Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the
month of February 2017
PEARSON plc
(Exact
name of registrant as specified in its charter)
N/A
(Translation
of registrant's name into English)
80 Strand
London, England WC2R 0RL
44-20-7010-2000
(Address
of principal executive office)
Indicate
by check mark whether the Registrant files or will file annual
reports
under
cover of Form 20-F or Form 40-F:
Form
20-F
X
Form 40-F
Indicate
by check mark whether the Registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934
Yes
No X
24
February 2017
London
Press
Release
PEARSON 2016 PRELIMINARY
RESULTS (UNAUDITED)
Pearson, the world’s learning company, is
announcing its preliminary full year results for 2016, following
its 18 January trading statement. Key headlines
include:
●
2016 operating profit and eps
slightly better than January 2017 guidance. Strong 2016 cash
conversion
o
Sales of
£4,552m declined 8% in underlying terms. Good growth in
Pearson VUE, US Virtual Schools Online Program Management and Wall
Street English in China was more than offset by expected declines
in US and UK student assessment and US school courseware, and a
much worse than expected decline in North American higher education
courseware, as detailed in our 18 January trading
statement.
o
Deferred
revenue was broadly level in underlying terms and is now 18% of our
revenues (2015: 16.5%).
o
Adjusted
operating profit of £635m was down 21% in underlying terms due
to weaker revenues, the partial reinstatement of incentives and
other operational factors, partially offset by cost savings from
the restructuring plan announced in January 2016, a larger
contribution from Penguin Random House, helped in part by modest
one-off benefits from the integration programme, and a return to
profit in our Growth segment.
o
Adjusted
earnings per share fell 16% to 58.8p reflecting weaker operating
results, higher interest and a higher tax rate of 16.5%, offset by
the strength of the US Dollar and other currencies against
Sterling.
o
Operating cash
flow increased 52% benefitting from tight working capital control,
lower cash incentive payments and the weakness of Sterling. Our
cash conversion increased to 104% (2015: 60%).
o
Net debt
increased to £1,092m (2015: £654m) reflecting the
strengthening of the US Dollar relative to Sterling and
restructuring costs.
o
Digital &
services revenues now make up 68% of our total revenues (2015:
65%). We have made good progress in simplifying our technology
platforms and seen strong growth in key digital products Revel,
iLit, Q-Interactive, Connections Education and global wins in
Online Program Management.
●
2016 statutory results and
goodwill impairment: Statutory
loss for the year of £2,335m included an impairment of
goodwill of £2,548m. This impairment charge is consistent with
the challenging market conditions which we disclosed in January,
and which resulted in an outlook for profit which is approximately
£180m lower than previously
anticipated.
●
2016 restructuring
program: Our 2016 restructuring
program was delivered in full, reducing our cost base exiting 2016
by £425m at a cost of £338m. Adjusting for the impact of
currency our plan delivered slightly higher benefits at a slightly
lower cost than planned.
●
2017
guidance, strategic actions to accelerate digital, simplify the
portfolio and preserve financial flexibility
o
2017 outlook
in line with 18 January trading
statement: Our guidance range is for operating profit in 2017
of £570m to £630m, adjusted earnings per share of 48.5p
to 55.5p and cash conversion in excess of 90%. This is based on our
existing portfolio, a 2017 net interest charge of £74m, a tax rate of
approximately 20%, and exchange
rates on 31 December 2016.
o
Trading in early 2017:
Our early trading is in line with
expectations. The phasing in our North American higher education
courseware business in 2017 will show a benefit from returns
normalising in the first half, whilst the underlying market
pressures we have described will impact gross sales primarily in
the second half.
o
Higher education courseware
strategic actions: On 18
January we announced a series of actions, accelerating our work to
simplify our product technology platform and enhancing our
courseware service capabilities with £50m of additional
investment, reducing eBook rental prices and launching our own
print rental program piloting with an initial group of 50 titles
made available through Pearson’s approved rental partners. We
have reduced prices for eBook rental across 2,000 titles, have made
good progress on our print rental program and are today announcing
details of the first wave of new digital products with greater
personalisation, enhanced engagement and cognitive
tutoring.
■
Penguin Random House:
With the integration of Penguin Random
House complete, and with greater industry-wide stability on digital
terms, we have issued an exit notice regarding our 47% stake in
Penguin Random House to our JV partner Bertelsmann, in the
contractual window, with a view to selling our stake or
recapitalising the business and extracting a dividend. We will use
proceeds from this action to maintain a strong balance sheet;
invest in our business; and return excess capital to shareholders
whilst retaining a solid investment grade credit rating. Our
guidance assumes ownership of our stake in PRH for all of
2017.
■
Direct Delivery:
We will continue to reduce our
exposure to large scale direct delivery services and focus on more
scalable online, virtual, and blended services, across our
portfolio. We are today announcing that Pearson has initiated
processes to explore a potential partnership for our English
language learning business Wall Street English (WSE) and the
possible sale of our English test preparation business Global
Education (GEDU). These processes are at an early stage and there
is no certainty that they will lead to transactions. In 2016, these
businesses contributed £253m of revenues and £3m of
adjusted operating income. Our guidance assumes ownership of both
for all of 2017.
■
Efficiency: We continue to manage our costs tightly. We will
take further actions to improve the overall efficiency of the
company and continue to realign our cost base to reflect the
changing needs of our markets. We will update on our plans through
the year.
o
Preserving
financial flexibility
■
Debt repayment:
To ensure efficient use of the cash
balances we held at 31 December 2016, we are today announcing that
we will trigger the early repayment option on our $550m 6.25%
Global Dollar bonds 2018.
■
Rebasing the dividend:
As already communicated in January, we
intend to recommend a final dividend of 34p for an overall 2016
dividend of 52p in line with our guidance, but as a result of the
factors above we intend to rebase our dividend from 2017
onwards.
Pearson’s chief
executive John Fallon said:
“2016
was a challenging year for Pearson, but we remain the global leader
in education, with a strong market position.
"Our
priorities for 2017 are clear. We will continue to accelerate our
digital transformation, simplify our portfolio, control our costs,
and focus our investment on the biggest growth opportunities in
education.”
Pearson’s results
presentation for investors and analysts will be audiocast live
today from 0900 (GMT) and available for replay from
1200 (GMT) via www.pearson.com. High resolution photographs for the
media are available from our website
www.pearson.com.
FINANCIAL SUMMARY
£
millions
|
2016
|
2015
|
Headline growth
|
CER growth
|
Underlying growth
|
Business
performance
|
|
|
|
|
|
Sales
|
4,552
|
4,468
|
2%
|
(9)%
|
(8)%
|
Adjusted operating profit
|
635
|
723
|
(12)%
|
(27)%
|
(21)%
|
Adjusted earnings per share
|
58.8p
|
70.3p
|
(16)%
|
|
|
Operating cash flow
|
663
|
435
|
52%
|
|
|
Net debt
|
(1,092)
|
(654)
|
(67)%
|
|
|
Statutory
results
|
|
|
|
|
|
Sales
|
4,552
|
4,468
|
2%
|
|
|
Operating (loss)/profit
|
(2,497)
|
(404)
|
|
|
|
(Loss)/profit before tax
|
(2,557)
|
(433)
|
|
|
|
(Loss)/Profit for the year
|
(2,335)
|
823
|
|
|
|
Basic earnings per share
|
(286.6)p
|
101.2p
|
|
|
|
Cash generated from
operations
|
522
|
518
|
1%
|
|
|
Dividend per share
|
52p
|
52p
|
0%
|
|
|
Throughout
this announcement:
a)
Growth rates are stated on a constant exchange rate (CER) basis
unless otherwise stated. Where quoted, underlying growth rates
exclude both currency movements and portfolio changes. Unless
otherwise stated, in 2015 sales exclude FT Group, while total
adjusted operating profits include FT Group. Continuing operations
exclude FT Group.
b) The
‘business performance’ measures are non-GAAP measures
and are included as they are key financial measures used by
management to evaluate performance and also for investors to track
the underlying operational performance of the Group.
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 16.
DIVISIONAL ANALYSIS –
GEOGRAPHY
£
millions
|
2016
|
2015
|
Headline growth
|
CER growth
|
Underlying growth
|
Sales
|
|
|
|
|
|
North America
|
2,981
|
2,940
|
1%
|
(12)%
|
(10)%
|
Core
|
803
|
815
|
(1)%
|
(7)%
|
(4)%
|
Growth
|
768
|
713
|
8%
|
0%
|
(1)%
|
Continuing
operations
|
4,552
|
4,468
|
2%
|
(9)%
|
(8)%
|
FT
Group
|
--
|
312
|
n/a
|
n/a
|
n/a
|
Total
sales
|
4,552
|
4,780
|
(5)%
|
(15)%
|
(8)%
|
Adjusted operating
profit/(loss)
|
|
|
|
|
|
North America
|
420
|
480
|
(13)%
|
(28)%
|
(28)%
|
Core
|
57
|
105
|
(46)%
|
(51)%
|
(51)%
|
Growth
|
29
|
(3)
|
n/a
|
n/a
|
n/a
|
Penguin Random House
|
129
|
90
|
43%
|
23%
|
23%
|
Adjusted operating profit
from continuing operations
|
635
|
672
|
(6)%
|
(21)%
|
(21)%
|
FT
Group
|
--
|
51
|
n/a
|
n/a
|
n/a
|
Total adjusted operating
profit
|
635
|
723
|
(12)%
|
(27)%
|
(21)%
|
2015
results reflect FT Group in discontinued operations and changes in
management responsibilities between the Geographies, which were
effective from 1 January 2016.
2017
OUTLOOK
In 2017, we expect to
report adjusted operating profit of between £570m and
£630m. This reflects the impact of the in-year benefits from
the 2016 restructuring offset by ongoing challenging conditions in
North America higher education courseware, the reinstatement of the
employee incentive pool, other operational factors (including dual
running costs as we rationalise our technology infrastructure, cost
inflation and increased investment relating to new product
launches) and the impact of some small disposals of sub-scale
businesses.
