REG - Pearson PLC - Final Results
25/02/2022 07:16
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RNS Number : 7863C Pearson PLC 25 February 2022
Pearson 2021 Preliminary Results and strategy update (Unaudited)
25 February 2022 Strong financial performance and building growth momentum
Andy Bird, Pearson's Chief Executive, said:
"2021 has been a year of strong progress with the Group's financial
performance ahead of expectations. This reflects disciplined management of the
business, operational execution, commitment of colleagues around the world and
their ability to successfully navigate challenging market conditions.
Pearson has been reorganised and refocused with a new purpose to 'add life to
a lifetime of learning' at the heart of everything we do. Our
direct-to-consumer strategy is being driven by Pearson+, which had 2.75
million registered users at the end of 2021, with a strategy in place to
engage more consumers and grow beyond Higher Education. Pearson is a digital
first business, with consumer grade products, and the momentum across the
company underpins our confidence for further growth in 2022 and beyond."
Underlying sales growth(1) of 8%
· Led by Assessment & Qualifications up 18%, driven by 19%
growth in Professional Certification (VUE) with OnVUE continuing to benefit
from growth in the IT sector. US Student Assessment grew 17% and Clinical
Assessment was up 30% with strong product launches in the year. Pearson VUE
and Clinical Assessment revenues have now grown in comparison to 2019, showing
more than post-COVID-19 recovery.
· Virtual Learning up 11% due to strong enrolment growth in Virtual
Schools in the prior academic year (2020-21). Underlying enrolment growth of
7% in Online Program Management (OPM).
· English Language Learning up 17% due to COVID-19 recovery in both
International courseware and Pearson Test of English (PTE).
· Workforce Skills up 6% with strong growth in GED and TalentLens.
· Higher Education down 5%, with growth in Canadian and UK
Courseware offset by a 6% decline in US Higher Education Courseware.
Adjusted operating profit¹ up 33% on an underlying basis to £385m
· Driven by operating leverage on revenue growth and cost savings
offsetting cost inflation and investment to accelerate future growth.
· Adjusted earnings per share¹ of 34.9p (2020: 28.7p) after an
effective tax rate charge of 20% (2020: 14%) and net interest charge of £57m
(2020: £61m).
Strong cash performance
· Operating cash inflow¹ increased on a headline basis from £315m
in 2020 to £388m in 2021 due to the drop-through of increased operating
profits and an improvement in net working capital partially offset by an
increase in capital expenditure.
Balance sheet strength supports investment and increased shareholder returns
· Acquisitions of Credly and Faethm to support growth strategy in
Workforce Skills division.
· Year-end net debt reduced to £350m (2020: £463m) with leverage
at 0.6x (2020: 0.8x).
· Proposed final dividend of 14.2p (2020: 13.5p), which equates to
a full year dividend of 20.5p (2020: 19.5p).
· Intention to commence a buyback to repurchase shares of £350m in
2022.
Statutory results
· Sales increased 1% to £3,428m (2020: £3,397m), reflecting
underlying performance, portfolio changes and currency movements.
· Statutory operating profit was £183m (2020: £411m). The
decrease in 2021 is mainly due to the gain on sale of PRH recognised in 2020
and restructuring costs in 2021 partially offset by improved trading profits,
reduced intangible charges and gains on the 2021 business disposals.
· Net cash generated from operations of £570m (2020: £450m).
· Statutory earnings per share of 21.1p (2020: 41.0p).
Significant strategic progress
· Direct to Consumer: Launched direct to consumer strategy led by
new digital learning service, Pearson+, which continues to make good progress
with 2.75m registered users at the end of 2021, reflecting a strong uptake
from MyLab and Mastering users, 133k paid subscriptions, and a latest app
store rating of 4.8.
· Higher Education: Pearson's flagship Higher Education product,
Revel, completed the move to incorporate the Pearson Learning Platform's
capabilities, providing enhanced features, and a new visual design for mobile.
· Workforce Skills: Acquired Faethm, the workforce AI and
predictive analytics company in September 2021, and in January 2022, Credly,
the market leader in digital workforce credentialing, to further enhance
Pearson's Workforce Skills capabilities.
· Simplification: The disposal of Pearson's Brazilian K12 Sistemas
business completed on 1 October 2021. Marketing is progressing well with other
businesses under strategic review.
· Today, we are announcing the acquisition of Clutch Prep, an
online video-based learning service that will rapidly fuel Pearson+ with
quality original video tutorials.
2022 outlook
· Confident of further group revenue growth, with adjusted
operating profit, interest and tax expected to be in line with current market
expectations(2).
· Assessment & Qualifications revenue growth of low to
mid-single digits with strong margins maintained.
· Growth in Virtual Learning with low-single digit growth in
Virtual Schools and high-single digit growth in Online Program Management
(OPM) and further margin expansion through operational efficiency improvements
in OPM.
· English Language Learning revenue growth of mid-single digits.
Business continues to recover from COVID-19 with further margin improvement
expected.
· Significant revenue growth in Workforce Skills underpinned by the
acquisitions of Faethm and Credly. Margins will be break-even as we invest to
accelerate growth.
· Higher Education revenue to decline, but by less than last year,
with margin stabilisation reflecting cost efficiencies. We expect enrolments
to decline, but at a lower rate than in 2021, although that could improve. We
also expect pricing pressure to continue due to the shift from print to ebooks
and Pearson+, and from bundles to digital only, offset by continued recapture
of the secondary market.
2025 ambition
· We expect the Group to achieve mid-single digit revenue CAGR from
2022 to 2025 and for margins to remain relatively stable in the near term, as
we invest to drive growth, improving by 2025 to mid-teens.
Strategy update
In March 2021, we presented our lifetime of learning strategy. Our priorities
continue to centre on building a company that is digital first, puts the
consumer at its heart, and delivers high quality learning products at scale to
more people than ever before.
To do that, we created a new organisational structure with five core
divisions, underpinned by a dedicated direct to consumer team that
successfully launched Pearson+ last July. We have also recently introduced a
new company purpose: 'to add life to a lifetime of learning.' We redefined
Pearson's purpose for the new reality of a world in which learning is becoming
more fluid and exists inside and outside of formal education.
The success of Pearson and the work we do has never been more important. The
world is changing, and the very definition of learning is expanding. We no
longer move only in a linear fashion through school, into higher education,
and then on to employment. All of us are learning all the time. Pearson is
re-focused and re-organised to capitalise on this new wave of learning.
We also recognise that learning is no longer a phase of life, it's a lifelong
journey. The need to upskill and reskill has never been more urgent. So, while
we'll continue to work with long standing partners such as schools,
universities, and colleges, we are also increasingly working with employers.
Companies now play a critical role in that learning lifecycle and we have an
opportunity to help individuals and employers turn the great resignation into
the great re-engagement. The recent acquisitions of Faethm and Credly in our
Workforce Skills division signal the direction of travel you can expect from
us, including the expansion into data as a service for employers and into
credentialing for workers. In English Language Learning, we are building a
business aimed at being the destination for committed English learners. We are
focused on continuing to grow our institutional business and high stakes
assessments, while building a direct-to-consumer strategy.
There are three reasons why Pearson will win in this new environment:
1. We are the world's leading learning company with a strong brand, an
unmatched scope and scale; and have the deep expertise of thousands of
employees who deliver high quality, trusted learning solutions every day.
2. We have a great foundation of established businesses that are
well-managed, cash generative and underpin the company financially.
3. We are bringing together the multiple facets of our expertise to
deliver innovative digital learning products through a more connected
commercial and consumer strategy.
Pearson is not just a collection of individual businesses, but, increasingly,
a highly interconnected company, with capabilities that work together to help
people learn at multiple points in their lives. Pearson has the potential to
accelerate growth when we leverage our businesses in a coordinated fashion
across the entire spectrum of learning.
Pearson+ is critical to fulfilling that strategy. We're building Pearson+ as
the premier digital learning ecosystem for life - whether through school,
university, work, languages, or life skills - for a growing addressable market
globally. Pearson+ will become the core digital offering for this company,
reaching multiple demographics and learners, giving us the opportunity to
create a meaningful business on a global scale. Consumers need a way to
discover, learn, build skills, and show credentials and they want a great user
experience. We can deliver that with a broader Pearson+ vision, by drawing on
the assets of each Pearson business and leveraging our growing relationships
with students, consumers, and enterprises. We can also support this with a
robust data infrastructure. The possibilities are vast when we can connect
these assets into one trusted ecosystem designed to meet consumer-led learning
where it happens.
We also continue to evolve our sustainable business plan to align with our
company strategy and purpose and to drive learning for everyone. We have
placed renewed energy into building our talent and our innovation culture,
so our people can make a difference at scale. As we become more digital,
we're providing products with a smaller carbon footprint, along with products
and services that meet the demands of a green economy and content that
influences action. As such, we are on track with our goal to make Pearson a
net zero carbon business by 2030.
