TIDMPSON
RNS Number : 7203F
Pearson PLC
23 February 2018
Pearson 2017 Preliminary Results (Unaudited)
23 February 2018 Pearson, the world's learning company, announces
its preliminary full year results for 2017.
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Highlights Operating performance on track
* 2017 adjusted operating profit of GBP576m is at the
top end of our upwardly-revised October 2017 guidance
range, adjusting for currency movements.
* Adjusted earnings per share of 54.1p is above the
October 2017 guidance range of 49.0p-52.0p reflecting
strong profitability, a lower than expected tax rate
of 11.1% and after a net interest charge of GBP79m.
* Total underlying revenues declined 2%, in line with
the performance in the nine-months, due to a decline
of 4% in North America partly offset by stabilisation
in Core and Growth.
* Statutory operating profit for the year was GBP451m
(2016: a loss of GBP2,497m).
* Strong cash flow with cash conversion at 116%.
* Robust financial position with net debt of GBP0.4bn
(2016: GBP1.1bn) benefiting from strong cash flow and
the proceeds of disposals in 2017. Reduced leverage
at 0.6x net debt to EBITDA (2016:1.4x).
* Returned GBP153m of capital (repurchasing 22m shares)
to 31 December 2017 via the GBP300m share buyback
announced on 17 October 2017. The buyback was
completed on 16 February 2018 repurchasing a total of
42.8m shares at an average price of 700p.
* The Board proposes a final dividend of 12p (2016:
34p), which equates to a full year dividend of 17p
(2016: 52p).
* As a result of our strategic review announced in May
2017 we are now classifying US K12 courseware as
held-for-sale.
* In March, Pearson will publish the first of our fully
audited efficacy reports into a series of key
products.
========================== ==========================================================================
John Fallon, Chief Executive said:
"Pearson has made good progress against its strategic priorities
in 2017 with further simplification of the portfolio, strengthening
of our balance sheet and delivering results at the top end of guidance.
We are confident we will make further progress against our strategic
priorities and grow underlying profit in 2018."
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Financial Summary
========================== ==========================================================================
Headline CER Underlying
GBPm 2017 2016 growth growth growth
Business performance
Sales 4,513 4,552 (1)% (4)% (2)%
Adjusted operating
profit 576 635 (9)% (13)% (9)%
Operating cash flow 669 663 1%
Adjusted earnings
per share 54.1p 58.8p (8)%
Dividend per share 17p 52p (67)%
Net debt (432) (1,092) 60%
Statutory results
Sales 4,513 4,552 (1)% (4)% (2)%
Operating profit/(loss) 451 (2,497) n/a
Profit/(loss) for
the year 408 (2,335) n/a
Cash generated from
operations 462 522 (11)%
Basic earnings / loss
per share 49.9p (286.8)p n/a
Throughout this announcement: a) Growth rates are stated on an
underlying basis unless otherwise stated. Underlying growth rates
exclude both currency movements and portfolio changes. b) The
'business performance' measures are non-GAAP measures and
reconciliations to the equivalent statutory heading under IFRS are
included in notes to the attached condensed consolidated financial
statements 2, 3, 4, 5, 7, and 17.
Progress on our strategic priorities During 2017 we made good progress
on our strategic priorities of digital transformation, investing
in structural growth and simplification as we become a leaner and
more agile business.
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Grow market share
through digital * We have historically provided a measure of digital
transformation and services revenue for Pearson. On that basis,
digital and services revenues grew to 69% of sales in
2017, up from 68% in 2016, with c.10% of our revenues
derived from non-digital services.
* We are today giving further transparency on our
digital transformation with an additional view
showing our revenues split between three categories:
digital (32%), digitally enabled (27%) and
non-digital (41%). US higher education digital
courseware revenue grew by 9% to become the majority
of our revenues in this segment, although in 2017
this growth was more than offset by the anticipated
continuation of underlying market pressures on our
print courseware revenue.
* US higher education digital courseware revenue grew
by 9% to become the majority of our revenues in this
segment, although in 2017 this growth was more than
offset by the anticipated continuation of underlying
market pressures on our print courseware revenue.
* We continue to focus on Inclusive Access (Direct
Digital Access) solutions, signing 210 new
institutions in 2017 taking the total to over 500
institutions. During the year, we delivered over 1m
course enrolments in this way rising to c.5% of our
higher education courseware revenue.
* We've reduced the rental price of 2,000 eBook titles
and have seen revenues rise by 22% during the year.
Furthermore, we saw early success with our print
rental pilot which started in Fall 2017, and we
expect to expand the number of titles to around 130
in Spring 2018.
* We have continued to invest in the Global Learning
Platform (GLP) and our innovative product and feature
pipeline. Over the next 12 months we will launch
pilot versions of new Developmental Math courseware
and an enhanced Revel platform based on the GLP.
* US student assessment saw growth of 7% in the volume
of digital tests.
* BTEC registrations in Core student assessment and
qualifications stabilised in 2017 following a period
of policy change.
========================== ================================================================
Invest in
structural growth * Online Program Management (OPM), virtual schools
markets (Connections Education), Professional Certification
(VUE) and English are our biggest growth
+8% OPM course enrolments opportunities. These are structurally growing markets,
which drive recurring revenue streams, which
+6% Connections FTE accounted for around 33% of our 2017 revenues
enrolments excluding Wall Street English (WSE), GEDU and US K12
courseware.
+1% VUE test volumes
+67% PTE test volumes * OPM and Connections Education both delivered good
enrolment growth partially offset by contract exits
and in-sourcing, but ended the year with strong
pipelines that set them up for growth in 2018 and
beyond.
* VUE signed over 50 new contracts in 2017 including a
ten-year contract with the Association of American
Medical Colleges (AAMC) to administer the Medical
College Admission Test (MCAT).
* English - Pearson Test of English (PTE) grew global
volumes by 67%. English courseware declined slightly
as gains in Growth were offset by declines in Core
and North America ahead of new product introductions.
Revenues in our English school franchise business in
Brazil declined as a result of macroeconomic
pressure.
========================== ================================================================
Become simpler and Simplification
more efficient * We completed the sales of Global Education (GEDU) and
a 22% stake in Penguin Random House and announced
that we had signed an agreement to sell WSE.
* We are today announcing that our US K12 courseware
business is held for sale and we are in discussions
with potential buyers regarding a disposal of the
business.
GBP300m Restructuring
Cost efficiency opportunity * The efficiency programme that we presented in August
2017 is on track to deliver GBP300m of annualised
cost savings by 2020(2) .
* We are making faster progress than expected in some
areas and this is reflected in the phasing of costs
and benefits. Restructuring costs in 2017 were around
GBP80m, slightly higher than our guided GBP70m and we
now expect restructuring costs of GBP90m in 2018 and
GBP130m in 2019 with further incremental savings,
building on the GBP15m delivered in 2017, of GBP80m
in 2018, GBP105m in 2019 and GBP100m impacting 2020.
