NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
2. Segment information
continued
|
|
|
|
|
|
all figures in £ millions
|
|
North
|
Core
|
Growth
|
Total
|
|
|
America
|
|
|
|
|
|
|
|
|
|
2018
half year
|
Courseware
|
|
|
|
|
|
Products
transferred at a point in time (sale or return)
|
|
276
|
81
|
105
|
462
|
Products
transferred at a point in time (other)
|
|
-
|
-
|
15
|
15
|
Products and
services transferred over time
|
|
265
|
25
|
8
|
298
|
|
|
541
|
106
|
128
|
775
|
Assessments*
|
|
|
|
|
|
Products
transferred at a point in time
|
|
49
|
26
|
-
|
75
|
Products and
services transferred over time
|
|
376
|
228
|
29
|
633
|
|
|
425
|
254
|
29
|
708
|
Services
|
|
|
|
|
|
Products
transferred at a point in time
|
|
-
|
13
|
13
|
26
|
Products and
services transferred over time
|
|
257
|
10
|
89
|
356
|
|
|
257
|
23
|
102
|
382
|
|
|
|
|
|
|
Total
sales
|
|
1,223
|
383
|
259
|
1,865
|
|
|
|
|
|
|
2018
full year
|
Courseware
|
|
|
|
|
|
Products
transferred at a point in time (sale or return)
|
|
718
|
313
|
197
|
1,228
|
Products
transferred at a point in time (other)
|
|
-
|
-
|
35
|
35
|
Products and
services transferred over time
|
|
718
|
4
|
54
|
776
|
|
|
1,436
|
317
|
286
|
2,039
|
Assessments*
|
|
|
|
|
|
Products
transferred at a point in time
|
|
106
|
52
|
-
|
158
|
Products and
services transferred over time
|
|
710
|
390
|
87
|
1,187
|
|
|
816
|
442
|
87
|
1,345
|
Services
|
|
|
|
|
|
Products
transferred at a point in time
|
|
-
|
26
|
38
|
64
|
Products and
services transferred over time
|
|
532
|
21
|
128
|
681
|
|
|
532
|
47
|
166
|
745
|
|
|
|
|
|
|
Total
sales
|
|
2,784
|
806
|
539
|
4,129
|
|
|
|
|
|
|
*
The analysis
of
Assessment revenues for 2018 has been
re-presented to better reflect the nature of
sales.
|
Adjusted operating
profit is one of the Group’s key business performance
measures. The measure includes the operating profit from the total
business including the results of discontinued operations when
relevant and excludes intangible charges for amortisation and
impairment, acquisition related costs, gains and losses arising
from acquisitions and disposals and the cost of major
restructuring. In 2018, the Group also excluded the impact of
adjustments arising from clarification of guaranteed minimum
pension (GMP) equalisation legislation in the UK. In May 2017, the
Group announced a restructuring programme, to run between 2017 and
2019, to drive further significant cost savings. This programme
began in the second half of 2017 and costs incurred to date relate
to delivery of cost efficiencies in the US higher education
courseware business and enabling functions together with further
rationalisation of the property and supplier portfolio. The
restructuring costs in the first half of 2019 of £64m and in
the first half of 2018 of £24m mainly relate to staff
redundancies.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
2. Segment information
continued
Charges
relating to acquired intangibles, acquisition costs and movements
in contingent acquisition and disposal 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. Intangible
amortisation charges to the end of June 2019 were £49m
compared to a charge of £57m in the equivalent period in
2018.
Other
net gains of £6m in 2019 relate to the sale of the K12 school
courseware business in the US. Other net gains of £230m in
2018, most of which occurred in the first half, relate to the sale
of the Wall Street English language teaching business (£207m)
and the disposal of our associate interest in UTEL, the online
University partnership in Mexico (£19m), together with other
small net gains totalling £4m.
The GMP
equalisation charge in 2018 arose from the ruling in the Lloyds
Bank High Court case in October 2018 that provided clarity on how
pension plans should equalise GMP between males and females. The
case ruling resulted in an income statement charge, an additional
liability and the potential requirement to make back payments to
pensioners who may have been retired for some years. The Group
excluded this charge from adjusted operating profit as it related
to historic circumstances.