We believe our strategic priorities, combined with our disciplined approach to
capital allocation, will enable us to create sustainable, long-term value for
every Pearson stakeholder. Today, we are setting out the financial framework
that underpins our strategy and have ambition through leveraging the
opportunities across the business to exceed these targets. Importantly, we
believe that Pearson is now in a position to sustainably grow not only
revenues but also profits and cashflows after allowing for continued
investment in our growth ambition. Furthermore, progress on our growth
priorities can be measured through our Key Performance Indicators (KPIs).
Financial expectations
Segment 2021 Revenue (£m) Margins 2021* 2022 expectations Revenue CAGR 2022 to 2025 Margins 2025*
Revenue Margins*
Assessment & Qualifications 1,204 18% Low to mid-single digit Maintained Low to mid-single digit Maintained
Virtual Learning 713 4% Low to mid-single digit Incremental improvement in Virtual Learning due to OPM efficiencies Mid-high single digit Low double digit
English Language Learning 238 6% Mid-single digit Improvement versus 2021 Mid-high single digit Mid-teens
Workforce Skills 172 16% Existing business: Mid-high single digit Break-even 2025 revenues more than double 2021 Low double digit
>40% for Faethm and Credly
Higher Education 849 9% Down less than 2021 Stabilisation Low to mid-single digit Mid-teens
Strategic review 252 9%
Group 3,428 11% Growth In line with market expectations Mid-single digit Mid-teens
*Adjusted operating profit margins
KPIs
KPI Objective KPI Measure 2021 Actual 2020 Actual
Digital growth Drive digital revenue growth Underlying growth in Group digital and digital-enabled sales 9% (2)%
Virtual Schools US enrolments 111k 109k
OPM student enrolments 275k 245k
OnVUE volumes 3.0m 2.1m
Higher Education US digital registrations 11.4m 12.3m
PTE volume 436k 350k
Consumer Create engaging and personalised NPS for Connections Academy +62 +60
Engagement consumer
experiences
NPS for PTE +56 +60
Pearson+ registered users 2.75m n/a
Product Improve the effectiveness of our products to deliver better outcomes PTE speed of score return 1.2 days 1.5 days
Effectiveness
VUE test volumes 16.8m 12.9m
VUE Partner retention 99% 96%
Higher Education product usage - text units 5.4m 5.4m
Investing in Talent Enhance our employee experience and help employees progress through Number of employees upskilling or reskilling 71% 63%
learning
Employee NPS +8 +17
Inclusion & Diversity Build an inclusive culture and increase diverse representation % of diverse candidates in leadership development and mentoring programmes 100% of programmes have a minimum of 50% diversity n/a
% of diverse candidates in leadership succession plans Women = 72% BIPOC/BAME = 24% n/a
Sustainability Strategy Achieve net zero carbon by 2030 Progress against achieving net zero carbon by 2030, as measured through 26% reduction vs 2018 base* 25% reduction vs 2018 base*
percentage carbon reduction
*Figures have been restated to reflect relevant disposals.
This announcement contains inside information.
Contacts
Investor Relations Jo Russell +44 (0) 7785 451 266
Media Tom Steiner +44 (0) 7787 415 891
Gemma Terry +44 (0) 7841 363 216
Teneo Charles Armitstead +44 (0) 7703 330 269
Virtual event Pearson's full year results hybrid presentation today at 0900 (GMT). Register
to receive log in details: https://pearson.connectid.cloud/register
(https://pearson.connectid.cloud/register)
Notes
Forward looking statements: Except for the historical information contained
herein, the matters discussed in this statement include forward-looking
statements. In particular, all statements that express forecasts, expectations
and projections with respect to future matters, including trends in results of
operations, margins, growth rates, overall market trends, the impact of
interest or exchange rates, the availability of financing, anticipated cost
savings and synergies and the execution of Pearson's strategy, are
forward-looking statements. By their nature, forward-looking statements
involve risks and uncertainties because they relate to events and depend on
circumstances that will occur in future. They are based on numerous
assumptions regarding Pearson's present and future business strategies and the
environment in which it will operate in the future. There are a number of
factors which could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking statements, including
a number of factors outside Pearson's control. These include international,
national and local conditions, as well as competition. They also include other
risks detailed from time to time in Pearson's publicly-filed documents and you
are advised to read, in particular, the risk factors set out in Pearson's
latest annual report and accounts, which can be found on this website
(www.pearsonplc.com). Any forward-looking statements speak only as of the date
they are made, and Pearson gives no undertaking to update forward-looking
statements to reflect any changes in its expectations with regard thereto or
any changes to events, conditions or circumstances on which any such statement
is based. Readers are cautioned not to place undue reliance on such
forward-looking statements.
Financial Overview
£m 2021 2020 Headline growth CER Underlying growth
growth*
Business performance
Sales 3,428 3,397 1% 7% 8%
Adjusted operating profit 385 313 23% 33% 33%
Operating cash flow 388 315
Adjusted earnings per share 34.9p 28.7p
Statutory results
Sales 3,428 3,397
Operating profit 183 411
Profit for the year 160 310
Net cash generated from operations 570 450
Basic earnings per share 21.1p 41.0p
Dividend per share 20.5p 19.5p
Net debt (350) (463)
Throughout this announcement: a) Growth rates are stated on an underlying
basis unless otherwise stated. Underlying growth rates exclude currency
movements, and portfolio changes. b) The 'business performance' measures are
non-GAAP measures and reconciliations to the equivalent statutory heading
under IFRS are included in notes to the attached condensed consolidated
financial statements 2, 3, 4, 5, 7, and 14.
2022 consensus on the Pearson website as at 12(th) November 2021; median
adjusted operating profit of £416m, interest £57.5m, tax rate 21%, £:$
1.37.
*Constant exchange rates are calculated by assuming the average FX in the
prior year prevailed through the current year.
Throughout this announcement: a) Growth rates are stated on an underlying
basis unless otherwise stated. Underlying growth rates exclude currency
movements, and portfolio changes. b) The 'business performance' measures are
non-GAAP measures and reconciliations to the equivalent statutory heading
under IFRS are included in notes to the attached condensed consolidated
financial statements 2, 3, 4, 5, 7, and 14.
2022 consensus on the Pearson website as at 12(th) November 2021; median
adjusted operating profit of £416m, interest £57.5m, tax rate 21%, £:$
1.37.
*Constant exchange rates are calculated by assuming the average FX in the
prior year prevailed through the current year.
Operational review
£ millions 2021 2020 Headline CER Underlying
growth Growth* growth
Sales
Assessment & Qualifications 1,204 1,082 11% 18% 18%
Virtual Learning 713 692 3% 11% 11%
English Language Learning 238 218 9% 17% 17%
Workforce Skills 172 163 6% 7% 6%
Higher Education 849 956 (11)% (5)% (5)%
Strategic review 252 286 (12)% (9)% 1%
Total 3,428 3,397 1% 7% 8%
Adjusted operating profit
Assessment & Qualifications 216 147 47% 59% 59%
Virtual Learning 32 29 10% 28% 28%
English Language Learning 15 1 1,400% 1,600% 1,600%
Workforce Skills 27 26 4% 4% 8%
Higher Education 73 93 (22)% (15)% (15)%
Strategic review 22 16 38% 38% 27%
Penguin Random House - 1 (100)% (100)% -
Total adjusted operating profit 385 313 23% 33% 33%
See note 2 in the condensed consolidated financial statements for the
reconciliation to the equivalent statutory measures.
*Constant exchange rates are calculated by assuming the average FX in the
prior year prevailed through the current year.
Assessment & Qualifications
In Assessment & Qualifications, revenue increased 18% on an underlying
basis and 11% on a headline basis. Professional Certification (VUE) revenue
was up 19%, with OnVUE continuing to benefit from growth in the IT sector. US
Student Assessment revenue was up 17% and Clinical Assessment revenue was up
30% with strong product launches in the year. Pearson VUE and Clinical
Assessment revenues have now grown in comparison to 2019, showing more than
post-COVID-19 recovery. Adjusted operating profit increased 59% in underlying
and 47% in headline terms due to the operating leverage on revenue growth
partly offset by currency movements.
Pearson VUE revenue grew 19% in underlying terms with test volumes increasing
30% to 16.8m due to COVID-19 recovery, new client launches and growth in
existing programmes. We renewed 99% of our expiring contract base and fully
resumed exam deliveries in our testing centres. Volumes in OnVUE, Pearson's
online proctoring service, grew 46% to 3m reflecting continuing demand for
remote testing and as a complementary expansion to our test centre-based
delivery options.
In US Student Assessment, revenue increased 17% in underlying terms due to new
contract wins and a return to state testing in 2021, following 2020
COVID-19-related cancellations.
In Clinical Assessment, revenue increased 30% in underlying terms due to new
product releases and a backlog of demand for mental health services as
in-person assessments resumed and schools reopened. Revenue growth continued
for our digitally delivered assessments as they have become more widely
accepted.
Virtual Learning
Revenue grew 11% on an underlying basis and 3% on a headline basis reflecting
strong enrolment growth in Virtual Schools in the 2020/2021 academic year,
with good underlying enrolment growth in OPM.
Adjusted operating profit grew 28% in underlying terms, due to operating
leverage and efficiency improvements in OPM more than offsetting the
investment in our Virtual Schools' platform and customer care support, as well
as margin impact in OPM due to discontinued programs. Headline profit grew 10%
with good growth in adjusted operating profit partially offset by currency
movements.
