REG - Pearson PLC - Final Results <Origin Href="QuoteRef">PSON.L</Origin> - Part 2
23/02/2018 07:06
- Part 2: For the preceding part double click ID:nRSW7203Fa
being
cancelled and the nominal value of these shares is transferred to a capital
redemption reserve. The nominal value of shares cancelled at 31 December 2017
was £5m.
Return on invested capital (ROIC)
Our ROIC is calculated as adjusted operating profit less cash tax paid,
expressed as a percentage of average gross invested capital. For the first
time in 2017 we have presented an additional ROIC measure showing ROIC on a
net basis. The net basis removes impaired goodwill from the invested capital
balance. The net approach assumes that goodwill which has been impaired is
treated in a similar fashion to goodwill disposed as it is no longer being
used to generate returns.
On a gross basis ROIC decreased from 5.0% in 2016 to 4.3% in 2017 and from
7.2% in 2016 to 6.2% in 2017 on a net basis. The movement largely reflects
lower profit in the year and increased tax payments (see note 18 to the
condensed financial statements).
Businesses held for sale
Following the decision to sell both our Wall Street English language teaching
business and the K12 school courseware business in the US, the assets and
liabilities of those businesses have been classified as held for sale on the
balance sheet at 31 December 2017.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2017
all figures in £ millions note 2017 2016
Continuing operations
Sales 2 4,513 4,552
Cost of goods sold (2,066) (2,093)
Gross profit 2,447 2,459
Operating expenses (2,202) (2,480)
Other net gains and losses 2 128 (25)
Impairment of intangible assets - (2,548)
Share of results of joint ventures and associates 78 97
Operating profit / (loss) 2 451 (2,497)
Finance costs 3 (110) (97)
Finance income 3 80 37
Profit / (loss) before tax 4 421 (2,557)
Income tax 5 (13) 222
Profit / (loss) for the year 408 (2,335)
Attributable to:
Equity holders of the company 406 (2,337)
Non-controlling interest 2 2
Earnings / (loss) per share (in pence per share)
Basic 6 49.9p (286.8)p
Diluted 6 49.9p (286.8)p
The accompanying notes to the condensed consolidated financial statements form
an integral part of the financial information.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2017
all figures in £ millions 2017 2016
Profit / (loss) for the year 408 (2,335)
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations - Group (158) 910
Net exchange differences on translation of foreign operations - associates (104) 3
Currency translation adjustment disposed (51) -
Attributable tax 9 (5)
Fair value gain on other financial assets 13 -
Attributable tax (4) -
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations - Group 175 (268)
Remeasurement of retirement benefit obligations - associates 7 (8)
Attributable tax (42) 58
Other comprehensive (expense) / income for the year (155) 690
Total comprehensive income / (expense) for the year 253 (1,645)
Attributable to:
Equity holders of the company 251 (1,648)
Non-controlling interest 2 3
CONDENSED CONSOLIDATED BALANCE SHEET
as at 31 December 2017
all figures in £ millions note 2017 2016
Property, plant and equipment 281 343
Intangible assets 11 2,964 3,442
Investments in joint ventures and associates 398 1,247
Deferred income tax assets 95 451
Financial assets - derivative financial instruments 140 171
Retirement benefit assets 545 158
Other financial assets 77 65
Trade and other receivables 103 104
Non-current assets 4,603 5,981
Intangible assets - pre-publication 741 1,024
Inventories 148 235
Trade and other receivables 1,110 1,357
Financial assets - marketable securities 8 10
Cash and cash equivalents (excluding overdrafts) 518 1,459
Current assets 2,525 4,085
Assets classified as held for sale 10 760 -
Total assets 7,888 10,066
Financial liabilities - borrowings (1,066) (2,424)
Financial liabilities - derivative financial instruments (140) (264)
Deferred income tax liabilities (164) (466)
Retirement benefit obligations (104) (139)
Provisions for other liabilities and charges (55) (79)
Other liabilities 12 (133) (422)
Non-current liabilities (1,662) (3,794)
Trade and other liabilities 12 (1,342) (1,629)
Financial liabilities - borrowings (19) (44)
Current income tax liabilities (231) (224)
Provisions for other liabilities and charges (25) (27)
Current liabilities (1,617) (1,924)
Liabilities classified as held for sale 10 (588) -
Total liabilities (3,867) (5,718)
Net assets 4,021 4,348
Share capital 200 205
Share premium 2,602 2,597
Treasury shares (61) (79)
Reserves 1,272 1,621
Total equity attributable to equity holders of the company 4,013 4,344
Non-controlling interest 8 4
Total equity 4,021 4,348
The condensed consolidated financial statements were approved by the Board on
22 February 2018.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2017
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2017
At 1 January 2017 205 2,597 (79) - - 905 716 4,344 4 4,348
Profit for the year - - - - - - 406 406 2 408
Other comprehensive income / (expense) - - - - 9 (313) 149 (155) - (155)
Total comprehensive income / (expense) - - - - 9 (313) 555 251 2 253
Equity-settled transactions - - - - - - 33 33 - 33
Issue of ordinary shares under share option schemes - 5 - - - - - 5 - 5
Buyback of equity (5) - - 5 - - (300) (300) - (300)
Purchase of treasury shares - - - - - - - - - -
Release of treasury shares - - 18 - - - (18) - - -
Changes in non-controlling interest - - - - - - (2) (2) 2 -
Dividends - - - - - - (318) (318) - (318)
At 31 December 2017 200 2,602 (61) 5 9 592 666 4,013 8 4,021
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY continued
