166 Pearson plc Annual report and accounts 2010

Principal subsidiaries

The principal operating subsidiaries at 31 December 2010 are listed below. They operate mainly in the countries of incorporation or registration. The investments are in equity share capital and they are all 100% owned.

Country of incorporation or registration Pearson Education Pearson Education Inc. US Pearson Education Ltd England Edexcel Ltd* England NCS Pearson Inc. US FT Group The Financial Times Ltd England Mergermarket Ltd England The Penguin Group Penguin Group (USA) Inc. US The Penguin Publishing Co Ltd England Dorling Kindersley Holdings Ltd* England

* Direct investment of Pearson plc.

The company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation to subsidiary undertakings whose results or financial position, in the opinion of the directors, principally affected the financial statements. A complete list of subsidiary and associated undertakings will be included in the next Pearson plc annual return filed with the Registrar of Companies. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 167 51 81 60 (17) 2010 (85) 171 621 691 333 106 296 938 938 469 857 403 (215) 5,959 1,053 801.2 1,234 77.5p 4,207 5,663 15.1% 2,640 43 39 84 (44) (97) 141 2009 710 148 275 523 587 358 858 858 403 484 (194) 5,140 1,035 5,624 2,470 799.3 1,002 3,780 65.4p 13.8% 74 93 36 (36) 121 (88) 414 2008 474 135 762 762 641 244 390 303 903 866 460 (178) 3,112 57.7p 797.0 4,819 4,405 2,002 14.6% 74 27 56 92 511 112 (32) (85) 2007 372 392 273 522 735 634 634 226 846 344 (145) 3,818 1,667 46.7p 4,329 2,628 796.8 13.7% Financial statements 17 27 66 73 211 (90) (28) 2006 129 370 765 592 592 463 280 280 344 848 640 (130) 43.1p 1,679 4,423 798.4 3,658 2,530 12.7% ection6 S peratingmargin continuing – djustedearnings djustedearnings djustedearnings per share djustedoperating profit ales llfigures £ millionsin O Netfinance costs Incometax Continuing adjusted operating Total profit A adjusted Total operating profit Non-controllinginterest A A FTGroup Penguin Discontinued Weightedaverage number shares of (millions) Education A NorthAmerican Education InternationalEducation Professional Professional Education Discontinued Total sales Total A S NorthAmerican Education Five year summary year Five InternationalEducation Penguin FTGroup Continuing 168 Pearson plc Annual report and accounts 2010

Five year summary continued

All figures in £ millions 2006 2007 2008 2009 2010 Cash flow Operating cash flow 575 684 796 913 1,057 Operating cash conversion 97% 108% 104% 106% 113% Operating free cash flow 434 533 631 723 904 Operating free cash flow per share 54.4p 66.9p 79.2p 90.5p 112.8p Total free cash flow 433 407 631 723 904 Total free cash flow per share 54.2p 51.1p 79.2p 90.5p 112.8p

Net assets 3,644 3,874 5,024 4,636 5,605

Net debt 1,059 973 1,460 1,092 430

Return on invested capital (gross basis) Total adjusted operating profit 592 634 762 858 938 Cash tax paid (59) (61) (89) (103) (85) Return 533 573 673 755 853 Average invested capital 6,553 6,423 7,337 8,504 8,315 Return on invested capital 8.1% 8.9% 9.2% 8.9% 10.3%

Dividend per share 29.3p 31.6p 33.8p 35.5p 38.7p Introduction Our str ategy Our performance Our impact on society Governance Financial statements – 169 5% 8% (17) 2010 2010 (85) 621 120 128 275 523 938 853 638 638 (215) income djusted A statement – – – – – (37) (37) (37) (37) Tax loss Tax recognition – – – – – 36 36 36 36 Tax Tax benefit amortisation – 3 – – (9) (9) (9) (12) (12) costs finance income/ thernet O – 5 (2) 70 75 73 (35) 105 105 intangibles ofacquired mortisation A Financial statements – 7 – – 7 7 (4) 11 11 costs cquisition ection6 S A – (1) (2) (2) (3) (12) losses (731) (746) (734) thernet gainsand O – – – – 81 81 50 (31) (50) operations iscontinued D (3) (73) 743 524 670 776 (146) income 1,297 1,300 tatutory S statement