Virtual Schools performed strongly driven by 43% enrolment growth in new and
existing schools for the 2020/2021 academic year. We opened five new
full-time, online partner schools in Florida, Rhode Island, Colorado, South
Carolina, and Oregon. We also announced our first Connections Academy in the
state of Virginia, which begins enrolment in March 2022, one school in New
Mexico moved from a partner school to district programme. This brings the
2021/2022 total number of partner schools to 47 in 30 states. Enrolments in
the 2021/2022 academic year grew by 2% despite a significant unwinding of the
"covid cohort".
In OPM, we saw good underlying enrolment growth of 7% as Maryville University
extended its OPM partnership for online degrees in the high-demand field of
Nursing through to 2033 and Northeastern University added a new online
master's degree and certificate programs in Nursing and Healthcare. We ended
the year with a total of 477 programs across 31 partners with the addition of
43 new programs in North America across 21 partners, and 7 new programs
internationally where underlying enrolments grew by more than 80%.
English Language Learning
In English Language Learning, sales were up 17% on an underlying basis and 9%
on a headline basis due to COVID-19 recovery in both International courseware
and Pearson Test of English (PTE) where volumes grew 25% compared to 2020.
Adjusted operating profit increased in underlying and headline terms due to
increased revenue.
Workforce Skills
In Workforce Skills, sales were up 6% on an underlying and headline basis,
predominantly driven by strong growth in GED and TalentLens due to a recovery
from COVID-19 and further expansion of their enterprise sales. GED test
volumes increased by 43%, enabled by the provision of online proctored
testing, launched in June 2020, which grew by 200%. BTEC and Apprenticeship
sales grew by 4%, with strong international growth partially offset by lower
growth in the UK, as registrations declined as a result of COVID-19 disruption
and rebates for exam cancellations continued in 2021.
Adjusted operating profit grew 8% in underlying terms, with strong flow
through of sales growth operating leverage. Headline profits grew 4% with good
underlying growth offset by portfolio changes.
Higher Education
In Higher Education, sales declined 5% for the full year on an underlying
basis and 11% on a headline basis with growth in Canadian and UK Courseware
more than offset by an underlying 6% decline in US Higher Education
Courseware.
Adjusted operating profit declined 15% in underlying and 22% in headline
terms. This is driven by the combined effects of the revenue declines and
continued investments in our content and platforms (inclusive of Pearson+).
We saw continued momentum in Inclusive Access where sales to not-for-profit
institutions grew 18% representing 16% of total US Higher Education Courseware
revenue versus 13% last year.
Strategic review
Sales in our international courseware local publishing businesses under
strategic review were up 1% on an underlying basis and down 12% on a headline
basis for the full year.
FINANCIAL REVIEW
Operating result
Sales increased on a headline basis by £31m or 1% from £3,397m in 2020 to
£3,428m in 2021 and adjusted operating profit increased by £72m or 23% from
£313m in 2020 to £385m in 2021 (for a reconciliation of this measure see
note 2 to the condensed consolidated financial statements).
The headline basis simply compares the reported results for 2021 with those
for 2020. We also present sales and profits on an underlying basis which
exclude the effects of exchange, the effect of portfolio changes arising from
acquisitions and disposals and the impact of adopting new accounting standards
that are not retrospectively applied. Our portfolio change is calculated by
taking account of the contribution from acquisitions and by excluding sales
and profits made by businesses disposed in either 2020 or 2021. Portfolio
changes mainly relate to the sale of Pearson Institute of Higher Education
('PIHE') in 2021, the sale of the K12 Sistemas business in Brazil in 2021 and
the sale of our remaining interest in Penguin Random House ('PRH') in the
first half of 2020. Acquisitions, including Spotlight and Faethm in 2021, had
only a small impact on reported sales and profits.
On an underlying basis, sales increased by 8% in 2021 compared to 2020 and
adjusted operating profit increased by 33%. Currency movements decreased sales
by £206m and decreased adjusted operating profit by £30m. Portfolio changes
decreased sales by £27m and decreased adjusted operating profit by £1m.
There were no new accounting standards adopted in 2021 that impacted sales or
profits.
Adjusted operating profit excludes intangible charges for amortisation and
impairment, acquisition related costs, gains and losses arising from
acquisitions and disposals and the cost of major restructuring. A summary of
these adjustments is included below and in more detail in note 2 to the
condensed consolidated financial statements.
All figures in £ millions 2021 2020
Operating profit 183 411
Add back: Cost of major restructuring 214 -
Add back: Intangible charges 51 80
Add back: Other net gains and losses (63) (178)
Adjusted operating profit 385 313
In March 2021, the Group announced a major restructuring programme to run
primarily in 2021. The programme includes the reorganisation of the Group into
five global business divisions and the simplification of the Group's property
portfolio. The restructuring costs in 2021 of £214m mainly relate to the
impairment of right of use property assets, the write-down of product
development assets and staff redundancies. There were no costs of major
restructuring in 2020.
Intangible amortisation charges in 2021 were £51m compared to a charge of
£80m in 2020. This reduction is due to a decrease in acquisition activity in
recent years and additional intangible charges which were recorded in 2020 and
are not repeated in 2021.
Other net gains and losses in 2021 largely relate to gains from the disposal
of PIHE and the K12 Sistemas business in Brazil offset by costs related to the
acquisition of Faethm and the wind down of certain strategic review
businesses. In 2020, other net gains and losses largely relate to the sale of
the remaining interest in PRH.
The statutory operating profit of £183m in 2021 compares to a profit of
£411m in 2020. The decrease in 2021 is mainly due to the gain on sale of PRH
recognised in 2020 and restructuring costs in 2021 partially offset by
improved trading profits, reduced intangible charges and gains on the 2021
business disposals.
Net finance costs
Net interest payable reflected in adjusted earnings in 2021 was £57m,
compared to £61m in 2020. The decrease is mainly due a reduction in interest
payable on lease liabilities following the disposal of PIHE.
Net finance income relating to retirement benefits has been excluded from our
adjusted earnings as we believe the income statement presentation does not
reflect the economic substance of the underlying assets and liabilities. Also
included in the statutory definition of net finance costs (but not in our
adjusted measure) are interest costs relating to acquisition or disposal
transactions, foreign exchange and other gains and losses on derivatives.
Interest relating to acquisition or disposal transactions is excluded from
adjusted earnings as it is considered part of the acquisition cost or disposal
proceeds rather than being reflective of the underlying financing costs of the
Group. Foreign exchange and other gains and losses are excluded from adjusted
earnings as they represent short-term fluctuations in market value and are
subject to significant volatility. Other gains and losses may not be realised
in due course as it is normally the intention to hold the related instruments
to maturity (for more information see note 3 to the condensed consolidated
financial statements).
In 2021, the total of these items excluded from adjusted earnings was income
of £31m compared to income of £4m in 2020. Net finance income relating to
retirement benefits decreased from £6m in 2020 to £4m in 2021 reflecting the
comparative funding position of the plans at the beginning of each year and
higher prevailing discount rates. In 2021, finance income of £6m relating to
the revaluation of the US K12 disposal proceeds was recorded compared to £26m
in 2020, and there were gains on long-term interest rate hedges and foreign
exchange gains on unhedged inter-company loans and cash and cash equivalents
in 2021 compared to losses in 2020. For a reconciliation of the adjusted
measure see note 3 to the condensed consolidated financial statements.
Taxation
The effective tax rate on adjusted earnings in 2021 was a charge of 19.5%
compared to an effective tax rate charge of 13.7% in 2020. The increase in
the effective rate is mainly due to a benefit from the release of tax
provisions due to the expiry of the relevant statute of limitation which was
recorded in 2020 and is not repeated in 2021.
The reported tax charge on a statutory basis in 2021 was a credit of £3m
(1.8%) compared to a charge of £44m (12.5%) in 2020. The principal reasons
for reduction in the tax charge are the benefit received from the revaluation
of deferred tax assets following the increase in the UK tax rate from 19% to
25% together with a benefit from a change in Italian tax accounting
treatment.
The Budget in March 2021 announced an increase in the UK corporation tax rate
to 25% with effect from 1 April 2023. This was substantively enacted on 24 May
2021. The UK corporation tax rate increase has resulted in an increase of
£27m in the UK deferred tax liability associated with the UK Group pension
plan asset position, which has been recognised in other comprehensive income,
together with a £25m increase in UK deferred tax assets, which has been
recognised in the income statement. The UK corporation tax rate change is
beneficial to the Group's statutory tax as it increases the value of certain
UK tax attributes of the Group such as tax losses and, as noted above, reduces
the overall statutory tax charge.
Operating tax paid in 2021 was £60m (2020: £10m). In 2020 tax paid was
impacted by refunds received in the US and UK relating to historical periods.
Non-operating tax paid was £117m in 2021 (2020: refund £12m) of which £97m
relates to the ongoing EU Commission investigation into whether certain
aspects of the UK tax system constituted State Aid (see note 15 for further
details). The Group expects to recover the funds in due course. The £97m is
recognised as a non-current tax asset.