for the year ended 31 December 2017
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2016
At 1 January 2016 205 2,590 (72) - - (7) 3,698 6,414 4 6,418
Loss for the year - - - - - - (2,337) (2,337) 2 (2,335)
Other comprehensive income / (expense) - - - - - 912 (223) 689 1 690
Total comprehensive income / (expense) - - - - - 912 (2,560) (1,648) 3 (1,645)
Equity-settled transactions - - - - - - 22 22 - 22
Issue of ordinary shares under share option schemes - 7 - - - - - 7 - 7
Buyback of equity - - - - - - - - - -
Purchase of treasury shares - - (27) - - - - (27) - (27)
Release of treasury shares - - 20 - - - (20) - - -
Changes in non-controlling interest - - - - - - - - (3) (3)
Dividends - - - - - - (424) (424) - (424)
At 31 December 2016 205 2,597 (79) - - 905 716 4,344 4 4,348
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2017
all figures in £ millions note 2017 2016
Cash flows from operating activities
Net cash generated from operations 17 462 522
Interest paid (89) (67)
Tax paid (75) (45)
Net cash generated from operating activities 298 410
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 13 (11) (15)
Purchase of investments (3) (6)
Purchase of property, plant and equipment (82) (88)
Purchase of intangible assets (150) (157)
Disposal of subsidiaries, net of cash disposed 19 (54)
Proceeds from sale of joint ventures and associates 411 4
Proceeds from sale of investments - 92
Proceeds from sale of property, plant and equipment - 4
Proceeds from sale of liquid resources 20 42
Loans (advanced to) / repaid by related parties (13) 14
Investment in liquid resources (18) (24)
Interest received 20 16
Dividends received from joint ventures and associates 458 131
Net cash generated from / (used in) investing activities 651 (41)
Cash flows from financing activities
Proceeds from issue of ordinary shares 5 7
Buyback of equity (149) -
Purchase of treasury shares - (27)
Proceeds from borrowings 2 4
Repayment of borrowings (1,294) (249)
Finance lease principal payments (5) (6)
Transactions with non-controlling interest - (2)
Dividends paid to company's shareholders (318) (424)
Net cash used in financing activities (1,759) (697)
Effects of exchange rate changes on cash and cash equivalents 16 81
Net decrease in cash and cash equivalents (794) (247)
Cash and cash equivalents at beginning of year 1,424 1,671
Cash and cash equivalents at end of year 630 1,424
For the purposes of the cash flow statement, cash and cash equivalents are
presented net of overdrafts repayable on demand. These overdrafts are excluded
from cash and cash equivalents disclosed on the balance sheet. In addition, in
2017, £127m of cash included above has been classified as held for sale on
the balance sheet.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. Basis of preparation
The condensed consolidated financial statements have been prepared in
accordance with the Disclosure and Transparency Rules of the Financial Conduct
Authority and in accordance with International Financial Reporting Standards
(IFRS) and IFRS Interpretations Committee interpretations as adopted by the
European Union (EU). In respect of accounting standards applicable to the
Group, there is no difference between EU-adopted IFRS and International
Accounting Standards Board (IASB)-adopted IFRS.
The condensed consolidated financial statements have also been prepared in
accordance with the accounting policies set out in the 2016 Annual Report and
have been prepared under the historical cost convention as modified by the
revaluation of certain financial assets and liabilities (including derivative
financial instruments) at fair value.
The Group's forecasts and projections, taking account of reasonably possible
changes in trading performance, seasonal working capital requirements and
potential acquisition activity, show that the Group should be able to operate
within the level of its current committed borrowing facilities. The directors
have confirmed that they have a reasonable expectation that the Group has
adequate resources to continue in operational existence. The condensed
consolidated financial statements have therefore been prepared on a going
concern basis.
The preparation of condensed consolidated financial statements requires the
use of certain critical accounting assumptions. It also requires management
to exercise its judgement in th with underlying profit growth, reporting adjusted operating profit of between £520m and £560m and adjusted earnings per share of 49p to 53p. This reflects our portfolio and exchange rates as at 31 December 2017 and the following factors: Trading. We expect
ongoing headwinds in our US higher education courseware to be offset by improving conditions in our other businesses. Portfolio changes. We completed the sale of a 22% stake in Penguin Random House and our Chinese English test-prep business GEDU in 2017.
The annualised impact of these disposals will reduce 2018 operating profit by £44m. We expect to complete the disposal of WSE and our stake in Mexican joint-venture Utel in the first-half of 2018 and have today announced that we have concluded the
strategic review of our US K12 courseware business and have classified the business as held for sale. WSE contributed £195m to 2017 sales and WSE and Utel contributed £5m to 2017 adjusted operating profit and £5m to statutory profit. US K12 courseware is
expected to contribute £385m to 2018 sales and around £11m to 2018 operating profit. Other operational factors, incentive and inflation. Our 2018 guidance incorporates cost inflation of c.£50m together with other operational factors and incentives of £30m.