peratingprofit djustedincome statement alesunderlying – constantand exchange rate movement llfigures £ millionsin llfigures £ millionsin Netfinance costs Profit before tax Portfoliochanges Exchangedifferences sales increase Total Underlyingincrease Constantexchange rate increase A Reconciliationthe of consolidated income statement tothe adjusted numbers presented as non-GAAP measures in the financial statements. A Underlyingincrease S Salesmovement continuingfor operations excluding the impact acquisitions of and disposals and movements in exchange rates. Corporate and operating measures operating and Corporate O Incometax A Profityear for the from continuingoperations Profitfor theyear from discontinuedoperations Non-controllinginterest Earnings Profityear for the 170 Pearson plc Annual report and accounts 2010

Corporate and operating measures continued

Adjusted income statement continued

2009

Other net Statutory Other net Amortisation finance Tax Adjusted income Discontinued gains and Acquisition of acquired income/ amortisation Tax loss income All figures in £ millions statement operations losses costs intangibles costs benefit recognition statement Operating profit 619 148 – – 91 – – – 858 Net finance costs (96) 1 – – – (2) – – (97) Profit before tax 523 149 – – 91 (2) – – 761 Income tax (146) (52) – – (33) 1 36 – (194) Profit for the year from continuing operations 377 97 – – 58 (1) 36 – 567 Profit for the year from discontinued operations 85 (97) – – 8 – 4 – – Profit for the year 462 – – – 66 (1) 40 – 567 Non-controlling interest (37) – – – (5) – (2) – (44) Earnings 425 – – – 61 (1) 38 – 523

Adjusted operating profit – underlying and constant exchange rate movement Operating profit movement excluding the impact of acquisitions, disposals and movements in exchange rates.

All figures in £ millions 2010 Underlying increase 103 Portfolio changes 5 Exchange differences 39 Total adjusted operating profit increase 147 Underlying increase 14% Constant exchange rate increase 15% Introduction Our str ategy Our performance Our impact on society Governance Financial statements – – 171 913 (87) 2009 2009 755 858 858 723 723 (103) (103) 8.9% 7,194 1,310 106% 799.3 90.5p 90.5p 8,504 – – 2010 2010 (68) (85) (85) Grossinvested capital 974 938 938 853 904 904 113% 7,341 8,315 1,057 801.2 10.3% 112.8p 112.8p 2009 652 858 (103) (103) 5,152 1,310 6,462 10.1% etinvested capital N 2010 (85) 974 740 938 (113) 5,362 6,336 11.7% Financial statements ection6 S verageinvested capital eturninvestedon capital eturninvestedon capital eturn llfigures £ millionsin llfigures £ millionsin Nonoperating tax paid Weightedaverage number shares of inissue (millions) Operatingfree cash flow per share freecash per flow share Total R Total operating freecash Total flow freecash flow Total A Netoperating finance costs paid Operatingcash flow Operatingtax paid Total adjusted Total operating profit Cashconversion A Adjustedoperating profit Freecash perflow share Operatingcash continuingfor flow and discontinued operations before tax and finance charges, dividedby the weightedaverage number shares of inissue. Amortisationacquired of intangibles Operatingtax paid A R R Averagegoodwill and other intangibles Averagenet operating assets Returnoninvested capital iscalculated using two methods: Grossbasis total – adjusted operating profit less operating cash tax paid expressed a percentageas average of grossinvested capital. Gross invested capital includes the original unamortised goodwill and intangibles. Netbasis total – adjusted operating profit less intangible amortisation and operating cash tax paid expressed a as percentageaverage of net invested capital. Net invested capital includes the carrying value (after amortisation) of goodwilland intangibles. 172 Pearson plc Annual report and accounts 2010

Other risks

Principal risks and uncertainties are outlined on page 35 of section 3 ‘Our performance’. Additional risks are set out below.