We expect adjusted earnings
per share to be between 48.5p and 55.5p, after an interest charge
of £74m and a tax rate of approximately 20%. This guidance is
based on our current portfolio of businesses and exchange rates on
31 December 2016.
The major factors behind
this guidance are as follows:
TRADING
CONDITIONS
In
North
America, our largest market,
our guidance for 2017 is based on assumptions of further declines
in enrolment and other pressures in the North American higher education
courseware market. The top of
the range implies that this is offset as the impact of the 2016
inventory correction at key channel partners partially unwinds with
lower returns resulting in net revenue growth in our North American
higher education courseware business of approximately 1%. The
bottom of our guidance range assumes that inventory levels continue
to fall resulting in a 7% net revenue decline. In both cases, we
assume an underlying decline in demand of between 6% and 7% in
demand for North American higher education
courseware.
Elsewhere in North America, we anticipate modest
declines in school courseware revenues reflecting a slightly larger
adoption market offset by our lower participation rate due to our
earlier decision not to compete in the current California English
Language Arts (ELA) adoption; and flat revenues in Open Territories
reflecting a smaller impact from new products after a very
successful 2016. We expect some continued pressure on testing
revenues in North America due the annualisation of contract losses
announced in 2015 and the roll off of temporary contracts won in
2016, together with a further shift to digital tests which reduces
revenue but benefits margins. Connections Education will see
double-digit growth in enrolment partially offset by some virtual
school partners choosing to take some non-core services in-house.
Online Program Management and professional certification will
continue to grow well.
In
our Core markets (which
include the UK, Italy and Australia), we anticipate flat revenues
with continued growth in Pearson Test of English Academic and in
Online Program Management due to program additions and new customer
wins; growth in UK school and higher education courseware due to a
strong slate of new products aligned with Pearson qualifications;
offset by modest declines in UK student assessment, where revenue
will lag the greater stability that we are now seeing in vocational
course registrations; together with business exits and weakness in
smaller markets.
In our
Growth
markets (which include Brazil, China,
India and South Africa) we expect a modest increase in revenues;
with growth in China driven by new product offerings and centre
openings at Wall Street English; in South Africa due to improving
enrolments in CTI our private university; and in Brazil on evidence
of greater economic stability. We expect courseware businesses
across Growth to grow well on new product launches, offsetting some
business exits as we focus on fewer, larger
opportunities.
In
Penguin Random
House, we anticipate a broadly
level publishing performance.
PORTFOLIO
CHANGES
We completed the sale of a
number of small subscale businesses which combined have the effect
of reducing 2017 Adjusted Operating Profit by
£10m.
OTHER
OPERATIONAL FACTORS
INCENTIVE
COMPENSATION
Group incentive
compensation increased by £55m in 2016, lower than the
budgeted £110m reflecting the weakness of performance versus
budget. The incentive pool will be reinstated in 2017 to ensure our
work force is properly incentivised.
CURRENCY
MOVEMENTS
In 2016, Pearson generated
approximately 62% of its sales in the US, 7% in Greater China, 5%
in the Euro zone, 3% in Brazil, 3% in Canada, 2% in Australia, 2%
in South Africa and 1% in India and our guidance is based on
exchange rates at 31 December 2016.
DEBT
REPAYMENT
To ensure efficient use of
the cash balances we held at 31 December 2016, we are today
announcing that we will trigger the early repayment option on our
$550m 6.25% Global Dollar bonds 2018.
INTEREST
AND TAX
We expect
our interest
charge to be £74m (2016:
£59m) due to currency movements and increases in US Dollar
LIBOR.
We expect an
adjusted tax
rate of approximately 20% on
our total adjusted profit (which includes the post-tax contribution
from Penguin Random House).
For
more information
T + 44 (0)20 7010
2310
Investors: Tom
Waldron
Press: Brendan
O’Grady
Ends
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/investors). 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.
STRATEGIC
OVERVIEW
Pearson is the
world’s learning company, with world-class educational
content and assessment. Our strategy is to combine these strengths
with new digital capabilities, to create products and services that
are scalable and replicable with recurring earnings streams,
enabling more personalized learning and more effective teaching,
and over time improving learning outcomes.
Structural pressures in
some markets together with cyclical and transitional issues have
led to a challenging operating environment for Pearson. To remain
focused on this opportunity, whilst dealing with challenging
markets, we have made significant portfolio and management changes,
completed a major restructuring which has exceeded its objective of
£350m of cost savings, embarked on a broad-based
simplification programme and continued to invest
£700m-£750m per year in our portfolio of products and
services.
Over the last four years,
we have been investing steadily to develop new digital products and
services, and forge broader partnerships with academic
institutions, that enable us to capitalise on our scale and exploit
the opportunities in global education. These new products and
services include:
1.
Adaptive,
personalised “next generation” digital courseware which
enhances the productivity of teachers and helps students learn more
effectively across our global markets;
2.
New
qualifications and certifications that help students to translate
education into employment by assessing career relevant knowledge
and skills, providing quality assurance to schools, universities
and employers;
3.
A new platform
by which we can meet the growing demand for high quality virtual
and blended schooling at greater scale, both in the US and
globally; and
4.
Online Program
Management partnerships with an increasing number of universities,
aimed at meeting the growing global demand for more flexible,
effective and good value higher education.
To further focus on these
opportunities, we have also been simplifying Pearson’s
portfolio of businesses. We have successfully merged Penguin with
Random House, to create the world’s leading trade publisher,
strengthening its position in a market facing digital disruption,
and generating significant cost savings. We have completed
Pearson’s exit from the financial news and information market
with the sales of The Financial Times Group, Mergermarket and our
stake in The Economist Group. We have continued to reshape our
portfolio of education assets, to reflect our tighter strategic
focus, with the sale of PowerSchool, Fronter and a number of print
textbooks lists, and the acquisition of Grupo
Multi.
With the integration of
Penguin Random House complete, and with greater industry-wide
stability on digital terms, we have issued an exit notice regarding
our 47% stake in Penguin Random House to our JV partner
Bertelsmann, in the contractual window, with a view to selling our
stake or recapitalising the business and extracting a
dividend.
In addition, we have today
announced that we have initiated processes to explore potential
partnership for our English language learning business Wall Street
English (WSE) and possible sale of our English test preparation
business Global Education (GEDU) as we reduce our exposure to large
scale direct delivery services and focus on more scalable online,
virtual, and blended services.
We have also simplified the
company in a number of other important ways:
1.
As print
volumes decline, we have significantly reduced our analogue fixed cost base. For example,
over the last four years Pearson operated warehouse volume has
fallen from 6.4m square feet to less than 1m square
feet;
2.
We have been
simplifying the fragmentation and
duplication of our back office and enterprise
infrastructure; implementing major efficiency improvements
across all our enabling
functions - technology, finance, HR; rationalising our
property portfolio; and renegotiating and consolidating major
supplier agreements to drive greater cost
efficiency;
3.
We have
reduced the geographical
complexity of Pearson, by concentrating our owned operations
in fewer markets. For example, Pearson moved to a distributor model
in more than 20 markets between 2012 and 2016;
and
4.
In 2016 we
combined our lines of business for courseware into a single product
organisation to rationalise and integrate our product development
capabilities and to focus more on adaptive, personalised
“next generation” courseware. We also integrated our
North America based assessment operations to focus more on
adaptive, personalised, online assessment in an era of "fewer,
smarter" tests.
This strategy is
creating a more focused, scalable business, with more digital
products, running on unified platforms that improve learning
outcomes and position Pearson to grow again.
FINANCIAL
OVERVIEW
Profit &
loss statement. In 2016, Pearson’s sales increased by
£84m in headline terms to £4.6bn. Total continuing
adjusted operating profit fell £37m to £635m (2015:
£672m).
Currency movements, primarily from the
depreciation of Sterling against the US Dollar during the period,
increased sales by £486m and operating profits by
£106m.
At
constant exchange rates (ie stripping out the impact of those
currency movements), our sales fell by 9% primarily due to weakness
in North American higher education courseware, US K12 assessment
and courseware and UK student assessment; and adjusted operating
profit fell by 21% due to lower revenues.
The effect of disposals reduced sales by
£63m and continuing adjusted operating profits by
£2m.
Stripping out the impact of portfolio changes
and currency movements, revenues were down 8% in underlying terms
while adjusted operating profit fell 21%.
Net interest payable in 2016 was £59m,
compared to £46m in 2015. Interest rose due to the weakness of
Sterling and lower released accrued interest payments following
agreement on historical tax positions.
Our adjusted tax rate in 2016 was 16.5% (2015:
15.5%). The increase in tax rate was primarily due to a smaller
benefit from adjustments arising from the agreement of historical
tax positions, partially offset by a larger proportion of total
adjusted profits coming from joint ventures and associates, from
which tax has already been deducted.
Adjusted earnings per share were 58.8p (2015:
70.3p).
Cash
generation. Headline operating cash flow increased by
£228m to £663m and operating cash conversion rose to 104%
from 60% due to lower cash incentive payments and tight working
capital control.
Return on
invested capital. Our return on average invested capital was
5.0% (2015: 5.8%) primarily due to lower adjusted operating
profit
Statutory
results. Our statutory results showed a loss for the year
after tax of £2,335m, including an impairment of goodwill of
£2,548m, reflecting trading pressures in our North American
businesses.
Balance
sheet. Our net debt increased to £1,092m (2015:
£654m) reflecting the strengthening of the US Dollar relative
to Sterling and restructuring costs. Pearson’s net
debt/EBITDA ratio remains solid at 1.4x (2015:
0.8x).
Dividend. The Board is proposing a flat final dividend of
34p, which results in an overall 2016 dividend of 52p, flat on
2015, subject to shareholder approval.