A net deferred tax asset of £17m is recognised in 2021 compared to a net
£30m deferred tax liability in 2020. The movement is primarily due to the
unwind of deferred tax liabilities. The current tax creditor principally
consists of provisions for tax uncertainties. There are contingent liabilities
in relation to tax as outlined in note 15 to the condensed consolidated
financial statements.
Other comprehensive income
Included in other comprehensive income are the net exchange differences on
translation of foreign operations. The loss on translation of £6m in 2021
compares to a loss in 2020 of £109m. The loss in 2021 arises due to the
strengthening of the US dollar being offset by the weakening of other
currencies used by the Group. A significant proportion of the Group's
operations are based in the US and the US dollar strengthened in 2021 from an
opening rate of £1:$1.37 to a closing rate at the end of 2021 of £1:$1.35.
At the end of 2020, the US dollar had weakened from an opening rate of
£1:$1.32 to a closing rate of £1:$1.37 and this movement was the main reason
for the loss in 2020.
Also included in other comprehensive income in 2021 is an actuarial gain of
£149m in relation to retirement benefit obligations of the Group. The gain
arises from the favourable impact of changes in the assumptions used to value
the liabilities in the plans and in particular movements in the discount rate.
The actuarial gain in 2021 of £149m compares to an actuarial loss in 2020 of
£23m. There is a £61m tax charge related to retirement benefit obligations
recognised in other comprehensive income, which is primarily driven by the
change in the UK corporation tax rate from 19% to 25% in 2023 increasing the
deferred tax liability held on the balance sheet.
Fair value gains of £24m have been recognised in other comprehensive income
and relate to movements in the value of investments in unlisted securities
held at fair value through other comprehensive income. In 2020, fair value
gains of £14m were recognised in other comprehensive income.
In 2021, a gain of £4m was recycled from the currency translation reserve to
the income statement in relation to businesses disposed. In 2020, a loss of
£70m was recycled from the currency translation reserve to the income
statement in relation to the disposal of PRH.
Cash flow and working capital
Our operating cash flow measure is an adjusted measure used to align cash
flows with our adjusted profit measures (see note 14 to the condensed
consolidated financial statements). Operating cash inflow increased on a
headline basis by £73m from £315m in 2020 to £388m in 2021. The increase is
largely explained by the drop-through of increased operating profits and an
improvement in net working capital offset by an increase in capital
expenditure.
The equivalent statutory measure, net cash generated from operations, was
£570m in 2021 compared to £450m in 2020. Compared to operating cash flow,
this measure includes restructuring costs but does not include regular
dividends from associates. It also excludes capital expenditure on property,
plant, equipment and software, and additions to right of use assets as well as
disposal proceeds from the sale of property, plant, equipment and right of use
assets (including the impacts of transfers to/from investment in finance lease
receivable). In 2021, restructuring cash outflow was £24m compared to £38m
in 2020.
In 2021, there was an overall £176m decrease in cash and cash equivalents
compared to an increase of £679m in 2020. The decrease in 2021 is primarily
due to repayments of borrowings of £167m, dividends paid of £149m, tax paid
of £177m, interest payments of £67m, capital expenditure of £176m,
acquisitions of £69m and repayments of lease liabilities of £88m. These were
offset by the cash inflow from operations of £570m and proceeds from
disposals of businesses and investments of £131m.
Working capital provisions continue to be an area of focus for the Group in
light of the impact of COVID-19 on trading, in particular the adequacy of
inventory and bad debt provisions. Reductions in the total level of inventory
held by the Group are driven by the digital first strategy and the resulting
reduction in physical product. The increase in trade and other liabilities
held by the Group is driven by timing differences which have increased
deferred income, an increase in accruals related to severance and the
recognition of deferred consideration in relation to acquisitions made in
2021. The increase in trade and other receivables held by the Group is driven
by revenue growth which has increased debtors despite strong collections and
an overall reduction in the bad debt provision.
Liquidity and capital resources
The Group's net debt reduced from £463m at the end of 2020 to £350m at the
end of 2021. The decrease is largely due to positive operating cashflow,
proceeds from disposals of businesses and investments and the disposal of
lease liabilities with PIHE partially offset by consideration paid for
acquisitions and tax, interest and dividend payments. Tax payments in 2021
include amounts related to State Aid which the Group expects to recover in due
course.
In May 2021, the Group repaid the remaining €195m of its €500m Euro 1.85%
notes. In June 2020, the Group completed the issuance of £350m guaranteed
notes maturing 4 June 2030.
At 31 December 2021, the Group had available liquidity of c£1.6bn, comprising
central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF).
In February 2022, the Group renegotiated its revolving credit facility,
extending the maturity of $1bn of the facility by one year to February
2026.
In assessing the Group's viability for the five years to December 2026, the
board analysed a variety of downside scenarios including a severe but
plausible scenario where the Group is impacted by all principal risks from
2022 as well as reverse stress testing to identify what would be required to
either breach covenants or run out of liquidity. The severe but plausible
scenario modelled an impact from risks which in aggregate were significantly
greater than seen in 2021 continuing throughout the five year period.
Even under a severe downside case, the Group would maintain comfortable
liquidity headroom and sufficient headroom against covenant requirements
during the period under assessment even before modelling the mitigating effect
of actions that management would take in the event that these downside risks
were to crystallise. The downside scenarios assume that the RCF will be
available throughout the period to 31 December 2026.
At 31 December 2021, the Group was rated BBB- (stable outlook) with Fitch and
Baa3 (stable outlook) with Moody's.
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 post-retirement
benefits amounted to £58m in 2021 (2020: £54m), of which a charge of £62m
(2020: £60m) was reported in adjusted operating profit and income of £4m
(2020: £6m) was reported in other net finance costs. The slight increase in
the operating charge in 2021 is mainly explained by curtailments recognised in
2020 which are not repeated in 2021.
The overall surplus on UK Group pension plans of £410m at the end of 2020 has
increased to a surplus of £537m at the end of 2021. The increase has arisen
principally due to the actuarial gain noted above in the other comprehensive
income section. In total, our worldwide net position in respect of pensions
and other post-retirement benefits increased from a net asset of £325m at the
end of 2020 to a net asset of £471m at the end of 2021.
Businesses acquired and businesses disposed
In September 2021, the Group completed the acquisition of 100% of the share
capital of Faethm Holdings Pty Limited ('Faethm'), having already held 9% of
the share capital previously. Total consideration for the acquisition was
£65m comprising cash consideration of £49m, £6m related to the Group's
existing interest in Faethm and £10m of contingent consideration payable in 2
years. Net assets acquired of £27m have been recognised on the Group's
balance sheet including £21m of acquired intangible assets. Goodwill of £38m
has also been recognised in relation to the acquisition.
In 2021, the Group also made two smaller acquisitions for total consideration
of £11m and acquired interests in two associates, Smashcut and Academy of
Pop, for total consideration of £17m. There were no significant acquisitions
in 2020.
The cash outflow in 2021 relating to acquisitions of subsidiaries is £55m. In
addition, there is a cash outflow relating to the acquisition of associates of
£10m and investments of £4m. In 2020, the cash outflow in relation to
acquisition of subsidiaries was £6m which related to prior year acquisitions,
and the cash outflow in relation to acquisition of investments was £6m.
In March 2021, the Group announced the sale of its interests in K12 Sistemas
in Brazil. The sale completed on 1 October 2021 for R$789m realising a gain on
disposal of £84m in 2021.
In March 2021, the Group announced that it was launching a strategic review of
its international courseware local publishing businesses. The strategic review
is progressing in line with plan. The related assets have been assessed in
light of IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'
and they do not meet the criteria to be classified as held for sale.
In November 2020, the Group announced the sale of its interests in PIHE in
South Africa. At the end of December 2020, the assets and liabilities of PIHE
were classified as held for sale on the balance sheet. The sale completed on 5
February 2021 for nominal consideration realising a loss on disposal of £5m
in 2021.
In December 2019, the Group announced the sale of its remaining 25% interest
in PRH. The business was sold at the beginning of April 2020 for $675m
realising a profit of £180m.
The cash inflow in 2021 relating to the disposal of businesses of £83m mainly
relates to the disposal of the K12 Sistemas business and deferred proceeds
from the US K12 Courseware sale in 2019 offset by cash disposed with PIHE and
other disposal costs. In addition, in 2021 there is a cash inflow of £48m
relating to the disposal of certain investments held at fair value through
other comprehensive income. The cash inflow in 2020 of £631m mainly relates
to the disposal of PRH and the deferred proceeds from US K12.
Further details relating to these transactions can be found in notes 11 and 12
to the condensed consolidated financial statements.
Dividends
The dividend accounted for in our 2021 financial statements totalling £149m
represents the final dividend in respect of 2020 (13.5p) and the interim
dividend for 2021 (6.3p). We are proposing a final dividend for 2021 of
14.2p bringing the total paid and payable in respect of 2021 to 20.5p. This
final 2021 dividend which was approved by the Board in February 2022, is
subject to approval at the forthcoming AGM and will be charged against 2022
profits. For 2021, the dividend is covered 1.7 times by adjusted earnings.
