Pearson 2006 Preliminary results

Pearson announced its 2006 Preliminary Results on Monday 26th February, 2007.

Download the full press release and financials in PDF format here.

UK Presentation

Marjorie Scardino, CEO and Robin Freestone, CFO, hosted a results presentation for analysts and investors at 09:00 (GMT).

A transcript of the event is available here.

Click here for a PDF version of the presentation slides.

 


Press Release (HTML)

  • Record results. Pearson reports its highest ever operating profits (adjusted operating profit up 15% to £592m), earnings (adjusted eps up 18% to 40.2p) and cash (free cash flow up £2m to £433m).
  • Sustained growth and market share gains. School sales up 6% and Higher Education sales up 4%, benefiting from leading position in content, assessment and technology; FT advertising revenues up 9%; Penguin sales up 3% despite tough consumer publishing market.
  • Stronger margins and double-digit profit growth in all businesses. Pearson margin up a percentage point to 13.4%. Education margin up to 14.1% and profits up 12%; FT Group margin up to 17.3% and profits up 18%; Penguin margin up to 7.8% and profits up 22%.
  • Higher returns. Return on invested capital up to 8.0% (from 6.7% in 2005), above Pearson's weighted average cost of capital; dividend increased by 8.5% to 29.3p, the largest increase for a decade.

Marjorie Scardino, chief executive, said: "This is another strong set of results. We have built market-leading businesses and invested consistently in their content, technology and international expansion. That strategy is paying off with sustained growth in sales, margins, earnings and returns, and we expect 2007 to be another good year."

Summary
£ millions 2006 2005 Headline
growth
Underlying
growth
Business performance
Sales 4,423 4,096 8% 4%
Adjusted operating profit 592 506 17% 15%
Adjusted profit before tax 502 422 19% --
Adjusted earnings per share 40.2p 34.1p 18% --
Operating cash flow 575 570 1% --
Free cash flow 433 431 -- --
Return on invested capital 8.0% 6.7% 1.3 ppts 0.6 ppts
Net debt 1,059 996 (6%) --
Statutory results
Sales 4,137 3,808 9%  
Operating profit 540 516 5% --
Profit before tax 466 446 4% --
Basic earnings per share 55.9p 78.2p (29%) --
Basic earnings per share - continuing 54.1p 38.9p 39% --
Cash generated from operations 621 653 (5%) --
Dividend per share 29.3p 27.0p 8.5% --

 

Throughout this statement, we refer to business performance measures for total operations (including Government Solutions) and growth rates on an underlying basis (ie excluding currency movements and portfolio changes) unless otherwise stated. The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the accounts 2, 5, 7,12,14 and 15. Profit measures within business performance are presented on an adjusted basis to exclude: i) other net gains and losses arising in connection with the sale of subsidiaries, investments and associates; ii) amortisation and adjustment of acquired intangible assets; and iii) short-term fluctuations in the market value of financial instruments (under IAS39) and other currency movements (under IAS21).

2006 OVERVIEW

Pearson's three key financial measures are adjusted earnings per share, free cash flow and return on invested capital. In 2006, adjusted EPS and free cash flow reached record levels, and our return on invested capital increased from 6.7% in 2005 to 8.0%, above our weighted average cost of capital of 7.7%.

Pearson's sales increased by 4% to £4.4bn and adjusted operating profit was up 15% to a record £592m. All parts of Pearson contributed, with good sales growth, further margin improvement and double-digit profit increases in each business. Adjusted earnings per share were 40.2p, up 18%.

Operating cash flow increased by £5m to £575m and free cash flow by £2m to £433m. Cash conversion was strong at 97% of operating profit (even after an exceptional 113% cash conversion rate in 2005). The ratio of average working capital to sales at Pearson Education and Penguin improved by 1.1% points to 26.3%.

Statutory results show an increase in operating profit to £540m (£516m in 2005). Basic earnings per share were 55.9p (compared with 78.2p in 2005, which included the £302m profit on the sale of Recoletos). Net debt rose by £63m to £1,059m (from £996m in 2005).

During the year, we completed a series of bolt-on acquisitions in Education (including Promissor, PBM, National Evaluation Systems, PowerSchool and Chancery) and the FT Group (Quote.com and Mergermarket). Our total investment in acquisitions in 2006 was £363m. Together, these acquisitions contributed £147m of sales and £17m of operating profit to our 2006 results (after integration costs, which are expensed).

