — 1 — — 1 1 1 1 1 1 2 2 2 — 1 2 3 3 4 9 9 10 2010 2009 2008 All figures in £ millions Group audit fees including fees for attestation under section 404 of the
Sarbanes-Oxley Act 6 6 5 Non-audit fees 4 3 3 10 9 8 2012 2011 2010 6 6 6 3 3 4 9 9 10 Tax services include services related to tax planning and various other tax advisory matters. Other services is mainly due diligence on acquisitions, notably our Brazilian acquisition, Sistema Educational Brasileiro (SEB), where we assessed that our auditors were best qualified and cost effective in taking on this role.F-25Consolidated Financial Statements (Continued)consolidated financial statements continued5. Employee information Notes 2010 2009 2008 All figures in £ millions Wages and salaries (including termination benefits and restructuring costs) 1,588 1,496 1,184 Social security costs 136 124 103 Share-based payment costs 26 35 27 25 Retirement benefits — defined contribution plans 25 66 60 39 Retirement benefits — defined benefit plans 25 22 16 35 Other post-retirement benefits 25 2 2 6 1,849 1,725 1,392 Notes 2012 2011 2010 1,659 1,531 1,452 132 126 111 26 28 36 32 25 71 62 62 25 22 20 16 25 4 3 2 1,916 1,778 1,675 2010 2009 2008 Average number employed North American Education 14,828 15,606 15,412 International Education 10,713 8,899 5,718 Professional 3,721 2,662 2,641 FT Group 2,557 2,328 2,379 Penguin 3,470 4,163 4,112 Other 1,028 1,047 909 36,317 34,705 31,171 2012 2011 2010 18,552 16,133 14,828 16,751 13,646 10,713 3,706 4,561 3,721 3,088 2,765 2,557 883 859 1,028 42,980 �� 37,964 32,847 in discontinued operations in 2009 was 2,459, and in 2008 was 2,509.F-26
6. Net finance costs Notes 2012 2011 2010 (75 ) (65 ) (82 ) 25 — — (12 ) (27 ) (4 ) — (8 ) (22 ) (9 ) (1 ) — — (2 ) (5 ) (6 ) (113 ) (96 ) (109 ) 10 10 9 25 13 3 — 9 11 18 — — — — 1 2 — — 7 32 25 36 (81 ) (71 ) (73 ) Consolidated Financial Statements (Continued)consolidated financial statements continued6. Net finance costs Notes 2010 2009 2008 All figures in £ millions Interest payable (82 ) (92 ) (106 ) Finance costs in respect of retirement benefits 25 (12 ) (12 ) — Net foreign exchange losses (9 ) (7 ) (11 ) Other losses on financial instruments in a hedging relationship: — fair value hedges — (1 ) (7 ) Other losses on financial instruments not in a hedging relationship: — derivatives (6 ) (10 ) (12 ) (109 ) (122 ) (136 ) Interest receivable 9 6 13 Finance income in respect of retirement benefits 25 — — 8 Net foreign exchange gains 18 — — Other gains on financial instruments in a hedging relationship: — fair value hedges — 4 2 — net investment hedges — — 1 Other gains on financial instruments not in a hedging relationship: — amortisation of transitional adjustment on bonds 2 3 1 — derivatives 7 13 16 36 26 41 (73 ) (96 ) (95 ) £nil net gain (2009: £3m net gain; 2008: £5m net loss)loss of £1m on fair value hedges in 2012 (2011: £nil; 2010: £nil) comprises a £40mgain of £7m (2011: loss (2009: £96m gain; 2008: £156mof £39m; 2010: £40m loss) on the underlying bonds, offset by a £40mloss of £8m (2011: gain (2009: £93m loss; 2008: £151mof £39m; 2010: £40m gain) on the related derivative financial instruments.7. Income tax Notes 2010 2009 2008 All figures in £ millions Charge in respect of current year (82 ) (106 ) (48 ) Other adjustments in respect of prior years 13 7 12 (69 ) (99 ) (36 ) In respect of temporary differences (77 ) (51 ) (93 ) Other adjustments in respect of prior years — 4 4 13 (77 ) (47 ) (89 ) (146 ) (146 ) (125 ) F-27
7. Income tax Notes 2012 2011 2010 (154 ) (187 ) (41 ) 18 36 6 (136 ) (151 ) (35 ) (48 ) (15 ) (81 ) 36 4 6 13 (12 ) (11 ) (75 ) (148 ) (162 ) (110 ) Notes to the Consolidated Financial Statements (Continued) 2010 2009 2008 All figures in £ millions Profit before tax 670 523 469 Tax calculated at UK rate (2010: 28%, 2009: 28%, 2008: 28.5%) (188 ) (147 ) (134 ) Effect of overseas tax rates (40 ) (27 ) (13 ) Joint venture and associate income reported net of tax 11 8 7 Net income/(expense) not subject to tax 8 8 (5 ) Utilisation of previously unrecognised tax losses and credits 56 2 4 Unutilised tax losses (6 ) (1 ) — Prior year adjustments 13 11 16 (146 ) (146 ) (125 ) UK (28 ) (41 ) (47 ) Overseas (118 ) (105 ) (78 ) (146 ) (146 ) (125 ) Tax rate reflected in earnings 21.8 % 27.9 % 26.7 % A number of changes to the UK Corporation tax system were announced in the June 2010 Budget Statement. The Finance (No. 2) Act 2010 was enacted in July 2010 and reduces the main rate of corporation tax from 28% to 27% from 1 April 2011. A reduction in the rate of corporation tax from 28% to 27% resulted in a reduction in the net deferred tax asset provided at 31 December 2010 of £3m, of which £1m was charged to the income statement and £2m to other comprehensive income. 2012 2011 2010 434 1,047 565 (106 ) (277 ) (158 ) (51 ) (27 ) (34 ) 2 9 11 (15 ) 7 9 (28 ) 88 — 2 1 56 (6 ) (3 ) (6 ) 54 40 12 (148 ) (162 ) (110 ) (22 ) (10 ) (25 ) (126 ) (152 ) (85 ) (148 ) (162 ) (110 ) 34.1 % 15.5 % 19.5 % /benefit recognised in other comprehensive income is as follows: 2010 2009 2008 All figures in £ millions Pension contributions and actuarial gains and losses (42 ) 79 10 Net investment hedges and other foreign exchange gains and losses 1 12 (1 ) (41 ) 91 9 2012 2011 2010 55 7 (42 ) — (4 ) 1 55 3 (41 ) £4m (2009:£6m (2011: tax benefit £6m; 2008:£3m; 2010: tax charge £7m)benefit £4m) relating to share-based payments has been recognised directly in equity.8. Earnings per shareF-28 Notes 2012 2011 2010 286 885 455 (3 ) 1 5 283 886 460 3 43 71 845 — — (8 ) 326 957 1,297 804.3 800.2 801.2 1.3 1.7 1.8 805.6 801.9 803.0 40.5p 119.6p 161.9p 40.5p 119.3p 161.5p 35.2p 110.7p 57.4p 35.1p 110.5p 57.3p 5.3p 8.9p 104.5p 5.4p 8.8p 104.2p 2012 2011 2010 225 206 187 121 112 105 346 318 292 Notes to the Consolidated Financial Statements (Continued) Notes 2010 2009 2008 All figures in £ millions Profit for the year from continuing operations 524 377 344 Non-controlling interest 5 (1 ) (2 ) 529 376 342 Profit/(loss) for the year from discontinued operations 3 776 85 (21 ) Non-controlling interest (8 ) (36 ) (29 ) 1,297 425 292 Weighted average number of shares (millions) 801.2 799.3 797.0 Effect of dilutive share options (millions) 1.8 0.8 0.5 Weighted average number of shares (millions) for diluted earnings 803.0 800.1 797.5 Basic 161.9p 53.2p 36.6p Diluted 161.5p 53.1p 36.6p Basic 66.0p 47.0p 42.9p Diluted 65.9p 47.0p 42.9p Basic 95.9p 6.2p (6.3p ) 9. Dividends 2010 2009 2008 All figures in £ millions Final paid in respect of prior year 23.3p (2009: 22.0p; 2008: 20.5p) 187 176 163 Interim paid in respect of current year 13.0p (2009: 12.2p; 2008: 11.8p) 105 97 94 292 273 257 20102012 of 25.7p30.0p per share which will absorb an estimated £206m£245m of shareholders’ funds. It will be paid on 63 May 20112013 to shareholders who are on the register of members on 85 April 2011.2013. These financial statements do not reflect this dividend.F-29Consolidated Financial Statements (Continued)consolidated financial statements continued10. Property, plant and equipment Assets in Land and Plant and course of buildings equipment construction Total All figures in £ millions At 1 January 2009 355 839 7 1,201 Exchange differences (21 ) (55 ) (1 ) (77 ) Additions 14 46 7 67 Disposals (2 ) (41 ) — (43 ) Acquisition through business combination 1 17 — 18 Reclassifications 1 5 (6 ) — At 31 December 2009 348 811 7 1,166 Exchange differences 8 28 — 36 Additions 21 55 12 88 Disposals (4 ) (58 ) — (62 ) Acquisition through business combination 8 25 — 33 Disposal through business disposal (48 ) (201 ) — (249 ) Reclassifications 3 5 (8 ) — 336 665 11 1,012 Assets in Land and Plant and course of buildings equipment construction Total All figures in £ millions At 1 January 2009 (170 ) (608 ) — (778 ) Exchange differences 11 42 — 53 Charge for the year (17 ) (68 ) — (85 ) Disposals 2 39 — 41 Acquisition through business combination — (9 ) — (9 ) At 31 December 2009 (174 ) (604 ) — (778 ) Exchange differences (4 ) (19 ) — (23 ) Charge for the year (16 ) (66 ) — (82 ) Disposals 3 58 — 61 Acquisition through business combination (3 ) (13 ) — (16 ) Disposal through business disposal 28 164 — 192 (166 ) (480 ) — (646 ) At 1 January 2009 185 231 7 423 At 31 December 2009 174 207 7 388 170 185 11 366 F-30 Land and
buildings Plant and
equipment Assets in
course of
construction Total 336 669 11 1,016 2 (2 ) — — 15 51 13 79 (13 ) (31 ) — (44 ) 11 21 — 32 — (2 ) — (2 ) 12 — (12 ) — 363 706 12 1,081 (9 ) (23 ) — (32 ) 12 51 15 78 (2 ) (20 ) — (22 ) 4 13 — 17 (1 ) (4 ) — (5 ) 8 — (8 ) — 9 (27 ) — (18 ) — 3 — 3 (32 ) (102 ) (1 ) (135 ) 352 597 18 967 Land
and
buildings Plant and
