Chief Financial Officer's report

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 and includes the benefit of tax amortisation where available on acquired goodwill and intangible assets. Exceptional restructuring costs in 2009 relate to the major restructuring programmes announced in February 2008 and 2009 and in 2010 relate only to the restructuring of RBI. Acquisition related costs relate to acquisition integration and, from 2010, professional and other transaction related fees and adjustments to deferred and contingent consideration now required to be expensed under international financial reporting standards. 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 10 to the combined financial statements. Comparison at constant exchange rates uses 2009 full year average and hedge exchange rates. Underlying growth rates are the year on year change at constant currencies, excluding the results of all acquisitions and disposals made both in the year and prior year.

Reported figures

Revenues at £6,055m (2009: £6,071m) were flat compared with 2009. At constant exchange rates, revenues were down 1% compared with the prior year. Underlying revenues, i.e. before acquisitions and disposals, were 2% higher. Revenue performance across the business
is described in the Business Review.

Reconciliation of reported revenues year-on-year

Reported operating profit, after amortisation and impairment of acquired intangible assets and goodwill and exceptional restructuring and acquisition related costs, was up 39% at £1,090m (2009: £787m). The significant increase principally reflects no intangible asset and
goodwill impairment and lower exceptional restructuring charges.

The amortisation charge in respect of acquired intangible assets, including the share of amortisation in joint ventures, amounted to £349m (2009: £368m), down £19m as a result of disposals and prior year impairments. Charges for impairment of acquired intangible assets and goodwill were nil (2009: £177m, principally relating to the RBI US business).

Exceptional restructuring costs, which in 2010 relate only to the restructuring of RBI, amounted to £57m (2009: £182m relating to major restructuring programmes across Reed Elsevier announced in February 2008 and 2009) and included severance and vacant property costs. Acquisition related costs amounted to £50m (2009: £48m) principally in respect of the integration within LexisNexis of the ChoicePoint business acquired in September 2008.

Disposals and other non operating losses of £46m principally relate to asset sales and related closures in RBI’s US businesses.

Net finance costs were £276m (2009: £291m), with the benefit of free cash flow and the July 2009 share placings being partly offset by the impact of higher coupon term debt issued in 2009 to repay certain of the ChoicePoint acquisition facility loans.

The reported profit before tax, including amortisation and impairment of acquired intangible assets and goodwill, exceptional restructuring and acquisition related costs, disposals and other non operating items, was £768m (2009: £435m).

The reported tax charge was higher at £120m (2009: £40m) reflecting the increase in reported profit before tax and prior year tax credits on disposals. The reported net profit attributable to the parent companies’ shareholders was £642m (2009: £391m).

Adjusted figures

Adjusted operating profit was £1,555m (2009: £1,570m), down 1%. (Adjusted operating profits are stated before amortisation of acquired goodwill and intangible assets, acquisition integration and exceptional restructuring costs). At constant exchange rates, adjusted operating profits were down 2%, including in particular the disposals within the RBI US business. Underlying adjusted operating profits, i.e. excluding acquisitions and disposals, were 1% lower. Profit performance across the business is described in the Business Review.

The overall adjusted operating margin at 25.7% was 0.2 percentage points lower than in the prior year, with total costs reduced by 1% at constant exchange rates. Excluding cost reduction from asset disposals and closures, which had a 0.5 percentage points benefit to margin, costs increased by 3% on an underlying basis. Increased spending on new product development, infrastructure, and sales & marketing, particularly in the legal businesses, has been offset by cost actions across the business, including incremental savings from the earlier exceptional restructuring programmes.

Changes in underlying revenue, cost and profit

The net pension expense was higher at £54m (2009: £42m), reflecting lower curtailment credits of £17m (2009: £43m) from changes to pension plan design and staff reductions, partly offset by an increase in the net pension financing credit to £26m (2009: £6m) reflecting the higher market value of scheme assets. The share based and related remuneration charge was £11m (2009: £17m). Restructuring costs included within adjusted operating profit, i.e. other than in respect of the exceptional restructuring programme in RBI and acquisition integration, amounted to £31m (2009: £21m).

Adjusted profit before tax was £1,279m (2009: £1,279m), flat against the prior year. At constant exchange rates, adjusted profit before tax was down 1%.

Reconciliation of adjusted and reported profit before tax

The effective tax rate on adjusted profit before tax at 22.7% was similar to the 2009 effective rate. 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 includes the benefit of tax amortisation where available on acquired goodwill and intangible assets. This more closely aligns with cash tax costs over the longer term. Adjusted operating profits and taxation are grossed up for the equity share of taxes in joint ventures.

The application of tax law and practice is subject to some uncertainty and provisions are held in respect of this. Issues are raised during the course of regular tax audits and discussions including on the deductibility of interest on cross-border financing are ongoing. Although the outcome of open items cannot be predicted, no material impact on results is expected from such issues.

The adjusted net profit attributable to shareholders of £983m (2009: £982m) was flat compared with the prior year. At constant exchange rates, adjusted net profit attributable to shareholders was down 1%.