* Many of the savings will come from the simplification
of our technology architecture which allows the
increased use of shared service centres enabling us
to standardise processes and reduce headcount. That,
in turn, facilitates opportunities such as the
greater centralisation of procurement and the
reduction in the number of our office locations.
2018 Outlook In 2018, we expect to report adjusted operating
profit of between GBP520m and GBP560m and adjusted
earnings per share of 49p to 53p (including businesses
held for sale.) The base for 2018 adjusted operating
profit guidance is 2017 adjusted operating profit
of GBP510m, being GBP576m less the full year
impacts of disposals made in 2017 (GBP44m) and
less favourable exchange rates at 31 December
2017 (GBP22m).
Board change Pearson announces that Harish Manwani, a non-executive
director of Pearson since 2013, is retiring from
the board at the Annual General Meeting in May,
and will not be seeking re-election, in anticipation
of his future commitments.
Pearson's chairman Sidney Taurel said:
"The board joins me in thanking Harish for his
commitment and invaluable contribution to Pearson.
He has brought considerable experience, particularly
in the terms of change management and organisation
structure, emerging markets and consumer products
and has helped us to focus our strategic thinking.
We wish Harish all the best in his future endeavours."
Contacts
Jo Russell, Tom Waldron,
Investor Relations Anjali Kotak +44 (0) 207 010 2310
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Media Tom Steiner +44 (0) 207 010 2310
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Webcast details Analyst and investor webcast details:
Pearson's results presentation for investors
and analysts will be audiocast live today from
0900 (GMT) via www.pearson.com.
Forward looking statements: Except for the historical
information contained herein, the matters discussed in this
statement include forward-looking statements. In particular, all
statements that express forecasts, expectations and projections
with respect to future matters, including trends in results of
operations, margins, growth rates, overall market trends, the
impact of interest or exchange rates, the availability of
financing, anticipated cost savings and synergies and the execution
of Pearson's strategy, are forward-looking statements. By their
nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that will
occur in future. They are based on numerous assumptions regarding
Pearson's present and future business strategies and the
environment in which it will operate in the future. There are a
number of factors which could cause actual results and developments
to differ materially from those expressed or implied by these
forward-looking statements, including a number of factors outside
Pearson's control. These include international, national and local
conditions, as well as competition. They also include other risks
detailed from time to time in Pearson's publicly-filed documents
and you are advised to read, in particular, the risk factors set
out in Pearson's latest annual report and accounts, which can be
found on its website (www.pearson.com/corporate/investors.html).
Any forward-looking statements speak only as of the date they are
made, and Pearson gives no undertaking to update forward-looking
statements to reflect any changes in its expectations with regard
thereto or any changes to events, conditions or circumstances on
which any such statement is based. Readers are cautioned not to
place undue reliance on such forward-looking statements.
Financial Overview Profit & loss statement. In 2017, Pearson's sales
decreased by GBP39m in headline terms to GBP4,513m.
Adjusted operating profit fell GBP59m to GBP576m
(2016: GBP635m).
Currency movements, primarily from the depreciation
of Sterling against the US Dollar and other currencies
during the period, increased sales by GBP126m
and operating profits by GBP23m.
The effect of disposals reduced sales by GBP54m
and continuing adjusted operating profits by
GBP24m.
Stripping out the impact of portfolio changes
and currency movements, revenues were down 2%
in underlying terms while adjusted operating
profit fell GBP58m or 9%.
Trading contributed GBP58m to this decline in
adjusted operating profit, other operating factors
including increased amortisation expense and
staff incentive contributed GBP95m to the decline
and cost inflation, an estimated GBP55m. This
was partly offset by a GBP150m year on year benefit
from restructuring savings.
Net interest payable in 2017 was GBP79m, compared
to GBP59m in 2016. The increase was primarily
due to additional charges relating to the early
redemption of various bonds during the year and
higher US interest rates.
Our adjusted tax rate in 2017 was 11.1% (2016:
16.5%). The decrease in tax rate was primarily
due to uncertain tax position provision releases
following the expiry of the relevant statutes
of limitation.
Adjusted earnings per share were 54.1p (2016:
58.8p).
Cash generation. Operating cash flow rose by
1% in headline terms, despite a decrease adjusted
in operating profit, driven by a strong cash
conversion of 116% driven by tight working capital
control, strong collections and high PRH cash
dividends.
Return on invested capital. On a gross(3) basis
ROIC decreased from 5.0% in 2016 to 4.3% in 2017
and from 7.2% in 2016 to 6.2% in 2017 on a net(4)
basis. The movement largely reflects lower profit
in the year and increased tax payments.
Statutory results. Our statutory profit from
continuing operations of GBP451m in 2017 compares
to a loss of GBP2,497m in 2016. The loss in 2016
is mainly attributable to an impairment charge
to North American goodwill and the higher level
of restructuring spend.
Capital allocation. Our capital allocation policy
remains unchanged: to maintain a strong balance
sheet and a solid investment grade rating, to
continue to invest in the business, to have a
sustainable and progressive dividend policy,
and to return surplus cash to our shareholders.
Balance sheet. Net debt to EBITDA was 0.6x (or
2.1x on a simplified credit agency view adjusting
for leases and other items). Net debt decreased
to GBP432m (2016: GBP1,092m) reflecting disposal
proceeds, operating cash flow and a benefit from
the weakening of the US Dollar relative to Sterling,
partially offset by restructuring costs, pension
contributions including amounts related to agreements
regarding the disposals of the FT and Penguin,
interest, tax, dividend payments and the share
buyback.
During 2017, we took steps to reduce our level
of gross debt and optimise our balance sheet,
successfully executing market tenders repurchasing
$383m of our $500m 3.75% US Dollar Notes due
2022 and $406m of our $500m 3.25% US Dollar Notes
due 2023. In addition, we redeemed the $300m
4.625% Senior Notes due June 2018 and the $550m
6.25% Notes due May 2018.
During January 2018, we also successfully repurchased
a total of $569m of debt at an average interest
rate of around 2.5% by tendering for EUR250m
of our Euro 1.875% Notes due May 2021 and EUR200m
of our Euro 1.375% Notes due May 2025 and cancelling
the associated currency swaps.
Pension plan. The overall surplus on the UK Group
pension plan of GBP158m at the end of 2016 has
increased to a surplus of GBP545m at the end
of 2017. The increase has arisen due to increased
contributions including GBP227m as part of the
agreements relating to the PRH merger in 2013
and FT Group sale in 2015, together with the
impact of favourable movements in assumptions.
Our UK Pension Plan used its strong funding position
to purchase two insurance buy-in policies with
Legal & General and Aviva, covering approximately
GBP1.2bn (one third) of its total liabilities.
This put the Plan in an even stronger position
and substantially reduced Pearson's future pension
funding risk, at no further cost to the company.