NORTH AMERICA (65% of group
revenues)
Revenues rose 1% in headline terms benefiting
from a stronger US Dollar, but declined 10% in underlying terms due
to a significant decline in higher education courseware, together
with anticipated declines in school assessment, due to previously
announced contract losses and in school courseware, due to a
smaller adoption market and our lower participation rate, partially
offset by growth in professional certification, virtual and blended
schools and Online Program Management (OPM).
Adjusted operating profits fell 13% in headline
terms and 28% at CER and underlying due primarily to the impact of
lower sales in higher education courseware.
Courseware
In
School, revenue declined 10%
with a smaller new Adoption Market and our lower participation rate
partially offset by good growth and market share gains in Open
Territories resulting from new product launches. Our new adoption participation rate
fell from over 90% in 2015 to 64% in 2016 due to our decision not
to compete for the California Grades K-8 English Language
Arts (ELA) adoption with a
core basal programme. We won an estimated 30% share of adoptions
competed for (31% in 2015) and 19% of total new adoption
expenditure of $470m (29% of $730m in 2015) driven by strong
performance in Indiana Math and Social Studies and South Carolina
Science and Social Studies. In Open Territories, we grew
strongly benefiting from our new MyPerspectives programme in Grades
6-12 ELA, ReadyGen, Investigations 3.0, the extension of
enVisionMATH to cover Grades 6-8 and growth in our digital reading
intervention programme, iLit.
In
Higher
Education, total US College
enrolments fell 1.4%, with combined two-year public and four-year
for-profit enrolments declining 5.0%, affected by rising employment
rates and regulatory change impacting the for-profit and
developmental learning sectors, partially offset by modest growth
in combined enrolments at four year public and private not for
profit institutions. Net revenues in our higher education
courseware business declined an unprecedented 18% during the year.
We estimate 2% of this decline was driven by lower enrolment,
particularly in Community College and amongst older students; 3-4%
by an accelerated impact from rental in the secondary market; and
approximately 12% due to an inventory correction in the channel
reflecting the cumulative impact of these factors in prior years.
Underlying market share trends remained stable and our market share
in the 12 months to January 2017 was 40.4%. During 2016 we
performed strongly in Science and Business & Economics with key
titles including Appling Biochemistry: Concepts &
Connections 1e, Amerman
Human Anatomy
& Physiology 1e, Marieb Human Anatomy & Physiology
10e, Young, Freedman
University Physics
14e and Parkin
Economics
12e. Global digital
registrations of MyLab and related products grew 2%. In North
America, digital registrations grew 2% with good growth in Science,
Business & Economics and Revel partly offset by continued
softness in Developmental Mathematics. Skill Builder Adaptive
Practice, our in-house adaptive homework solution launched in over
60 titles in 2016. Faculty generated studies indicate that the use
of MyLab, Mastering and Revel programmes, as part of a broader
course redesign, can support improvements in student test scores
and lower institutional cost (http://pear.sn/IZxLE).
Findings
from an efficacy study suggest that students in Developmental
Mathematics courses who complete on average 50 of the learning
objectives in MyMathLab-Developmental double their odds of passing
the course; and that users of MyWritingLab who complete seven
topics increase their final Exam Scores by around 14%. In another
study at a mid-sized university in the Midwest during the 2015-16
academic year, students using MyITLab were able to raise their exam
scores by half a letter grade for every seven additional MyLab IT
activities attempted.In institutional
courseware solutions, Pearson signed 148 large-scale, enterprise
adoptions of Direct Digital Access (DDA), where content is
purchased via an upfront course fee and integrated with university
IT systems. New signings in the year included University of
Tennessee –
Knoxville
(UTK) and Kentucky State University
(KYSU).
Assessment
In
School
Assessment (State and National
Assessments), revenues declined 22% due to previously announced
contract losses. The states of Arkansas, Mississippi and Ohio
discontinued PARCC assessments and we ceased to administer the
majority of the current Texas STAAR contract, as announced in 2015.
We replaced the loss from
Massachusetts leaving PARCC by winning a five year subcontract to
deliver Massachusetts’ new custom assessment. We were awarded
a one-year emergency contract in Tennessee to score and report 2016
state assessments. Kentucky renewed a contract with Pearson for two
years to provide its state assessments in Math, English Language
Arts, and Science. Arizona extended Pearson’s contract to
provide the English language learner assessments for the 2016-2017
school year, while Colorado extended a contract with Pearson to
provide PARCC, science, and social studies assessments. We won new
contracts in Delaware for social studies assessment and a
subcontract to develop high school math and English language arts
assessments in Louisiana. We delivered 23.6
million standardised online tests to K12 students, a reduction of
11% from 2015 due to overall reduction in test counts across
contracts. Paper based
standardised test volumes fell 33% to 21.9 million. Digital tests
on Pearson’s TestNav platform now account for over 52% of our
testing volumes. We launched aimswebPlusTM,
an update to our leading formative assessment platform, first
launched in 2000.
In
Professional Certification,
revenues grew 7% with VUE global test volume up 3% to almost 15
million, boosted by continued growth in IT, Professional, US
teacher certification programmes and strong growth in GED, the High
School Equivalency test that as part of a joint venture with the
American Council on Education. We renewed our contracts with the
Computing Technology Industry Association (CompTIA) for three
years, the Florida Department of Business & Professional
Regulation for five years, the American Register of
Radiologic Technologists (ARRT) for 7 years and a contract to
administer insurance back office licensing services in North
Carolina for 5 years.
Clinical Assessment
sales declined 1% following the strong
performance over the previous two years driven by the introduction
of the fifth edition of the Wechsler Intelligence Scale
for Children (WISC-V).
Behavior
Assessment for Children 3e (BASC) continues to see strong growth and
Q-Interactive, Pearson's digital solution for Clinical Assessment
administration, saw continued strong growth in license sales with
sub-test administrations up more than 80% over the same period last
year.
Services
Connections
Education, our virtual school business, served
nearly 73,000 Full Time Equivalent students through full-time
virtual and blended school programs, up 6% on last year.
Connections revenues grew 8%. Five new full-time online, statewide,
partner schools opened for the 2016-17 school year in Arkansas,
Washington, Colorado, Pennsylvania, and New Mexico. The 2016
Connections Education 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.
In
Pearson Online Services, our
higher education Online Program Management (OPM) business, course
enrolments grew strongly, up over 19% to more than 314,000, boosted
by strong growth in Arizona State University Online, new partners
and programme extensions. We signed eleven new programmes in 2016
including two new partners; Eastern Gateway Community College in
collaboration with American Federation of State, County and
Municipal Employees and we took over an existing suite of online
Nursing programmes with Duquesne University. Strong growth in OPM
was partially offset by a decline in Learning Studio, which is
currently being retired. Overall revenues grew
5%.
CORE (18% of group
revenues)
Revenues declined
1% in headline terms, were down 7% at CER reflecting the closure of
Wall Street English Germany, disposal of other subscale businesses
and the
transfer of some smaller businesses to
our Growth segment and declined 4% in underlying terms, primarily
due to expected declines in vocational course registrations in UK
schools and courseware. This was partially offset by strong growth
in English assessments in Australia and OPM services in the UK and
Australia. Adjusted operating profit declined 51% primarily due to
lower revenues in UK student assessment.
Courseware
Courseware revenues
declined 7%. In school revenues declined in smaller markets in
Europe and Africa, in Australia as we exited a number of sub-scale
market segments and in UK primary due to a smaller adoption cycle,
partially offset by growth in secondary in the UK due to new
product launches aligned with our qualifications and the successful
delivery of “The Crunch” food project in partnership
with the Wellcome Trust. In higher education courseware revenues
declined in smaller markets, in Australia due to phasing and in the
UK as we exited sub-scale market segments. In the UK, 2.1 million
pupils are now using a Pearson digital service on ActiveLearn
Primary, including Bug Club, up from 1.8 million a year ago. In a
randomised control trial where its impact was periodically assessed
Bug Club was shown to have made a highly statistically significant
impact on pupils’ reading, vocabulary and spelling
performance, with a greater positive impact in schools with a
higher proportion of children receiving free school
meals.
Assessment
In
Higher Education and School
Assessment, revenues fell
10%. UK qualifications have been impacted by government policy,
where changes to accountability measures have led to lower
vocational registrations. As expected, BTEC Firsts registrations in
UK schools have begun to stabilize, though overall BTEC and
apprenticeship registrations continued to fall in 2016 albeit at a
slower rate. GCSE and GCE entries for summer 2016 declined modestly
compared with 2015, primarily due to lower AS level entries as a
result of a policy-driven shift to more linear courses. We
successfully delivered the National Curriculum Test for 2016,
marking 3.4 million scripts and successfully implemented the
transition from levels to scaled scores.
Clinical Assessment
grew 9% with Australian revenues
benefiting from strong growth in the new edition of the Wechsler Intelligence Scale
for Children (WISC-V).
At
VUE, revenues declined 1%
due to the initial impact of contract renewals. We were awarded
contracts to continue to administer the UK Driving Theory test for
the UK Driver and Vehicle Standards Agency (DVSA) for four years
from September 2016, to continue to provide testing services to the
Construction Industry Training Board for four years from April 2017
and to administer the UK Clinical Aptitude Test for five years from
January 2017. In France, VUE was awarded a new licence by the
Délégation à la Sécurité et à la
Circulation Routières (DSCR) du Ministere de
l’Intérieur to be one of the providers administering the
country’s computer based driving theory exam throughout
France
The Pearson Test
of English Academic (PTEA) saw continued strong growth in
global test volumes with the Australian Department of Immigration
and Border Protection and New Zealand immigration accepting the
test for proof of English ability for a range of student visas.
