UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the
month of
July
2018
PEARSON plc
(Exact
name of registrant as specified in its charter)
N/A
(Translation
of registrant's name into English)
80 Strand
London, England WC2R 0RL
44-20-7010-2000
(Address
of principal executive office)
Indicate
by check mark whether the Registrant files or will file annual
reports
under
cover of Form 20-F or Form 40-F:
Form
20-F
X
Form 40-F
Indicate
by check mark whether the Registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934
Yes
No X
Interim results for the six months to 30
th
June
2018
(unaudited)
27 July 2018
|
Good progress against strategic priorities, efficiency programme on
track, guidance unchanged for 2018
|
Highlights
|
Revenue up 2% in underlying terms
●
North America up 3%, Core up 2% and Growth down
4%.
●
Revenue increased primarily due to US Higher
Education Courseware, Online Program Management (OPM), Connections
Academy, Professional Certification and Pearson Test of English
Academic (PTEA), partially offset by the expected declines
in Learning Studio and the expected decline in sales in
our South Africa School Courseware business due to a large order in
the first half 2017.
●
As in previous years, Pearson's sales are weighted
towards the second half of the year.
Adjusted operating profit up 46% in underlying terms, good growth
in EPS
●
Reflecting sales growth and savings from the
2017-2019 restructuring programme, partially offset by cost
inflation and other operational factors.
Strong balance sheet with net debt of £775m (H1 2017:
£1,633m)
●
Reflecting proceeds from disposals and operating
cash flow, partially offset by the share
buyback.
●
Net debt increased from £432m at the end of
2017 to £775m at the end of June 2018 in line with typical
seasonality of the business.
●
Interim dividend 5.5p (2017:
5p).
Statutory results
●
Statutory operating profit of £233m (2017:
£16m) with the year on year improvement driven by the profit
on disposal of Wall Street English (WSE) and
Utel.
●
Statutory EPS 24.1p (2017: (2.1)p) with the year
on year improvement due to lower interest cost and the profit on
disposal of WSE and Utel.
Simplification plans on track
●
Cost savings of £40m delivered in the first
half, decommissioned over 200 applications and started the
implementation of our new Enterprise Resource Planning (ERP)
software system in the US.
●
US K12 courseware business continues to be held
for sale.
Underlying FY 2018 guidance unchanged
●
US Higher Education Courseware revenue grew
modestly in the first half helped by lower returns, as expected.
However, in line with our full year guidance for this segment, we
continue to expect a decline in net sales in the second half as
gross sales continue to be impacted by ongoing underlying market
pressures.
●
We expect Pearson to deliver underlying profit
growth in 2018.
|
John Fallon,
Chief
Executive said:
"
Although there is still much
to do, we have had a good first half and continued to make progress
against our strategic priorities. We are driving ahead in digital
learning, helping more people develop the skills they need to
prosper in a fast changing world.
"
|
Financial Summary
|
£m
|
H1 2018
|
H1 2017
|
Headline growth
|
CER growth
|
Underlying growth
|
|
Business performance
|
|
|
|
|
|
|
Sales
|
1,865
|
2,047
|
(9)%
|
(3)%
|
2%
|
|
Adjusted operating profit
|
107
|
107
|
0%
|
16%
|
46%
|
|
Operating cash flow
|
(202)
|
(72)
|
|
|
|
|
Adjusted earnings per share
|
8.2p
|
5.6p
|
|
|
|
|
Dividend per share
|
5.5p
|
5p
|
|
|
|
|
Net debt
|
(775)
|
(1,633)
|
|
|
|
|
Statutory results
|
|
|
|
|
|
|
Sales
|
1,865
|
2,047
|
|
|
|
|
Operating profit
|
233
|
16
|
|
|
|
|
Cash generated from operations
|
(131)
|
(219)
|
|
|
|
|
Basic earnings / loss per share
|
24.1p
|
(2.1)p
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughout this announcement: a) Growth rates are stated on an
underlying basis unless otherwise stated. Underlying growth rates
exclude currency movements, portfolio changes and changes related
to the adoption of IFRS15. 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
17.
Progress on our strategic priorities
During the first half of 2018 we continued to make progress on our
strategic priorities of digital transformation, investing in
structural growth and simplification, making us a leaner and
more agile business.
|
Grow market sharethrough digitaltransformation
|
●
Global digital registrations of MyLab and related
digital courseware products rose 1% (H1 2017: a decline of
1%).