Dividend. In line with our policy, the Board
is proposing a final dividend of 12p (2016: 34p)
which results in an overall dividend of 17p (2016:
52p) subject to shareholder approval.
Share buyback. We launched a GBP300m share buyback,
beginning on 18 October 2017 utilising part of
the proceeds from the disposal of a 22% stake
in Penguin Random House. We completed the programme
on 16 February 2018.
Businesses held for sale. Following the decision
to sell both WSE and the K12 school courseware
business in the US, the assets and liabilities
of those businesses have been classified as held
for sale on the balance sheet at 31 December
2017.
2018 Outlook 2017 has been a year of progress for Pearson,
delivering adjusted operating profit at the top
end of our guidance range and continuing to invest
in the digital transformation and simplification
of the company. We expect to make further progress
in 2018, with underlying profit growth, reporting
adjusted operating profit of between GBP520m
and GBP560m and adjusted earnings per share of
49p to 53p. This reflects our portfolio and exchange
rates as at 31 December 2017 and the following
factors:
Trading. We expect ongoing headwinds in our US
higher education courseware to be offset by improving
conditions in our other businesses.
Portfolio changes. We completed the sale of a
22% stake in Penguin Random House and our Chinese
English test-prep business GEDU in 2017. The
annualised impact of these disposals will reduce
2018 operating profit by GBP44m. We expect to
complete the disposal of WSE and our stake in
Mexican joint-venture Utel in the first-half
of 2018 and have today announced that we have
concluded the strategic review of our US K12
courseware business and have classified the business
as held for sale. WSE contributed GBP195m to
2017 sales and WSE and Utel contributed GBP5m
to 2017 adjusted operating profit and GBP5m to
statutory profit. US K12 courseware is expected
to contribute GBP385m to 2018 sales and around
GBP11m to 2018 operating profit.
Other operational factors, incentive and inflation.
Our 2018 guidance incorporates cost inflation
of c.GBP50m together with other operational factors
and incentives of GBP30m.
Restructuring benefits. We expect incremental
in-year benefits from the 2017-2019 restructuring
programme of GBP80m in 2018. Exceptional restructuring
costs of GBP90m will continue to be excluded
from adjusted operating profit.
Interest & Tax. We expect a 2018 net interest
charge of c.GBP45m and a tax rate of 20%.
Currency. In 2017, Pearson generated approximately
61% of its sales in the US, 7% in Greater China,
5% in the Euro zone, 3% in Brazil, 3% in Canada,
3% in Australia, 2% in South Africa and 1% in
India and our guidance is based on exchange rates
at 31 December 2017.
We calculate that a 5c move in the in the US
Dollar exchange rate to Sterling would impact
adjusted EPS by around 2p to 2.5p.
Notes:
(1.) Digital includes products such as digital courseware and eBooks
and digital services such as OPM and virtual schools. An example
of Digitally-enabled would be professional certification services
built around the administration of computer based tests, but in
physical centres that ensure the security of the test. Non-digital
includes our print products, and also non-digital services such
as CTI our university in South Africa.
(2) A significant part of these costs and savings are US Dollar
denominated and other non-Sterling currencies and are therefore
subject to exchange rate movements over the implementation timeframe.
(3) Gross ROIC is a non-GAAP measure and has been disclosed as it
is part of Pearson's key business performance measures. 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.
(4) Net ROIC. 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 that has
been impaired is treated in a similar fashion to goodwill disposed
as it is no longer being used to generate returns.
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Operational review - Geography
Headline CER Underlying
GBP millions 2017 2016 growth growth growth
Sales
North America 2,929 2,981 (2)% (4)% (4)%
Core 815 803 1% (1)% 0%
Growth 769 768 0% (4)% 0%
Total sales 4,513 4,552 (1)% (4)% (2)%
Adjusted operating
profit
North America 394 420 (6)% (10)% (10)%
Core 50 57 (12)% (14)% (14)%
Growth 38 29 31% 17% 3%
Penguin Random House 94 129 (27)% (29)% (8)%
Total adjusted operating
profit 576 635 (9)% (13)% (9)%
See note 2 in the consolidated financial statements for the
reconciliation to the equivalent statutory measures.
North America (65% of revenues)
Revenues declined 4% in underlying terms, primarily due to anticipated
declines in higher education and school courseware, school assessment,
and Learning Studio, a learning management system we are retiring.
North American higher education courseware fell 3%. School courseware
fell high single digits, impacted by a lower adoption participation
rate and weak Open Territory sales in the second half of the year.
School assessment declined high-single digits, due to previously
announced contract losses. Learning Studio revenues continued to
decline as we move towards the retirement of the product in 2019.
Offsetting that we saw modest growth in both virtual schools and
Online Program Management (OPM) due to good underlying volume growth
partially offset by some contract exits and in-sourcing. Revenues
in North American Professional Certification were flat on phasing
of new contracts and a slowdown in IT certification late in 2017.
Adjusted operating profits fell 10% in underlying terms, due primarily
to the impact of lower sales and other operating factors partially
offset by restructuring savings.
Courseware In school, revenue declined high single digits
primarily due to sharp declines across Open Territory
states in the second half of the year. This was
partially offset by growth in Adoption state
revenues where strong performance in Texas Grades
K-12 Spanish, Indiana Grades K-12 Science and
South Carolina Grades 6-8 Science outweighed
a lower adoption participation rate resulting
from our decision not to compete for the California
Grades K-8 English Language Arts (ELA) adoption
with a core basal programme.
Our new adoption participation rate fell to 61%
from 64% in 2016. We won an estimated 38% share
of adoptions competed for (30% in 2016) and 29%
of total new adoption expenditure of $365m (19%
of $470m in 2016).
In higher education, total US college enrolments,
as reported by the National Student Clearinghouse,
fell 1.1%, with combined two-year public and
four-year for-profit enrolments declining 2.5%.
Enrolment weakness was particularly focused on
part-time students where enrolment declined 3.3%,
a bigger decline than in any of the last five
years. Full-time enrolment grew 0.3%, the first
expansion since Fall 2010.
Net revenues in our higher education courseware
business declined 3% during the year. We estimate
around 2% of this decline was driven by lower
enrolment; just over 1% from the adoption of
Open Educational Resources (OER); around 5% from
the secondary market, new initiatives and other
factors, primarily the growth in print rental;
offset by c.3% benefit from institutional selling
and the shift to digital and a 2% benefit in
2017 from lower returns by the channel.
In 2017, Pearson's US higher education courseware
market share, as reported by MPI, was in the
upper half of the c40-41.5% range seen over the
last five years.
During 2017 we performed strongly in Statistics
and Business Statistics, Biology and Accounting.
Statistics benefited from the popularity of "best
in class" learning application StatCrunch, Biology
from the success of Campbell Biology 11e and
MasteringBiology, and Accounting from the success
of Miller-Nobles Horngren Accounting 11e and
MyAccountingLab. This was offset by weakness
in Information Technology, particularly in the
for-profit sector and continued softness in Developmental
Mathematics.