In December 2006 we announced the sale of Government Solutions to Veritas Capital for $560m in cash, $40m in preferred stock and a 10% interest in the company. In 2006 Government Solutions contributed £286m of sales and £22m of operating profit to Pearson. The sale was completed on 15 February 2007. As part of our plan to reduce our UK pension deficit, we will inject £100m of the cash proceeds from the sale of Government Solutions into our UK pension scheme during 2007.

The board is proposing a dividend increase of 8.5% to 29.3p, the largest increase for a decade. Subject to shareholder approval, 2006 will be Pearson's 15th straight year of increasing our dividend above the rate of inflation, and in the past five years alone we have returned approximately £1bn ($1.8bn) to shareholders through the dividend.

2007 OUTLOOK

We expect 2007 to be another good year for Pearson, with continued margin improvement and growth ahead of our markets. We expect to achieve good underlying earnings growth, cash conversion ahead of our 80% threshold, and a further increase in return on invested capital. At this early stage in the year our outlook is:

  • Pearson Education (65% of 2006 sales; 68% of operating profit). We expect School to achieve underlying sales growth in the 4-6% range; Higher Education to grow in the 3-5% range; and Professional sales to be broadly level with 2006. We expect margins to improve again in School and Professional, and to be stable in Higher Education.
  • Penguin (19% of sales; 11% of operating profit) expected to improve margins further, as its publishing investment and efficiency programmes continue to bear fruit.
  • Financial Times Group (16% of sales; 21% of operating profit) expected to continue its strong profit growth. At FT Publishing, advertising trends remain difficult to predict, but we expect our cost measures, integration actions and revenue diversification to push margins into double digits in 2007. IDC has stated that it expects to achieve revenue growth in the 6-9% range and net income growth in the high single-digits to low double-digits (headline growth under US GAAP).

Interest. Our interest charge in 2007 will reflect the receipt of the sale proceeds from Government Solutions, a £100m cash payment into our UK pension scheme and higher interest rates.

Tax. For 2007, we expect our effective tax rate on adjusted earnings to be in the 28-30% range (compared with our 2006 rate of 30.9%). Our tax position benefits from deductions relating to amortisation of goodwill arising on acquisitions, and from 2007 we will reflect those deductions in adjusted earnings. The amount of tax paid (£59m in 2006) is not affected.

Exchange rates. Pearson generates about two-thirds of its sales in the US and each five cent change in the average £:$ exchange rate for the full year (which in 2006 was £1:$1.84) would have an impact of approximately 1p on adjusted earnings per share.

Dividends. In recent years, our dividend policy has been to increase the dividend ahead of the rate of inflation. Looking ahead, the Board expects to raise the dividend more in line with earnings growth, while building our dividend cover towards two times earnings.

For more information:

Luke Swanson / Simon Mays-Smith/ Deborah Lincoln + 44 (0) 20 7010 2310

Pearson's results presentation for investors and analysts will be webcast live today from 09.00 (GMT) and available for replay from 12.00 (GMT) via www.pearson.com.

We are holding a conference call for US investors at 15.00 (GMT) / 10.00 (EST). To participate please dial in on +1 718 354 1175 (inside the US) or +44 20 8974 7900 (outside the US), participant code 476378. The call will be available for replay at www.pearson.com.

Video interviews with Marjorie Scardino and Robin Freestone are available at www.pearson.com; high resolution photographs are available for the media at www.newscast.co.uk.

BUSINESS PERFORMANCE

Business Performance
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales
School 1,455 1,295 12% 6%
Higher Education 795 779 2% 4%
Professional* 627 589 6% 3%
Pearson Education 2,877 2,663 8% 4%
FT Publishing 366 332 10% 8%
IDC 332 297 12% 4%
FT Group 698 629 11% 6%
Penguin 848 804 5% 3%
Total 4,423 4,096 8% 4%
Adjusted operating profit
School 184 147 25% 17%
Higher Education 161 156 3% 3%
Professional* 60 45 33% 29%
Pearson Education 405 348 16% 12%
FT Publishing 32 21 52% 52%
IDC 89 80 11% 9%
FT Group 121 101 20% 18%
Penguin 66 60 10% 22%
Total 592 509 16% 15%
Recoletos -- (3)    
Total 592 506 17% 15%

 