Restructuring benefits. We expect incremental in-year benefits from the 2017-2019 restructuring programme of £80m in 2018. Exceptional restructuring costs of £90m will continue to be excluded from adjusted operating profit. Interest & Tax. We expect a
e process of applying the Group's accounting
policies. The areas requiring a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the condensed
consolidated financial statements have been set out in the 2016 Annual Report.
This preliminary announcement does not constitute the Group's full financial
statements for the year ended 31 December 2017. The Group's full financial
statements will be approved by the Board of Directors and reported on by the
auditors in March 2018. Accordingly, the financial information for 2017 is
presented unaudited in the preliminary announcement.
The financial information for the year ended 31 December 2016 does not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. A copy of the statutory accounts for that year has been delivered to
the Registrar of Companies. The independent auditors' report on the full
financial statements for the year ended 31 December 2016 was unqualified and
did not contain an emphasis of matter paragraph or any statement under section
498 of the Companies Act 2006.
The Group will adopt IFRS 15 'Revenue from Contracts with Customers' as at 1
January 2018 and apply the modified retrospective approach. Comparatives for
2017 will not be restated and the cumulative impact of adoption will be
recognised in retained earnings as at 1 January 2018. Had the Group been
applying IFRS 15 during 2017, it is estimated that both sales and profit
before tax would have been around £2m higher, with the balance sheet impact
at the beginning and end of the year being similar. The impact on sales and
profit before tax for 2018 is not expected to be materially different to 2017,
assuming a like for like business portfolio. The Group is currently estimating
that the cumulative pre-tax impact of adopting IFRS 15 on 1 January 2018 will
reduce retained earnings and decrease net assets by around £143m.
The Group will also adopt IFRS 9 'Financial Instruments as at 1 January 2018
and apply the new rules retrospectively, with the practical expedients
permitted in the standard. Comparatives for 2017 will not be restated. The
Group has assessed the impact of adopting IFRS 9 and is expecting the only
material adjustment to be a small increase in the provision for losses against
trade debtors. The Group does not anticipate the expected credit loss model
having a material impact on profit before tax for 2018 unless market
conditions or other factors change the outlook for credit losses. The Group is
currently estimating its provision for these losses as at 1 January 2018 to
increase by around 1% of gross trade debtors as a result of adopting the
expected credit loss model for impairments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
2. Segment information
The primary segments for management and reporting are Geographies (North
America, Core and Growth). In addition, the Group separately discloses the
results from the Penguin Random House associate (PRH).
all figures in £ millions 2017 2016
Sales by Geography
North America 2,929 2,981
Core 815 803
Growth 769 768
Total sales 4,513 4,552
Adjusted operating profit by Geography
North America 394 420
Core 50 57
Growth 38 29
PRH 94 129
Total adjusted operating profit 576 635
There were no material inter-segment sales.
Adjusted operating profit is one of the Group's key business performance
measures; it includes the operating profit from the total business including
the results of discontinued operations when relevant.
In January 2016, the Group announced that it was embarking on a restructuring
programme to simplify the business, reduce costs and position the Group for
growth in its major markets. The costs of this programme in 2016 were
significant enough to exclude from the adjusted operating profit measure so as
to better highlight the underlying performance. A new programme of
restructuring, announced in May 2017, began in the second half of 2017 and is
expected to drive further significant cost savings. The costs of this new
programme have also been excluded from the adjusted operating profit measure
for the same reason.
Other net gains and losses that represent profits and losses on the sale of
subsidiaries, joint ventures, associates and other financial assets are
excluded from adjusted operating profit as they distort the performance of the
Group. Other net gains of £128m in 2017 largely relate to the sale of our
test preparation business in China which resulted in a profit on sale of £44m
and the part sale of our share in PRH which resulted in a profit of £96m (see
also note 14). In 2016, the net losses in the Core segment mainly relate to
the closure of our English language schools in Germany and in the North
America segment relate to the sale of the Pearson English Business Solutions
business.
Charges relating to acquired intangibles, acquisition costs and movements in
contingent acquisition consideration are also excluded from adjusted operating
profit when relevant as these items reflect past acquisition activity and do
not necessarily reflect the current year performance of the Group. In 2016,
intangible charges included an impairment of goodwill in our North American
business of £2,548m.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
2. Segment information continued
As a result of US tax reform there is an adjustment to the share of profit
from associates of £8m in 2017 relating to the revaluation of deferred tax
balances. This adjustment has been excluded from our adjusted operating profit
(see also note 5).