Digital revenues grew 9% benefiting from continued
growth in direct sales, favourable mix and selected
price increases. Global digital registrations
of MyLab and related products fell 1%. In North
America, digital registrations fell 3% with good
growth in Science, Business & Economics and Revel
offset by lower overall enrolment and continued
softness in Developmental Mathematics. Revel
registrations grew more than 50%. Including stand-alone
e-book registrations, total North American digital
registrations were flat.
The actions announced in early 2017 to promote
access over ownership met with success. We reduced
the rental price of 2,000 eBook titles and saw,
eBook revenues increase more than 20% in response.
Our print rental programme has had a successful
start, and we have added more than 90 further
titles. In institutional courseware solutions
we signed 210 institutions to our Inclusive Access
(Direct Digital Access, DDA) solutions, taking
the total to over 500. During the year, we delivered
over 1m course enrolments with inclusive access
rising to c.5% of our higher education revenue
as more colleges and faculties see the benefit
of this model.
Assessment In school assessment (State and National assessments),
revenues declined high single digits due to previously
announced contract losses.
Colorado announced in June 2017 they will be
leaving the PARCC consortium after the 17/18
school year. Pearson won the subsequent bid to
deliver ELA, Math, Science, and Social Studies
for at least the next six years.
Pearson secured contract extensions in Virginia,
Indiana, Arizona, Minnesota, Puerto Rico, Kentucky,
New York City and North Carolina and for the
National Assessment of Educational Progress.
We delivered 25.3m standardised online tests
to K12 students, up 7% from 2016. TestNav 8,
Pearson's next-generation online test platform,
supported a peak load of 752,000 tests in a single
day and provided 99.99% up time. Our AI scoring
systems scored 35m responses to open-ended test
items, around 30% of the total. Paper based standardised
test volumes fell 7% to 20.4m.
In Professional Certification, VUE global test
volume rose 1% to over 15m. Revenues in North
America were flat, with continued growth in certification
for professional bodies, offset by modest declines
in US teacher certification and the GED High
School Equivalency Test, after strong performance
last year, and by weakness in higher level IT
certifications in the second half.
We signed over 50 new contracts in 2017 including
a ten-year contract with the (AAMC) to administer
the MCAT, and contracts with ExxonMobil for five
years and the Project Management Institute for
four years. Our renewal rate on existing contracts
continues to be over 95%. During the year we
renewed over 50 contracts including the American
Board of Internal Medicine (ABIM) for nine years,
Florida Teacher Licensure Assessments for five
years, Pharmacy Technician Certification Board
(PTCB) for five years, and The Institute of Internal
Auditors for four years.
Clinical assessment sales declined slightly on
an absence of new major product introductions.
Q-Interactive, Pearson's digital solution for
Clinical Assessment administration, saw continued
strong growth in license sales with sub-test
administrations up more than 33% over the same
period last year.
Services Connections Education our virtual school business,
served nearly 78,000 Full Time Equivalent students
through full-time virtual and blended school
programs, up 6% on last year.
Two new full-time online, state-wide, partner
schools opened for the 2017-18 school year. Enrolment
growth from new and existing schools was partially
offset by the termination of a school partnership
at the end of the 2016-2017 school year.
Revenues grew modestly as enrolment growth was
partially offset by increased in-sourcing, as
some partners took non-core services in-house.
Enrolment and revenue is expected to grow in
2018 as growth in existing school partnerships
and the opening of new partner schools for the
2018-19 school year offsets the termination of
two further contracts and the in-sourcing of
services by some customers.
The 2017 Connections Academy Parent Satisfaction
Survey showed strong results with 92% of families
with students enrolled in full-time online partner
schools stating they would recommend the schools
to others and 95% agreeing that the curriculum
is of high quality. Results from the survey are
available at pear.sn/HPTn30dCNHH.
In Pearson Online Services, revenues declined
high single digits, primarily due to a decline
in Learning Studio revenues as we retire the
product and the restructuring of smaller non-OPM
contracts. Learning Studio declined by just over
50% to a revenue contribution of GBP11m in 2017.
In OPM, we grew revenues modestly as course enrolments
grew strongly, up 8% to more than 341,000, boosted
by good growth and program extensions at key
partners including Arizona State University Online,
Maryville University, Rutgers University and
University of Alabama at Birmingham and from
new partners, partially offset by contract exits.
We signed 45 multi-year programs in 2017 renewed
19 programs and launched 14 new programs at partners
including Maryville University, Duquesne University
and Ohio University. During the year we also
agreed the termination of nine programs that
were not mutually viable and did not renew a
further six programs.
Brinker International, Inc. (NYSE: EAT), one
of the world's leading casual dining restaurant
companies and owner of Chili's(R) Grill & Bar
and Maggiano's Little Italy(R), with over 1,600
owned, operated and franchised restaurant locations,
partnered with Pearson to launch a comprehensive
employer-education program Best You EDU that
provides free educational opportunities to Brinker
employees including foundational, GED and Associate
Degree programs.
2018 Outlook In US higher education courseware, we expect
revenues to be flat to down mid-single digit
percent as similar pressures seen in the last
two years continue with lower college enrolments,
increased use of OER and attrition from growth
in the secondary market driven by print rental,
are partially offset by growth in digital revenues,
benefits from our actions to promote access over
ownership and a continued normalisation of channel
returns behaviour.
Evidence of a marginally slower rate of decline
in US student enrolment together with slightly
lower than expected attrition from OER in 2017,
mean that we are now planning for an underlying
decline in demand of around 6% in US higher education
courseware, slightly improved from our prior
range of 6% to 7%.
We expect stable testing revenues in North America
student assessment as new contracts offset a
continued contraction in revenue associated with
our PARCC contract.
Connections Education is expected to grow modestly
as new partner school openings and good growth
in enrolment is partially offset by in-sourcing
of non-core services by some partners and contract
exits. North American Online Program Management
is expected to see modest growth in revenue as
investment in new programs begin to ramp up.
Professional certification is expected to grow
revenues in the mid-single digits benefiting
from new contracts, including our nationwide
contract with the AAMC.
============= ==========================================================
Core (18% of revenues)
Revenues grew 1% in headline terms, were down 1% at CER and flat
on underlying terms, primarily due to growth in OPM in the UK and
Australia and growth in Pearson Test of English offset by declines
in school, higher education, English courseware and student assessment
and qualifications.
Adjusted operating profit declined 14%, or GBP8m, in underlying
terms due to revenue mix, investment in new products and services
and business exits, partially offset by restructuring savings.
Courseware Courseware revenues declined moderately. In school,
revenues declined in Australia, due to market
contraction in the primary sector partly offset
by slight growth in secondary, and declines in
smaller markets in Europe and Africa. In higher
education, revenues were down slightly due to
declines in smaller markets, whilst in Australia
and the UK an increase in direct to institution
sales and a further shift to digital offset declines
in traditional textbook sales. In English, there
were declines in smaller markets.
