REG - Pearson PLC - Pearson 2022 Preliminary Results
03/03/2023 07:00
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RNS Number : 7455R Pearson PLC 03 March 2023
Pearson 2022 Preliminary Results (Unaudited)
3(rd) March 2023 A year of continued strategic momentum and operational execution delivers
strong financial performance and growth
Andy Bird, Pearson's Chief Executive, said:
"These results are testament to the strong momentum that we've been building
operationally and strategically over the past 24 months. For a second
consecutive year, our financial performance was ahead of expectations, and we
saw progress in our strategic initiatives, which are taking Pearson on a new,
exciting journey.
Our portfolio continues to strengthen, with our new Workforce Skills talent
investment platform created to leverage the structural growth in our markets
and increased need for upskilling and reskilling. This will be a key growth
driver for Pearson over the coming years. Our confidence for the future is
underpinned by ongoing innovation, alongside our increasing divisional
interconnectivity. This is combined with accelerating demand for our digital
solutions, a growing consumer-focused proposition and our ability to serve
more people across their lifelong learning journeys."
Underlying sales growth(1) of 5%
· Assessment & Qualifications up 8% driven by strong performances in US
Student Assessment and UK & International Qualifications as exams resumed,
and in Clinical Assessment due to good government funding and continued focus
on health and wellbeing. Pearson VUE saw particularly strong growth in the IT
and healthcare segments.
· Virtual Learning up 4% driven by firm retention rates in Virtual Schools in
the prior academic year (2021/22) and favourable revenue mix. OPM sales were
up 4%.
· Higher Education down 4% driven by a decline in enrolments and a loss of
adoptions to non-mainstream publishers, including open educational resources,
partially offset by improved pricing. Pearson+ increased paid subscriptions to
406k in the Fall semester (Fall 2021:133k).
· English Language Learning up 24% due to increased Pearson Test of English
(PTE) volumes, which were up 90%, as global mobility continued to improve with
border re-openings and market share gains in India.
· Workforce Skills up 7% with growth driven by BTEC and Apprenticeships, GED and
TalentLens.
· Businesses under strategic review down 16%.
Adjusted operating profit(1) up 11% on an underlying basis to £456m
· Driven by operating leverage on revenue growth and property cost savings,
partially offset by inflation. We continued to invest in growth, including in
our new Workforce Skills talent investment platform, supported by the
reallocation of costs from other areas of the business.
· Headline growth was 18% reflecting underlying performance, portfolio changes
and currency movements.
· Interest and tax charges were lower than normal in 2022, due to the release of
tax provisions. This, along with the significant increase in adjusted
operating profit and the reduction in issued shares given the share buyback,
has driven a 48% increase in adjusted earnings per share of 51.8p (2021:
34.9p). The effective tax rate was 16% (2021: 20%) and the net interest charge
was £1m (2021: £57m).
Cash performance
· Operating cash(1) inflow increased on a headline basis from £388m in 2021 to
£401m in 2022, representing strong cash conversion of 88% despite the impact
of the timing of the disposal of our international courseware local publishing
businesses.
Strong balance sheet supports continued investment and increased shareholder
returns
· Acquisitions of Mondly, Credly and PDRI (subject to close) to support growth
strategy across the Pearson ecosystem.
· Year-end net debt of £0.6bn (2021: £0.4bn) with leverage at 0.8x (2021:
0.6x).
· Proposed final dividend of 14.9p (2021: 14.2p) which equates to a full year
dividend of 21.5p (2021:20.5p).
· Completed the £350m share buyback with a total of 42.3m shares repurchased in
2022.
Statutory results
· Sales increased 12% to £3,841m (2021: £3,428m) reflecting underlying
performance, portfolio changes and currency movements.
· Statutory operating profit was £271m (2021: £183m). The increase in 2022 was
driven by operating leverage on revenue growth, property cost savings, and a
lower restructuring charge, partially offset by inflation and a reduction in
other net gains and losses arising from business acquisitions and disposals.
· Net cash generated from operations of £527m (2021: £570m).
· Statutory earnings per share of 32.8p (2021: 23.5p).
Strategic 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.
We also outlined three reasons why we believe Pearson will win in this new
environment:
· 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.
· We have a great foundation of established businesses that are well-managed,
cash generative and underpin the company financially.
· We are bringing together the multiple facets of our expertise through a more
connected commercial and consumer strategy which will deliver innovative
digital learning products to delight our customers.
During 2022, we made strong progress both strategically and operationally as
we continued to focus on reshaping our portfolio, growing our digital
capabilities, increasing the interconnectivity across Pearson to unlock
synergies and implementing change in our Higher Education division to drive
future growth.
Accelerating our digital journey
In 2022, we achieved 9% underlying growth in Group digital and digital-enabled
sales. The Pearson+ roll out has also continued at pace leading to a threefold
increase in paid subscriptions to 406k in the Fall semester (Fall 2021:133k)
and registered users growing to 2.83m (Fall 2021: 2.75m). We have continued to
invest in the platform launching 18 study channels to grow Pearson+ and widen
the total addressable market beyond Higher Education. Our online language
learning app Mondly has also been successfully integrated into Pearson+,
broadening the appeal further.
Maintaining focus on efficiencies
We remain on track to deliver approximately £120m of cost efficiencies in
2023. The restructure is now complete with confirmed efficiencies in product
and content support costs, technology and corporate property, across all
divisions but weighted to Higher Education. These efficiencies will help
accelerate our improved margin expectation to 2023 from 2025. One-time costs,
which are excluded from adjusted operating profit to better highlight
underlying performance are £150m. Of this, £85m are incurred in cash, mostly
in 2023, with the remaining £65m relating to write offs of predominantly
property lease assets.
Implementing change in Higher Education to drive growth
We have implemented change in our US Higher Education sales leadership,
restructured the sales team and developed a new go to market strategy for
2023. Investment is focused on modernising our platform products to increase
stability and deliver upgraded, best-in-class features that will improve the
instructor and student experience. We expect to see the benefits of these
changes in 2023 and beyond.
Reshaping the portfolio
Our recent acquisitions and disposals are benefitting the wider Group and
increasing Pearson's interconnectivity:
· The integration of Faethm and Credly is going well and will form part of our
new Workforce Skills talent investment platform to be launched in 2023.
· Our acquisition of Mondly also continues to enhance our credentials in the
language learning direct to consumer space with paid subscriptions standing at
446k at the end of 2022. Mondly contributes to the transformation of English
Language Learning and increases interconnectivity across the Group, including
the successful integration of Mondly into Pearson+ in 2022.
· Subject to closing, the acquisition of PDRI will expand Pearson's services to
US federal agencies and grow our presence with large employers.
· Disposal of our international courseware local publishing businesses is now
complete. We have decided to retain our Australia and Canada businesses with
approximately £30m of revenue retained within our Assessment &
Qualifications division.
· Strategic review of OPM is progressing and we will update in due course.
The enterprise learning market is estimated to be worth over £200bn in total
and is comprised of several different sub-markets, including enterprise
employee benefit, talent management and pre-hire recruitment workforce skills.
The scale and growth of these markets is being driven by seismic change in the
workplace with organisations hunting for new skills to help them navigate
economic disruption, climate change, AI, new technologies and much more. The
World Economic Forum estimates that one billion people will need reskilling by
2030.
We have organised our Workforce Skills division into two sectors so that we
can harness the growth opportunities in this changing environment.
Firstly, in our Vocational Qualifications business (previously known as our
Performance business), we already offer high quality qualifications such as
BTECs and Apprenticeships that allow learners to build the knowledge, skills
and behaviours they need for career success.
Secondly, our Workforce Solutions business (previously known as our
Transformation business), offers a series of interconnected and tailored
products and services. These are specifically designed for enterprise and
institutional customers, though always with a focus on the needs of the
consumer. They utilise capabilities from our two recent acquisitions - Credly
and Faethm, as well as existing Pearson products and services such as GED and
TalentLens.
We are excited to be launching our new talent investment platform in 2023. We
have tested the technology and key value propositions with several enterprises
in the second half of 2022. The platform helps enterprises solve their
workforce planning, upskilling and recruitment challenges. It connects
Faethm's skills and data science capabilities with Credly's portable skills
profile and credentialed learning for enterprises. We will sell this as a SaaS
product with additional professional services, adding new features and
capabilities to deepen the insights we can deliver for both enterprises and
learners alike.
We expect Workforce Solutions to become the growth engine of Workforce Skills
and we see near-term priority growth opportunities in pre-hire recruitment,
talent management and learning as an enterprise employee benefit.
2023 outlook
· We are confident of further group underlying sales growth of low to mid-single
digit, excluding OPM and the strategic review businesses, with adjusted
operating profit and tax in line with current market expectations(2). Our
interest charge is expected to be c.£35m.
· Assessment & Qualifications revenue growth of low to mid-single digit with
increased margins.
· In Virtual Learning, Virtual Schools revenue to decline by mid-single digit
impacted by the COVID-19 cohort unwind in the 2022/23 academic year, as well
as the loss of a major school. We expect margins to increase. We remain
confident in the long-term performance of this division and will launch Career
Academies aimed at supporting teenagers who wish to gain career education and
experience. Four Career Academies will operate in the 2023-24 school year in
four states and enrollment is underway. OPM continues to be under strategic
review.
· Higher Education revenue to decline, by low-single digit, with increased
margins.
· English Language Learning revenue growth of high-single digit with increased
margins.