The following table reconciles adjusted operating profit to operating profit
for each of our primary segments.
all figures in £ millions North America Core Growth PRH Total
2017
Adjusted operating profit 394 50 38 94 576
Cost of major restructuring (60) (11) (8) - (79)
Intangible charges (89) (12) (37) (28) (166)
Other net gains and losses (3) - 35 96 128
Impact of US tax reform - - - (8) (8)
Operating profit 242 27 28 154 451
2016
Adjusted operating profit 420 57 29 129 635
Cost of major restructuring (172) (62) (95) (9) (338)
Intangible charges (2,684) (16) (33) (36) (2,769)
Other net gains and losses (12) (12) (1) - (25)
Impact of US tax reform - - - - -
Operating (loss) / profit (2,448) (33) (100) 84 (2,497)
Corporate costs are allocated to business segments on an appropriate basis
depending on the nature of the cost and therefore the total segment result is
equal to the Group operating profit.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
3. Net finance costs
all figures in £ millions 2017 2016
Net interest payable (79) (59)
Net finance income in respect of retirement benefits 3 11
Finance costs associated with transactions (6) -
Net foreign exchange gains / (losses) 44 (20)
Derivatives in a hedge relationship 1 -
Derivatives not in a hedge relationship 7 8
Net finance costs (30) (60)
Analysed as:
Finance costs (110) (97)
Finance income 80 37
Net finance costs (30) (60)
Analysed as:
Net interest payable (79) (59)
Other net finance income / (costs) 49 (1)
Net finance costs (30) (60)
Net finance costs classified as other net finance costs / income are excluded
in the calculation of our adjusted earnings.
Net finance income relating to retirement benefits is excluded as we believe
the presentation does not reflect the economic substance of the underlying
assets and liabilities. We exclude finance costs relating to acquisition
transactions as these relate to future earn outs or acquisition expenses and
are not part of the underlying financing.
Foreign exchange and other gains and losses are also excluded as they
represent short-term fluctuations in market value and are subject to
significant volatility. Other gains and losses may not be realised in due
course as it is normally the intention to hold the related instruments to
maturity. In 2017 and 2016 the foreign exchange gains and losses largely
relate to foreign exchange differences on unhedged US dollar and Euro loans,
cash and cash equivalents.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. Profit before tax
all figures in £ millions note 2017 2016
Profit / (loss) before tax 421 (2,557)
Cost of major restructuring 2 79 338
Intangible charges 2 166 2,769
Other net gains and losses 2 (128) 25
Other net finance (income) / costs 3 (49) 1
Impact of US tax reform 2 8 -
Adjusted profit before tax 497 576
5. Income tax
all figures in £ millions 2017 2016
Income tax (charge) / benefit (13) 222
Tax benefit on cost of major restructuring (26) (84)
Tax benefit on intangible charges (85) (255)
Tax charge / (benefit) on other net gains and losses 20 (14)
Tax charge on other net finance costs 9 -
Impact of US tax reform added back 1 -
Tax amortisation benefit on goodwill and intangibles 39 36
Adjusted income tax charge (55) (95)
Tax rate reflected in statutory earnings 3.1% 8.7%
Tax rate reflected in adjusted earnings 11.1% 16.5%
The adjusted income tax charge excludes the tax benefit or charge on items
that are excluded from the profit or loss before tax (see note 4).
As a result of US tax reform, the reported tax charge on a statutory basis
includes a benefit from revaluation of deferred tax balances to the reduced
federal rate of £5m and a repatriation tax charge of £6m. In addition to the
impact on the reported tax charge, the Group's share of profit from associates
was adversely impacted by £8m (see also notes 2 and 4). These adjustments
have been excluded from the adjusted operating profit and tax charge as they
are considered to be transition adjustments that are not expected to recur in
the near future.
The tax benefit from tax deductible goodwill and intangibles is added to the
adjusted income tax charge as this benefit more accurately aligns the adjusted
tax charge with the expected rate of cash tax payments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
6. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss
attributable to equity shareholders of the company (earnings) by the weighted
average number of ordinary shares in issue during the year, excluding ordinary
shares purchased by the company and held as treasury shares. Diluted earnings
per share is calculated by adjusting the weighted average number of ordinary
shares to take account of all dilutive potential ordinary shares and adjusting
the profit attributable, if applicable, to account for any tax consequences
that might arise from conversion of those shares. A dilution is not calculated
for a loss.
all figures in £ millions 2017 2016
Earnings / (loss) for the year 408 (2,335)
Non-controlling interest (2) (2)
Earnings / (loss) attributable to equity shareholders of the company 406 (2,337)
Weighted average number of shares (millions) 813.4 814.8
Effect of dilutive share options (millions) 0.3 -
Weighted average number of shares (millions) for diluted earnings 813.7 814.8
Earnings / (loss) per share
Basic 49.9p (286.8)p
Diluted 49.9p (286.8)p
7. Adjusted earnings per share
In order to show results from operating activities on a consistent basis, an
adjusted earnings per share is presented which excludes certain items as set
out below.
Adjusted earnings is a non-GAAP financial measure and is included as it is a
key financial measure used by management to evaluate performance and allocate
resources to business segments. The measure also enables our investors to more
easily, and consistently, track the underlying operational performance of the
Group and its business segments by separating out those items of income and
expenditure relating to acquisition and disposal transactions, and major
restructuring programmes.
