NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
1. Basis of preparation
The
condensed consolidated financial statements have been prepared in
accordance with the Disclosure and Transparency Rules of the
Financial Conduct Authority and in accordance with International
Financial Reporting Standards (IFRS) and IFRS Interpretations
Committee interpretations as adopted by the European Union (EU). In
respect of accounting standards applicable to the Group, there is
no difference between EU-adopted IFRS and International Accounting
Standards Board (IASB)-adopted IFRS.
The
condensed consolidated financial statements have also been prepared
in accordance with the accounting policies set out in the 2016
Annual Report and have been prepared under the historical cost
convention as modified by the revaluation of certain financial
assets and liabilities (including derivative financial instruments)
at fair value.
The
Group's forecasts and projections, taking account of reasonably
possible changes in trading performance, seasonal working capital
requirements and potential acquisition activity, show that the
Group should be able to operate within the level of its current
committed borrowing facilities. The directors have confirmed
that they have a reasonable expectation that the Group has adequate
resources to continue in operational existence. The condensed
consolidated financial statements have therefore been prepared on a
going concern basis.
The
preparation of condensed consolidated financial statements requires
the use of certain critical accounting assumptions. It also
requires management to exercise its judgement in the process of
applying the Group’s accounting policies. The areas requiring
a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the condensed
consolidated financial statements have been set out in the 2016
Annual Report.
This
preliminary announcement does not constitute the Group’s full
financial statements for the year ended 31 December 2017. The
Group’s full financial statements will be approved by the
Board of Directors and reported on by the auditors in March 2018.
Accordingly, the financial information for 2017 is presented
unaudited in the preliminary announcement.
The
financial information for the year ended 31 December 2016 does not
constitute statutory accounts as defined in section 434 of the
Companies Act 2006. A copy of the statutory accounts for that year
has been delivered to the Registrar of Companies. The independent
auditors' report on the full financial statements for the year
ended 31 December 2016 was unqualified and did not contain an
emphasis of matter paragraph or any statement under section 498 of
the Companies Act 2006.
The
Group will adopt IFRS 15 ’Revenue from Contracts with
Customers’ as at 1 January 2018 and apply the modified
retrospective approach. Comparatives for 2017 will not be restated
and the cumulative impact of adoption will be recognised in
retained earnings as at 1 January 2018. Had the Group been applying
IFRS 15 during 2017, it is estimated that both sales and profit
before tax would have been around £2m higher, with the balance
sheet impact at the beginning and end of the year being similar.
The impact on sales and profit before tax for 2018 is not expected
to be materially different to 2017, assuming a like for like
business portfolio. The Group is currently estimating that the
cumulative pre-tax impact of adopting IFRS 15 on 1 January 2018
will reduce retained earnings and decrease net assets by around
£143m.
The
Group will also adopt IFRS 9 ‘Financial Instruments as at 1
January 2018 and apply the new rules retrospectively, with the
practical expedients permitted in the standard. Comparatives for
2017 will not be restated. The Group has assessed the impact of
adopting IFRS 9 and is expecting the only material adjustment to be
a small increase in the provision for losses against trade debtors.
The Group does not anticipate the expected credit loss model having
a material impact on profit before tax for 2018 unless market
conditions or other factors change the outlook for credit losses.
The Group is currently estimating its provision for these losses as
at 1 January 2018 to increase by around 1% of gross trade debtors
as a result of adopting the expected credit loss model for
impairments.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
2. Segment information
The
primary segments for management and reporting are Geographies
(North America, Core and Growth). In addition, the Group separately
discloses the results from the Penguin Random House associate
(PRH).
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Sales
by Geography
|
|
|
|
North
America
|
|
2,929
|
2,981
|
Core
|
|
815
|
803
|
Growth
|
|
769
|
768
|
Total
sales
|
|
4,513
|
4,552
|
|
|
|
|
Adjusted
operating profit by Geography
|
|
|
|
North
America
|
|
394
|
420
|
Core
|
|
50
|
57
|
Growth
|
|
38
|
29
|
PRH
|
|
94
|
129
|
Total
adjusted operating profit
|
|
576
|
635
|
There
were no material inter-segment sales.
Adjusted
operating profit is one of the Group’s key business
performance measures; it includes the operating profit from the
total business including the results of discontinued operations
when relevant.