Other risks Mitigating factors Changes in students’ buying and distribution behaviour We are continuing to improve our pricing strategies, put downward pressure on price. product bundling and contract terms. We are monitoring the development of rental programs. Our professional services and school assessment In addition to the internal business procedures and businesses involve complex contractual relationships controls implemented to ensure we successfully deliver with both government agencies and commercial on our contractual commitments, we also seek to customers for the provision of various testing services. develop and maintain good relationships with our Our financial results, growth prospects and/or customers to minimise associated risks. We also look reputation may be adversely affected if these contracts to diversify our portfolio to minimise reliance on any and relationships are poorly managed. single contract. We operate in markets which are dependent on We mitigate these IT risks by establishing strong IT Information Technology (IT) systems and technological policies and operational controls, employing project change. management techniques to manage new software developments and/or system implementations and have implemented an array of security measures to protect our IT assets from attacks or failures that could impact the confidentiality, availability or integrity of our systems. Failure to generate anticipated revenue growth, We perform pre-acquisition due diligence and closely synergies and/or cost savings from acquisitions could monitor the post-integration performance to ensure we lead to goodwill and intangible asset impairments. are meeting operational and financial targets. Any divergence from these plans will result in management action to improve performance and minimise the risk of any impairments. Executive management and the board receive regular reports on the status of acquisition performance. Expected benefits from our finance transformation We monitor the programme performance closely and programme initiatives may not be realised. seek to mitigate this risk through strong project management techniques and developed project plans. The project is managed by an executive committee and governance programmes have been established with our outsource providers. Changes in our tax position can significantly affect our We employ internal tax professionals in the UK and the reported earnings and cash flows. US who review all significant arrangements around the world and respond to changes in tax legislation. They work closely with local management and external tax advisors. We generate a substantial proportion of our revenue in The Group’s policy on managing foreign currency risk is foreign currencies particularly the US dollar, and foreign described in note 19 to the financial statements. exchange rate fluctuations could adversely affect our earnings and the strength of our balance sheet. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 173 www.pearson.com Financial statements ection6 S itigatingfactors M Thediversification of the FT Group intoother business modelsand revenue streams, subscription e.g. based businesses,digital revenues, business tobusiness products,conferences, inaddition toits global reach, offsets reliance on newspaper print advertising and circulationrevenue streams. approachThe Group’s tofunding isdescribed on approachthe Group’s tothepage 31 and management of financial risks 19 to the set is out in note financial statements. consider We social, environmental and ethical (SEE) risksnodifferently to we themanage way other any businessrisk. Our 2009 risk assessment did identifynot significantany under-managed SEE risks, nor any have of ourmost important SEE risks, many concerned with reputationalrisks, changed year-on-year. These are: journalistic/authorintegrity, ethical business behaviour, intellectualcopyright protection, compliance with UN GlobalCompact standards, environmental impact, peopleand data privacy. Formore information, see the Pearson corporate responsibilityreport ‘Live and Learn: Our Impact on Society’.The web link isavailable at therrisks O Theinherent volatility advertising of could adversely affect the profitabilityof our newspaper business. A significant A deterioration in Group profitability flow caused severea by and/or cash economic depressioncould reduce our liquidity impair and/or our financial ratios, and trigger a need to raise additional fundsfrom the capital renegotiatemarkets and/or our bankingcovenants. Social,environmental and ethical risk. 174 Pearson plc Annual report and accounts 2010