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
|
|
|
|
|
|
|
2019
half year
|
Adjusted operating
profit
|
79
|
31
|
9
|
25
|
144
|
Cost of
major restructuring
|
(52)
|
(7)
|
(4)
|
(1)
|
(64)
|
Intangible
charges
|
(31)
|
(3)
|
(9)
|
(6)
|
(49)
|
Other
net gains and losses
|
6
|
-
|
-
|
-
|
6
|
UK
pension GMP equalisation
|
-
|
-
|
-
|
-
|
-
|
Operating
profit
|
2
|
21
|
(4)
|
18
|
37
|
|
|
|
|
|
|
2018
half year
|
Adjusted operating
profit
|
64
|
10
|
11
|
22
|
107
|
Cost of
major restructuring
|
(18)
|
(4)
|
(2)
|
-
|
(24)
|
Intangible
charges
|
(35)
|
(4)
|
(11)
|
(7)
|
(57)
|
Other
net gains and losses
|
4
|
-
|
203
|
-
|
207
|
UK
pension GMP equalisation
|
-
|
-
|
-
|
-
|
-
|
Operating
profit
|
15
|
2
|
201
|
15
|
233
|
|
|
|
|
|
|
2018
full year
|
Adjusted operating
profit
|
362
|
57
|
59
|
68
|
546
|
Cost of
major restructuring
|
(78)
|
(16)
|
-
|
(8)
|
(102)
|
Intangible
charges
|
(72)
|
(8)
|
(19)
|
(14)
|
(113)
|
Other
net gains and losses
|
4
|
-
|
226
|
-
|
230
|
UK
pension GMP equalisation
|
-
|
(8)
|
-
|
-
|
(8)
|
Operating
profit
|
216
|
25
|
266
|
46
|
553
|
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 period ended 30 June 2019
3. Net finance costs
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Net
interest payable
|
|
(18)
|
(26)
|
(24)
|
Net
finance income in respect of retirement benefits
|
|
7
|
5
|
11
|
Finance
costs associated with transactions
|
|
-
|
(1)
|
(1)
|
Net
foreign exchange losses
|
|
(3)
|
(13)
|
(36)
|
Derivatives in a
hedge relationship
|
|
-
|
-
|
(4)
|
Derivatives not in
a hedge relationship
|
|
(10)
|
4
|
(1)
|
Net
finance costs
|
|
(24)
|
(31)
|
(55)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Finance
costs
|
|
(46)
|
(63)
|
(91)
|
Finance
income
|
|
22
|
32
|
36
|
Net
finance costs
|
|
(24)
|
(31)
|
(55)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Net
interest payable reflected in adjusted earnings
|
|
(18)
|
(26)
|
(24)
|
Other
net finance costs
|
|
(6)
|
(5)
|
(31)
|
Net
finance costs
|
|
(24)
|
(31)
|
(55)
|
Net
interest payable is the finance cost measure used in calculating
adjusted earnings.
Net
finance costs classified as other net finance costs are excluded in
the calculation of the Group’s adjusted
earnings.
Net
finance income relating to retirement benefits is excluded as it is
considered that the presentation does not reflect the economic
substance of the underlying assets and liabilities. The Group
excludes finance costs relating to acquisition and disposal
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 2019 and 2018, 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 period ended 30 June 2019
4.
Profit before tax
|
|
|
|
|
all figures in £ millions
|
note
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Profit
before tax
|
|
13
|
202
|
498
|
Cost of
major restructuring
|
2
|
64
|
24
|
102
|
Other
net gains and losses
|
2
|
(6)
|
(207)
|
(230)
|
Intangible
charges
|
2
|
49
|
57
|
113
|
Other
net finance costs
|
3
|
6
|
5
|
31
|
UK
pension GMP equalisation
|
2
|
-
|
-
|
8
|
Adjusted
profit before tax
|
|
126
|
81
|
522
|
5.
Income tax
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Income
tax benefit / (charge)
|
|
35
|
(13)
|
92
|
Tax
benefit on cost of major restructuring
|
|
(13)
|
(6)
|
(37)
|
Tax
(benefit) / charge on other net gains and losses
|
|
(37)
|
15
|
(31)
|
Tax
benefit on intangible charges
|
|
(12)
|
(14)
|
(18)
|
Tax
benefit on other net finance costs
|
|
(1)
|
(1)
|
(6)
|
Tax
benefit on UK pension GMP equalisation
|
|
-
|
-
|
(2)
|
Tax
amortisation benefit on goodwill and intangibles
|
|
5
|
3
|
29
|
Adjusted
income tax (charge) / benefit
|
|
(23)
|
(16)
|
27
|
|
|
|
|
|
Tax
rate reflected in statutory earnings
|
|
(269.2)%
|
6.4%
|
(18.5)%
|
Tax
rate reflected in adjusted earnings
|
|
18.0%
|
20.0%
|
(5.2)%
|
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).