· Double-digits revenue growth in Workforce Skills, underpinned by our new
talent investment platform, with improved margins.
2025 ambition
· We continue to expect the Group to achieve mid-single digit underlying revenue
3-year CAGR from 2022 to 2025 and for margins to be mid-teens in the near
term, as we invest to drive growth, improving by 2025.
Financial Expectations
Segment 2022 Revenue (£m) Margins 2022* 2023 Expectations Underlying revenue 3-year CAGR 2022 to 2025 Margins 2025*
Revenue Growth Margins*
Assessment & Qualifications 1,444 18% Low to mid-single digit Increase Low to mid-single digit Increase
Virtual Learning 820 9%
Virtual Schools 519 Mid-single digit decline Increase Low-single digit Increase
OPM 301 Under strategic review
Higher Education 898 10% Low-single digit decline Increase Low to mid-single digit Increase
English Language Learning 321 8% High-single digit Increase High-single digit Increase
Workforce Skills 204 (1)% Double-digits Improve Greater than 20% Increase
Strategic Review 154 10%
Group 3,841 12% Excluding OPM and strategic review: Low to mid-single digit Mid-teens Mid-single digit Upper end of mid-teens
*Adjusted operating profit margins.
KPIs
KPI Objective KPI Measure 2022 Actual 2021 Actual
Digital Growth Drive digital revenue growth Underlying growth in Group digital and digital-enabled sales 9% 9%
Virtual Schools US enrolments 106k 111k
OPM student enrolments 270k 275k
OnVUE volumes 3.0m 3.0m
Higher Education US digital registrations 9.9m 11.1m
PTE volume 827k 436k
Consumer Engagement Create engaging and personalised consumer experiences NPS for Connections Academy +67 +62
NPS for PTE +52 +56
Pearson+ registered users 2.83m 2.75m
Mondly paid subscriptions 446k N/A
Workforce Skills registered users 4.7m N/A
Product Effectiveness Improve the effectiveness of our products to deliver better outcomes PTE speed of score return 1.3 days 1.2 days
VUE test volumes 19.4m 16.8m
VUE Partner retention 99.9% 99%
Workforce Skills number of enterprise customers 1,503 645
Workforce Skills enterprise customer net retention rate 74% N/A
Higher Education product usage - text units 4.8m 5.4m
Culture of Engagement & Inclusion Build a culture of engagement and inclusion where diverse talent is heard, Employee engagement 3.96 GrandMean on a 5 point Likert scale N/A
invested in and valued for their strengths and skills
Pearson uses the GallupQ(12) survey to measure engagement, annually
Investing in diverse talent In the last six months, someone at work has talked to me about my progress= N/A
67%
The % of responses who agree or strongly agree to Gallup Q(12) survey
questions.
This last year, I have had opportunities at work to learn and grow = 72% N/A
Culture of Inclusion Index 4.12 GrandMean N/A
on a 5 point Likert scale
The GrandMean of 3 Gallup Q(12) survey questions:
- At work, I am treated with respect
- My company is committed to building the strengths of each employee
- If I raised a concern about ethics and integrity, I am confident my employer
would do what is right
Increasing diverse talent Diverse candidates in leadership development and mentoring programmes= 75% N/A
Diverse candidates in succession plans for leadership: Women= 72%
Women= 52% People of colour/BAME= 24%
People of colour/BAME= 26%
Sustainability Strategy Achieve net zero carbon by 2030 Progress against achieving net zero carbon by 2030, as measured through 33% reduction vs 2018 base 31% reduction vs 2018 base
percentage carbon reduction
-2021 US digital registrations restated from 11.4m to 11.1m due to
recategorising 0.3m of registrations from US to International.
-Pearson+ registered users represents the number of unique user accounts added
over an academic year.
-Workforce Skills registered users represents the number of net new user
accounts on a trailing 12-month basis and includes net new user accounts from
Credly pre-acquisition.
-VUE test volumes include GED tests.
-VUE Partner retention is based on revenue mix.
-Workforce Skills number of enterprise customers represents the number of
customers at period end.
-Net zero carbon figures have been restated in 2021 to reflect acquisitions,
disposals and data improvements. The net zero carbon figures have been assured
by an independent third-party, Corporate Citizenship.
Contacts
Investor Relations Jo Russell +44 (0) 7785 451 266
James Caddy +44 (0) 7825 948 218
Gemma Terry +44 (0) 7841 363 216
Teneo Charles Armitstead +44 (0) 7703 330 269
Results event Pearson's full year results hybrid presentation today at 10:00 (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 its 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 2022 2021 Headline growth CER Underlying growth 1
growth 1
Business performance
Sales 3,841 3,428 12% 3% 5%
Adjusted operating profit 456 385 18% 6% 11%
Operating cash flow 401 388
Adjusted earnings per share 51.8p 34.9p
Statutory results
Sales 3,841 3,428
Operating profit 271 183
Profit for the year 244 178(+)
Net cash generated from operations 527 570
Basic earnings per share 32.8p 23.5p(+)
Dividend per share 21.5p 20.5p
Net debt (557) (350)
Return on Capital 8.7% 7.9%
Operational review
£m 2022 2021 Headline CER Underlying
growth Growth 1 growth 1
Sales
Assessment & Qualifications 1,444 1,238(±) 17% 8% 8%
Virtual Learning 820 713 15% 4% 4%
Higher Education 898 849 6% (4)% (4)%
English Language Learning 321 238 35% 28% 24%
Workforce Skills 204 172 19% 16% 7%
Strategic review 154 218(±) (29)% (30)% (16)%
Total 3,841 3,428 12% 3% 5%
Adjusted operating profit/loss
Assessment & Qualifications 258 219(±) 18% 6% 6%
Virtual Learning 70 32 119% 88% 88%
Higher Education 91 73 25% 12% 12%
English Language Learning 25 15 67% 47% 33%
Workforce Skills (3) 27 (111)% (104)% (67)%
Strategic review 15 19(±) (21)% (26)% 0%
Total 456 385 18% 6% 11%
1 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. Constant exchange rates are
calculated by assuming the average FX in the prior year prevailed through the
current year.
(2)2023 consensus on the Pearson website as at 28th November 2022; median
adjusted operating profit of £585m at £:$ 1.14, interest £43m, tax rate
24%.
(+)Comparative amounts have been revised, see note 1 for further details.
±Comparative amounts have been restated to reflect the move between operating
segments.
Assessment & Qualifications
In Assessment & Qualifications, sales increased 8% on an underlying basis
and 17% on a headline basis. Adjusted operating profit increased 6% in
underlying terms due to operating leverage on revenue growth partially offset
by inflation and 18% in headline terms due to this and currency movements.
Pearson VUE sales were flat in underlying terms with particularly strong
growth in the IT and healthcare segments, offset by the known headwind
resulting from the DVSA contract change, as previously announced in 2021. VUE
test volumes grew 16% to 19.4m as we still capture volumes across all three
DVSA regions, given we provide the central platform for test delivery. We
retained all our major contracts that were up for renewal and increased our
contract renewal rate to 99.9% across the business.
In US Student Assessment, sales increased 17% in underlying terms due to a
combination of the commencement of new contracts, which were won in 2020 and
2021, a return of volumes with full state testing commencing post COVID-19,
and the addition of new services to existing contracts.
In Clinical Assessment, sales increased 7% in underlying terms due to good
government funding and continued focus on health and wellbeing.
In UK and International Qualifications, sales increased 16% in underlying
terms as exams resumed following COVID-19.
We are pleased with the continued momentum that Assessment &
Qualifications showed in 2022. We're poised to deliver low to mid-single digit
revenue growth and continued strong margins in 2023, with an excellent outlook
beyond, with growth initiatives that will help us to expand the scope of
offering and reach.
Virtual Learning
In Virtual Learning, sales increased 4% on an underlying basis and 15% on a
headline basis. Adjusted operating profit grew 88% in underlying terms due to
operating leverage on revenue growth and efficiency improvements in Virtual
Schools and OPM, more than offsetting the investment in our Virtual Schools'
platform and teaching costs, and increased 119% in headline terms due to this
and currency movements.
Virtual Schools sales were up 4%, driven by firm retention rates in the
2021/22 academic year and favourable revenue mix, partially offset by a 5%
decline in enrolments for the 2022/23 academic year and lower district
partnership renewals. We opened new full-time online partner schools in
Colorado, Missouri and Virginia which partially offset the planned exits of
partner schools in Washington, Colorado, Missouri and one of two schools in
Tennessee. As at December 2022, this brings the 2022/2023 total number of
partner schools to 46 in 31 states.
In OPM, sales were up 4% driven by enrolment growth in our UK and Australia
programs, which were offset by an enrolment decline in our North America
programs.
Virtual Learning had a good performance in 2022 with strong retention rates in
Virtual Schools despite the COVID-19 cohort unwind. We expect mid-single digit
decline in revenue growth for Virtual Schools in 2023 but remain confident in
the long-term performance of the business, with increased margins, as we
launch Career Academies aimed at supporting teenagers who wish to gain career
and technical education and experience. The strategic review of OPM continues
and we will update the market once the review is complete.
Higher Education
In Higher Education, sales declined 4% for the full year on an underlying
basis and increased 6% on a headline basis due to currency movements. Adjusted
operating profit increased 12% in underlying terms driven primarily by cost
savings, partially offset by trading performance, and increased 25% in
headline terms due to this and currency movements.