equipment Assets in
course of
construction Total (166 ) (484 ) — (650 ) (1 ) 1 — — (16 ) (54 ) — (70 ) 2 29 — 31 (1 ) (10 ) — (11 ) — 2 — 2 (5 ) 5 — — (187 ) (511 ) — (698 ) Consolidated Financial Statements (Continued)consolidated financial statements continued Land
and
buildings Plant and
equipment Assets in
course of
construction Total 6 17 — 23 (21 ) (59 ) — (80 ) 2 19 — 21 (1 ) (6 ) — (7 ) — 2 — 2 (8 ) 8 — — (3 ) 7 — 4 17 78 — 95 (195 ) (445 ) — (640 ) 170 185 11 366 176 195 12 383 157 152 18 327 £10m (2009: £12m)£19m (2011: £15m) has been included in the income statement in cost of goods sold, £7m (2009: £7m)£9m (2011: £10m) in distribution expenses and £52m (2009:(2011: £45m) in administrative and other expenses. In 2010 £13m (2009: £21m)2012 £7m (2011: £8m) relates to discontinued operations.£12m (2009: £15m)£17m (2011: £18m).11. Intangible assets Acquired customer Acquired Acquired Other lists and trademarks publishing intangibles Goodwill Software relationships and brands rights acquired Total All figures in £ millions At 1 January 2009 4,570 310 341 128 165 258 5,772 Exchange differences �� (420 ) (25 ) (32 ) (9 ) (5 ) (22 ) (513 ) Additions — internal development — 35 — — — — 35 Additions — purchased — 24 — — — — 24 Disposals (9 ) (5 ) — — — — (14 ) Acquisition through business combination 205 — 38 24 55 25 347 At 31 December 2009 4,346 339 347 143 215 261 5,651 Exchange differences 140 9 10 4 9 10 182 Additions — internal development — 41 — — — — 41 Additions — purchased — 15 — — — — 15 Disposals (11 ) (18 ) — — — — (29 ) Acquisition through business combination 288 9 159 40 6 76 578 Disposal through business disposal (195 ) (43 ) (85 ) (1 ) — (41 ) (365 ) 4,568 352 431 186 230 306 6,073 F-31
11. Intangible assets Goodwill Software Acquired
customer
lists and
relationships Acquired
trademarks
and brands Acquired
publishing
rights Other
intangibles
acquired Total 4,568 352 431 186 230 306 6,073 15 (1 ) 1 (1 ) (12 ) (1 ) 1 — 49 — — — — 49 — 28 — — — — 28 — (9 ) — — — — (9 ) 620 9 200 68 — 100 997 (4 ) — — — (5 ) — (9 ) 5,199 428 632 253 213 405 7,130 (213 ) (13 ) (22 ) (11 ) (9 ) (22 ) (290 ) — 38 — — — — 38 — 36 — — — — 36 — (11 ) — — — — (11 ) 505 12 128 27 10 110 792 (50 ) — (89 ) (2 ) — — (141 ) — 18 — — — — 18 (364 ) (42 ) (14 ) (9 ) (7 ) (5 ) (441 ) 5,077 466 635 258 207 488 7,131 Consolidated Financial Statements (Continued)consolidated financial statements continued Acquired customer Acquired Acquired Other lists and trademarks publishing intangibles Goodwill Software relationships and brands rights acquired Total All figures in £ millions At 1 January 2009 — (203 ) (67 ) (17 ) (69 ) (63 ) (419 ) Exchange differences — 19 6 1 6 8 40 Charge for the year — (44 ) (35 ) (11 ) (22 ) (35 ) (147 ) Disposals — 4 — — — — 4 At 31 December 2009 — (224 ) (96 ) (27 ) (85 ) (90 ) (522 ) Exchange differences — (5 ) (3 ) (2 ) (2 ) (1 ) (13 ) Charge for the year — (51 ) (39 ) (12 ) (24 ) (38 ) (164 ) Disposals — 16 — — — — 16 Acquisition through business combination — (5 ) — — — — (5 ) Disposal through business disposal — 19 35 — — 28 82 — (250 ) (103 ) (41 ) (111 ) (101 ) (606 ) At 1 January 2009 4,570 107 274 111 96 195 5,353 At 31 December 2009 4,346 115 251 116 130 171 5,129 4,568 102 328 145 119 205 5,467 Goodwill Software Acquired
customer
lists and
relationships Acquired
trademarks
and brands Acquired
publishing
rights Other
intangibles
acquired Total — (250 ) (103 ) (41 ) (111 ) (101 ) (606 ) — (2 ) 1 — 4 (3 ) — — (48 ) (55 ) (22 ) (22 ) (40 ) (187 ) — 6 — — — — 6 — (2 ) — — — — (2 ) — — — — 1 — 1 — (296 ) (157 ) (63 ) (128 ) (144 ) (788 ) — 9 7 3 5 8 32 — (54 ) (85 ) (27 ) (20 ) (51 ) (237 ) — 8 — — — — 8 — (7 ) — — — — (7 ) — — 45 1 — — 46 — (4 ) — — — — (4 ) — 32 1 — 4 — 37 — (312 ) (189 ) (86 ) (139 ) (187 ) (913 ) 4,568 102 328 145 119 205 5,467 5,199 132 475 190 85 261 6,342 5,077 154 446 172 68 301 6,218 £4,568m£5,077m 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. £3,090m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,478m relates to acquisitions completed after 1 January 2003 (the date of transition to IFRS).£3m (2009: £5m)£10m (2011: £10m) is included in the income statement in cost of goods sold and £149m (2009: £126m)£205m (2011: £177m) in administrative and other expenses. Also included in the amortisation charge for the year in 2012 is an impairment of £21m relating to Pearson in Practice which is included in the income statement in administrative and other expenses. In 2010 £12m (2009: £16m)2012 £7m (2011: £6m) of amortisation relates to discontinued operations.5–20 years 5–20 years 5–20 years 2–20 years 2012 One to five
years Six to ten
years More than
ten years Total 263 132 51 446 89 49 34 172 59 8 1 68 231 63 7 301 F-32Notes to the Consolidated Financial Statements (Continued)12and monitored at the level of, 10 aggregated cash-generating units (CGUs) within the business segments as follows: 2010 2009 All figures in £ millions US Education Publishing 1,976 1,876 US School Assessment and Information 683 652 Canada 197 181 International Education Publishing 686 468 International Education Assessment and Testing 227 222 Professional Publishing 13 13 Professional Assessment and Training 287 226 4,069 3,638 Financial Times 48 43 Mergermarket 136 125 184 168 Penguin US 196 190 Penguin UK 103 103 Penguin Asia Pacific & International 16 63 315 356 4,568 4,162 Interactive Data — 184 4,568 4,346 As highlighted 2012 2011 2,384 2,127 773 792 188 192 463 508 450 460 267 228 15 13 334 377 4,874 4,697 51 49 152 138 203 187 5,077 4,884 2008 business review, integration of the US School and Higher Education businesses began in 2008. This integrationconsolidated financial statements continued throughout 2009 and advanced to a point where, from 1 January 2010, these companies have been combined into one CGUimpairment review purposes. — 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 11.2%9.8% to 12.1%12.7% for the Pearson Education businesses (2009: 10.9%(2011: 10.7% to 11.8%13.3%), 12.9% and 11.5% to 20.0%18.4% for the FT Group businesses (2009: 12.7%(2011: 11.6% to 18.1%) and 10.5% to 13.0% for the Penguin businesses (2009: 9.5% to 11.4%17.9%). — A perpetuity growth rate of 2.0% was used for cash flows subsequent to the approved budget period for all CGUs in 2010 (2009:2012 (2011: 2.0%). This perpetuity growth rate is a conservative rate and is considered to be lower than the long-term historic growth rates of the underlying territories in which the CGU operates and the long-term growth rate prospects of the sectors in which the CGU operates.F-33Notes to the Consolidated Financial Statements (Continued) — The cash flow growth rates are derived from management’s latest forecast of sales taking into consideration experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate.12. Investments in joint ventures and associates 2010 2009 All figures in £ millions At beginning of year 18 13 Share of (loss)/profit after tax (1 ) 4 Dividends (3 ) (3 ) Loan repayment — (3 ) Additions and further investment 4 13 Transfer to subsidiary — (6 ) 18 18 2012 2011 18 18 — (3 ) (4 ) (2 ) (2 ) (2 ) 6 7 (10 ) — 8 18 20102012 was £12m (2009:£1m (2011: £11m). 2010 2009 All figures in £ millions Non-current assets 15 15 Current assets 14 11 Current liabilities (11 ) (8 ) 18 18 Income 17 12 Expenses (18 ) (8 ) (1 ) 4 F-34 2012 2011 5 15 19 17 (2 ) (1 ) (14 ) (13 ) 8 18 24 22 (28 ) (24 ) (4 ) (2 ) Notes to the Consolidated Financial Statements (Continued) 2010 2009 All figures in £ millions At beginning of year 12 10 Exchange differences (1 ) 4 Share of profit after tax 42 26 Dividends (20 ) (19 ) Additions 17 1 Reversal of distribution from associate in excess of carrying value (7 ) (7 ) Actuarial gains/(losses) on retirement benefit obligations 1 (3 ) Transfer from other financial assets 9 — 53 12 Included in the share of profit after tax is a gain in fair values of £12m (2009: £nil) arising on a stepped acquisition by FTSE International Ltd. 2012 2011 14 53 (8 ) (3 ) 23 35 (24 ) (30 ) 32 2 — (15 ) (3 ) (8 ) — (20 ) (27 ) — 7 14 £11m (2009: £10m)£13m to the FT Group during 2011. This royalty payment ceased upon the year.20102012 was £21m (2009:£20m (2011: £nil). principal associates, all of which are unlisted, are as follows: % Country of incorporation interest held Assets Liabilities Revenues Profit All figures in £ millions The Economist Newspaper Ltd England 50 129 (129 ) 169 25 FTSE International Ltd England 50 62 (44 ) 45 17 Other 41 (6 ) 9 — 232 (179 ) 223 42 % Country of incorporation interest held Assets Liabilities Revenues Profit All figures in £ millions The Economist Newspaper Ltd England 50 116 (116 ) 161 22 FTSE International Ltd England 50 28 (24 ) 38 4 Other 14 (6 ) 12 — 158 (146 ) 211 26 2012 Country of