Share buyback
On 24 February 2022, the Board approved a £350m share buyback programme in
order to return capital to shareholders. The programme will commence as soon
as is practicable. The shares bought back will be cancelled and the nominal
value of the shares will be transferred to the capital redemption reserve.
In 2020, approximately 30m shares were bought back and cancelled at a cost of
£176m. The nominal value of these shares, £7m was transferred to the capital
redemption reserve.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2021
all figures in £ millions note 2021 2020
Continuing operations
Sales 2 3,428 3,397
Cost of goods sold (1,747) (1,767)
Gross profit 1,681 1,630
Operating expenses (1,562) (1,402)
Other net gains and losses 2 63 178
Share of results of joint ventures and associates 1 5
Operating profit 2 183 411
Finance costs 3 (68) (107)
Finance income 3 42 50
Profit before tax 4 157 354
Income tax 5 3 (44)
Profit for the year 160 310
Attributable to:
Equity holders of the company 159 310
Non-controlling interest 1 -
Earnings per share (in pence per share)
Basic 6 21.1p 41.0p
Diluted 6 20.9p 41.0p
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 2021
all figures in £ millions 2021 2020
Profit for the year 160 310
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations - Group (6) (109)
Currency translation adjustment disposed 4 (70)
Attributable tax 10 (13)
Items that are not reclassified to the income statement
Fair value gain on other financial assets 24 14
Attributable tax (3) (6)
Remeasurement of retirement benefit obligations - Group 149 (23)
Attributable tax (61) 2
Other comprehensive income / (expense) for the year 117 (205)
Total comprehensive income for the year 277 105
Attributable to:
Equity holders of the company 276 105
Non-controlling interest 1 -
CONDENSED CONSOLIDATED BALANCE SHEET
as at 31 December 2021
all figures in £ millions note 2021 2020
Property, plant and equipment 366 515
Intangible assets 10 2,769 2,742
Investments in joint ventures and associates 24 6
Deferred income tax assets 57 32
Financial assets - derivative financial instruments 30 45
Retirement benefit assets 537 410
Other financial assets 113 138
Income tax assets 97 -
Trade and other receivables 129 223
Non-current assets 4,122 4,111
Intangible assets - product development 894 905
Inventories 98 129
Trade and other receivables 1,257 1,118
Financial assets - derivative financial instruments 2 18
Income tax assets 26 -
Cash and cash equivalents (excluding overdrafts) 937 1,097
Current assets 3,214 3,267
Assets classified as held for sale 7 73
Total assets 7,343 7,451
Financial liabilities - borrowings (1,245) (1,397)
Financial liabilities - derivative financial instruments (30) (40)
Deferred income tax liabilities (40) (62)
Retirement benefit obligations (66) (85)
Provisions for other liabilities and charges (7) (8)
Other liabilities (95) (80)
Non-current liabilities (1,483) (1,672)
Trade and other liabilities (1,256) (1,196)
Financial liabilities - borrowings (155) (254)
Financial liabilities - derivative financial instruments (4) (12)
Income tax liabilities (125) (84)
Provisions for other liabilities and charges (40) (25)
Current liabilities (1,580) (1,571)
Liabilities classified as held for sale - (74)
Total liabilities (3,063) (3,317)
Net assets 4,280 4,134
Share capital 189 188
Share premium 2,626 2,620
Treasury shares (12) (7)
Reserves 1,467 1,324
Total equity attributable to equity holders of the company 4,270 4,125
Non-controlling interest 10 9
Total equity 4,280 4,134
The condensed consolidated financial statements were approved by the Board on
24 February 2022.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2021
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2021
At 1 January 2021 188 2,620 (7) 18 53 388 865 4,125 9 4,134
Profit for the year - - - - - - 159 159 1 160
Other comprehensive income / (expense) - - - - 24 (2) 95 117 - 117
Total comprehensive income / (expense) - - - - 24 (2) 254 276 1 277
Equity-settled transactions - - - - - - 28 28 - 28
Transfer of gain on disposal of FVOCI investment - - - - (44) - 44 - - -
Issue of ordinary shares 1 6 (1) - - - - 6 - 6
Buyback of equity - - - - - - - - - -
Purchase of treasury shares - - (16) - - - - (16) - (16)
Release of treasury shares - - 12 - - - (12) - - -
Dividends - - - - - - (149) (149) - (149)
At 31 December 2021 189 2,626 (12) 18 33 386 1,030 4,270 10 4,280
2020
At 1 January 2020 195 2,614 (24) 11 39 567 911 4,313 10 4,323
Profit for the year - - - - - - 310 310 - 310
Other comprehensive income / (expense) - - - - 14 (179) (40) (205) - (205)
Total comprehensive income / (expense) - - - - 14 (179) 270 105 - 105
Equity-settled transactions - - - - - - 29 29 - 29
Transfer of gain on disposal of FVOCI investment - - - - - - - - - -
Issue of ordinary shares - 6 - - - - - 6 - 6
Buyback of equity (7) - - 7 - - (176) (176) - (176)
Purchase of treasury shares - - (6) - - - - (6) - (6)
Release of treasury shares - - 23 - - - (23) - - -
Dividends - - - - - - (146) (146) (1) (147)
At 31 December 2020 188 2,620 (7) 18 53 388 865 4,125 9 4,134
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2021
all figures in £ millions note 2021 2020
Cash flows from operating activities
Net cash generated from operations 14 570 450
Interest paid (67) (63)
Tax (paid) / received (177) 2
Net cash generated from operating activities 326 389
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 11 (55) (6)
Acquisition of associates (10) -
Purchase of investments (4) (6)
Purchase of property, plant and equipment (64) (53)
Purchase of intangible assets (112) (81)
Disposal of subsidiaries, net of cash disposed 12 83 100
Proceeds from sale of joint ventures and associates 12 - 531
Proceeds from sale of investments 12 48 -
Lease receivables repaid including disposals 21 41
Loans repaid by related parties - 48
Interest received 13 13
Dividends from joint ventures and associates - 4
Net cash (used in) / generated from investing activities (80) 591
Cash flows from financing activities
Proceeds from issue of ordinary shares 6 6
Buyback of equity - (176)
Purchase of treasury shares (16) (6)
Proceeds from borrowings - 346
Repayment of borrowings (167) (230)
Repayment of lease liabilities (88) (92)
Dividends paid to company's shareholders (149) (146)
Dividends paid to non-controlling interest - (1)
Net cash used in financing activities (414) (299)
Effects of exchange rate changes on cash and cash equivalents (8) (2)
Net (decrease) / increase in cash and cash equivalents (176) 679
Cash and cash equivalents at beginning of year 1,113 434
Cash and cash equivalents at end of year 937 1,113
For the purposes of the cash flow statement, cash and cash equivalents are
presented net of overdrafts repayable on demand. These overdrafts are excluded
from cash and cash equivalents disclosed on the balance sheet.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
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 UK-adopted International Accounting
Standards. On 31 December 2020, IFRS as adopted by the European Union at that
date was brought into UK law and became UK-adopted International Accounting
Standards, with future changes being subject to endorsement by the UK
Endorsement Board. The Group transitioned to UK-adopted International
Accounting Standards in its condensed consolidated financial statements on 1
January 2021. This change constitutes a change in accounting framework.
However, there is no impact on recognition, measurement or disclosure in the
period reported as a result of the change in framework. The condensed
consolidated financial statements have also been prepared in accordance with
the International Financial Reporting Standards as issued by the International
Accounting Standards Board (IASB). In respect of accounting standards
applicable to the Group, there is no difference between UK-adopted
International Accounting Standards and IFRSs as issued by the IASB.
The condensed consolidated financial statements have also been prepared in
accordance with the accounting policies set out in the 2020 Annual Report,
except as outlined above, 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.
No new standards were adopted in 2021. 'Interest Rate Benchmark Reform - Phase
2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)' is effective
from 1 January 2021 and in addition, the Group has early adopted the amendment
to IFRS 16 'COVID-19 related rent concessions beyond 30 June 2021'. The
amendments do not have a material impact on the condensed consolidated
financial statements. The Group has also considered the IFRIC interpretation
on 'Configuration and Customisation costs in a Cloud Computing Arrangement'
and concluded that it does not have a material impact on the condensed
consolidated financial statements.
The 2020 Annual Report refers to new standards that the Group will adopt in
future years but that are not yet effective in 2021. The Group does not expect
these to have a material impact.
In assessing the Group's ability to continue as a going concern for the period
to 30 June 2023, the board analysed a variety of downside scenarios including
a severe but plausible scenario where the Group is impacted by all principal
risks from 2022 as well as reverse stress testing to identify what would be
required to either breach covenants or run out of liquidity. The severe but
plausible scenario modelled a severe reduction in revenue, profit and
operating cash flow from risks which in aggregate were significantly greater
than seen in 2021 continuing throughout 2022 to 2023.
At 31 December 2021, the Group had available liquidity of c£1.6bn, comprising
central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF).
