Pearson finals

An international media and education company, providing educational materials, technologies, assessments and related services to teachers and students.  Owner of The Financial Times and part owner (47%) of Penguin Random House.  I have a holding in my income portfolio (epic code: PSON).

Pearson announced their final results yesterday and they were as expected following their trading statement on 23 January commented on here.

Sales increased +2.2% to £5,069m and +1% on a LFL basis.  Adjusted operating profit was £871m, down -6.5% and on a like-for-like basis down -9% with statutory operating profit at £458m down -6%.

Adjusted EPS after restructuring charges was 70.1p*, down -15.1% and as guided at the time of their trading statement.  Statutory EPS was 66.5p up +72.3% and from continuing operations 36.3p up +17.1%.

The final dividend was increased by +6.7% to 32p, making 48p for the year an increase of +6.7%; the 22nd year of dividend increases above the rate of inflation.  The dividend was not fully covered by continuing operations at 0.8x, although covered 1.46x by the adjusted EPS.

Free cash flow at £183m was well down on last year's £634m and net debt increased by £287m to £1,491m.  Net debt is 1.9x EBITDA and operating cash flow is just 24% of the debt; interest cover though is adequate at 6x.

Return on capital employed for the business was an unimpressive 6.4%, affected by lower profitability and restructuring charges; this compares to their weighted average cost of capital of 9.3%.

With respect to the current year management have said: "...At current exchange rates, we expect to report adjusted earnings per share of between 62p and 67p in 2014..."

Managements view of 2015 and beyond is - "...We are in the middle of what we believe will be a short, but difficult, transition - one that through our combined investment and restructuring programs will drive a leaner, more cash generative, faster growing business from 2015..."  As I mentioned here at the time of their trading statement a little more patience is required while Fallon returns the business to growth.

It was surprising that the market reacted in the way it did, by pulling the share price down almost 6% to 1013p yesterday, as much of the 2013 result and expectations for 2014 was already in the public domain, but that's the market - best to turn it off at times!  Worth remembering that after the trading statement on 23 January 2014 the price was 1191p.


*Adjusted EPS essentially includes trading of discontinued businesses and excludes amortisation and acquisition costs.