incorporation %
interest held Assets Liabilities Revenues Profit England 50 140 (140 ) 174 23 14 (7 ) 17 1 29 (2 ) 9 (1 ) 183 (149 ) 200 23 2011 Country of
incorporation %
interest held Assets Liabilities Revenues Profit England 50 140 (140 ) 179 27 England 50 — — 31 7 16 (2 ) 15 1 156 (142 ) 225 35 * FTSE International Ltd included to date of disposal F-35
On 16 December 2011 the Group sold its 50% interest in FTSE International Ltd.Notes to the Consolidated Financial Statements (Continued)2011 428 (1 ) (15 ) 412 Deferred income tax 2010 2009 All figures in £ millions Deferred income tax assets to be recovered after more than 12 months 276 374 Deferred income tax assets to be recovered within 12 months — 13 276 387 Deferred income tax liabilities to be settled after more than 12 months (471 ) (473 ) Deferred income tax liabilities to be settled within 12 months — — (471 ) (473 ) (195 ) (86 ) 2012 2011 229 287 (601 ) (620 ) (372 ) (333 ) within 12 months relate to the utilisation of losses in the US.£14m£13m at 31 December 20102012 (2011: £13m) in respect of UK losses, and approximately £16m£30m (2011: £15m) in respect of losses in other territories. None of the unrecognised UK losses have expiry dates associated with them. Notes 2010 2009 All figures in £ millions At beginning of year (86 ) (75 ) Exchange differences (4 ) 10 Income statement charge 7 (72 ) (51 ) Acquisition through business combination 29 (37 ) (45 ) Disposal through business disposal 30 47 — Tax (charge)/benefit to other comprehensive income or equity (43 ) 75 (195 ) (86 ) Notes 2012 2011 (333 ) (195 ) 14 (5 ) 7 (17 ) (37 ) 30 (67 ) (96 ) 31 11 1 38 (1 ) (18 ) — (372 ) (333 ) creditcharge (2011: £26m charge) relating to discontinued operations (2009: £4m charge).F-36Notes to the Consolidated Financial Statements (Continued) Retirement Trading Goodwill and Returns benefit losses intangibles provisions obligations Other Total All figures in £ millions At 1 January 2009 73 20 106 7 166 372 Exchange differences (5 ) (2 ) (10 ) (1 ) (17 ) (35 ) Acquisition through business combination — — — — — — Income statement (charge)/benefit (46 ) (7 ) (4 ) (6 ) 42 (21 ) Tax benefit to other comprehensive income or equity — — — 68 3 71 22 11 92 68 194 387 Exchange differences 1 — 3 — 5 9 Acquisition through business combination — — — — 4 4 Disposal through business disposal — — — — (7 ) (7 ) Income statement (charge)/benefit (18 ) (7 ) 1 (9 ) (35 ) (68 ) Tax (charge)/benefit to other comprehensive income or equity — — — (53 ) 4 (49 ) 5 4 96 6 165 276 Trading
losses Goodwill
and
intangibles Returns
provisions Retirement
benefit
obligations Other Total 5 4 96 6 165 276 — — 1 — 2 3 8 — — — 1 9 1 (4 ) (8 ) 19 (6 ) 2 — — — (6 ) 3 (3 ) 14 — 89 19 165 287 — — (3 ) (1 ) (5 ) (9 ) 19 — — — — 19 (13 ) — (16 ) (5 ) (33 ) (67 ) — — — 43 (6 ) 37 (2 ) — (25 ) (9 ) (2 ) (38 ) 18 — 45 47 119 229 Goodwill and intangibles Other Total All figures in £ millions At 1 January 2009 (318 ) (129 ) (447 ) Exchange differences 30 15 45 Acquisition through business combination (41 ) (4 ) (45 ) Income statement benefit/(charge) 10 (40 ) (30 ) Tax benefit to other comprehensive income or equity — 4 4 (319 ) (154 ) (473 ) Exchange differences (9 ) (4 ) (13 ) Acquisition through business combination (41 ) — (41 ) Disposal through business disposal 25 29 54 Income statement benefit/(charge) 10 (14 ) (4 ) Tax benefit to other comprehensive income or equity — 6 6 (334 ) (137 ) (471 ) Goodwill and
intangibles Other Total (334 ) (137 ) (471 ) (6 ) (2 ) (8 ) (102 ) (3 ) (105 ) — 1 1 (22 ) (17 ) (39 ) — 2 2 (464 ) (156 ) (620 ) 18 5 23 (65 ) (21 ) (86 ) 11 — 11 15 35 50 — 1 1 10 10 20 (475 ) (126 ) (601 ) F-37
14. Classification of financial instrumentsNotes to the Consolidated Financial Statements (Continued)14. Classification of financial instruments 2010 Fair value Amortised cost Derivatives Derivatives Total Total Available deemed held in hedging Other Loans and Other carrying market Notes for sale for trading relationships liabilities receivables liabilities value value All figures in £ millions Investments in unlisted securities 15 58 — — — — — 58 58 Cash and cash equivalents 17 — — — — 1,736 — 1,736 1,736 Marketable securities 12 — — — — — 12 12 Derivative financial instruments 16 — 28 112 — — — 140 140 Trade receivables 22 — — — — 1,031 — 1,031 1,031 70 28 112 — 2,767 — 2,977 2,977 Derivative financial instruments 16 — (6 ) — — — — (6 ) (6 ) Trade payables 24 — — — — — (470 ) (470 ) (470 ) Other financial liabilities — put option over non-controlling interest 24 — — — (25 ) — — (25 ) (25 ) Bank loans and overdrafts 18 — — — — — (73 ) (73 ) (73 ) Borrowings due within one year 18 — — — — — (331 ) (331 ) (333 ) Borrowings due after more than one year 18 — — — — — (1,908 ) (1,908 ) (1,939 ) — (6 ) — (25 ) — (2,782 ) (2,813 ) (2,846 ) F-38 2012 Fair value Amortised cost 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 15 31 — — — — — 31 31 32 1 — — — — — 1 1 17 — — — — 1,062 — 1,062 1,062 32 — — — — 115 — 115 115 6 — — — — — 6 6 16 — 1 177 — — — 178 178 22 — — — — 883 — 883 883 — — — — 249 — 249 249 38 1 177 — 2,309 — 2,525 2,525 Consolidated Financial Statements (Continued)consolidated financial statements continued 2009 Fair value Amortised cost Derivatives Derivatives Total Total Available deemed held in hedging Other Loans and Other carrying market Notes for sale for trading relationships liabilities receivables liabilities value value All figures in £ millions Investments in unlisted securities 15 62 — — — — — 62 62 Cash and cash equivalents 17 — — — — 750 — 750 750 Marketable securities 63 — — — — — 63 63 Derivative financial instruments 16 — 42 70 — — — 112 112 Trade receivables 22 — — — — 989 — 989 989 125 42 70 — 1,739 — 1,976 1,976 Derivative financial instruments 16 — (9 ) — — — — (9 ) (9 ) Trade payables 24 — — — — — (461 ) (461 ) (461 ) Other financial liabilities — put option over non — controlling interest 24 — — — (23 ) — — (23 ) (23 ) Bank loans and overdrafts 18 — — — — — (70 ) (70 ) (70 ) Borrowings due within one year 18 — — — — — (4 ) (4 ) (4 ) Borrowings due after more than one year 18 — — — — — (1,934 ) (1,934 ) (1,969 ) — (9 ) — (23 ) — (2,469 ) (2,501 ) (2,536 ) 2012 Fair value Amortised cost 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 24 — — — — — (337 ) (337 ) (337 ) — — — — — (148 ) (148 ) (148 ) 24 — — — (68 ) — — (68 ) (68 ) 18 — — — — — (55 ) (55 ) (55 ) 32 — — — — — (7 ) (7 ) (7 ) 18 — — — — — (229 ) (229 ) (228 ) 18 — — — — — (1,988 ) (1,988 ) (2,043 ) — — — (68 ) — (2,764 ) (2,832 ) (2,886 ) 2011 Fair value Amortised cost 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 15 26 — — — — — 26 26 17 — — — — 1,369 — 1,369 1,369 9 — — — — — 9 9 16 — 3 174 — — — 177 177 22 — — — — 1,061 — 1,061 1,061 35 3 174 — 2,430 — 2,642 2,642 16 — (1 ) (2 ) — — — (3 ) (3 ) 24 — — — — — (483 ) (483 ) (483 ) 24 — — — (86 ) — — (86 ) (86 ) 18 — — — — — (78 ) (78 ) (78 ) 18 — — — — — (9 ) (9 ) (9 ) 18 — — — — — (1,964 ) (1,964 ) (2,000 ) — (1 ) (2 ) (86 ) — (2,534 ) (2,623 ) (2,659 ) F-39
15. Other financial assets 2012 2011 26 58 (2 ) — 10 12 (2 ) (44 ) (1 ) — 31 26 Notes to the Consolidated Financial Statements (Continued)15. Other financial assets 2010 2009 All figures in £ millions At beginning of year 62 63 Exchange differences 1 (6 ) Acquisition of investments 7 10 Transfers to associates (9 ) — Disposal of investments (3 ) (5 ) 58 62 16. Derivative financial instruments 2010 2009 Gross notional Gross notional amounts Assets Liabilities amounts Assets Liabilities All figures in £ millions Interest rate derivatives — in a fair value hedge relationship 1,327 112 — 1,103 70 — Interest rate derivatives — not in a hedge relationship 256 8 — 486 13 (7 ) Cross currency rate derivatives — in a net investment hedge relationship 220 20 (6 ) 220 29 (2 ) 1,803 140 (6 ) 1,809 112 (9 ) In less than one year 319 6 — 238 — (7 ) Later than one year and not later than five years 749 74 (6 ) 844 60 (2 ) Later than five years 735 60 — 727 52 — 1,803 140 (6 ) 1,809 112 (9 ) 2012 2011 Gross notional
amounts Assets Liabilities Gross notional