In the US, we saw a decline in enrolments and a loss of adoptions to
non-mainstream publishers, including open educational resources, partially
offset by improved pricing. There was continued momentum in Inclusive Access
with 9% sales growth to not-for-profit institutions and the total number of
institutions increasing to 1,040. Pearson+ performed well in the Fall semester
with 2.83m registered users and 406k paid subscriptions, representing a
threefold increase compared to the prior year Fall semester.
We expect revenue to be down by low-single digit in 2023, with increased
margins. We have made organisational changes to strengthen our position,
including implementing change in our US Higher Education sales leadership,
restructuring the sales team and developing a new go to market strategy for
2023. We will also be focusing our investment in four main product initiatives
in 2023: converging and upgrading our courseware platforms, simplifying our
Inclusive Access integration strategies, building out digital learning
experiences, and driving improvements in stability. This will make us much
more commercial and competitive on a day-to-day basis, enabling us to win and
capture the opportunity in 2023 and beyond.
English Language Learning
In English Language Learning, sales were up 24% on an underlying basis and 35%
on a headline basis. Adjusted operating profit increased by 33% in underlying
terms due to increased revenue partially offset by increased investment and
increased 67% in headline terms due to this and currency movements.
PTE volumes were up 90% driven by border re-openings, as well as market share
gain in India. Within Institutional, there was strong growth in Latin America
and the Middle East, offset by the impact of government reforms in China.
English Language Learning continues to deliver strong growth and strategic
progress for Pearson more broadly. We expect this division to deliver
high-single digit revenue growth in 2023, with increased margins. This
division is demonstrating growing interconnectivity with other divisions,
which will bring millions of direct-to-consumer relationships into the broader
Pearson ecosystem.
Workforce Skills
In Workforce Skills, sales were up 7% on an underlying and 19% on a headline
basis. Adjusted operating profit declined by 67% in underlying terms due to
investment in the business across Faethm, Credly and our talent investment
platform and decreased 111% in headline terms due to this, currency movements
and portfolio changes.
Revenue growth was driven by growth in BTEC and Apprenticeships, GED and
TalentLens. The Vocational Qualifications business (previously known as the
Performance business) grew by 5% in underlying terms. The Workforce Solutions
business (previously known as the Transformation business) grew by 12% in
underlying terms. Pearson has 1,503 enterprise clients in its Workforce Skills
portfolio, up 133% on last year, with the acquisition of Credly underpinning
this growth.
We executed well against our plan in 2022, testing our new talent investment
platform with enterprises, whilst demonstrating good progress in setting up
the division for future growth. In 2023, we will commercially launch this
product, which will help this division achieve double-digits revenue growth
and improved margins, while also being a key driver of growth for Pearson over
time.
Strategic review
Sales in our international courseware local publishing businesses under
strategic review declined 16% on an underlying basis and were down 29% on a
headline basis for the full year. Following the announcement of the sale of
our international courseware local publishing businesses in Europe, French
speaking Canada, Hong Kong and South Africa, these financials are no longer
included in our underlying performance measures.
FINANCIAL REVIEW
Operating result
Sales increased on a headline basis by £413m or 12% from £3,428m in 2021 to
£3,841m in 2022 and adjusted operating profit increased by £71m or 18% from
£385m in 2021 to £456m in 2022 (for a reconciliation of this measure see
note 2 to the condensed consolidated financial statements).
The headline basis simply compares the reported results for 2022 with those
for 2021. 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
excluding sales and profits made by businesses disposed in either 2021 or 2022
and by ensuring the contribution from acquisitions is comparable year on year.
Portfolio changes mainly relate to the disposals of our international
courseware local publishing businesses in Europe, French-speaking Canada,
South Africa and Hong Kong in 2022, the sale of the Sistemas business in
Brazil in 2021 and the acquisitions of Credly and Mondly in 2022 and of Faethm
in 2021.
On an underlying basis, sales increased by 5% in 2022 compared to 2021 and
adjusted operating profit increased by 11%. Currency movements increased sales
by £296m and increased adjusted operating profit by £46m. Portfolio changes
decreased sales by £37m and decreased adjusted operating profit by £13m.
There were no new accounting standards adopted in 2022 that impacted sales or
operating profits.
Adjusted operating profit includes the results from discontinued operations
when relevant but excludes charges for intangible amortisation and impairment,
acquisition related costs, gains and losses arising from disposals, the cost
of major restructuring and one off-costs related to the UK pension scheme. A
summary of these adjustments is included below and in more detail in note 2 to
the condensed consolidated financial statements.
All figures in £ millions 2022 2021
Operating profit 271 183
Add back: Cost of major restructuring 150 214
Add back: Intangible charges 56 51
Add back: UK pension discretionary increases 3 -
Add back: Other net gains and losses (24) (63)
Adjusted operating profit 456 385
In August 2022, the Group announced a major restructuring programme to run in
2022. The programme includes efficiencies in product and content, support
costs, technology and corporate property. The restructuring costs in 2022 of
£150m mainly relate to staff redundancies and impairment of right of use
property assets. In 2021, restructuring costs of £214m mainly related to the
impairment of right of use property assets, the write-down of product
development assets and staff redundancies. The 2022 charge includes the impact
of updated assumptions related to the recoverability of right-of-use assets
made in 2021.
Intangible amortisation charges in 2022 were £56m compared to a charge of
£51m in 2021. This is due to increased amortisation from recent acquisitions
partially offset by a reduction in amortisation from intangible assets at the
end of their useful life and recent disposals.
UK pension discretionary increases in 2022 relate to one-off pension increases
awarded to certain cohorts of pensioners in response to the cost of living
crisis.
Other net gains and losses in 2022 relate to the gains on the disposal of our
international courseware local publishing businesses in Europe,
French-speaking Canada and Hong Kong and a gain arising on a decrease in the
deferred consideration payable on prior year acquisitions, offset by a loss on
disposal of our international courseware local publishing businesses in South
Africa due to recycled currency translation adjustments and costs related to
disposals and acquisitions. Other net gains and losses in 2021 largely related
to the disposal of PIHE and the disposal of the K12 Sistemas business in
Brazil offset by costs related to the acquisition of Faethm and the wind down
of certain strategic review businesses.
The reported operating profit of £271m in 2022 compares to a profit of £183m
in 2021. The increase in 2022 was driven by operating leverage on revenue
growth, property cost savings and a lower restructuring charge, partially
offset by inflation and a reduction in other net gains and losses from
business acquisitions and disposals.
Revision of prior year comparative figures
Certain prior year comparative figures have been restated to correct an error
in the accounting treatment for investments in unlisted securities. In 2021,
the correction has resulted in an increase in statutory profit of £18m,
comprising finance income of £20m and a tax charge of £2m. There is an equal
and opposite decrease in other comprehensive income. The impact on both
statutory basic and diluted earnings per share is 2.4p for 2021. On the
balance sheet the revision increases retained earnings with an equal and
opposite decrease in the fair value reserve. There is no impact to any
adjusted measures, net assets, cash flows nor total equity. See note 1 to the
Condensed Consolidated Financial Statements for further details.
Net finance
costs
Net interest payable reflected in adjusted earnings in 2022 was £1m, compared
to £57m in 2021. The difference is primarily due to the release of £35m of
interest recorded in respect of provisions for uncertain tax positions where
the related interest was recognised in this line in the income statement. In
addition, interest charges have reduced due to the reduction in gross bond
debt and increased interest income on cash balances given interest rate rises.
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 net finance costs (but not in our adjusted measure) are
interest costs relating to acquisition or disposal transactions, fair value
movements on investments classified as fair value through profit and loss,
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, fair value movements 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). Interest on certain tax provisions is
excluded from our adjusted measure in order to mirror the treatment of the
underlying tax item.
In 2022, the total of these items excluded from adjusted earnings was income
of £53m compared to income of £51m in 2021. Net finance income in respect of
retirement benefits increased from £4m in 2021 to £9m in 2022 reflecting the
comparative funding position of the plans at the beginning of each year and
higher prevailing discount rates. Interest costs in respect of deferred and
contingent consideration are £5m in 2022 due to recent acquisitions. In 2022,
there were no finance charges relating to the revaluation of the K12 disposal
proceeds compared to income of £6m in 2021 as the outstanding amount has been
fully repaid. Fair value gains on investments in unlisted securities are £28m
in 2022 compared to £20m in 2021. In addition, there were similar gains year
on year on long-term interest rate hedges and an interest charge on tax
provisions of £5m has been recognised in 2022 in relation to the State Aid
matter. For a reconciliation of the adjusted measure see note 3 to the
condensed consolidated financial statements.
Taxation
The reported tax charge on a statutory basis in 2022 was a charge of £79m
(24.5%) compared to a credit of £1m (0.6%) in 2021. The tax charge for the
period has been impacted principally by two items:
· The release of tax risk provisions totalling £72m following the
expiry of the statute of limitations for certain periods in the US. This
release impacts both statutory and adjusted earnings with a £37m credit to
adjusted earnings and the remainder only impacting statutory results.
· As previously disclosed, the European Commission determined that
the United Kingdom controlled foreign company group financing partial
exemption partially constituted State Aid. This decision was appealed by the
UK Government and other parties. On 8 June 2022, the EU General Court
dismissed the appeal. Following the EU General Court's negative decision, the
UK Government and other parties have submitted appeals to the European Court
of Justice. At 31 December 2021, the potential risk associated with this issue
was disclosed as a contingent liability, however, following the dismissal of
the first appeal the prospects of successfully challenging the European
Commission's decision are now considered to be such that a provision is
required.
