Reed Elsevier combined businesses

Reported figures	2009 £m	2008 £m	% change	% change at constant currencies
Revenue	6,071	5,334	+14%	0%
Operating profit	787	901	-13%	-22%
Profit before tax	435	617	-29%	-36%
Net borrowings	3,931	5,726

Adjusted figures	2009 £m	2008 £m	% change	% change at constant currencies
Operating profit	1,570	1,379	+14%	+1%
Profit before tax	1,279	1,205	+6%	-6%
Operating cash flow	1,558	1,407	+11%	-2%
Operating margin	25.9%	25.9%
Operating cash flow conversion	99%	102%

Adjusted figures are presented as additional performance measures used by management and are stated before amortisation and impairment of acquired intangible assets and goodwill, exceptional restructuring and acquisition related costs, disposals and other non operating items, related tax effects and movements on deferred tax balances not expected to crystallise in the near term. Reconciliations between the reported and adjusted figures are provided in note 11 to the combined financial statements.

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Currency

The average exchange rates in the year saw the US dollar stronger against both sterling and the euro, whilst the euro was stronger against sterling. This gives a favourable effect on translation of reported results expressed in sterling.

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Reported figures

(The reported figures include amortisation and impairment of acquired intangible assets and goodwill, exceptional restructuring and acquisition related costs, disposals and other non operating items, related tax effects and movements in deferred tax assets and liabilities that are not expected to crystallise in the near term. Adjusted figures that exclude these items are used by Reed Elsevier as additional performance measures and are discussed later below.)

Revenue was £6,071m (2008: £5,334m), up 14%, including a full year contribution from the ChoicePoint business acquired in September 2008. At constant exchange rates, revenue was flat compared with the prior year. Underlying revenues, i.e. before acquisitions and disposals, were 6% lower principally reflecting the impact of the global recession on our markets, most particularly the significant downturn in advertising and promotion markets in Reed Exhibitions and Reed Business Information (RBI).

Reported operating profit, after amortisation and impairment of acquired intangible assets and goodwill and exceptional restructuring and acquisition related costs, was £787m (2008: £901m), down 13%. The decrease principally reflects intangible asset and goodwill impairment charges relating to RBI and increased restructuring and acquisition integration spend, partly offset by currency translation effects.

The amortisation charge in respect of acquired intangible assets, including the share of amortisation in joint ventures, amounted to £368m (2008: £281m), up £87m as a result of ChoicePoint and other 2008 acquisitions and currency translation effects. Charges for impairment of acquired intangible assets and goodwill were £177m (2008: £9m) principally relating to RBI and certain minor exhibitions businesses.

Exceptional restructuring costs incurred amounted to £182m (2008: £152m) relating to the major restructuring programmes announced in February 2008 and 2009 and included severance, outsourcing migration and related vacant property costs. Acquisition related costs amounted to £48m (2008: £27m) principally in respect of the integration of the ChoicePoint business into LexisNexis.

Disposals and other non operating losses of £61m (2008: £92m) comprise restructuring costs in relation to assets held for sale and related closures, in particular RBI US controlled circulation titles, less net gains on disposals of minor titles and investments and fair value increases in the portfolio of venture capital investments.

Net finance costs were higher at £291m (2008: £192m, including £18m of acquisition related fees incurred in connection with ChoicePoint acquisition financing) principally reflecting a full year’s financing of the ChoicePoint acquisition and currency translation effects, less the benefit of the July 2009 share placing and free cash flow.

The reported profit before tax, including amortisation and impairment of acquired intangible assets and goodwill, exceptional restructuring and acquisition related costs, and non operating items, was £435m (2008: £617m).

The reported tax charge was lower at £40m (2008: £155m) reflecting the reduced reported profit before tax, geographic mix effects, tax credits on prior period disposals of £34m and the full year deferred tax credit on amortisation of the deferred tax liability established on acquisition of ChoicePoint in relation to its intangible assets.

Discontinued operations

Net profit from discontinued operations of £18m in the prior year comprised the gain on disposal of the remaining Education Division businesses of £67m less taxes of £49m.

Total operations

The reported attributable profit of £391m compares with £476m in 2008, reflecting the lower reported profit before tax partly mitigated by lower tax costs and currency translation effects.

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Adjusted figures

Adjusted figures are used by Reed Elsevier as additional performance measures and are stated before the amortisation and impairment of acquired intangible assets and goodwill, exceptional restructuring and acquisition related costs, and, in respect of earnings, reflect a tax rate that excludes the effect of movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term. Exceptional restructuring costs relate to the major restructuring programmes announced in February 2008 and 2009. Acquisition related costs relate to acquisition integration and fees incurred in connection with acquisition financing. Profit and loss on disposals and other non operating items are also excluded from the adjusted figures. Reconciliations between the reported and adjusted figures are set out in note 11 to the combined financial statements. Comparison at constant exchange rates uses 2008 full year average and hedge exchange rates.

