REG - Pearson PLC - Final Results <Origin Href="QuoteRef">PSON.L</Origin> - Part 4
23/02/2018 07:05
- Part 4: For the preceding part double click ID:nRSW7203Fc
decreased by 9%. Currency movements increased sales
by £126m and adjusted operating profit by £23m. Portfolio changes decreased
sales by £54m and adjusted operating profit by £24m.
Adjusted operating profit includes the results from discontinued operations
when relevant but excludes intangible charges for amortisation and impairment,
acquisition related costs, gains and losses arising from acquisitions and
disposals and the cost of major restructuring. In 2017 we have excluded the
impact of US tax reform on our associate operating profit as outlined in the
section on taxation. A summary of these adjustments is included below and in
more detail in note 2 to the condensed financial statements.
all figures in £ millions 2017 2016
Operating profit / (loss) 451 (2,497)
Add back: Cost of major restructuring 79 338
Add back: Intangible charges 166 2,769
Add back: Other net gains and losses (128) 25
Add back: Impact of US tax reform 8 -
Adjusted operating profit 576 635
Amortisation and impairment charges in 2017 were £166m compared to a charge of
£2,769m in 2016. The 2016 charge includes an impairment charge to North
American goodwill of £2,548m. This charge arose following trading in the final
quarter of 2016 and the consequent revision to strategic plans which reflected
underlying issues in the North American higher education courseware market
that were more severe than had previously been anticipated. These issues
related to declining student enrolments, changes in buying patterns of
students and correction of inventory levels by distributors and bookshops.
Other net gains of £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. Other
net losses in 2016 of £25m mainly relate to the closure of our English
language schools in Germany and the sale of the Pearson English Business
Solutions business in North America.
Total restructuring cost in 2016 amounted to £338m and included costs
associated with headcount reductions, property rationalisation and closure or
exit from certain systems, platforms, products and supplier and customer
relationships. In May 2017, we announced an additional restructuring
programme, to run between 2017 and 2019, that will drive further significant
cost savings. Costs incurred to date relating to this new programme were £79m
at the end of 2017 and related to cost efficiencies in our higher education
and enabling functions together with further rationalisation of the property
portfolio.
The statutory operating profit from continuing operations of £451m in 2017
compares to a loss of £2,497m in 2016. The loss in 2016 is mainly attributable
to the impairment charge to North American goodwill noted above and the higher
level of restructuring spend.
Net finance costs
Net interest payable was £79m in 2017, compared to £59m in 2016. The increase
was primarily due to higher US interest rates in 2017, additional charges
relating to the early redemption of various bonds during the year and some
additional interest on tax provisions. In March and November 2017
respectively, the Group redeemed the $550m 6.25% Global dollar bonds and $300m
4.625% US dollar notes, both originally due in 2018. In addition, in August
2017, the Group redeemed $385 m out of the $500m 3.75% US dollar notes due in
2022 and $406m out of the $500m 3.25% US dollar notes due in 2023. Although
there is a charge in respect of the early redemptions there are partial year
savings as a result which have flowed through the income statement in the
period since redemption, with the full annualised savings coming through in
2018.
Finance income relating to retirement benefits has been excluded from our
adjusted earnings as we believe the income statement presentation does not
reflect the economic substance of the underlying assets and liabilities. Also
included in the statutory definition of net finance costs (but not in our
adjusted measure) are interest costs relating to acquisition consideration,
foreign exchange and other gains and losses on derivatives. Interest relating
to acquisition consideration is excluded from adjusted earnings as it is
considered to be part of the acquisition cost rather than being reflective of
the underlying financing costs of the Group. Foreign exchange and other gains
and losses are excluded from adjusted earnings as they represent short-term
fluctuations in market value and are subject to significant volatility. Other
gains and losses may not be realised in due course as it is normally the
intention to hold the related instruments to maturity (for more information
see note 3 to the condensed financial statements).
In 2017, the total of these items excluded from adjusted earnings was a gain
of £49m compared to a loss of £1m in 2016. Finance income relating to
retirement benefits decreased from £11m in 2016 to £3m in 2017 reflecting the
comparative funding position of the plans at the beginning of each year. This
decrease was more than offset by foreign exchange gains on unhedged cash and
cash equivalents and other financial instruments that generated losses in
2016. For a reconciliation of the adjusted measure see note 3 to the condensed
financial statements.
Taxation
The effective tax rate on adjusted earnings in 2017 was 11.1% compared to an
effective rate of 16.5% in 2016. The decrease in tax rate was primarily due to
uncertain tax position provision releases following the expiry of the relevant
statutes of limitation. For a reconciliation of the adjusted measure see notes
4 and 5 to the condensed financial statements.
The reported tax charge on a statutory basis in 2017 was £13m (3.1%) compared
to a benefit of £222m (8.7%) in 2016. The statutory tax benefit in 2016 was
mainly due to the release of deferred tax liabilities relating to tax
deductible goodwill that was impaired. Operating tax paid in 2017 was £75m
compared to £63m in 2016.
As a result of US tax reform, the reported tax charge on a statutory basis
includes a benefit from revaluation of deferred tax balances to the reduced
federal rate of £5m and a repatriation tax charge of £6m. The Group continues
to analyse the detail of the new legislation and this may result in revisions
to these impacts.
In addition to the impact on the reported tax charge, the Group's share of
profit from associates was adversely impacted by £8m. The charge has been
excluded from our adjusted measures.