In
January 2016, the Group announced that it was embarking on a
restructuring programme to simplify the business, reduce costs and
position the Group for growth in its major markets. The costs of
this programme in 2016 were significant enough to exclude from the
adjusted operating profit measure so as to better highlight the
underlying performance. A new programme of restructuring, announced
in May 2017, began in the second half of 2017 and is expected to
drive further significant cost savings. The costs of this new
programme have also been excluded from the adjusted operating
profit measure for the same reason.
Other
net gains and losses that represent profits and losses on the sale
of subsidiaries, joint ventures, associates and other financial
assets are excluded from adjusted operating profit as they distort
the performance of the Group. Other net gains of £128m in 2017
largely relate to the sale of our test preparation business in
China which resulted in a profit on sale of £44m and the part
sale of our share in PRH which resulted in a profit of £96m
(see also note 14). In 2016, the net losses in the Core segment
mainly relate to the closure of our English language schools in
Germany and in the North America segment relate to the sale of the
Pearson English Business Solutions business.
Charges
relating to acquired intangibles, acquisition costs and movements
in contingent acquisition consideration are also excluded from
adjusted operating profit when relevant as these items reflect past
acquisition activity and do not necessarily reflect the current
year performance of the Group. In 2016, intangible charges included
an impairment of goodwill in our North American business of
£2,548m.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
2. Segment information
continued
As a
result of US tax reform there is an adjustment to the share of
profit from associates of £8m in 2017 relating to the
revaluation of deferred tax balances. This adjustment has been
excluded from our adjusted operating profit (see also note
5).
The
following table reconciles adjusted operating profit to operating
profit for each of our primary segments.
|
|
|
|
|
|
all figures in £ millions
|
North
America
|
Core
|
Growth
|
PRH
|
Total
|
|
|
|
|
|
|
2017
|
Adjusted operating
profit
|
394
|
50
|
38
|
94
|
576
|
Cost of
major restructuring
|
(60)
|
(11)
|
(8)
|
-
|
(79)
|
Intangible
charges
|
(89)
|
(12)
|
(37)
|
(28)
|
(166)
|
Other
net gains and losses
|
(3)
|
-
|
35
|
96
|
128
|
Impact
of US tax reform
|
-
|
-
|
-
|
(8)
|
(8)
|
Operating
profit
|
242
|
27
|
28
|
154
|
451
|
|
|
|
|
|
|
2016
|
Adjusted operating
profit
|
420
|
57
|
29
|
129
|
635
|
Cost of
major restructuring
|
(172)
|
(62)
|
(95)
|
(9)
|
(338)
|
Intangible
charges
|
(2,684)
|
(16)
|
(33)
|
(36)
|
(2,769)
|
Other
net gains and losses
|
(12)
|
(12)
|
(1)
|
-
|
(25)
|
Impact
of US tax reform
|
-
|
-
|
-
|
-
|
-
|
Operating
(loss) / profit
|
(2,448)
|
(33)
|
(100)
|
84
|
(2,497)
|
Corporate
costs are allocated to business segments on an appropriate basis
depending on the nature of the cost and therefore the total segment
result is equal to the Group operating profit.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
3. Net finance costs
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Net
interest payable
|
|
(79)
|
(59)
|
Net
finance income in respect of retirement benefits
|
|
3
|
11
|
Finance
costs associated with transactions
|
|
(6)
|
-
|
Net
foreign exchange gains / (losses)
|
|
44
|
(20)
|
Derivatives in a
hedge relationship
|
|
1
|
-
|
Derivatives not in
a hedge relationship
|
|
7
|
8
|
Net
finance costs
|
|
(30)
|
(60)
|
|
|
|
|
Analysed
as:
|
|
|
|
Finance
costs
|
|
(110)
|
(97)
|
Finance
income
|
|
80
|
37
|
Net
finance costs
|
|
(30)
|
(60)
|
|
|
|
|
Analysed
as:
|
|
|
|
Net
interest payable
|
|
(79)
|
(59)
|
Other
net finance income / (costs)
|
|
49
|
(1)
|
Net
finance costs
|
|
(30)
|
(60)
|
Net
finance costs classified as other net finance costs / income are
excluded in the calculation of our adjusted earnings.
Net
finance income relating to retirement benefits is excluded as we
believe the presentation does not reflect the economic substance of
the underlying assets and liabilities. We exclude finance costs
relating to acquisition transactions as these relate to future earn
outs or acquisition expenses and are not part of the underlying
financing.
