REG - Pearson PLC - 2022 Interim Results
01/08/2022 07:00
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RNS Number : 3515U Pearson PLC 01 August 2022
Interim results for the six months to 30(th) June 2022 (Unaudited)
1 August 2022 Strong financial performance and continued momentum; Full
year expectations reaffirmed
Highlights
· Strong financial performance with underlying sales
growth of 6% and adjusted operating profit up 22%. Full year expectations
reaffirmed.
· Continued strategic and operational momentum across the
business.
· Accelerating our digital journey with the development
of Pearson's lifelong learning ecosystem.
· At least £100m of further efficiencies identified and
to be delivered in 2023; accelerates our improved margin expectation to 2023
from 2025.
· We are launching a strategic review of our OPM
business.
Andy Bird, Pearson's Chief Executive, said:
"Pearson has delivered another encouraging financial performance in the first
half of the year. We continue to make excellent strategic and operational
progress, with momentum across the business. We are already seeing clear
benefits from our increasingly diverse learning ecosystem, with Pearson
serving more people across their lifelong learning journeys. Our digital
strategy is progressing well; Pearson+ grew to 4.5m registered users,
increasingly taking us direct to consumers.
"Our focus on delivery and execution remains and full year 2022 expectations
are reaffirmed. In addition, the more integrated platform we are building
across the company is creating efficiencies, underpinning our new guidance for
accelerated margin improvement. We have a robust balance sheet which, together
with our cash generation, will support continued investment in growth and
create value for our shareholders."
Underlying sales growth of 6% to £1,788m
· Assessment & Qualifications up 16% driven by US
Student Assessment and UK & International Qualifications as exam
timetables normalise after COVID-19 disruption. Clinical Assessment delivered
better-than-expected performance supported by an ongoing focus on health and
wellness as well as government funding.
· Virtual Learning up 3% with robust retention rates in
Virtual Schools, offset by weaker than expected Spring enrolments in OPM.
· English Language Learning up 22% as improved global
mobility drove excellent growth in the Pearson Test of English (PTE).
· Workforce Skills up 6% with continued growth in BTEC,
GED and TalentLens. Recent acquisitions, Faethm and Credly, grew strongly.
· Higher Education down 4%, in line with expectations, as
Fall enrolment trends in the US continued into the Spring period.
· Sales in businesses under strategic review declined as
expected due to COVID-19 impacting revenue phasing in Canada and South Africa
in 2021 as well as ceased businesses.
Adjusted operating profit up £33m to £160m
· Driven by an encouraging trading performance, FX
benefit and property savings, partially offset by inflation, portfolio
investment and the phasing of costs last year.
· Adjusted earnings per share growth to 22.5p (H1 2021:
10.5p) reflecting adjusted operating profit growth, and the one off tax
provision releases resulting in net interest receivable of £18m (net interest
charge H1 2021: £(27)m) and an adjusted effective tax rate of 5% (H1 2021:
20%).
Strong balance sheet underpins investment in growth and shareholder returns
· Operating cash flow was £9m (H1 2021: £10m) with the
drop through of increased trading profits offset by increased receivables
given the strong revenue growth in H1. These receivables will be collected in
H2.
· Robust balance sheet, with H1 net debt of £810m (H1
2021 £646m). Operating cash was more than offset by dividends, share buyback
and tax. We had available liquidity of approximately £1.2bn (H1 2021:
£1.4bn) at the end of H1.
· H1 acquisitions of Credly and Mondly are accelerating
the growth strategy in Workforce Skills and English Language Learning
divisions respectively.
· Proposed interim dividend of 6.6p (H1 2021: 6.3p)
represents an increase of 5%.
· £350m share buyback progressing with over £165m of
shares repurchased at the 29(th) July.
Statutory results
· Sales of £1,788m (H1 2021: £1,597m), reflecting
underlying performance, portfolio changes and currency movements.
· Operating profit of £148m (H1 2021: £9m) due to
underlying performance, the reduction in costs of major restructuring and the
net gain related to acquisitions and disposals compared to a loss in 2021.
· Statutory earnings per share of 17.5p (H1 2021: 2.3p).
· Net cash generated from operations was £53m (H1 2021:
£79m).
Strategic progress
· Accelerating our digital journey.
- Continued strategic progress in building Pearson's digital
learning ecosystem - already have a large-scale user base.
- Pearson+ roll out progressing well, 4.5m registered users
and 329k cumulative paid subscriptions as at 15 July 2022. Channels &
Social launching for back-to-school 2022 to broaden Pearson+ reach and grow
total addressable market.
· Maintained focus on driving higher returns through
efficiency savings.
- Re-organisation of Pearson into five divisions with
responsibility for their full cost base is now complete, enabling more
efficient ways of working and operating as a business in a digital world.
· Further efficiencies identified of at least £100m for
2023, through rightsizing costs as we implement the new strategy and
portfolio, product and content rationalisation, further corporate property
reductions and other operating productivities. This accelerates our improved
margin expectation to 2023 from 2025. One-time costs to deliver these savings,
which we will exclude from adjusted operating profit to better highlight
underlying performance, are expected to be c.£120m of which approximately
half will be cash related.
· Reshaping our portfolio.
- Integration of Faethm and Credly progressing well with
plans to pilot a new suite of workforce services in Q3 2022 ahead of a
commercial launch in H1 2023.
- Acquisition of Mondly enhances our credentials in the
language learning direct to consumer space as well as creating synergies
across Pearson.
- Ongoing progress with announcement of sale of Italian and
German K12 Courseware businesses for £163m to Sanoma Corporation and the
completion of sale of ERPI (Editions du renouveau pedagogique) business in
Canada to TC Media.
- Retaining Australian and English-speaking Canadian K12
Courseware businesses to deliver increased shareholder value as part of the
Group.
- Pearson continues to make progress in the remaining areas
of the strategic review.
- Impact of total strategic review disposals on 2022
adjusted operating profit expected to be c.£15-20m reflecting the second half
weighting of their financial contribution. Operating cashflow for these
businesses is weighted to Q4 and the timing of completion is also likely to
impact operating cash conversion in 2022.
- Launching strategic review of OPM business.
2022 outlook reaffirmed*
Group revenue and adjusted operating profit expectations remain unchanged
based on prevailing FX rates as outlined on 25 February 2022. Pearson sees
upside potential in English Language Learning, Virtual Schools and Clinical
Assessment given outperformance in the first half and likely increased
pressure in enrolments in OPM and Higher Education. Growth in Pearson+
subscriptions will lead to a shift in HE revenue recognition from Q3 to Q4.
This year we expect a net interest charge of £10-15m and an effective tax
rate of 15-17% reflecting the statute of limitations on a number of tax
provisions which lapsed in April 2022.
Financial summary
£m H1 2022 H1 2021 Headline growth CER Underlying growth
growth**
Business performance
Sales 1,788 1,597 12% 6% 6%
Adjusted operating profit 160 127 26% 19% 22%
Operating cash flow 9 10
Adjusted earnings per share 22.5p 10.5p
Statutory results
Sales 1,788 1,597
Operating profit 148 9
Net cash generated from operations 53 79
Basic earnings per share 17.5p 2.3p
Dividend per share 6.6p 6.3p
Net debt (810) (646)
Throughout this announcement: a) Growth rates are on an underlying basis
unless otherwise stated. Underlying growth rates exclude currency movements,
and portfolio changes. b) The 'business performance' measures are non-GAAP
measures and reconciliations to the equivalent statutory heading under IFRS
are included in notes to the attached condensed consolidated financial
statements 2, 3, 4, 5, 7, and 16.
*2022 consensus on the Pearson website as at full year 2021; median adjusted
operating profit of £416m at £:$ 1.37.
**Constant exchange rates are calculated by assuming the average FX in the
prior period prevailed through the current period.
Tax update
On 8 June 2022 the EU General Court dismissed various applications, including
the UK Government's, to annul the European Commission decision that certain
aspects of the UK tax code constituted State Aid. Following this decision, it
has been concluded that a provision is now required in relation to this issue.
The total exposure is calculated to be £105m (excluding interest) with a
provision of £63m now included in the results, outside adjusted earnings,
representing our estimate of the exposure. There is no cash impact as a
payment on account was made during 2021.
Executive Changes
· Tim Bozik is retiring after nearly forty years at
Pearson. He will remain interim chief product officer and co-president of
Direct to Consumer until early 2023.
· We have expanded Tom ap Simon's role. He will become
President of Higher Education effective September 6, in addition to his
current role as president of Virtual Learning.
· Building on Tim's work, Tom will look for further
opportunities to transform the Higher Education business, accelerate
innovation, and unlock growth opportunities.
This announcement contains inside information.
Contacts
Investor Relations Jo Russell +44 (0) 7785 451 266
James Caddy +44 (0) 7825 948 218
Media Tom Steiner +44 (0) 7787 415 891
Gemma Terry +44 (0) 7841 363 216
Teneo Charles Armitstead +44 (0) 7703 330 269
Virtual event Pearson's interim results online presentation today at 0900 (BST). Register to
receive log in details: https://pearson.connectid.cloud/register
(https://pearson.connectid.cloud/register)
Notes
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 this website
(www.pearsonplc.com (www.pearsonplc.com) ). 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.
KPIs
KPI Objective KPI Measure H1 2022 H1 2021
Digital growth Drive digital revenue growth OPM student enrolments 143k 144k
OnVUE volumes 1.4m 1.6m
Higher Education US digital registrations 4.8m 5.3m
PTE volume 344k 189k
Consumer Create engaging and personalised NPS for Connections Academy +67 +62
Engagement consumer
experiences
NPS for PTE +51 +56
Pearson+ registered users* 4.5m n/a
Workforce Skills registered users** 4.1m n/a
Product Improve the effectiveness of our products to deliver better outcomes PTE speed of score return 1.3 days 1.2 days
Effectiveness
VUE*** test volumes 10.0m 8.5m
Higher Education product usage - text units 2.1m 2.2m
Workforce Skills number of enterprise customers**** 1,387 518
Full list of strategic KPIs to be reported on alongside full year results
* Pearson+ registered users represents the number of unique user accounts
added over an academic year.
** Workforce Skills registered users represents the number of new unique user
accounts on a trailing 12-month basis and includes new unique user accounts
from Credly pre-acquisition.