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 period ended 30 June 2019
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
period, 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
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Earnings for the
period
|
|
48
|
189
|
590
|
Non-controlling
interest
|
|
(1)
|
(1)
|
(2)
|
Earnings
attributable to equity shareholders
|
|
47
|
188
|
588
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares (millions)
|
|
775.6
|
779.0
|
778.1
|
Effect
of dilutive share options (millions)
|
|
0.5
|
0.6
|
0.6
|
Weighted average
number of shares (millions) for diluted earnings
|
776.1
|
779.6
|
778.7
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
Basic
|
|
6.1p
|
24.1p
|
75.6p
|
Diluted
|
|
6.1p
|
24.1p
|
75.5p
|
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 over time by separating out those items of income and
expenditure relating to acquisition and disposal transactions,
major restructuring programmes and certain other items that are
also not representative of underlying performance (see notes 2, 3,
4 and 5 for further information and reconciliation to equivalent
statutory measures).
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 notes 2, 3, 4 and 5.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
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 GMP equalisation
|
Tax
amortisation benefit
|
Adjusted
income statement
|
|
|
|
|
|
|
|
|
|
|
2019 half year
|
Operating
profit
|
2
|
37
|
64
|
(6)
|
49
|
-
|
-
|
-
|
144
|
Net
finance costs
|
3
|
(24)
|
-
|
-
|
-
|
6
|
-
|
-
|
(18)
|
Profit
before tax
|
4
|
13
|
64
|
(6)
|
49
|
6
|
-
|
-
|
126
|
Income
tax
|
5
|
35
|
(13)
|
(37)
|
(12)
|
(1)
|
-
|
5
|
(23)
|
Profit
for the period
|
|
48
|
51
|
(43)
|
37
|
5
|
-
|
5
|
103
|
Non-controlling
interest
|
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
Earnings
|
|
47
|
51
|
(43)
|
37
|
5
|
-
|
5
|
102
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
|
|
775.6
|
Weighted
average number of shares (millions) for diluted
earnings
|
|
|
|
776.1
|
|
|
|
|
|
Adjusted earnings per share (basic)
|
|
|
|
13.2p
|
Adjusted
earnings per share (diluted)
|
|
|
|
13.1p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
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 GMP equalisation
|
Tax
amortisation benefit
|
Adjusted
income statement
|
|
|
|
|
|
|
|
|
|
|
2018
half year
|
Operating
profit
|
2
|
233
|
24
|
(207)
|
57
|
-
|
-
|
-
|
107
|
Net
finance costs
|
3
|
(31)
|
-
|
-
|
-
|
5
|
-
|
-
|
(26)
|
Profit
before tax
|
4
|
202
|
24
|
(207)
|
57
|
5
|
-
|
-
|
81
|
Income
tax
|
5
|
(13)
|
(6)
|
15
|
(14)
|
(1)
|
-
|
3
|
(16)
|
Profit
for the period
|
|
189
|
18
|
(192)
|
43
|
4
|
-
|
3
|
65
|
Non-controlling
interest
|
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
Earnings
|
|
188
|
18
|
(192)
|
43
|
4
|
-
|
3
|
64
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
|
|
779.0
|
Weighted
average number of shares (millions) for diluted
earnings
|
|
|
|
779.6
|
|
|
|
|
|
Adjusted
earnings per share (basic)
|
|
|
|
8.2p
|
Adjusted
earnings per share (diluted)
|
|
|
|
8.2p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
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 GMP equalisation
|
Tax
amortisation benefit
|
Adjusted
income statement
|
|
|
|
|
|
|
|
|
|
|
2018
full year
|
Operating
profit
|
2
|
553
|
102
|
(230)
|
113
|
-
|
8
|
-
|
546
|
Net
finance costs
|
3
|
(55)
|
-
|
-
|
-
|
31
|
-
|
-
|
(24)
|
Profit
before tax
|
4
|
498
|
102
|
(230)
|
113
|
31
|
8
|
-
|
522
|
Income
tax
|
5
|
92
|
(37)
|
(31)
|
(18)
|
(6)
|
(2)
|
29
|
27
|
Profit
for the period
|
|
590
|
65
|
(261)
|
95
|
25
|
6
|
29
|
549
|
Non-controlling
interest
|
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Earnings
|
|
588
|
65
|
(261)
|
95
|
25
|
6
|
29
|
547
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
|
|
778.1
|
Weighted
average number of shares (millions) for diluted
earnings
|
|
|
|
778.7
|
|
|
|
|
|
Adjusted
earnings per share (basic)
|
|
|
|
70.3p
|
Adjusted
earnings per share (diluted)
|
|
|
|
70.2p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
8.