●
In North America, MyLab and related digital
courseware registrations declined 1% (H1 2017: a decline of 2%).
Registrations of Revel, our integrated, digital-first courseware
platform, grew 65% in the first half of 2018 (H1 2017: 50%) to over
275,000, equating to more than 530,000 over the last 12 months.
Including standalone eBooks North American digital registrations
rose 4% in the first half.
●
North American Higher Education Courseware digital
revenue grew modestly.
●
We signed more than 100 new institutions to
Inclusive Access, where the delivery of courseware on the first day
of the course is integrated with college systems, in the first
half, taking the total to over 600
institutions.
●
We now have 130 titles available in our partner
print rental programme and we plan to double that again next year
adding a further 150 titles.
●
We are launching pilot versions of new
developmental math courseware on the Global Learning Platform (GLP)
in the second half of this year and an enhanced Revel platform
based on the GLP in 2019.
●
US Student Assessments saw 1% growth in the volume
of digital tests in the first half, extended contracts in Kentucky
and Arizona and was awarded new contracts in Utah and
Iowa.
|
Invest instructural growthmarkets
|
●
We saw good enrolment growth in OPM, where we
partner with universities to take their teaching online, and in
Connections Academy our K12 virtual school business, with strong
pipelines underpinning revenue growth in both
businesses.
●
In Professional Certification, the launch of a
contract to administer medical college admissions tests contributed
to revenue growth, we renewed 42 existing contracts, signed 45 new
agreements and five contracts were not renewed. Pearson's
Professional Certification business, VUE, partners with more than
500 credential owners across the globe.
●
Pearson Test of English Academic (PTEA) grew
global test volumes by 41%.
|
Become simpler andmore efficient
|
●
We completed the sale of WSE in March
2018.
●
Our US K12 Courseware business continues to be
held for sale.
●
Under the three-year transformation programme
announced in May 2017 to further simplify the business, we are on
track to deliver incremental cost savings of £300m per annum,
with the full benefits accruing from the end of 2019
onwards
1
.
●
In the first half of the year, we achieved cost
savings of £40m, decommissioned over 200 applications, closed
seven data centres and seven offices and started the implementation
of our new ERP system in the US.
●
During the second half of the year we expect to
deliver further incremental savings of £40m, £105m in
2019 and £100m in 2020. Restructuring costs in the first half
were £24m.
|
2018 outlook
|
Our guidance for the full year remains unchanged. We continue to
expect net sales of our US Higher Education Courseware to be flat
to down mid-single digit for the full year driven by ongoing
underlying market pressures. We continue to expect Pearson to
deliver underlying profit growth in 2018.
We expect to report an adjusted operating profit of between
£520m and £560m and adjusted earnings per share of 49p to
53p in 2018 based on our portfolio
2
and
exchange rates prevailing on 31st December
2017.
We expect net debt to be in line with full year 2017.
We calculate that a 5c move in the US Dollar exchange rate to
Sterling would impact adjusted EPS by around 2p to
2.5p.
|
Contacts
Investor Relations
|
Jo Russell, Tom Waldron, Anjali Kotak
|
+44 (0) 207 010 2310
|
Media
|
Tom Steiner
|
+44 (0) 207 010 2310
|
Brunswick
|
Charles Pretzlik, Nick Cosgrove, Simone Selzer
|
+44 (0) 207 404 5959
|
Webcast details
|
Pearson's results presentation for investors and analysts will be
audiocast live today from 0830 (BST)
via
www.pearson.com
.
Dial in details:
United Kingdom Toll-Free: 08003589473United Kingdom Toll: +44
3333000804
PIN: 52241606#
Audience URL:
http://pear.sn/8Rlc30l7Rb2
|
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.pearson.com/corporate/investors.html). 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
|
Profit & loss statement
Pearson's sales decreased by £182m in headline terms to
£1,865m (H1 2017: £2,047m) with portfolio adjustments
reducing sales by £92m, IFRS 15 increasing revenues by
£6m and currency movements decreasing revenues by £128m.
