REG - Pearson PLC - Final Results <Origin Href="QuoteRef">PSON.L</Origin> - Part 5
23/02/2018 07:05
- Part 5: For the preceding part double click ID:nRSW7203Fd
2016
Operating profit / (loss) 2 (2,497) 338 25 2,769 - - - 635
Net finance costs 3 (60) - - - 1 - - (59)
Profit / (loss) before tax 4 (2,557) 338 25 2,769 1 - - 576
Income tax 5 222 (84) (14) (255) - - 36 (95)
Profit / (loss) for the year (2,335) 254 11 2,514 1 - 36 481
Non-controlling interest (2) - - - - - - (2)
Earnings / (loss) (2,337) 254 11 2,514 1 - 36 479
Weighted average number of shares (millions) 814.8
Weighted average number of shares (millions) for diluted earnings 814.8
Adjusted earnings per share (basic) 58.8p
Adjusted earnings per share (diluted) 58.8p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
8. Dividends
all figures in £ 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 3,429
Average: other non-current intangibles 2,606 2,481 2,606 2,481
Average: intangible assets - pre-publication 995 926 995 926
Average: tangible fixed assets and working capital 731 1,070 731 1,070
Average: total invested capital 11,568 11,464 8,126 7,906
ROIC 4.3% 5.0% 6.2% 7.2%
ROIC is a non-GAAP measure and has been disclosed as it is part of Pearson's
key performance indicators. ROIC is used to track investment returns and to
help inform capital allocation decisions within the business. Average values
for total invested capital are calculated as the average monthly balance for
the year.
For the first time in 2017 we have presented ROIC on a net basis after
removing impaired goodwill from the invested capital balance. The net approach
assumes that goodwill which has been impaired is treated in a similar fashion
to goodwill disposed as it is no longer being used to generate returns.
19. Contingencies
There are contingent Group liabilities that arise in the normal course of
business in respect of indemnities, warranties and guarantees in relation to
former subsidiaries and in respect of guarantees in relation to subsidiaries,
joint ventures and associates. In addition there are contingent liabilities of
the Group in respect of legal claims, contract disputes, royalties, copyright
fees, permissions and other rights. None of these claims are expected to
result in a material gain or loss to the Group.
On 24 November 2017 the European Commission published an opening decision that
the United Kingdom controlled foreign company group financing partial
exemption ("FCPE") constitutes State Aid. No final decision has yet been
published, and may anyway be challenged by the UK tax authorities. The Group
has benefited from the FCPE in 2017 and prior periods by approximately £90m.
At present the Group believes no provision is required in respect of this
issue.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2017
20. Related parties
At 31 December 2017 the Group had loans to Penguin Random House (PRH) of £46m
(2016: £33m) which were unsecured with interest calculated based on market
rates. The loans are provided under a working capital facility and fluctuate
during the year.
At 31 December 2017, the Group also had a current asset receivable from PRH of
£19m (2016: £21m) and a current liability payable of £3m (2016: £nil) arising
from the provision of services. Service fee income from PRH was £3m in 2017
(2016: £4m).
During the year the Group received dividends of £458m (2016: £131m) from PRH
including £312m in relation to the re-capitalisation of the venture following
Pearson's disposal of part of its share. At 31 December 2017 the Group had a
dividend receivable from PRH of £49m (2016: £nil) which was also due in
respect of re-capitalisation.
Apart from transactions with the Group's associates and joint ventures noted
above, there were no other material related party transactions and no
guarantees have been provided to related parties in the year.
21. Events after the balance sheet date
During January 2018, Pearson successfully executed market tenders to
repurchase E250m of its E500m Euro 1.875% Notes due May 2021 and E200m of its
E500m Euro 1.375% Notes due May 2025.
On 16 February 2018, Pearson completed its £300m share buyback programme. In
aggregate between 18 October 2017 and 16 February 2018, Pearson repurchased
42,835,577 shares, including 21,839,676 repurchased since 31 December 2017 at
a cost of £151m.
This information is provided by RNS
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