Adjusted operating profit was £1,570m (2008: £1,379m), up 14%, including a full year contribution from the ChoicePoint business acquired in September 2008. At constant exchange rates, adjusted operating profits were up 1%. Underlying adjusted operating profits, ie before acquisitions and disposals, were 9% lower reflecting the operational gearing on underlying revenue declines of 6%. Underlying costs were £227m lower than in 2008 or 5.4%, at constant currencies, through significant cost actions across the business including the exceptional restructuring programmes.

The overall adjusted operating margin was unchanged at 25.9% (2008: 25.9%). An underlying margin decline of 0.8 percentage points was largely offset by the strong growth in profitability and adjusted operating margin at ChoicePoint.

The net pension expense was £18m (2008: £36m). Excluding the unallocated net pension financing credit, the net pension expense was lower at £24m (2008: £75m), reflecting the higher discount rates and lower inflation assumptions at the beginning of the year compared with the prior year and pension curtailment credits of £43m arising from changes to pension plan benefits and staff reductions, partially offset by currency translation effects. The net pension financing credit was £6m (2008: £39m) reflecting the lower market value of scheme assets at the beginning of the year compared with a year before. The charge for share based payments was £17m (2008: £46m) reflecting reduced vesting assumptions for long term incentive schemes. Restructuring costs, other than in respect of the exceptional restructuring programme and acquisition integration, were £20m (2008: £13m).

Net interest expense was £291m (2008: £174m before acquisition related financing fees) principally reflecting a full year’s financing of the ChoicePoint acquisition and currency translation effects, less the benefit of the July 2009 share placing and free cash flow.

Adjusted profit before tax was £1,279m (2008: £1,205m), up 6%. At constant exchange rates, adjusted profit before tax was 6% lower reflecting the flat adjusted operating profit performance and higher net interest expense.

The effective tax rate on adjusted profit before tax at 22.9% was marginally lower than the rate in 2008 reflecting financing efficiencies and geographic mix effects. The effective tax rate on adjusted profit before tax excludes movements in deferred taxation assets and liabilities that are not expected to crystallise in the near term, and more closely aligns with cash tax costs. Adjusted operating profits and taxation are grossed up for the equity share of taxes in joint ventures.

The adjusted profit attributable to shareholders of £982m (2008: £919m) was up 7%. At constant exchange rates, adjusted profit attributable to shareholders was down 5%.

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Cash flows

Adjusted operating cash flow was £1,558m (2008: £1,407m), up 11%, or down 2% at constant currencies.

The rate of conversion of adjusted operating profits into cash flow was very high at 99% (2008: 102%). The small decline in adjusted operating cash flow at constant currencies reflects the 1% increase in adjusted operating profits at constant currencies and the slightly lower cash flow conversion rate than the prior year’s record level.

Capital expenditure included within adjusted operating cash flow was £242m (2008: £172m), including £164m (2008: £115m) in respect of capitalised development costs included within internally generated intangible assets. The increase reflects a full year of ChoicePoint capital expenditures and increased investment in product platforms and related infrastructure, and currency translation effects.

Free cash flow – after interest and taxation – was £1,051m (2008: £999m) before exceptional restructuring and acquisition related spend. The increase reflects the currency translation benefit included in adjusted operating cash flow, partially offset by higher interest payments.

Exceptional restructuring spend was £124m (2008: £72m) principally relating to severance, outsourcing migration and vacant property costs. Payments made in respect of acquisition integration amounted to £45m (2008: £27m) principally in respect of the ChoicePoint acquisition. Tax paid in the year was reduced by £36m (2008: £32m) in relation to the restructuring and acquisition related spend.

Ordinary dividends paid to shareholders in the year, being the 2008 final and 2009 interim dividends, amounted to £457m (2008: £418m). In 2008, the special distribution paid to shareholders in January 2008 from the net proceeds of the Education Division disposal amounted to £2,013m (including £27m paid to the employee benefit trust).

Free cash flow – after dividends and exceptional restructuring and acquisition integration spend – was £461m (2008: £496m). Spend on acquisitions was £94m, including £56m of payments in respect of ChoicePoint change of control and other non operating liabilities assumed on acquisition and £29m in respect of deferred consideration on prior year acquisitions. Including deferred consideration payable, an amount of £17m was capitalised in the year as acquired intangible assets and £6m as goodwill. The total consideration in respect of acquisitions made in the year was £9m. Tax paid in the year was reduced by £53m in relation to settlement of outstanding ChoicePoint share options on acquisition and other liabilities.