Stripping out the impact of portfolio changes, IFRS 15 and currency
movements, revenues were up 2% in underlying terms due to 3% growth
in North America and a 2% increase in our Core segment partly
offset by a 4% decline in our Growth segment.
The 2018 adjusted operating profit of £107m (H1 2017:
£107m) reflects sales growth and savings from the 2017-2019
restructuring programme, offset by cost inflation, other
operational factors, and the impact of FX and disposals. The first
half adjusted operating profit also includes a £6m phasing
benefit from the implementation of IFRS 15. Excluding this and the
impact of FX and disposals, underlying adjusted operating profit
grew 46%.
Net interest payable in the first half was £26m, (H1 2017:
£47m) reflecting lower average net debt and reduced bond
redemption charges.
Our adjusted tax charge was £16m (H1 2017:
£13m).
Adjusted earnings for the period were £64m (H1 2017:
£46m) and adjusted earnings per share were 8.2p (H1 2017:
5.6p).
Cash generation.
Net cash
used in operations was £131m compared to £219m in 2017.
The reduction in cash outflow is primarily due to the absence of
last year's special pension payments relating to the Penguin Random
House merger in 2013. Operating cash outflow increased by
£130m from £72m in 2017 to £202m. This increase was
driven by higher incentive payments, lower associate dividends and
revenue related movements in working capital.
Statutory results.
Our
statutory profit of £189m in 2018 compares to a loss of
£16m in H1 2017 driven by the profit on disposals of WSE and
Utel.
Capital allocation.
Our
disciplined approach to capital allocation and to maintaining a
strong balance sheet will play a major part in driving long-term
growth. Through investing in the business, delivering a sustainable
and progressive dividend and returning any surplus cash to our
shareholders we will create further value.
Balance sheet.
Net debt
decreased to £775m (H1 2017: £1,633m) reflecting disposal
proceeds and operating cash flow partially offset by the share
buyback.
Dividend.
In line with our
policy, the Board is proposing an interim dividend of 5.5p (2017:
5p).
Businesses held for sale.
The assets and liabilities of our US K12
School Courseware business remain classified as held for sale on
the balance sheet at 30 June 2018.
|
Notes:
1
Phased
plan first presented on August 4
th
2017
based on December 2016 exchange rates. A significant part of these
costs and savings are denominated in US Dollar and other
non-Sterling currencies and are therefore subject to exchange rate
movements over the implementation timeframe.
2
The sale of WSE in March
2018 reduces the expected FY18 adjusted operating profit from our
portfolio at the start of the year by around £6m. This impact
has been absorbed within the guidance range for Adjusted
Operating Profit, which remains
£520m-£560m.
|
Operational review - Geography
£ millions
|
H1 2018
|
H1 2017
|
Headline
growth
|
CER
growth
|
Underlying
growth
|
Sales
|
|
|
|
|
|
North America
|
1,223
|
1,285
|
(5%)
|
3%
|
3%
|
Core
|
383
|
384
|
0%
|
2%
|
2%
|
Growth
|
259
|
378
|
(31%)
|
(26%)
|
(4)%
|
Total sales
|
1,865
|
2,047
|
(9%)
|
(3%)
|
2%
|
|
|
|
|
|
|
Adjusted operating profit
|
|
|
|
|
|
North America
|
64
|
43
|
49%
|
77%
|
89%
|
Core
|
10
|
10
|
0%
|
0%
|
11%
|
Growth
|
11
|
8
|
38%
|
88%
|
38%
|
Penguin Random House
|
22
|
46
|
(52%)
|
(50%)
|
(4)%
|
Total adjusted operating profit
|
107
|
107
|
0%
|
16%
|
46%
|
See note 2 in the consolidated financial statements for the
reconciliation to the equivalent statutory measures.
North America (66% of revenues)
|
Underlying revenue rose 3% due to growth in US Higher Education
Courseware, OPM, Connections Academy, School Assessments and
Professional Certification, partially offset by modest declines in
K12 Courseware and the planned decline in revenue in Learning
Studio, a higher education learning management system we are
retiring.
Adjusted operating profit increased substantially in underlying
terms due primarily to stronger trading and the benefits of the
restructuring programme.
|
Courseware
|
In School Courseware, revenues were down primarily due to lower
sales in open territories, reflecting the strong performance of
myPerspectives for grades 6-12 English Language Arts (ELA) in the
prior period. Revenues in adoption states declined
slightly.