Foreign
exchange and other gains and losses are also excluded as they
represent short-term fluctuations in market value and are subject
to significant volatility. Other gains and losses may not be
realised in due course as it is normally the intention to hold the
related instruments to maturity. In 2017 and 2016 the foreign
exchange gains and losses largely relate to foreign exchange
differences on unhedged US dollar and Euro loans, cash and cash
equivalents.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for
the year ended 31 December 2017
4.
Profit before tax
|
|
|
|
all figures in £ millions
|
note
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Profit
/ (loss) before tax
|
|
421
|
(2,557)
|
Cost of
major restructuring
|
2
|
79
|
338
|
Intangible
charges
|
2
|
166
|
2,769
|
Other
net gains and losses
|
2
|
(128)
|
25
|
Other
net finance (income) / costs
|
3
|
(49)
|
1
|
Impact
of US tax reform
|
2
|
8
|
-
|
Adjusted
profit before tax
|
|
497
|
576
|
5.
Income tax
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Income
tax (charge) / benefit
|
|
(13)
|
222
|
Tax
benefit on cost of major restructuring
|
|
(26)
|
(84)
|
Tax
benefit on intangible charges
|
|
(85)
|
(255)
|
Tax
charge / (benefit) on other net gains and losses
|
|
20
|
(14)
|
Tax
charge on other net finance costs
|
|
9
|
-
|
Impact
of US tax reform added back
|
|
1
|
-
|
Tax
amortisation benefit on goodwill and intangibles
|
|
39
|
36
|
Adjusted
income tax charge
|
|
(55)
|
(95)
|
|
|
|
|
Tax
rate reflected in statutory earnings
|
|
3.1%
|
8.7%
|
Tax
rate reflected in adjusted earnings
|
|
11.1%
|
16.5%
|
The
adjusted income tax charge excludes the tax benefit or charge on
items that are excluded from the profit or loss before tax (see
note 4).
As a
result of US tax reform, the reported tax charge on a statutory
basis includes a benefit from revaluation of deferred tax balances
to the reduced federal rate of £5m and a repatriation tax
charge of £6m. In addition to the impact on the reported tax
charge, the Group’s share of profit from associates was
adversely impacted by £8m (see also notes 2 and 4). These
adjustments have been excluded from the adjusted operating profit
and tax charge as they are considered to be transition adjustments
that are not expected to recur in the near future.
The tax
benefit from tax deductible goodwill and intangibles is added to
the adjusted income tax charge as this benefit more accurately
aligns the adjusted tax charge with the expected rate of cash tax
payments.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
6.
Earnings per share
Basic
earnings per share is calculated by dividing the profit or loss
attributable to equity shareholders of the company (earnings) by
the weighted average number of ordinary shares in issue during the
year, excluding ordinary shares purchased by the company and held
as treasury shares. Diluted earnings per share is calculated by
adjusting the weighted average number of ordinary shares to take
account of all dilutive potential ordinary shares and adjusting the
profit attributable, if applicable, to account for any tax
consequences that might arise from conversion of those shares. A
dilution is not calculated for a loss.
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Earnings / (loss)
for the year
|
|
408
|
(2,335)
|
Non-controlling
interest
|
|
(2)
|
(2)
|
Earnings
/ (loss) attributable to equity shareholders of the
company
|
|
406
|
(2,337)
|
|
|
|
|
|
|
|
|
Weighted average
number of shares (millions)
|
|
813.4
|
814.8
|
Effect
of dilutive share options (millions)
|
|
0.3
|
-
|
Weighted average
number of shares (millions) for diluted earnings
|
|
813.7
|
814.8
|
|
|
|
|
|
|
|
|
Earnings
/ (loss) per share
|
|
|
|
Basic
|
|
49.9p
|
(286.8)p
|
Diluted
|
|
49.9p
|
(286.8)p
|
7.
Adjusted earnings per share
In
order to show results from operating activities on a consistent
basis, an adjusted earnings per share is presented which excludes
certain items as set out below.
Adjusted earnings
is a non-GAAP financial measure and is included as it is a key
financial measure used by management to evaluate performance and
allocate resources to business segments. The measure also enables
our investors to more easily, and consistently, track the
underlying operational performance of the Group and its business
segments by separating out those items of income and expenditure
relating to acquisition and disposal transactions, and major
restructuring programmes.
