Reed Elsevier combined businesses
| |
2008
£m |
2007
£m |
%
change |
%
change at
constant
currencies |
| Reported figures |
| Revenue |
5,334 |
4,584 |
+16% |
+7% |
| Operating profit |
901 |
888 |
+1% |
-6% |
| Profit before tax |
617 |
812 |
-24% |
-30% |
| Net borrowings |
5,726 |
492 |
|
|
| Adjusted figures |
| Operating profit |
1,379 |
1,137 |
+21% |
+12% |
| Profit before tax |
1,205 |
998 |
+21% |
+11% |
| Operating cash flow |
1,407 |
1,108 |
+27% |
+17% |
| Operating margin |
25.9% |
24.8% |
|
|
| Operating cash flow conversion |
102% |
97% |
|
|
Adjusted figures are presented as additional performance measures and are stated before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, disposals and other non operating items, related tax effects and movements on deferred tax balances not expected to crystallise in the near term. Reconciliations between the reported and adjusted figures are provided in note 11 to the combined financial statements.
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Currency
The average exchange rates in the year saw sterling weaken against both the US dollar and the euro. This gives a favourable effect on translation of reported growth rates expressed in sterling.
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Income statement
Revenue from continuing operations (ie excluding Harcourt Education) was £5,334m, up 16%. At constant exchange rates, revenue was 7% higher, or 4% higher underlying, ie before acquisitions and disposals.
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Reported figures
Continuing operations
Reported operating profit from continuing operations, after amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, was £901m, up 1%. The movement reflects the strong underlying operating performance and part year contribution from ChoicePoint, offset by the costs of the restructuring programme and currency translation effects.
The amortisation charge in respect of acquired intangible assets, including the share of amortisation in joint ventures, amounted to £281m, up £60m as a result of ChoicePoint and other recent acquisitions and currency translation effects. Goodwill impairment charges of £9m relate to minor exhibitions businesses.
Exceptional restructuring costs incurred to date in the restructuring programme announced in February 2008 and in RBI amounted to £152m (2007: nil) principally in respect of severance, outsourcing migration costs and associated property costs. Acquisition related costs amounted to £27m (2007: £20m).
Disposals and other non operating items of £92m comprise gains on disposals of businesses and investments of £15m, costs of the RBI divestment process terminated in December 2008 of £31m, a £70m write down to £14m in the carrying value of the investment in Education Media and Publishing Group that arose on the sale of the Harcourt US K-12 Schools business in 2007, and fair value decreases in the portfolio of venture capital investments of £6m.
Net finance costs were higher at £192m (2007: £139m) principally reflecting funding of ChoicePoint and other recent acquisitions and currency translation effects, and include £18m of acquisition related costs with respect to fees incurred in connection with ChoicePoint acquisition financing.
The reported profit before tax, including amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, and non operating items, was £617m, down 24%.
The reported tax charge of £155m compares with a credit of £82m in the prior year, which included the £223m credit in respect of previously unrecognised deferred tax assets and capital losses, arising in continuing operations, that were realisable as a result of the disposal of Harcourt Education.
Discontinued operations
The gain on the disposal of discontinued operations was £67m relating to the disposal of Harcourt Assessment (2007: £611m on disposals of the Harcourt International and US K-12 Schools businesses), after £27m of recycled cumulative currency translation losses since adoption of IFRS previously taken to reserves. Taxes on the disposals were £49m (2007: £380m excluding the tax credits included in continuing operations described above). Net profit from discontinued operations in 2007 also included the post-tax results of Harcourt Education of £78m.
Total operations
The reported attributable profit of £476m compares with £1,200m in 2007, which included the tax credits, the results of Harcourt Education and the gain on sale of businesses.
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Adjusted figures
Adjusted figures are used by Reed Elsevier as additional performance measures and are stated before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, and, in respect of earnings, reflect a tax rate that excludes the effect of movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term. Exceptional restructuring costs relate to the major restructuring programme announced in February 2008 and in RBI. Acquisition related costs relate to acquisition integration and fees incurred in connection with acquisition financing. Profit and loss on disposals and other non operating items are also excluded from the adjusted figures. Comparison at constant exchange rates uses 2007 full year average and hedge exchange rates.