*** VUE test volumes include GED tests
**** Workforce Skills number of enterprise customers represents the number of
customers at period end
Operational review
£ millions H1 2022 H1 2021 Headline CER Underlying
growth growth* growth
Sales
Assessment & Qualifications 697 573 22% 16% 16%
Virtual Learning 390 353 10% 3% 3%
English Language Learning 122 94 30% 26% 22%
Workforce Skills 127 112 13% 13% 6%
Higher Education 373 365 2% (4)% (4)%
Strategic review 79 100 (21)% (21)% (13)%
Total 1,788 1,597 12% 6% 6%
Adjusted operating profit/(loss)
Assessment & Qualifications 137 96 43% 34% 34%
Virtual Learning 14 14 0% (21)% (21)%
English Language Learning (4) (13) 69% 69% 62%
Workforce Skills 28 34 (18)% (15)% (6)%
Higher Education (4) 4 (>100%) (>100%) (>100%)
Strategic review (11) (8) (38)% (25)% 0%
Total adjusted operating profit/(loss) 160 127 26% 19% 22%
*Constant exchange rates are calculated by assuming the average FX in the
prior period prevailed through the current period.
Assessment & Qualifications
In Assessment & Qualifications, revenue increased 16% on an underlying
basis and 22% on a headline basis. Adjusted operating profit increased 34% in
underlying terms due to the operating leverage on revenue growth.
Professional Certification (VUE) revenue was down 3%. Ongoing growth across
clients and programmes, particularly in the IT and Professional sectors was
offset by the expected headwind resulting from the DVSA contract change, as
previously announced in 2021. DVSA volumes in the UK have recovered extremely
well both at our test centres and with competitors who also use the DVSA
booking platform.
Clinical Assessment outperformed expectations in the first half, with revenue
up 14% due to an ongoing focus on mental health and wellbeing combined with
government funding driving demand for core products and digital solutions.
US Student Assessment saw exceptional underlying sales growth of 45% driven by
the resumption of full spring exam activities across most US states, as well
as the positive impact of recent contract wins and additional scope being
added to several existing contracts.
In UK & International Qualifications, underlying sales grew 24% as a
result of exams returning to normal in the UK and international markets,
following the COVID-19 related rebate to schools in 2021.
Virtual Learning
Revenue grew 3% on an underlying basis and 10% on a headline basis due to
robust retention rates in Virtual Schools in the 2021/2022 academic year,
partially offset by weaker Spring enrolments in OPM. Adjusted operating
profit was down 21% in underlying terms, due to the investment in our Virtual
Schools' platform, curriculum and customer care support as well as lower
Spring enrolments in OPM.
In Virtual Schools, revenue grew 6% as retention rates for the current school
year, 2021/22, remain robust, whilst applications for the 2022-23 academic
school year - an early indication of demand, are tracking well. In June,
Pearson announced approval of a new full-time online school in Colorado,
Colorado Connections Academy, which will serve students statewide in grades
K-12, starting in the 2022-23 academic school year. Pearson operates 47
schools across 30 states.
In OPM, weaker underlying Spring enrolments, down 1% led to a revenue decline
of 2%. During the period we announced the end of our partnership with Arizona
State University at the end of June 2023. We are launching a strategic review
of our OPM business. We will update the market on the outcome once the review
is concluded.
English Language Learning
In English Language Learning, sales were up 22% on an underlying basis and 30%
on a headline basis due predominantly to the benefits of ongoing re-opening of
borders and improving global mobility on Pearson Test of English (PTE) where
volumes grew 82% compared to the same period in 2021. The adjusted operating
loss improved by 62% on an underlying basis due to revenue growth.
The Group is pleased with the progress made so far in integrating the recent
acquisition of Mondly which gives us access to the high growth direct to
consumer language learning market as well as creating synergies across the
group.
Workforce Skills
In Workforce Skills, sales were up 6% on an underlying basis and 13% on a
headline basis, predominantly driven by growth in BTEC due to the return of
examinations, growth in GED, TalentLens and Apprenticeships. Adjusted
operating profit decreased 6% in underlying terms, with high flow through of
sales growth driving operating leverage offset by investment.
Ongoing progress is being made with developing the Workforce Skills product
roadmap and integrated product strategy. We are focused on the integration of
Faethm and Credly with a dedicated product delivery team working across both
businesses. Pearson has 1,387 enterprise clients in its Workforce Skills
portfolio, up 168% on last year, with the acquisitions of Credly and Faethm
underpinning this growth.
Higher Education
In Higher Education, sales declined 4% on an underlying basis and grew 2% on a
headline basis. US Higher Education Courseware revenue declined 5%, as
expected, reflecting the continued decline in enrolments and courses per
enrolment in the 2021/22 academic year. We continue to make progress with our
strategy of shifting from ownership to access, with Inclusive Access sales
into non-profit institutions up 7% to represent 19% of US Higher Education
revenue.
Adjusted operating profit declined by £8m in underlying terms driven by
revenue declines.
We are seeing momentum build in Pearson+ with registered users increasing 64%
to 4.5m and cumulative paid subscriptions increased from 133k to 329k.
Pearson+ units as a proportion of total text units have also increased from
5.7% in H2 2021 to 14.4% in H1 2022.
Building on the success of Pearson+, we will launch Channels for the
back-to-school period giving students access to 16-18 Channels with high
quality learning videos and practice problems across an array of disciplines
such as Chemistry, Algebra and Anatomy. This will be a critical tool in
building direct relationships with a wider group of students enabling us to
test additional features and deliver more learning content. Pearson+ Channels
can be accessed at channels.pearson.com.
Strategic review
Sales in our international courseware local publishing businesses under
strategic review were down 13% on an underlying basis and 21% on a headline
basis, as COVID-19 impacted revenue phasing in Canada and South Africa in 2021
as well as ceased businesses. Adjusted operating profit, on an underlying
basis, was flat with sales decline offset by cost savings.
FINANCIAL REVIEW
Operating result
Due to seasonal bias in some of the Group's businesses, Pearson typically
makes a higher proportion of its profits in the second half of the year.
Operating cash flow at the half year is a modest cash inflow reflecting the
seasonal increase in working capital.
Sales for the six months to 30 June 2022 increased on a headline basis by
£191m or 12% from £1,597m for the six months to 30 June 2021 to £1,788m for
the same period in 2022 and adjusted operating profit increased by £33m or
26% from £127m in the first half of 2021 to a profit of £160m in the first
half of 2022 (for a reconciliation of this measure see note 2 to the condensed
consolidated financial statements).
The headline basis simply compares the reported results for the six months to
30 June 2022 with those for the equivalent period in the prior year. We also
present sales and profits on an underlying basis which exclude the effects of
exchange, the effect of portfolio changes arising from acquisitions and
disposals and the impact of adopting new accounting standards that are not
retrospectively applied, when relevant. Our portfolio change is calculated by
taking account of the contribution from acquisitions and by excluding sales
and profits made by businesses disposed in either 2021 or 2022. Portfolio
changes mainly relate to the sale of the Group's interests in its Canadian
educational publisher ERPI (Éditions du renouveau pédagogique) in June 2022,
the disposals of Pearson Institute of Higher Education ('PIHE') and the K12
Sistemas business in Brazil in 2021, and the acquisitions of Credly and Mondly
in 2022 and of Faethm in 2021.
On an underlying basis, sales increased by 6% in the first six months of 2022
compared to the equivalent period in 2021 and adjusted operating profit
increased by 22%. Currency movements increased sales by £88m and adjusted
operating profit by £9m, and portfolio changes increased sales by £1m and
decreased adjusted operating profit by £4m. There were no new accounting
standards adopted in the first half of 2022 that impacted sales or profits.
Adjusted operating profit includes the results from discontinued operations
when relevant but excludes charges for intangible amortisation and impairment,
acquisition related costs, gains and losses arising from acquisitions and
disposals and the cost of major restructuring. A summary of these adjustments
is included below and in more detail in note 2 to the condensed consolidated
financial statements.
all figures in £ millions 2022 2021 2021
half year half year full year
Operating profit 148 9 183
Add back: Cost of major restructuring - 85 214
Add back: Intangible charges 26 27 51
Add back: Other net gains and losses (14) 6 (63)
Adjusted operating profit 160 127 385
In March 2021, the Group announced a major restructuring programme to run
primarily in 2021. The programme included the reorganisation of the Group into
five global business divisions and the simplification of the Group's property
portfolio. The restructuring costs in 2021 mainly relate to the impairment of
right of use property assets, the write-down of product development assets and
staff redundancies. There is no cost of major restructuring in the first half
of 2022.
Intangible amortisation charges to the end of June 2022 were £26m compared to
a charge of £27m in the equivalent period in 2021. This is due to increased
amortisation from recent acquisitions which is more than offset by a reduction
in amortisation from intangible assets at the end of their useful life and
recent disposals.
Other net gains and losses in 2022 relate to the gain on disposal of the ERPI
business and a gain arising on a decrease in the deferred consideration
payable on prior year acquisitions, offset by costs related to disposals and
acquisitions. Other net gains and losses in the first half of 2021 largely
related to the disposal of PIHE and at the full year also included the
disposal of the K12 Sistemas business in Brazil offset by costs related to the
acquisition of Faethm and the wind down of certain strategic review
businesses.
The reported operating profit of £148m in the first half of 2022 compares to
a profit of £9m in the first half of 2021. The increase in 2022 is mainly due
to improved trading profits, the reduction in cost of major restructuring and
the net gain related to acquisitions and disposals compared to a net loss in
the first half of 2021.
Net finance costs
Net interest receivable reflected in adjusted earnings to 30 June 2022 was
£18m, compared to a payable of £27m in the first half of 2021. The
difference is primarily due to the release of £35m of interest recorded in
respect of provisions for uncertain tax positions where the related interest
was recognised in this line in the income statement. In addition, interest
charges have reduced due to the reduction in gross bond debt and increased
interest income on cash balances.
Net finance income relating to retirement benefits has been excluded from our
adjusted earnings as we believe the income statement presentation does not
reflect the economic substance of the underlying assets and liabilities. Also
included in net finance costs (but not in our adjusted measure) are interest
costs relating to acquisition or disposal consideration, foreign exchange,
other gains and losses on derivatives and interest related to certain tax
provisions. Interest relating to acquisition or disposal consideration is
excluded from adjusted earnings as it is considered to be part of the
acquisition cost or disposal proceeds rather than being reflective of the
underlying financing costs of the Group. Foreign exchange and other gains and
losses are excluded from adjusted earnings as they represent short-term
fluctuations in market value and are subject to significant volatility. Other
gains and losses may not be realised in due course as it is normally the
intention to hold the related instruments to maturity. Interest on certain tax
provisions is excluded from our adjusted measure in order to mirror the
treatment of the underlying tax item (for more information see note 3 to the
condensed consolidated financial statements).