Dividends
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Amounts
recognised as distributions to equity shareholders in the
period
|
|
101
|
93
|
136
|
The
directors are proposing an interim dividend of 6.0p per equity
share, payable on 13 September 2019 to shareholders on the register
at the close of business on 16 August 2019. This interim dividend,
which will absorb an estimated £47m of shareholders’
funds, has not been included as a liability at 30 June
2019.
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:
|
|
|
|
|
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Average
rate for profits
|
|
1.29
|
1.38
|
1.34
|
Period
end rate
|
|
1.27
|
1.32
|
1.27
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
10.
Assets and liabilities classified as held for sale
Held for sale assets and liabilities in 2018
relate to the K12 school courseware business in the US (K12)
prior to their disposal in 2019.
The
held for sale balances are analysed as follows:
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Intangible
assets
|
|
-
|
72
|
168
|
Deferred income tax
assets
|
|
-
|
86
|
98
|
Trade
and other receivables
|
|
-
|
33
|
25
|
Non-current
assets
|
|
-
|
191
|
291
|
|
|
|
|
|
Intangible assets
– pre-publication
|
|
-
|
239
|
242
|
Inventories
|
|
-
|
58
|
55
|
Trade
and other receivables
|
|
-
|
119
|
60
|
Current
assets
|
|
-
|
416
|
357
|
|
|
|
|
|
Total
assets
|
|
-
|
607
|
648
|
|
|
|
|
|
Other
liabilities
|
|
-
|
(335)
|
(371)
|
Non-current
liabilities
|
|
-
|
(335)
|
(371)
|
|
|
|
|
|
Trade
and other liabilities
|
|
-
|
(183)
|
(202)
|
Current
liabilities
|
|
-
|
(183)
|
(202)
|
|
|
|
|
|
Total
liabilities
|
|
-
|
(518)
|
(573)
|
|
|
|
|
|
Net
assets
|
|
-
|
89
|
75
|
Goodwill
is allocated to the held for sale businesses on a relative fair
value basis where these businesses form part of a larger cash
generating unit (CGU). The goodwill allocated to the K12 business
was reassessed at 31 December 2018 and at the date of
disposal.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
11.
Non-current intangible assets
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Goodwill
|
|
2,189
|
2,156
|
2,111
|
Other
intangibles
|
|
873
|
911
|
898
|
Non-current
intangible assets
|
|
3,062
|
3,067
|
3,009
|
There
were no impairments to goodwill or other intangibles in either 2019
or 2018.
12.
Trade and other liabilities
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Trade
payables
|
|
(234)
|
(205)
|
(311)
|
Sales
return liability
|
|
(90)
|
(122)
|
(173)
|
Accruals
|
|
(356)
|
(375)
|
(397)
|
Deferred
income
|
|
(398)
|
(304)
|
(387)
|
Other
liabilities
|
|
(265)
|
(284)
|
(287)
|
Trade
and other liabilities
|
|
(1,343)
|
(1,290)
|
(1,555)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Trade
and other liabilities – current
|
|
(1,209)
|
(1,173)
|
(1,400)
|
Other
liabilities – non-current
|
|
(134)
|
(117)
|
(155)
|
Total
trade and other liabilities
|
|
(1,343)
|
(1,290)
|
(1,555)
|
The
deferred income balance comprises contract liabilities in respect
of advance payments in assessment, testing and training businesses;
subscription income in school and college businesses; and
obligations to deliver digital content in future
periods.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
13.