Assessment In student assessment and qualifications, revenues
declined mid-single digits primarily due to lower
AS level, iGCSE and Apprenticeship volumes as
a result of policy changes. BTEC revenues also
declined modestly as revenues recognised in 2017
lagged the greater stability we have seen in
registrations and billed revenue in the year.
We successfully delivered the National Curriculum
Test for 2017, marking 3.5m scripts, up slightly
from 2016.
Clinical assessment grew strongly with revenues
benefiting from strong growth in the new editions
of the Wechsler Intelligence Scale for Children
(WISC-V) and the Clinical Evaluation of Language
Fundamentals (CELF-5).
Pearson Test of English (PTE) saw continued strong
growth in test volumes, which rose 84% from 2016,
driven primarily by its use to support visa applications
to the Australian Department of Immigration and
Border Protection and good growth in New Zealand.
In Professional certification, revenues were
flat as the impact of last year's renegotiated
terms of the UK Driving Theory test for the DVSA
was offset by growth from new and existing contracts.
Services In higher education services, revenues grew strongly.
Our OPM revenues were up 33%. In Australia, we
saw good growth due to our successful partnership
with Monash University, and continued success
of the Graduate Diploma in Psychology. We have
a total of c.9,300 course registrations across
the seven programs in Australia up from c.6,900
in 2016. In the UK, we launched five new programs
in addition to the two launched in 2016. UK course
registrations grew, reaching c.1,400 compared
to c.370 in 2016.
English services grew, with strong growth in
WSE Italy, due to the opening of new centres
in 2015 and 2016, partially offset by declines
in Japan.
2018 Outlook In Core, we are expecting modest growth driven
by our recent investments in student assessment
and qualifications, where we are offering new
products and services of considerably greater
value, along with continued growth in PTE and
OPM with 10 new program launches in the UK, and
growth in existing programs in Australia.
============= ==========================================================
Growth (17% of revenues)
Revenues were flat in both headline and underlying terms due to
growth in China, school courseware in South Africa and Pearson Test
of English, offset by declines in higher education services primarily
due to lower enrolment at CTI and business disposals in India, and
declines in Brazil. Revenues were down 4% at CER due to the disposal
of GEDU.
Adjusted operating profit increased 3% in underlying terms, reflecting
the higher revenues in China, South Africa school courseware and
PTE in India, together with the benefits of restructuring, partially
offset by lower revenues in Brazil.
Courseware Courseware revenues grew moderately, due to strong
growth in school textbook sales in South Africa
and English language courseware in China, partially
offset by weakness in Brazil.
Services In English services, growth in Wall Street English
in China, due to new centre openings, was offset
by declines in Brazil due to macroeconomic pressures.
In school services, revenue fell, with student
enrolment in our sistemas business in Brazil
falling 14% primarily due to NAME, our public
sistema, where we took the strategic decision
to exit two thirds of our contracts with municipalities
due to unattractive economic prospects, together
with a reduction in student enrolments in our
Dom Bosco private sistema due to challenging
economic conditions. In India, Pearson MyPedia,
an inside service 'sistema' solution for schools,
expanded to over 500 schools with approximately
157,000 learners.
In higher education services, revenues declined
sharply due to a 14% fall in total student enrolment
at CTI our university in South Africa driven
by the cumulative impact of economic factors
in recent years, partially offset by improved
new student enrolments in 2017, together with
business exits in India.
Assessment Professional Certification grew strongly. Pearson
Test of English saw over 30% growth in the volume
of tests taken in India.
2018 Outlook In our growth markets we expect a modest increase
in revenues, with growth in China in ELT products,
PTE and in South Africa due to improving enrolments
in CTI partially offset by declines in school
courseware after a strong 2017. In Brazil, we
expect revenue to increase modestly from growth
in Wizard and school sistemas, partially offset
by declines in government contracts. In India,
we expect PTE and MyPedia to continue growing.
============= ==========================================================
Penguin Random House
Following the disposal of a 22% stake on 5 October 2017 Pearson
owns 25% of Penguin Random House, the first truly global consumer
book publishing company.
Penguin Random House performed in line with our expectations with
revenues up slightly on a headline and underlying basis year on
year on rising audio sales, broadly stable print sales, and modest
ongoing declines in demand for e-books, whilst the business benefitted
from bestsellers by Dan Brown, R.J. Palacio, John Grisham, Jamie
Oliver, and Dr. Seuss.
2018 Outlook In Penguin Random House, we anticipate a broadly
level publishing performance and expect an annual
after-tax contribution of around GBP60-65m to
our adjusted operating profit.
============= ==========================================================
FINANCIAL REVIEW
Operating result
Sales decreased on a headline basis by GBP39m or 1% from
GBP4,552m in 2016 to GBP4,513m in 2017 and adjusted operating
profit decreased by GBP59m or 9% from GBP635m in 2016 to GBP576m in
2017 (for a reconciliation of this measure see note 2 to the
condensed financial statements).
The headline basis compares the reported results. We also
present sales and profits on an underlying basis which exclude the
effects of exchange and the effect of portfolio changes arising
from acquisitions and disposals. Our portfolio change is calculated
by taking account of the contribution from acquisitions and by
excluding sales and profits made by businesses disposed in either
2016 or 2017. Portfolio changes mainly relate to the closure of our
English language schools in Germany and the sale of the Pearson
English Business Solutions business in North America during 2016
and the sale of our test preparation business in China and
reduction in our equity interest in PRH in 2017. Acquisitions were
not significant in either 2016 or 2017.
On an underlying basis, sales decreased by 2% in 2017 compared
to 2016 and adjusted operating profit decreased by 9%. Currency
movements increased sales by GBP126m and adjusted operating profit
by GBP23m. Portfolio changes decreased sales by GBP54m and adjusted
operating profit by GBP24m.
Adjusted operating profit includes the results from discontinued
operations when relevant but 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 2017 we have excluded the impact of US tax
reform on our associate operating profit as outlined in the section
on taxation. A summary of these adjustments is included below and
in more detail in note 2 to the condensed financial statements.
all figures in GBP millions 2017 2016
Operating profit / (loss) 451 (2,497)
Add back: Cost of major restructuring 79 338
Add back: Intangible charges 166 2,769
Add back: Other net gains and losses (128) 25
Add back: Impact of US tax reform 8 -
-------------------------------------- ----- -------
Adjusted operating profit 576 635
Amortisation and impairment charges in 2017 were GBP166m
compared to a charge of GBP2,769m in 2016. The 2016 charge includes
an impairment charge to North American goodwill of GBP2,548m. This
charge arose following trading in the final quarter of 2016 and the
consequent revision to strategic plans which reflected underlying
issues in the North American higher education courseware market
that were more severe than had previously been anticipated. These
issues related to declining student enrolments, changes in buying
patterns of students and correction of inventory levels by
distributors and bookshops.