In February 2022, the Group renegotiated its revolving credit facility,
extending the maturity of $1bn of the facility by one year to February
2026. Even under a severe downside case, the Group would maintain comfortable
liquidity headroom and sufficient headroom against covenant requirements
during the period under assessment even before modelling the mitigating effect
of actions that management would take in the event that these downside risks
were to crystallise.
The directors have confirmed that there are no material uncertainties that
cast doubt on the Group's going concern status and that they have a reasonable
expectation that the Group has adequate resources to continue in operational
existence for a minimum of the next 12 months. 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 2020 Annual
Report.
For the year ended 31 December 2021, in light of the new strategy and
organisation design, a key judgement has been added in respect of the
allocation of goodwill to cash generating units and groups of cash generating
units. In addition, in 2021, the Group has undertaken a programme to simplify
its property portfolio to occupy a significantly smaller square footage. The
recoverability of right of use assets and in particular assumptions related to
the ability to sublease leased assets in the future has become a key area of
estimation.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
1. Basis of preparation continued
As set out in the 2020 Annual Report, other areas where assumptions and
estimates are significant include the recoverability of goodwill balances, the
valuation of tax balances, provisions for returns and the valuation of
retirement benefit obligations and assets. The recoverability of product
development assets is no longer considered an area of key estimation as the
risk of a material adjustment within the next financial year has diminished as
impairment triggers resulting from COVID-19 have reduced. In addition, the
Group has assessed the impact of the uncertainty presented by the COVID-19
pandemic on the condensed consolidated financial statements, specifically
considering the impact on key judgements and significant estimates along with
other areas of increased risk including provisions for bad debt, provisions
for inventory obsolescence, valuation of property related assets and financial
instruments. No material accounting impacts relating to the areas assessed
were recognised in 2021. The Group will continue to monitor these areas of
increased judgement, estimation and risk for material changes.
The Group has assessed the impacts of climate change on the Group's financial
statements. The assessment did not identify any material impact on the Group's
significant judgements or estimates, the recoverability of the Group's assets
at 31 December 2021 or the assessment of going concern for the period to June
2023.
The financial information for the year ended 31 December 2020 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 2020 was unqualified and did not
contain an emphasis of matter paragraph or any statement under section 498 of
the Companies Act 2006.
This preliminary announcement does not constitute the Group's full financial
statements for the year ended 31 December 2021. The Group's full financial
statements will be approved by the Board of Directors and reported on by the
auditors in March 2022. Accordingly, the financial information for 2021 is
presented unaudited in the preliminary announcement.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the year
ended 31 December 2021
2. Segment information
On 8 March 2021, the Group announced a new strategy, which included a new
management structure and operating model. As a result, the primary operating
segments reported to the Group's chief operating decision-maker, the Pearson
Executive Management team, have changed from 1 July 2021 to reflect the new
Group structure. There are now five main global business divisions, which are
each considered separate operating segments for management and reporting
purposes. These five divisions are Virtual Learning, Higher Education, English
Language Learning, Workforce Skills and Assessments & Qualifications. In
addition, the International Courseware local publishing businesses are under
strategic review and during this time are being managed as a separate
division, known as Strategic Review. For the comparative period, the Group has
separately disclosed the results from the Penguin Random House associate (PRH)
to the point of disposal in April 2020. Comparative figures for 2020 have been
restated to reflect the new segments.
The following describes the principal activities of the five main operating
segments:
- Assessments & Qualifications - Pearson VUE, US School
Assessment, Clinical Assessment, UK GCSE and A Levels and International
academic qualifications.
- Virtual Learning - Virtual Schools and Online Program Management.
- English Language Learning - Pearson Test of English, Institutional
Courseware and English Online Solutions.
- Workforce Skills - BTEC, GED, TalentLens, Faethm, Pearson College
and Apprenticeships.
- Higher Education - US, Canadian and International Higher Education
Courseware businesses.
all figures in £ millions 2021 2020¹
Sales
Assessments & Qualifications 1,204 1,082
Virtual Learning 713 692
English Language Learning 238 218
Workforce Skills 172 163
Higher Education 849 956
Strategic Review 252 286
Total sales 3,428 3,397
Adjusted operating profit
Assessments & Qualifications 216 147
Virtual Learning 32 29
English Language Learning 15 1
Workforce Skills 27 26
Higher Education 73 93
Strategic Review 22 16
Penguin Random House - 1
Total adjusted operating profit 385 313
1. Comparative amounts have been restated to reflect the new operating
segments.
There were no material inter-segment sales.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the year
ended 31 December 2021
2. Segment information continued
The Group derived revenue from the transfer of goods and services over time
and at a point in time in the following major product lines:
all figures in £ millions Assessment & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Total
2021
Courseware
Products transferred at a point in time 44 - 109 - 283 198 634
Products and services transferred over time 14 - 26 - 558 33 631
58 - 135 - 841 231 1,265
Assessments
Products transferred at a point in time 173 - 6 16 - - 195
Products and services transferred over time 973 - 72 119 - - 1,164
1,146 - 78 135 - - 1,359
Services
Products transferred at a point in time - - 22 - - 14 36
Products and services transferred over time - 713 3 37 8 7 768
- 713 25 37 8 21 804
Total sales 1,204 713 238 172 849 252 3,428
2020¹
Courseware
Products transferred at a point in time 43 - 106 - 313 208 670
Products and services transferred over time 14 - 24 - 630 28 696
57 - 130 - 943 236 1,366
Assessments
Products transferred at a point in time 138 - 3 7 - - 148
Products and services transferred over time 887 - 61 123 - - 1,071
1,205 - 64 130 - - 1,219
Services
Products transferred at a point in time - - 22 - - 22 44
Products and services transferred over time - 692 2 33 13 28 768
- 692 24 33 13 50 812
Total sales 1,082 692 218 163 956 286 3,397
1. Comparative amounts have been restated to reflect the new operating
segments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the year
ended 31 December 2021
2. Segment information continued
Adjusted operating profit is one of the Group's key business performance
measures. The measure includes the operating profit from the total business
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.
Cost of major restructuring - In March 2021, the Group announced a
restructuring programme, to run primarily in 2021. The programme includes the
reorganisation of the Group into five global business divisions and the
simplification of the Group's property portfolio. The restructuring costs in
2021 of £214m mainly relate to the impairment of right of use property
assets, the write-down of product development assets and staff redundancies.
Intangible charges - These represent charges relating to intangibles acquired
through business combinations. These charges are excluded as they reflect past
acquisition activity and do not necessarily reflect the current year
performance of the Group. Intangible amortisation charges in 2021 were £51m
including impairment charges of nil. In 2020, intangible charges were £80m
including impairment charges of £12m.
Other net gains and losses - These represent profits and losses on the sale of
subsidiaries, joint ventures, associates and other financial assets and are
excluded from adjusted operating profit as they distort the performance of the
Group as reported on a statutory basis. Other net gains and losses also
includes costs related to business closures and acquisitions. Other net gains
and losses in 2021 largely relate to gains from the disposal of PIHE and the
K12 Sistemas business in Brazil offset by costs related to the acquisition of
Faethm and the wind down of certain strategic review businesses. In 2020 other
net gains and losses largely relate to the sale of the remaining interest in
PRH.
The following table reconciles adjusted operating profit to operating profit
for each of our primary segments.
Assessments & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Penguin Random House Total
all figures in £ millions
2021
Adjusted operating profit 216 32 15 27 73 22 - 385
Cost of major restructuring (48) (48) (27) (28) (63) - - (214)
Intangible charges (13) (25) (3) (7) (2) (1) - (51)
Other net gains and losses - - - (2) - 65 - 63
Operating profit / (loss) 155 (41) (15) (10) 8 86 - 183
2020(1)
Adjusted operating profit 147 29 1 26 93 16 1 313
Cost of major restructuring - - - - - - - -
Intangible charges (29) (30) (7) (8) (3) (3) - (80)
Other net gains and losses - - - - - (2) 180 178
Operating profit / (loss) 118 (1) (6) 18 90 11 181 411
1. Comparative amounts have been restated to reflect the new operating
segments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
3. Net finance costs
all figures in £ millions 2021 2020
Net interest payable (57) (61)
Net finance income in respect of retirement benefits 4 6
Fair value re-measurement of disposal proceeds 6 26
Net foreign exchange gains / (losses) 1 (6)
Derivatives not in a hedge relationship 20 (22)
Net finance costs (26) (57)
Analysed as:
Finance costs (68) (107)
Finance income 42 50
Net finance costs (26) (57)
Analysed as:
Net interest payable reflected in adjusted earnings (57) (61)
Other net finance income 31 4
Net finance costs (26) (57)
Net interest payable is the finance cost measure used in calculating adjusted
earnings. Net finance costs classified as other net finance costs are excluded
from the calculation of the Group's adjusted earnings.
Net finance income in respect of retirement benefits is excluded as it is
considered that the presentation does not reflect the economic substance of
the underlying assets and liabilities. The Group excludes finance costs
relating to acquisition and disposal transactions as these relate to future
earn-outs or acquisition expenses and are not part of the underlying
financing. In 2021 and 2020, the fair value re-measurement of disposal
proceeds relates to the US K12 disposal in 2019.