amounts Assets Liabilities 1,465 143 — 1,208 151 — 61 1 — 65 3 (1 ) 220 34 — 220 23 (2 ) 1,746 178 — 1,493 177 (3 ) 215 4 — — — (1 ) 701 69 — 946 81 (2 ) 830 105 — 547 96 — 1,746 178 — 1,493 177 (3 ) 2010,2012, the currency split of themark-to-market values of rate derivatives, including the exchange of principal on cross currencycross-currency rate derivatives, was US dollar £(97)£(59)m, sterling £259m£257m and South African rand £(28)£(20)m (2009:(2011: US dollar £(127)£(66)m, sterling £252m£263m and South African rand £(22)£(23)m).20102012 range from 3.65% to 9.28% (2009:(2011: 3.65% to 9.28%) and the floating rates are based on LIBOR in US dollar and sterling.F-40Notes to the Consolidated Financial Statements (Continued)17. Cash and cash equivalents (excluding overdrafts) 2010 2009 All figures in £ millions Cash at bank and in hand 763 580 Short-term bank deposits 973 170 1,736 750 2012 2011 372 864 690 505 1,062 1,369 115 — 1,177 1,369 20102012 the currency split of cash and cash equivalents was US dollar 73% (2009: 35%47% (2011: 31%), sterling 9% (2009: 22%25% (2011: 38%), euro 6% (2009: 18%3% (2011: 8%) and other 12% (2009: 25% (2011: 23%). 2010 2009 All figures in £ millions Cash and cash equivalents 1,736 750 Bank overdrafts (72 ) (70 ) 1,664 680 F-41 2012 2011 1,062 1,369 115 — (33 ) (78 ) (7 ) — 1,137 1,291 Consolidatedconsolidated financial statements continuedStatements (Continued)liabilities – Borrowings18. Financial liabilities — Borrowings 2010 2009 All figures in £ millions 7.0% Global Dollar Bonds 2011 (nominal amount $500m) — 322 5.5% Global Dollar Bonds 2013 (nominal amount $350m) 236 226 5.7% US Dollar Bonds 2014 (nominal amount $400m) 288 274 7.0% Sterling Bonds 2014 (nominal amount £250m) 256 254 6.0% Sterling Bonds 2015 (nominal amount £300m) 297 297 4.0% US Dollar Notes 2016 (nominal amount $350m) 227 — 6.25% Global Dollar Bonds 2018 (nominal amount $550m) 389 359 4.625% US Dollar Notes 2018 (nominal amount $300m) 208 191 Finance lease liabilities 7 11 1,908 1,934 Bank loans and overdrafts 73 70 7.0% Global Dollar Bonds 2011 (nominal amount $500m) 325 — Finance lease liabilities 6 4 404 74 2,312 2,008 2012 2011 — 233 264 286 256 257 298 298 229 238 402 419 217 224 315 — 22 — 7 9 2,010 1,964 219 — 33 78 10 �� 9 262 87 2,272 2,051 7 — 2,279 2,051 £12m£11m of accrued interest (2009:(2011: £12m). Included in the current borrowings above is £1m£2m of accrued interest (2009: £nil)(2011: £ nil). 2010 2009 All figures in £ millions Between one and two years 4 327 Between two and five years 1,080 760 Over five years 824 847 1,908 1,934 F-42 2012 2011 524 241 552 1,080 934 643 2,010 1,964 Consolidatedconsolidated financial statements continuedStatements (Continued)liabilities – Borrowings continued 2010 2009 Effective Carrying Carrying interest rate value Market value value Market value All figures in £ millions Bank loans and overdrafts n/a 73 73 70 70 7.0% Global Dollar Bonds 2011 7.16 % 325 327 322 331 5.5% Global Dollar Bonds 2013 5.76 % 236 241 226 232 5.7% US Dollar Bonds 2014 5.88 % 288 277 274 266 7.0% Sterling Bonds 2014 7.20 % 256 282 254 276 6.0% Sterling Bonds 2015 6.27 % 297 329 297 317 4.0% US Dollar Notes 2016 4.26 % 227 226 — — 6.25% Global Dollar Bonds 2018 6.46 % 389 385 359 360 4.625% US Dollar Notes 2018 4.69 % 208 192 191 176 Finance lease liabilities n/a 13 13 15 15 2,312 2,345 2,008 2,043 2012 2011 Effective interest
rate Carrying
value Market
value Carrying
value Market
value n/a 55 55 78 78 5.76 % 219 218 233 237 5.88 % 264 260 286 280 7.20 % 256 274 257 282 6.27 % 298 337 298 340 4.26 % 229 233 238 237 6.46 % 402 410 419 409 4.69 % 217 209 224 206 3.94 % 315 313 — — n/a 17 17 18 18 2,272 2,326 n/a 7 7 — — 2,279 2,333 2,051 2,087 2010 2009 All figures in £ millions US dollar 1,759 1,457 Sterling 553 551 Euro — — 2,312 2,008 2012 2011 1,684 1,488 573 563 22 — 2,279 2,051 2010 2009 All figures in £ millions Floating rate — expiring within one year — — — expiring beyond one year 1,118 1,084 1,118 1,084 2012 2011 — — 1,077 1,126 1,077 1,126 F-43Consolidatedconsolidated financial statements continuedStatements (Continued)liabilities – Borrowings continued 2010 2009 All figures in £ millions Not later than one year 6 4 Later than one year and not later than two years 4 5 Later than two years and not later than three years 3 3 Later than three years and not later than four years — 3 Later than four years and not later than five years — — Later than five years — — Future finance charges on finance leases — — 13 15 The Present value of finance lease liabilities is as follows: 2010 2009 All figures in £ millions Not later than one year 6 4 Later than one year and not later than five years 7 11 Later than five years — — 13 15 2012 2011 10 9 4 8 3 1 — — — — — — — — 17 18 2012 2011 10 9 7 9 — — 17 18 19. Financial risk managementbelow.overleaf. All the treasury policies remained unchanged throughout, 2010, except for a revisionrevisions to the Group’s bank counterparty limits.F-44Notes to the Consolidated Financial Statements (Continued)20102012 the fixed to floating hedging ratio, on the above basis, was approximately 136%55%. This above-policy level reflects the receipt of the proceeds from the divestment of Interactive Data in 2010, combined with strong cash collections, resulting in lower than typical net debt and hence a higher hedging ratio. Our policy does not require us to cancel derivative contracts and we expect to return to compliance with this policy during 2011. A simultaneous 1% change on 1 January 20112013 in the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £2m£6m effect on profit before tax.20102012 the average maturity of gross borrowings was 4.43.9 years (2009: 5.1(2011: 4.0 years) of which bonds represented 96% (2009: 96%97% (2011: 95%) of these borrowings.BaalBaa1 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 Baal/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 20102012 the committed facilities amounted to £1,118m£1,077m and their weighted average maturity was 4.92.9 years.F-45Consolidatedconsolidated financial statements continuedStatements (Continued)risk management continued 2010 2009 All figures in £ millions Cash and cash equivalents 1,736 750 Marketable securities 12 63 Derivative financial instruments 134 103 Bank loans, overdrafts and loan notes (73 ) (70 ) Bonds (2,226 ) (1,923 ) Finance lease liabilities (13 ) (15 ) (430 ) (1,092 ) 2012 2011 1,062 1,369 6 9 178 174 (55 ) (78 ) (2,200 ) (1,955 ) (17 ) (18 ) (1,026 ) (499 ) 115 — (7 ) — (918 ) (499 ) 2010 2009 All figures in £ millions Fixed rate 577 772 Floating rate (147 ) 320 430 1,092 2012 2011 499 510 419 (11 ) 918 499 2010 2009 All figures in £ millions US dollar 1,954 1,656 Sterling 333 330 Other 25 22 2,312 2,008 2012 2011 1,905 1,687 353 343 21 21 2,279 2,051 20102012 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows: Less than One to More than one year five years five years Total All figures in £ millions Re-pricing profile of borrowings 403 1,084 825 2,312 Effect of rate derivatives 1,264 (529 ) (735 ) — 1,667 555 90 2,312 F-46 Less than
one year One to
five years More than
five years Total 291 1,054 934 2,279 1,311 (480 ) (831 ) — 1,602 574 103 2,279 Consolidatedconsolidated financial statements continuedStatements (Continued)risk management continued 2010 USD GBP Other Total All figures in £ millions Not later than one year 571 117 160 848 Later than one year and not later than five years 767 399 32 1,198 Later than five years 792 — — 792 2,130 516 192 2,838 Bonds 1,938 710 — 2,648 Rate derivatives — inflows (364 ) (297 ) — (661 ) Rate derivatives — outflows 340 7 34 381 Trade creditors 216 96 158 470 2,130 516 192 2,838 2009 USD GBP Other Total All figures in £ millions Not later than one year 265 110 151 526 Later than one year and not later than five years 878 313 30 1,221 Later than five years 739 106 — 845 1,882 529 181 2,592 Bonds 1,692 745 — 2,437 Rate derivatives — inflows (386 ) (313 ) — (699 ) Rate derivatives — outflows 353 8 32 393 Trade creditors 223 89 149 461 1,882 529 181 2,592 2012 USD GBP Other Total 489 126 142 757 726 357 21 1,104 863 — — 863 2,078 483 163 2,724 1,837 639 — 2,476 (326 ) (264 ) — (590 ) 328 3 22 353 239 105 141 485 2,078 483 163 2,724 2011 USD GBP Other Total 261 124 156 541 984 378 25 1,387 563 — — 563 1,808 502 181 2,491 1,553 675 — 2,228 (292 ) (281 ) — (573 ) 321 5 27 353 226 103 154 483 1,808 502 181 2,491 F-47Consolidatedconsolidated financial statements continuedStatements (Continued)risk management continuedcross currencycross-currency rate derivatives) with its forecast operating profit before depreciation and amortisation. This policy aims to soften 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.cross currencycross-currency swaps) were: US dollar £683m,£1,354m, sterling £179m£58m and South African rand £9m.—– fair value measurementF-48Consolidatedconsolidated financial statements continuedStatements (Continued)risk management continued 2010 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total All figures in £ millions Derivative financial assets — 140 — 140 — 112 — 112 Marketable securities — 12 — 12 — 63 — 63 Investments in unlisted securities — — 58 58 — — 62 62 Derivative financial liabilities — (6 ) — (6 ) — (9 ) — (9 ) Other financial liabilities — put option over non-controlling interest — — (25 ) (25 ) — — (23 ) (23 ) — 146 33 179 — 166 39 205 2012 2011 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total — 178 — 178 — 177 — 177 — 6 — 6 — 9 — 9 — — 30 30 — — 26 26 — — 1 1 — — — — — — — — — (3 ) — (3 ) — — (68 ) (68 ) — — (86 ) (86 ) — 184 (37 ) 147 — 183 (60 ) 123 2010 Investments in Other financial unlisted securities liabilities All figures in £ millions At beginning of year 62 (23 ) Exchange differences 1 — Additions 7 (2 ) Disposals (12 ) — 58 (25 ) 2012 2011 Investments in