The adjusted earnings per share includes both continuing and discontinued
businesses on an undiluted basis when relevant. The company's definition of
adjusted earnings per share may not be comparable to other similarly titled
measures reported by other companies. A reconciliation of the adjusted
measures to their corresponding statutory measures is shown in the tables
below and in the relevant notes.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Impact of US tax reform Tax amortisation benefit Adjusted income statement
2017
Operating profit / (loss) 2 451 79 (128) 166 - 8 - 576
Net finance costs 3 (30) - - - (49) - - (79)
Profit / (loss) before tax 4 421 79 (128) 166 (49) 8 - 497
Income tax 5 (13) (26) 20 (85) 9 1 39 (55)
Profit / (loss) for the year 408 53 (108) 81 (40) 9 39 442
Non-controlling interest (2) - - - - - - (2)
Earnings / (loss) 406 53 (108) 81 (40) 9 39 440
Weighted average number of shares (millions) 813.4
Weighted average number of shares (millions) for diluted earnings 813.7
Adjusted earnings per share (basic) 54.1p
Adjusted earnings per share (diluted) 54.1p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Impact of US tax reform Tax amortisation benefit Adjusted income statement
2016
Operating profit / (loss) 2 (2,497) 338 25 2,769 - - - 635
Net finance costs 3 (60) - - - 1 - - (59)
Profit / (loss) before tax 4 (2,557) 338 25 2,769 1 - - 576
Income tax 5 222 (84) (14) (255) - - 36 (95)
Profit / (loss) for the year (2,335) 254 11 2,514 1 - 36 481
Non-controlling interest (2) - - - - - - (2)
Earnings / (loss) (2,337) 254 11 2,514 1 - 36 479
Weighted average number of shares (millions) 814.8
Weighted average number of shares (millions) for diluted earnings 814.8
Adjusted earnings per share (basic) 2018 net interest charge of c.£45m and a tax rate of 20%. Currency. In 2017, Pearson generated approximately 61% of its sales in the US, 7% in Greater China, 5% in the Euro zone, 3% in Brazil, 3% in Canada, 3% in Australia, 2% in South Africa and 1% in
India and our guidance is based on exchange rates at 31 December 2017. We calculate that a 5c move in the in the US Dollar exchange rate to Sterling would impact adjusted EPS by around 2p to 2.5p.
Notes: 1.Digital includes products such as digital courseware and eBooks and digital services such as OPM and virtual schools. An example of Digitally-enabled would be professional certification services built around the administration of computer based tests, but in physical centres that ensure the security of the test. Non-digital includes our print products, and also non-digital services such as CTI our university in South Africa.2 A significant part of these costs and savings are US Dollar denominated and other non-Sterling currencies and are therefore subject to exchange rate movements over the implementation timeframe.3Gross ROIC is a non-GAAP measure and has been disclosed as it is part of Pearson's key business performance measures. ROIC is used to track investment returns and to help inform capital allocation decisions within the business. Average values for total invested capital are calculated as the average monthly balance for the year.4Net ROIC. For the first time in 2017 we have presented ROIC on a net basis after removing impaired goodwill from the invested capital balance. The net approach assumes that goodwill that has been impaired is treated in a similar fashion to goodwill disposed as it is no longer being used to generate returns.
Notes: 1.Digital includes products such as digital courseware and eBooks and
digital services such as OPM and virtual schools. An example of
Digitally-enabled would be professional certification services built around
the administration of computer based tests, but in physical centres that
ensure the security of the test. Non-digital includes our print products, and
also non-digital services such as CTI our university in South Africa.2 A
significant part of these costs and savings are US Dollar denominated and
other non-Sterling currencies and are therefore subject to exchange rate
movements over the implementation timeframe.3Gross ROIC is a non-GAAP measure
and has been disclosed as it is part of Pearson's key business performance
measures. ROIC is used to track investment returns and to help inform capital
allocation decisions within the business. Average values for total invested
capital are calculated as the average monthly balance for the year.4Net ROIC.
For the first time in 2017 we have presented ROIC on a net basis after
removing impaired goodwill from the invested capital balance. The net approach
assumes that goodwill that has been impaired is treated in a similar fashion
to goodwill disposed as it is no longer being used to generate returns.
Operational review - Geography
£ millions 2017 2016 Headline growth CER growth Underlying growth
Sales
North America 2,929 2,981 (2)% (4)% (4)%
Core 815 803 1% (1)% 0%
Growth 769 768 0% (4)% 0%
Total sales 4,513 4,552 (1)% (4)% (2)%
Adjusted operating profit
North America 394 420 (6)% (10)% (10)%
Core 50 57 (12)% (14)% (14)%
Growth 38 29 31% 17% 3%
Penguin Random House 94 129 (27)% (29)% (8)%
Total adjusted operating profit 576 635 (9)% (13)% (9)%
See note 2 in the consolidated financial statements for the reconciliation to
the equivalent statutory measures.
North America (65% of revenues)
Revenues declined 4% in underlying terms, primarily due to anticipated declines in higher education and school courseware, school assessment, and Learning Studio, a learning management system we are retiring. North American higher education courseware fell 3%. School courseware fell high single digits, impacted by a lower adoption participation rate and weak Open Territory sales in the second half of the year. School assessment declined high-single digits, due to previously announced contract losses. Learning Studio revenues continued to decline as we move towards the retirement of the product in 2019. Offsetting that we saw modest growth in both virtual schools and Online Program Management (OPM) due to good underlying volume growth partially offset by some contract exits and in-sourcing. Revenues in North American Professional Certification were flat on phasing of new contracts and a slowdown in IT certification late in 2017. Adjusted operating profits fell 10% in underlying terms, due primarily to the impact of lower sales and other operating factors partially offset by restructuring savings.