On that basis a tax provision of £63m plus £5m of associated interest has
been recorded. The provision represents an estimate of the expected value
which has been calculated by considering a range of possible outcomes and
applying a probability to each, resulting in a weighted average outcome. The
possible outcomes considered range from no liability through to the full
exposure (£105m excluding interest). Due to the large and unusual nature of
the provision and the specific one-off nature of the issue, the provision is
excluded from adjusted earnings. There is no cash impact in 2022 as a payment
on account was made during 2021. The provision of £63m has been offset on the
balance sheet against the payments previously made. As the provision is less
than the payments made there is a remaining non-current tax receivable of
£41m disclosed on the balance sheet.
The tax on adjusted earnings in 2022 was a charge of £71m (£2021: £64m),
corresponding to an effective tax rate on adjusted profit before tax of 15.6%
(2021: 19.5%). The decrease in the effective rate is primarily due to the
release of tax risk provisions following the expiry of the statute of
limitations in the US. For a reconciliation of the adjusted measure see note 5
to the condensed consolidated financial statements.
In 2022, there was a net tax payment of £109m (2021: £177m). The overall
amount decreased primarily due to the 2021 payment of £97m related to the
ongoing EU Commission investigation which is non-recurring. Excluding this
payment, tax payments increased primarily due to increased operating profits
and legislative changes in the US.
A net deferred tax asset of £20m is recognised in 2022 compared to a net
£17m deferred tax asset in 2021. 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 gain on translation of £330m in 2022
compares to a loss in 2021 of £6m. The gain in 2022 arises from an overall
strengthening of the currencies to which the Group is exposed and in
particular the relative strength of the US dollar. A significant proportion of
the Group's operations are based in the US and the US dollar strengthened in
2022 from an opening rate of £1:$1.35 to a closing rate at the end of 2022 of
£1:$1.21. At the end of 2021, the US dollar had strengthened from an opening
rate of £1:$1.37 to a closing rate of £1:$1.35. The loss in 2021 was driven
by this movement in the US dollar, offset by the weakening of other currencies
used by the Group.
Also included in other comprehensive income in 2022 is an actuarial gain of
£54m in relation to the retirement benefit obligations of the Group. The gain
arises largely from a decrease in liabilities driven by higher discount rates
and changes to demographic assumptions, partially offset by losses on
associated matching assets and experience losses. The actuarial gain in 2022
of £54m compares to an actuarial gain in 2021 of £149m.
Fair value gains of £18m have been recognised in other comprehensive income
and relate to movements in the value of investments in unlisted securities
held at FVOCI. In 2021, fair value gains of £4m were recognised.
In 2022, a loss of £5m (2021: £4m gain) was recycled from the currency
translation reserve to the income statement in relation to businesses
disposed.
Cash flow and working capital
Our operating cash flow measure is 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 £13m from £388m in 2021 to £401m in 2022. The increase is
largely explained by the drop-through of increased operating profits offset by
unfavourable working capital movements driven by the timing of the disposals
of the international courseware local publishing businesses and an increase in
capitalised product development.
The equivalent statutory measure, net cash generated from operations, was
£527m in 2022 compared to £570m in 2021. Compared to operating cash flow,
this measure includes restructuring costs but does not include regular
dividends from associates. It also excludes capital expenditure on property,
plant, equipment and software, and additions to right of use assets as well as
disposal proceeds from the sale of property, plant, equipment and right of use
assets (including the impacts of transfers to/from investment in finance lease
receivable). In 2022, restructuring cash outflow was £35m compared to £24m
in 2021.
In 2022, there was an overall £394m decrease in cash and cash equivalents
compared to a decrease of £176m in 2021. The decrease in 2022 is primarily
due to payments for acquisitions of subsidiaries of £228m, repayments of
borrowings of £171m, dividends paid of £157m, share buyback programme of
£353m, other own share purchases of £37m, tax paid of £109m, capital
expenditure of £147m, and repayments of lease liabilities of £93m. These
were offset by the cash inflow from operations of £527m and proceeds from
disposals of businesses and investments of £350m.
Liquidity and capital resources
The Group's net debt increased from £350m at the end of 2021 to £557m at the
end of 2022. The increase is largely due to the £350m share buyback programme
and dividend payments, partially offset by strong operating cash flow and net
proceeds from M&A activity.
In May 2022, the Group repaid the remaining $117m (£95m) of its 2022 US
dollar bond upon maturity. In December 2022, the Group repaid the remaining
$94m (£76m) of its 2023 US dollar bond. In May 2021, the Group repaid the
remaining €195m (£167m) of its €500m Euro 1.85% notes.
At 31 December 2022, the Group had approximately £1.4bn in total liquidity
immediately available from cash and its Revolving Credit Facility maturing
February 2026. In assessing the Group's liquidity and viability, the Board
analysed a variety of downside scenarios including impacts from macro economic
factors and other risks. Even under a severe downside case where declines in
profitability compared to 2022 are modelled in 2023 and 2024, 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. In all scenarios it is assumed that
the Revolving Credit Facility is available.
At 31 December 2022, 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 £66m in 2022 (2021: £58m), of which a charge of £75m
(2021: £62m) was reported in operating profit and income of £9m (2021: £4m)
was reported in other net finance costs. In 2022, a charge of £3m (2021: nil)
related to one-off discretionary pension increases has been excluded from
adjusted operating profit.
The overall surplus on UK Group pension plans of £537m at the end of 2021 has
increased to a surplus of £573m at the end of 2022. The increase has arisen
principally due to the actuarial gain noted above in the other comprehensive
income section. In total, our worldwide net position in respect of pensions
and other post-retirement benefits increased from a net asset of £471m at the
end of 2021 to a net asset of £520m at the end of 2022.
Businesses acquired
In January 2022, the Group acquired 100% of the share capital in Credly Inc
(Credly), having previously held a 19.9% interest in the company. Total
consideration for the acquisition was £149m comprising upfront cash
consideration of £107m, Pearson's existing interest valued at £31m and £11m
of deferred consideration. The deferred consideration is payable in 2 years.
Additional contingent amounts are also payable in 2024 if certain revenue and
non-financial targets are met, and dependent on continuing employment, and
therefore these additional amounts will be expensed over the period and are
not treated as consideration. Net assets acquired of £44m were recognised on
the Group's balance sheet including £49m of acquired intangible assets.
Goodwill of £105m was also recognised in relation to the acquisition.
In April 2022, the Group acquired 100% of the share capital of ATI STUDIOS
A.P.P.S S.R.L (Mondly). Total consideration for the acquisition was £135m
comprising upfront cash consideration of £105m, and deferred consideration of
£30m. The deferred consideration is payable over the next two years. In
addition, a further $29.6m (c£24m) of cash and $10m (c£8m) in shares will be
paid over the next four years, dependent on continuing employment, and
therefore will be expensed over the period and are not treated as
consideration. Net assets acquired of £38m were recognised on the Group's
balance sheet including £50m of acquired intangible assets. Goodwill of £97m
was also recognised in relation to the acquisition.
In 2022, the Group also made two smaller acquisitions for total consideration
of £11m. In December 2022, the Group announced that it had signed a deal to
acquire 100% of Personnel Decisions Research Institutes, LLC, the transaction
has not yet completed.
The cash outflow in 2022 relating to acquisitions of subsidiaries was £228m.
In addition, there was a cash outflow relating to the acquisition of
associates of £5m and investments of £12m.
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. Net assets
acquired of £27m were recognised on the Group's balance sheet including £21m
of acquired intangible assets. Goodwill of £38m was also recognised in
relation to the acquisition. Contingent consideration amounts have been
settled during 2022 resulting in the recognition of an £8m gain in the income
statement within other net gains and losses.
In 2021, the Group also made two smaller acquisitions for total consideration
of £11m and acquired interests in two associates, Smashcut and Academy of
Pop, for total consideration of £17m.
The cash outflow in 2021 relating to acquisitions of subsidiaries was £55m.
In addition, there was a cash outflow relating to the acquisition of
associates of £10m and investments of £4m.
Businesses disposed
In March 2021, the Group announced that it was launching a strategic review of
its international courseware local publishing businesses. In 2022, the Group
disposed of its interests in the Canadian educational publisher (ERPI),
Pearson Italia S.p.A, Stark Verlag GmbH, Austin Education (Hong Kong) Limited,
Pearson South Africa (Pty) Ltd and various other South African companies.
Total cash proceeds received was £287m resulting in a pre-tax gain on
disposal of £42m. All entities disposed of were previously in the Strategic
Review segment. £5m of losses arose from other immaterial disposals and costs
related to the wind-down of certain businesses. None of the disposed
businesses meet the criteria to be presented as discontinued operations.
In February 2021, the Group completed the sale of its interests in PIHE in
South Africa resulting in a pre-tax loss of £5m. In October 2021, the Group
completed the sale of its K12 Sistemas business in Brazil resulting in a
pre-tax gain of £84m.
The cash inflow in 2022 relating to the disposal of businesses was £333m
mainly relating to the disposals described above and the receipt of deferred
proceeds from the US K12 Courseware sale in 2019. In 2021, the cash inflow
from disposals of £83m mainly related to the disposal of the K12 Sistemas
business and the receipt of deferred proceeds from the US K12 Courseware sale
in 2019.
In addition, proceeds of £17m (2021: £48m) were received in relation to the
disposal of investments.