Foreign exchange and other gains and losses are also excluded as they
represent short-term fluctuations in market value and are subject to
significant volatility. Other gains and losses may not be realised in due
course as it is normally the intention to hold the related instruments to
maturity. In 2021 and 2020, the foreign exchange gains and losses largely
relate to foreign exchange differences on unhedged intercompany loans and cash
and cash equivalents. Losses on derivatives not in a hedge relationship
represent the unrealised mark to market of long-term interest rate hedges used
to fix the interest rate of borrowings.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
4. Profit before tax
all figures in £ millions note 2021 2020
Profit before tax 157 354
Cost of major restructuring 2 214 -
Other net gains and losses 2 (63) (178)
Intangible charges 2 51 80
Other net finance income 3 (31) (4)
Adjusted profit before tax 328 252
5. Income tax
all figures in £ millions 2021 2020
Income tax benefit / (charge) 3 (44)
Tax benefit on cost of major restructuring (47) -
Tax charge on other net gains and losses 14 3
Tax benefit on intangible charges (12) (22)
Tax charge on other net finance costs 6 4
Tax amortisation benefit on goodwill and intangibles 8 24
Benefit from change in tax accounting treatment (11) -
Tax benefit on UK tax rate change (25) -
Adjusted income tax charge (64) (35)
Tax rate reflected in statutory earnings (1.8)% 12.5%
Tax rate reflected in adjusted earnings 19.5% 13.7%
The adjusted income tax charge excludes the tax benefit or charge on items
excluded from the profit before tax (see note 4).
The tax benefit from tax deductible goodwill and intangibles is added to the
adjusted income tax charge as this benefit more accurately aligns the adjusted
tax charge with the expected rate of cash tax payments.
In 2020, included within the tax charge relating to intangible charges above
is a one-off charge of £17m relating to the impairment of a deferred tax
asset associated with goodwill. If this item was excluded there would be a tax
credit of £10m associated with intangible charges.
The Budget in March 2021 announced an increase in the UK corporation tax rate
to 25% with effect from 1 April 2023. This was substantively enacted on 24 May
2021. The UK corporation tax rate increase has resulted in an increase of
£27m in the UK deferred tax liability associated with the UK Group pension
plan asset position, which has been recognised in other comprehensive income,
together with a £25m increase in UK deferred tax assets, which has been
recognised in the income statement.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
6. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss
attributable to equity shareholders of the company (earnings) by the weighted
average number of ordinary shares in issue during the year, excluding ordinary
shares purchased by the company and held as treasury shares. Diluted earnings
per share is calculated by adjusting the weighted average number of ordinary
shares to take account of all dilutive potential ordinary shares and adjusting
the profit attributable, if applicable, to account for any tax consequences
that might arise from conversion of those shares.
all figures in £ millions 2021 2020
Earnings for the year 160 310
Non-controlling interest (1) -
Earnings attributable to equity holders 159 310
Weighted average number of shares (millions) 754.1 755.4
Effect of dilutive share options (millions) 5.0 0.0
Weighted average number of shares (millions) for diluted earnings 759.1 755.4
Earnings per share (in pence per share)
Basic 21.1p 41.0p
Diluted 20.9p 41.0p
7. Adjusted earnings per share
In order to show results from operating activities on a consistent basis, an
adjusted earnings per share is presented which excludes certain items as set
out below.
Adjusted earnings is a non-GAAP financial measure and is included as it is a
key financial measure used by management to evaluate performance and allocate
resources to business segments. The measure also enables our investors to more
easily, and consistently, track the underlying operational performance of the
Group and its business segments over time by separating out those items of
income and expenditure relating to acquisition and disposal transactions,
major restructuring programmes and certain other items that are also not
representative of underlying performance (see notes 2, 3, 4 and 5 for further
information and reconciliation to equivalent statutory measures).
The adjusted earnings per share includes both continuing and discontinued
businesses on an undiluted basis when relevant. The Group's definition of
adjusted earnings per share may not be comparable to other similarly titled
measures reported by other companies. A reconciliation of the adjusted
measures to their corresponding statutory measures is shown in the tables
below and in notes 2, 3, 4 and 5.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
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 Benefit from change in tax accounting treatment Change in UK tax rate Tax amortisation benefit Adjusted income statement
2021
Operating profit 2 183 214 (63) 51 - - - - 385
Net finance costs 3 (26) - - - (31) - - - (57)
Profit before tax 4 157 214 (63) 51 (31) - - - 328
Income tax 5 3 (47) 14 (12) 6 (11) (25) 8 (64)
Profit for the year 160 167 (49) 39 (25) (11) (25) 8 264
Non-controlling interest (1) - - - - - - - (1)
Earnings 159 167 (49) 39 (25) (11) (25) 8 263
Weighted average number of shares (millions) 754.1
Weighted average number of shares (millions) for diluted earnings 759.1
Adjusted earnings per share (basic) 34.9p
Adjusted earnings per share (diluted) 34.6p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges Other net finance costs Tax amortisation benefit Adjusted income statement
2020
Operating profit 2 411 - (178) 80 - - 313
Net finance costs 3 (57) - - - (4) - (61)
Profit before tax 4 354 - (178) 80 (4) - 252
Income tax 5 (44) - 3 (22) 4 24 (35)
Profit for the year 310 - (175) 58 - 24 217
Non-controlling interest - - - - - - -
Earnings 310 - (175) 58 - 24 217
Weighted average number of shares (millions) 755.4
Weighted average number of shares (millions) for diluted earnings 755.4
Adjusted earnings per share (basic) 28.7p
Adjusted earnings per share (diluted) 28.7p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
8. Dividends
all figures in £ millions 2021 2020
Amounts recognised as distributions to equity shareholders in the year 149 146
The directors are proposing a final dividend of 14.2p per equity share,
payable on 6 May 2022 to shareholders on the register at the close of business
on 25 March 2022. This final dividend, which will absorb an estimated £107m
of shareholders' funds, has not been included as a liability as at 31 December
2021.
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:
2021 2020
Average rate for profits 1.38 1.28
Year end rate 1.35 1.37
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
10. Non-current intangible assets
all figures in £ millions 2021 2020
Goodwill 2,145 2,094
Other intangibles 624 648
Non-current intangible assets 2,769 2,742
In 2021, the CGUs and aggregations of CGUs were revised to take into account
the announcement and implementation of a new strategy including five new
business divisions and a strategic review division. The newly created CGUs and
CGU aggregations reflect the level at which goodwill is monitored by
management and mirror the primary operating segments. Goodwill has been
reallocated to the new CGUs and aggregations of CGUs using a relative value
method. The new CGU aggregations and the associated goodwill balances are set
out in the table below:
all figures in £ millions 2021
Assessments & Qualifications 1,198
Virtual Learning 395
English Language Learning 153
Workforce Skills 223
Higher Education 68
Strategic Review 108
Total goodwill 2,145
Following the annual impairment review for 2021, no impairment charges have
been recorded against goodwill or intangibles. In 2020, following the annual
impairment review, impairments of £12m were recorded against intangibles, but
no impairments were recorded against goodwill.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
11. Acquisitions
In September 2021, Pearson completed the acquisition of 100% of the share
capital of Faethm, having already held 9% of the share capital. Faethm uses
artificial intelligence and analytics services to help governments, companies
and workers understand the dynamic forces shaping the labour market. Faethm
will be part of the Workforce Skills division. The total consideration for the
transaction was £65m, which included £10m of contingent consideration which
is payable after two years, dependent upon meeting certain earnings targets.
The contingent consideration has been valued at the net present value of the
Group's best estimate of the amount that will be payable.
In addition, the Group made two additional acquisitions of subsidiaries for
total consideration of £11m. In both cases, the Group acquired 100% of the
share capital of the respective entities. Opinion Interactive LLC (also known
as Spotlight Education) was acquired in February 2021. MZ Development Inc. was
acquired in July 2021. Both will be part of the Assessments &
Qualifications division.
Details of the fair values of the assets and liabilities recognised at the
acquisition date and the related consideration is shown in the table below.
The fair values of Faethm's net assets are provisional at this stage as
management are finalising their review of the asset valuations. The
provisional goodwill arising from the acquisition of Faethm represents assets
and benefits that cannot be separately recognised. The goodwill is not
deductible for tax purposes and at the acquisition date there were no material
contingent liabilities.
There were no significant acquisitions in 2020.
all figures in £ millions 2021 2021 2021 2020
Faethm Other Total Total
Intangible assets 21 6 27 -
Deferred tax assets 11 - 11 -
Trade and other receivables 1 1 2 -
Cash and cash equivalents (excluding overdrafts) 4 - 4 -
Trade and other liabilities (4) (1) (5) -
Deferred tax liabilities (6) - (6) -
Net assets acquired 27 6 33 -
Goodwill 38 5 43 -
Total 65 11 76 -
Satisfied by:
Cash consideration 49 5 54 -
Fair value of existing interest 6 - 6
Contingent consideration 10 6 16 -
Total consideration 65 11 76 -
Cash flow from acquisitions
Cash - current year acquisitions (49) (5) (54) -
Cash and cash equivalents acquired 4 - 4 -
Deferred payments for prior year acquisitions - (4) (4) (6)
Acquisition costs paid (1) - (1) -
Net cash outflow from acquisitions (46) (9) (55) (6)
Faethm generated revenues of £1m and a loss before tax of £1m for the period
from the acquisition date to 31 December 2021. If the acquisition had occurred
on 1 January 2021, there would not have been a material impact on the Group's
results.