Courseware In school, revenue declined high single digits primarily due to sharp declines across Open Territory states in the second half of the year. This was partially offset by growth in Adoption state revenues where strong performance in Texas Grades K-12
Spanish, Indiana Grades K-12 Science and South Carolina Grades 6-8 Science outweighed a lower adoption participation rate resulting from our decision not to compete for the California Grades K-8 English Language Arts (ELA) adoption with a core basal
programme. Our new adoption participation rate fell to 61% from 64% in 2016. We won an estimated 38% share of adoptions competed for (30% in 2016) and 29% of total new adoption expenditure of $365m (19% of $470m in 2016). In higher education, total US
college enrolments, as reported by the National Student Clearinghouse, fell 1.1%, with combined two-year public and four-year for-profit enrolments declining 2.5%. Enrolment weakness was particularly focused on part-time students where enrolment declined
3.3%, a bigger decline than in any of the last five years. Full-time enrolment grew 0.3%, the first expansion since Fall 2010. Net revenues in our higher education courseware business declined 3% during the year. We estimate around 2% of this decline was
driven by lower enrolment; just over 1% from the adoption of Open Educational Resources (OER); around 5% from the secondary market, new initiatives and other factors, primarily the growth in print rental; offset by c.3% benefit from institutional selling
58.8p
Adjusted earnings per share (diluted) 58.8p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
8. Dividends
all figures in £ millions 2017 2016
Amounts recognised as distributions to equity shareholders in the year 318 424
The directors are proposing a final dividend of 12.0p per equity share,
payable on 11 May 2018 to shareholders on the register at the close of
business on 6 April 2018. This final dividend, which will absorb an estimated
£93m of shareholders' funds, has not been included as a liability as at 31
December 2017.
9. Exchange rates
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant rates are
as follows:
2017 2016
Average rate for profits 1.30 1.33
Year end rate 1.35 1.23
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
10. Assets and liabilities classified as held for sale
Held for sale assets and liabilities relate to the Wall Street English
language teaching business (WSE) and the K12 school courseware business in the
US (K12). The held for sale balances are analysed as follows:
all figures in £ millions WSE K12 2017
Property, plant and equipment 16 - 16
Intangible assets 15 166 181
Deferred income tax assets - 68 68
Trade and other receivables 4 23 27
Non-current assets 35 257 292
Intangible assets - pre-publication 8 239 247
Inventories - 46 46
Trade and other receivables 12 36 48
Cash and cash equivalents (excluding overdrafts) 127 - 127
Current assets 147 321 468
Total assets 182 578 760
Deferred income tax liabilities (2) - (2)
Other liabilities (10) (274) (284)
Non-current liabilities (12) (274) (286)
Trade and other liabilities (152) (150) (302)
Current liabilities (152) (150) (302)
Total liabilities (164) (424) (588)
Net assets 18 154 172
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
11. Non-current intangible assets
all figures in £ millions 2017 2016
Goodwill 2,030 2,341
Other intangibles 934 1,101
Non-current intangible assets 2,964 3,442
At the end of 2016, following trading in the final quarter of the year, it
became clear that underlying issues in the North American higher education
courseware market were more severe than had been previously anticipated. These
issues related to declining student enrolments, changes in buying patterns of
students and correction of inventory levels by distributors and bookshops. As
a result of revisions to strategic plans and estimates for future cash flows
it was determined during the goodwill impairment review that the fair value
less costs of disposal of the North America cash generating unit (CGU) no
longer supported the carrying value of this goodwill and as a consequence
impaired goodwill by £2,548m. There were no impairments to goodwill or
intangibles in 2017.
12. Trade and other liabilities
all figures in £ millions 2017 2016
Trade payables (265) (333)
Accruals (447) (507)
Deferred income (322) (883)
Other liabilities (441) (328)
Trade and other liabilities (1,475) (2,051)
Analysed as:
Trade and other liabilities - current (1,342) (1,629)
Other liabilities - non-current (133) (422)
Total trade and other liabilities (1,475) (2,051)
The deferred income balance comprises advance payments in assessment, testing
and training businesses; subscription income in school and college businesses;
and obligations to deliver digital content in future periods.
Included in other current liabilities in 2017 is a liability of £151m in
respect of the remaining commitment on the share buyback programme.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
13. Business combinations
There were no significant acquisitions completed in the year and there were no
material adjustments to prior year acquisitions. The net cash outflow relating
to acquisitions in the year is shown in the table below:
all figures in £ millions 2017
Cash - Current year acquisitions -
Deferred payments for prior year acquisitions and other items (11)
Net cash outflow on acquisitions (11)
14. Disposals including business closures
In August 2017, Pearson completed the sale of its test preparation business in
China (GEDU) resulting in a pre-tax profit on sale of £44m. In October 2017,
the sale of a 22% share in Penguin Random House (PRH) resulted in a pre-tax
profit of £96m. An analysis of these disposals together with other disposals
in the period is shown below.