Continuing operations
Adjusted operating profit for the continuing operations, including a part year contribution from ChoicePoint, was £1,379m, up 21%. At constant exchange rates, adjusted operating profits were up 12%, or 9% underlying, ie before acquisitions and disposals.
The net pension expense (excluding the unallocated net pension financing credit) was £75m (2007: £78m) reflecting higher discount rates and lower pension curtailment credits. The net pension financing credit was £39m (2007: £39m). The charge for share based payments was £46m (2007: £38m). Restructuring costs, other than in respect of the exceptional restructuring programmes and acquisition integration, were £13m (2007: £16m).
Overall adjusted operating margin for the continuing businesses was up 1.1 percentage points at 25.9% reflecting the good revenue growth and cost efficiency.
Net interest expense, before acquisition related financing fees, was higher at £174m (2007: £139m) principally reflecting funding of ChoicePoint and other recent acquisitions and currency translation effects, less the benefit of disposals and free cash flow.
Adjusted profit before tax from continuing operations was £1,205m, up 21%. At constant exchange rates, adjusted profit before tax grew by 11%.
The effective tax rate on adjusted profit before tax for the continuing businesses, at 23.4%, was similar to the rate in 2007. The effective tax rate on adjusted profit before tax excludes movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term, and more closely aligns with cash tax costs. Adjusted operating profits and taxation are also grossed up for the equity share of taxes in joint ventures.
The adjusted profit from continuing operations attributable to shareholders of £919m was up 20%. At constant exchange rates, adjusted profit attributable to shareholders was up 11% for continuing operations.
Discontinued operations
Adjusted operating profit from discontinued operations was nil (2007: £121m) following the sale of the Harcourt Education division.
Total operations
The adjusted profit attributable to shareholders, including discontinued operations, was £919m, up 8%. At constant exchange rates, adjusted profit attributable to shareholders from total operations was down 1%, reflecting the sale of the Harcourt Education division.
The effective tax rate on the profit from total operations, at 23.4%, was similar to the 23.6% effective rate for 2007.
The adjusted profit before tax for total operations, if stated including the adjusted operating profits of discontinued operations, would have been £1,205m, compared to £1,119m in 2007.
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Cash flows
Adjusted operating cash flow from continuing operations was £1,407m, up 27%, or up 17% at constant currencies. The rate of conversion of adjusted operating profits into cash flow for continuing businesses was 102% (2007: 97%) reflecting the continuous focus on management of working capital.
Capital expenditure included within adjusted operating cash flow from continuing operations was £172m (2007: £145m), including £115m in respect of capitalised development costs included within intangible assets.
Free cash flow from continuing operations – after interest and taxation – was significantly higher at £999m (2007: £717m) before exceptional restructuring and acquisition related spend, principally reflecting the stronger adjusted operating cash flow performance and currency translation effects.
Ordinary dividends paid to shareholders in the year, relating to the 2007 final and 2008 interim dividends, amounted to £418m (2007: £416m). The special distribution paid to shareholders in January 2008 from the net proceeds of the Harcourt Education disposal amounted to £2,013m (including £27m paid to the employee benefit trust).
Share repurchases by the parent companies amounted to £40m (2007: £199m). Shares of the parent companies purchased by the employee benefit trust to meet future obligations in respect of share based remuneration amounted to £54m (2007: £74m). Net proceeds from the exercise of share options were £54m (2007: £177m).
Spend on acquisitions, after taking account of £51m net cash acquired and excluding borrowings assumed, was £2,161m, including £1,931m in respect of ChoicePoint. Including deferred consideration payable, an amount of £1,579m was capitalised as acquired intangible assets and £1,279m as goodwill. Payments made in respect of acquisition integration amounted to £27m and acquisition related financing fees £18m.
Proceeds from disposals of businesses, other than discontinued operations, and of other assets, less the cash costs of the terminated RBI divestment process, amounted to £8m. Payments made in respect of the exceptional restructuring costs totalled £72m.
