Penguin Random House Merger Sets Back Profits At Pearson plc

Shares in Pearson (LSE: PSON) (NYSE: PSO.US) dipped by 2% in early trade, following the release of its nine-month interim statement.

There was nothing shocking within the report; indeed, it was broadly resiliant, but the market was maybe hoping for more of the growth that it announced it was seeing back in July, which sparked a resurgence in the share price. Expectations have since been tempered, with Pearson having only risen around 9% in the last 12 months compared to the FTSE 100’s 17%+.

Underlying sales grew by 2% (4% at constant exchange rates) thanks to decent international performances, particularly in emerging markets, while management reiterated its full-year guidance of adjusted EPS to be broadly level 2012’s 82.6p.

Adjusted operating profit for 2013 (before restructuring charges) is expected to be lower than in 2012 due to the “accounting impact of the Penguin Random House transaction and weak market conditions for college textbooks in North American Education”. Management went on to explain:

“Following completion of the Penguin Random House merger on 1 July 2013, we now consolidate our share of Penguin Random House’s post-tax profit into Pearson’s operating profit. (Previously, Penguin’s operating profit was reported before tax.) This accounting treatment reduces Pearson’s operating profit by approximately £25m in 2013, but at the EPS level we gain an equivalent benefit through our tax charge.”

Commenting on Pearson’s restructuring programme, chief executive John Fallon said:

“Market conditions remain strong in digital, services and emerging markets, but are more challenging in some of our largest textbook publishing markets. This reinforces the importance of our strategy of accelerated change, so that we can shift more capital and talent more quickly towards these significant growth opportunities. The pace of this restructuring is increasing through the second half of this year and will continue into the first half of 2014. Inevitably, this restructuring carries some short term operational risks, but, overall, it is going very well – and we are confident of the benefits it will bring.” 

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> Sam does not own shares in Pearson.