In the period to 30 June 2022, the total of these items excluded from adjusted
earnings was a benefit of £13m compared to a benefit of £22m in the first
half of 2021. Net finance income relating to retirement benefits increased
from £2m in the first half of 2021 to £4m in 2022 reflecting the comparative
funding position of the plans at the beginning of each year and higher
prevailing discount rates. In 2022, there were no finance charges relating to
the revaluation of the K12 disposal proceeds as the outstanding amount has
been fully repaid compared to income of £5m in the first half of 2021 (see
note 15 to the condensed consolidated financial statements). In addition,
there were similar gains on long-term interest rate hedges and an interest
charge on tax provisions of £5m has been recognised in relation to the State
Aid matter. For a reconciliation of the adjusted measure see note 3 to the
condensed consolidated financial statements.
Taxation
The reported tax on statutory earnings for the six months to 30 June 2022 was
a charge of £48m compared to a benefit of £14m in the period to 30 June
2021. This equates to an effective tax rate of 27% (2021: (350)%).
The tax charge for the period has been impacted principally by two items:
· The release of tax risk provisions totalling £72m following the
expiry of the statute of limitations for certain periods in the US. This
release impacts both statutory and adjusted earnings with a £37m credit to
adjusted earnings with the remainder only impacting statutory results. As
noted above there is a release of £35m of interest associated with these tax
risk provisions.
· As previously disclosed, the European Commission determined that
the United Kingdom controlled foreign company group financing partial
exemption partially constituted State Aid. This decision was appealed by the
UK Government and other parties. On 8 June 2022, the EU General Court
dismissed the appeal. At 31 December 2021, the potential risk associated with
this issue was disclosed as a contingent liability, however, following the
dismissal of the appeal the prospects of successfully challenging the European
Commission's decision are now considered to be such that a provision is
required.
On that basis a tax provision of £63m plus £5m of associated interest has
been recorded. The provision represents an estimate of the expected value
which has been calculated by considering a range of possible outcomes and
applying a probability to each, resulting in a weighted average outcome. The
possible outcomes considered range from no liability through to the full
exposure (£105m excluding interest). Due to the large and unusual nature of
the provision and the specific one-off nature of the issue, the provision is
excluded from adjusted earnings. There is no cash impact as a payment on
account was made during 2021. The provision of £63m has been offset on the
balance sheet against the payments previously made. As the provision is less
than the payments made there is a remaining non-current tax receivable of
£41m associated with this issue.
The total adjusted tax charge for the period was £9m (2021: £20m),
corresponding to an effective tax rate on adjusted profit before tax of 5%
(2021: 20%). The lower effective rate compared to 2021 is primarily due to the
release of tax risk provisions following the expiry of the statute of
limitations in the US. We continue to expect the adjusted effective tax rate
to be between 15% and 17% for the 2022 full year.
In the first half of 2022, there was a net tax payment of £51m. The majority
of the 2022 payment relates to the US. In the first half of 2021 there was a
net payment of £121m of which £100m related to the ongoing European
Commission investigation.
Other comprehensive income
Included in other comprehensive income are the net exchange differences on
translation of foreign operations. The gain on translation of £334m at 30
June 2022 compares to a loss at 30 June 2021 of £41m. The gain in 2022 arises
from an overall strengthening of the currencies to which the Group is exposed
and in particular the relative strength of the US dollar. A significant
proportion of the Group's operations are based in the US and the US dollar
closing rate at 30 June 2022 was £1:$1.21 compared to the opening rate of
£1:$1.35. At the end of June 2021, the US dollar rate was £1:$1.38 compared
to the opening rate of £1:$1.37.
Also included in other comprehensive income at 30 June 2022 is an actuarial
gain of £121m in relation to retirement benefit obligations. The gain arises
largely from a decrease in liabilities driven by higher discount rates and
changes to demographic assumptions, partially offset by losses on associated
matching assets and experience losses. The gain in 2022 compares to an
actuarial gain at 30 June 2021 of £33m.
Fair value gains of £25m have been recognised in other comprehensive income
and relate to movements in the value of investments in unlisted securities
held at fair value through other comprehensive income, including the uplift of
the investment held in Credly prior to the acquisition of the remaining
shares. This compares to fair value gains of £22m recognised in other
comprehensive income at 30 June 2021 which related to movements in the value
of investments in unlisted securities held at fair value through other
comprehensive income.
In 2022, a gain of £7m was recycled from the currency translation reserve to
the income statement in relation to the disposal of ERPI. In 2021, a loss of
£4m was recycled from the currency translation reserve to the income
statement in relation to businesses disposed.
Cash flow and working capital
Our operating cash flow measure is used to align cash flows with our adjusted
profit measures (see note 16 to the condensed consolidated financial
statements). Operating cash flow decreased on a headline basis by £1m from an
inflow of £10m in the first half of 2021 to an inflow of £9m in the first
half of 2022. The decrease is largely explained by the drop-through of
increased trading profits which is offset by adverse working capital movements
as a result of timing differences on billings, payments and inventory.
The equivalent statutory measure, net cash generated from operations, was an
inflow of £53m in 2022 compared to an inflow of £79m in 2021. Compared to
operating cash flow, this measure includes restructuring costs but does not
include regular dividends from associates. It also excludes capital
expenditure on property, plant, equipment and software, and additions to right
of use assets as well as disposal proceeds from the sale of property, plant,
equipment and right of use assets (including the impacts of transfers to/from
investment in finance lease receivable).
In the first half of 2022, there was an overall decrease of £545m in cash and
cash equivalents from £937m at the end of 2021 to £392m at 30 June 2022. The
decrease in 2022 is primarily due to payments for the acquisition of
subsidiaries of £221m, repayments of borrowings of £95m, dividends paid of
£107m, own share purchases of £165m, tax paid of £51m, interest payments of
£35m, capital expenditure on property, plant, equipment and software of £67m
and payments of lease liabilities of £54m. These were offset by the cash
inflow from operations of £53m, business disposals of £108m and favourable
foreign exchange movements on cash of £53m.
Liquidity and capital resources
The Group's net debt increased from £350m at the end of 2021 to £810m at the
end of June 2022. The increase is largely due to positive operating cash flow
and proceeds from disposals of businesses, offset by tax and interest
payments, dividend payments, amounts paid under the share buyback programme
and consideration paid for acquisitions.
In May 2022, the Group repaid the remaining $117m (£95m) of its 2022 US
dollar bond upon maturity. In May 2021, the Group repaid the remaining €195m
(£167m) of its €500m Euro 1.85% notes.
At 30 June 2022, the Group had approximately £1.2bn in total liquidity
immediately available from cash and its Revolving Credit Facility maturing
February 2026. In assessing the Group's liquidity and viability, the Board
analysed a variety of downside scenarios including impacts from COVID-19 and
other risks. Even under a severe downside case where declines in profitability
compared to 2021 and H1 2022 are modelled in H2 2022 and 2023, the Group would
maintain comfortable liquidity headroom and sufficient headroom against
covenant requirements during the period under assessment even before modelling
the mitigating effect of actions that management would take in the event that
these downside risks were to crystallise.
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. This plan has a
strong funding position and a surplus with a very substantially de-risked
investment portfolio including approximately 50% of the assets in buy-in
contracts and no exposure to quoted equities. We have some smaller defined
benefit sections in the US and Canada but, outside the UK, most of our
companies operate defined contribution plans.
The charge to profit in respect of worldwide pensions and retirement benefits
amounted to £30m in the period to 30 June 2022 (30 June 2021: £29m) of which
a charge of £34m (30 June 2021: £31m) was reported in adjusted operating
profit and income of £4m (30 June 2021: £2m) was reported against other net
finance costs.
The overall surplus on UK Group pension plans of £537m at the end of 2021 has
increased to a surplus of £652m at the end of June 2022. The increase has
arisen principally due to the actuarial gain noted above in the other
comprehensive income section. In total, our worldwide net position in respect
of pensions and other post-retirement benefits increased from a net asset of
£471m at the end of 2021 to a net asset of £591m at the end of June 2022.
Businesses acquired
In January 2022, the Group acquired 100% of the share capital in Credly Inc
(Credly), having previously held a 19.9% interest in the company. Total
consideration for the acquisition was £149m comprising upfront cash
consideration of £107m, Pearson's existing interest valued at £31m and £11m
of deferred consideration. The deferred consideration is payable in 2 years.
Additional amounts are also payable if certain revenue and non-financial
targets are met, and dependent on continuing employment, and therefore these
additional amounts will be expensed over the period and are not treated as
consideration. Net assets acquired of £44m were recognised on the Group's
balance sheet including £49m of acquired intangible assets. Goodwill of
£105m was also recognised in relation to the acquisition.
In April 2022, the Group acquired 100% of the share capital of ATI STUDIOS
A.P.P.S S.R.L (Mondly). Total consideration for the acquisition was £135m
comprising upfront cash consideration of £105m, and deferred consideration of
£30m. The deferred consideration is payable over the next two years. In
addition, a further $29.6m (c£24m) of cash and $10m (c£8m) in shares will be
paid over the next four years, dependent on continuing employment, and
therefore will be expensed over the period and are not treated as
consideration. Net assets acquired of £38m were recognised on the Group's
balance sheet including £50m of acquired intangible assets. Goodwill of £97m
was also recognised in relation to the acquisition.
In 2022, the Group also made two smaller acquisitions for total consideration
of £11m.
The cash outflow in 2022 relating to acquisitions of subsidiaries was £221m.
In addition, there was a cash outflow relating to the acquisition of
associates of £4m and investments of £4m.
In September 2021, the Group completed the acquisition of 100% of the share
capital of Faethm Holdings Pty Limited ('Faethm'), having already held 9% of
the share capital previously. Total consideration for the acquisition was
£65m comprising cash consideration of £49m, £6m related to the Group's
existing interest in Faethm and £10m of contingent consideration payable in 2
years. Net assets acquired of £27m were recognised on the Group's balance
sheet including £21m of acquired intangible assets. Goodwill of £38m was
also recognised in relation to the acquisition.
In 2021, the Group also made two smaller acquisitions for total consideration
of £11m and acquired interests in two associates, Smashcut and Academy of
Pop, for total consideration of £17m.