Other net gains of GBP128m in 2017 largely relate to the sale of
our test preparation business in China which resulted in a profit
on sale of GBP44m and the part sale of our share in PRH which
resulted in a profit of GBP96m. Other net losses in 2016 of GBP25m
mainly relate to the closure of our English language schools in
Germany and the sale of the Pearson English Business Solutions
business in North America.
Total restructuring cost in 2016 amounted to GBP338m and
included costs associated with headcount reductions, property
rationalisation and closure or exit from certain systems,
platforms, products and supplier and customer relationships. In May
2017, we announced an additional restructuring programme, to run
between 2017 and 2019, that will drive further significant cost
savings. Costs incurred to date relating to this new programme were
GBP79m at the end of 2017 and related to cost efficiencies in our
higher education and enabling functions together with further
rationalisation of the property portfolio.
The statutory operating profit from continuing operations of
GBP451m in 2017 compares to a loss of GBP2,497m in 2016. The loss
in 2016 is mainly attributable to the impairment charge to North
American goodwill noted above and the higher level of restructuring
spend.
Net finance costs
Net interest payable was GBP79m in 2017, compared to GBP59m in
2016. The increase was primarily due to higher US interest rates in
2017, additional charges relating to the early redemption of
various bonds during the year and some additional interest on tax
provisions. In March and November 2017 respectively, the Group
redeemed the $550m 6.25% Global dollar bonds and $300m 4.625% US
dollar notes, both originally due in 2018. In addition, in August
2017, the Group redeemed $385 m out of the $500m 3.75% US dollar
notes due in 2022 and $406m out of the $500m 3.25% US dollar notes
due in 2023. Although there is a charge in respect of the early
redemptions there are partial year savings as a result which have
flowed through the income statement in the period since redemption,
with the full annualised savings coming through in 2018.
Finance income relating to retirement benefits has been excluded
from our adjusted earnings as we believe the income statement
presentation does not reflect the economic substance of the
underlying assets and liabilities. Also included in the statutory
definition of net finance costs (but not in our adjusted measure)
are interest costs relating to acquisition consideration, foreign
exchange and other gains and losses on derivatives. Interest
relating to acquisition consideration is excluded from adjusted
earnings as it is considered to be part of the acquisition cost
rather than being reflective of the underlying financing costs of
the Group. Foreign exchange and other gains and losses are excluded
from adjusted earnings 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 (for more
information see note 3 to the condensed financial statements).
In 2017, the total of these items excluded from adjusted
earnings was a gain of GBP49m compared to a loss of GBP1m in 2016.
Finance income relating to retirement benefits decreased from
GBP11m in 2016 to GBP3m in 2017 reflecting the comparative funding
position of the plans at the beginning of each year. This decrease
was more than offset by foreign exchange gains on unhedged cash and
cash equivalents and other financial instruments that generated
losses in 2016. For a reconciliation of the adjusted measure see
note 3 to the condensed financial statements.
Taxation
The effective tax rate on adjusted earnings in 2017 was 11.1%
compared to an effective rate of 16.5% in 2016. The decrease in tax
rate was primarily due to uncertain tax position provision releases
following the expiry of the relevant statutes of limitation. For a
reconciliation of the adjusted measure see notes 4 and 5 to the
condensed financial statements.
The reported tax charge on a statutory basis in 2017 was GBP13m
(3.1%) compared to a benefit of GBP222m (8.7%) in 2016. The
statutory tax benefit in 2016 was mainly due to the release of
deferred tax liabilities relating to tax deductible goodwill that
was impaired. Operating tax paid in 2017 was GBP75m compared to
GBP63m in 2016.
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 GBP5m and a repatriation
tax charge of GBP6m. The Group continues to analyse the detail of
the new legislation and this may result in revisions to these
impacts.
In addition to the impact on the reported tax charge, the
Group's share of profit from associates was adversely impacted by
GBP8m. The charge has been excluded from our adjusted measures.
Other comprehensive income
Included in other comprehensive income are the net exchange
differences on translation of foreign operations. The loss on
translation of GBP262m in 2017 compares to a gain in 2016 of
GBP913m and has arisen due to the relative weakness of the US
dollar compared to Sterling. A significant proportion of the
Group's operations are based in the US and the US dollar weakened
in 2017 from an opening rate of GBP1:$1.23 to a closing rate at the
end of 2017 of GBP1:$1.35. At the end of 2016 most of the
currencies that Pearson is exposed to had strengthened relative to
Sterling following the Brexit vote. In 2016 the US dollar had
strengthened in comparison to the opening rate moving from
GBP1:$1.47 to GBP1:$1.23.
Also included in other comprehensive income in 2017 is an
actuarial gain of GBP182m in relation to retirement benefit
obligations of the Group and our share of the retirement benefit
obligations of PRH. The gain arises from the impact of favourable
movements in mortality assumptions, discount rate, member options
on retirement and asset returns which offset the impact of the UK
plan's purchase of insurance buy-in policies. The gain in 2017
compares to an actuarial loss in 2016 of GBP276m.
Cash flows
Our operating cash flow measure is used to align cash flows with
our adjusted profit measures (see note 17 to the condensed
financial statements). Operating cash flow increased on a headline
basis by GBP6m from GBP663m in 2016 to GBP669m in 2017. The
increase is also reflected in operating cash conversion (operating
cash flow as a percentage of adjusted operating profit) which
increased from 104% in 2016 to 116% in 2017. The increase is
largely explained by increased dividends from PRH and increased
cash collections.
The equivalent statutory measure, net cash generated from
operations, was GBP462m in 2017 compared to GBP522m in 2016.
Compared to operating cash flow, this measure includes
restructuring costs and special pension contributions but does not
include regular dividends from associates or capital expenditure on
property, plant, equipment and software. Restructuring costs paid
decreased from GBP167m in 2016 to GBP71m in 2017 primarily due to
the new restructuring programme only commencing during the second
half of 2017. Special pension contributions increased to GBP227m in
2017 from GBP90m in 2016. In 2016 the funding was in respect of the
FT Group disposal in 2015 and in 2017 related both to the FT Group
disposal (GBP25m) and to agreements relating to the PRH merger in
2013 (GBP202m).
The Group's net debt decreased from GBP1,092m at the end of 2016
to GBP432m at the end of 2017 as the proceeds from disposals,
operating cash flow and the positive effect of exchange rate
movements more than offset restructuring spend, tax, interest,
pension and dividend payments. The Group's gross debt was
restructured during the year including the repayment of various
bonds as detailed in note 15 to the condensed financial
statements.
Post-retirement benefits
Pearson operates a variety of pension and post-retirement plans.
Our UK Group pension plan has by far the largest defined benefit
section. We have some smaller defined benefit sections in the US
and Canada but, outside the UK, most of our companies operate
defined contribution plans.