Shareholder information

Pearson ordinary shares are listed on the London Share dealing facilities Stock Exchange and on the New York Stock Exchange Equiniti offers telephone and internet services in the form of American Depositary Receipts. for dealing in Pearson shares. For further information, please contact them on 08456 037 037 Corporate website (telephone dealing – weekdays only) or log on to The investors’ section of our corporate website www.shareview.co.uk/dealing (online dealing). www.pearson.com provides a wealth of information You will need your shareholder reference number for shareholders. It is also possible to sign up to as shown on your share certificate. receive email alerts for reports and press releases A weekly postal dealing service is also available relating to Pearson. through Equiniti. Please telephone 0871 384 2248* for details or log on to www.shareview.co.uk to download Shareholder information online a form. Equiniti provides a range of shareholder information online. You can check your holding and find practical ShareGift help on transferring shares or updating your details at Shareholders with small holdings of shares, whose www.shareview.co.uk. For more information, please value makes them uneconomic to sell, may wish to contact our registrar, Equiniti, Aspect House, Spencer donate them to ShareGift, the share donation charity Road, Lancing, West Sussex BN99 6DA. Telephone (registered charity number 1052686). Further 0871 384 2233* or, for those shareholders with information about ShareGift and the charities it has hearing difficulties, textphone number 0871 384 2255*. supported may be obtained from their website, www.ShareGift.org or by contacting them at 17 Information about the Pearson share price Carlton House Terrace, London SW1Y 5AH. The company’s share price can be found on our website at www.pearson.com. It also appears in the American Depositary Receipts (ADRs) financial columns of the national press. Pearson’s ADRs are listed on the New York Stock Exchange and traded under the symbol PSO. Each Payment of dividends to mandated accounts ADR represents one ordinary share. For enquiries Should you elect to have your dividends paid through regarding registered ADR holder accounts and BACS, this can be done directly into a bank or building dividends, please contact BNY Mellon Shareowner society account, with the tax voucher sent to the Services, PO Box 358516, Pittsburgh, PA 15252-8516, shareholder’s registered address. Equiniti can be telephone 1 866 259 2289 (toll free within the US) or contacted for information on 0871 384 2043*. 001 201 680 6825 (outside the US). Alternatively, you may e-mail [email protected], or log on to Dividend reinvestment plan (DRIP) www.bnymellon.com/shareowner. Voting rights for registered ADR holders can be exercised through The The DRIP gives shareholders the right to buy the Bank of New York Mellon, and for beneficial ADR company’s shares on the London stock market with holders (and/or nominee accounts) through your US their cash dividend. For further information, please brokerage institution. Pearson will file with the contact Equiniti on 0871 384 2268*. Securities and Exchange Commission a Form 20-F. Individual Savings Accounts (ISAs) *Calls to these numbers are charged at 8p per minute from a BT landline. Other provider costs may vary. Lines open Equiniti offers ISAs in Pearson shares. For more 8.30am to 5.30pm Monday to Friday. information, please go to www.shareview.co.uk/ dealing or call customer services on 0845 300 0430*. Introduction Our strategy Our performance Our impact on society Governance Financial statements 175 6 May 6 6 April 6 April 8 12 April 12 28 April28 1 August 1 16 September 16 Goldman Sachs, Freshfields Bruckhaus DeringerHerbert LLP, PricewaterhouseCoopers LLP HSBC Bank plc JPMorgan Cazenove Limited and Citigroup Financial statements Ex-dividenddate Recorddate Lastdividend for date reinvestment election AnnualGeneral Meeting Paymentdate fordividend and share purchasedate fordividend reinvestment Section6 Advisers Auditors Interimresults Paymentdate forinterim dividend Bankers Financialadvisers JPMorganCazenove Limited and Citigroup Solicitors SmithLLP and Morgan, Lewis Bockius & LLP Financial calendar 2011 Brokers ips on protectingipson shares your Keepdocumentationany that contains your shareholderreference number safe placeina and shredunwantedany documentation. address. change you when registrar promptly the Inform Beaware dividend of payment dates and contact the registrarreceivedonot if you yourdividend cheque or betterstill, make arrangements the tohave dividend paiddirectly into yourbank account. Considerholding yourshares electronically CREST ina accountvianominee. a Formore information, please log ontoour website at www.pearson.com/shareholderfaqs T Shareregister fraud: protecting investment your Pearsondoes contactnot its shareholders directly to providerecommendation advice and neither does it appointthird parties As todoso. required our law, by shareholderregister isavailable publicfor inspection butcannot we control the useinformation of obtained persons by inspecting the register. Please treat any approachespurporting tooriginate from Pearson with caution. › › › › › › › › 176 Pearson plc Annual report and accounts 2010