In Higher Education Courseware, total US College Spring enrolments
fell 1.3%, with combined two-year public and four-year for-profit
enrolments declining 2.7%, affected by rising employment rates and
by regulatory change impacting the for-profit and developmental
learning sectors.
Higher Education Courseware net revenues grew modestly. Lower gross
sales, driven by continued cautious buying patterns from the
channel, were more than offset by lower returns. In line with our
full year guidance we expect a decline in net sales in the second
half, as seasonally larger gross sales continue to be impacted by
this underlying market pressure. Digital revenues grew modestly
benefiting from continued growth in direct sales, favourable mix
and selected price increases.
Global digital registrations of MyLab and related digital
courseware products rose 1% (H1 2017: 1%
decline).
In North America, MyLab and related digital courseware
registrations declined 1% (H1 2017: 2% decline). Good growth in
qualitative business and applied sciences and Revel was offset by
the retirement of older titles and continued softness in enrolments
in developmental math. Registrations of Revel, our integrated,
digital-first courseware platform, grew 65% in the first half of
2018 (H1 2017: 50%) to over 275,000, equating to more than 530,000
over the last 12 months. Including standalone eBooks North American
digital registrations rose 4% in the first half.
Our Global Learning Platform development and digital roadmap are on
track to deliver new digital products with greater personalisation
and enhanced engagement. In Fall 2018, we will launch pilot
versions of new developmental math courseware and an enhanced Revel
platform based on the GLP in 2019.
Expansion of our partner print rental programme is progressing
well, ahead of Fall 2018.
We now have 130 titles available in our partner print rental
programme and we plan to double that again next year adding a
further 150 titles. We have recently announced an expansion of our
partnership with Barnes & Noble Education in addition to our
existing partnerships with Chegg and IndiCo. We continue to
negotiate with other key channel partners.
Revenues from eBook rental grew 24% year on year in the first half
as lower prices position eBook rental as a competitive alternative
to print rental.
We continue to make good progress with our Inclusive Access (Direct
Digital Access) solutions, signing over 100 new institutions in the
first half, taking the total to over 600 institutions. Inclusive
Access ensures that students have affordable access to the
courseware that they need on day one of the course, whilst further
shifting our business model in this segment away from ownership and
towards subscription. Revenues from Inclusive Access at non-profit
and public institutions grew strongly and accounted for around 8%
of revenues in the seasonally small first half, as we signed new
deals and added new courses at existing partner
institutions
|
Assessment
|
In Student Assessment, revenues rose slightly as the business
stabilised as expected benefiting from new contracts with College
Board and New Meridian. We extended contracts in Kentucky and
Arizona and were awarded new contracts in Utah and
Iowa.
We delivered 21.7 million standardised online tests to K12
students, an increase of 1% from the same period in 2017.
Paper-based standardised test volumes fell 18% to 9.1 million.
Digital tests on Pearson's TestNav platform accounted for 70% of
our testing volumes (H1 2017: 66%).
In Professional Certification, revenues grew modestly
benefiting from the launch of a contract to administer medical
college admissions tests. Global test volumes declined 1% to 8.1m
due to lower volumes in IT and teaching
certification.
During the first half Pearson's Professional Certification
business, VUE renewed 42 existing contracts including Microsoft and
Adobe and signed 45 new agreements. Pearson was awarded the
Texas Educator Certification Examination program contract,
including the TExES, TExMaT, TASC, and TASC-ASL
tests. Registration for the examinations begins 1st
September 2018. Five contracts were not renewed. Pearson VUE
partners with more than 500 credential owners across the
globe.
To support the delivery of our contract to administer medical
college admissions tests, Pearson is investing in 60 new locations
in the US and Canada. These centres will also provide additional
capacity to serve both existing clients and a strong pipeline of
new contracts.
Clinical Assessment sales were slightly down due to a limited
pipeline of new products. Q-Interactive, Pearson's digital solution
for Clinical Assessment administration, saw continued strong growth
in licence sales with sub-test administrations up 97% over the same
period last year. Clinical product launches planned for later in
2018 include Peabody Picture Vocabulary Test (PPVT), the Expressive
Vocabulary Test (EVT) and aimswebPlus.
|
Services
|
Revenues for our K12 online school business rose strongly due to
enrolment growth at Connections Academy schools, with growth in
existing partnerships plus the opening of new partner schools
offsetting the impact of an anticipated contract exit in
Louisiana.