The charge to profit in respect of worldwide pensions and
retirement benefits amounted to GBP72m in 2017 (2016: GBP70m) of
which a charge of GBP75m (2016: GBP81m) was reported in adjusted
operating profit and income of GBP3m (2016: GBP11m) was reported
against other net finance costs.
The overall surplus on the UK Group pension plan of GBP158m at
the end of 2016 has increased to a surplus of GBP545m at the end of
2017. The increase has arisen principally due to increased
contributions, including the GBP227m as part of the agreements
relating to PRH and FT Group, and due to the impact of favourable
movements in assumptions discussed above.
In total, our worldwide net position in respect of pensions and
other post-retirement benefits increased from a net asset of GBP19m
at the end of 2016 to a net asset of GBP441m at the end of
2017.
Dividends
The dividend accounted for in our 2017 financial statements
totalling GBP318m represents the final dividend in respect of 2016
(34.0p) and the interim dividend for 2017 (5.0p). We are proposing
a final dividend for 2017 of 12.0p bringing the total paid and
payable in respect of 2017 to 17.0p. This final 2017 dividend which
was approved by the Board in February 2018, is subject to approval
at the forthcoming AGM and will be charged against 2018 profits.
For 2017, the dividend is covered 3.2 times by adjusted
earnings.
Share buyback
The GBP300m share buyback programme announced in October 2017
was completed on 16 February 2018. In 2017, our brokers purchased
21m shares at a value of GBP153m of which GBP149m had been
cancelled at 31 December 2017. Cash payments of GBP149m had been
made in respect of the purchases with the outstanding GBP4m
settlement made at the beginning of January 2018. This GBP4m
together with the remaining value of the buy-back programme
(GBP147m) was recorded as a liability on the balance sheet at 31
December 2017. A further 22m shares were repurchased under the
programme in 2018. The shares bought back are being cancelled and
the nominal value of these shares is transferred to a capital
redemption reserve. The nominal value of shares cancelled at 31
December 2017 was GBP5m.
Return on invested capital (ROIC)
Our ROIC is calculated as adjusted operating profit less cash
tax paid, expressed as a percentage of average gross invested
capital. For the first time in 2017 we have presented an additional
ROIC measure showing ROIC on a net basis. The net basis removes
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.
On a gross basis ROIC decreased from 5.0% in 2016 to 4.3% in
2017 and from 7.2% in 2016 to 6.2% in 2017 on a net basis. The
movement largely reflects lower profit in the year and increased
tax payments (see note 18 to the condensed financial
statements).
Businesses held for sale
Following the decision to sell both our Wall Street English
language teaching business and the K12 school courseware business
in the US, the assets and liabilities of those businesses have been
classified as held for sale on the balance sheet at 31 December
2017.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2017
all figures in GBP millions note 2017 2016
Continuing operations
Sales 2 4,513 4,552
Cost of goods sold (2,066) (2,093)
-------------------------------------------------- ---- ------- ---------
Gross profit 2,447 2,459
Operating expenses (2,202) (2,480)
Other net gains and losses 2 128 (25)
Impairment of intangible assets - (2,548)
Share of results of joint ventures and associates 78 97
-------------------------------------------------- ---- ------- ---------
Operating profit / (loss) 2 451 (2,497)
Finance costs 3 (110) (97)
Finance income 3 80 37
-------------------------------------------------- ---- ------- ---------
Profit / (loss) before tax 4 421 (2,557)
Income tax 5 (13) 222
-------------------------------------------------- ---- ------- ---------
Profit / (loss) for the year 408 (2,335)
Attributable to:
Equity holders of the company 406 (2,337)
Non-controlling interest 2 2
Earnings / (loss) per share (in pence per share)
Basic 6 49.9p (286.8)p
Diluted 6 49.9p (286.8)p
The accompanying notes to the condensed consolidated financial
statements form an integral part of the financial information.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2017
all figures in GBP millions 2017 2016
Profit / (loss) for the year 408 (2,335)
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations - Group (158) 910
Net exchange differences on translation of foreign operations - associates (104) 3
Currency translation adjustment disposed (51) -
Attributable tax 9 (5)
Fair value gain on other financial assets 13 -
Attributable tax (4) -
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations - Group 175 (268)
Remeasurement of retirement benefit obligations - associates 7 (8)
Attributable tax (42) 58
Other comprehensive (expense) / income for the year (155) 690
Total comprehensive income / (expense) for the year 253 (1,645)
Attributable to:
Equity holders of the company 251 (1,648)
Non-controlling interest 2 3
---------------------------------------------------------------------------- ----- -------
CONDENSED CONSOLIDATED BALANCE SHEET
as at 31 December 2017
all figures in GBP millions note 2017 2016
Property, plant and equipment 281 343
Intangible assets 11 2,964 3,442
Investments in joint ventures and associates 398 1,247
Deferred income tax assets 95 451
Financial assets - derivative financial instruments 140 171
Retirement benefit assets 545 158
Other financial assets 77 65
Trade and other receivables 103 104
----------------------------------------------------- ----- -------- --------
Non-current assets 4,603 5,981
Intangible assets - pre-publication 741 1,024
Inventories 148 235
Trade and other receivables 1,110 1,357
Financial assets - marketable securities 8 10
Cash and cash equivalents (excluding overdrafts) 518 1,459
----------------------------------------------------- ----- -------- --------
Current assets 2,525 4,085
Assets classified as held for sale 10 760 -
Total assets 7,888 10,066
Financial liabilities - borrowings (1,066) (2,424)
Financial liabilities - derivative financial
instruments (140) (264)
Deferred income tax liabilities (164) (466)
Retirement benefit obligations (104) (139)
Provisions for other liabilities and charges (55) (79)
Other liabilities 12 (133) (422)
----------------------------------------------------- ----- -------- --------
Non-current liabilities (1,662) (3,794)
Trade and other liabilities 12 (1,342) (1,629)
Financial liabilities - borrowings (19) (44)
Current income tax liabilities (231) (224)
Provisions for other liabilities and charges (25) (27)
----------------------------------------------------- ----- -------- --------
Current liabilities (1,617) (1,924)
Liabilities classified as held for sale 10 (588) -
----------------------------------------------------- ----- -------- --------
Total liabilities (3,867) (5,718)
Net assets 4,021 4,348
Share capital 200 205
Share premium 2,602 2,597
Treasury shares (61) (79)
Reserves 1,272 1,621
----------------------------------------------------- ----- -------- --------
Total equity attributable to equity holders
of the company 4,013 4,344
Non-controlling interest 8 4
----------------------------------------------------- ----- -------- --------
Total equity 4,021 4,348
The condensed consolidated financial statements were approved by
the Board on 22 February 2018.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2017
Equity attributable to equity holders
of the company
-------------------------------------------------------------------------------
all figures in Capital Fair
GBP Share Share Treasury redemption value Translation Retained Non-controlling Total
millions capital premium shares reserve reserve reserve earnings Total interest equity
2017
--------------------------------------------------------------------------------------------------------------------------
At 1 January
2017 205 2,597 (79) - - 905 716 4,344 4 4,348
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- ------
Profit for the
year - - - - - - 406 406 2 408
Other
comprehensive
income /
(expense) - - - - 9 (313) 149 (155) - (155)
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- ------
Total
comprehensive
income /
(expense) - - - - 9 (313) 555 251 2 253
Equity-settled
transactions - - - - - - 33 33 - 33
Issue of