* includes Government Solutions

SCHOOL

RECORD RESULTS: SALES UP 6%; PROFITS UP 17%; MARGINS UP BY 1.2% PTS TO 12.6%

School
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 1,455 1,295 12% 6%
Adjusted operating profit 184 147 25% 17%

 

Significant share gains in US School publishing

  • Pearson US School publishing up 3%, against an industry decline of 6% (source: Association of American Publishers), as we benefit from our sustained investment in new basal programmes and innovative digital services.
  • Pearson takes the leading share of the new adoption market: 30% of the total market and 33% where we competed. #1 or #2 market share in reading, maths, science and social studies. Total new adoption opportunity of approximately $670m in 2006, down from $900m in 2005.
  • Innovative digital programme for California takes #1 position and a 43% market share in elementary social studies. Digital curriculum services being developed for new adoptions.
  • US School new adoption market expected to grow strongly over the next three years (estimated at $760m in '07; $900m in '08; $950m in '09).

Strong growth and continued share gains in school testing

  • US School testing sales up in the high single digits (after 20%+ growth in 2005), benefiting from further contract wins, market share gains and leadership in onscreen marking, online testing and embedded (formative) assessment.
  • Acquisition of National Evaluation Systems (NES), the leading provider of customised assessments for teacher certification in the US, with testing programmes in 16 states including Florida (won in 2006) and California (renewed in 2006). NES expands our testing capabilities in an attractive adjacent market.

School technology business broadened

  • Acquisition of Chancery and PowerSchool enhances our leading position in the US Student Information Systems (SIS) market. Integration on track and good growth prospects as schools upgrade information systems to manage and report data on student attendance and performance.
  • Organic growth and margin improvement continues in digital curriculum business, Pearson Digital Learning. Continued investment in new generation digital products to meet demands of school districts for personalised classroom learning.
  • Four product nominations in six categories, more than any other education company, for the Software and Information Industry Association 'Codie' awards. The products are: Prosper, a formative assessment tool for 'at-risk' students; Write to Learn, a web-based tool for learning to read and write; Chancery SMS, a student information system for middle and large school districts; and California History-Social Studies.

Good growth in international school

  • International testing businesses continue to benefit from technology leadership. In the UK, we have marked over 9 million GCSE, AS and A-Level scripts on screen. In 2007 we will roll out Results Plus across the UK, providing students, teachers and parents with online access to question-level examination performance data.
  • In school publishing, UK launch of ActiveTeach technology provides multimedia resources for maths and science teaching and brings market share gains. Market-leading school companies in Hong Kong and South Africa outperform their markets.
  • Acquisition of Paravia Bruno Mondadori (PBM), one of Italy's leading education publishers. Good progress in integrating publishing, sales and marketing, distribution and back office operations with our existing Italian business, and in sharing content and technology.
  • Successful launch of regional adaptations of English Adventure (with Disney), our worldwide English Language Training programme for elementary schools, in Asia and Latin America.

HIGHER EDUCATION

RECORD RESULTS: SALES UP 4%; PROFITS UP 3%; MARGINS UP BY 0.3% PTS TO 20.3%

Higher Education
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 795 779 2% 4%
Adjusted operating profit 161 156 3% 3%

 

Steady growth momentum

  • US Higher Education up 4%; ahead of the industry once again.
  • Over the past eight years, Pearson US Higher Education has grown at an average annual rate of 7%, compared to the industry's average growth rate of 4%.

Rapid growth in online learning and custom publishing

  • Approximately 4.5m US college students using one of our online programmes. Of these, approximately 2.3m (up almost 30% on 2005) register for an online course on one of our 'MyLab' online homework and assessment programmes.
  • 16 subject-specific 'MyLab' online homework and assessment programmes now available supporting more than 200 titles. Research studies show significant gains in student success rates and productivity improvements for institutions.
  • Strong market share, student performance and institutional productivity gains in college maths, supported by MyMathLab.
  • In psychology and economics, two of the three largest markets in US higher education, Pearson publishes successful first edition bestsellers: Cicarrelli's Psychology together with MyPsychLab and Hubbard's Economics together with MyEconLab. Cicarrelli's Psychology increases Pearson's market share by 3% to 25% and is the bestselling launch of a first edition in the discipline in the past decade.
  • Continued strong double digit growth in custom publishing - which builds customised textbooks and online services around the courses of individual faculties or professors.