The number
of professional associations using PTE Academic to credential
English language standards of their members continued to grow and
now includes the Australian Nursing & Midwifery Accreditation
Council. All Australian and NZ universities now accept PTE Academic
for admissions purposes, as do most of the UK and Canadian
universities, and a growing number of US institutions
including Harvard Business School,
Yale and Wharton Business School.
Services
In
Higher Education
Services, revenues grew 12%.
Our
Online Program Management revenues grew 74%. In Australia we saw
strong growth due to our successful partnership with Monash
University, led by the Graduate Diploma in Psychology, now one of
Monash's largest postgraduate courses. Our partnership with
Griffith University remains strong, with performance driven mainly
by the MBA course. In the UK, our ongoing Online Program Management
partnership with King's College London saw us commence teaching in
early 2016 of several post-graduate Psychology and Law programmes.
We have signed an addition l partnership with Manchester
Metropolitan University to launch three online post-graduate
degrees in business studies in 2017, and have also partnered
with another Russell Group University to launch a wide range
of online post-graduate programmes over the next four
years.
Wall Street English
revenues grew strongly in Italy as we
opened new centres and rolled out the New Student Experience (NSE)
in all centres in the country. The NSE delivers a next generation
Wall Street English service with adaptive, personalised learning
incorporating Pearson’s Global Scale of English. We announced
the closure of our unprofitable Wall Street English schools in
Germany.
GROWTH (17% of group
revenues)
Revenues grew 8% in headline terms, were flat at
CER reflecting the transfer of some smaller business from Core
partially offset by the sale of smaller sub-scale businesses and
down 1% in underlying terms. In China, growth in adult English
language learning and English courseware was partly offset by
declines in English test preparation. In Brazil, revenues declined
due to enrolment declines in our English language learning
business, related to macroeconomic pressures. In South Africa,
revenues grew strongly with growth in school textbooks, offset by
enrolment declines at CTI. In the Middle East revenues fell
significantly due to our previously announced withdrawal from an
agreement to run three Saudi Colleges of Excellence, with the
colleges transitioning to new providers from 30 June 2015.
Excluding the impact of the exit from this agreement, underlying
revenues in Growth were up 1%.
Adjusted operating profit increased £32m to
a profit of £29m reflecting the benefits of restructuring and
the absence of a contract termination charge in the Middle East
which impacted the first half of 2015.
Courseware
Courseware revenues grew 8%, due to strong
growth in school textbook sales in South Africa and English
language courseware in China, Argentina and Mexico partially offset
by weakness in Brazil. We saw strong growth in registrations for
MyEnglishLab boosted by new editions of key titles such as
Speakout and Top Notch. Middle East school
courseware declined as a result of macroeconomic pressure and lower
purchases from key international school
clients.
Services
In
China,
growth in Wall Street English was
offset by declines at Global Education. Enrolments grew 8% at WSE,
to 72,500. We launched the New Student Experience across all 68 WSE
China centres, opened two new retail centres in Beijing and
Shenzhen and a new corporate training centre in Shenzhen. In Global
Education we transferred two cities to franchisees. Underlying
revenue declined with lower enrolments partially offset by an
ongoing shift to more premium courses with smaller class
sizes.
In Brazil,
student enrolment in our
sistemas business fell 9% due to attrition in NAME and Dom Bosco
partially offset by new students at COC. Revenues grew slightly due
to improved mix. Revenues in English language learning fell due to
challenging economic conditions, partially offset by an increased
footprint for our leading brand in language learning, Wizard, where
new school openings expanded the number of franchise schools by 7%
to 2,392.
At
our public sistema NAME an efficacy study suggested that, after
controlling for all of the identified student and school level
factors, grade 5 NAME students significantly outperformed
comparison students by 28 points in mathematics equating to one
level higher attainment in the state Prova Brasil assessment. In
another study at our largest private Sistema, COC students scored
significantly higher than students in similar non-COC schools in
Writing, Natural Sciences, Humanities, Language, and
Mathematics.
In
South Africa, student
enrolment at CTI universities fell by 25% to 8,500 driven primarily
by tightening consumer credit affecting enrolment
rates.
In
India, Pearson MyPedia, an
inside service ‘sistema’ solution for schools
comprising print and digital content, assessments and academic
support services, expanded to over 200 schools with approximately
56,000 learners in its first full year since launch. The Pearson
Test of English Academic saw nearly 50% growth in the volume of
tests taken.
PENGUIN RANDOM
HOUSE
Pearson owns 47% of Penguin Random House, the
first truly global consumer book publishing
company.
Penguin Random House delivered a strong profit
performance in 2016 with continued net benefits from the merger
integration.
Revenues declined after a very strong
performance in 2015, which was boosted by the success of
multi-million sellers Grey
and The Girl on the Train
and due to the anticipated industry-wide decrease in e-book
purchases following 2015’s industry-wide digital-terms
changes. Revenues in 2016 benefitted from strong sales of
The Girl On The Train by
Paula Hawkins, in its second year of publication, and Jojo
Moyes’s Me Before You
and After You together with
broad resilience of print books, including growing print sales
online and increased demand for audio books.
The U.S. business published 585 New York Times print and e-book
bestsellers in 2016 (2015: 584). The division benefited from
multi-million copy successes of The Girl On The Train and two novels
from Jojo Moyes. Additional number one Adult titles were
The Whistler by John
Grisham; Night School by
Lee Child; Fool Me
Once by Harlan Coben; When Breath Becomes Air by Paul
Kalanithi; and Ina Garten’s Cooking For Jeffrey.
Children’s authors who extended their outstanding sales in
2016 included Dr. Seuss and Roald Dahl, whose The BFG benefited from a movie
tie-in; Rick Yancey; James Dashner; Drew Daywalt; Oliver
Jeffers; and R. J. Palacio.
The U.K. business published 202 titles on the
Sunday Times bestseller
lists (2015: 201). The division’s top-selling hardback was
Night School by Lee Child.
The Girl On The Train sold
over three million copies in multi-formats, and Me Before You and After You cumulatively sold more than
2.5 million. Top-performing children’s franchises were Roald
Dahl and the tenth volume in Jeff Kinney’s Diary Of A Wimpy Kid
series.
Penguin Random House completed the sale of its
travel-content division, Fodors, to Internet Brands, an online
media and technology company, on 30 June 2016, and transferred the
ownership of Random House Studio, its film and television
development and production division, to a division of
Bertelsmann.
The integration of Penguin and Random House
continued to provide benefits in 2016 including net benefits from
the first full year of systems and warehouse combinations in North
America and in Spain and Latin America.
Penguin Random House fiction and nonfiction
authors with highly anticipated new books in 2017 include Dan
Brown, Ron Chernow, Lee Child, Harlan Coben, Janet Evanovich, Ken
Follett, John Grisham, Paula Hawkins, Jeff Kinney, Dean Koontz,
Nigella Lawson, John le Carré, James Patterson, Philip
Pullman, Sheryl Sandberg, John Sanford, Danielle Steel, and Rick
Yancey, as well as new Star Wars™ and LEGO® movie tie-in
titles.
FINANCIAL
REVIEW
Operating
result
On
a headline basis, sales from continuing operations increased by
£84m or 2% from £4,468m in 2015 to £4,552m in 2016.
Total adjusted operating profit decreased by £88m from
£723m in 2015 to £635m in 2016. On an underlying basis,
sales from continuing operations decreased by 8% in 2016 compared
to 2015 and total adjusted operating profit decreased by 21%. Our
underlying measures exclude the effects of exchange and portfolio
changes arising from acquisitions and disposals. In 2016, currency
movements increased sales by £486m and adjusted operating
profit by £106m. Portfolio changes decreased sales by
£63m and adjusted operating profit by
£53m.
Our portfolio change is calculated by taking
account of the additional contribution (at constant exchange rates)
from acquisitions, however, in 2015 and in 2016 acquisitions
weren’t significant. We also exclude sales and profits made
by businesses disposed in either 2015 or 2016. Total adjusted
operating profit includes the results from discontinued operations
but excludes intangible charges for amortisation and impairment,
acquisition related costs and other gains and losses arising from
acquisitions and disposals. In 2016 we have also amended our
definition of adjusted operating profit to exclude the cost of
major restructuring. In January 2016, Pearson announced that it was
embarking on a major restructuring programme to simplify the
business, reduce costs and position the company for growth in its
major markets. The scope and costs of the 2016 programme are
significantly more than normal levels of restructuring that we
typically absorb within our adjusted measures. Total restructuring
in 2016 amounted to £338m and includes costs associated with
headcount reductions, property rationalisation and closure or exit
from certain systems, platforms, products and supplier and customer
relationships.
The statutory operating loss from continuing
operations of £2,497m in 2016 compares to a loss of £404m
in 2015. The increased loss is mainly attributable to impairment
charges. At the end of 2016, following trading in the final quarter
of the year, it became clear that the underlying issues in the
North American higher education courseware market were more severe
than 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, in
January 2017, we revised our strategic plans and our estimates for
future cash flows and as a consequence made an impairment to North
American goodwill of £2,548m. In 2015, following economic and
market deterioration in the Group’s operations in emerging
markets and ongoing cyclical and policy related pressures in the
Group’s mature market operations we impaired intangible
assets in North America by £282m, in Core markets by £37m
and in Growth markets by £530m.
Other gains and losses in continuing operations
in 2016 of £25m mainly relate to the closure of our English
language schools in Germany and the sale of the Pearson English
Business Solutions business. Other gains and losses in continuing
operations in 2015 include the gain on sale of PowerSchool of
£30m and net losses of £17m from the sale and write down
of smaller non-core businesses and investments.
Discontinued
operations
Discontinued operations in 2015 relate to the
sale of the Financial Times and the Group’s 50% interest in
the Economist. The Economist sale was substantially completed in
October 2015 and realised a gain of £473m before tax. The
remaining interest in the Economist was held at fair value and
subsequently sold in the first half of 2016 without realising any
further gain or loss. The sale of the Financial Times completed on
30 November 2015 and realised a gain of £711m before tax. The
gains on these transactions and the results for 2015 to the
respective sale dates have been included in discontinued
operations.