unlisted
securities Other financial
liabilities Investments in
unlisted
securities Other financial
liabilities 26 (86 ) 58 (25 ) (2 ) 5 — 3 10 — 13 (63 ) — (25 ) — (1 ) (1 ) — — — (2 ) 38 (45 ) — 31 (68 ) 26 (86 ) F-49Consolidatedconsolidated financial statements continuedStatements (Continued)risk management continued—– sensitivity analysis20102012 the sensitivity of the carrying value of the Group’s financial instruments to fluctuations in Impact of 1% Impact of 1% Impact of 10% Impact of 10% Carrying increase in decrease in strengthening in weakening in value interest rates interest rates sterling sterling All figures in £ millions Investments in unlisted securities 58 — — (2 ) 3 Cash and cash equivalents 1,736 — — (140 ) 171 Marketable securities 12 — — — — Derivative financial instruments 134 (62 ) 67 11 (14 ) Bonds (2,226 ) 59 (64 ) 142 (174 ) Other borrowings (86 ) — — 8 (9 ) Put option over non-controlling interest (25 ) — — 2 (3 ) Other net financial assets 556 — — (42 ) 51 159 (3 ) 3 (21 ) 25 Carrying value Impact of 1%
increase in
interest rates Impact of 1%
decrease in
interest rates Impact of 10%
strengthening in
sterling Impact of 10%
weakening in
sterling 31 — — (3 ) 4 1 — — — — 1,062 — — (75 ) 92 115 — — (4 ) 4 6 — — — — 178 (66 ) 65 7 (9 ) (2,200 ) 64 (63 ) 149 (183 ) (72 ) — — 5 (6 ) (7 ) — — 1 (1 ) (68 ) — — 7 (7 ) 546 — — (43 ) 52 101 — — (10 ) 12 (307 ) (2 ) 2 34 (42 ) depending ondue to the location and functional currency of the entityentities 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.F-50Consolidated Financial Statements (Continued)consolidated financial statements continued20. Intangible assets — Pre-publication 2010 2009 All figures in £ millions At beginning of year 1,727 1,800 Exchange differences 52 (160 ) Additions 319 322 Disposals (248 ) (230 ) Acquisition through business combination 13 (1 ) Transfer to inventories — (4 ) 1,863 1,727 At beginning of year (1,077 ) (1,105 ) Exchange differences (33 ) 102 Charge for the year (350 ) (307 ) Disposals 248 230 Acquisition through business combination (4 ) 3 (1,216 ) (1,077 ) Carrying amounts 647 650 2012 2011 1,965 1,863 (74 ) 6 364 331 (188 ) (249 ) 14 14 (3 ) — (202 ) — 1,876 1,965 (1,315 ) (1,216 ) 55 (11 ) (316 ) (331 ) 188 249 (8 ) (6 ) 186 — (1,210 ) (1,315 ) 666 650 £399m (2009: £398m)£431m (2011: £413m) which will be realised in more than one year. 2010 2009 All figures in £ millions Raw materials 34 32 Work in progress 19 23 Finished goods 376 390 429 445 2012 2011 13 24 11 20 237 363 261 407 £836m (2009: £843m)£512m (2011: £585m). In 2010 £87m (2009: £75m)2012 £71m (2011: £63m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.F-51Consolidated Financial Statements (Continued)consolidated financial statements continued22. Trade and other receivables 2010 2009 All figures in £ millions Trade receivables 1,028 989 Royalty advances 111 99 Prepayments and accrued income 77 75 Other receivables 121 121 1,337 1,284 Trade receivables 3 — Royalty advances 89 86 Prepayments and accrued income 28 24 Other receivables 9 2 129 112 2012 2011 868 1,048 16 107 81 90 139 141 1,104 1,386 15 13 13 88 33 34 18 16 79 151 2010 2009 All figures in £ millions At beginning of year (76 ) (72 ) Exchange differences (2 ) 5 Income statement movements (33 ) (26 ) Utilised 26 20 Acquisition through business combination (3 ) (3 ) Disposal through business disposal 5 — (83 ) (76 ) 2012 2011 (102 ) (83 ) 4 1 (21 ) (31 ) 53 17 (1 ) (8 ) — 2 12 — (55 ) (102 ) F-52Notes to the Consolidated Financial Statements (Continued) 2010 2009 All figures in £ millions Within due date 1,180 1,096 Up to three months past due date 234 228 Three to six months past due date 39 51 Six to nine months past due date 6 20 Nine to 12 months past due date 13 4 More than 12 months past due date 21 20 1,493 1,419 Less: provision for bad and doubtful debts (83 ) (76 ) Less: provision for sales returns (379 ) (354 ) 1,031 989 2012 2011 774 1,079 231 289 43 37 10 4 7 3 5 — 1,070 1,412 (187 ) (351 ) 883 1,061 23. Provisions for other liabilities and charges Deferred consideration Leases Other Total All figures in £ millions At 1 January 2010 38 9 21 68 Exchange differences 1 1 — 2 Charged to income statement 2 — 5 7 Deferred consideration on acquisition — current year 8 — — 8 Deferred consideration on acquisition — prior year adjustments (10 ) — — (10 ) Acquisition through business combination — current year 10 — — 10 Utilised (20 ) — (5 ) (25 ) 29 10 21 60 2010 2009 All figures in £ millions Non-current 42 50 Current 18 18 60 68 Deferred
consideration Property Legal and
other Total 97 17 49 163 (3 ) — (4 ) (7 ) — 12 45 57 — (1 ) (2 ) (3 ) 6 — — 6 (3 ) — 4 1 (31 ) (1 ) (8 ) (40 ) (2 ) (1 ) (26 ) (29 ) 64 26 58 148 2012 Deferred
consideration Property Legal and
other Total 6 12 �� 20 38 58 14 38 110 64 26 58 148 2011 32 5 11 48 65 12 38 115 97 17 49 163 acquisitionformation of Frontera venture in 2009.F-53
Legal and other includes provisions in relation to legal claims, contract disputes and potential contract losses. 2012 2011 337 483 30 25 440 544 714 678 21 18 68 86 228 232 1,838 2,066 18 25 147 147 25 62 13 6 79 85 282 325 1,556 1,741 Consolidated Financial Statements (Continued)consolidated financial statements continued24. Trade and other liabilities 2010 2009 All figures in £ millions Trade payables 470 461 Social security and other taxes 22 30 Accruals 559 504 Deferred income 559 487 Interest payable 12 10 Put option over non-controlling interest 25 23 Other liabilities 204 205 1,851 1,720 Accruals 26 23 Deferred income 120 116 Put option over non-controlling interest 25 23 Other liabilities 75 91 246 253 1,605 1,467 testingteaching businesses; subscription income in school and newspaper businesses; and obligations to deliver digital content in future periods.optionoptions over non-controlling interest isare the fair value of an optionoptions held by the non-controlling interestinterests in the Group’s SouthSouthern African business. The option enables the non-controlling 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.25. Retirement benefit and other post-retirement obligations Active Deferred Pensioners Total 3 26 32 61 18 21 — 39 21 47 32 100 F-54Notes to the Consolidated Financial Statements (Continued) 2010 2009 2008 UK Group Other UK Group Other UK Group Other plan plans PRMB plan plans PRMB plan plans PRMB % Inflation 3.50 2.50 2.50 3.50 2.50 2.50 2.80 2.80 2.80 Rate used to discount plan liabilities 5.50 5.10 5.10 5.70 5.30 5.50 6.40 6.30 6.30 Expected return on assets 6.00 6.60 — 6.00 6.80 — 6.30 7.60 — Expected rate of increase in salaries 4.70 4.00 — 5.00 4.00 — 4.30 4.50 — Expected rate of increase for pensions in payment and deferred pensions 2.60 to 4.40 — — 2.60 to 4.40 — — 2.30 to 4.20 — — Initial rate of increase in healthcare rate — — 8.00 — — 8.50 — — 9.00 Ultimate rate of increase in healthcare rate — — 5.00 — — 5.00 — — 5.00 2012 2011 2010 UK Group
plan Other
plans PRMB UK Group
plan Other
plans PRMB UK Group
plan Other