The cash outflow in 2021 relating to acquisitions of subsidiaries was £55m.
In addition, there was a cash outflow relating to the acquisition of
associates of £10m and investments of £4m.
Businesses held for sale and businesses disposed
In March 2021, the Group announced that it was launching a strategic review of
its international courseware local publishing businesses. In June 2022, the
Group disposed of its interest in the Canadian educational publisher, ERPI for
cash consideration of £36m, resulting in a pre-tax gain on sale of £23m. In
June 2022, the Group announced the disposal of its courseware businesses in
Italy and Germany. The disposal is expected to complete in the second half of
2022 and the related assets and liabilities have been classified as held for
sale on the 30 June 2022 balance sheet. The remaining international courseware
assets have also been assessed in light of IFRS 5 'Non-current Assets Held for
Sale and Discontinued Operations' and those which meet the criteria have been
classified as held for sale. None of the disposed businesses or held for sale
assets meet the criteria to be presented as discontinued operations.
In February 2021, the Group completed the sale of its interests in PIHE in
South Africa resulting in a pre-tax loss of £5m.
In March 2021, the Group announced the sale of its interests in K12 Sistemas
in Brazil. At 30 June 2021, the assets and liabilities of the K12 Sistemas
were classified as held for sale on the balance sheet. The sale completed on 1
October 2021 for R$789m realising a gain on disposal of £84m in 2021.
The cash inflow in the first half of 2022 relating to the disposal of
businesses was £108m mainly relating to the disposal of ERPI and the receipt
of deferred proceeds from the US K12 Courseware sale in 2019. In 2021, the
cash inflow from disposals of £83m mainly related to the disposal of the K12
Sistemas business and the receipt of deferred proceeds from the US K12
Courseware sale in 2019.
Dividends
The dividend accounted for in the six months to 30 June 2022 is the final
dividend in respect of 2021 of 14.2p. An interim dividend for 2022 of 6.6p was
declared by the Board in July 2022 and will be accounted for in the second
half of 2022.
Share buyback
On 24 February 2022, the Board approved a £350m share buyback programme in
order to return capital to shareholders. The first tranche of the programme
(contracted at £250m) commenced on 4 April 2022 and in the period to 30 June
2022 approximately 20m shares have been bought back and cancelled at a cash
cost of £141m. The nominal value of the cancelled shares of £4m has been
transferred to the capital redemption reserve.
Principal risks and uncertainties
In the 2021 Annual Report and Accounts (and the US Form 20-F for 2021), we set
out our assessment of the principal risk issues that face the business under
the categories: accreditation risk, capability risk, competitive marketplace,
content and channel risk, customer expectations and portfolio change.
We also noted in our 2021 Annual Report and Accounts that the Group continues
to closely monitor significant near-term and emerging risks which have been
identified as climate transition, COVID-19, inflation, supply chain, tax and
the war in Ukraine.
The principal risks and uncertainties are summarised below. The selection of
principal risks will be reviewed in the second half of the year alongside the
Group's long-term strategic planning process. However, these risks have not
changed materially from those detailed in the 2021 Annual Report (and the US
Form 20-F for 2021).
Accreditation Risk
Termination of accreditation due to policy changes or failure to maintain the
accreditation of our courses and assessments from states, countries, and
professional associations reducing their eligibility for funding or
attractiveness for learners.
Sub-risk: Political and regulatory
Capability Risk
Inability to meet our contractual obligations or to transform as required by
our strategy due to infrastructure or organisational challenges
Sub-risks: business resilience; business transformation and change; IT
resilience; safety and corporate security; Talent.
Competitive Marketplace
Significant changes in our target markets could make those markets less
attractive. These could be due to significant changes in demand or in supply
which impact the addressable market, market share and margins (e.g. changes in
enrolments, insourcing of learning and assessment by customers, Open
Educational Resources, shift from in person to virtual or vice versa).
Sub-risks: consumer learning preferences; market pricing; product
differentiation; substitutes.
Content and Channel Risk
The choice of appropriate, effective content and channels for learning and
assessment is a key factor in achieving strong learner outcomes at an
appropriate price point. As the business becomes more digital, the choice of
content and channels will be increasingly driven by data about learner
preferences and
what leads to the greatest demonstrable improvements in skills and knowledge.
Sub-risks: effective method of delivery; intellectual property protection;
products and services - effective investment in own and third party content;
balance of content creation vs content purchased.
Customer Expectations
Rising end-user expectations increase the need to offer differentiated value
propositions, risking margin pressure to meet these expectations and potential
loss of sales if not successful.
Sub risks: customer experience; accessibility; data architecture and usage.
Portfolio Change
Failure to effectively execute desired or required portfolio changes to
promote scale, capability and increase focus on key divisional and geographic
markets either due to execution failures or inability to secure transactions
at appropriate valuations.
Sub-risks: achieving value on acquisitions/disposals; identification of
requirements; integration of acquisitions.
Reputation and Responsibility
The risk of serious reputational harm through failure to meet obligations to
key stakeholders. These include legal and regulatory requirements, avoidance
of serious unethical behaviour and serious breaches of customer trust.
Sub-risks: compliance with laws and regulations; cyber security; safeguarding;
test failure; data privacy; use of third parties.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the period ended 30 June 2022
all figures in £ millions note 2022 2021 2021
half year half year full year
Continuing operations
Sales 2 1,788 1,597 3,428
Cost of goods sold (963) (838) (1,747)
Gross profit 825 759 1,681
Operating expenses (690) (744) (1,562)
Other net gains and losses 2 14 (6) 63
Share of results of joint ventures and associates (1) - 1
Operating profit 2 148 9 183
Finance costs 3 (8) (31) (68)
Finance income 3 39 26 42
Profit before tax 4 179 4 157
Income tax 5 (48) 14 3
Profit for the period 131 18 160
Attributable to:
Equity holders of the company 131 17 159
Non-controlling interest - 1 1
Earnings per share from continuing operations (in pence per share)
Basic 6 17.5p 2.3p 21.1p
Diluted 6 17.4p 2.2p 20.9p
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 period ended 30 June 2022
all figures in £ millions 2022 2021 2021
half year half year full year
Profit for the period 131 18 160
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations 334 (41) (6)
Currency translation adjustment on disposals (7) 4 4
Attributable tax - - 10
Items that are not reclassified to the income statement
Fair value gain on other financial assets 25 22 24
Attributable tax (1) (5) (3)
Remeasurement of retirement benefit obligations 121 33 149
Attributable tax (30) (36) (61)
Other comprehensive income / (expense) 442 (23) 117
Total comprehensive income / (expense) 573 (5) 277
Attributable to:
Equity holders of the company 572 (6) 276
Non-controlling interest 1 1 1
CONDENSED CONSOLIDATED BALANCE SHEET
as at 30 June 2022
all figures in £ millions note 2022 2021 2021
half year half year full year
Property, plant and equipment 292 453 366
Investment property 72 - -
Intangible assets 10 3,214 2,686 2,769
Investments in joint ventures and associates 24 12 24
Deferred income tax assets 41 45 57
Financial assets - derivative financial instruments 33 34 30
Net retirement benefit assets 652 437 537
Other financial assets 120 160 113
Income tax assets 41 - 97
Trade and other receivables 143 137 129
Non-current assets 4,632 3,964 4,122
Intangible assets - pre-publication 932 875 894
Inventories 103 126 98
Trade and other receivables 1,207 1,147 1,257
Financial assets - derivative financial instruments 1 5 2
Current income tax assets 2 134 26
Cash and cash equivalents (excluding overdrafts) 392 648 937
Current assets 2,637 2,935 3,214
Assets classified as held for sale 13 201 18 7
Total assets 7,470 6,917 7,343
Financial liabilities - borrowings (1,151) (1,259) (1,245)
Financial liabilities - derivative financial instruments (44) (31) (30)
Deferred income tax liabilities (96) (103) (40)
Net retirement benefit obligations (61) (79) (66)
Provisions for other liabilities and charges (9) (8) (7)
Other liabilities (123) (61) (95)
Non-current liabilities (1,484) (1,541) (1,483)
Trade and other liabilities (1,234) (1,049) (1,256)
Financial liabilities - borrowings (150) (156) (155)
Financial liabilities - derivative financial instruments (10) (8) (4)
Current income tax liabilities (30) (95) (125)
Provisions for other liabilities and charges (28) (26) (40)
Current liabilities (1,452) (1,334) (1,580)
Liabilities classified as held for sale 13 (42) (3) -
Total liabilities (2,978) (2,878) (3,063)
Net assets 4,492 4,039 4,280
Share capital 185 189 189
Share premium 2,628 2,622 2,626
Treasury shares (22) (7) (12)
Reserves 1,690 1,225 1,467
Total equity attributable to equity holders of the company 4,481 4,029 4,270
Non-controlling interest 11 10 10
Total equity 4,492 4,039 4,280
The condensed consolidated financial statements were approved by the Board on
31 July 2022.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the period ended 30 June 2022
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2022 half year
At 1 January 2022 189 2,626 (12) 18 33 386 1,030 4,270 10 4,280
Profit for the period - - - - - - 131 131 - 131
Other comprehensive income - - - - 25 326 90 441 1 442
Total comprehensive income - - - - 25 326 221 572 1 573
Equity-settled transactions - - - - - - 18 18 - 18
Issue of ordinary shares - 2 - - - - - 2 - 2
Buyback of equity (4) - - 4 - - (250) (250) - (250)
Purchase of treasury shares - - (24) - - - - (24) - (24)
Release of treasury shares - - 14 - - - (14) - - -
Transfer of gain on disposal of FVOCI investment - - - - (27) - 27 - - -
Dividends - - - - - - (107) (107) - (107)
At 30 June 2022 185 2,628 (22) 22 31 712 925 4,481 11 4,492
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the period ended 30 June 2022
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2021 half year
At 1 January 2021 188 2,620 (7) 18 53 388 865 4,125 9 4,134
Profit for the period - - - - - - 17 17 1 18
Other comprehensive income / (expense) - - - - 22 (37) (8) (23) - (23)
Total comprehensive income / (expense) - - - - 22 (37) 9 (6) 1 (5)
Equity-settled transactions - - - - - - 16 16 - 16
Issue of ordinary shares 1 2 (1) - - - - 2 - 2
Buyback of equity - - - - - - - - - -
Purchase of treasury shares - - (6) - - - - (6) - (6)
Release of treasury shares - - 7 - - - (7) - - -
Dividends - - - - - - (102) (102) - (102)
At 30 June 2021 189 2,622 (7) 18 75 351 781 4,029 10 4,039
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the period ended 30 June 2022
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2021 full year
At 1 January 2021 188 2,620 (7) 18 53 388 865 4,125 9 4,134
Profit for the period - - - - - - 159 159 1 160
Other comprehensive income / (expense) - - - - 24 (2) 95 117 - 117
Total comprehensive income / (expense) - - - - 24 (2) 254 276 1 277
Equity-settled transactions - - - - - - 28 28 - 28
Issue of ordinary shares 1 6 (1) - - - - 6 - 6
Buyback of equity - - - - - - - - - -
Purchase of treasury shares - - (16) - - - - (16) - (16)
Release of treasury shares - - 12 - - - (12) - - -
Transfer of gain on disposal of FVOCI investment - - - - (44) - 44 - - -
Dividends - - - - - - (149) (149) - (149)
At 31 December 2021 189 2,626 (12) 18 33 386 1,030 4,270 10 4,280