Net finance
costs
Net interest payable in 2016 was £59m,
compared to £46m in 2015. The majority of the movement in net
interest payable was due to a one-off release of accrued interest
in 2015 following agreement of historical tax positions. The most
significant element of the net interest payable figure is interest
on bond debt. Interest on bond debt was in line with the prior
year, with the savings from bond repayments offset by the impact of
rising US dollar interest rates and the effect of
exchange.
Finance income and costs relating to retirement
benefits have 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 finance costs relating to foreign
exchange and other gains and losses. 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.
In
2016, the total of these items excluded from adjusted earnings was
a loss of £1m compared to a gain of £17m in 2015. Finance
income relating to retirement benefits increased from £4m in
2015 to £11m in 2016 but this increase was offset by foreign
exchange losses on unhedged cash and cash equivalents and other
financial instruments. In 2015, there were foreign exchange gains
on unhedged cash and cash equivalents and other financial
instruments.
Taxation
The effective tax rate on adjusted earnings in
2016 was 16.5% compared to an effective rate of 15.5%
in 2015.
The increase in tax rate
was primarily due to a smaller benefit from adjustments arising
from the agreement of historical tax positions, partially offset by
profits from joint ventures and associates, from which tax has
already been deducted, being a larger proportion of total adjusted
profits.
The reported tax benefit on a statutory basis in
2016 was £222m (8.7%) compared to a benefit of £81m
(18.7%) in 2015. The statutory tax benefit in 2016 is mainly
due to the release of deferred tax liabilities relating to tax
deductible goodwill that has been impaired. The statutory tax
benefit in 2015 was mainly due to benefits arising on the increase
in intangible charges. Operating tax paid in 2016 was £63m
compared to £129m in 2015.
Other comprehensive
income
Included in other comprehensive income are the
net exchange differences on translation of foreign operations. The
gain on translation of £913m in 2016 compares to a loss in
2015 of £69m and has arisen due to the strength of the US
Dollar and many other currencies relative to Sterling. In 2016
Sterling weakened relative to many of the currencies that Pearson
is exposed to. A significant proportion of the group’s
operations are based in the US and the US dollar strengthened
significantly in 2016 from an opening rate of £1:$1.47 to a
closing rate at the end of 2016 of £1:$1.23. At the end of
2015 the US dollar had strengthened in comparison to the opening
rate moving from £1:$1.56 to £1:$1.47 but this effect was
more than offset by weakness in other
currencies.
Also included in other comprehensive income in
2016 is an actuarial loss of £276m in relation to post
retirement plans of the Group and our share of the post retirement
plans of PRH. The loss mainly arises from the unfavourable impact
of changes in the assumptions used to value the liabilities in the
plans which in aggregate exceeded favourable returns on plan
assets. The loss in 2016 compares to an actuarial gain in 2015 of
£118m.
Cash
flows
Operating cash flow increased by £228m from
£435m in 2015 to £663m in 2016. The increase is also
reflected in operating cash conversion which rose from 60% in 2015
to 104% in 2016. The increase is partly explained by reduced
incentive payments in 2016 and improved collection of receivables.
The Group’s net debt increased from £654m at the end of
2015 to £1,092m at the end of 2016 as operating cash flow was
more than offset by restructuring spend, tax, interest, dividend
payments and the effect of exchange.
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 for continuing operations amounted
to £70m in 2016 (2015: £81m) of which a charge of
£81m (2015: £85m) was reported in adjusted operating
profit and an income of £11m (2015: £4m) was reported
against other net finance costs.
The overall surplus on the UK Group pension plan
of £337m at the end of 2015 has decreased to a surplus of
£158m at the end of 2016. The movement has arisen principally
due to lower discount rates used to value the liabilities partially
offset by continuing asset returns and deficit funding. As a
consequence of the disposal of the FT Group in 2015, we have agreed
to accelerate the funding of the UK Group pension plan and as a
result the Plan is expected to be fully funded on a ‘self
sufficiency’ basis by 2019, inclusive of payments in 2017 in
relation to the PRH merger in 2013, currently estimated at
£225m.
In
total, our worldwide net position in respect of pensions and other
post-retirement benefits decreased from a net asset of £198m
at the end of 2015 to a net asset of £19m at the end of
2016.
Dividends
The dividend accounted for in our 2016 financial
statements totalling £424m represents the final dividend in
respect of 2015 (34.0p) and the interim dividend for 2016 (18.0p).
We are proposing a final dividend for 2016 of 34.0p bringing the
total paid and payable in respect of 2016 to 52.0p. This final 2016
dividend which was approved by the Board in February 2017, is
subject to approval at the forthcoming AGM and will be charged
against 2017 profits. For 2016, the dividend is covered 1.1 times
by adjusted earnings.
Return on invested capital
(ROIC)
Our ROIC is calculated as total adjusted
operating profit less cash tax, expressed as a percentage of
average gross invested capital. ROIC decreased from 5.8% in 2015 to
5.0% in 2016. The movement largely reflects lower profit in the
year partly offset by reduced tax payments (see note
17).
CONDENSED CONSOLIDATED INCOME
STATEMENT
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
Sales
|
2
|
4,552
|
4,468
|
Cost of goods sold
|
|
(2,093)
|
(1,981)
|
Gross
profit
|
|
2,459
|
2,487
|
|
|
|
|
Operating
expenses
|
|
(2,505)
|
(2,094)
|
Impairment of intangible
assets
|
|
(2,548)
|
(849)
|
Share of results of joint
ventures and associates
|
|
97
|
52
|
Operating
loss
|
2
|
(2,497)
|
(404)
|
|
|
|
|
Finance costs
|
3
|
(97)
|
(100)
|
Finance income
|
3
|
37
|
71
|
Loss
before tax
|
4
|
(2,557)
|
(433)
|
Income tax
|
5
|
222
|
81
|
Loss for the year from
continuing operations
|
|
(2,335)
|
(352)
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Profit for the year from discontinued
operations
|
8
|
-
|
1,175
|
|
|
|
|
(Loss) / profit for the
year
|
|
(2,335)
|
823
|
|
|
|
|
Attributable
to:
|
|
|
|
Equity holders of the
company
|
|
(2,337)
|
823
|
Non-controlling interest
|
|
2
|
-
|
|
|
|
|
(Loss) /
earnings per share from continuing and discontinued
operations (in pence per share)
|
Basic
|
6
|
(286.8)p
|
101.2 p
|
Diluted
|
6
|
(286.8)p
|
101.2 p
|
Loss per share
from continuing operations (in pence per
share)
|
Basic
|
6
|
(286.8)p
|
(43.3)p
|
Diluted
|
6
|
(286.8)p
|
(43.3)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
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / profit for the year
|
|
(2,335)
|
823
|
|
|
|
|
Items that may be
reclassified to the income statement
|
|
|
|
Net exchange differences on translation of
foreign operations – Group
|
|
910
|
(85)
|
Net exchange differences on translation of
foreign operations – associates
|
|
3
|
16
|
Currency translation adjustment
disposed
|
|
-
|
(10)
|
Attributable tax
|
|
(5)
|
5
|
|
|
|
|
Items that are not
reclassified to the income statement
|
|
|
|
Re-measurement of retirement benefit obligations
- Group
|
|
(268)
|
110
|
Re-measurement of retirement benefit obligations
- associates
|
|
(8)
|
8
|
Attributable tax
|
|
58
|
(24)
|
Other comprehensive income
for the year
|
|
690
|
20
|
|
|
|
|
Total comprehensive (expense)
/ income for the year
|
|
(1,645)
|
843
|
|
|
|
|
Attributable
to:
|
|
|
|
Equity holders of the
company
|
|
(1,648)
|
845
|
Non-controlling interest
|
|
3
|
(2)
|
CONDENSED CONSOLIDATED
BALANCE SHEET
As
at 31 December 2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
343
|
320
|
Intangible assets
|
11
|
3,442
|
5,164
|
Investments in joint ventures and
associates
|
|
1,247
|
1,103
|
Deferred income tax assets
|
|
451
|
276
|
Financial assets – Derivative financial
instruments
|
|
171
|
78
|
Retirement benefit assets
|
|
158
|
337
|
Other financial assets
|
|
65
|
143
|
Trade and other receivables
|
|
104
|
115
|
Non-current
assets
|
|
5,981
|
7,536
|
|
|
1,0241
|
841
|
Intangible assets –
Pre-publication
|
|
1,024
|
841
|
Inventories
|
|
235
|
211
|
Trade and other receivables
|
|
1,357
|
1,284
|
Financial assets – Derivative financial
instruments
|
|
-
|
32
|
Financial assets – Marketable
securities
|
|
10
|
28
|
Cash and cash equivalents (excluding
overdrafts)
|
|
1,459
|
1,703
|
Current
assets
|
|
4,085
|
4,099
|
Total
assets
|
|
10,066
|
11,635
|
Financial liabilities –
Borrowings
|
|
(2,424)
|
(2,048)
|
Financial liabilities – Derivative
financial instruments
|
|
(264)
|
(136)
|
Deferred income tax
liabilities
|
|
(466)
|
(560)
|
Retirement benefit
obligations
|
|
(139)
|
(139)
|
Provisions for other liabilities and
charges
|
|
(79)
|
(71)
|
Other liabilities
|
12
|
(422)
|
(356)
|
Non-current
liabilities
|
|
(3,794)
|
(3,310)
|
Trade and other liabilities
|
12
|
(1,629)
|
(1,390)
|
Financial liabilities –
Borrowings
|
|
(44)
|
(282)
|
Financial liabilities – Derivative
financial instruments
|
|
-
|
(29)
|
Current income tax
liabilities
|
|
(224)
|
(164)
|
Provisions for other liabilities and
charges
|
|
(27)
|
(42)
|
Current
liabilities
|
|
(1,924)
|
(1,907)
|
Total
liabilities
|
|
(5,718)
|
(5,217)
|
Net
assets
|
|
4,348
|
6,418
|
Share capital
|
|
205
|
205
|
Share premium
|
|
2,597
|
2,590
|
Treasury shares
|
|
(79)
|
(72)
|
Reserves
|
|
1,621
|
3,691
|
Total equity attributable to equity holders of
the company
|
|
4,344
|
6,414
|
Non-controlling interest
|
|
4
|
4
|
Total
equity
|
|
4,348
|
6,418
|
The condensed consolidated financial statements
were approved by the Board on 23 February 2017.