The adjusted earnings per share includes both
continuing and discontinued businesses on an undiluted basis when
relevant. The company’s definition of adjusted earnings per
share may not be comparable to other similarly titled measures
reported by other companies. A reconciliation of the adjusted
measures to their corresponding statutory measures is shown in the
tables below and in the
relevant notes.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
7. Adjusted earnings per share
continued
|
|
|
|
|
|
|
|
|
|
all figures in £ millions
|
note
|
Statutory
income statement
|
Cost of
major restructuring
|
Other
net gains and losses
|
Intangible
charges
|
Other
net finance costs
|
Impact
of US tax reform
|
Tax
amortisation benefit
|
Adjusted
income statement
|
|
|
|
|
|
|
|
|
|
|
2017
|
Operating
profit / (loss)
|
2
|
451
|
79
|
(128)
|
166
|
-
|
8
|
-
|
576
|
Net
finance costs
|
3
|
(30)
|
-
|
-
|
-
|
(49)
|
-
|
-
|
(79)
|
Profit
/ (loss) before tax
|
4
|
421
|
79
|
(128)
|
166
|
(49)
|
8
|
-
|
497
|
Income
tax
|
5
|
(13)
|
(26)
|
20
|
(85)
|
9
|
1
|
39
|
(55)
|
Profit
/ (loss) for the year
|
|
408
|
53
|
(108)
|
81
|
(40)
|
9
|
39
|
442
|
Non-controlling
interest
|
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Earnings
/ (loss)
|
|
406
|
53
|
(108)
|
81
|
(40)
|
9
|
39
|
440
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
|
|
813.4
|
Weighted
average number of shares (millions) for diluted
earnings
|
|
|
|
813.7
|
|
|
|
|
|
Adjusted earnings per share (basic)
|
|
|
|
54.1p
|
Adjusted
earnings per share (diluted)
|
|
|
|
54.1p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
7. Adjusted earnings per share
continued
|
|
|
|
|
|
|
|
|
|
all figures in £ millions
|
note
|
Statutory
income statement
|
Cost of
major restructuring
|
Other
net gains and losses
|
Intangible
charges
|
Other
net finance costs
|
Impact
of US tax reform
|
Tax
amortisation benefit
|
Adjusted
income statement
|
|
|
|
|
|
|
|
|
|
|
2016
|
Operating profit /
(loss)
|
2
|
(2,497)
|
338
|
25
|
2,769
|
-
|
-
|
-
|
635
|
Net
finance costs
|
3
|
(60)
|
-
|
-
|
-
|
1
|
-
|
-
|
(59)
|
Profit
/ (loss) before tax
|
4
|
(2,557)
|
338
|
25
|
2,769
|
1
|
-
|
-
|
576
|
Income
tax
|
5
|
222
|
(84)
|
(14)
|
(255)
|
-
|
-
|
36
|
(95)
|
Profit
/ (loss) for the year
|
|
(2,335)
|
254
|
11
|
2,514
|
1
|
-
|
36
|
481
|
Non-controlling
interest
|
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Earnings /
(loss)
|
|
(2,337)
|
254
|
11
|
2,514
|
1
|
-
|
36
|
479
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
|
|
814.8
|
Weighted
average number of shares (millions) for diluted
earnings
|
|
|
|
814.8
|
|
|
|
|
|
Adjusted
earnings per share (basic)
|
|
|
|
58.8p
|
Adjusted
earnings per share (diluted)
|
|
|
|
58.8p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
8.
Dividends
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Amounts
recognised as distributions to equity shareholders in the
year
|
318
|
424
|
The
directors are proposing a final dividend of 12.0p per equity share,
payable on 11 May 2018 to shareholders on the register at the close
of business on 6 April 2018. This final dividend, which will absorb
an estimated £93m of shareholders’ funds, has not been
included as a liability as at 31 December 2017.
9.
Exchange rates
Pearson
earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant
rates are as follows:
|
|
|
|
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Average
rate for profits
|
|
1.30
|
1.33
|
Year
end rate
|
|
1.35
|
1.23
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
10.