Three new full-time online, state-wide partner schools will open in
the 2018-19 school year in Florida, Michigan, and Ohio, bringing
the number of partner schools to 37 in 28 states.
Full Time Equivalent (FTE) students served grew 3% to 75,000
despite the closure of Louisiana Connections Academy. Contract
exits at Commonwealth Charter Academy in Pennsylvania and Florida
Virtual School are expected to lead to a decline in FTE enrolment
in 2018. We continue to expect revenue growth for the full
year.
The 2018 Connections Academy Parent
Satisfaction
Survey
continues to show solid
endorsement for the schools with 93% of families with enrolled
students stating they would recommend our virtual schools to others
and 95% agreeing that the curriculum is high
quality.
Additionally, new audited efficacy
research
published in April shows
positive academic outcomes for students enrolled in partner schools
and provides insights into the types of students choosing a
full-time K12 online education.
In Pearson Online Services, revenues increased as good growth in
OPM enrolment and revenue more than offset the decline in Learning
Studio revenues, a learning management system, which will be fully
retired in 2019. Learning Studio revenues declined by over 80% to
less than £1m in the first half of 2018.
In our OPM business, course enrolments grew 11% to over 194,000,
boosted by strong growth in Arizona State University Online (ASU),
new partners and program extensions.
Our OPM business pipeline continues to benefit from strong growth
in the value of net new signings and renewals.
During the first half we signed seven new multi-year programs
across five partners including the University of North Dakota
Master of Accounting (MAcc) and Master of Science in Analytics
programs; Pepperdine Master of Leadership; University of Maryland
Master of Science in Business Analytics (MSBA); and Hofstra
University LLM and MA in American Legal Studies and Ohio University
MSBA.
Our partnership with ASU continues to grow strongly and we will
deliver approximately 180 bachelor's and master's degree programs
with ASU as of this Fall. Our relationship with Maryville
University continues to grow with more than 30 new degree program
launches planned over the next three years.
We renewed seven programs including University of Maryland MBA,
Ohio University MHA and MSN, University of Alabama MSMIS and BSIS
and George Washington University HCMBA.
During the half year we also agreed the termination of six programs
that were not mutually viable as we continue to optimise our
partner portfolio and a further two programs were not
renewed.
Our comprehensive employer-education business, Accelerated
Pathways, continues to add more corporate partners offering
foundational education, GED and online degree programs to employees
across the US.
|
Core (20% of revenues)
|
In underlying terms, revenues rose 2%, primarily due to strong
growth in Pearson Test of English, Clinical Assessment and OPM
services in the UK and Australia partially offset by a weaker
performance in Student Assessment and Qualifications and in
Courseware.
Adjusted operating profit was up 11% in underlying terms primarily
due to trading and the benefits of restructuring.
|
Courseware
|
Courseware revenues declined primarily due to declines in School
and Higher Education Courseware in the UK and Australia and Higher
Education in Germany, partly offset by growth in School Courseware
in Italy and English courseware in smaller markets.
|
Assessment
|
In Student Assessment and Qualifications, revenues fell slightly as
modest growth in BTEC Firsts and GCE A-Level was more than offset
by: modest declines in BTEC Nationals, expected declines in AS
levels and UK iGCSEs as a result of policy changes; and weakness in
the UK Apprenticeship market due to market disruption
following the introduction of the Levy in 2017, which is expected
to continue for the rest of 2018.
We successfully delivered the National Curriculum Test for 2018,
marking 3.6 million scripts, up slightly from 2017. We will
continue to administer the NCT test until September
2019.
Clinical Assessment revenues increased due to the introduction of
the fifth edition of the Wechsler Intelligence Scale for Children
(WISC-V) in the Netherlands and Germany.
In our Professional Certification business VUE, revenues were up
slightly due to growth from clients located in the UK and France.
In the UK, we launched additional computer-based exams for an
existing client in the financial services sector and in France we
launched MOI (the French Driving Test) in late 2017.