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December
2016
|
|
|
|
|
|
|
|
|
|
Equity attributable to the equity holders of the
company
|
Non-controlling interest
|
Total equity
|
all figures in £
millions
|
Share capital
|
Share premium
|
Treasury shares
|
Translation reserve
|
Retained earnings
|
Total
|
|
|
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
|
Tax on equity-settled
transactions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Issue of ordinary shares under share option
schemes
|
-
|
7
|
-
|
-
|
-
|
7
|
-
|
7
|
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
|
2015
|
At
1 January 2015
|
205
|
2,579
|
(75)
|
70
|
3,200
|
5,979
|
6
|
5,985
|
Profit for the year
|
-
|
-
|
-
|
-
|
823
|
823
|
-
|
823
|
Other comprehensive
income/(expense)
|
-
|
-
|
-
|
(77)
|
99
|
22
|
(2)
|
20
|
Total comprehensive
income/(expense)
|
-
|
-
|
-
|
(77)
|
922
|
845
|
(2)
|
843
|
Equity-settled transactions
|
-
|
-
|
-
|
-
|
26
|
26
|
-
|
26
|
Tax on equity-settled
transactions
|
-
|
-
|
-
|
-
|
(1)
|
(1)
|
-
|
(1)
|
Issue of ordinary shares under share option
schemes
|
-
|
11
|
-
|
-
|
-
|
11
|
|
11
|
Purchase of treasury shares
|
-
|
-
|
(23)
|
-
|
-
|
(23)
|
-
|
(23)
|
Release of treasury shares
|
-
|
-
|
26
|
-
|
(26)
|
-
|
-
|
-
|
Changes in non-controlling
interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Dividends
|
-
|
-
|
-
|
-
|
(423)
|
(423)
|
-
|
(423)
|
At
31 December 2015
|
205
|
2,590
|
(72)
|
(7)
|
3,698
|
6,414
|
4
|
6,418
|
CONDENSED CONSOLIDATED CASH
FLOW STATEMENT
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
Net cash generated from
operations
|
16
|
522
|
518
|
Interest paid
|
|
(67)
|
(75)
|
Tax paid
|
|
(45)
|
(232)
|
Net cash generated from
operating activities
|
|
410
|
211
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Acquisition of subsidiaries, net of cash
acquired
|
13
|
(15)
|
(9)
|
Acquisition of joint ventures and
associates
|
|
-
|
(11)
|
Purchase of investments
|
|
(6)
|
(7)
|
Purchase of property, plant and
equipment
|
|
(88)
|
(86)
|
Purchase of intangible
assets
|
|
(157)
|
(161)
|
Disposal of subsidiaries, net of cash
disposed
|
|
(54)
|
1,030
|
Proceeds from sale of joint ventures and
associates
|
|
4
|
379
|
Proceeds from sale of
investments
|
8
|
92
|
13
|
Proceeds from sale of property, plant and
equipment
|
|
4
|
2
|
Proceeds from sale of intangible
assets
|
|
-
|
1
|
Proceeds from sale of liquid
resources
|
|
42
|
17
|
Loans repaid by related
parties
|
|
14
|
7
|
Investment in liquid
resources
|
|
(24)
|
(29)
|
Interest received
|
|
16
|
24
|
Dividends received from joint ventures and
associates
|
|
131
|
162
|
Net cash (used in) /
generated from investing activities
|
|
(41)
|
1,332
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
Proceeds from issue of ordinary
shares
|
|
7
|
11
|
Purchase of treasury shares
|
|
(27)
|
(23)
|
Proceeds from borrowings
|
|
4
|
372
|
Repayment of borrowings
|
|
(249)
|
(300)
|
Finance lease principal
payments
|
|
(6)
|
(1)
|
Transactions with non-controlling
interests
|
|
(2)
|
-
|
Dividends paid to company’s
shareholders
|
|
(424)
|
(423)
|
Net cash (used in) /
generated from financing activities
|
|
(697)
|
(364)
|
|
|
|
|
Effects of exchange rate changes on cash and
cash equivalents
|
|
81
|
(19)
|
Net (decrease) / increase in
cash and cash equivalents
|
|
(247)
|
1,160
|
|
|
|
|
Cash and cash equivalents at beginning of
year
|
|
1,671
|
511
|
Cash and cash equivalents at
end of year
|
|
1,424
|
1,671
|
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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for the year ended 31 December
2016
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 2015 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.
In
April 2016 the IFRS Interpretations Committee (IFRS IC) rejected a
request to add to its agenda an item concerning cash pooling
arrangements, specifically addressing when and whether particular
cash pooling arrangements would meet the requirements for
offsetting in accordance with IAS 32. After consideration of the
IFRS IC rejection notice, Pearson has settled many of the balances
within its cash pooling arrangements during the year and has chosen
to show any residual balances within these arrangements gross in
the balance sheet at 31 December 2016. Pearson has considered the
prior year comparatives in light of this guidance, and has
concluded that those balances at 31 December 2015 that would not
meet these requirements for net treatment are immaterial for
restatement in the context of the overall presentation of the
Group's balance sheet at these dates.
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 2015 Annual Report.
This preliminary announcement does not constitute the Group’s
full financial statements for the year ended 31 December 2016. The
Group’s full financial statements will be approved by the
Board of Directors and reported on by the auditors in March 2017.
Accordingly, the financial information for 2016 is presented
unaudited in the preliminary
announcement.
The financial information for the year ended 31
December 2015 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 2015 was unqualified and
did not contain an emphasis of matter paragraph or any statement
under section 498 of the Companies Act 2006.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
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). The results of the FT Group
(to 30 November 2015) are shown as discontinued in the relevant
years. The results for 2015 have been restated to reflect minor
changes in management responsibilities between the Geographies
which were effective from 1 January 2016.
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Sales by
Geography
|
|
|
|
North America
|
|
2,981
|
2,940
|
Core
|
|
803
|
815
|
Growth
|
|
768
|
713
|
Sales
– continuing operations
|
|
4,552
|
4,468
|
Sales – discontinued
operations
|
|
-
|
312
|
Total sales
|
|
4,552
|
4,780
|
|
|
|
|
Adjusted
operating profit by Geography
|
|
|
|
North America
|
|
420
|
480
|
Core
|
|
57
|
105
|
Growth
|
|
29
|
(3)
|
PRH
|
|
129
|
90
|
Adjusted operating profit
– continuing operations
|
|
635
|
672
|
Adjusted operating profit – discontinued
operations
|
|
-
|
51
|
Total adjusted operating
profit
|
|
635
|
723
|
There were no material inter-segment
sales.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
2.
Segment information continued
The following table reconciles adjusted
operating profit to operating profit for each of our primary
segments.
all figures in £
millions
|
North
America
|
Core
|
Growth
|
PRH
|
Continuing
|
Discontinued
|
Total
|
2016
|
|
|
|
|
|
|
|
|
Adjusted operating profit
|
420
|
57
|
29
|
129
|
635
|
-
|
635
|
Costs of major restructuring
|
(172)
|
(62)
|
(95)
|
(9)
|
(338)
|
-
|
(338)
|
Other net gains and losses
|
(12)
|
(12)
|
(1)
|
-
|
(25)
|
-
|
(25)
|
Intangible charges
|
(2,684)
|
(16)
|
(33)
|
(36)
|
(2,769)
|
-
|
(2,769)
|
Operating
(loss) / profit
|
(2,448)
|
(33)
|
(100)
|
84
|
(2,497)
|
-
|
(2,497)
|
2015 (restated)
|
|
|
|
|
|
|
|
|
Adjusted operating profit /
(loss)
|
480
|
105
|
(3)
|
90
|
672
|
51
|
723
|
Costs of major restructuring
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Other net gains and losses
|
19
|
(5)
|
-
|
(1)
|
13
|
1,184
|
1,197
|
Intangible charges
|
(386)
|
(79)
|
(583)
|
(41)
|
(1,089)
|
(3)
|
(1,092)
|
Operating
profit / (loss)
|
113
|
21
|
(586)
|
48
|
(404)
|
1,232
|
828
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
2.
Segment information continued
Adjusted operating profit 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.
In
2016 the definition of adjusted operating profit has been amended
to exclude the costs of major restructuring activity. In January
2016, Pearson announced that it was embarking on a restructuring
programme to simplify the business, reduce costs and position the
company for growth in its major markets. The costs of this
programme in 2016 are significant enough to exclude in our adjusted
operating profit measure so as to better highlight the underlying
performance. There was no major restructuring in 2015 and
accordingly the change has no effect on the comparative adjusted
operating profit.
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. In
2016, the losses in the Core segment mainly relate to the closure
of our English language schools in Germany and in our North America
segment to the sale of the Pearson English Business Solutions
business. In 2015, other gains and losses included in discontinued
operations relate to the sale of the FT Group including the 50%
share of the Economist. Included in other net gains and losses
within continuing operations in 2015 in the North America segment
is the profit on disposal of PowerSchool net of small losses on
other investments.
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
don’t necessarily reflect the current year performance of the
Group. In 2016, intangible charges include the impairment of
goodwill in the North American business of £2,548m. In 2015,
intangible charges included an impairment of goodwill and
intangibles in our North American business of £282m, our core
business of £37m and our Growth business of
£530m.