Dividends
The dividend accounted for in our 2022 financial statements totalling £156m
represents the final dividend in respect of 2021 (14.2p) and the interim
dividend for 2022 (6.6p). We are proposing a final dividend for 2022 of
14.9p bringing the total paid and payable in respect of 2022 to 21.5p. This
final 2022 dividend which was approved by the Board in March 2023, is subject
to approval at the forthcoming AGM. For 2022, the dividend is covered 2.4
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 commenced on 4 April
2022 and completed in December 2022. Approximately 42.3m shares have been
bought back and cancelled at a cash cost of £353m. The nominal value of the
cancelled shares of £10m has been transferred to the capital redemption
reserve.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2022
all figures in £ millions note 2022 2021¹
Continuing operations
Sales 2 3,841 3,428
Cost of goods sold (2,046) (1,747)
Gross profit 1,795 1,681
Operating expenses (1,549) (1,562)
Other net gains and losses 2 24 63
Share of results of joint ventures and associates 1 1
Operating profit 2 271 183
Finance costs 3 (71) (68)
Finance income 3 123 62
Profit before tax 4 323 177
Income tax 5 (79) 1
Profit for the year 244 178
Attributable to:
Equity holders of the company 242 177
Non-controlling interest 2 1
Earnings per share (in pence per share)
Basic 6 32.8p 23.5p
Diluted 6 32.6p 23.3p
The accompanying notes to the condensed consolidated financial statements form
an integral part of the financial information.
1. Comparative amounts have been restated, see note 1 for further
details.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2022
all figures in £ millions 2022 2021¹
Profit for the year 244 178
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations 330 (6)
Currency translation adjustment disposed (5) 4
Attributable tax 4 10
Items that are not reclassified to the income statement
Fair value gain on other financial assets 18 4
Attributable tax 1 (1)
Remeasurement of retirement benefit obligations 54 149
Attributable tax (12) (61)
Other comprehensive income for the year 390 99
Total comprehensive income for the year 634 277
Attributable to:
Equity holders of the company 630 276
Non-controlling interest 4 1
1. Comparative amounts have been restated, see note 1 for further
details.
CONDENSED CONSOLIDATED BALANCE SHEET
as at 31 December 2022
all figures in £ millions note 2022 2021
Property, plant and equipment 250 366
Investment property 60 -
Intangible assets 10 3,177 2,769
Investments in joint ventures and associates 25 24
Deferred income tax assets 57 57
Financial assets - derivative financial instruments 43 30
Retirement benefit assets 581 537
Other financial assets 133 113
Income tax assets 41 97
Trade and other receivables 139 129
Non-current assets 4,506 4,122
Intangible assets - product development 975 894
Inventories 105 98
Trade and other receivables 1,139 1,257
Financial assets - derivative financial instruments 16 2
Income tax assets 9 26
Cash and cash equivalents (excluding overdrafts) 543 937
Current assets 2,787 3,214
Assets classified as held for sale 16 7
Total assets 7,309 7,343
Financial liabilities - borrowings (1,144) (1,245)
Financial liabilities - derivative financial instruments (54) (30)
Deferred income tax liabilities (37) (40)
Retirement benefit obligations (61) (66)
Provisions for other liabilities and charges (14) (7)
Other liabilities (120) (95)
Non-current liabilities (1,430) (1,483)
Trade and other liabilities (1,254) (1,256)
Financial liabilities - borrowings (71) (155)
Financial liabilities - derivative financial instruments (11) (4)
Income tax liabilities (43) (125)
Provisions for other liabilities and charges (85) (40)
Current liabilities (1,464) (1,580)
Liabilities classified as held for sale - -
Total liabilities (2,894) (3,063)
Net assets 4,415 4,280
Share capital 179 189
Share premium 2,633 2,626
Treasury shares (15) (12)
Reserves 1,605 1,467
Total equity attributable to equity holders of the company 4,402 4,270
Non-controlling interest 13 10
Total equity 4,415 4,280
The condensed consolidated financial statements were approved by the Board on
2 March 2023.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2022
Equity attributable to equity holders of the company
all figures in £ millions Share capital Share premium Treasury shares Capital redemption reserve Fair value reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
2022
At 1 January 2022 189 2,626 (12) 18 (4) 386 1,067 4,270 10 4,280
Profit for the year - - - - - - 242 242 2 244
Other comprehensive income - - - - 18 323 47 388 2 390
Total comprehensive income - - - - 18 323 289 630 4 634
Equity-settled transactions - - - - - - 38 38 - 38
Taxation on equity-settled transactions - - - - - - 3 3 - 3
Transfer of gain on disposal of FVOCI investment - - - - (27) - 27 - - -
Issue of ordinary shares - 7 - - - - - 7 - 7
Buyback of equity (10) - - 10 - - (353) (353) - (353)
Purchase of treasury shares - - (37) - - - - (37) - (37)
Release of treasury shares - - 34 - - - (34) - - -
Dividends - - - - - - (156) (156) (1) (157)
At 31 December 2022 179 2,633 (15) 28 (13) 709 881 4,402 13 4,415
2021¹
At 1 January 2021 188 2,620 (7) 18 53 388 865 4,125 9 4,134
Adjustment - - - - (57) - 57 - - -
1 January 2021 restated 188 2,620 (7) 18 (4) 388 922 4,125 9 4,134
Profit for the year - - - - - - 177 177 1 178
Other comprehensive income - - - - 4 (2) 97 99 - 99
Total comprehensive income / (expense) - - - - 4 (2) 274 276 1 277
Equity-settled transactions - - - - - - 28 28 - 28
Transfer of gain on disposal of FVOCI investment - - - - (4) - 4 - - -
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 (4) 386 1,067 4,270 10 4,280
1. Comparative amounts have been restated, see note 1 for further
details.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2022
all figures in £ millions note 2022 2021¹
Cash flows from operating activities
Profit before tax 4 323 177
Net finance (income) / costs 3 (52) 6
Depreciation and impairment - PPE & investment property 136 241
Amortisation and impairment - software 125 117
Amortisation and impairment - acquired intangible assets 54 50
Other net gains and losses (24) (63)
Product development capital expenditure (357) (287)
Product development amortisation 303 279
Share-based payment costs 35 28
Inventories (34) 22
Trade and other receivables 33 (71)
Trade and other liabilities (84) 37
Provisions for other liabilities and charges 50 14
Other movements 19 20
Net cash generated from operations 527 570
Interest paid (57) (67)
Tax paid (109) (177)
Net cash generated from operating activities 361 326
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired 11 (228) (55)
Acquisition of joint ventures and associates 11 (5) (10)
Purchase of investments (12) (4)
Purchase of property, plant and equipment (57) (64)
Purchase of intangible assets (90) (112)
Disposal of subsidiaries, net of cash disposed 12 333 83
Proceeds from sale of investments 12 17 48
Proceeds from sale of property, plant and equipment 14 -
Lease receivables repaid including disposals 18 21
Interest received 22 13
Dividends from joint ventures and associates 1 -
Net cash generated from / (used in) investing activities 13 (80)
Cash flows from financing activities
Proceeds from issue of ordinary shares 7 6
Buyback of equity (353) -
Purchase of treasury shares (37) (16)
Repayment of borrowings (171) (167)
Repayment of lease liabilities (93) (88)
Dividends paid to company's shareholders (156) (149)
Dividends paid to non-controlling interest (1) -
Net cash used in financing activities (804) (414)
Effects of exchange rate changes on cash and cash equivalents 36 (8)
Net decrease in cash and cash equivalents (394) (176)
Cash and cash equivalents at beginning of year 937 1,113
Cash and cash equivalents at end of year 543 937
1.Comparative amounts have been restated, see note 1 for further details.
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2022
For the purposes of the cash flow statement, cash and cash equivalents are
presented net of overdrafts repayable on demand. These overdrafts are excluded
from cash and cash equivalents disclosed on the balance sheet.
The Group has changed the presentation of the condensed consolidated cash flow
statement with the aim of simplifying for the reader. The reconciliation to
net cash generated from operations is now presented with the primary condensed
cash flow statement and certain line items have been aggregated and
disaggregated. There has been no change to the classification of cash flows as
operating, investing and financing. There has been no change to the definition
of the Group's alternative performance measure related to cash flow as set out
in note 14.
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. 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) as they apply to
annual reporting periods beginning on 1 January 2022. 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 2021 Annual Report and
have been prepared under the historical cost convention as modified by the
revaluation of certain financial assets and liabilities (including derivative
financial instruments) at fair value.
No new accounting standards were adopted in 2022. New pronouncements effective
from 1 January 2022 have not had a material impact on the condensed
consolidated financial statements. The 2021 Annual Report refers to new
standards that the Group will adopt in future years but that are not yet
effective in 2022. 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 2024, the board analysed a variety of downside scenarios including
a severe but plausible scenario where the Group is impacted by all principal
risks from 2023 adjusted for probability weighting, 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 throughout 2023 to
2024.
At 31 December 2022, the Group had available liquidity of c£1.4bn, comprising
central cash balances and its undrawn $1.19bn Revolving Credit Facility (RCF).
In February 2023, the Group renegotiated its revolving credit facility,
reducing the maximum facility to $1bn. 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 concluded that there are no material uncertainties that
cast doubt on the Group's ability to continue as a going concern and that they
have a reasonable expectation that the Group has adequate resources to
continue in operational existence for the assessment period to 30 June 2024.