Other comprehensive income
Included in other comprehensive income are the net exchange differences on
translation of foreign operations. The loss on translation of £262m in 2017
compares to a gain in 2016 of £913m and has arisen due to the relative
weakness of the US dollar compared to Sterling. A significant proportion of
the Group's operations are based in the US and the US dollar weakened in 2017
from an opening rate of £1:$1.23 to a closing rate at the end of 2017 of
£1:$1.35. At the end of 2016 most of the currencies that Pearson is exposed to
had strengthened relative to Sterling following the Brexit vote. In 2016 the
US dollar had strengthened in comparison to the opening rate moving from
£1:$1.47 to £1:$1.23.
Also included in other comprehensive income in 2017 is an actuarial gain of
£182m in relation to retirement benefit obligations of the Group and our share
of the retirement benefit obligations of PRH. The gain arises from the impact
of favourable movements in mortality assumptions, discount rate, member
options on retirement and asset returns which offset the impact of the UK
plan's purchase of insurance buy-in policies. The gain in 2017 compares to an
actuarial loss in 2016 of £276m.
Cash flows
Our operating cash flow measure is used to align cash flows with our adjusted
profit measures (see note 17 to the condensed financial statements). Operating
cash flow increased on a headline basis by £6m from £663m in 2016 to £669m in
2017. The increase is also reflected in operating cash conversion (operating
cash flow as a percentage of adjusted operating profit) which increased from
104% in 2016 to 116% in 2017. The increase is largely explained by increased
dividends from PRH and increased cash collections.
The equivalent statutory measure, net cash generated from operations, was
£462m in 2017 compared to £522m in 2016. Compared to operating cash flow, this
measure includes restructuring costs and special pension contributions but
does not include regular dividends from associates or capital expenditure on
property, plant, equipment and software. Restructuring costs paid decreased
from £167m in 2016 to £71m in 2017 primarily due to the new restructuring
programme only commencing during the second half of 2017. Special pension
contributions increased to £227m in 2017 from £90m in 2016. In 2016 the
funding was in respect of the FT Group disposal in 2015 and in 2017 related
both to the FT Group disposal (£25m) and to agreements relating to the PRH
merger in 2013 (£202m).
The Group's net debt decreased from £1,092m at the end of 2016 to £432m at the
end of 2017 as the proceeds from disposals, operating cash flow and the
positive effect of exchange rate movements more than offset restructuring
spend, tax, interest, pension and dividend payments. The Group's gross debt
was restructured during the year including the repayment of various bonds as
detailed in note 15 to the condensed financial statements.
Post-retirement benefits
Pearson operates a variety of pension and post-retirement plans. Our UK Group
pension plan has by far the largest defined benefit section. We have some
smaller defined benefit sections in the US and Canada but, outside the UK,
most of our companies operate defined contribution plans.
The charge to profit in respect of worldwide pensions and retirement benefits
amounted to £72m in 2017 (2016: £70m) of which a charge of £75m (2016: £81m)
was reported in adjusted operating profit and income of £3m (2016: £11m) was
reported against other net finance costs.
The overall surplus on the UK Group pension plan of £158m at the end of 2016
has increased to a surplus of £545m at the end of 2017. The increase has
arisen principally due to increased contributions, including the £227m as part
of the agreements relating to PRH and FT Group, and due to the impact of
favourable movements in assumptions discussed above.
In total, our worldwide net position in respect of pensions and other
post-retirement benefits increased from a net asset of £19m at the end of 2016
to a net asset of £441m at the end of 2017.
Dividends
The dividend accounted for in our 2017 financial statements totalling £318m
represents the final dividend in respect of 2016 (34.0p) and the interim
dividend for 2017 (5.0p). We are proposing a final dividend for 2017 of 12.0p
bringing the total paid and payable in respect of 2017 to 17.0p. This final
2017 dividend which was approved by the Board in February 2018, is subject to
approval at the forthcoming AGM and will be charged against 2018 profits. For
2017, the dividend is covered 3.2 times by adjusted earnings.
Share buyback
The £300m share buyback programme announced in October 2017 was completed on
16 February 2018. In 2017, our brokers purchased 21m shares at a value of
£153m of which £149m had been cancelled at 31 December 2017. Cash payments of
£149m had been made in respect of the purchases with the outstanding £4m
settlement made at the beginning of January 2018. This £4m together with the
remaining value of the buy-back programme (£147m) was recorded as a liability
on the balance sheet at 31 December 2017. A further 22m shares were
repurchased under the programme in 2018. The shares bought back are being
cancelled and the nominal value of these shares is transferred to a capital
redemption reserve. The nominal value of shares cancelled at 31 December 2017
was £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 the process of applying the Group's accounting
policies. The areas requiring a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the condensed
consolidated financial statements have been set out in the 2016 Annual
Report.
This preliminary announcement does not constitute the Group's full financial
statements for the year ended 31 December 2017. The Group's full financial
statements will be approved by the Board of Directors and reported on by the
auditors in March 2018. Accordingly, the financial information for 2017 is
presented unaudited in the preliminary announcement.
The financial information for the year ended 31 December 2016 does not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. A copy of the statutory accounts for that year has been delivered to
the Registrar of Companies. The independent auditors' report on the full
financial statements for the year ended 31 December 2016 was unqualified and
did not contain an emphasis of matter paragraph or any statement under section
498 of the Companies Act 2006.
The Group will adopt IFRS 15 'Revenue from Contracts with Customers' as at 1
January 2018 and apply the modified retrospective approach. Comparatives for
2017 will not be restated and the cumulative impact of adoption will be
recognised in retained earnings as at 1 January 2018. Had the Group been
applying IFRS 15 during 2017, it is estimated that both sales and profit
before tax would have been around £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
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