RELX

Business Context and Reporting Period

Company: Reed Elsevier PLC and Reed Elsevier NV (collectively "Reed Elsevier")
Reporting Period: Fiscal year ended December 31, 2004
Business Overview: A global publisher and information provider operating through four main segments: Elsevier (science and medical), LexisNexis (legal), Harcourt Education (education), and Reed Business (business-to-business). The company operates a dual-listed company structure with equalisation arrangements ensuring equivalent economic interests for shareholders of both PLC and NV entities.

Key Financial Metrics (Year Ended Dec 31, 2004)

Note: US GAAP figures differ significantly due to the non-amortisation of goodwill and indefinite-lived intangible assets.

Material Changes vs. Prior Period

• Turnover: Decreased 2% to £4,812 million (actual rates) due to adverse currency translation effects (US dollar weakness). At constant exchange rates, turnover increased 5%.
• Operating Profit: Increased 5% to £697 million (actual rates) or 10% at constant exchange rates. Growth was driven by improved operating performance and lower amortisation charges, partially offset by currency impacts.
• Profit Attributable: Decreased 9% to £303 million (actual rates) primarily due to lower exceptional tax credits compared to 2003, despite higher pre-tax profits.
• Segment Performance:
  • Elsevier: Turnover down 1% (actual); Adjusted operating profit down 1% (actual). Growth in online sales offset by flat academic book sales.
  • LexisNexis: Turnover down 2% (actual); Adjusted operating profit up 2% (actual). Strong growth in risk management and international markets.
  • Harcourt Education: Turnover down 3% (actual); Adjusted operating profit down 6% (actual). Impacted by the US textbook adoption cycle.
  • Reed Business: Turnover down 3% (actual); Adjusted operating profit down 4% (actual). Exhibitions grew 6%, offsetting declines in business information.
• Acquisitions: Total acquisition spend was £647 million, including Seisint Inc. (£414 million) and Saxon Publishers (£117 million).

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in electronic products and services. The company intends to pursue a policy of more progressive dividend growth, targeting a dividend cover of at least two times earnings (excluding amortisation and exceptional items).
• Accounting Changes: The company will adopt International Financial Reporting Standards (IFRS) for the 2005 financial year. Preliminary estimates suggest this will increase 2004 attributable profit by £156 million (51%) and reduce shareholders' funds by £603 million.
• Key Risks:
  • Currency Fluctuations: Significant exposure to the US dollar and Euro; a weaker dollar reduced reported turnover by £342 million in 2004.
  • Technology & Competition: Rapid technological change and competition in electronic delivery platforms.
  • Regulatory & Legal: Risks related to data privacy (e.g., Driver's Privacy Protection Act litigation involving Seisint), intellectual property protection, and changes in government funding for education and academic institutions.
  • Market Cyclicality: Advertising and exhibition revenues are sensitive to economic cycles.

Investor Verification Checklist

• US GAAP vs. UK GAAP Reconciliation: Verify the significant difference in reported net income (£449m vs £303m) driven by goodwill amortisation policies.
• IFRS Adoption Impact: Review the estimated £156 million profit increase and £603 million equity reduction upon IFRS adoption in 2005.
• Currency Sensitivity: Assess the impact of the US dollar/sterling exchange rate on future reported earnings, given 58% of turnover originates from North America.
• Acquisition Integration: Monitor the integration and performance contribution of the Seisint Inc. acquisition (£414m) and associated data security risks.
• Dividend Sustainability: Confirm the ability to maintain the proposed dividend cover of 2x earnings, particularly given the high level of net borrowings (£2.5 billion).