Business combinations
There
were no significant acquisitions in the period and there were no
material adjustments to prior year acquisitions. The net cash
outflow on acquisition of subsidiaries of £5m relates to
deferred payments on prior year acquisitions. In the first half of
2019, the Group’s associate, Penguin Random House raised
additional capital from its owners in proportion to their equity
interests with the Group’s share being
£40m.
14.
Disposals
In
March 2019, the Group completed the sale of its K12 business
resulting in a pre-tax profit on sale of £6m. Total gross
proceeds were £192m including £172m of deferred proceeds
which include the fair value of an unconditional vendor note for
$225m and an entitlement to 20% of future cash flows to equity
holders and 20% of net proceeds in the event of a subsequent sale
(see also note 16 for further details). Tax on the disposal is
estimated to be a benefit of £37m. An analysis of the disposal
is shown below.
|
|
|
|
|
|
all figures in £ millions
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
(101)
|
Intangible assets
– pre-publication
|
|
|
|
|
(238)
|
Inventories
|
|
|
|
|
(64)
|
Trade and other
receivables
|
|
|
|
|
(71)
|
Cash and cash
equivalents (excluding overdrafts)
|
|
|
|
|
(105)
|
Net deferred income
tax liabilities
|
|
|
|
|
(100)
|
Trade and
other liabilities
|
|
|
|
|
521
|
Cumulative
translation adjustment
|
|
|
|
|
(4)
|
Net
assets disposed
|
|
|
|
|
(162)
|
|
|
|
|
|
|
Cash
proceeds
|
|
|
|
|
20
|
Deferred
proceeds
|
|
|
|
|
172
|
Costs of
disposal
|
|
|
|
|
(24)
|
Gain
on disposal
|
|
|
|
|
6
|
|
|
|
|
|
|
Cash
flow from disposals
|
|
|
|
|
|
Proceeds –
current year disposals
|
|
|
|
|
20
|
Cash and cash
equivalents disposed
|
|
|
|
|
(105)
|
Costs and other
disposal liabilities paid
|
|
|
|
|
(15)
|
Net
cash outflow from disposals
|
|
|
|
|
(100)
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
15.
Net debt
|
|
|
|
|
all figures in £ millions
|
note
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
Derivative
financial instruments
|
|
59
|
72
|
67
|
Trade
and other receivables – investment in finance
lease
|
|
184
|
-
|
-
|
Current
assets
|
|
|
|
|
Derivative
financial instruments
|
|
2
|
-
|
1
|
Trade
and other receivables – investment in finance
lease
|
|
30
|
-
|
-
|
Cash
and cash equivalents (excluding overdrafts)
|
|
417
|
330
|
568
|
Non-current
liabilities
|
|
|
|
|
Borrowings
|
|
(1,869)
|
(1,069)
|
(674)
|
Derivative
financial instruments
|
|
(46)
|
(58)
|
(36)
|
Current
liabilities
|
|
|
|
|
Borrowings
|
|
(141)
|
(33)
|
(46)
|
Derivative
financial instruments
|
|
(12)
|
(17)
|
(23)
|
Net
debt
|
|
(1,376)
|
(775)
|
(143)
|
Included within
borrowings at 30 June 2019 is £862m (non-current £736m,
current £126m) relating to lease liabilities that were brought
on balance sheet at 1 January 2019 following the transition to IFRS
16. Also, under IFRS 16, the Group has recognised investments in
finance leases in relation to some of its sub-let properties as
separately disclosed above (see also note 1b). After excluding
lease liabilities (including those previously recognised as finance
leases) and the investment in finance leases, the Group’s net
debt was £726m.
In
March 2019, the Group executed market tenders to repurchase
€55m of its €500m 1.875% notes due 2021 of which
€250m were outstanding at 31 December 2018. In addition, the
Group also announced the refinancing of its bank facility, reducing
its size to $1.19bn and extending its maturity date to February
2024.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
16.