all figures in £ millions GEDU PRH Other 2017
Property, plant and equipment (7) - - (7)
Intangible assets (2) - (7) (9)
Investments in joint ventures and associates - (352) - (352)
Net deferred income tax assets (1) (2) - (3)
Intangible assets - pre publication - - (1) (1)
Inventories (1) - (1) (2)
Trade and other receivables (16) - - (16)
Current income tax receivable - (5) - (5)
Cash and cash equivalents (excluding overdrafts) (13) - - (13)
Trade and other liabilities 33 - 1 34
Cumulative translation adjustment 3 48 - 51
Net assets disposed (4) (311) (8) (323)
Proceeds 54 413 1 468
Costs of disposal (6) (6) (5) (17)
Gain / (loss) on disposal 44 96 (12) 128
Cash flow from disposals
Proceeds - current year disposals 468
Cash and cash equivalents disposed (13)
Costs and other disposal liabilities paid (25)
Net cash inflow from disposals 430
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
15. Net debt and EBITDA
all figures in £ millions note 2017 2016
Non-current assets
Derivative financial instruments 140 171
Current assets
Marketable securities 8 10
Cash and cash equivalents (excluding overdrafts) 518 1,459
Non-current liabilities
Borrowings (1,066) (2,424)
Derivative financial instruments (140) (264)
Current liabilities
Borrowings (19) (44)
Total (559) (1,092)
Cash and cash equivalents classified as held for sale 127 -
Net debt (432) (1,092)
EBITDA (excluding restructuring)
Adjusted operating profit 2 576 635
Depreciation 80 80
Software amortisation 82 70
EBITDA 738 785
Net debt / EBITDA ratio 0.6x 1.4x
In March 2017, the Group redeemed its $550m 6.25% Global dollar bonds due in
2018. In August 2017, the Group redeemed $385m of its $500m 3.75% US dollar
notes due in 2022 and $406m of its $500m 3.25% US dollar notes due in 2023. In
November 2017, the Group redeemed its $300m 4.625% US dollar notes due in
2018.
The net debt / EBITDA ratio is presented as it is a measure commonly used by
investors to measure balance sheet strength.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
16. Classification of assets and liabilities measured at fair value
---------Level 2--------- -----Level 3------
all figures in £ millions Available for sale assets Derivatives Other assets Available for sale assets Other liabilities Total fair value
2017
Investments in unlisted securities - - - 77 - 77
Marketable securities 8 - - - - 8
Derivative financial instruments - 140 - - - 140
Total financial assets held at fair value 8 140 - 77 - 225
Derivative financial instruments - (140) - - - (140)
Total financial liabilities held at fair value - (140) - - - (140)
2016
Investments in unlisted securities - - - 65 - 65
Marketable securities 10 - - - - 10
Derivative financial instruments - 171 - - - 171
Total financial assets held at fair value 10 171 - 65 - 246
Derivative financial instruments - (264) - - - (264)
Total financial liabilities held at fair value - (264) - - - (264)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
16. Classification of assets and liabilities measured at fair value
continued
The fair values of level 2 assets and liabilities are determined by reference
to market data and established estimation techniques such as discounted cash
flow and option valuation models. Within level 3 assets and liabilities, the
fair value of available for sale assets is determined by reference to the
financial performance of the underlying asset and amounts realised on the sale
of similar assets, while the fair value of other liabilities represents the
present value of the estimated future liability. There have been no transfers
in classification during the year.
The market value of the Group's bonds is £1,066m (2016: £2,381m) compared to
their carrying value of £1,062m (2016: £2,420m). For all other financial
assets and liabilities, fair value is not materially different to carrying
value.
Movements in fair values of level 3 assets and liabilities are shown in the
table below:
all figures in £ millions 2017 2016
Investments in unlisted securities
At beginning of year 65 143
Exchange differences (4) 8
Additions 3 6
Fair value movements 13 -
Disposals - (92)
At end of year 77 65
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
17. Cash flows
all figures in £ millions 2017 2016
Reconciliation of profit / (loss) for the year to net cash generated from
operations
Profit / (loss) for the year 408 (2,335)
Income tax 13 (222)
Depreciation, amortisation and impairment charges 313 2,912
Net (profit) / loss on disposal of businesses (128) 25
Net loss on disposal of fixed assets 12 15
Net finance costs 30 60
Share of results of joint ventures and associates (78) (97)
Net foreign exchange adjustment (26) 43
Share-based payment costs 33 22
Pre-publication (35) (19)
Inventories 24 17
Trade and other receivables 133 156
Trade and other liabilities 6 61
Retirement benefit obligations (232) (106)
Provisions for other liabilities and charges (11) (10)
Net cash generated from operations 462 522
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
17. Cash flows continued
all figures in £ millions note 2017 2016
Reconciliation of net cash generated from operations to closing net debt
Net cash generated from operations 462 522
Dividends from joint ventures and associates 458 131
Less: re-capitalisation dividends from PRH (312) -
Net purchase of PPE including finance lease principal payments (87) (90)
Net purchase of intangible assets (150) (157)
Add back: cost of major restructuring paid 71 167
Add back: special pension contribution 227 90
Operating cash flow 669 663
Operating tax paid (75) (63)
Net operating finance costs paid (69) (51)
Operating free cash flow 525 549
Costs of major restructuring paid (71) (167)
Special pension contribution (227) (90)
Non-operating tax received - 18
Free cash flow 227 310
Dividends paid (including to non-controlling interests) (318) (424)
Net movement of funds from operations (91) (114)
Acquisitions and disposals 416 19
Re-capitalisation dividends from PRH 312 -
Purchase of treasury shares - (27)
Loans (advanced) / repaid (13) 14
New equity 5 7
Buyback of equity (149) -
Other movements on financial instruments 14 4
Net movement of funds 494 (97)
Exchange movements on net debt 166 (341)
Movement in net debt 660 (438)
Opening net debt (1,092) (654)
Closing net debt 15 (432) (1,092)
Operating cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of Pearson's corporate and operating measures.