plans PRMB 3.0 2.5 2.5 3.0 2.5 2.5 3.5 2.5 2.5 4.4 3.6 3.6 4.9 4.2 4.2 5.5 5.1 5.1 5.8 5.5 — 5.7 6.4 — 6.0 6.6 — 3.5 3.9 — 4.0 4.0 — 4.7 4.0 — 2.3 to 5.1 — — 2.4 to 4.3 — — 2.6 to 4.4 — — — — 8.0 — — 7.5 — — 8.0 — — 5.0 — — 5.0 — — 5.0 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.3.5%3.0% reflects the RPI rate. In line with changes to legislation in 2010, certain benefits have been calculated with reference to CPI as the inflationary measure and in these instances a rate of 2.8%2.5% has been used. The change from RPI to CPI for deferred revaluation and Post 88 GMP pension increases in payment has been included in these results, resulting in a gain of £23m, taken as an actuarial gain on the obligation.4.7%3.5% for 20102012 with a short-term assumption of 3.3%3.0% for twothree years.In 2008mortality assumptions were derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). In 2009plan, 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,F-55Notes to the Consolidated Financial Statements (Continued)In 2008 a 1%A 1.5% improvement floor on the medium cohort was applied. In 2009 this was changed to 1.5%is applied for males, and 1.25% for females, with tapering.assumptionsRP2000 table is used, were based on standard US mortality tables. In 2008 a switch from GAM94 to RP2000 was made, to reflectreflecting the mortality assumption now moremost prevalent in the US, and inUS. In 2010 a 10 yearten-year projection was added. Group plans is as follows: UK US 2010 2009 2010 2009 Male 22.8 22.7 18.4 17.6 Female 23.6 23.5 20.6 20.2 UK US 2012 2011 2012 2011 23.0 22.6 19.2 19.2 24.2 23.5 21.1 21.1 UK US 2010 2009 2010 2009 Male 25.4 25.3 18.4 17.6 Female 25.7 25.6 20.6 20.2 UK US 2012 2011 2012 2011 25.1 25.2 19.2 19.2 26.1 25.6 21.1 21.1 2010 Defined UK Group benefit Defined plan other Sub-total contribution PRMB Total All figures in £ millions Current service cost 21 2 23 68 2 93 Curtailments (5 ) — (5 ) — — (5 ) 16 2 18 68 2 88 Expected return on plan assets (93 ) (7 ) (100 ) — — (100 ) Interest on plan liabilities 100 9 109 — 3 112 7 2 9 — 3 12 23 4 27 68 5 100 177 13 190 — — 190 F-56 2012 UK Group
plan Defined
benefit other Sub-total Defined
contribution PRMB Total 23 3 26 78 4 108 23 3 26 78 4 108 (111 ) (8 ) (119 ) — — (119 ) 96 7 103 — 3 106 (15 ) (1 ) (16 ) — 3 (13 ) 8 2 10 78 7 95 146 15 161 — — 161 2011 UK Group
plan Defined
benefit other Sub-total Defined
contribution PRMB Total 21 3 24 69 3 96 21 3 24 69 3 96 (107 ) (7 ) (114 ) — — (114 ) 100 8 108 — 3 111 (7 ) 1 (6 ) — 3 (3 ) 14 4 18 69 6 93 161 5 166 — — 166 Notes to the Consolidated Financial Statements (Continued) 2009 Defined UK Group benefit Defined plan other Sub-total contribution PRMB Total All figures in £ millions Current service cost 14 3 17 62 2 81 Past service cost — 1 1 — — 1 14 4 18 62 2 82 Expected return on plan assets (83 ) (5 ) (88 ) — — (88 ) Interest on plan liabilities 89 8 97 — 3 100 6 3 9 — 3 12 20 7 27 62 5 94 136 8 144 — — 144 2008 Defined UK Group benefit Defined plan other Sub-total contribution PRMB Total All figures in £ millions Current service cost 33 3 36 41 1 78 Past service cost — 1 1 — 5 6 33 4 37 41 6 84 Expected return on plan assets (104 ) (7 ) (111 ) — — (111 ) Interest on plan liabilities 93 7 100 — 3 103 (11 ) — (11 ) — 3 (8 ) 22 4 26 41 9 76 (130 ) (27 ) (157 ) — — (157 ) 2010 UK Group
plan Defined
benefit other Sub-total Defined
contribution PRMB Total 21 2 23 68 2 93 (5 ) — (5 ) — — (5 ) 16 2 18 68 2 88 (93 ) (7 ) (100 ) — — (100 ) 100 9 109 — 3 112 7 2 9 — 3 12 23 4 27 68 5 100 177 13 190 — — 190 credit, a £1m charge relating to defined benefit schemes and a £2m charge relating to defined contribution schemes (2009: £2m charge relating to defined benefit schemes and £2m charge relating to defined contribution schemes; 2008: £2m charge relating to defined benefit schemes and £2m charge relating to defined contribution schemes).In 2008 the UK Group plan current service cost included £14m relating to defined contribution sections. In 2009 and 2010 the defined contribution section of the UK Group plan is recorded within the defined contribution expense.F-57Consolidated consolidated financial statements continuedStatements (Continued)statement information continued 2010 2009 Other Other Other Other UK Group funded unfunded UK Group funded unfunded plan plans plans Total plan plans plans Total All figures in £ millions Fair value of plan assets 1,847 135 — 1,982 1,609 118 — 1,727 Present value of defined benefit obligation (1,852 ) (158 ) (20 ) (2,030 ) (1,798 ) (151 ) (18 ) (1,967 ) (5 ) (23 ) (20 ) (48 ) (189 ) (33 ) (18 ) (240 ) Other post-retirement medical benefit obligation (72 ) (65 ) Other pension accruals (28 ) (34 ) (148 ) (339 ) Retirement benefit assets — — Retirement benefit obligations (148 ) (339 ) 2012 2011 UK Group
plan Other
funded
plans Other
unfunded
plans Total UK Group
plan Other
funded
plans Other
unfunded
plans Total 2,162 165 — 2,327 2,008 149 — 2,157 (2,181 ) (196 ) (24 ) (2,401 ) (1,983 ) (173 ) (24 ) (2,180 ) (19 ) (31 ) (24 ) (74 ) 25 (24 ) (24 ) (23 ) (89 ) (85 ) (35 ) (33 ) (198 ) (141 ) — 25 (198 ) (166 ) gains/(losses)losses have been recognised in other comprehensive income: 2010 2009 2008 All figures in £ millions Amounts recognised for defined benefit plans 75 (295 ) (74 ) Amounts recognised for post-retirement medical benefit plans (5 ) (4 ) 3 70 (299 ) (71 ) (176 ) (246 ) 53 2012 2011 2010 (114 ) (47 ) 75 (5 ) (9 ) (5 ) (119 ) (56 ) 70 (351 ) (232 ) (176 ) 2010 2009 Other Other UK Group funded UK Group funded plan plans Total plan plans Total % Equities 27.0 3.3 30.3 27.4 2.4 29.8 Bonds 49.3 2.7 52.0 47.2 2.1 49.3 Properties 11.2 0.1 11.3 9.4 0.0 9.4 Other 5.6 0.8 6.4 10.4 1.1 11.5 2012 2011 UK Group
plan Other
funded
plans Total UK Group
plan Other
funded
plans Total 32 2 34 27 3 30 38 3 41 48 3 51 9 1 10 3 — 3 14 1 15 15 1 16 F-58Consolidated consolidated financial statements continuedStatements (Continued)statement information continued 2012 2011 Quoted
market price No quoted
market price Quoted
market price No quoted
market price 6 1 1 1 25 3 23 3 21 — 29 — 19 — 23 — — 10 — 3 1 14 1 16 72 28 77 23 2012 2011 73 78 2 6 25 16 2010 2009 UK Group Other UK Group Other plan plans Total plan plans Total All figures in £ millions Opening fair value of plan assets 1,609 118 1,727 1,478 100 1,578 Exchange differences — 4 4 — (6 ) (6 ) Expected return on plan assets 93 7 100 83 5 88 Actuarial gains 84 6 90 53 3 56 Contributions by employer 132 13 145 64 26 90 Contributions by employee 3 — 3 3 — 3 Benefits paid (74 ) (13 ) (87 ) (72 ) (10 ) (82 ) 1,847 135 1,982 1,609 118 1,727 Opening defined benefit obligation (1,798 ) (169 ) (1,967 ) (1,429 ) (165 ) (1,594 ) Exchange differences — (5 ) (5 ) — 14 14 Current service cost (21 ) (2 ) (23 ) (14 ) (3 ) (17 ) Past service cost — — — — (1 ) (1 ) Curtailment 5 — 5 — — — Interest cost (100 ) (9 ) (109 ) (89 ) (8 ) (97 ) Actuarial losses (9 ) (6 ) (15 ) (335 ) (16 ) (351 ) Contributions by employee (3 ) — (3 ) (3 ) — (3 ) Benefits paid 74 13 87 72 10 82 (1,852 ) (178 ) (2,030 ) (1,798 ) (169 ) (1,967 ) 2012 2011 UK Group
plan Other
plans Total UK Group
plan Other
plans Total 2,008 149 2,157 1,847 135 1,982 — (5 ) (5 ) — 1 1 111 8 119 107 7 114 35 7 42 54 (2 ) 52 72 2 74 71 18 89 2 — 2 3 — 3 (78 ) (11 ) (89 ) (74 ) (10 ) (84 ) 12 15 27 — — — 2,162 165 2,327 2,008 149 2,157 (1,983 ) (197 ) (2,180 ) (1,852 ) (178 ) (2,030 ) — 7 7 — — — (23 ) (3 ) (26 ) (21 ) (3 ) (24 ) (96 ) (7 ) (103 ) (100 )�� (8 ) (108 ) (144 ) (12 ) (156 ) (81 ) (18 ) (99 ) (2 ) — (2 ) (3 ) — (3 ) 78 11 89 74 10 84 (11 ) (19 ) (30 ) — — — (2,181 ) (220 ) (2,401 ) (1,983 ) (197 ) (2,180 ) 2010 2009 All figures in £ millions Opening defined benefit obligation (65 ) (68 ) Exchange differences (2 ) 8 Current service cost (2 ) (2 ) Interest cost (3 ) (3 ) Actuarial losses (5 ) (4 ) Benefits paid 5 4 (72 ) (65 ) F-59 2012 2011 (85 ) (72 ) 4 (2 ) (4 ) (3 ) (3 ) (3 ) (5 ) (9 ) 4 4 (89 ) (85 ) Notes to the Consolidated Financial Statements (Continued) 2010 2009 2008 2007 2006 All figures in £ millions Fair value of plan assets 1,982 1,727 1,578 1,853 1,633 Present value of defined benefit obligation (2,030 ) (1,967 ) (1,594 ) (1,811 ) (1,810 ) (48 ) (240 ) (16 ) 42 (177 ) Experience adjustments on plan assets 90 56 (268 ) 29 74 Experience adjustments on plan liabilities (15 ) (351 ) 194 50 28 2012 2011 2010 2009 2008 2,327 2,157 1,982 1,727 1,578 (2,401 ) (2,180 ) (2,030 ) (1,967 ) (1,594 ) (74 ) (23 ) (48 ) (240 ) (16 ) 42 52 90 56 (268 ) (156 ) (99 ) (15 ) (351 ) 194 20092012 and this valuation revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2020.June 2017. In 20102012 the Group contributed £41m (2009: £42m)£48m (2011: £48m) towards the funding shortfall andshortfall. Following the completion of the triennial funding valuation the Group has agreed to contribute a similar amount£41m per annum until 20202017 in excess of regular contributions. In addition, a mechanism has been agreed for the Group to make supplementary payments up to a maximum of £15m per annum. If such payments are made they are expected to accelerate the end date for extinguishing the deficit. Regular contributions to the plan are estimated to be £22m£23m for 2011.Under UK law (section 75 debt) a company that participates in a multi-employer defined benefit plan is liable, on withdrawal from that pension plan, for its share of the total deficit in the plan calculated on a ‘solvency’ or ‘buy out’ basis. The Interactive Data sale and the termination of Interactive Data Corporation (Europe) Ltd’s participation in the UK Group plan triggered this ‘section 75’ liability. £68m was contributed to the plan in respect of this liability.$94m$80m in 20112013 and $97m$84m in 20122014 to its US pension plans. UK Group