Principal offices worldwide

Pearson plc Financial Times Group 80 Strand, London WC2R 0RL, UK Number One Southwark Bridge, T +44 (0)20 7010 2000 London SE1 9HL, UK F +44 (0)20 7010 6060 T +44 (0)20 7873 3000 [email protected] F +44 (0)20 7873 3076 www.pearson.com [email protected] www.ft.com Pearson Inc. 1330 Avenue of the Americas, The Penguin Group (UK) New York City, NY 10019, USA 80 Strand, London WC2R 0RL, UK T +1 212 641 2400 T +44 (0)20 7010 2000 F +1 212 641 2500 F +44 (0)20 7010 6060 [email protected] [email protected] www.pearson.com www.penguin.co.uk Pearson North America The Penguin Group (USA) One Lake Street, 375 Hudson Street, New York City, Upper Saddle River, NY 10014, USA NJ 07458, USA T +1 212 366 2000 T +1 201 236 7000 F +1 212 366 2666 F +1 201 236 3222 [email protected] [email protected] us.penguingroup.com www.pearsoned.com Pearson plc ­Pearson International Registered number 53723 (England) 190 High Holborn, London WC1V 7BH, UK T +44 (0)20 7190 4190 [email protected] www.pearson.com Always learning

Pearson is the world’s leading learning company. We have 36,000 people in more than 70 countries, helping people of all ages to make progress in their lives through all kinds of learning.

Learn more at www.pearson.com

Browse, download or print our interactive online annual report at www.pearson.com/investor/ar2010 View our 2010 results presentation at: www.pearson.com/pearson-2010‑results/

Notes

Reliance on this document trends in results of operations, margins, growth rates, Our Business Review on pages 10 to 47 has been prepared overall market trends, the impact of interest or exchange in accordance with the Directors’ Report Business Review rates, the availability of financing, anticipated costs savings Requirements of section 417 of the Companies Act 2006. and synergies and the execution of Pearson’s strategy, are It also incorporates much of the guidance set out in the forward-looking statements. By their nature, forward- Accounting Standards Board’s Reporting Statement on looking statements involve risks and uncertainties because the Operating and Financial Review. they relate to events and depend on circumstances that will occur in the future. There are a number of factors which The intention of this document is to provide information to could cause actual results and developments to differ shareholders and is not designed to be relied upon by any materially from those expressed or implied by these Design and Production: Radley Yeldar (London) ry.com other party or for any other purpose. forward-looking statements, including a number of factors Print: Pureprint Group Forward-looking statements outside Pearson’s control. Any forward-looking statements Pearson has supported the planting of half an acre of new native woodland with the Woodland Trust, helping to offset This document contains forward-looking statements which speak only as of the date they are made, and Pearson gives 70 tonnes of carbon dioxide emissions generated by the production of this report. are made by the directors in good faith based on information no undertaking to update forward-looking statements to available to them at the time of approval of this report. In reflect any changes in its expectations with regard thereto This report has been printed on Cocoon Offset 100 andC ocoon Pre-print 100 which is FSC® certified and contains 100% particular, all statements that express forecasts, expectations or any changes to events, conditions or circumstances on recycled de-inked waste paper. It was printed using vegetable oil based inks by a CarbonNeutral® printer certified toI SO and projections with respect to future matters, including which any such statement is based.­ 14001 environmental management system and registered to EMAS the Eco Management Audit Scheme. page38 ciet y so n o ct pa Our im oran explanation ofour approach to F corporateresponsibility goto page15 nce a rm o ort and accounts 2010 p to Our Perf oran in-depth analysis ofhow we performedgoto in 2010 F nnual re A learn open Pearson page10 tegy a Our Str strategy goto

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