Corporate costs are allocated to business
segments including discontinued operations 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 continued
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Net interest payable
|
|
(59)
|
(46)
|
Finance income in respect of retirement
benefits
|
|
11
|
4
|
Net foreign exchange gains /
(losses)
|
|
(20)
|
7
|
Derivatives not in a hedging
relationship
|
|
8
|
6
|
Net finance
costs
|
|
(60)
|
(29)
|
|
|
|
|
Analysed as:
|
|
|
|
Finance costs
|
|
(97)
|
(100)
|
Finance income
|
|
37
|
71
|
Net finance
costs
|
|
(60)
|
(29)
|
|
|
|
|
Analysed as:
|
|
|
|
Net interest payable
|
|
(59)
|
(46)
|
Other net finance (costs) /
income
|
|
(1)
|
17
|
Net finance
costs
|
|
(60)
|
(29)
|
Net finance costs classified as other net
finance costs / income are excluded in the calculation of our
adjusted earnings.
We
have excluded finance costs relating to retirement benefits as we
believe the presentation does not reflect the economic substance of
the underlying assets and liabilities.
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 2016 and
2015 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 continued
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Loss before tax –
continuing operations
|
|
(2,557)
|
(433)
|
Costs of major restructuring
|
2
|
338
|
-
|
Intangible charges
|
2
|
2,769
|
1,089
|
Other gains and losses
|
2
|
25
|
(13)
|
Other net finance costs /
(income)
|
3
|
1
|
(17)
|
Adjusted profit before tax – continuing
operations
|
|
576
|
626
|
Adjusted profit before tax – discontinued
operations
|
|
-
|
51
|
Total adjusted profit before
tax
|
|
576
|
677
|
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit –
continuing operations
|
|
222
|
81
|
Tax benefit on costs of major
restructuring
|
|
(84)
|
-
|
Tax benefit on intangible
charges
|
|
(255)
|
(257)
|
Tax (benefit) / charge on
other gains and losses
|
|
(14)
|
40
|
Tax charge on other net
finance costs
|
|
-
|
7
|
Tax amortisation benefit on
goodwill and intangibles
|
|
36
|
33
|
Adjusted income tax charge – continuing
operations
|
|
(95)
|
(96)
|
Adjusted income tax charge – discontinued
operations
|
|
-
|
(9)
|
Total adjusted income tax
charge
|
|
(95)
|
(105)
|
Tax rate reflected in adjusted
earnings
|
|
16.5%
|
15.5%
|
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).
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 continued
for the year ended 31 December
2016
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.
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year from continuing operations
|
|
(2,335)
|
(352)
|
Non-controlling interest
|
|
(2)
|
-
|
Loss from continuing
operations
|
|
(2,337)
|
(352)
|
Profit for the year from discontinued
operations
|
|
-
|
1,175
|
Non-controlling interest
|
|
-
|
-
|
(Loss) /
earnings
|
|
(2,337)
|
823
|
Weighted average number of shares
(millions)
|
814.8
|
813.3
|
Effect of dilutive share options
(millions)
|
-
|
-
|
Weighted average number of shares (millions) for
diluted earnings
|
814.8
|
813.3
|
(Loss) / earnings per share
from continuing and discontinued operations
|
Basic
|
(286.8)p
|
101.2 p
|
Diluted
|
(286.8)p
|
101.2 p
|
Loss per share from
continuing operations
|
Basic
|
(286.8)p
|
(43.3)p
|
Diluted
|
(286.8)p
|
(43.3)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 also enables our
investors to more easily, and consistently, track the underlying
operational performance of the Group.
The adjusted earnings per share includes both
continuing and discontinued businesses on an undiluted basis. The
Company’s definition of adjusted earnings per share may not
be comparable to other similarly titled measures reported by other
companies.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
7.
Adjusted earnings per share continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory income
|
Re-analyse discontinued ops
|
Costs of major restructuring
|
Other net gains and losses
|
Acquisition costs
|
Intangible charges
|
Other net finance costs
|
Tax amortisation
|
Adjusted income
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
2
|
(2,497)
|
-
|
338
|
25
|
-
|
2,769
|
-
|
-
|
635
|
Net finance costs
|
3
|
(60)
|
-
|
-
|
-
|
-
|
-
|
1
|
-
|
(59)
|
Profit before
tax
|
4
|
(2,557)
|
-
|
338
|
25
|
-
|
2,769
|
1
|
-
|
576
|
Income tax
|
5
|
222
|
-
|
(84)
|
(14)
|
-
|
(255)
|
-
|
36
|
(95)
|
Profit for the year -
continuing
|
|
(2,335)
|
-
|
254
|
11
|
-
|
2,514
|
1
|
36
|
481
|
Profit for the year -
discontinued
|
8
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Profit for the
year
|
|
(2,335)
|
-
|
254
|
11
|
-
|
2,514
|
1
|
36
|
481
|
Non – controlling
interest
|
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Earnings
|
|
(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 continued
for the year ended 31 December
2016
7.
Adjusted earnings per share continued
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory income
|
Re-analyse discontinued ops
|
Costs of major restructuring
|
Other net gains and losses
|
Acquisition costs
|
Intangible charges
|
Other net finance costs
|
Tax amortisation
|
Adjusted income
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
2
|
(404)
|
51
|
-
|
(13)
|
-
|
1,089
|
-
|
-
|
723
|
Net finance costs
|
3
|
(29)
|
-
|
-
|
-
|
-
|
-
|
(17)
|
-
|
(46)
|
Profit before tax
|
4
|
(433)
|
51
|
-
|
(13)
|
-
|
1,089
|
(17)
|
-
|
677
|
Income tax
|
5
|
81
|
(9)
|
-
|
40
|
-
|
(257)
|
7
|
33
|
(105)
|
Profit for the year -
continuing
|
|
(352)
|
42
|
-
|
27
|
-
|
832
|
(10)
|
33
|
572
|
Profit for the year -
discontinued
|
8
|
1,175
|
(42)
|
-
|
(1,135)
|
-
|
2
|
-
|
-
|
-
|
Profit for the year
|
|
823
|
-
|
-
|
(1,108)
|
-
|
834
|
(10)
|
33
|
572
|
Non – controlling
interest
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Earnings
|
|
823
|
-
|
-
|
(1,108)
|
-
|
834
|
(10)
|
33
|
572
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
(millions)
|
|
|
813.3
|
Weighted average number of shares (millions) for
diluted earnings
|
|
|
813.3
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share
(basic)
|
|
|
70.3p
|
Adjusted earnings per share
(diluted)
|
|
|
70.3p
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
8.
Discontinued
operations
On
16 October 2015, Pearson substantially completed the sale of its
50% interest in the Economist and on 30 November 2015 Pearson
completed the sale of the Financial Times. The results of the
Economist and the Financial Times are included in discontinued
operations to the date of sale in 2015.
The sales and profit for
the year for discontinued operations are analysed
below.
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Sales by
discontinued operations
|
|
-
|
312
|
|
|
-
|
|
Operating profit included in adjusted
earnings
|
|
-
|
51
|
Intangible amortisation
|
|
-
|
(3)
|
Gain on disposal of the Financial
Times
|
|
-
|
711
|
Gain on disposal of the
Economist
|
|
-
|
473
|
Profit before
tax
|
|
-
|
1,232
|
Attributable tax
charge
|
|
-
|
(57)
|
Profit
for the year - discontinued operations
|
|
-
|
1,175
|
|
|
-
|
|
Operating profit included
in adjusted earnings
|
|
-
|
51
|
Attributable tax
charge
|
|
-
|
(9)
|
Profit
for the year included in adjusted earnings
|
|
-
|
42
|
Intangible
amortisation
|
|
-
|
(3)
|
Attributable tax
benefit
|
|
-
|
1
|
Gain on disposal of the Financial
Times
|
|
-
|
711
|
Attributable tax
charge
|
|
-
|
(49)
|
Gain on disposal of the
Economist
|
|
-
|
473
|
Attributable tax
charge
|
|
-
|
-
|
Profit
for the year - discontinued operations
|
|
-
|
1,175
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
8.
Discontinued operations continued
The gains on disposal of the Financial Times and
Economist in 2015 are shown in the tables
below.
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Gain on
sale of the Financial Times
|
|
|
|
|
|
|
|
Proceeds
|
|
-
|
858
|
Net assets disposed
|
|
-
|
(100)
|
Cost of disposal
|
|
-
|
(47)
|
Gain on
disposal before tax
|
|
-
|
711
|
Attributable tax
charge
|
|
-
|
(49)
|
Gain on disposal after
tax
|
|
-
|
662
|
|
|
|
|
Gain on
sale of the Economist
|
|
|
|
|
|
|
|
Proceeds
|
|
92
|
377
|
Re-measurement of retained asset at fair
value
|
|
-
|
92
|
Net (assets) / liabilities
disposed
|
|
(92)
|
4
|
Cost of disposal
|
|
-
|
-
|
Gain on
disposal before tax
|
|
-
|
473
|
Attributable tax
charge
|
|
-
|
-
|
Gain on disposal after
tax
|
|
-
|
473
|
The amount included as re-measurement of
retained assets related to an 11% stake in the Economist which was
held at fair value within other financial assets on the balance
sheet at 31 December 2015 but was subsequently disposed in the
first half of 2016 with no further gain or
loss.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognised as distributions to equity
shareholders in the year
|
|
424
|
423
|
The directors are proposing
a final dividend of 34.0p per equity share, payable on 12 May 2017
to shareholders on the register at the close of business on 7 April
2017. This final dividend, which will absorb an estimated
£278m of shareholders’ funds, has not been included as a
liability as at 31 December 2016.
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:
|
|
|
|
|
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate for
profits
|
|
1.33
|
1.53
|
Year end
rate
|
|
1.23
|
1.47
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
11.