Assets and liabilities classified as held for sale
Held
for sale assets and liabilities relate to the Wall Street English
language teaching business (WSE) and the K12 school courseware
business in the US (K12). The held for sale balances are analysed
as follows:
|
|
|
|
|
all figures in £ millions
|
|
WSE
|
K12
|
2017
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
16
|
-
|
16
|
Intangible
assets
|
|
15
|
166
|
181
|
Deferred income tax
assets
|
|
-
|
68
|
68
|
Trade and other
receivables
|
|
4
|
23
|
27
|
Non-current
assets
|
|
35
|
257
|
292
|
|
|
|
|
|
Intangible assets
– pre-publication
|
|
8
|
239
|
247
|
Inventories
|
|
-
|
46
|
46
|
Trade and other
receivables
|
|
12
|
36
|
48
|
Cash and cash
equivalents (excluding overdrafts)
|
|
127
|
-
|
127
|
Current
assets
|
|
147
|
321
|
468
|
|
|
|
|
|
Total
assets
|
|
182
|
578
|
760
|
|
|
|
|
|
Deferred income tax
liabilities
|
|
(2)
|
-
|
(2)
|
Other
liabilities
|
|
(10)
|
(274)
|
(284)
|
Non-current
liabilities
|
|
(12)
|
(274)
|
(286)
|
|
|
|
|
|
Trade and other
liabilities
|
|
(152)
|
(150)
|
(302)
|
Current
liabilities
|
|
(152)
|
(150)
|
(302)
|
|
|
|
|
|
Total
liabilities
|
|
(164)
|
(424)
|
(588)
|
|
|
|
|
|
Net
assets
|
|
18
|
154
|
172
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
11.
Non-current intangible assets
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Goodwill
|
|
2,030
|
2,341
|
Other
intangibles
|
|
934
|
1,101
|
Non-current
intangible assets
|
|
2,964
|
3,442
|
At the
end of 2016, following trading in the final quarter of the year, it
became clear that underlying issues in the North American higher
education courseware market were more severe than had been
previously anticipated. These issues related to declining student
enrolments, changes in buying patterns of students and correction
of inventory levels by distributors and bookshops. As a result of
revisions to strategic plans and estimates for future cash flows it
was determined during the goodwill impairment review that the fair
value less costs of disposal of the North America cash generating
unit (CGU) no longer supported the carrying value of this goodwill
and as a consequence impaired goodwill by £2,548m. There were
no impairments to goodwill or intangibles in 2017.
12.
Trade and other liabilities
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
(265)
|
(333)
|
Accruals
|
|
(447)
|
(507)
|
Deferred
income
|
|
(322)
|
(883)
|
Other
liabilities
|
|
(441)
|
(328)
|
Trade
and other liabilities
|
|
(1,475)
|
(2,051)
|
|
|
|
|
Analysed
as:
|
|
|
|
Trade
and other liabilities – current
|
|
(1,342)
|
(1,629)
|
Other
liabilities – non-current
|
|
(133)
|
(422)
|
Total
trade and other liabilities
|
|
(1,475)
|
(2,051)
|
The
deferred income balance comprises advance payments in assessment,
testing and training businesses; subscription income in school and
college businesses; and obligations to deliver digital content in
future periods.
Included in other
current liabilities in 2017 is a liability of £151m in respect
of the remaining commitment on the share buyback
programme.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
13.
Business combinations
There
were no significant acquisitions completed in the year and there
were no material adjustments to prior year acquisitions. The net
cash outflow relating to acquisitions in the year is shown in the
table below:
|
|
all figures in £ millions
|
2017
|
|
|
|
|
Cash
– Current year acquisitions
|
-
|
Deferred payments
for prior year acquisitions and other items
|
(11)
|
Net
cash outflow on acquisitions
|
(11)
|
14.
Disposals including business closures
In
August 2017, Pearson completed the sale of its test preparation
business in China (GEDU) resulting in a pre-tax profit on sale of
£44m. In October 2017, the sale of a 22% share in Penguin
Random House (PRH) resulted in a pre-tax profit of £96m. An
analysis of these disposals together with other disposals in the
period is shown below.