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the period ended 30 June 2022
all figures in £ millions note 2022 2021 2021
half year half year full year
Cash flows from operating activities
Profit before tax 179 4 157
Net finance costs (31) 5 26
Depreciation and impairment - PPE & investment property 42 104 241
Amortisation and impairment - software 60 56 117
Amortisation and impairment - acquired intangible assets 26 27 50
Other net gains and losses (14) 6 (63)
Product development capital expenditure (151) (151) (287)
Product development amortisation 136 143 279
Share-based payment costs 18 16 28
Inventories (34) (4) 22
Trade and other receivables 14 18 (71)
Trade and other liabilities (197) (156) 37
Other movements 5 11 34
Net cash generated from operations 53 79 570
Interest paid (35) (33) (67)
Tax paid (51) (121) (177)
Net cash (used in) / generated from operating activities (33) (75) 326
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 11 (221) (6) (55)
Acquisition of joint ventures and associates (4) (5) (10)
Purchase of investments (4) (1) (4)
Purchase of property, plant and equipment (21) (31) (64)
Purchase of intangible assets (46) (39) (112)
Disposal of subsidiaries, net of cash disposed 12 108 (7) 83
Proceeds from sale of investments - - 48
Proceeds from sale of property, plant and equipment 14 - -
Lease receivables repaid including disposals 9 6 21
Interest received 11 3 13
Dividends received from joint ventures and associates 2 - -
Net cash used in investing activities (152) (80) (80)
Cash flows from financing activities
Proceeds from issue of ordinary shares 2 2 6
Buyback of equity (141) - -
Purchase of treasury shares (24) (6) (16)
Repayment of borrowings (95) (167) (167)
Repayment of lease liabilities (48) (36) (88)
Dividends paid to company's shareholders (107) (102) (149)
Net cash used in financing activities (413) (309) (414)
Effects of exchange rate changes on cash and cash equivalents 53 (1) (8)
Net decrease in cash and cash equivalents (545) (465) (176)
Cash and cash equivalents at beginning of period 937 1,113 1,113
Cash and cash equivalents at end of period 392 648 937
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the period ended 30 June 2022
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.
The Group has changed the presentation of the condensed consolidated cash flow
statement with the aim of simplifying for the reader. The reconciliation to
net cash generated from operations is now presented with the primary condensed
cash flow statement and certain line items have been aggregated and
disaggregated. There has been no change to the classification of cash flows as
operating, investing and financing. There has been no change to the definition
of the Group's alternative performance measure related to cash flow as set out
in note 16.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
1. Basis of preparation
The condensed consolidated financial statements have been prepared in
accordance with the Disclosure Guidance and Transparency Rules sourcebook of
the UK's Financial Conduct Authority and in accordance with UK-adopted IAS 34
'Interim Financial Reporting'. The condensed consolidated financial statements
should be read in conjunction with the annual financial statements for the
year ended 31 December 2021 which were prepared in accordance with UK-adopted
International Accounting Standards and with the requirements of the Companies
Act 2006 and in accordance with IFRSs as issued by the International
Accounting Standards Board (IASB). In respect of accounting standards
applicable to the Group, there is no
difference between UK-adopted IASs and IFRSs as issued by the IASB.
The condensed consolidated financial statements have also been prepared in
accordance with the accounting policies set out in the 2021 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 2022, the Group classified certain
assets as investment property. The accounting policy in relation to investment
property is as follows:
'Properties that are no longer occupied by the Group and which are held for
operating lease rental are classified as investment property. Investment
property assets are carried at cost less accumulated depreciation and any
recognised impairment in value. The depreciation policies for investment
property are consistent with those described for property, plant and
equipment'.
The 2021 Annual Report refers to new standards that the Group will adopt in
future years but that are not yet effective. The Group does not expect these
to have a material impact.
In assessing the Group's ability to continue as a going concern for the period
until 31 December 2023, the Board analysed a variety of downside scenarios
including a severe but plausible scenario where the Group is impacted by a
combination of all principal risks from 2022 as well as reverse stress testing
to identify what would be required to either breach covenants or run out of
liquidity. The severe but plausible scenario modelled a severe reduction in
revenue, profit and operating cash flow from risks continuing throughout 2022
to 2023.
At 30 June 2022, the Group had available liquidity of c£1.2bn, comprising
central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF)
maturing February 2026. Even under a severe downside case, the Group would
maintain comfortable liquidity headroom and sufficient headroom against
covenant requirements during the period under assessment even before modelling
the mitigating effect of actions that management would take in the event that
these downside risks were to crystallise.
The directors have confirmed that they have a reasonable expectation that the
Group has adequate resources to continue in operational existence for a
minimum of the next 18 months from the date of these condensed consolidated
financial statements. 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 2021 Annual
Report.
In 2022, the Group has progressed with the strategic review of its
international courseware local publishing businesses. The Group's interests in
its Canadian educational publisher ERPI (Éditions du renouveau pédagogique)
were disposed in June 2022 and certain other assets have met the criteria to
be classified as held for sale at 30 June 2022. Whether the associated results
and cash flows of the related businesses should be classified and presented as
discontinued operations is a significant judgement. The Group's judgement is
that the results and cash flows of the related businesses should not be
classified and presented as discontinued operations. The basis of this
judgement is that the businesses disposed, or classified as held for sale, do
not constitute a separate major line of business or geographical area of
operations. The Group will continue to operate in the international K12
courseware market and in all geographical areas where disposals have taken
place or are expected to take place. All of the businesses subject to this
judgement are within the Strategic Review segment and represent £53m of sales
for the period ended 30 June 2022 out of the total sales in the Strategic
Review segment of £79m. If the Group
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
1. Basis of preparation continued
had concluded that these businesses represented discontinued operations, their
results would not have been included within each of the continuing operations
income statement lines. Profit for the period from continuing operations would
have been £7m lower and this amount would have been separately presented as
profit for the period from discontinued operations as a single line item. The
Group will continue to monitor these areas of significant judgement,
estimation and risk for material changes.
The financial information for the year ended 31 December 2021 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 2021 was unqualified and did not
contain an emphasis of matter paragraph or any statement under section 498 of
the Companies Act 2006. The condensed consolidated financial statements and
related notes for the six months to 30 June 2022 are unaudited but have been
reviewed by the auditors and their review opinion is included at the end of
these interim financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
2. Segment information
On 8 March 2021, the Group announced a new strategy, which included a new
management structure and operating model. As a result, the primary operating
segments reported to the Group's chief operating decision-maker, the Pearson
Executive Management team changed from 1 July 2021 to reflect the new Group
structure. There are now five main global business divisions, which are each
considered separate operating segments for management and reporting purposes.
These five divisions are Assessment & Qualifications, Virtual Learning,
English Language Learning, Higher Education and Workforce Skills. In addition,
the International Courseware local publishing businesses are under strategic
review and during this time are being managed as a separate division, known as
Strategic Review. See note 2 of the 2021 Annual Report and Accounts for
further information about each division. Comparative figures for half year
2021 have been restated to reflect the new operating segments.
all figures in £ millions 2022 2021 2021
half year half year full year
Sales
Assessment & Qualifications 697 573 1,204
Virtual Learning 390 353 713
English Language Learning 122 94 238
Workforce Skills 127 112 172
Higher Education 373 365 849
Strategic Review 79 100 252
Total sales 1,788 1,597 3,428
Adjusted operating profit
Assessment & Qualifications 137 96 216
Virtual Learning 14 14 32
English Language Learning (4) (13) 15
Workforce Skills 28 34 27
Higher Education (4) 4 73
Strategic Review (11) (8) 22
Total adjusted operating profit 160 127 385
There were no material inter-segment sales.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
2. Segment information continued
The Group derived revenue from the transfer of goods and services over time
and at a point in time in the following major product lines:
all figures in £ millions Assessment & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Total
2022 half year
Courseware
Products transferred at a point in time 20 - 41 1 92 67 221
Products and services transferred over time 8 - 8 - 278 9 303
28 - 49 1 370 76 524
Assessments
Products transferred at a point in time 80 - 4 10 - - 94
Products and services transferred over time 589 - 55 94 - - 738
669 - 59 104 - - 832
Services
Products transferred at a point in time - - 10 - - - 10
Products and services transferred over time - 390 4 22 3 3 422
- 390 14 22 3 3 432
Total sales 697 390 122 127 373 79 1,788
2021 half year
Courseware
Products transferred at a point in time 20 - 43 - 84 72 219
Products and services transferred over time 6 - 8 - 277 15 306
26 - 51 - 361 87 525
Assessments
Products transferred at a point in time 73 - 2 9 - - 84
Products and services transferred over time 474 - 33 84 - - 591
547 - 35 93 - - 675
Services -
Products transferred at a point in time - - 8 - - 11 19
Products and services transferred over time - 353 - 19 4 2 378
- 353 8 19 4 13 397
Total sales 573 353 94 112 365 100 1,597
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
2. Segment information continued
all figures in £ millions Assessment & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Total
2021 full year
Courseware
Products transferred at a point in time 44 - 109 - 283 198 634
Products and services transferred over time 14 - 26 - 558 33 631
58 - 135 - 841 231 1,265
Assessments
Products transferred at a point in time 173 - 6 16 - - 195
Products and services transferred over time 973 - 72 119 - - 1,164
1,146 - 78 135 - - 1,359
Services
Products transferred at a point in time - - 22 - - 14 36
Products and services transferred over time - 713 3 37 8 7 768
- 713 25 37 8 21 804
Total sales 1,204 713 238 172 849 252 3,428
Adjusted operating profit is one of the Group's key business performance
measures. The measure includes the operating profit from the total business,
including the results of discontinued operations when relevant, but excludes
charges for intangible amortisation and impairment, acquisition related costs,
gains and losses arising from acquisitions and disposals and the cost of major
restructuring.
