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, 2003, filed on March 15, 2004. Reed Elsevier operates as a dual-listed company structure with separate legal identities in England and the Netherlands, conducting business through two jointly owned entities: Reed Elsevier Group plc (publishing and information) and Elsevier Reed Finance BV (financing). The company is a leading global publisher and information provider with four primary segments: Science & Medical, Legal, Education, and Business.
Key Financial Metrics (Year Ended Dec 31, 2003)
| Metric | 2003 (UK GAAP) | 2002 (UK GAAP) | 2003 (US GAAP) |
|---|---|---|---|
| Turnover | £4,925 million | £5,020 million | N/A |
| Operating Profit | £661 million | £507 million | £1,657 million |
| Profit Attributable to Shareholders | £334 million | £181 million | £538 million (Net Income) |
| Net Borrowings | £2,372 million | £2,732 million | N/A |
| Combined Shareholders' Funds | £2,434 million | £2,640 million | £3,303 million |
| Operating Cash Flow | £1,065 million | £1,035 million | N/A |
| Dividends Paid/Proposed | £304 million | £282 million | N/A |
Note: UK GAAP figures are presented in Sterling. US GAAP figures are presented in Sterling for comparison purposes in the filing, though the filing notes significant differences in accounting treatment, particularly regarding goodwill amortization.
Material Changes vs. Prior Period
- Profitability Surge: Profit attributable to shareholders increased by 85% to £334 million (UK GAAP) and US GAAP net income rose to £538 million. This was driven by improved operating performance, lower goodwill amortization charges, and reduced exceptional items.
- Revenue Decline: Total turnover decreased by 2% to £4,925 million. At constant exchange rates, turnover was flat. The decline was primarily due to a 10% drop in the Education segment (loss of California state testing contract) and a 4% drop in the Business segment (advertising market weakness).
- Segment Performance:
- Science & Medical: Turnover up 7%; Operating profit up 28%.
- Legal: Turnover down 2%; Operating profit up 56%.
- Education: Turnover down 10%; Operating profit down 11%.
- Business: Turnover down 4%; Operating profit up 100% (driven by cost reductions and lower amortization).
- Debt Reduction: Net borrowings decreased by £360 million to £2,372 million, reflecting strong operating cash flows and favorable exchange translation effects.
- Acquisitions: Total acquisition spend was £226 million, including the Holtzbrinck STM business in Germany and Applied Discovery Inc. in the US.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted improved operating margins (23.9% excluding amortization and exceptional items) and successful cost management. The company expects to maintain a dividend cover of at least two times based on earnings before amortization and exceptional items. A final dividend of 8.7p (PLC) and €0.22 (NV) was proposed.
Key Risks and Contingencies:
- Legal Proceedings: The company is a defendant in the Electronic Database Copyright Infringement Litigation (Tasini case aftermath) regarding freelance author copyrights. It is also involved in class actions regarding the Driver's Privacy Protection Act (DPPA) and Fair Credit Reporting Act (FCRA) related to LexisNexis data usage.
- Market Risks: Significant exposure to exchange rate fluctuations (USD/GBP/EUR). The US dollar strengthened against the pound in 2003, negatively impacting reported turnover but positively impacting profit before tax due to debt denomination.
- Technology & Competition: Risks related to the migration from print to electronic formats, potential obsolescence of products, and competition in electronic delivery platforms.
- Regulatory: Changes in government funding for schools and academic institutions could adversely affect the Education and Science & Medical segments.
Investor Verification Checklist
- Goodwill Amortization: Verify the impact of the difference between UK GAAP (amortization charged) and US GAAP (no amortization for indefinite-lived assets) on reported earnings.
- Education Segment Exposure: Assess the long-term impact of the loss of the California state testing contract on the Education segment's revenue trajectory.
- Legal Liabilities: Monitor the status of the Tasini related litigation and DPPA/FCRA class actions for potential material damages.
- Currency Hedging: Review the effectiveness of the company's hedging strategies given the significant exposure to USD-denominated debt and revenue.
- Dividend Equalization: Confirm the mechanics of the dividend equalization agreement between Reed Elsevier PLC and NV shareholders.