Good progress in international markets

  • Good growth in local language publishing programmes. Increasing focus on custom publishing and technology based assessment services with the MyLab suite of products.

PROFESSIONAL

RECORD RESULTS: SALES UP 3%; PROFITS UP 29%; MARGINS UP BY 2.0% PTS TO 9.6%

Professional
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 627 589 6% 3%
Adjusted operating profit 60 45 33% 29%

 

Note: includes Government Solutions

Professional Testing: rapid organic sales and profit growth

  • Professional Testing sales up more than 30% in 2006 (and have doubled over the past two years). Approximately 4m secure online tests delivered in more than 5,000 test centres worldwide in 2006.
  • Successful start-up of the worldwide Graduate Management Admissions Test. 220,000 examinations delivered in 400 test centres in 96 countries, in first year of new contract.
  • Professional Testing moves from around breakeven in 2005 to profitability in 2006.
  • Successful integration of Promissor, acquired in January 2006. Combination brings together two leading international professional testing companies and takes Pearson into new US state and federal regulatory markets.

Professional publishing: further margin improvement

  • Technology publishing profits up as further cost actions offset continued industry weakness.
  • Strong performance from Wharton School Publishing and FTPress imprints, aided by Pearson's global distribution and strong retail relationships. 41 titles published in 2006 including Jerry Porras, Stewart Emery and Mark Thompson's Success Built To Last (the sequel to Built To Last) and Jeffrey Gitomer's The Little Red Book of Sales Answers, The Little Gold Book of Yes Attitude. Three Wall Street Journal business bestsellers, two BusinessWeek bestsellers and one New York Times bestseller in 2006.

Government Solutions: sale completed in February 2007

  • Sale of Government Solutions to Veritas Capital for $560m in cash, $40m in preferred stock and a 10% interest in the company completed on 15 February 2007.
  • Government Solutions contributed £286m of sales and £22m of operating profit to Pearson in 2006.

FT PUBLISHING

GOOD SALES MOMENTUM AND SIGNIFICANT PROFIT IMPROVEMENT:
SALES UP 8%; PROFITS UP 52%; MARGINS UP BY 2.4% PTS TO 8.7%

FT Publishing
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 366 332 10% 8%
Adjusted operating profit 32 21 52% 52%

 

Continued growth and profit improvement at the Financial Times and FT.com

  • FT newspaper and FT.com sales up 8% to £238m; £9m profit improvement to £11m.
  • FT advertising revenues up 9% with rapid growth in online, luxury goods and corporate finance categories, all up more than 30%.
  • FT's worldwide circulation up 1% to 430, 469 (Source: ABC, average for six months to December 2006). FT.com's paying subscribers up 7% to 90,000 and December audience up 29% to 4.2m.
  • Growing international presence and readership. 47% growth in readership in the US Mendelsohn Affluent Survey and 26% growth in the Asian Business Readership Survey. The FT ranked number one European business title in Europe for the fifteenth time (European Business Readership Survey).
  • Continued benefits of international expansion: approximately three-quarters of the FT's advertising booked in two or more international editions; almost half of the FT's advertising booked for all four editions worldwide.
  • 'New newsroom' creates an integrated multi-media newsroom, improving commissioning, reporting, editing and production efficiency, and providing further cost savings.

Sustained progress across FT Publishing

  • Acquisition and integration of Mergermarket, an online financial data and intelligence provider. On a pro forma basis, Mergermarket's revenues grew 80% in 2006, with 90% customer renewals. Margins improving as expected in spite of significant investment in new products and geographic markets.
  • FT Business shows good growth and improves margins driven by strong performance in events, UK retail finance titles (Investment Adviser, Financial Adviser) and internationally by The Banker, which celebrated its 80th year. FT Business integrated with the Financial Times early in 2007.
  • Les Echos achieves modest circulation (average circulation of 119,117) and advertising growth in a weak market ahead of the 2007 French presidential elections; FT Deutschland outperforms the German newspaper market once again, increasing circulation 2% to 104,000.
  • The Economist, in which Pearson owns a 50% stake, increases its circulation by 9% to 1.2m (for the July-December ABC period).

