OUR STRATEGY OUR PERFORMANCE OUR IMPACT ON SOCIETY To find out more about our business For an in-depth analysis of how we For an explanation of our approach to strategy go to page 06 performed in 2012 go to page 11 corporate responsibility go to page 34 ANNUAL REPORT AND ACCOUNTS 2012 Always learning Pearson is the world’s leading learning company. We have 48,000 people in more than 70 countries, helping people of all ages to make progress in their lives through all kinds of learning. WE HAVE THREE WORLD-LEADING BUSINESSES: Education Consumer publishing Business information We provide learning materials, Penguin publishes thousands of fiction and The FT Group provides news, data, technologies, assessments and services non-fiction books each year – on paper, on comment and analysis to the international to teachers and students of all ages and screens and in audio formats – for readers business community. It is known around in more than 70 countries. of all ages. It is one of the world’s leading the world for its independent and consumer publishing businesses and an authoritative information. iconic global brand. VISIT OUR ONLINEE RREPORTINGEPORTING CECENTRE:NTRE: Learnn moree ar2012.pearson.comcom SUMMARY REPORT Quick, visual presentationesentation of the year’s highlightshlights VIDEO CONTENT Interviews with: › Chairman Glen MMorenooreno › Chief executive Johnohn FallonFallon › Chief financial officerfficer RobinRobin FreestoneFreestone Global trends filmm DOWNLOADS Annual and corporateporate responsibilityresponsibility reports, in full orr by sectionsection SEARCH Use our predictiveve searchsearch to find what you needneed quicklquicklyy 01 Heading one OVERVIEW Overview 02 Financial highlights A summary of who we are and what 04 Chairman’s introduction 1 we do, including performance highlights, 06 Chief executive’s strategic overview our business strategy and key areas of investment and focus. OUR PERFORMANCE OUR Our performance 11 Our per for mance An in-depth analysis of how we 12 2013 Outlook 2 performed in 2012, the outlook 14 Education: North America, International, Professional for 2013 and the principal risks and 22 Business information: FT Group uncertainties affecting our businesses. 24 Consumer publishing: Penguin 27 Other financial information Business review Business 31 Principal risks and uncertainties OUR IMPACT ON SOCIETY ON IMPACT OUR Our impact on society 34 Introduction 36 Raising literacy levels Directors’ reportDirectors’ Explains Pearson’s approach to 3 corporate responsibility, giving a 37 Improving learning outcomes summary of our work in 2012 and 38 Contributing to competitiveness our plans for 2013. 39 Responsible business practice 42 Seven commitments GOVERNANCE Governance 44 Board of directors Provides details of the board, its policies 47 Chairman’s letter 4 and procedures and the report on 48 Board governance directors’ remuneration. 64 Report on directors’ remuneration FINANCIAL STATEMENTS FINANCIAL Financial statements 93 Financial statements: contents Detailed financial statements for both 94 Independent auditors’ report 5 the Group and the parent company, 96 Group accounts including an analysis of the key measures 166 Parent company accounts used by the Group in its management 175 Principal subsidiaries of the business. 176 Five-year summary 178 Corporate and operating measures 181 Shareholder information 183 Principal offices worldwide 02 Pearson plc Annual report and accounts 2012 Financial highlights In financial terms, Pearson’s goal is to achieve 2012 SALES sustainable growth on three key financial goals – earnings, cash and return on invested capital, and reliable cash returns to our investors through £6.1bn healthy and growing dividends. Over the past five years, we have produced consistent and considerable growth on all measures. In 2012, +5% though we performed well competitively in tough market conditions, headline earnings and cash were lower than the previous year. Our return on invested capital was level at 9.1% and we are proposing a 7% dividend increase. 2012 2011 HEADLINE CER UNDERLYING 2012 ADJUSTED OPERATING PROFIT £m £m GROWTH GROWTH GROWTH Business performance* Sales 6,112 5,862 4% 5% (1)% £936m Adjusted operating profit 936 942 (1)% 1% (2)% Adjusted earnings per share 84.2p 86.5p (3)% Operating cash flow 788 983 (20)% +1% Free cash flow 657 772 (15)% Free cash flow per share 81.7p 96.5p (15)% Return on invested capital 9.1% 9.1% – Net debt (918) (499) (84)% Statutory results Sales 5,059 4,817 5% OUR FIVE-YEAR RECORD Operating profit 515 1,118 (54)% Average annual growth in Profit before tax 434 1,047 (59)% headline terms 2007–2012 Basic earnings per share 40.5p 119.6p (66)% Adjusted earnings per share Cash generated from operations 916 1,093 (16)% +13% Dividend per share 45.0p 42.0p 7% Operating cash flow *Total business (Includes Penguin, which is discontinued in our statutory accounts.) Note Pearson’s 2011 statutory results include a £412m profit on the sale of our 50% stake in FTSE +3% International. The 2012 statutory results include £113m in closure costs related to Pearson in Practice. Throughout this document: Dividend a) Growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated. Where quoted, underlying growth rates exclude both currency movements and portfolio changes. Sales and operating profit are stated on a continuing basis, unless otherwise stated. +7% b) The ‘business performance’ measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes 2, 8 and 34 to the annual report. Section 1 Overview 03 OVERVIEW 59% 76% 6% 7% 13% 2012 by region 2012 by business 17% North America £3,604m Education £4,616m Europe £1,334m Penguin £1,053m Asia £786m FT Group £443m RoW £388m PERFORMANCEOUR SOCIETY ON IMPACT OUR 22% 74% 7% 5% 84% 7% 11% 2012 by region 2012 by business 12% North America £692m Education £789m Europe £109m Penguin £98m Asia £66m FT Group £49m RoW £69m GOVERNANCE Sales £m Adjusted operating profit £m 7000 1000 Pearson Pearson 6000 800 Education 5000 Education FINANCIAL STATEMENTS FINANCIAL 600 4000 3000 400 2000 Penguin 200 Penguin 1000 FT Group FT Group 0 0708 09 1011 12 0 0708 09 1011 12 04 Pearson plc Annual report and accounts 2012 Chairman’s introduction Dear shareholders, 2012 was a year of significant leadership transition at Pearson. Marjorie Scardino retired on 31 December, after a remarkable 16-year tenure as chief executive, and John Fallon assumed the role on 1 January of this year. Marjorie’s contribution to Pearson has been defining: › she led the transformation of a traditional family holding company into a modern global enterprise; Watch an interview with Glen Moreno, Chairman of Pearson. › she established a clear company purpose: to help ar2012.pearson.com people improve their lives through learning; › she developed a company culture – to be brave, The basic direction of imaginative and decent – which will be a lasting legacy; › and she leaves behind a thriving company which our strategy is unchanged, has benefited customers, staff and shareholders. and we are travelling faster We all are hugely grateful for her efforts and accomplishments. in our transformation. CEO succession CEO succession is a very important board responsibility, and one that we have been working on for several years. In 2012, the nomination committee spent a great deal of time evaluating candidates and planning for a seamless handover of duties. We are confident that John Fallon is the right person to lead Pearson in its next phase of development, and his leadership over the past few months has reinforced that confidence. We are now focused on the future development of our board, which I address in the Governance section of this report. Pearson’s transformation so far Over the past decade or so, Pearson has focused on three fundamental transformations: › from a media holding company to an integrated education company; › from a largely Anglo-American company to a truly global enterprise; › from an analogue print publisher to a digital content and services company. Section 1 Overview 05 SHARE PRICE PERFORMANCE The driving forces behind these transformations are OVERVIEW building. They include the recognised need for more One year % change effective and affordable education, especially from Pearson -1.8% the growing middle class across the globe, and the FTSE 100 5.8% inexorable tide of “disruptive” technologies which FTSE All-Share Media 19.0% are transforming education models. STOXX 600 Media 17.4% These forces provide Pearson with huge opportunities, Three year % change but also challenges. Pearson 33.3% A challenging 2012 FTSE 100 9.0% OUR PERFORMANCEOUR SOCIETY ON IMPACT OUR FTSE All-Share Media 39.6% As CFO Robin Freestone outlines in his report on our STOXX 600 Media 19.0% financial performance, 2012 was a challenging year for many of our businesses, offset by encouraging growth Five year % change in our newer global and digital initiatives. Pearson 62.3% These challenges were reflected in our share price FTSE 100 -8.7% performance, which underperformed our indices. FTSE All-Share Media 18.3% STOXX 600 Media -16.1% On a longer-term basis, our share price and total shareholder return continue to reflect outperformance. Source: Datastream to 31 December 2012 (See charts opposite.) Transformation and acceleration As John explains in his CEO report, the basic direction of Pearson’s strategy will not change. Indeed, our efforts to transform the company will accelerate. TOTAL SHAREHOLDER RETURN Significant restructuring (including the Penguin One year % change Random House merger), accelerated technology Pearson 1.9% investment and increased operating efficiency will FTSE 100 10.0% enable us to reach our strategic goals more rapidly. FTSE All-Share Media 23.1% As a shareholder, I am very confident about GOVERNANCE STOXX 600 Media 22.5% Pearson’s future. Three year % change All great businesses are based on fundamental customer demand, and the global demand for Pearson 48.6% affordable, effective education is huge and growing.