Non-current intangible
assets
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
2,341
|
4,134
|
Other intangibles
|
|
1,101
|
1,030
|
Non-current
intangible assets
|
|
3,442
|
5,164
|
At
the end of 2016, following trading in the final quarter of the
year, it became clear that the underlying issues in the North
American higher education courseware market were more severe than
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, in January 2017,
strategic plans and estimates for future cash flows were revised
and we determined during the goodwill impairment review that the
fair value less costs of disposal of the North America cash
generating unit (CGU) no longer supported the carrying value of
this goodwill and as a consequence impaired goodwill by
£2,548m.
In
2015, following significant economic and market deterioration in
the Group’s operations in emerging markets and ongoing
cyclical and policy related pressures in the Group’s mature
market operations, an impairment of £507m was booked in
respect of the Group’s Growth operations, representing
impairments of £269m in the Brazil CGU, £181m in the
China CGU, £48m in the South Africa CGU and £9m in the
Other Growth CGU, thereby bringing the carrying value of goodwill
in those CGUs down to £nil. Impairments of £10m and
£13m were also booked in respect of other acquired intangibles
in the South Africa and Other Growth CGUs respectively, bringing
their carrying value down to £nil. Impairments of £282m
and £37m were also booked in respect of the North America and
Core CGUs respectively, bringing the carrying value of the goodwill
in those CGUs down to fair value less costs of
disposal.
12.
Trade and other
liabilities
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
(333)
|
(319)
|
Accruals
|
|
(532)
|
(393)
|
Deferred
income
|
|
(883)
|
(766)
|
Other liabilities
|
|
(303)
|
(268)
|
Trade
and other liabilities
|
|
(2,051)
|
(1,746)
|
|
|
|
|
Analysed
as:
|
|
|
|
Trade and other liabilities
– current
|
|
(1,629)
|
(1,390)
|
Other liabilities –
non-current
|
|
(422)
|
(356)
|
Total
trade and other liabilities
|
|
(2,051)
|
(1,746)
|
The deferred income balance
comprises principally multi-year obligations to deliver workbooks
to adoption customers in school businesses; advance payments in
assessment, testing and training businesses; subscription income in
school and college businesses; and obligations to deliver digital
content in future periods.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
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:
|
|
|
|
|
|
|
|
|
Total
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash – Current year
acquisitions
|
|
|
|
(7)
|
Deferred payments for prior
year acquisitions and other items
|
|
(8)
|
Net cash
outflow on acquisitions
|
|
|
|
(15)
|
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
Derivative financial
instruments
|
|
171
|
78
|
Current
assets
|
|
|
|
Derivative financial
instruments
|
|
-
|
32
|
Marketable securities
|
|
10
|
28
|
Cash and cash equivalents (excluding
overdrafts)
|
|
1,459
|
1,703
|
Non-current
liabilities
|
|
|
|
Borrowings
|
|
(2,424)
|
(2,048)
|
Derivative financial
instruments
|
|
(264)
|
(136)
|
Current
liabilities
|
|
|
|
Borrowings
|
|
(44)
|
(282)
|
Derivative financial
instruments
|
|
-
|
(29)
|
Total
net debt
|
|
(1,092)
|
(654)
|
EBITDA
(excluding restructuring)
|
|
|
|
Adjusted operating
profit
|
2
|
635
|
723
|
Depreciation
|
|
80
|
75
|
Software
amortisation
|
|
70
|
74
|
Total
EBITDA
|
|
785
|
872
|
Net Debt
/ EBITDA ratio
|
|
1.4x
|
0.8x
|
In
May 2016, Pearson repaid its $350m 4.0% US Dollar Notes on
maturity.
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 continued
for the year ended 31 December
2016
15.
Classification of assets and
liabilities measured at fair value
|
---------Level 2---------
|
-----Level 3------
|
|
|
|
Available for sale assets
|
Derivatives
|
Other assets
|
Available for sale assets
|
Other liabilities
|
Total fair
value
|
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Investment 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)
|
|
2015
|
|
|
|
|
|
|
|
|
Investment in unlisted
securities
|
-
|
-
|
-
|
143
|
-
|
143
|
|
Marketable securities
|
28
|
-
|
-
|
-
|
-
|
28
|
|
Derivative financial
instruments
|
-
|
110
|
-
|
-
|
-
|
110
|
|
Total financial assets held at fair
value
|
28
|
110
|
-
|
143
|
-
|
281
|
|
|
|
|
|
|
|
|
|
Derivative financial
instruments
|
-
|
(165)
|
-
|
-
|
-
|
(165)
|
|
Total financial liabilities held at fair
value
|
-
|
(165)
|
-
|
-
|
-
|
(165)
|
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
15.
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 Pearson’s bonds is
£2,381m (2015: £2,245m) compared to their carrying value
of £2,420m 2015: £2,284m). 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:
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unlisted
securities
|
|
|
|
At
beginning of year
|
|
143
|
45
|
Exchange differences
|
|
8
|
3
|
Additions
|
|
6
|
101
|
Fair value movements
|
|
-
|
-
|
Disposals
|
|
(92)
|
(6)
|
At end of
year
|
|
65
|
143
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of (loss) /
profit for the year to net cash (used in) / generated from
operations
|
|
|
|
|
|
|
|
(Loss) / profit for the year
|
|
(2,335)
|
823
|
Income tax
|
|
(222)
|
(24)
|
Depreciation, amortisation and impairment
charges
|
|
2,912
|
1,200
|
Net loss / (profit) on disposal of businesses
and fixed assets
|
|
40
|
(1,194)
|
Net finance costs
|
|
60
|
29
|
Share of results of joint ventures and
associates
|
|
(97)
|
(68)
|
Share-based payment costs
|
|
22
|
26
|
Net foreign exchange
adjustment
|
|
43
|
22
|
Pre-publication
|
|
(19)
|
(57)
|
Inventories
|
|
17
|
10
|
Trade and other receivables
|
|
156
|
(99)
|
Trade and other liabilities
|
|
61
|
(80)
|
Retirement benefit
obligations
|
|
(106)
|
(57)
|
Provisions
|
|
(10)
|
(13)
|
Net cash generated from
operations
|
|
522
|
518
|
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
note
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net cash
generated from operations to closing net debt
|
|
|
|
|
|
|
|
Net cash generated from
operations
|
|
522
|
518
|
Dividends from joint ventures and
associates
|
|
131
|
162
|
Net purchase of PPE including finance lease
principal payments
|
|
(90)
|
(85)
|
Net purchase of intangible
assets
|
|
(157)
|
(160)
|
Add back: cost of major restructuring
paid
|
|
167
|
-
|
Add back: special pension
contribution
|
|
90
|
-
|
Operating cash
flow
|
|
663
|
435
|
Operating tax paid
|
|
(63)
|
(129)
|
Net operating finance costs
paid
|
|
(51)
|
(51)
|
Operating free cash
flow
|
|
549
|
255
|
Cost of major restructuring
paid
|
|
(167)
|
-
|
Special pension contribution (net of
tax)
|
|
(72)
|
-
|
Non-operating tax paid
|
|
-
|
(103)
|
Free cash
flow
|
|
310
|
152
|
Dividends paid (including to non-controlling
interests)
|
|
(424)
|
(423)
|
Net
movement of funds from operations
|
|
(114)
|
(271)
|
Acquisitions and disposals
|
|
19
|
1,395
|
Purchase of treasury shares
|
|
(27)
|
(23)
|
Loans repaid
|
|
14
|
7
|
New equity
|
|
7
|
11
|
Other movements on financial
instruments
|
|
4
|
(1)
|
Net movement of
funds
|
|
(97)
|
1,118
|
Exchange movements on net
debt
|
|
(341)
|
(133)
|
Total movement in net
debt
|
|
(438)
|
985
|
Opening net debt
|
|
(654)
|
(1,639)
|
Closing net
debt
|
14
|
(1,092)
|
(654)
|
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.
Special pension contributions of £90m
(£72m net of tax) in 2016 relate to the sale of the FT
Group.
NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued
for the year ended 31 December
2016
17.
Return on invested capital
(ROIC)
|
|
|
|
|
|
2016
|
2015
|
all figures in £
millions
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating profit
|
|
635
|
723
|
Less: operating tax paid
|
|
(63)
|
(129)
|
Return
|
|
572
|
594
|
|
|
|
|
Average: Goodwill
|
|
6,987
|
6,419
|
Average: Other non-current
intangibles
|
|
2,481
|
2,296
|
Average: Intangible assets –
Pre-publication
|
|
926
|
821
|
Average: Tangible fixed assets and working
capital
|
|
1,070
|
781
|
Average:
Total invested capital
|
|
11,464
|
10,317
|
|
|
|
|
ROIC
|
|
5.0%
|
5.8%
|
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.
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.
At
31 December 2016 the Group had loans to Penguin Random House (PRH)
of £33m (2015: £47m) which were unsecured with interest
calculated based on market rates. The loans are provided under a
working capital facility and fluctuate during the year. The loans
outstanding at 31 December 2016 were repaid in their entirety in
January 2017. At 31 December 2016, the Group also had a current
asset receivable from PRH of £21m (2015: £27m) arising
from the provision of services. Service fee income from PRH was
£4m in 2016 (2015: £16m).
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.
20.
Events after the balance
sheet date
On
18 January 2017,
Pearson announced the intention to issue an exit notice to
Bertelsmann regarding the 47% associate investment in PRH with a
view to selling the stake or recapitalizing the business and
extracting a dividend.
On
24 February 2017, Pearson announced the intention to trigger the
early repayment option on its $550m 6.25% Global Dollar bonds 2018.
There were no other significant post balance sheet
events.
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
PEARSON
plc
|
|
|
Date:
24 February 2017
|
|
|
By: /s/
NATALIE DALE
|
|
|
|
------------------------------------
|
|
Natalie
Dale
|
|
Deputy
Company Secretary
|