INTERACTIVE DATA CORPORATION (NYSE:IDC)

RECORD RESULTS: SALES UP 4%; PROFITS UP 9%; MARGINS STABLE AT 26.8%

IDC
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 332 297 12% 4%
Adjusted operating profit 89 80 11% 9%

 

Faster organic growth

  • FT Interactive Data, IDC's largest business (approximately two-thirds of IDC revenues), generates strong, consistent growth in North America and Europe.
  • Improving momentum at ComStock and eSignal. Comstock enjoys good new sales progress with institutional clients and lower cancellation levels. eSignal produces continued growth in its base of direct subscription terminals.
  • Renewal rates for IDC's institutional businesses remain at around 95%.

Continued focus on high value services

  • FT Interactive Data's growth driven by sustained demand for fixed income evaluated pricing services and related reference data. Continues to expand its market coverage, adding independent valuations of credit default swaps and other derivative securities
  • CMS BondEdge launches fixed income analytical data feed service. Enables CMS BondEdge to deliver new applications for sophisticated risk measures.
  • ComStock real-time services power algorithmic trading applications. ComStock's highly reliable, low-latency consolidated data-feed service supports increasingly sophisticated institutional electronic trading applications.
  • IDC divisions unified under the Interactive Data brand to emphasise the breadth of its comprehensive range of products and services across the front, middle and back offices of customers.

Further expansion into adjacent markets

  • Following the acquisition of IS.Teledata (re-branded Interactive Data Managed Solutions in July 2006), IDC now provides customised, web-based financial information systems for retail banking and private client applications as well as for infomedia portals and online brokers.
  • The acquisition of Quote.com in March 2006, which expanded eSignal's suite of real-time market data platforms and analytics, added two financial websites. As a result, eSignal is generating strong growth in online advertising.
  • Interactive Data Managed Solutions and Quote.com contribute over $50 million to IDC's 2006 revenue.

PENGUIN

GOOD SALES GROWTH AND SIGNIFICANT PROFIT INCREASE:
SALES UP 3%; PROFITS UP 22%; MARGINS UP BY 0.3% PTS TO 7.8%

Penguin
£ millions 2006 2005 Headline
growth
Underlying
growth
Sales 848 804 5% 3%
Adjusted operating profit 66 60 10% 22%

 

Record literary success and bestseller performance

  • Record number of bestsellers for record number of weeks - Penguin US places 139 books on The New York Times bestseller list, 10 more than in 2005, and keeps them there for 809 weeks overall, up 119 weeks from 2005; Penguin UK places 59 titles in the BookScan Top Ten bestseller list, up 5 from 2005, and keeps them there for 361 weeks, up 42 weeks from 2005.
  • Penguin authors win a large number of prestigious literary awards including: a Pulitzer Prize for Fiction (March by Geraldine Brooks); a National Book Critics Circle Award (THEM: A Memoir of Parents by Francine du Plessix Gray); the Michael L. Printz award (Looking for Alaska by John Green); the Whitbread Book of the Year Award (Matisse the Master by Hilary Spurling); the Orange Prize for Fiction (On Beauty by Zadie Smith); and the Man Booker Prize (The Inheritance of Loss by Kiran Desai).
  • Penguin UK's focus on fiction rewarded with a substantial increase in market share, led by Marina Lewycka's A Short History of Tractors in Ukrainian.
  • Penguin US premium paperback format continues to accelerate revenue growth and improves profitability in the important mass market category. Strong performance from paperbacks with Penguin authors holding the #1 position on The New York Times paperback fiction list for a record 22 successive weeks.

Continued focus on quality and efficiency

  • Pearson-wide renegotiation of major global paper, print and binding contracts brings cost savings in 2006 and beyond.
  • Integration of Australia and New Zealand warehouses and back office operations produces further scale benefits.
  • Investment in India as a pre-production and design centre for reference titles.

Strong international growth

  • Penguin India, which celebrates its 20th anniversary in 2007, continues its rapid growth and extends its market leadership. Penguin authors win all the prizes in India's national book awards: Vikram Chandra in fiction for Sacred Games, Vikram Seth in non-fiction for Two Lives and Kiran Desai in readers' choice for The Inheritance of Loss.
  • Penguin China continues to acquire rights to between four and six Chinese titles each year, following acquisition of Jian Rong's Wolf Totem, due to be published in English in 2008. Penguin enters the Chinese market with the launch of ten translated Penguin Classic titles in 2007.
  • Penguin South Africa grows strongly in 2006 and continues to increase market share.