|
|
|
|
|
|
all figures in £ millions
|
|
GEDU
|
PRH
|
Other
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
(7)
|
-
|
-
|
(7)
|
Intangible
assets
|
|
(2)
|
-
|
(7)
|
(9)
|
Investments in
joint ventures and associates
|
|
-
|
(352)
|
-
|
(352)
|
Net deferred income
tax assets
|
|
(1)
|
(2)
|
-
|
(3)
|
Intangible assets
– pre publication
|
|
-
|
-
|
(1)
|
(1)
|
Inventories
|
|
(1)
|
-
|
(1)
|
(2)
|
Trade and other
receivables
|
|
(16)
|
-
|
-
|
(16)
|
Current income tax
receivable
|
|
-
|
(5)
|
-
|
(5)
|
Cash and cash
equivalents (excluding overdrafts)
|
|
(13)
|
-
|
-
|
(13)
|
Trade and other
liabilities
|
|
33
|
-
|
1
|
34
|
Cumulative
translation adjustment
|
|
3
|
48
|
-
|
51
|
Net
assets disposed
|
|
(4)
|
(311)
|
(8)
|
(323)
|
|
|
|
|
|
|
Proceeds
|
|
54
|
413
|
1
|
468
|
Costs of
disposal
|
|
(6)
|
(6)
|
(5)
|
(17)
|
Gain
/ (loss) on disposal
|
|
44
|
96
|
(12)
|
128
|
|
|
|
|
|
|
Cash
flow from disposals
|
|
|
|
|
|
Proceeds –
current year disposals
|
|
|
|
|
468
|
Cash and cash
equivalents disposed
|
|
|
|
|
(13)
|
Costs and other
disposal liabilities paid
|
|
|
|
|
(25)
|
Net
cash inflow from disposals
|
|
|
|
|
430
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
15.
Net debt and EBITDA
|
|
|
|
all figures in £ millions
|
note
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
Derivative
financial instruments
|
|
140
|
171
|
Current
assets
|
|
|
|
Marketable
securities
|
|
8
|
10
|
Cash
and cash equivalents (excluding overdrafts)
|
|
518
|
1,459
|
Non-current
liabilities
|
|
|
|
Borrowings
|
|
(1,066)
|
(2,424)
|
Derivative
financial instruments
|
|
(140)
|
(264)
|
Current
liabilities
|
|
|
|
Borrowings
|
|
(19)
|
(44)
|
Total
|
|
(559)
|
(1,092)
|
Cash
and cash equivalents classified as held for sale
|
|
127
|
-
|
Net
debt
|
|
(432)
|
(1,092)
|
|
|
|
|
EBITDA
(excluding restructuring)
|
|
|
|
Adjusted operating
profit
|
2
|
576
|
635
|
Depreciation
|
|
80
|
80
|
Software
amortisation
|
|
82
|
70
|
EBITDA
|
|
738
|
785
|
|
|
|
|
Net
debt / EBITDA ratio
|
|
0.6x
|
1.4x
|
In
March 2017, the Group redeemed its $550m 6.25% Global dollar bonds
due in 2018. In August 2017, the Group redeemed $385m of its $500m
3.75% US dollar notes due in 2022 and $406m of its $500m 3.25% US
dollar notes due in 2023. In November 2017, the Group redeemed its
$300m 4.625% US dollar notes due in 2018.
The net
debt / EBITDA ratio is presented as it is a measure commonly used
by investors to measure balance sheet strength.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
16.
Classification of assets and liabilities measured at fair
value
|
---------Level
2---------
|
-----Level
3------
|
|
all figures in £ millions
|
Available for sale
assets
|
Derivatives
|
Other
assets
|
Available for sale
assets
|
Other
liabilities
|
Total
fair value
|
2017
|
|
|
|
|
|
|
|
Investments in
unlisted securities
|
-
|
-
|
-
|
77
|
-
|
77
|
Marketable
securities
|
8
|
-
|
-
|
-
|
-
|
8
|
Derivative
financial instruments
|
-
|
140
|
-
|
-
|
-
|
140
|
Total
financial assets held at fair value
|
8
|
140
|
-
|
77
|
-
|
225
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
-
|
(140)
|
-
|
-
|
-
|
(140)
|
Total
financial liabilities held at fair value
|
-
|
(140)
|
-
|
-
|
-
|
(140)
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
Investments in
unlisted securities
|
-
|
-
|
-
|
65
|
-
|
65
|
Marketable
securities
|
10
|
-
|
-
|
-
|
-
|
10
|
Derivative
financial instruments
|
-
|
171
|
-
|
-
|
-
|
171
|
Total
financial assets held at fair value
|
10
|
171
|
-
|
65
|
-
|
246
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
-
|
(264)
|
-
|
-
|
-
|
(264)
|
Total
financial liabilities held at fair value
|
-
|
(264)
|
-
|
-
|
-
|
(264)
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
16. Classification of assets and liabilities measured at fair
value
continued
The
fair values of level 2 assets and liabilities are determined by
reference to market data and established estimation techniques such
as discounted cash flow and option valuation models. Within level 3
assets and liabilities, the fair value of available for sale assets
is determined by reference to the financial performance of the
underlying asset and amounts realised on the sale of similar
assets, while the fair value of other liabilities represents the
present value of the estimated future liability. There have been no
transfers in classification during the year.