The condensed consolidated financial statements have therefore been prepared
on a going concern basis.
The preparation of condensed consolidated financial statements requires the
use of certain critical accounting assumptions. It also requires management to
exercise its judgement in the process of applying the Group's accounting
policies. The areas requiring a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the condensed
consolidated financial statements, have been set out in the 2021 Annual
Report.
In addition, during 2022, the Group disposed of its interests in the
international courseware local publishing businesses in Europe,
French-speaking Canada, South Africa and Hong Kong. Whether the associated
results and cash flows of the related businesses should be classified and
presented as discontinued operations is a significant judgement. The Group's
judgement is that the results and cash flows of the
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
1. Basis of preparation continued
related businesses should not be classified and presented as discontinued
operations. The basis of this judgement is that the businesses disposed do not
constitute a separate major line of business or geographical area of
operations. The Group will continue to operate in the international K12
courseware market and in all geographical areas where disposals have taken
place. All of the businesses subject to this judgement are within the
Strategic Review segment and represent £126m of sales for the year ended 31
December 2022 out of the total sales in the Strategic Review segment of
£154m. If the Group had concluded that these businesses represented
discontinued operations, their results and the related gains on disposal would
not have been included within each of the continuing operations income
statement lines. Profit for the period from continuing operations would have
been £52m lower and this amount would have been separately presented as
profit for the period from discontinued operations as a single line item.
Adjusted operating profit would be unchanged.
As set out in the 2021 Annual Report, other areas where assumptions and
estimates are significant include the recoverability of goodwill balances, the
valuation of tax balances, provisions for returns, the recoverability of
right-of-use asset and the valuation of retirement benefit obligations and
assets. In addition, the Group has assessed the impact of the uncertainty
presented by the volatile macro-economic and geo-political environment on the
condensed consolidated financial statements, specifically considering the
impact on key judgements and significant estimates along with other areas of
increased risk including financial instruments, hedge accounting and
translation methodologies. No material accounting impacts relating to the
areas assessed were recognised in 2022. 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 2022 or the
assessment of going concern for the period to June 2024. The Group will
continue to monitor these areas of increased judgement, estimation and risk
for material changes.
The financial information for the year ended 31 December 2021 does not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. A copy of the statutory accounts for that year has been delivered to the
Registrar of Companies. The independent auditors' report on the full financial
statements for the year ended 31 December 2021 was unqualified and did not
contain an emphasis of matter paragraph or any statement under section 498 of
the Companies Act 2006.
This preliminary announcement does not constitute the Group's full financial
statements for the year ended 31 December 2022. The Group's full financial
statements will be approved by the Board of Directors and reported on by the
auditors in March 2023. Accordingly, the financial information for 2022 is
presented unaudited in the preliminary announcement.
Comparative period revisions
Investments in unlisted securities
In 2022, the Group identified an error related to the classification of
certain investments in unlisted securities as fair value through other
comprehensive income rather than fair value through profit and loss. The
investments are held within other financial assets on the balance sheet. The
related accounting has been corrected in 2022 and comparative 2021 line items
have been corrected to reflect the change in accounting treatment, although
the Group has determined that the error did not have a material impact on its
previously issued consolidated financial statements. The fair value movements
are now recorded within finance income, rather than within other comprehensive
income. All impacted primary statements and related notes have been restated.
In 2021, the restatement has resulted in an increase in statutory profit of
£18m, comprising finance income of £20m and a tax charge of £2m. Other
comprehensive income has decreased by £18m but total comprehensive income is
unchanged. The impact on both statutory and diluted earnings per share is an
increase of 2.4p for 2021. The fair value movements in the income statement
are excluded from adjusted earnings, as described in note 3. There is no
impact to any adjusted measures.
Opening retained earnings at 1 January 2021 has increased by £57m and an
equivalent decrease has been recorded to the opening fair value reserve.
Closing retained earnings at 31 December 2021 has increased by £37m and an
equivalent decrease has been recorded to the closing fair value reserve.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
1. Basis of preparation continued
The restatement has no impact on the carrying amount of other financial assets
on the balance sheet and has no impact on reported net assets, cash flows or
total equity. Accordingly, an additional balance sheet as at 1 January 2021
has not been presented.
Operating segments
On 8 March 2021, the Group announced a new strategy, which included a new
management structure and operating model. As a result, the primary operating
segments reported to the Group's chief operating decision-maker, the Pearson
Executive Management team, changed from 1 July 2021 to reflect the new Group
structure consisting of five main global business divisions - Virtual
Learning, Higher Education, English Language Learning, Workforce Skills and
Assessments & Qualifications. In addition, the International Courseware
local publishing businesses were under strategic review and were managed as a
separate division, known as Strategic Review. In 2022, some of the businesses
from the Strategic Review division have been disposed of (see note 12) and the
decision was made to retain the English-speaking Canadian and Australian K12
courseware businesses. Both of these businesses have been transferred from the
Strategic Review division to Assessment & Qualifications. Comparative
figures for 2021 have been restated to reflect this move between segments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
2. Segment information
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 and associated courseware.
- 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, Credly, TalentLens, Faethm, Pearson
College and Apprenticeships.
- Higher Education - US, Canadian and International Higher Education
Courseware businesses.
all figures in £ millions 2022 2021¹
Sales
Assessments & Qualifications 1,444 1,238
Virtual Learning 820 713
English Language Learning 321 238
Workforce Skills 204 172
Higher Education 898 849
Strategic Review 154 218
Total sales 3,841 3,428
Adjusted operating profit
Assessments & Qualifications 258 219
Virtual Learning 70 32
English Language Learning 25 15
Workforce Skills (3) 27
Higher Education 91 73
Strategic Review 15 19
Total adjusted operating profit 456 385
1. Comparative amounts have been restated to reflect the move between
operating segments.
There were no material inter-segment sales.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
2. Segment information continued
The Group derived revenue from the transfer of goods and services over time
and at a point in time in the following major product lines:
all figures in £ millions Assessment & Qualifications Virtual Learning English Language Learning Workforce Skills Higher Education Strategic Review Total
2022
Courseware
Products transferred at a point in time 64 - 110 2 302 148 626
Products and services transferred over time 21 - 25 - 588 6 640
85 - 135 2 890 154 1,266
Assessments
Products transferred at a point in time 169 - 5 14 - - 188
Products and services transferred over time 1,190 - 138 142 - - 1,470
1,359 - 143 156 - - 1,658
Services
Products transferred at a point in time - - 29 - - - 29
Products and services transferred over time - 820 14 46 8 - 888
- 820 43 46 8 - 917
Total sales 1,444 820 321 204 898 154 3,841
2021¹
Courseware
Products transferred at a point in time 62 - 109 - 283 180 634
Products and services transferred over time 30 - 26 - 558 17 631
92 - 135 - 841 197 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 1,238 713 238 172 849 218 3,428
1. Comparative amounts have been restated to reflect the move between
operating segments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
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 disposals, the cost of major
restructuring and one-off costs related to the UK pension scheme.
Cost of major restructuring - In August 2022, the Group announced a major
restructuring programme to run in 2022. The programme includes efficiencies in
product and content, support costs, technology and corporate property. The
restructuring costs in 2022 of £150m mainly relate to staff redundancies and
impairment of right of use property assets. In 2021, restructuring costs of
£214m mainly related to the impairment of right of use property assets, the
write-down of product development assets and staff redundancies. The 2022
charge includes the impact of updated assumptions related to the
recoverability of right-of-use assets made in 2021.
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 2022 were £56m
compared to a charge of £51m in 2021. This is due to increased amortisation
from recent acquisitions partially offset by a reduction in amortisation from
intangible assets at the end of their useful life and recent disposals.
UK pension discretionary increases - Charges in 2022 relate to one-off pension
increases awarded to certain cohorts of pensioners in response to the cost of
living crisis.
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 2022 relate to the gains on the disposal of our international
courseware local publishing businesses in Europe, French-speaking Canada and
Hong Kong and a gain arising on a decrease in the deferred consideration
payable on prior year acquisitions, offset by a loss on disposal of our
international courseware local publishing businesses in South Africa due to
recycled currency translation adjustments and costs related to disposals and
acquisitions. Other net gains and losses in 2021 largely related to the
disposal of PIHE and the disposal of the K12 Sistemas business in Brazil
offset by costs related to the acquisition of Faethm and the wind down of
certain strategic review businesses.
