Business Context and Reporting Period
This Form 20-F is the annual report for Reed Elsevier PLC and Reed Elsevier NV (collectively "Reed Elsevier") for the fiscal year ended December 31, 2005. The company is a leading global publisher and information provider operating through four main segments: Elsevier (science and medical), LexisNexis (legal and professional), Harcourt Education (education), and Reed Business (business-to-business information and exhibitions). The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, marking the first year of IFRS application for the combined businesses.
Key Financial Metrics (Year Ended Dec 31, 2005)
| Metric | 2005 (IFRS) | 2004 (IFRS) | Change |
|---|---|---|---|
| Revenue | £5,166 million | £4,812 million | +7.4% |
| Operating Profit | £839 million | £766 million | +9.5% |
| Adjusted Operating Profit | £1,142 million | £1,066 million | +7.1% |
| Profit Before Tax | £701 million | £631 million | +11.1% |
| Net Profit (Attributable to Parent) | £462 million | £459 million | +0.7% |
| Net Borrowings | £2,694 million | £2,532 million | +6.4% |
| Cash and Cash Equivalents | £296 million | £225 million | +31.6% |
| Operating Cash Flow | £1,223 million | £1,154 million | +6.0% |
Note: Adjusted Operating Profit excludes amortization of acquired intangible assets (£276m), acquisition integration costs (£21m), and joint venture tax effects.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7% (7% at constant exchange rates), driven by organic growth and acquisitions. North America contributed 58% of total revenue.
- Segment Performance:
- LexisNexis: Revenue +13%, Adjusted Operating Profit +18%. Growth driven by online information demand and the full-year contribution of the Seisint acquisition.
- Reed Business: Revenue +6%, Adjusted Operating Profit +10%. Exhibitions grew 11% underlying; magazines saw 2% underlying growth.
- Elsevier: Revenue +5%, Adjusted Operating Profit +1%. Growth offset by costs for new product launches (Scopus) and currency effects.
- Harcourt Education: Revenue +4%, Adjusted Operating Profit +3%. Performance was mixed; US Schools grew, while Supplemental and Assessment segments declined due to market shifts and budget constraints.
- Acquisitions: Total acquisition spend was £307 million in 2005, primarily the £188 million acquisition of MediMedia MAP (medical publishing). In 2004, spend was £647 million, including Seisint Inc. and Saxon Publishers.
- Profitability: While Operating Profit rose 10%, Net Profit was flat (+1%) due to a higher effective tax rate (34% vs 27% in 2004) driven by deferred tax movements on unrealized exchange differences.
Guidance, Outlook, and Risks
- Share Repurchase Program: The boards approved a new annual share repurchase program for 2006, expecting to spend approximately $350 million (£200 million) in 2006 and $1 billion (£600 million) over three years.
- Dividends: A final dividend of 10.7p (PLC) and €0.267 (NV) was proposed, representing an 11% and 9% increase respectively over the prior year.
- Key Risks:
- Technology & Competition: Rapid technological change and the shift to electronic delivery formats could render products obsolete.
- Security Breaches: The company faced unauthorized access to LexisNexis databases in 2005, resulting in class action lawsuits (Syran v. LexisNexis; Witriol v. LexisNexis). Management believes it has strong defenses.
- Regulatory & Tax: Changes in data protection laws, intellectual property rights, and tax legislation in over 100 jurisdictions pose significant risks.
- Government Funding: Education and science segments are sensitive to changes in public funding for schools and academic institutions.
Investor Verification Checklist
- Legal Proceedings: Verify the status and potential financial impact of the two putative class actions regarding the LexisNexis data security breaches.
- Accounting Transition: Review Note 34 for reconciliations between previous UK GAAP and IFRS, specifically regarding the treatment of goodwill (no amortization under IFRS) and pension obligations.
- Deferred Tax: Investigate the £44 million deferred tax charge on unrealized exchange differences that increased the effective tax rate, as these are not expected to crystallize in the foreseeable future.
- Acquisition Integration: Assess the integration progress and performance of MediMedia MAP (acquired Aug 2005) and Seisint (acquired 2004) against management's growth targets.
- Currency Exposure: Monitor the impact of the strengthening US dollar on reported results, as the company has significant revenue and debt exposure in USD.