ordinary
shares under
share
option schemes - 5 - - - - - 5 - 5
Buyback of
equity (5) - - 5 - - (300) (300) - (300)
Purchase of
treasury
shares - - - - - - - - - -
Release of
treasury
shares - - 18 - - - (18) - - -
Changes in
non-controlling
interest - - - - - - (2) (2) 2 -
Dividends - - - - - - (318) (318) - (318)
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- ------
At 31 December
2017 200 2,602 (61) 5 9 592 666 4,013 8 4,021
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
continued
for the year ended 31 December 2017
Equity attributable to equity holders
of the company
-------------------------------------------------------------------------------
all figures in Capital Fair
GBP Share Share Treasury redemption value Translation Retained Non-controlling Total
millions capital premium shares reserve reserve reserve earnings Total interest equity
2016
---------------------------------------------------------------------------------------------------------------------------
At 1 January
2016 205 2,590 (72) - - (7) 3,698 6,414 4 6,418
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- -------
Loss for the
year - - - - - - (2,337) (2,337) 2 (2,335)
Other
comprehensive
income /
(expense) - - - - - 912 (223) 689 1 690
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- -------
Total
comprehensive
income /
(expense) - - - - - 912 (2,560) (1,648) 3 (1,645)
Equity-settled
transactions - - - - - - 22 22 - 22
Issue of
ordinary
shares under
share
option schemes - 7 - - - - - 7 - 7
Buyback of
equity - - - - - - - - - -
Purchase of
treasury
shares - - (27) - - - - (27) - (27)
Release of
treasury
shares - - 20 - - - (20) - - -
Changes in
non-controlling
interest - - - - - - - - (3) (3)
Dividends - - - - - - (424) (424) - (424)
---------------- ------- ------- -------- ---------- ------- ----------- -------- ------- --------------- -------
At 31 December
2016 205 2,597 (79) - - 905 716 4,344 4 4,348
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2017
all figures in GBP millions note 2017 2016
Cash flows from operating activities
Net cash generated from operations 17 462 522
Interest paid (89) (67)
Tax paid (75) (45)
Net cash generated from operating activities 298 410
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 13 (11) (15)
Purchase of investments (3) (6)
Purchase of property, plant and equipment (82) (88)
Purchase of intangible assets (150) (157)
Disposal of subsidiaries, net of cash disposed 19 (54)
Proceeds from sale of joint ventures and associates 411 4
Proceeds from sale of investments - 92
Proceeds from sale of property, plant and equipment - 4
Proceeds from sale of liquid resources 20 42
Loans (advanced to) / repaid by related parties (13) 14
Investment in liquid resources (18) (24)
Interest received 20 16
Dividends received from joint ventures and associates 458 131
-------------------------------------------------------------- ---- ------- -----
Net cash generated from / (used in) investing activities 651 (41)
Cash flows from financing activities
Proceeds from issue of ordinary shares 5 7
Buyback of equity (149) -
Purchase of treasury shares - (27)
Proceeds from borrowings 2 4
Repayment of borrowings (1,294) (249)
Finance lease principal payments (5) (6)
Transactions with non-controlling interest - (2)
Dividends paid to company's shareholders (318) (424)
Net cash used in financing activities (1,759) (697)
Effects of exchange rate changes on cash and cash equivalents 16 81
Net decrease in cash and cash equivalents (794) (247)
Cash and cash equivalents at beginning of year 1,424 1,671
Cash and cash equivalents at end of year 630 1,424
For the purposes of the cash flow statement, cash and cash
equivalents are presented net of overdrafts repayable on demand.
These overdrafts are excluded from cash and cash equivalents
disclosed on the balance sheet. In addition, in 2017, GBP127m of
cash included above has been classified as held for sale on the
balance sheet.
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 GBP2m 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
GBP143m.
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 GBP 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
GBP128m in 2017 largely relate to the sale of our test preparation
business in China which resulted in a profit on sale of GBP44m and
the part sale of our share in PRH which resulted in a profit of
GBP96m (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 GBP2,548m.
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 GBP8m 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 GBP 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 GBP 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 GBP 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 GBP 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 GBP5m and a repatriation
tax charge of GBP6m. In addition to the impact on the reported tax
charge, the Group's share of profit from associates was adversely
impacted by GBP8m (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 GBP 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
Other
net Other Impact
Statutory Cost of gains net of US Tax Adjusted
all figures in income major and Intangible finance tax amortisation income
GBP millions note statement restructuring losses charges costs reform benefit 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
Other
net Other Impact
Statutory Cost of gains net of US Tax Adjusted
all figures in income major and Intangible finance tax amortisation income
GBP millions note statement restructuring losses charges costs reform benefit 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 GBP 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 GBP93m 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 GBP 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 GBP 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
GBP2,548m. There were no impairments to goodwill or intangibles in
2017.
12. Trade and other liabilities
all figures in GBP 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
GBP151m 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 GBP 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 GBP44m. In October 2017, the sale of a 22% share in
Penguin Random House (PRH) resulted in a pre-tax profit of GBP96m.
An analysis of these disposals together with other disposals in the
period is shown below.
all figures in GBP 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 GBP 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 -----Level
2--------- 3------
Available Derivatives Other Available Other Total
for assets for liabilities fair
sale sale value
all figures in GBP millions assets assets
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 GBP1,066m (2016:
GBP2,381m) compared to their carrying value of GBP1,062m (2016:
GBP2,420m). 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 GBP 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 GBP 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 GBP 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 GBP312m 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 GBP227m in 2017 were made as
part of the agreements relating to the PRH merger in 2013 (GBP202m)
and the sale of the FT Group in 2015 (GBP25m). In 2016 special
pension contributions of GBP90m 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 GBP 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 GBP90m. 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 GBP46m (2016: GBP33m) 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 GBP19m (2016: GBP21m) and a current
liability payable of GBP3m (2016: GBPnil) arising from the
provision of services. Service fee income from PRH was GBP3m in
2017 (2016: GBP4m).
During the year the Group received dividends of GBP458m (2016:
GBP131m) from PRH including GBP312m 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 GBP49m (2016: GBPnil) 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 EUR250m of its EUR500m Euro 1.875% Notes due
May 2021 and EUR200m of its EUR500m Euro 1.375% Notes due May
2025.
On 16 February 2018, Pearson completed its GBP300m 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 GBP151m.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LFFFVFTIFFIT
(END) Dow Jones Newswires
February 23, 2018 02:00 ET (07:00 GMT)
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