Proceeds, net of expenses, from share placings by the parent companies in July 2009 were £829m. No share repurchases were made by the parent companies in the year (2008: £40m) and no shares of the parent companies were purchased by the employee benefit trust (2008: £54m). Net proceeds from the exercise of share options were £5m (2008: £54m).

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Debt

Net borrowings at 31 December 2009 were £3,931m (2008: £5,726m), a decrease of £1,795m since 31 December 2008. The decrease principally reflects the July 2009 share placings, which raised £829m net of expenses, free cash flow and currency translation effects. Currency translation effects decreased net borrowings by £559m, reflecting the impact of the weakening of the US dollar, from $1.45:£1 at the beginning of the year to $1.62:£1 at the end, on the largely US dollar denominated net debt.

Gross borrowings after fair value adjustments at 31 December 2009 amounted to £4,706m (2008: £6,142m). The fair value of related derivative assets was £41m (2008: £41m). Cash balances totalled £734m (2008: £375m).

As at 31 December 2009, after taking into account interest rate and currency derivatives, a total of 75% of Reed Elsevier’s gross borrowings (equivalent to 90% of net borrowings) were at fixed rates with a weighted average remaining life of 5.7 years and interest rate of 6.0%.

Net pension obligations, ie pension obligations less pension assets, at 31 December 2009 were £235m (2008: £369m). The decrease reflects the impact of higher plan asset values, pension benefit curtailments and currency translation partially offset by the effects of lower discount rates and an increased inflation assumption in the UK scheme.

The ratio of net debt to adjusted ebitda (earnings before interest, tax, depreciation and amortisation) at 31 December 2009 was 2.2x (2008: 2.7x, proforma for ChoicePoint), and 2.9x (LTM June 2009: 3.6x; 2008: 3.3x, proforma for ChoicePoint) on a pensions and lease adjusted basis. Reed Elsevier’s target is a ratio of net debt to adjusted ebitda of 2.0-3.0x (on a pensions and lease adjusted basis) over the longer term, consistent with a solid investment grade credit rating.

Term debt maturities
$m

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Liquidity

Fixed rate term debt of $1,500m, €600m and £300m and floating rate term debt of €50m, totalling £1,836m, were issued in the year in maturities ranging from 4 to 10 years, with a weighted average coupon of 7.5% (before taking into account fixed to floating interest rate swaps), and the proceeds used to repay the majority of the ChoicePoint acquisition facility, being bank loans maturing in 2010 and 2011. The net proceeds of the July 2009 equity placings were used to repay the outstanding ChoicePoint acquisition facility and reduce short term commercial paper borrowings.

At 31 December 2009, Reed Elsevier had in place a $2.5 billion committed bank facility maturing in May 2010, providing back up for commercial paper borrowings and other short term debt, none of which was drawn, and a $2.0 billion committed bank facility, forward starting in May 2010 and maturing in May 2012. In January 2010 the $2.5 billion committed facility maturing in May 2010 was cancelled and the start date of the $2.0 billion committed facility brought forward to start immediately. This back up facility provides security of funding for $2.0 billion of short term debt to May 2012.

After taking account of these committed bank facilities and available cash resources, no borrowings mature in 2010 and 2011, £730m of borrowings mature in 2012 and £3,201m mature in 2013 and beyond. The strong free cash flow of the business, the available resources and back up facilities, and Reed Elsevier’s ability to access debt capital markets are expected to provide sufficient liquidity to repay or refinance borrowings as they mature.

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Capital employed and returns

The capital employed at 31 December 2009 was £11,918m (2008: £13,125m) after adding back accumulated amortisation and impairment of acquired intangible assets and goodwill. The decrease of £1,207m principally reflects the impact of currency translation at year end rates.

The return on average capital employed in the year was 10.4% (2008: 12.1%). This is based on adjusted operating profits for the year, less tax at the effective rate, and the average of the capital employed at the beginning and end of the year, retranslated at the average exchange rates, adjusted for major acquisition timing and to exclude the gross up to goodwill in respect of deferred tax liabilities established on acquisitions in relation to intangible assets. The reduction in the return reflects the initially dilutive effect on returns of the ChoicePoint acquisition and the lower adjusted operating profits in the business excluding ChoicePoint.

Acquisitions typically dilute the overall return initially, but build to deliver longer term returns well over Reed Elsevier’s average for the business. The recent acquisitions made in the years 2007 and 2008 are delivering post tax returns in 2009 of 10% and 6% respectively. The post tax return on ChoicePoint was 6% in the year, which compares with 4% in the prior year on a proforma basis.

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