These measures are presented in order to align the cash flows with
corresponding adjusted profit measures.
Dividends received from associates include dividends from PRH in 2017 of
£312m relating to the re-capitalisation of PRH. The re-capitalisation was
part of the transaction that included the sale of 22% of our equity interest
in the venture (see note 14).
Special pension contributions of £227m in 2017 were made as part of the
agreements relating to the PRH merger in 2013 (£202m) and the sale of the FT
Group in 2015 (£25m). In 2016 special pension contributions of £90m relate
to the sale of the FT Group. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for the year ended 31 December 2017
18. Return on invested capital (ROIC)
all figures in £ millions 2017 2016 2017 2016
Gross Gross Net Net
Adjusted operating profit 576 635 576 635
Less: operating tax paid (75) (63) (75) (63)
Return 501 572 501 572
Average: goodwill 7,236 6,987 3,794
- More to follow, for following part double click ID:nRSW7203Fc and the shift to digital and a 2% benefit in 2017 from lower returns by the channel. In 2017, Pearson's US higher education courseware market share, as reported by MPI, was in the upper half of the c40-41.5% range seen over the last five years. During 2017
we performed strongly in Statistics and Business Statistics, Biology and Accounting. Statistics benefited from the popularity of "best in class" learning application StatCrunch, Biology from the success of Campbell Biology 11e and MasteringBiology, and
Accounting from the success of Miller-Nobles Horngren Accounting 11e and MyAccountingLab. This was offset by weakness in Information Technology, particularly in the for-profit sector and continued softness in Developmental Mathematics. Digital revenues
grew 9% benefiting from continued growth in direct sales, favourable mix and selected price increases. Global digital registrations of MyLab and related products fell 1%. In North America, digital registrations fell 3% with good growth in Science, Business
& Economics and Revel offset by lower overall enrolment and continued softness in Developmental Mathematics. Revel registrations grew more than 50%. Including stand-alone e-book registrations, total North American digital registrations were flat. The
actions announced in early 2017 to promote access over ownership met with success. We reduced the rental price of 2,000 eBook titles and saw, eBook revenues increase more than 20% in response. Our print rental programme has had a successful start, and we
have added more than 90 further titles. In institutional courseware solutions we signed 210 institutions to our Inclusive Access (Direct Digital Access, DDA) solutions, taking the total to over 500. During the year, we delivered over 1m course enrolments
with inclusive access rising to c.5% of our higher education revenue as more colleges and faculties see the benefit of this model.
Assessment In school assessment (State and National assessments), revenues declined high single digits due to previously announced contract losses. Colorado announced in June 2017 they will be leaving the PARCC consortium after the 17/18 school year. Pearson won the
subsequent bid to deliver ELA, Math, Science, and Social Studies for at least the next six years. Pearson secured contract extensions in Virginia, Indiana, Arizona, Minnesota, Puerto Rico, Kentucky, New York City and North Carolina and for the National
Assessment of Educational Progress. We delivered 25.3m standardised online tests to K12 students, up 7% from 2016. TestNav 8, Pearson's next-generation online test platform, supported a peak load of 752,000 tests in a single day and provided 99.99% up
time. Our AI scoring systems scored 35m responses to open-ended test items, around 30% of the total. Paper based standardised test volumes fell 7% to 20.4m. In Professional Certification, VUE global test volume rose 1% to over 15m. Revenues in
North America were flat, with continued growth in certification for professional bodies, offset by modest declines in US teacher certification and the GED High School Equivalency Test, after strong performance last year, and by weakness in higher level IT
certifications in the second half. We signed over 50 new contracts in 2017 including a ten-year contract with the (AAMC) to administer the MCAT, and contracts with ExxonMobil for five years and the Project Management Institute for four years. Our renewal
rate on existing contracts continues to be over 95%. During the year we renewed over 50 contracts including the American Board of Internal Medicine (ABIM) for nine years, Florida Teacher Licensure Assessments for five years, Pharmacy Technician
Certification Board (PTCB) for five years, and The Institute of Internal Auditors for four years. Clinical assessment sales declined slightly on an absence of new major product introductions. Q-Interactive, Pearson's digital solution for Clinical
Assessment administration, saw continued strong growth in license sales with sub-test administrations up more than 33% over the same period last year.
Services Connections Education our virtual school business, served nearly 78,000 Full Time Equivalent students through full-time virtual and blended school programs, up 6% on last year. Two new full-time online, state-wide, partner schools opened for the 2017-18
- More to follow, for following part double click ID:nRSW7203FcRecent news on Pearson
See all newsREG - Pearson PLC - Transaction in Own Shares
AnnouncementREG - Pearson PLC - Transaction in Own Shares
AnnouncementREG - Pearson PLC - Transaction in Own Shares
AnnouncementREG - Pearson PLC - Transaction in Own Shares
AnnouncementREG - Pearson PLC - Transaction in Own Shares
Announcement