Net proceeds from the sale of discontinued operations in the year were £270m and taxes paid on completed disposals were £320m.
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Debt
Net borrowings at 31 December 2008 were £5,726m, an increase of £5,234m since 31 December 2007. The increase principally reflects the payment of the special distribution to shareholders, the acquisition of ChoicePoint and currency translation effects, together with ordinary dividends paid, share repurchases and acquisition and restructuring spend, partly offset by the free cash flow from continuing operations, and proceeds from the exercise of share options and disposals. Currency translation differences increased net borrowings by £1,281m, reflecting the impact of the strengthening of the US dollar against sterling on the largely US dollar denominated net debt.
Gross borrowings after fair value adjustments at 31 December 2008 amounted to £6,142m. The fair value of related derivative assets was £41m. Cash balances totalled £375m.
Net pension obligations, ie pension obligations less pension assets, at 31 December 2008 were £369m which compares with a net surplus as at 31 December 2007 of £50m. The movement principally reflects a decline in asset values in the year.
As at 31 December 2008, after taking into account interest rate and currency derivatives, a total of 52% of Reed Elsevier’s gross borrowings (equivalent to 56% of net borrowings) were at fixed rates and had a weighted average remaining life of 6.1 years and interest rate of 5.3%. After taking additional account of US$1.6bn of term debt issued in January 2009, a total of 69% of gross borrowings (equivalent to 74% of net borrowings) were at fixed rates and had a weighted average remaining life of 6.6 years and interest rate of 6.0%.
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Liquidity
At 31 December 2008, Reed Elsevier had access to US$3.0bn of committed bank facilities maturing in May 2010, providing back up for short term debt, of which US$38m was drawn. In February 2009, this facility was reduced to US$2.5bn and, at the same time, a new US$2.0bn committed bank facility, forward starting in May 2010 and maturing in May 2012, was put in place. Together these two back up facilities provide security of funding for US$2.5bn of short term debt to May 2010 and for US$2.0bn from May 2010 to May 2012.
After taking account of these committed bank facilities, available cash resources and the US$1.6bn of term debt issued in January 2009, no borrowings mature within the next two years, £1,253m of borrowings mature in the third year and £4,528m beyond the third year. The strong free cash flow of the business (£999m before exceptional restructuring and acquisition related spend and dividends in 2008), the available resources and back up facilities, and Reed Elsevier’s ability to access debt capital markets are expected to provide sufficient liquidity to refinance the loans outstanding on the ChoicePoint acquisition facility, due in 2010 and 2011, and term debt as they mature.
The business is strongly cash generative with conversion of adjusted operating profit into cash at 102% in 2008. The ratio of net debt to adjusted ebitda (earnings before interest, tax, depreciation and amortisation) is 3.7x (3.5x on a pro forma basis including ChoicePoint; 2.8x using the same exchange rates for both net debt and ebitda). Reed Elsevier’s target remains a ratio of net debt to ebitda of 2.0-3.0x over the longer term, consistent with a solid investment grade credit rating.
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Capital employed and returns
The capital employed in the continuing businesses at 31 December 2008 was £13,125m (2007: £7,825m), after adding back accumulated amortisation of acquired intangible assets and goodwill. The increase of £5,300m principally reflects the impact of acquisitions and currency translation effects partially offset by disposals and increases in pension deficits.
The return on average capital employed for the continuing businesses in the year was 12.1% (2007: 11.8%). This return is based on adjusted operating profits, less tax at the effective rate, and the average capital employed, adjusted for acquisition timing and to exclude the gross up to goodwill in respect of deferred tax liabilities on acquisitions, retranslated at average exchange rates. The 0.3% increase reflects a 1.0% improvement from underlying profit growth and low capital requirements, partly offset by the dilutive effect of the ChoicePoint acquisition with its low initial returns.
Acquisitions typically dilute the overall return initially, but build quickly to deliver longer term returns well over Reed Elsevier’s average for the business. The recent acquisitions made in the years 2006-2008 are delivering post tax returns in 2008 of 11%, 8% and proforma 4% respectively.