In March 2021, the Group announced a major restructuring programme to run
primarily in 2021. The programme included the reorganisation of the Group into
five global business divisions and the simplification of the Group's property
portfolio. The restructuring costs in 2021 mainly relate to the impairment of
right of use property assets, the write-down of product development assets and
staff redundancies. There is no cost of major restructuring in the first half
of 2022.
Intangible amortisation charges to the end of June 2022 were £26m compared to
a charge of £27m in the equivalent period in 2021. This is due to increased
amortisation from recent acquisitions which is more than offset by a reduction
in amortisation from intangible assets at the end of their useful life and
recent disposals.
Other net gains and losses of £14m in 2022 relate to the gain on disposal of
the ERPI business and a gain arising on a decrease in the deferred
consideration payable on prior year acquisitions, offset by costs related to
disposals and acquisitions. Costs related to disposals and acquisitions
include amounts payable to former owners or employees in relation to acquired
businesses that are dependent on future employment and therefore do not meet
the criteria to be included as part of the acquisition consideration,
adjustments to deferred or contingent consideration from transactions from
previous periods, and transaction costs relating to acquisition and disposal
activity in the current period. Other net gains and losses in the first half
of 2021 largely related to the disposal of PIHE and at the full year also
included the disposal of the K12 Sistemas business in Brazil offset by costs
related to the acquisition of Faethm and the wind down of certain strategic
review businesses.
Adjusted operating profit should not be regarded as a complete picture of the
Group's financial performance. For example, adjusted operating profit includes
the benefits of major restructuring programmes but excludes the significant
associated costs, and adjusted operating profit excludes costs related to
acquisitions, and the amortisation of intangibles acquired in business
combinations, but does not exclude the associated revenues. The Group's
definition of adjusted operating profit may not be comparable to other
similarly titled measures reported by other companies.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
2. Segment information continued
The following table reconciles adjusted operating profit to operating profit
for each of our operating segments:
all figures in £ millions Assessment & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Total
2022 half year
Adjusted operating profit / (loss) 137 14 (4) 28 (4) (11) 160
Cost of major restructuring - - - - - - -
Intangible charges (7) (10) (2) (5) (2) - (26)
Other net gains and losses - - (3) 4 - 13 14
Operating profit / (loss) 130 4 (9) 27 (6) 2 148
2021 half year
Adjusted operating profit / (loss) 96 14 (13) 34 4 (8) 127
Cost of major restructuring (24) (15) (11) (13) (22) - (85)
Intangible charges (7) (12) (3) (4) (1) - (27)
Other net gains and losses - - - - - (6) (6)
Operating profit / (loss) 65 (13) (27) 17 (19) (14) 9
2021 full year
Adjusted operating profit / (loss) 216 32 15 27 73 22 385
Cost of major restructuring (48) (48) (27) (28) (63) - (214)
Intangible charges (13) (25) (3) (7) (2) (1) (51)
Other net gains and losses - - - (2) - 65 63
Operating profit / (loss) 155 (41) (15) (10) 8 86 183
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
3. Net finance costs
all figures in £ millions 2022 2021 2021
half year half year full year
Net interest receivable / (payable) 18 (27) (57)
Net finance income in respect of retirement benefits 4 2 4
Fair value re-measurement of disposal proceeds - 5 6
Interest on deferred and contingent consideration (1) - -
Net foreign exchange gains 1 1 1
Derivatives not in a hedge relationship 14 14 20
Interest on tax provisions (5) - -
Net finance income / (costs) 31 (5) (26)
Analysed as:
Finance costs (8) (31) (68)
Finance income 39 26 42
Net finance income / (costs) 31 (5) (26)
Analysed as:
Net interest receivable / (payable) reflected in adjusted earnings 18 (27) (57)
Other net finance income 13 22 31
Net finance income / (costs) 31 (5) (26)
Net interest receivable / (payable) is the finance cost measure used in
calculating adjusted earnings. Net finance income classified as other net
finance income are excluded in the calculation of the Group's adjusted
earnings.
Net finance income in respect of retirement benefits is excluded as it is
considered that the income statement presentation does not reflect the
economic substance of the underlying assets and liabilities. The Group
excludes finance costs relating to acquisition and disposal transactions as
these relate to future earn-outs or acquisition expenses and are not part of
the underlying financing arrangements of the Group. In 2021, the fair value
re-measurement of disposal proceeds relates to proceeds from the US K12
disposal in 2019.
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. Gains on derivatives not in a hedge relationship represent the
unrealised mark to market of long-term interest rate hedges used to fix the
interest rate of borrowings.
Interest on certain tax provisions is excluded from our adjusted measure in
order to mirror the treatment of the underlying tax item.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
4. Profit before tax
all figures in £ millions note 2022 2021 2021
half year half year full year
Profit before tax 179 4 157
Cost of major restructuring 2 - 85 214
Other net gains and losses 2 (14) 6 (63)
Intangible charges 2 26 27 51
Other net finance income 3 (13) (22) (31)
Adjusted profit before tax 178 100 328
5. Income tax
all figures in £ millions 2022 2021 2021
half year half year full year
Income tax (charge) / benefit (48) 14 3
Tax benefit on cost of major restructuring - (21) (47)
Tax charge / (benefit) on other net gains and losses 34 (10) 14
Tax benefit on intangible charges (6) (12) (12)
Tax charge on other net finance income 3 5 6
Tax amortisation benefit on goodwill and intangibles 7 4 8
Benefit from change in tax accounting treatment - - (11)
Tax charge / (benefit) on UK tax rate change 1 - (25)
Adjusted income tax charge (9) (20) (64)
Tax rate reflected in statutory earnings 26.8% (350.0)% (1.8)%
Tax rate reflected in adjusted earnings 5.1% 20.0 % 19.5%
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 charge on other net gains and losses of £34m is primarily the impact
of the release of tax risk provisions of £35m offset with the recognition of
a provision of £63m related to the potential State Aid exposure.
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.
The 2022 adjusted tax charge includes the impact of the release of tax risk
provisions of £37m following the expiry of the statute of limitations for
certain periods in the US.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
6. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss
attributable to equity shareholders of the company (earnings) by the weighted
average number of ordinary shares in issue during the year, excluding ordinary
shares purchased by the company and held as treasury shares. Diluted earnings
per share is calculated by adjusting the weighted average number of ordinary
shares to take account of all dilutive potential ordinary shares and adjusting
the profit attributable, if applicable, to account for any tax consequences
that might arise from conversion of those shares.
all figures in £ millions 2022 2021 2021
half year half year full year
Earnings for the period 131 18 160
Non-controlling interest - (1) (1)
Earnings attributable to equity shareholders 131 17 159
Weighted average number of shares (millions) 750.3 753.2 754.1
Effect of dilutive share options (millions) 2.6 3.4 5.0
Weighted average number of shares (millions) for diluted earnings 752.9 756.6 759.1
Earnings per share
Basic 17.5p 2.3p 21.1p
Diluted 17.4p 2.2p 20.9p
7. Adjusted earnings per share
In order to show results from operating activities on a consistent basis, an
adjusted earnings per share is presented which excludes certain items as set
out below.
Adjusted earnings is a non-GAAP financial measure and is included as it is a
key financial measure used by management to evaluate performance and allocate
resources to business segments. The measure also enables our investors to more
easily, and consistently, track the underlying operational performance of the
Group and its business segments over time by separating out those items of
income and expenditure relating to acquisition and disposal transactions,
major restructuring programmes and certain other items that are also not
representative of underlying performance (see notes 2, 3, 4 and 5 for further
information and reconciliation to equivalent statutory measures).
The adjusted earnings per share includes both continuing and discontinued
businesses on an undiluted basis when relevant. The company's definition of
adjusted earnings per share may not be comparable to other similarly titled
measures reported by other companies. A reconciliation of the adjusted
measures to their corresponding statutory measures is shown in the tables
below and in notes 2, 3, 4 and 5.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Tax amortisation benefit Change in UK tax rate Benefit from change in tax accounting treatment Adjusted income statement
2022 half year
Operating profit / (loss) 2 148 - (14) 26 - - - - 160
Net finance income / (costs) 3 31 - - - (13) - - - 18
Profit / (loss) before tax 4 179 - (14) 26 (13) - - - 178
Income tax 5 (48) - 34 (6) 3 7 1 - (9)
Profit / (loss) for the year 131 - 20 20 (10) 7 1 - 169
Non-controlling interest - - - - - - - - -
Earnings / (loss) 131 - 20 20 (10) 7 1 - 169
Weighted average number of shares (millions) 750.3
Weighted average number of shares (millions) for diluted earnings 752.9
Adjusted earnings per share (basic) 22.5p
Adjusted earnings per share (diluted) 22.4p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Tax amortisation benefit Change in UK tax rate Benefit from change in tax accounting treatment Adjusted income statement
2021 half year
Operating profit 2 9 85 6 27 - - - - 127
Net finance costs 4 (5) - - - (22) - - - (27)
Profit / (loss) before tax 5 4 85 6 27 (22) - - - 100
Income tax 6 14 (21) (10) (12) 5 4 - - (20)
Profit / (loss) for the year 18 64 (4) 15 (17) 4 - - 80
Non-controlling interest (1) - - - - - - - (1)
Earnings / (loss) 17 64 (4) 15 (17) 4 - - 79
Weighted average number of shares (millions) 753.2
Weighted average number of shares (millions) for diluted earnings 756.6
Adjusted earnings per share (basic) 10.5p
Adjusted earnings per share (diluted) 10.4p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Tax amortisation benefit Change in UK tax rate Benefit from change in tax accounting treatment Adjusted income statement
2021 full year
Operating profit / (loss) 2 183 214 (63) 51 - - - - 385
Net finance costs 4 (26) - - - (31) - - - (57)
Profit / (loss) before tax 5 157 214 (63) 51 (31) - - - 328
Income tax 6 3 (47) 14 (12) 6 8 (25) (11) (64)
Profit / (loss) for the year 160 167 (49) 39 (25) 8 (25) (11) 264
Non-controlling interest (1) - - - - - - - (1)
Earnings / (loss) 159 167 (49) 39 (25) 8 (25) (11) 263
Weighted average number of shares (millions) 754.1
Weighted average number of shares (millions) for diluted earnings 759.1
Adjusted earnings per share (basic) 34.9p
Adjusted earnings per share (diluted) 34.6p
8. Dividends
all figures in £ millions 2022 2021 2021
half year half year full year
Amounts recognised as distributions to equity shareholders in the period 107 102 149
The directors are declaring an interim dividend of 6.6p per equity share,
payable on 19 September 2022 to shareholders on the register at the close of
business on 12 August 2022. This interim dividend, which will absorb an
estimated £49m of shareholders' funds, has not been included as a liability
as at 30 June 2022.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
9. Exchange rates
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant rates are as
follows:
2022 2021 2021
half year half year full year
Average rate for profits 1.30 1.39 1.38
Period end rate 1.21 1.38 1.35
10. Non-current intangible assets
all figures in £ millions 2022 2021 2021
half year half year full year
Goodwill 2,470 2,073 2,145
Other intangibles 744 613 624
Non-current intangible assets 3,214 2,686 2,769
In 2022, business combinations resulted in the recognition of additional
goodwill of £204m and intangible assets of £109m (see note 11 for further
details). In addition, the table above excludes goodwill and intangible assets
of £75m which are classified as held for sale. Other movements in the
goodwill balance relate to foreign exchange differences and in the intangibles
balance relate to amortisation offset by foreign exchange differences.