Adjusted operating profit should not be regarded as a complete picture of the
Group's financial performance. For example, adjusted operating profit includes
the benefits of major restructuring programmes but excludes the significant
associated costs, and adjusted operating profit excludes costs related to
acquisitions, and the amortisation of intangibles acquired in business
combinations, but does not exclude the associated revenues. The Group's
definition of adjusted operating profit may not be comparable to other
similarly titled measures reported by other companies.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
2. Segment information continued
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 Total
all figures in £ millions
2022
Adjusted operating profit 258 70 25 (3) 91 15 456
Cost of major restructuring (39) (29) (11) (7) (63) (1) (150)
Intangible charges (14) (21) (6) (12) (3) - (56)
UK Pension discretionary increases (1) (1) - - (1) - (3)
Other net gains and losses (2) (2) (11) - - 39 24
Operating profit / (loss) 202 17 (3) (22) 24 53 271
2021(1)
Adjusted operating profit 219 32 15 27 73 19 385
Cost of major restructuring (48) (48) (27) (28) (63) - (214)
Intangible charges (13) (25) (3) (7) (2) (1) (51)
UK Pension discretionary increases - - - - - - -
Other net gains and losses - - - (2) - 65 63
Operating profit / (loss) 158 (41) (15) (10) 8 83 183
1. Comparative amounts have been restated to reflect the move between
operating segments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
3. Net finance costs
all figures in £ millions 2022 2021¹
Interest payable on financial liabilities at amortised cost and associated (32) (30)
derivatives
Interest on lease liabilities (25) (27)
Interest on deferred and contingent consideration (5) -
Derivatives not in a hedge relationship (2) -
Interest on tax provisions (7) (11)
Net finance costs (71) (68)
Interest receivable on financial assets at amortised cost 18 5
Interest on lease receivables 5 6
Net finance income in respect of retirement benefits 9 4
Fair value re-measurement of disposal proceeds - 6
Fair value movements on investments held at FVTPL 28 20
Net foreign exchange gains 1 1
Derivatives not in a hedge relationship 27 20
Interest on tax provisions 35 -
Net finance income 123 62
Analysed as:
Net interest payable reflected in adjusted earnings (1) (57)
Other net finance income 53 51
Net finance income / (costs) 52 (6)
1. Comparative amounts have been restated, see note 1 for further
details.
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.
all figures in £ millions 2022 2021¹
Net finance income / (costs) 52 (6)
Net finance income in respect of retirement benefits (9) (4)
Fair value re-measurement of disposal proceeds - (6)
Interest on deferred and contingent consideration 5 -
Fair value movements on investments held at FVTPL (28) (20)
Net foreign exchange gains (1) (1)
Derivatives not in a hedge relationship (25) (20)
Interest on tax provisions 5 -
Net interest payable reflected in adjusted earnings (1) (57)
1. Comparative amounts have been restated, see note 1 for further
details.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
3. Net finance costs continued
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
excluded are interest costs relating to acquisition or disposal transactions,
fair value movements on investments classified as FVTPL, 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, fair value movements and other gains and losses are excluded
from adjusted earnings as they represent short-term fluctuations in market
value and are subject to significant volatility. Other gains and losses may
not be realised in due course as it is normally the intention to hold the
related instruments to maturity. Interest on certain tax provisions is
excluded from our adjusted measure in order to mirror the treatment of the
underlying tax item.
4. Profit before tax
all figures in £ millions note 2022 2021¹
Profit before tax 323 177
Cost of major restructuring 2 150 214
Other net gains and losses 2 (24) (63)
Intangible charges 2 56 51
UK Pension discretionary increases 2 3 -
Other net finance income 3 (53) (51)
Adjusted profit before tax 455 328
1. Comparative amounts have been restated, see note 1 for further
details.
5. Income tax
all figures in £ millions 2022 2021¹
Profit before tax 323 177
Tax calculated at UK rate (19%) (62) (34)
Effect of overseas tax rate (12) (24)
Non-deductible expenses (9) (9)
Impact of rate changes 3 25
Benefit from change in tax accounting treatment - 22
Other tax items 1 21
Income tax (charge) / credit (79) 1
Tax rate reflected in statutory earnings 24.5% (0.6)%
1. Comparative amounts have been restated, see note 1 for further
details.
The statutory rate is higher than the standard rate of tax due to profits
arising in countries where the tax rate is higher than the UK rate together
with various expenses that are not deductible for tax purposes. Also included
in the income tax charge is a provision in relation to the potential State Aid
risk (see note 15 for further details) which is principally offset against the
release of historic provisions for tax risks where the statue of limitations
has now expired.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
5. Income tax continued
all figures in £ millions 2022 2021¹
Income tax (charge) / benefit (79) 1
Tax benefit on cost of major restructuring (37) (47)
Tax charge on other net gains and losses 10 14
Tax benefit on intangible charges (11) (12)
Tax benefit on UK pensions discretionary increase (1) -
Tax charge on other net finance costs 13 8
Tax amortisation benefit on goodwill and intangibles 16 8
Benefit from change in tax accounting treatment - (11)
Tax benefit on UK tax rate change (1) (25)
Other tax items 19 -
Adjusted income tax charge (71) (64)
Tax rate reflected in adjusted earnings 15.6% 19.5%
1. Comparative amounts have been restated, see note 1 for further
details.
The adjusted income tax charge excludes the tax benefit or charge on items
excluded from profit before tax (see note 4).
Other tax items of £19m primarily consists of the release of non-operating
tax risk provisions of £35m following the expiry of the statute of
limitations for certain offset by a provision of £63m related to the
potential State Aid exposure.
The current tax benefit from tax deductible goodwill and intangibles is added
to the adjusted income tax charge as this benefit more accurately aligns the
adjusted tax charge with the expected rate of cash tax payments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
6. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss
attributable to equity shareholders of the company (earnings) by the weighted
average number of ordinary shares in issue during the year, excluding ordinary
shares purchased by the company and held as treasury shares. Diluted earnings
per share is calculated by adjusting the weighted average number of ordinary
shares to take account of all dilutive potential ordinary shares and adjusting
the profit attributable, if applicable, to account for any tax consequences
that might arise from conversion of those shares.
all figures in £ millions 2022 2021¹
Earnings for the year 244 178
Non-controlling interest (2) (1)
Earnings attributable to equity holders 242 177
Weighted average number of shares (millions) 738.1 754.1
Effect of dilutive share options (millions) 3.9 5.0
Weighted average number of shares (millions) for diluted earnings 742.0 759.1
Earnings per share (in pence per share)
Basic 32.8p 23.5p
Diluted 32.6p 23.3p
1. Comparative amounts have been restated, see note 1 for further
details.
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 2022
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges UK Pension discretionary increases Other finance costs Other tax items Adjusted income statement
2022
Operating profit 2 271 150 (24) 56 3 - - 456
Net finance costs 3 52 - - - - (53) - (1)
Profit before tax 4 323 150 (24) 56 3 (53) - 455
Income tax 5 (79) (37) 10 (11) (1) 13 34 (71)
Profit for the year 244 113 (14) 45 2 (40) 34 384
Non-controlling interest (2) - - - - - - (2)
Earnings 242 113 (14) 45 2 (40) 34 382
Weighted average number of shares (millions) 738.1
Weighted average number of shares (millions) for diluted earnings 742.0
Adjusted earnings per share (basic) 51.8p
Adjusted earnings per share (diluted) 51.5p
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
7. Adjusted earnings per share continued
all figures in £ millions note Statutory income statement Cost of major restructuring Other net gains and losses Intangible charges UK Pension discretionary increases Other finance costs Other tax items Adjusted income statement
2021¹
Operating profit 2 183 214 (63) 51 - - - 385
Net finance costs 3 (6) - - - - (51) - (57)
Profit before tax 4 177 214 (63) 51 - (51) - 328
Income tax 5 1 (47) 14 (12) - 8 (28) (64)
Profit for the year 178 167 (49) 39 - (43) (28) 264
Non-controlling interest (1) - - - - - - (1)
Earnings 177 167 (49) 39 - (43) (28) 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
1. Comparative amounts have been restated, see note 1 for further
details.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
8. Dividends
all figures in £ millions 2022 2021
Amounts recognised as distributions to equity shareholders in the year 156 149
The directors are proposing a final dividend of 14.9p per equity share,
payable on 5 May 2023 to shareholders on the register at the close of business
on 24 March 2023. This final dividend, which will absorb an estimated £107m
of shareholders' funds, has not been included as a liability as at 31 December
2022.
9. Exchange rates
Pearson earns a significant proportion of its sales and profits in overseas
currencies, the most important being the US dollar. The relevant rates are as
follows:
2022 2021
Average rate for profits 1.24 1.38
Year end rate 1.21 1.35
10. Non-current intangible assets
all figures in £ millions 2022 2021
Goodwill 2,480 2,145
Other intangibles 697 624
Non-current intangible assets 3,177 2,769
In 2022, business combinations resulted in the recognition of additional
goodwill of £204m and intangible assets of £110m (see note 11 for further
details).
There were no significant impairments to acquisition related or other
intangibles in 2022 or 2021.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
11. Acquisitions
On 28 January 2022, the Group acquired 100% of the share capital in Credly Inc
(Credly), having previously held a 19.9% interest in the company. Credly was
founded in 2012 in New York and is a digital credential service provider whose
platform enables customers to design, create, issue and manage digital
credentials. It now forms part of the Workforce Skills division. Total
consideration was £149m comprising upfront cash consideration of £107m,
Pearson's existing interest valued at £31m and £11m of deferred
consideration. The deferred consideration is payable in two years, with
additional amounts being payable if certain revenue and non-financial targets
are met, and dependent on continuing employment, and therefore these
additional amounts will be expensed over the period and are not treated as
consideration. £49m of intangible assets were recognised, mainly relating to
the existing customer relationships that will be amortised over 20 years, and
technology, which will be amortised over five years.
On 28 April 2022, the Group acquired 100% of the share capital of ATI STUDIOS
A.P.P.S S.R.L (Mondly), a global online learning platform offering customers
learning in English and 40 other languages via its app, website, virtual
reality and augmented reality products. It now forms part of the English
Language Learning division. Total consideration was £135m comprising upfront
cash consideration of £105m, and deferred consideration of £30m. The
deferred consideration is payable over the next two years with no performance
conditions attached. In addition, a further $29.6m (c£24m) of cash and $10m
(c£8m) in shares will be paid over the next four years, dependent on
continuing employment, and therefore these additional amounts will be expensed
over the period and are not treated as consideration. £50m of intangible
assets were recognised, the majority of which relates to acquired technology,
and will be amortised over periods upto seven years.