plan Defined
benefit
other Total 77 27 104 80 24 104 85 22 107 87 23 110 91 18 109 503 76 579 2010 1% increase 1% decrease All figures in £ millions (Decrease)/increase in defined benefit obligation — UK Group plan (262.0 ) 324.0 (Decrease)/increase of aggregate of service cost and interest cost — UK Group plan (13.7 ) 16.3 (Decrease)/increase in defined benefit obligation — US plan (2.5 ) 1.3 2012 1% increase 1% decrease (311.7 ) 388.1 (0.1 ) (1.2 ) (11.6 ) 13.9 2010 1 year increase 1 year decrease All figures in £ millions lncrease/(decrease) in defined benefit obligation — UK Group plan 52.7 (50.5 ) lncrease/(decrease) in defined benefit obligation — US plan 1.6 (1.7 ) F-60 2012 1 year
increase 1 year
decrease 76.7 (73.9 ) 2.1 (2.1 ) Notes to the Consolidated Financial Statements (Continued) 2010 1% increase 1% decrease All figures in £ millions lncrease/(decrease) in post-retirement medical benefit obligation 3.1 (2.8 ) lncrease/(decrease) of aggregate of service cost and interest cost 0.1 (0.1 ) 26. Share-based payments 2012 1% increase 1% decrease 2.9 (2.6 ) 0.1 (0.1 ) 2010 2009 2008 All figures in £ millions Pearson plans 35 27 25 2012 2011 2010 28 36 32 paymentspayment charges included in discontinued operations amounted to £4m (2009: £10m; 2008: £8m)(2011: £4m; 2010: £7m). — 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. — 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 monthsix-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.— This plan was first introduced in 2001, and renewed in 2006 and again in 2011. The plan consists of two parts: share optionsand/orrestricted 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.March 2009May 2011 and March 2010May 2012 vest dependent on relative total 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 20092011 and 20102012 vest depending on continuing service over a three-year period. — 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 of up to one matching share for every invested share 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.F-61Notes to the Consolidated Financial Statements (Continued)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. 2010 2009 Weighted Weighted Number of average Number of average share exercise share exercise options price options price 000s £ 000s £ Outstanding at beginning of year 12,487 12.78 14,379 13.14 Granted during the year 628 8.06 1,320 5.47 Exercised during the year (1,154 ) 7.12 (656 ) 5.91 Forfeited during the year (457 ) 9.08 (2,488 ) 13.02 Expired during the year (2,626 ) 23.47 (68 ) 5.20 8,878 10.20 12,487 12.78 5,825 12.40 9,264 15.28 2012 2011 Number of
share options Weighted
average
exercise price Number of
share options Weighted
average
exercise price 000s £ 000s £ 3,203 7.15 8,878 10.20 1,321 9.09 1,157 8.92 (840 ) 5.59 (2,323 ) 7.27 (294 ) 7.84 (457 ) 8.54 (17 ) 5.60 (4,052 ) 14.12 3,373 8.24 3,203 7.15 106 5.58 64 5.54 £9.63 (2009: £7.15)£12.01 (2011: £11.14). 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. 2010 2009 Weighted Weighted Number average Number average of share contractual of share contractual Range of exercise prices options life options life 000s Years 000s Years 0 — 5 38 0.65 172 1.07 5 — 10 4,757 1.86 5,523 2.37 10 — 15 4,083 0.36 4,225 1.36 15 — 20 — — 270 0.75 20 — 25 — — 344 0.19 >25 — — 1,953 0.19 8,878 1.17 12,487 1.57 2012 2011 Number of
share
options
000s Weighted
average
contractual
life Years Number of
share
options
000s Weighted
average
contractual
life Years — — — — 3,373 2.56 3,203 2.51 — — — — 3,373 2.56 3,203 2.51 20102012 and 20092011 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.F-62Notes to the Consolidated Financial Statements (Continued) 2010 2009 Weighted Weighted average average Fair value £2.14 £1.69 Weighted average share price £9.48 £7.13 Weighted average exercise price £8.06 £5.47 Expected volatility 28.28 % 27.32 % Expected life 4.0 years 4.0 years Risk free rate 2.24 % 2.45 % Expected dividend yield 3.75 % 4.74 % Forfeiture rate 3.5 % 3.5 % 2012
Weighted
average 2011
Weighted
average £ 2.38 £ 2.97 £ 11.51 £ 11.47 £ 9.09 £ 8.92 23.62 % 27.50 % 3.8 years 4.0 years 0.74 % 1.91 % 3.65 % 3.37 % 3.3 % 3.5 % 2010 2009 Weighted Weighted Number of average Number of average shares fair value shares fair value 000s £ 000s £ Long-Term Incentive Plan 4,742 9.45 4,519 5.77 Annual Bonus Share Matching Plan 266 10.25 271 6.70 2012 2011 Number of
shares
000s Weighted
average
fair value
£ Number of
shares
000s Weighted
average
fair value
£ 4,503 11.56 4,854 10.44 237 11.52 285 11.29 Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. The number of shares expected to vest has beenis adjusted, based on historical 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 entitlementParticipants under both plans are entitled to dividends during the vesting period and therefore the share price is not discounted.were consideredare taken into consideration by adjusting the number of shares expected to vest based on the most likely outcome of the relevant performance criteria.27. Share capital and share premium Number Ordinary Share of shares shares premium 000s £m £m At 1 January 2009 809,276 202 2,505 Issue of ordinary shares — share option schemes 1,523 1 7 At 31 December 2009 810,799 203 2,512 Issue of ordinary shares — share option schemes 1,878 — 12 812,677 203 2,524 Number
of shares
000s Ordinary
shares
£m Share
premium
£m 812,677 203 2,524 2,949 1 20 815,626 204 2,544 1,417 — 11 817,043 204 2,555 (2009:(2011: 25p per share). All issued shares are fully paid. All shares have the same rights.F-63Notes to the Consolidated Financial Statements (Continued)28. Treasury shares Pearson plc Interactive Data Total Number Number of shares of shares 000s £m 000s £m £m At 1 January 2009 10,448 112 9,205 110 222 Purchase of treasury shares 2,200 13 1,280 20 33 Release of treasury shares (2,983 ) (29 ) — — (29 ) At 31 December 2009 9,665 96 10,485 130 226 Purchase of treasury shares 8,000 77 — — 77 Release/cancellation of treasury shares (3,656 ) (36 ) (10,485 ) (130 ) (166 ) 14,009 137 — — 137 Pearson plc Number
of shares
000s £m 14,009 137 5,387 60 (4,731 ) (48 ) 14,665 149 — — (4,563 ) (46 ) 10,102 103 1.7% (2009: 1.2% (2011: 1.8%) ofcalled-up share capital, are treated as treasury shares for accounting purposes and have a par value of 25p per share.£3.5m (2009: £2.4m)£2.5m (2011: £3.7m).20102012 the market value of Pearson plc treasury shares was £141.2m (2009: £86.1m)£120.0m (2011: £177.4m).29. Business combinationsOn 17 June 2010 the Group acquired 100% of the shares of Melorio plc, a vocational training provider. On 19 August 2010 the Group acquired 100% of the shares of Wall Street Institute Education S.a.r.l (WSI), a group providing spoken English training for adults. On 1 September 2010 the Group acquired 69% of the voting equity of Sistema Educacional Brasileiro’s (SEB) school learning systems division. On 7 September 2010 the Group acquired 100% of the shares of America’s Choice Inc, a provider of school improvement services.F-64
29. Other comprehensive income 2012 Attributable to equity holders
of the Company Non-
controlling
interest Total Translation
reserve Retained
earnings Total (236 ) — (236 ) (2 ) (238 ) — (119 ) (119 ) — (119 ) — (3 ) (3 ) — (3 ) — 55 55 — 55 (236 ) (67 ) (303 ) (2 ) (305 ) 2011 Attributable to equity holders
of the Company Non-
controlling
interest Total Translation
reserve Retained
earnings Total (38 ) — (38 ) (6 ) (44 ) — (56 ) (56 ) — (56 ) — (8 ) (8 ) — (8 ) — 3 3 — 3 (38 ) (61 ) (99 ) (6 ) (105 ) 2010 Attributable to equity holders
of the Company Non-
controlling
interest Total Translation
reserve Retained
earnings Total 162 — 162 11 173 13 — 13 — 13 — 70 70 — 70 — 1 1 — 1 — (41 ) (41 ) — (41 ) 175 30 205 11 216 Consolidated Financial Statements (Continued)consolidated financial statements continued 2010 2009 America’s Melorio SEB WSI Choice Other Total Total Notes fair value fair value fair value fair value fair value fair value fair value All figures in £ millions Property, plant and equipment 10 4 7 3 — 3 17 9 Intangible assets 11 89 103 32 24 37 285 142 Intangible assets — Pre-publication 20 — 3 — — 6 9 2 Inventories — 5 1 1 (5 ) 2 14 Trade and other receivables 8 13 8 7 5 41 23 Cash and cash equivalents 3 5 2 12 4 26 29 Financial liabilities — Borrowings (13 ) — — — — (13 ) — Net deferred income tax liabilities 13 (24 ) — (3 ) �� (4 ) (6 ) (37 ) (45 ) Retirement benefit obligations — — — — (1 ) (1 ) (1 ) Provisions for other liabilities and charges 23 (10 ) — — — — (10 ) — Trade and other liabilities (9 ) (10 ) (14 ) (5 ) 1 (37 ) (91 ) Current income tax liabilities — — (3 ) — — (3 ) (4 ) Non-controlling interest — (39 ) — — — (39 ) (16 ) 48 87 26 35 44 240 62 Goodwill 11 50 141 39 30 28 288 205 Increase in fair values of proportionate holding arising on stepped acquisition — — — — — — (23 ) 98 228 65 65 72 528 244 Satisfied by: Cash (98 ) (228 ) (65 ) (65 ) (74 ) (530 ) (201 ) Other consideration — — — — — — (5 ) Deferred consideration — — — — (8 ) (8 ) (27 ) Net prior year adjustments — — — — 10 10 (11 ) (98 ) (228 ) (65 ) (65 ) (72 ) (528 ) (244 ) 2012 2011 Notes Certiport