Investing in digital to engage consumers

  • Strong growth in online revenues and unique visitors to Penguin and DK websites.
  • Penguin leading the market in developing new content creation and distribution models. In 2006 Penguin won the Revolution Award for Best Brand Building using Digital Channels and the Neilsen Nibbie for Innovation in the Book Business for the Penguin Remixed competition and the Penguin Podcast. These two initiatives have been followed by further campaigns including the launch of the acclaimed Penguin Blog, Penguin's presence in Second Life and the recent wiki-novel, A Million Penguins, which hosted 60,000 unique visitors in its first week. DK Travel content made available on MSN and Rough Guides distributed through mobile phones.
  • Subscribers to Penguin and DK opt-in newsletters building rapidly, allowing Penguin consumers to personalise areas of interest and strengthening relationship with Penguin brand.
  • Jamie Oliver's 'Cookcast' was the first ever live streamed cookery webcast and one of the most successful webcasts ever in the UK.

Strong 2007 publishing schedule

  • Strong list of new titles for 2007 from bestselling and new authors including Alan Greenspan, Khaled Hosseini, Jamie Oliver, Al Gore, Jeremy Clarkson, Patricia Cornwell, Marina Lewycka and Naomi Klein.

FINANCIAL REVIEW

Operating profit

Total adjusted operating profit increased by £86m or 17% to £592m in 2006 from £506m in 2005. Adjusted operating profit excludes amortisation and adjustment of acquired intangibles and other gains and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations. For the purposes of our adjusted operating profit we add back the profits from discontinued operations. In 2006 these relate to the disposal of the Group's interest in Government Solutions and in 2005 to the disposals of Government Solutions and Recoletos.

Statutory operating profit increased by £24m or 5%. This was a lower increase than seen in the adjusted operating profit due to an increased intangible amortisation charge and the absence of the Marketwatch profit on disposal recorded in 2005.

Net finance costs

Net finance costs reported in our adjusted earnings comprise net interest payable and net finance income relating to pension schemes. Net interest payable in 2006 was £94m, up from £77m in 2005. Although we were partly protected by our fixed rate policy, the strong rise in average US dollar floating interest rates had an adverse effect. Year on year, average three month LIBOR (weighted for the Group's borrowings in US dollars, euros and sterling at the year end) rose by 1.5% to 4.9%. Combining the rate rise with an increase in the Group's average net debt of £40m, the Group's average net interest rate payable rose by 1.1% to 7.0%. In 2006 the net finance income relating to pension schemes was an income of £4m compared to a cost of £7m in the previous year, giving an overall net finance cost of £90m in 2006 compared to £84m in 2005.

Taxation

The tax rate on adjusted earnings increased slightly from 30.3% in 2005 to 30.9%. Our overseas profits, which arise mainly in the US, are generally subject to tax rates which are higher than the UK Corporation Tax rate of 30%. But this factor was again offset by releases of provisions following further progress in agreeing our tax affairs with the authorities and reassessment of the provisions required for uncertain items.

The reported tax charge on a statutory basis of £11m represents just over 2% of reported profits. This low rate was mainly accounted for by two factors. First, in the light of the announcement of the disposal of Pearson Government Solutions, we have recognised a deferred tax asset in relation to capital losses in the US where previously we were not confident that the benefit of the losses would be realised prior to their expiry. Second, in the light of our trading performance in 2006 and our strategic plans together with the expected utilisation of US trading losses in the Government Solutions sale, we have re-evaluated the likely utilisation of operating losses both in the US and the UK; this has enabled us to increase the amount of the deferred tax asset carried forward in respect of such losses. The combined effect of these two factors was to create a non-recurring credit of £127m.

Minority interests

Following the disposal of our 79% holding in Recoletos and the purchase of the 25% minority stake in Edexcel in 2005, our minority interests now comprise mainly the minority share in IDC. In January 2006 we increased our stake in IDC to 62%, reducing the minority interest from 39% to 38%.

Dividends

The dividend accounted for in our 2006 financial statements totalling £220m, represents the final dividend (17.0p) in respect of 2005 and the 2006 interim dividend of 10.5p. We are proposing a final dividend for 2006 of 18.8p, bringing the total paid and payable in respect of 2006 to 29.3p, an 8.5% increase on 2005. This final 2006 proposed dividend was approved by the board in February 2007, is subject to shareholder approval at the forthcoming AGM and will be charged against 2007 profits. For 2006, the dividend is covered 1.4 times by adjusted earnings.