REED ELSEVIER COMBINED BUSINESSES

Profit & Loss
The reported profit before tax for the Reed Elsevier combined businesses, after the amortisation of goodwill and intangible assets and exceptional items, was £289m/460m, which compares with a reported profit of £275m/442m in 2001. The increase reflects higher underlying operating profits, less the full year effect of financing and goodwill and intangible asset amortisation of the Harcourt businesses, acquired in July 2001, as well as dilution from other 2001 acquisitions and disposals. The reported attributable profit of £181m/288m increased against a reported attributable profit of £126m/202m in 2001 and includes exceptional prior year tax credits.

Turnover increased by 10% expressed in sterling to £5,020m, by 9% expressed in euros to €7,982m, and by 13% at constant exchange rates. This included a full year contribution from the acquired Harcourt businesses. Underlying revenue growth, including the Harcourt acquired businesses on a proforma basis, was 1% at constant exchange rates, or 4% before taking into account the decline in Business division revenues driven by the global economic slowdown. The acquired Harcourt businesses saw proforma revenue growth of 4% over 2001, with 6% in Science & Medical and 2% in Education.

Adjusted operating profits, excluding the amortisation of goodwill and intangible assets and exceptional items, were up 14% expressed in sterling at £1,133m, up 13% expressed in euros at 1,801m, and up 17% at constant exchange rates. This included a full year contribution from the acquired Harcourt businesses. Underlying adjusted operating profit growth, including the Harcourt acquired businesses on a proforma basis, was 8%, or 9% excluding the Business division. The acquired Harcourt businesses saw proforma operating profit growth of approximately 10%, with 14% in Science & Medical and 6% in Education. Adjusted operating margins improved by 0.9 percentage points to 22.6%.

The amortisation charge for intangible assets and goodwill amounted to £527m/838m, up £26m/32m on the prior year, including a full year’s amortisation of the acquired Harcourt assets partly offset by currency translation effects.

Exceptional items showed a pre-tax charge of £111m/176m, comprising, £57m/90m of Harcourt and other acquisition integration and related costs, £42m/67m in respect of restructuring actions taken principally in response to the global economic slowdown, and a £12m/19m net loss on disposal of businesses and fixed asset investments. After a tax credit of £122m/194m arising on the exceptional costs and in respect of prior year disposals, exceptional items showed a post-tax gain of £11m/18m. This compares with a net exceptional post-tax credit of £9m/13m in 2001.

Net interest expense, at £206m/327m, was £64m/98m higher than in the prior year, reflecting a full year’s financing cost for the Harcourt acquisition in part offset by the benefit of the 2001 free cash flow, lower interest rates and currency translation. Net interest cover on an adjusted basis was 5.5 times.

Adjusted profits before tax, before the amortisation of goodwill and intangible assets and exceptional items, at £927m/1,474m, were up 9% expressed in sterling and up 8% expressed in euros. At constant exchange rates, adjusted profits before tax were up 11%. The slightly lower growth at reported rates reflects currency translation effects from the year on year US dollar weakness.

The effective tax rate on adjusted earnings was unchanged at 26.3%. The adjusted profit attributable to shareholders of £682m/1,084m was up 9% expressed in sterling, 8% expressed in euros, and 11% at constant exchange rates.

Cash flows and debt
Adjusted operating cash flow, before exceptional items, was £1,010m/1,606m representing an 89% conversion rate of adjusted operating profits into cash. This compares with a conversion rate in 2001 of 102% which was significantly flattered by the seasonality of the acquired Harcourt businesses which strongly favours the second half. Excluding the acquired Harcourt businesses, the conversion rate was approximately 93%, up 8 percentage points on the prior year, reflecting tight management of working capital and capital expenditure. Capital expenditure in the year amounted to £179m/285m and depreciation was £136m/216m, both similar to the prior year.

Free cash flow – after interest, taxation and dividends but before acquisition spend and exceptional receipts and payments – was £378m/601m, compared to £459m/738m in 2001 which benefited from the seasonal weighting of the Harcourt cashflows to the post-acquisition period. Net exceptional cash inflows of £7m/11m include £106m/169m proceeds from disposals of businesses and fixed asset investments and £20m/32m of reduced tax payments, less exceptional acquisition related and restructuring payments of £119m/190m.

In 2002, acquisitions were made for a total consideration of £99m/157m, including £9m/14m deferred to future years and after taking account of net cash acquired of £4m/6m. Deferred consideration paid in respect of prior year acquisitions and payment of change of control and other non operating liabilities assumed on the acquisition of Harcourt totalled £94m/150m.

Net borrowings at 31 December 2002 were £2,732m/4,180m, a decrease of £497m in sterling and 1,116m in euros since 31 December 2001, reflecting the free cash flow less acquisition spend, and favourable exchange translation effects from a weaker US dollar.