The Education business, now branded Harcourt Education, has performed well to deliver underlying growth in a difficult schools market. The Harcourt US Education and Testing businesses acquired in July 2001 have made a good contribution and have been integrated with Reed Elsevier’s other education businesses to become a leading global business in the English speaking schools market. The Harcourt US K-12 schools business again significantly outperformed the market.

Revenues and adjusted operating profits increased substantially with a full year contribution from the acquired Harcourt businesses. Underlying growth in revenues and operating profits was 2% and 4% respectively at constant exchange rates including the acquired Harcourt businesses on a proforma basis.

The Harcourt US K-12 schools business performed well against a market estimated to be some 5% lower, delivering revenues marginally ahead of the prior year. This market decline is a reflection of the weaker adoptions cycle in 2002 compounded by more cautious spending by US states, with budgets under pressure and deferral of spend in anticipation of the increased funding allocated by the federal government. Adjusted operating profits were up 4% before other acquisitions driven by greater cost efficiency across the supply chain and operating infrastructure, as well as from integration of the supplemental businesses.

Operating margins were lower at 18.4% due to the effect of including the acquired Harcourt businesses for a full year with their seasonally low first half margin. Underlying margins on a proforma basis improved by 0.5 percentage points despite the low revenue growth, due to the greater cost efficiency.

Harcourt Education’s significant outperformance of the US K-12 market has been driven by strong new publishing against available adoption opportunities and good growth in sales of the backlist and in open territories particularly in the elementary schools market. We won the highest overall market share of 2002 state adoption revenues.

The Harcourt Testing businesses saw underlying revenues 8% ahead, driven by good growth from new and existing state contracts and successful new educational and clinical assessment publishing. Operating margins increased through significant process improvements and underlying operating profits were 25% higher.

The Harcourt Education International business saw flat revenues, before acquisitions. Strong growth from successful new publishing in the UK secondary schools market was offset by a weaker UK primary schools market and lower academic publishing sales. The Global Library business grew well with an expanded sales and marketing organisation. Underlying operating profits in the International business were 10% lower, due to the flat sales and investment in new publishing and sales and marketing.

Harcourt Education remains focused on delivering market leading textbook programmes and we are continuing to invest in expanding our curriculum range and in electronic learning resources. In Testing we have now launched a major new edition of the Stanford Achievement Test series which combines the power of well established norm referencing tests with the flexibility to adapt to individual state criteria. Our online testing capabilities are developing well and positioned for market growth.

In 2003, the US schools market is expected to see some recovery despite continuing state budget pressures through the benefit of additional federal funding and more state adoption revenues available. We have strong publishing programmes across our businesses to address these opportunities. In Testing, revenue growth will be held back by the non-renewal of the California state testing contract but this will have only a limited impact on planned profit growth. Our cost savings programmes and continuing integration benefits should deliver further margin improvement whilst we continue to increase investment in new publishing and electronic learning. The longer term growth opportunities in Harcourt Education remain very attractive.