Classification of assets and liabilities measured at fair
value
|
Level
2
|
---Level
3---
|
Total
fair value
|
all figures in £ millions
|
Derivatives
|
FVOCI
investments
|
FVTPL -
Other
receivables
|
2019
half year
|
|
|
|
|
|
Investments in
unlisted securities
|
-
|
118
|
-
|
118
|
Other
receivables
|
-
|
-
|
181
|
181
|
Derivative
financial instruments
|
61
|
-
|
-
|
61
|
Total
financial assets held at fair value
|
61
|
118
|
181
|
360
|
|
|
|
|
|
Derivative
financial instruments
|
(58)
|
-
|
-
|
(58)
|
Total
financial liabilities held at fair value
|
(58)
|
-
|
-
|
(58)
|
|
|
|
|
|
2018
half year
|
|
|
|
|
|
Investments in
unlisted securities
|
-
|
86
|
-
|
86
|
Other
receivables
|
-
|
-
|
-
|
-
|
Derivative
financial instruments
|
72
|
-
|
-
|
72
|
Total
financial assets held at fair value
|
72
|
86
|
-
|
158
|
|
|
|
|
|
Derivative
financial instruments
|
(75)
|
-
|
-
|
(75)
|
Total
financial liabilities held at fair value
|
(75)
|
-
|
-
|
(75)
|
|
|
|
|
|
2018
full year
|
|
|
|
|
|
Investments in
unlisted securities
|
-
|
93
|
-
|
93
|
Other
receivables
|
-
|
-
|
-
|
-
|
Derivative
financial instruments
|
68
|
-
|
-
|
68
|
Total
financial assets held at fair value
|
68
|
93
|
-
|
161
|
|
|
|
|
|
Derivative
financial instruments
|
(59)
|
-
|
-
|
(59)
|
Total
financial liabilities held at fair value
|
(59)
|
-
|
-
|
(59)
|
|
|
|
|
|
FVTPL -
Other receivables relate to amounts due following the sale of the
K12 business comprising an unconditional vendor note for $225m
(repayable after 7 years or earlier based on the performance of the
K12 business) and an entitlement to 20% of future cash flows to
equity holders and 20% of net proceeds in the event of a subsequent
sale within the next 15 years.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
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 FVOCI investments
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.
The
fair value of FVTPL - Other receivables is determined using present
value techniques whereby the expected value of future cash flows is
discounted using a rate which is representative of the
creditworthiness of the K12 business. The key inputs used in the
present value calculations are forecast sales, discount rate and
the expected date of a subsequent sale of the K12 business. If the
forecast sales used in the calculations were increased / decreased
by 5%, the value of the receivable would increase / decrease by
£23m. If the discount rate used in the calculations was
increased / decreased by 1%, the value of the receivable would
decrease / increase by £5m. The calculations are not
materially sensitive to reasonable changes in the expected date of
a subsequent sale of the K12 business.
There
have been no transfers in classification during the
year.
The
market value of the Group’s bonds is £627m (2018 half
year: £656m, 2018 full year: £661m) compared to their
carrying value of £623m (2018 half year: £655m, 2018 full
year: £672m). 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 for investments in
unlisted securities are shown in the table below:
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Investments
in unlisted securities
|
|
|
|
|
At
beginning of year
|
|
93
|
77
|
77
|
Exchange
differences - OCI
|
|
-
|
2
|
3
|
Additions
|
|
7
|
5
|
13
|
Fair
value movements - OCI
|
|
18
|
2
|
8
|
Disposals
|
|
-
|
-
|
(8)
|
At
end of period
|
|
118
|
86
|
93
|
Since
inception, the only movements in FVTPL – Other receivables
relate to foreign exchange movements which arise on
consolidation.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
17. Cash flows
|
|
|
|
|
all figures in £ millions
|
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Reconciliation
of profit for the period to net cash used in / generated from
operations
|
|
|
|
|
|
|
|
|
Profit
for the period
|
|
48
|
189
|
590
|
Income
tax
|
|
(35)
|
13
|
(92)
|
Depreciation,
amortisation and impairment charges
|
|
158
|
123
|
253
|
Net
profit on disposal of businesses
|
|
(6)
|
(207)
|
(230)
|
Charges
relating to GMP equalisation