In 2022, in light of the sale of the Canadian educational publisher ERPI, and
the classification of certain assets and liabilities as held for sale, the
CGUs within the Strategic Review segment have been revised. Goodwill has been
reallocated to the new CGUs within the Strategic Review segment on a relative
value basis. The methodology and assumptions for the relative value allocation
are consistent with those used in 2021.
The CGUs which hold the assets and liabilities classified as held for sale
have been assessed for impairment using a fair value less costs to dispose
valuation method. No impairment was identified. The Group has assessed its
remaining goodwill and intangibles for impairment triggers and concluded that
a full goodwill impairment review is not required at 30 June 2022.
The 2021 Annual Report sets out the key assumptions by segment. The discount
rate, perpetuity growth rate and other assumptions used in the impairment
review, and the sensitivity to changes in those assumptions remain broadly the
same as the position outlined in the 2021 Annual Report in that none of the
CGUs or groups of CGUs were sensitive to reasonably possible changes in the
key assumptions used in the impairment review, including those related to
climate change.
There were no significant impairments to acquisition related or other
intangibles in the first half of 2022 or 2021.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
11. Business Combinations
On 28 January 2022, the Group acquired 100% of the share capital in Credly Inc
(Credly), having previously held a 19.9% interest in the company. Credly was
founded in 2012 in New York and is a digital credential service provider whose
platform enables customers to design, create, issue and manage digital
credentials. It will form part of the Workforce Skills division. Total
consideration was £149m comprising upfront cash consideration of £107m,
Pearson's existing interest valued at £31m and £11m of deferred
consideration. The deferred consideration is payable in two years, with
additional amounts being payable if certain revenue and non-financial targets
are met, and dependent on continuing employment, and therefore these
additional amounts will be expensed over the period and are not treated as
consideration.
On 28 April 2022, the Group acquired 100% of the share capital of ATI STUDIOS
A.P.P.S S.R.L (Mondly), a global online learning platform offering customers
learning in English and 40 other languages via its app, website, virtual
reality and augmented reality products. It will form part of the English
Language Learning division. Total consideration was £135m comprising upfront
cash consideration of £105m, and deferred consideration of £30m. The
deferred consideration is payable over the next two years with no performance
conditions attached. In addition, a further $29.6m (c£24m) of cash and $10m
(c£8m) in shares will be paid over the next four years, dependent on
continuing employment, and therefore these additional amounts will be expensed
over the period and are not treated as consideration.
These transactions have resulted in the recognition of £202m of goodwill,
which represents the expected growth through new products and customers, the
workforce and know-how acquired and the anticipated synergies, none of which
can be recognised as separate intangible assets. The goodwill is not
deductible for tax purposes.
In 2022, the Group also made two smaller acquisitions in the period for total
consideration of £11m.
In 2021, the Group acquired Faethm for total consideration of £65m, as well
as two smaller acquisitions for total consideration of £11m. Details of the
fair values of the assets acquired and the consideration are shown in the
table below. Amounts are provisional as management finalise reviews of the
asset valuations.
all figures in £ millions 2022 2022 2022 2022 2021 2021
Credly Mondly Other half year half year full year
Intangible assets 49 50 10 109 2 27
Deferred tax assets 7 1 - 8 - 11
Trade and other receivables 6 2 1 9 - 2
Cash and cash equivalents 12 1 - 13 - 4
Trade and other liabilities (18) (8) - (26) - (5)
Deferred tax liabilities (12) (8) (2) (22) - (6)
Net assets acquired 44 38 9 91 2 33
Goodwill 105 97 2 204 2 43
Total 149 135 11 295 4 76
Satisfied by:
Cash consideration 107 105 11 223 2 54
Deferred and contingent consideration 11 30 - 41 2 16
Fair value of existing investment 31 - - 31 - 6
Total consideration 149 135 11 295 4 76
Credly generated revenues of £6m and a loss before tax of £1m for the period
from acquisition date to 30 June 2022. Mondly generated revenues of £3m and a
profit before tax of £1m for the period from acquisition date to 30 June
2022. If the acquisitions had occurred on 1 January 2022, the Group's revenue
would have been £7m higher and the profit before tax would not have been
materially different.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
11. Business Combinations continued
The net cash outflow relating to acquisitions in the period is shown in the
table below including £7m (2021: £4m) relating to deferred payments for
prior year acquisitions.
all figures in £ millions 2022 2021 2021
half year half year full year
Cash - current year acquisitions (223) (2) (54)
Cash and cash equivalents acquired 13 - 4
Deferred payments for prior year acquisitions (7) (4) (4)
Acquisition costs paid (4) - (1)
Net cash outflow on acquisitions (221) (6) (55)
In addition to the cash flows relating to subsidiaries above, the Group also
acquired an associate for cash consideration of £2m (2021: £5m) and paid a
further £2m that was payable in respect of an existing investment in an
associate.
12. Disposals and business closures
In June 2022, the Group disposed of its interest in the Canadian educational
publisher, ERPI for cash consideration of £36m, resulting in a pre-tax gain
on sale of £23m. There have been no other significant disposals in the first
half of 2022. Additional losses of £10m relate to other disposals including
costs related to the disposal of certain businesses under strategic review. In
February 2021, the Group completed the sale of its interests in PIHE in South
Africa resulting in a pre-tax loss of £5m. In October 2021, the sale of the
Group's interests in K12 Sistemas in Brazil was also completed for
consideration of £108m, resulting in a gain on sale of £84m. There were no
other business disposals in 2021 and additional losses of £14m relate to
other disposal costs including costs related to the wind-down of certain
businesses under strategic review. Deferred proceeds relating to the K12 sale
were received in 2022 and 2021.
all figures in £ millions 2022 2021 2021
notes half year half year full year
Intangible assets (1) - (3)
Property, plant and equipment - (48) (48)
Intangible assets - product development (9) - (6)
Inventories (7) - (2)
Trade and other receivables (5) (2) (6)
Cash and cash equivalents (excluding overdrafts) (3) (21) (24)
Trade and other liabilities 6 1 4
Provisions for other liabilities and charges - 3 3
Financial liabilities - borrowings - 67 67
Net assets disposed (19) - (15)
Cumulative translation adjustment 7 (4) (4)
Cash proceeds 38 - 108
Costs of disposal (13) (2) (24)
Gain / (loss) on disposal 13 (6) 65
Cash flow from disposals
Proceeds - current year disposals 38 - 108
Proceeds - prior year disposals 15 87 16 16
Cash and cash equivalents disposed (3) (21) (24)
Costs and other disposal liabilities paid (14) (2) (17)
Net cash inflow / (outflow) from disposals 108 (7) 83
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the period
ended 30 June 2022
13. Assets and liabilities held for sale
Assets and businesses are classified as held for sale when their carrying
amounts are recovered through sale rather than through continuing use. They
only meet the held for sale condition when the assets are ready for immediate
sale in their present condition, management is committed to the sale and it is
highly probable that the sale will complete within one year. Depreciation
ceases on assets and businesses when they are classified as held for sale and
the assets and businesses are impaired if their carrying value exceeds their
fair value less expected costs to sell.
The held for sale assets and liabilities in 2022 are the Group's interests in
the parts of the Strategic Review division which are in the process of being
sold or where a disposal agreement has already been reached but the sale has
not yet completed. The assets and liabilities which leave the group at the
point of disposal may differ from those shown in the table below.
At 31 December 2021, a property that was subsequently sold in 2022 was
classified as held for sale. At 30 June 2021, the assets and liabilities
classified as held for sale were the Group's interests in K12 Sistemas in
Brazil following announcement of the sale in March 2021, with the sale
completing in October 2021 (see note 12).
all figures in £ millions 2022 2021 2021
half year half year full year
Property, plant and equipment 9 - 7
Intangible assets 75 3 -
Deferred income tax assets 14 1 -
Intangible assets - pre-publication 26 6 -
Inventories 28 3 -
Trade and other receivables 49 5 -
Provisions for liabilities and charges (2) - -
Trade and other liabilities (33) (3) -
Financial liabilities - borrowings (7) - -
Net assets classified as held for sale 159 15 7
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
14. Net debt
all figures in £ millions 2022 2021 2021
half year half year full year
Non-current assets
Derivative financial instruments 33 34 30
Trade and other receivables - investment in finance lease 109 105 100
Current assets
Derivative financial instruments 1 5 2
Trade and other receivables - investment in finance lease 17 16 15
Cash and cash equivalents (excluding overdrafts) 392 648 937
Non-current liabilities
Borrowings (1,158) (1,259) (1,245)
Derivative financial instruments (44) (31) (30)
Current liabilities
Borrowings (150) (156) (155)
Derivative financial instruments (10) (8) (4)
Net debt (810) (646) (350)
Included in borrowings at 30 June 2022 are lease liabilities of £630m
(non-current £557m, current £73m). This compares to lease liabilities of
£651m (non-current £581m, current £70m) at 30 June 2021 and £633m
(non-current £565m, current £68m) at 31 December 2021. The net lease
liability at 30 June 2022 after including the investment in finance leases
noted above was £504m (2021 half year: £530m, 2021 full year: £518m). Net
debt excluding net lease liabilities is £306m (2021 half year: net debt
£116m, 2021 full year: net cash £168m).