These transactions have resulted in the recognition of £202m of goodwill,
which represents the expected growth through new products and customers, the
workforce and know-how acquired and the anticipated synergies, none of which
can be recognised as separate intangible assets. The goodwill is not
deductible for tax purposes.
In 2022, the Group also made three smaller acquisitions in the period for
total consideration of £11m. In December 2022, the Group announced that it
had signed a deal to acquire 100% of Personnel Decisions Research Institutes,
LLC, the transaction has not yet completed.
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
now forms part of the Workforce Skills division. The total consideration for
the transaction was £65m, which included £10m of contingent consideration,
dependent upon meeting certain earnings targets. The contingent consideration
was valued at the net present value of the Group's best estimate of the amount
that will be payable. In 2022, contingent consideration amounts have been
settled resulting in the recognition of an £8m gain in the income statement
within other net gains and losses.
In addition, the Group made two additional acquisitions of subsidiaries for
total consideration of £11m in 2021.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
11. Acquisitions continued
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.
Amounts for intangible assets and goodwill are provisional as management
finalise reviews of the asset valuations.
all figures in £ millions 2022 2022 2022 2022 2021
Credly Mondly Other Total Total
Intangible assets 49 50 11 110 27
Deferred tax assets 7 1 - 8 11
Trade and other receivables 6 2 - 8 2
Cash and cash equivalents 12 1 - 13 4
Trade and other liabilities (18) (8) - (26) (5)
Deferred tax liabilities (12) (8) (2) (22) (6)
Net assets acquired 44 38 9 91 33
Goodwill 105 97 2 204 43
Total 149 135 11 295 76
Satisfied by:
Cash consideration 107 105 11 223 54
Deferred and contingent consideration 11 30 - 41 16
Fair value of existing investment 31 - - 31 6
Total consideration 149 135 11 295 76
Cash flow from acquisitions
Cash - current year acquisitions (223) (54)
Cash and cash equivalents acquired 13 4
Deferred payments for prior year acquisitions and other items (10) (4)
Acquisition costs paid (8) (1)
Net cash outflow (228) (55)
Credly generated revenues of £13m and a loss after tax of £4m for the period
from acquisition date to 31 December 2022. Mondly generated revenues of £11m
and a profit after tax of £3m for the period from acquisition date to 31
December 2022. If the acquisitions had occurred on 1 January 2022, the Group's
revenue would have been £7m higher and the profit after tax would have been
£1m lower.
Total acquisition-related costs of £20m were recognised in 2022 within other
net gains and losses.
In addition to the cash flows relating to subsidiaries above, the Group also
acquired an associate for cash
consideration of £2m (2021: £10m) and paid a further £3m in respect of an
existing investment in an associate.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
12. Disposals
In March 2021, the Group announced a strategic review of its international
courseware local publishing businesses. In 2022, the Group disposed of its
interests in the Canadian educational publisher (ERPI), Pearson Italia S.p.A,
Stark Verlag GmbH, Austin Education (Hong Kong) Limited, Pearson South Africa
(Pty) Ltd and various other South African companies. Total cash consideration
received was £287m resulting in a pre-tax gain on disposal of £42m. All
entities disposed of were previously in the Strategic Review segment. £5m of
losses arose from other immaterial disposals and costs related to the
wind-down of certain businesses. None of the disposed businesses meet the
criteria to be presented as discontinued operations.
In February 2021, the Group completed the sale of its interests in PIHE in
South Africa resulting in a pre-tax loss of £5m. In 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.
Deferred proceeds relating to the K12 sale were received in 2021 and 2022.
all figures in £ millions 2022 2021
Intangible assets, including goodwill (77) (3)
Property, plant and equipment (11) (48)
Intangible assets - product development (39) (6)
Inventories (33) (2)
Trade and other receivables (106) (6)
Deferred tax (12) -
Cash and cash equivalents (excluding overdrafts) (21) (24)
Provisions for other liabilities and charges 1 3
Retirement benefit obligations 2 -
Trade and other liabilities 52 4
Financial liabilities - borrowings 8 67
Net assets disposed (236) (15)
Cumulative currency translation adjustment 5 (4)
Cash proceeds 291 108
Deferred proceeds 2 -
Costs of disposal (25) (24)
Gain on disposal 37 65
Cash flow from disposals
Proceeds - current year disposals 291 108
Proceeds - prior year disposals 86 16
Cash and cash equivalents disposed (21) (24)
Costs and other disposal liabilities paid (23) (17)
Net cash inflow from disposals 333 83
In addition to the above, in 2022, proceeds of £17m (2021: £48m) were
received in relation to the disposal of investments.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
13. Net debt
all figures in £ millions 2022 2021
Non-current assets
Derivative financial instruments 43 30
Trade and other receivables - investment in finance lease 104 100
Current assets
Derivative financial instruments 16 2
Trade and other receivables - investment in finance lease 17 15
Cash and cash equivalents (excluding overdrafts) 543 937
Non-current liabilities
Borrowings (1,144) (1,245)
Derivative financial instruments (54) (30)
Current liabilities
Borrowings (71) (155)
Derivative financial instruments (11) (4)
Net debt (557) (350)
Included in borrowings at 31 December 2022 are lease liabilities of £605m
(non-current £534m, current £71m). This compares to lease liabilities of
£633m (non-current £565m, current £68m) at 31 December 2021. The net lease
liability at 31 December 2022 after including the investment in finance leases
noted above was £484m (2021: £518m). Net debt excluding net lease
liabilities is £73m (2021: net cash of £168m).
In May 2022, the Group repaid its $117m (£95m) USD 3.75% notes upon maturity.
In December 2022, the Group repaid its $94m (£76m) USD 3.25% notes. In May
2021, the Group repaid the remaining €195m (£167m) of its €500m Euro
1.85% notes.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
14. Cash flows
Operating cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of the Group's corporate and operating measures.
These measures are presented in order to align the cash flows with
corresponding adjusted profit measures. The table below reconciles the
statutory profit and cash flow measures to the corresponding adjusted
measures.
all figures in £ millions Statutory measure Cost of major restructuring Other net gains and losses Intangible charges UK Pension discretionary increases Purchase/ disposal of PPE and software Net addition of right of use assets Dividends from joint ventures and associates Adjusted measure
2022
Operating profit 271 150 (24) 56 3 - - - 456 Adjusted operating profit
Net cash generated from operations 527 35 - - - (133) (29) 1 401 Operating cash flow
2021
Operating profit 183 214 (63) 51 - - - - 385 Adjusted operating profit
Net cash generated from operations 570 24 - - - (176) (30) - 388 Operating cash flow
The table below reconciles operating cash flow to net debt.
all figures in £ millions note 2022 2021
Reconciliation of operating cash flow to closing net debt
Operating cash flow 401 388
Tax paid (109) (177)
Net finance costs paid (35) (54)
Net cost paid for major restructuring (35) (24)
Free cash flow 222 133
Dividends paid (including to non-controlling interest) (157) (149)
Net movement of funds from operations 65 (16)
Acquisitions and disposals 105 62
Disposal of lease liabilities 8 67
Net equity transactions (383) (10)
Other movements on financial instruments (2) 10
Movement in net debt (207) 113
Opening net debt (350) (463)
Closing net debt 14 (557) (350)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
15. Contingencies and other liabilities
There are contingent Group liabilities that arise in the normal course of
business in respect of indemnities, warranties and guarantees in relation to
former subsidiaries and in respect of guarantees in relation to subsidiaries,
joint ventures and associates. In addition, there are contingent liabilities
of the Group in respect of unsettled or disputed tax liabilities, legal
claims, contract disputes, royalties, copyright fees, permissions and other
rights. None of these claims are expected to result in a material gain or loss
to the Group.
On 25 April 2019, the European Commission published the full decision that the
United Kingdom controlled foreign company group financing partial exemption
('FCPE') partially constitutes State Aid. This decision was appealed by the UK
Government and other parties. On 8 June 2022 the EU General Court dismissed
the appeal following which it has been concluded that a provision is now
required in relation to this issue. The total exposure in relation to this
issue is calculated to be £105m (excluding interest) with a provision of
£63m now included in the results representing our estimate of the expected
value. Further information is included in the Financial Review - Taxation.
This issue is specific to periods up to 2018 and is not a continuing exposure.
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 1,212m
(£190m) up to 31 December 2022. 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.
The Group is also under assessment from the UK tax authorities in relation to
an issue related to the UK's FCPE legislation with the relevant years being
2019 to 2021. The maximum exposure is calculated to be £44m with a provision
of £13m currently held in relation to this issue. The provision is calculated
considering a range of possible outcomes and applying a probability to each,
resulting in a weighted average outcome. The possible outcomes considered
range from no liability through to the full exposure (£44m). This issue is
specific to 2019 to 2021 and is not a continuing exposure.
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 2022, the Group had a
current liability payable to Academy of Pop of £5m (2021: £7m) which relates
to the Group's initial capital contribution that had not yet been paid as at
31 December 2022. This balance was paid in February 2023.
There were no other material related party transactions in 2022 or 2021 and no
guarantees have been provided to related parties in the year.
17. Events after the balance sheet date
In February 2023, the Group renegotiated its revolving credit facility,
reducing the maximum facility to $1bn.
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