The
market value of the Group’s bonds is £1,066m (2016:
£2,381m) compared to their carrying value of £1,062m
(2016: £2,420m). For all other financial assets and
liabilities, fair value is not materially different to carrying
value.
Movements in fair
values of level 3 assets and liabilities are shown in the table
below:
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Investments
in unlisted securities
|
|
|
|
At
beginning of year
|
|
65
|
143
|
Exchange
differences
|
|
(4)
|
8
|
Additions
|
|
3
|
6
|
Fair
value movements
|
|
13
|
-
|
Disposals
|
|
-
|
(92)
|
At
end of year
|
|
77
|
65
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
17. Cash flows
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Reconciliation
of profit / (loss) for the year to net cash generated from
operations
|
|
|
|
|
|
|
Profit
/ (loss) for the year
|
|
408
|
(2,335)
|
Income
tax
|
|
13
|
(222)
|
Depreciation,
amortisation and impairment charges
|
|
313
|
2,912
|
Net
(profit) / loss on disposal of businesses
|
|
(128)
|
25
|
Net
loss on disposal of fixed assets
|
|
12
|
15
|
Net
finance costs
|
|
30
|
60
|
Share
of results of joint ventures and associates
|
|
(78)
|
(97)
|
Net
foreign exchange adjustment
|
|
(26)
|
43
|
Share-based payment
costs
|
|
33
|
22
|
Pre-publication
|
|
(35)
|
(19)
|
Inventories
|
|
24
|
17
|
Trade
and other receivables
|
|
133
|
156
|
Trade
and other liabilities
|
|
6
|
61
|
Retirement benefit
obligations
|
|
(232)
|
(106)
|
Provisions for
other liabilities and charges
|
|
(11)
|
(10)
|
Net
cash generated from operations
|
|
462
|
522
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
17. Cash flows
continued
|
|
|
|
all figures in £ millions
|
note
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Reconciliation
of net cash generated from operations to closing net
debt
|
|
|
|
|
|
|
Net
cash generated from operations
|
|
462
|
522
|
Dividends from
joint ventures and associates
|
|
458
|
131
|
Less:
re-capitalisation dividends from PRH
|
|
(312)
|
-
|
Net
purchase of PPE including finance lease principal
payments
|
|
(87)
|
(90)
|
Net
purchase of intangible assets
|
|
(150)
|
(157)
|
Add
back: cost of major restructuring paid
|
|
71
|
167
|
Add
back: special pension contribution
|
|
227
|
90
|
Operating
cash flow
|
|
669
|
663
|
Operating tax
paid
|
|
(75)
|
(63)
|
Net
operating finance costs paid
|
|
(69)
|
(51)
|
Operating
free cash flow
|
|
525
|
549
|
Costs
of major restructuring paid
|
|
(71)
|
(167)
|
Special
pension contribution
|
|
(227)
|
(90)
|
Non-operating tax
received
|
|
-
|
18
|
Free
cash flow
|
|
227
|
310
|
Dividends paid
(including to non-controlling interests)
|
|
(318)
|
(424)
|
Net
movement of funds from operations
|
|
(91)
|
(114)
|
Acquisitions and
disposals
|
|
416
|
19
|
Re-capitalisation
dividends from PRH
|
|
312
|
-
|
Purchase of
treasury shares
|
|
-
|
(27)
|
Loans
(advanced) / repaid
|
|
(13)
|
14
|
New
equity
|
|
5
|
7
|
Buyback
of equity
|
|
(149)
|
-
|
Other
movements on financial instruments
|
|
14
|
4
|
Net
movement of funds
|
|
494
|
(97)
|
Exchange movements
on net debt
|
|
166
|
(341)
|
Movement
in net debt
|
|
660
|
(438)
|
Opening
net debt
|
|
(1,092)
|
(654)
|
Closing
net debt
|
15
|
(432)
|
(1,092)
|
Operating
cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of Pearson’s corporate and
operating measures. These measures are presented in order to align
the cash flows with corresponding adjusted profit
measures.