fair value Author
Solutions
fair value Global
English
fair value Embanet
Compass
fair value Other
fair value Total
fair value Total
fair value 10 — 1 — 3 6 10 21 11 49 35 36 74 86 280 375 20 5 — 1 — — 6 8 — — — — 1 1 2 5 8 8 13 — 34 58 2 — 8 18 6 34 151 — — — — — — (9 ) 13 (20 ) (3 ) (13 ) (21 ) (10 ) (67 ) (96 ) — — — — (2 ) (2 ) (4 ) 23 — — — — (1 ) (1 ) (78 ) (11 ) (28 ) (22 ) (26 ) (24 ) (111 ) (115 ) — — (1 ) — — (1 ) (2 ) — — — — — — (1 ) 30 13 17 61 62 183 310 11 58 56 46 350 (5 ) 505 620 — — — — — — (15 ) 88 69 63 411 57 688 915 (88 ) (69 ) (63 ) (411 ) (51 ) (682 ) (913 ) — — — — (6 ) (6 ) — — — — — — — (2 ) (88 ) (69 ) (63 ) (411 ) (57 ) (688 ) (915 ) £41m£34m and includes trade receivables with a fair value of £34m.£26m. The gross contractual amount for trade receivables due is £37m£27m of which £3m£1m is expected to be uncollectable.£12m£nil of goodwill arising on 20102012 acquisitions is expected to be deductible for tax purposes.The non-controlling interestpurposes (2011: £1m).SEB2012 have the following useful economic lives: Certiport: customer lists and relationships 3-20 years; Author Solutions: customer lists and relationships 5 years, trademarks and brands 20 years, other intangibles 7-20 years; Global English: other intangibles 10 years. As EmbanetCompass was measured usingacquired in late 2012 the non-controlling interest’s proportionate shareuseful economic lives of the acquiree’s net assets.F-65 2012 2011 2010 (682 ) (913 ) (530 ) (31 ) (5 ) (20 ) 34 151 26 (37 ) (12 ) (11 ) (716 ) (779 ) (535 ) Notes to the Consolidated Financial Statements (Continued) 2010 2009 2008 All figures in £ millions Cash — Current year acquisitions (530 ) (201 ) (394 ) Cash — Acquisitions yet to complete — (4 ) (12 ) Deferred payments for prior year acquisitions and other items (20 ) (32 ) (5 ) Cash and cash equivalents acquired 26 29 16 Acquisition costs paid (11 ) — — (535 ) (208 ) (395 ) In 2010, acquisitionsAcquisitions in 2012 contributed £84m£45m to sales and £6m£5m to operating profit before acquisition costs and amortisation of acquired intangibles from the date of acquisition to the balance sheet date. Of these amounts, MelorioCertiport contributed £38m of sales and £5m of profit, SEB contributed £11m£20m of sales and a lossprofit of £4m, Global English contributed £14m of sales and £2m WSIof profit and EmbanetCompass contributed £13m£7m of sales and £1m of profit and America’s Choice contributed £9m of sales and £nil of profit.2010,2012, the Group estimates that sales for the period would have been £5,799m£5,168m and profit before tax would have been £676m.30. Disposals Notes 2010 2009 2008 All figures in £ millions Property, plant and equipment 10 (57 ) — (7 ) Intangible assets 11 (88 ) — (3 ) Inventories — — (7 ) Other financial assets (3 ) — — Trade and other receivables (103 ) — (8 ) Cash and cash equivalents (165 ) — — Net deferred income tax liabilities 13 47 — — Retirement benefit obligations 8 — — Trade and other liabilities 132 — 9 Current income tax liabilities 12 — — Non-controlling interest 271 — — Attributable goodwill 11 (195 ) — (99 ) Cumulative translation adjustment (13 ) — (49 ) (154 ) — (164 ) Cash received 1,234 — 114 Deferred receipts — — 2 Costs (43 ) — (5 ) 1,037 — (53 ) F-66
31. Disposals including business closures Notes 2012 2011 2010 10 (3 ) — (57 ) 11 (45 ) (4 ) (88 ) — — (3 ) — (7 ) — — (5 ) (103 ) — (6 ) (165 ) 13 11 1 47 — 1 8 — 2 132 — 1 12 — 7 271 11 (50 ) (4 ) (195 ) — — (13 ) (87 ) (14 ) (154 ) — — 1,234 (26 ) — (43 ) (113 ) (14 ) 1,037 Consolidated Financial Statements (Continued)consolidated financial statements continued 2010 2009 2008 All figures in £ millions Cash — Current year disposals 1,234 — 114 Cash and cash equivalents disposed (165 ) — — Costs paid (32 ) — (15 ) Pension contribution paid on disposal (53 ) — — 984 — 99 2012 2011 2010 — — 1,234 — (6 ) (165 ) (11 ) — (32 ) — — (53 ) (11 ) (6 ) 984 20102012 includes the write down of assets resulting from the closure of Pearson in Practice. The disposal in 2011 relates to Longman Nigeria, and in 2010 to Interactive DataData. Notes 2012 2011 10 40 — 11 404 — 12 27 — 13 38 — 15 1 — 451 — 20 16 — 80 — 17 115 — 1,172 — 18 (7 ) 13 (20 ) — 25 (26 ) — 23 (29 ) — (234 ) — (316 ) — 856 — disposal in 2008 relatesreceipt of proceeds from shares issued to employees of Interactive Data.Data Management business. Further details are shown in note 3.31. Cash generated from operations Notes 2010 2009 2008 All figures in £ millions Profit 1,300 462 323 Income tax 480 198 209 Depreciation 10 82 85 80 Amortisation of acquired intangible assets 11 113 103 86 Amortisation of other intangible assets 11 51 44 30 Loss on sale of property, plant and equipment 3 2 1 Net finance costs 3,6 73 95 91 Share of results of joint ventures and associates 12 (41 ) (30 ) (25 ) (Profit)/loss on disposal of discontinued operations 3 (1,037 ) — 53 Loss on disposal 10 — — Acquisition costs 11 — — Net foreign exchange adjustment from transactions (3 ) (14 ) 105 Share-based payment costs 26 39 37 33 Pre-publication 29 (16 ) (58 ) Inventories 37 32 (12 ) Trade and other receivables (82 ) (14 ) (81 ) Trade and other liabilities 165 103 82 Retirement benefit obligations (64 ) (72 ) (14 ) Provisions for other liabilities and charges 3 (3 ) (9 ) 1,169 1,012 894 Notes 2012 2011 2010 329 956 1,300 167 199 480 10 80 70 82 11 183 139 113 11 54 48 51 — — 3 6 81 71 73 12 (9 ) (33 ) (41 ) 3 — — (1,037 ) 113 (435 ) 10 21 12 11 32 — — (21 ) 24 (3 ) 26 32 40 39 (55 ) 2 29 49 15 37 (94 ) (9 ) (82 ) — 31 165 (41 ) (65 ) (64 ) (5 ) 28 3 916 1,093 1,169 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.F-67Notes to the Consolidated Financial Statements (Continued) 2010 2009 2008 All figures in £ millions Net book amount 3 3 3 Loss on sale of property, plant and equipment (3 ) (2 ) (1 ) — 1 2 2012 2011 2010 1 9 3 — — (3 ) 1 9 — £2m (2009: £8m; 2008:£nil (2011: £10m; 2010: £2m).32. Contingenciesrights and royalty agreements.other rights. None of these claims are expected to result in a material gain or loss to the Group.33. Commitments 2010 2009 All figures in £ millions Not later than one year 164 153 Later than one year and not later than two years 151 144 Later than two years and not later than three years 130 129 Later than three years and not later than four years 112 114 Later than four years and not later than five years 95 99 Later than five years 785 848 1,437 1,487 — — the directors’ remuneration report.F-68
38. Events after the balance sheet dateNotes to the Consolidated Financial Statements (Continued)35. Events after the balance sheet dateOn 22 November 2010,In January 2013, the Group announcedcompleted the proposed acquisitionpurchase of a 75% stake5% equity investment in CTI Education Group,NOOK Media, LLC for $89.5m. NOOK Media is a leading South African educationnew company for £31m. As atconsisting of Barnes & Noble’s digital businesses including its NOOK e-reader and tablets, the end of December 2010, this acquisition had not been completed but is expected to complete in the first half of 2011.On 18 January 2011,NOOK digital bookstore and its 674 college bookstores across America.announced that it had agreed to increase its shareholdingcompleted the purchase of the remaining minority interest in TutorVista,Tutorvista, the Bangalore based tutoring services company, to a controlling 76% stake for a consideration of $127m.On 7 March 2011, the Group and Education Development International plc (EDI) announced that they had reached agreement on the terms of a recommended cash offer to be made by Pearson for the entire issued share capital of EDI. The offer values EDI at approximately £112.7m. EDI is a leading provider of education and training qualifications and assessment services, with a strong reputation for the use of information technology to administer learning programmes and deliver on-screen assessments.behalfbehalf.Pearson plc Robin Freestone Chief Financial Officer Pearson plc/s/ Robin FreestoneRobin FreestoneChief Financial Officer25, 2011F-6922, 2013