Total acquisition-related costs of £2m were recognised in 2021 within other
operating costs.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
12. Disposals
In February 2021, the Group completed the sale of its interests in PIHE in
South Africa resulting in a pre-tax loss of £5m. In October 2021, the Group
completed the sale of its K12 Sistemas business in Brazil resulting in a
pre-tax gain of £84m. There were no other business disposals in 2021 and
additional losses of £14m relate to other disposal costs including costs
related to the wind down of certain businesses under strategic review. In
April 2020, the Group completed the sale of the remaining 25% interest in PRH
resulting in a pre-tax profit of £180m. There were no other material
disposals in 2020. Deferred proceeds relating to the K12 sale were received in
2021 and 2020.
all figures in £ millions 2021 2020
Intangible assets (3) -
Property, plant and equipment (48) -
Investments in joint ventures and associates - (418)
Intangible assets - product development (6) -
Inventories (2) -
Trade and other receivables (6) -
Cash and cash equivalents (excluding overdrafts) (24) -
Provisions for other liabilities and charges 3 -
Trade and other liabilities 4 -
Financial liabilities - Borrowings 67 -
Cumulative translation adjustment (4) 70
Net assets disposed (19) (348)
Cash proceeds 108 531
Costs of disposal including business wind downs (24) 1
Gain on disposal 65 184
Cash flow from disposals
Proceeds - current year disposals 108 531
Proceeds - prior year disposals 16 105
Cash and cash equivalents disposed (24) -
Costs and other disposal liabilities paid (17) (5)
Net cash inflow from disposals 83 631
In addition to the above, in 2021, proceeds of £48m were received in relation
to the disposal of certain investments held at fair value through other
comprehensive income.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
13. Net debt
all figures in £ millions 2021 2020
Non-current assets
Derivative financial instruments 30 45
Trade and other receivables - investment in finance lease 100 112
Current assets
Derivative financial instruments 2 18
Trade and other receivables - investment in finance lease 15 18
Cash and cash equivalents (excluding overdrafts) 937 1,116
Non-current liabilities
Borrowings (1,245) (1,463)
Derivative financial instruments (30) (40)
Current liabilities
Borrowings (155) (257)
Derivative financial instruments (4) (12)
Net debt (350) (463)
Net debt presented above includes no borrowings (2020: £69m) or cash and cash
equivalents (2020: £19m) which are included in assets and liabilities held
for sale.
Included in borrowings at 31 December 2021 are lease liabilities of £633m
(non-current £565m, current £68m). This compares to lease liabilities of
£752m (non-current £676m, current £76m) at 31 December 2020. The net lease
liability at 31 December 2021 after including the investment in finance leases
noted above was £518m (2020: £622m). Net cash excluding net lease
liabilities was £168m (2020: £159m).
On 4 June 2020, the Group completed the issuance of £350m guaranteed notes
maturing 4 June 2030. The notes bear a coupon of 3.75% and have been issued in
accordance with the ICMA Social Bond Principles 2018. The proceeds will be
primarily used to finance and re-finance delivery of education in Connections
Academy, BTEC and GED businesses to help achieve the United Nations' 4th
Sustainable Development Goal (SDG) for a Quality Education. The social bond
framework is a natural progression of Pearson's long-standing commitment to
integrating social and environmental sustainability into the business.
In 2021, the movement on borrowings reflects the repayment of amounts
outstanding under the Group's 1.875% Euro bond. In addition, bonds maturing in
2022 have been reclassified from non-current to current borrowings.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
14. Cash flows
all figures in £ millions 2021 2020
Reconciliation of profit for the year to net cash generated from operations
Profit for the year 160 310
Income tax (3) 44
Depreciation, amortisation and impairment charges 408 317
Net profit on disposal of businesses (65) (184)
Other net gains and losses 2 6
Net loss on disposal of fixed assets 4 2
Net profit on disposal of right of use assets including transfers to - (6)
investment in finance lease receivable
Net finance costs 26 57
Share of results of joint ventures and associates (1) (5)
Net foreign exchange adjustment 9 (34)
Share-based payment costs 28 29
Product development (6) (56)
Inventories 22 35
Trade and other receivables (71) (1)
Trade and other liabilities 37 (26)
Retirement benefit obligations 6 (1)
Provisions for other liabilities and charges 14 (37)
Net cash generated from operations 570 450
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
14. Cash flows continued
all figures in £ millions note 2021 2020
Reconciliation of net cash generated from operations to closing net debt
Net cash generated from operations 570 450
Dividends from joint ventures and associates - 4
Purchase of PPE (64) (53)
Addition of new right-of-use lease assets (30) (61)
Net disposal of right-of-use lease assets including transfers to/from - 18
investment in finance lease receivable
Purchase of intangible assets (112) (81)
Add back: net costs paid for major restructuring 24 38
Operating cash flow 388 315
Operating tax paid (60) (10)
Net operating finance costs paid (54) (50)
Operating free cash flow 274 255
Non-operating tax (paid) / received (117) 12
Net costs paid for major restructuring (24) (38)
Free cash flow 133 229
Dividends paid (including to non-controlling interest) (149) (147)
Net movement of funds from operations (16) 82
Acquisitions and disposals 62 619
Disposal of lease liabilities 67 -
Loans repaid - 48
Proceeds from issue of ordinary shares 6 6
Buyback of equity - (176)
Purchase of treasury shares (16) (6)
Other movements on financial instruments 20 (29)
Net movement of funds 123 544
Exchange movements on net debt (10) 9
Movement in net debt 113 553
Opening net debt (463) (1,016)
Closing net debt 13 (350) (463)
Operating cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of the Group's corporate and operating measures.
These measures are presented in order to align the cash flows with
corresponding adjusted profit measures.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021
15. 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 unsettled or disputed tax liabilities, legal
claims, contract disputes, royalties, copyright fees, permissions and other
rights. None of these claims are expected to result in a material gain or loss
to the Group.
On 25 April 2019, the European Commission published the full decision that the
United Kingdom controlled foreign company group financing partial exemption
('FCPE') partially constitutes State Aid. The Group has lodged an appeal. The
Group has benefited from the FCPE in 2018 and prior years by approximately
£116m (which does not include additional interest that would be due if this
amount had to be repaid). In February 2021, the Group received Charging
Notices requiring a payment on account of materially all of the alleged State
Aid to be made. Payments totaling £105m (comprising tax and interest) were
made during 2021 and the Group expects to recover the funds in due course. The
Group continues to be of the view that no provision is required in respect of
this issue.
The Group is under assessment from the tax authorities in Brazil challenging
the deduction for tax purposes of goodwill amortisation for the years 2012 to
2017. Similar assessments may be raised for other years. Potential total
exposure (including possible interest and penalties) could be up to BRL 1,079m
(£143m) up to 31 December 2021, with additional potential exposure of BRL 98m
(£13m) in relation to deductions expected to be taken in future periods.
Such assessments are common in Brazil. The Group believes that the likelihood
that the tax authorities will ultimately prevail is low and that the Group's
position is strong. At present, the Group believes no provision is required.
16. Related parties
In 2021, the Group acquired a 40% interest in Academy of Pop and is accounting
for the investment as an associate. At 31 December 2021, the Group had a
current liability payable to Academy of Pop of £7m which relates to the
Group's initial capital contribution that has not yet been paid. This balance
is expected to be paid in H1 2022.
In 2020, the Group disposed of its interests in Penguin Random House and
therefore Penguin Random House is no longer a related party. Prior to the
completion of the sale of Penguin Random House, the Group received dividends
of £1m from Penguin Random House and repaid loans of £49m which were
outstanding at the point of disposal.
There were no other material related party transactions in 2021 or 2020 and no
guarantees have been provided to related parties in the year.
17. Events after the balance sheet date
On 28 January 2022, the Group acquired 100% of the share capital in Credly
Inc, having previously held a 19.9% interest in the company. Total
consideration is c$200m comprising upfront cash consideration of c$142m,
Pearson's existing interest valued at c$42m and c$16m of deferred
consideration. Net assets acquired will mainly comprise of acquired intangible
assets.
In January 2022, the Group received $117m in relation to full and final
payment of the remaining receivable balance which arose on the disposal of the
US K-12 business in 2019.
In February 2022, the Group renegotiated its revolving credit facility,
extending the maturity of $1bn of the facility by one year to 2026.
On 24 February 2022, the Board approved a £350m share buyback programme in
order to return capital to shareholders. The programme will commence as soon
as is practicable.
1 Measures are non-GAAP measures. Reconciliations to the equivalent statutory
heading under IFRS are included in notes to the attached condensed
consolidated financial statements 2, 3, 4, 5, 7 and 14. Underlying growth
rates exclude currency movements, and portfolio changes.
(2)Consensus adjusted operating profit as at 12(th) November 2021 was £416m
at average USD:GBP of 1.37.
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