Dividends
received from associates include dividends from PRH in 2017 of
£312m relating to the re-capitalisation of PRH. The
re-capitalisation was part of the transaction that included the
sale of 22% of our equity interest in the venture (see note
14).
Special
pension contributions of £227m in 2017 were made as part of
the agreements relating to the PRH merger in 2013 (£202m) and
the sale of the FT Group in 2015 (£25m). In 2016 special
pension contributions of £90m relate to the sale of the FT
Group.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for
the year ended 31 December 2017
18. Return on invested capital (ROIC)
|
|
|
|
|
|
all figures in £ millions
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
Gross
|
Net
|
Net
|
|
|
|
|
|
|
Adjusted operating
profit
|
|
576
|
635
|
576
|
635
|
Less:
operating tax paid
|
|
(75)
|
(63)
|
(75)
|
(63)
|
Return
|
|
501
|
572
|
501
|
572
|
|
|
|
|
|
|
Average:
goodwill
|
|
7,236
|
6,987
|
3,794
|
3,429
|
Average: other
non-current intangibles
|
|
2,606
|
2,481
|
2,606
|
2,481
|
Average: intangible
assets – pre-publication
|
|
995
|
926
|
995
|
926
|
Average: tangible
fixed assets and working capital
|
|
731
|
1,070
|
731
|
1,070
|
Average:
total invested capital
|
|
11,568
|
11,464
|
8,126
|
7,906
|
|
|
|
|
|
|
ROIC
|
|
4.3%
|
5.0%
|
6.2%
|
7.2%
|
ROIC is
a non-GAAP measure and has been disclosed as it is part of
Pearson’s key performance indicators. ROIC is used to track
investment returns and to help inform capital allocation decisions
within the business. Average values for total invested capital are
calculated as the average monthly balance for the
year.
For the
first time in 2017 we have presented ROIC on a net basis after
removing impaired goodwill from the invested capital balance. The
net approach assumes that goodwill which has been impaired is
treated in a similar fashion to goodwill disposed as it is no
longer being used to generate returns.
19. Contingencies
There
are contingent Group liabilities that arise in the normal course of
business in respect of indemnities, warranties and guarantees in
relation to former subsidiaries and in respect of guarantees in
relation to subsidiaries, joint ventures and associates. In
addition there are contingent liabilities of the Group in respect
of legal claims, contract disputes, royalties, copyright fees,
permissions and other rights. None of these claims are expected to
result in a material gain or loss to the Group.
On 24
November 2017 the European Commission published an opening decision
that the United Kingdom controlled foreign company group financing
partial exemption (“FCPE”) constitutes State Aid.
No final decision has yet been published, and may anyway be
challenged by the UK tax authorities. The Group has benefited from
the FCPE in 2017 and prior periods by approximately £90m. At
present the Group believes no provision is required in respect of
this issue.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the year ended 31 December 2017
20. Related parties
At 31
December 2017 the Group had loans to Penguin Random House (PRH) of
£46m (2016: £33m) which were unsecured with interest
calculated based on market rates. The loans are provided under a
working capital facility and fluctuate during the
year.
At 31
December 2017, the Group also had a current asset receivable from
PRH of £19m (2016: £21m) and a current liability payable
of £3m (2016: £nil) arising from the provision of
services. Service fee income from PRH was £3m in 2017 (2016:
£4m).
During
the year the Group received dividends of £458m (2016:
£131m) from PRH including £312m in relation to the
re-capitalisation of the venture following Pearson’s disposal
of part of its share. At 31 December 2017 the Group had a dividend
receivable from PRH of £49m (2016: £nil) which was also
due in respect of re-capitalisation.
Apart
from transactions with the Group’s associates and joint
ventures noted above, there were no other material related party
transactions and no guarantees have been provided to related
parties in the year.
21. Events after the balance sheet date
During
January 2018, Pearson successfully executed market tenders to
repurchase €250m of its €500m Euro 1.875% Notes due May
2021 and €200m of its €500m Euro 1.375% Notes due
May 2025.
On 16
February 2018, Pearson completed its £300m share buyback
programme. In aggregate between 18 October 2017 and 16 February
2018, Pearson repurchased 42,835,577 shares, including 21,839,676
repurchased since 31 December 2017 at a cost of
£151m.