|
|
-
|
-
|
8
|
Net
loss / (profit) on disposal of fixed assets
|
|
2
|
6
|
(85)
|
Disposal of right
of use assets held under leases
|
|
(12)
|
-
|
-
|
Net
finance costs
|
|
24
|
31
|
55
|
Share
of results of joint ventures and associates
|
|
(18)
|
(15)
|
(44)
|
Net
foreign exchange adjustment
|
|
4
|
8
|
28
|
Share-based payment
costs
|
|
14
|
19
|
37
|
Pre-publication
|
|
(24)
|
(13)
|
(37)
|
Inventories
|
|
(58)
|
(19)
|
(10)
|
Trade
and other receivables
|
|
1
|
(16)
|
(15)
|
Trade
and other liabilities
|
|
(227)
|
(241)
|
35
|
Retirement benefit
obligations
|
|
2
|
(4)
|
(9)
|
Provisions for
other liabilities and charges
|
|
10
|
(5)
|
63
|
Net
cash (used in) / generated from operations
|
|
(117)
|
(131)
|
547
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
17. Cash flows
continued
|
|
|
|
|
all figures in £ millions
|
note
|
2019
|
2018
|
2018
|
|
|
half
year
|
half
year
|
full
year
|
|
|
|
|
|
Reconciliation
of net cash used in / generated from operations to closing net
debt
|
|
|
|
|
|
|
|
|
Net
cash (used in) / generated from operations
|
|
(117)
|
(131)
|
547
|
Dividends from
joint ventures and associates
|
|
15
|
66
|
117
|
Less:
re-capitalisation dividends from PRH
|
|
-
|
(51)
|
(50)
|
Purchase of
PPE
|
|
(38)
|
(33)
|
(74)
|
Acquisition of new
right-of-use lease assets
|
|
(6)
|
-
|
-
|
Proceeds from sale
of PPE
|
|
-
|
-
|
128
|
Disposal of
right-of-use lease assets
|
|
14
|
-
|
-
|
Purchase of
intangible assets
|
|
(57)
|
(80)
|
(130)
|
Add
back: net costs paid for / (proceeds from) major
restructuring
|
|
60
|
27
|
(25)
|
Operating
cash flow
|
|
(129)
|
(202)
|
513
|
Operating tax
paid
|
|
(8)
|
(8)
|
(43)
|
Net
operating finance costs paid
|
|
(31)
|
(18)
|
(22)
|
Operating
free cash flow
|
|
(168)
|
(228)
|
448
|
Net
(cost paid for) / proceeds from major restructuring
|
|
(60)
|
(27)
|
25
|
Free
cash flow
|
|
(228)
|
(255)
|
473
|
Dividends paid
(including to non-controlling interest)
|
|
(101)
|
(93)
|
(137)
|
Net
movement of funds from operations
|
|
(329)
|
(348)
|
336
|
Acquisitions and
disposals
|
|
(150)
|
94
|
92
|
Re-capitalisation
dividends from PRH
|
|
-
|
51
|
50
|
Loans
(advanced) / repaid
|
|
(10)
|
46
|
46
|
New
equity
|
|
3
|
3
|
6
|
Buyback
of equity
|
|
-
|
(153)
|
(153)
|
Purchase of
treasury shares
|
|
(40)
|
-
|
-
|
Other
movements on financial instruments
|
|
(10)
|
1
|
(6)
|
Net
movement of funds
|
|
(536)
|
(306)
|
371
|
Exchange movements
on net debt
|
|
(9)
|
(37)
|
(82)
|
Movement
in net debt
|
|
(545)
|
(343)
|
289
|
Opening
net debt
|
|
(143)
|
(432)
|
(432)
|
Adjustment on
initial application of IFRS 16
|
|
(688)
|
-
|
-
|
Closing
net debt
|
15
|
(1,376)
|
(775)
|
(143)
|
Operating cash flow
and free cash flow are non-GAAP measures and have been disclosed as
they are part of the Group’s corporate and operating
measures. These measures are presented in order to align the cash
flows with corresponding adjusted profit measures.
Following
transition to IFRS 16, the Group has included the new lease
liabilities and investment in finance lease as part of its net
debt. As a result, the Group’s operating cash flow (and free
cash flow) now includes the acquisition and modification of new
right-of-use lease assets and the disposal of right-of-use lease
assets as these transactions result in a movement in overall net
debt (see also note 1b).
Re-capitalisation
dividends from PRH in 2018 were part of the transaction that
included the sale of 22% of our equity interest in the venture in
2017.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2019
18. 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 unsettled or disputed tax liabilities, 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 25
April 2019, the European Commission published the full decision
that the United Kingdom controlled foreign company group financing
partial exemption (“FCPE”) partially constitutes State
Aid. The Group has lodged an appeal. The Group has benefited
from the FCPE in 2018 and prior years by approximately £116m.