In May 2022, the Group repaid its $117m (£95m) USD 3.75% notes upon maturity.
In May 2021, the Group repaid the remaining €195m (£167m) of its €500m
Euro 1.85% notes.
In 2022, the movement on borrowings reflects the repayment of the 2022 USD
3.75% notes. In addition, the 2023 USD 3.25% notes have been reclassified from
non-current to current borrowings. Movements on derivative liabilities reflect
the close out of the remaining 2029 USD interest rate swaps taken out to hedge
future USD borrowings with the proceeds being used to pay down the mark to
market on other derivatives reducing future interest costs and movements in
the mark to market of long-term interest rate hedges used to fix the interest
rate of borrowings.
In 2022, net debt presented above includes non-current borrowings of £7m
which are included in assets and liabilities held for sale.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
15. Classification of assets and liabilities measured at fair value
Level 1 Level 2 ---Level 3--- Total fair value
all figures in £ millions FVTPL - Cash and cash equivalents Derivatives FVOCI FVTPL - Other
Investments
2022 half year
Investments in unlisted securities - - 120 - 120
Other receivables - - - - -
Cash and cash equivalents 23 - - - 23
Derivative financial instruments - 34 - - 34
Total financial assets held at fair value 23 34 120 - 177
Derivative financial instruments - (54) - - (54)
Deferred and contingent consideration - - - (79) (79)
Total financial liabilities held at fair value - (54) - (79) (133)
2021 half year
Investments in unlisted securities - - 160 - 160
Other receivables - - - 84 84
Cash and cash equivalents 75 - - - 75
Derivative financial instruments - 39 - - 39
Total financial assets held at fair value 75 39 160 84 358
Derivative financial instruments - (39) - - (39)
Deferred and contingent consideration - - - (29) (29)
Total financial liabilities held at fair value - (39) - (29) (68)
2021 full year
Investments in unlisted securities - - 113 - 113
Other receivables - - - 87 87
Cash and cash equivalents 84 - - - 84
Derivative financial instruments - 32 - - 32
Total financial assets held at fair value 84 32 113 87 316
Derivative financial instruments - (34) - - (34)
Deferred and contingent consideration - - - (44) (44)
Total financial liabilities held at fair value - (34) - (44) (78)
There have been no transfers in classification during the year.
Level 1 valuations are based on unadjusted quoted prices in active markets for
identical financial instruments. Cash and cash equivalents include money
market funds which are treated as fair value through profit and loss (FVTPL)
under IFRS 9 with the fair value movements recognised as finance income or
cost.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
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, the fair value of
FVOCI investments is determined by reference to the financial performance of
the underlying asset and amounts realised on the sale of similar assets.
Individually these assets are immaterial and therefore no sensitivities have
been disclosed.
Other receivables relate to amounts due following the sale of the US K12
courseware business in March 2019. In the first half of 2021, the Group
received a partial repayment of the vendor note and the remaining £87m was
repaid in January 2022.
The movements in fair values of level 3 financial assets measured at fair
value, being the other receivable and investments in unlisted securities, are
shown in the table below:
all figures in £ millions 2022 2021 2021
half year half year full year
At beginning of period 200 234 234
Exchange differences - OCI 9 (2) 2
Additions 4 1 4
Repayments (87) (16) (16)
Disposals (31) - (54)
Fair value movements - Income Statement - 5 6
Fair value movements - OCI 25 22 24
At end of period 120 244 200
The movement in the fair value of the deferred and contingent consideration is
shown in the table below:
all figures in £ millions 2022 2021 2021
half year half year full year
At beginning of period (44) (30) (30)
Exchange differences (7) (1) (1)
Acquisitions (41) (2) (16)
Fair value movements - Income Statement 6 - (1)
Repayments 7 4 4
At end of period (79) (29) (44)
In 2022, disposals of investments in unlisted securities include the impact of
acquiring the remaining shares in Credly Inc.
The market value of the Group's bonds is £658m (2021 half year: £815m, 2021
full year: £798m) compared to their carrying value of £678m (2021 half year:
£763m, 2021 full year: £767m). For all other financial assets and
liabilities, fair value is not materially different to carrying value.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
16. Cash flows
Operating cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of the Group's corporate and operating measures.
These measures are presented in order to align the cash flows with
corresponding adjusted profit measures. The table below reconciles the
statutory profit and cash flow measures to the corresponding adjusted
measures. The table on the next page reconciles operating cash flow to net
debt.
all figures in £ millions Statutory measure Cost of major restructuring Other net gains and losses Intangible charges Purchase/ disposal of PPE and software Net addition of right of use assets Dividends from joint ventures and associates Adjusted measure
2022 half year
Operating profit 148 - (14) 26 - - - 160 Adjusted operating profit
Net cash generated from operations 53 13 - - (53) (6) 2 9 Operating cash flow
2021 half year
Operating profit 9 85 6 27 - - - 127 Adjusted operating profit
Net cash generated from operations 79 10 - - (70) (9) - 10 Operating cash flow
2021 full year
Operating profit 183 214 (63) 51 - - - 385 Adjusted operating profit
Net cash generated from operations 570 24 - - (176) (30) - 388 Operating cash flow
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
16. Cash flows continued
all figures in £ millions note 2022 2021 2021
half year half year full year
Reconciliation of operating cash flow to closing net debt
Operating cash flow 9 10 388
Tax paid (51) (121) (177)
Net finance costs paid (24) (30) (54)
Cost paid for major restructuring (13) (10) (24)
Free cash flow (79) (151) 133
Dividends paid (including to non-controlling interest) (107) (102) (149)
Net movement of funds from operations (186) (253) (16)
Acquisitions and disposals (121) (19) 62
Disposal of lease liabilities - 67 67
Net equity transactions (163) (4) (10)
Other movements on financial instruments 10 26 10
Movement in net debt (460) (183) 113
Opening net debt (350) (463) (463)
Closing net debt 14 (810) (646) (350)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the period ended 30 June 2022
17. Contingencies and other liabilities
There are contingent Group liabilities that arise in the normal course of
business in respect of indemnities, warranties and guarantees in relation to
former subsidiaries and in respect of guarantees in relation to subsidiaries,
joint ventures and associates. In addition, there are contingent liabilities
of the Group in respect of unsettled or disputed tax liabilities, legal
claims, contract disputes, royalties, copyright fees, permissions and other
rights. None of these claims are expected to result in a material gain or loss
to the Group.
The Group is under assessment from the tax authorities in Brazil challenging
the deduction for tax purposes of goodwill amortisation for the years 2012 to
2017. Similar assessments may be raised for other years. Potential total
exposure (including possible interest and penalties) could be up to BRL 1,126m
(£178m) up to 30 June 2022, with additional potential exposure of BRL 88m
(£14m) in relation to deductions expected to be taken in future periods.
Such assessments are common in Brazil. The Group believes that the likelihood
that the tax authorities will ultimately prevail is low and that the Group's
position is strong. At present, the Group believes no provision is required.
On 25 April 2019, the European Commission published the full decision that the
United Kingdom controlled foreign company group financing partial exemption
('FCPE') partially constitutes State Aid. This decision was appealed by the UK
Government and other parties. On 8 June 2022 the EU General Court dismissed
the appeal following which it has been concluded that a provision is now
required in relation to this issue. The total exposure in relation to this
issue is calculated to be £105m (excluding interest) with a provision of
£63m now included in the results representing our estimate of the expected
value. Further information is included in the Financial Review - Tax section.
The Group is also under assessment from the UK tax authorities in relation to
an issue related to the UK's FCPE legislation with the relevant years being
2019 to 2021. The maximum exposure is calculated to be £44m with a provision
of £13m currently held in relation to this issue. The provision is calculated
considering a range of possible outcomes and applying a probability to each,
resulting in a weighted average outcome. The possible outcomes considered
range from no liability through to the full exposure (£44m). This issue is
specific to 2019 to 2021 and is not a continuing exposure.
18. Related parties
Related party transactions in the six months ended 30 June 2022 were
substantially the same in nature to
those disclosed in note 36 of the Annual Report and Accounts for the year
ended 31 December 2021. All related party transactions are on an arm's length
basis. There were no other material related party transactions in the period
that have materially affected the financial position or performance of the
Group and no guarantees have been provided to related parties in the year.
19. Events after the balance sheet date
In July 2022, the Group has continued to execute its share buyback programme.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors confirm that these condensed consolidated financial statements
have been prepared in accordance with UK-adopted International Accounting
Standard 34 'Interim Financial Reporting' and that the interim management
report includes a fair review of the information required by DTR 4.2.7 and DTR
4.2.8 namely:
· An indication of important events that have occurred during
the first six months and their impact on the condensed consolidated financial
statements, and a description of the principal risks and uncertainties for the
remaining six months of the financial year; and
· Material related party transactions in the first six months
and any material changes in related party transactions described in the 2021
Annual Report.
The directors of Pearson plc are listed in the 2021 Annual Report. There have
been the following changes to the Board since the publication of the Annual
Report.
Sidney Taurel - resigned April 2022
A list of current directors is maintained on the Pearson plc website:
www.pearsonplc.com (www.pearsonplc.com) .
By order of the Board
Andy Bird
Chief Executive
31 July 2022
Sally Johnson
Chief Financial Officer
31 July 2022
INDEPENDENT REVIEW REPORT TO PEARSON PLC
Independent Review Report on the condensed consolidated interim financial
statements
Conclusion
We have been engaged by Pearson plc (the Company) to review the condensed set
of financial statements in the half-yearly financial report for the six months
ended 30 June 2022 which comprises the condensed consolidated income
statement, the condensed consolidated statement of comprehensive income, the
condensed consolidated balance sheet, the condensed consolidated statement of
changes in equity, the condensed consolidate cash flow statement and the
explanatory notes. We have read the other information contained in the half
yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with UK adopted international accounting standards and
in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board. The condensed set of financial
statements included in this half-yearly financial report has been prepared in
accordance with UK adopted International Accounting Standard 34, "Interim
Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
31 July 2022
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