At present, the Group believes no provision is required in respect
of this issue.
In the
first half of 2019 the Group received an assessment from the
Brazilian tax authorities challenging the deduction for tax
purposes of goodwill amortisation for the years 2013 to 2015.
Similar assessments may be raised for other years.
Potential total exposure could be up to £122
million up to 30 June 2019. Such
assessments are common in Brazil. The Group believes that the
likelihood that the tax authorities will ultimately prevail is low,
and that our position is strong. At present the Group believes
no provision is required.
19. Related parties
At 30
June 2019, the Group had loans to Penguin Random House (PRH) of
£10m (2018 half year: £nil, 2018 full year: £nil)
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 30
June 2019, the Group also had a current asset receivable from PRH
of £9m (2018 half year: £13m, 2018 full year: £17m)
mainly arising from PRH’s management of accounts receivable
balances on Pearson’s behalf. Service fee income from PRH was
£1m in the first half of 2019 (2018 half year: £1m, 2018
full year: £3m).
During
the period, the Group received dividends of £15m (2018 half
year: £66m, 2018 full year: £117m) from PRH. In 2018,
dividends from PRH included amounts relating to the
re-capitalisation of the venture following the Group’s
disposal of part of its share in 2017.
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 period.
20. Events after the balance sheet date
There
were no significant post balance sheet events.
STATEMENT
OF DIRECTORS’ RESPONSIBILITIES
The
directors confirm that these condensed consolidated financial
statements have been prepared in accordance with International
Accounting Standard 34, ‘Interim Financial Reporting’,
as adopted by the European Union and that the interim management
report includes a fair review of the information required by DTR
4.2.7 and DTR 4.2.8 namely:
●
An indication of
important events that have occurred during the first six months and
their impact on the condensed consolidated financial statements,
and a description of the principal risks and uncertainties for the
remaining six months of the financial year; and
●
Material related
party transactions in the first six months and any material changes
in related party transactions described in the 2018 Annual
Report.
The
directors of Pearson plc are listed in the 2018 Annual Report.
There have been the following changes to the Board since the
publication of the Annual Report.
Sherry
Coutu – appointed 1 May 2019
Graeme
Pitkethly – appointed 1 May 2019
A list
of current directors is maintained on the Pearson plc website:
www.pearson.com.
By
order of the Board
John
Fallon
Chief
Executive
25 July
2019
Coram
Williams
Chief
Financial Officer
25 July
2019
INDEPENDENT
REVIEW REPORT TO PEARSON PLC
Report on the condensed consolidated financial
statements
Our conclusion
We have
reviewed Pearson plc’s condensed consolidated financial
statements (the ‘interim financial statements’) in the
Interim Financial Report of Pearson plc for the six month period
ended 30 June 2019. Based on our review, nothing has come to our
attention that causes us to believe that the interim financial
statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34 ‘Interim
Financial Reporting’ as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority.
What we have reviewed
The
interim financial statements comprise:
●
the condensed
consolidated balance sheet at 30 June 2019;
●
the condensed
consolidated income statement and condensed consolidated statement
of comprehensive income for the period then ended;
●
the condensed
consolidated cash flow statement for the period then
ended;
●
the condensed
consolidated statement of changes in equity for the period then
ended; and
●
the explanatory
notes to the condensed consolidated financial
statements.
The
interim financial statements included in the Interim Financial
Report have been prepared in accordance with International
Accounting Standard 34 ‘Interim Financial Reporting’ as
adopted by the European Union and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom’s
Financial Conduct Authority.
As
disclosed in note 1a to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The
Interim Financial Report, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Interim
Financial Report in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom’s
Financial Conduct Authority.
Our
responsibility is to express a conclusion on the interim financial
statements in the Interim Financial Report based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
INDEPENDENT REVIEW REPORT TO PEARSON PLC
continued
What a review of condensed consolidated financial statements
involves
We
conducted our review in accordance with International Standard on
Review Engagements (UK and Ireland) 2410 ‘Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity’ issued by the Auditing Practices Board for use in the
United Kingdom. A review of interim financial information consists
of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures.
A
review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit
opinion.
We have
read the other information contained in the Interim Financial
Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers
LLP
Chartered
Accountants
London
25 July
2019