The PTEA saw continued strong growth in test volumes during the
first half, up 59% from 2017. This was driven primarily by its use
to support visa applications to the Australian Department of Home
Affairs and it also experienced good growth in New
Zealand.
|
Services
|
In Higher Education Services, our OPM revenues grew strongly
with 27% growth in course enrolments across six university partners
and 20 programs in Australia and the UK. In addition, we have
partnered with Northumbria University in the UK and plan to
relaunch the University's existing online MSc Surveying program in
early 2019 with further programs planned over the next five years
as the University looks to expand its online presence in flexible,
career-focused education.
|
Growth (14% of revenues)
|
In Growth, revenues fell 4% in underlying terms primarily due to
the expected decline in sales in South Africa School Courseware and
the phasing of revenue in the Middle East, partially offset by
growth in English Courseware in China and Mexico, sistemas in
Brazil and MyPedia in India. Excluding South Africa School
Courseware, our Growth segment revenue was up 1% in underlying
terms at the half year. Headline revenues declined 31% due to
the above factors, FX and the disposals of Wall Street English and
GEDU.
Adjusted operating profit grew 38% in underlying terms primarily
reflecting the benefits of restructuring.
|
Courseware
|
Courseware revenues declined due to the expected decline in sales
in South Africa School Courseware against prior year H1,
which benefited from a large order in Q1 2017 and the phasing of
orders in School and Higher Education Courseware in the Middle East
partially offset by strong growth in English Language Courseware in
China and Mexico.
|
Assessment
|
PTEA grew strongly in China and other smaller
markets.
|
Services
|
In Brazil, revenues were flat with growth in sistemas due
to price increases and growth in our English language school
franchise, Wizard due to new product launches, offset by business
exits in vocational education.
In South Africa, total enrolments were flat at CTI, our
university in South Africa, with new student enrolment up 18%.
Revenues declined as we moved to a bring-your-own-device model
which results in lower upfront revenue.
In India, School and Higher Education
Services revenues declined with growth in MyPedia, a service
'sistema' solution for schools offset by small business
exits.
|
Penguin Random House
|
Pearson owns 25% of Penguin Random House, the first truly global
consumer book publishing company.
Penguin Random House performed in line with our expectations with
revenues down on an underlying basis year on year due to softer
fiction print sales, and lower eBook sales, partially offset by
rising audio sales. The business benefited from major bestsellers
by Bill Clinton and James Patterson, Jordan Peterson, Lee Child,
R.J. Palacio, and Dr. Seuss.
Our stake in Penguin Random House contributed £22m to our
adjusted operating profit down 4% in underlying terms. Headline
adjusted operating profit fell 52% primarily due to the disposal of
a 22% stake
in Penguin Random House to Bertelsmann in October
2017.
|
FINANCIAL REVIEW
Operating
result
Due to seasonal bias in some of the Group's businesses, Pearson
makes a higher proportion of its sales and the majority of its
profits in the second half of the year. Operating cash flow at the
half year is a cash outflow reflecting the seasonal increase in
working capital.
Sales for the six months to 30 June 2018 decreased on a headline
basis by £182m or 9% from £2,047m in 2017 to £1,865m
in 2018 and adjusted operating profit was £107m in the first
half in both 2017 and 2018 (for a reconciliation of this measure
see note 2 to the condensed financial statements).
The
headline basis simply compares the reported results for the six
months to 30 June 2018 with those for the equivalent period in the
prior year. We also present sales and profits on an underlying
basis which exclude the effects of exchange, the effect of
portfolio changes arising from acquisitions and disposals and the
impact of adopting new accounting standards that are not
retrospectively applied. Our portfolio change is calculated by
taking account of the contribution from acquisitions and by
excluding sales and profits made by businesses disposed in either
2017 or 2018. Portfolio changes mainly relate to the sale of our
test preparation business in China and reduction in our equity
interest in PRH in 2017 and the sale of our Wall Street English
language teaching business in the first half of 2018. Acquisitions
were not significant in either 2017 or 2018.
In 2018, our underlying basis excludes the impact of IFRS 15
'Revenue from Contracts with Customers'. This new standard was
adopted on 1 January 2018 but the comparative figures for 2017 have
not been restated. On 1 January 2018 we also adopted IFRS 9
'Financial Instruments' but this did not have a material impact on
profit in the first half of 2018. The full impact of adopting these
standards is shown in note 1 to the condensed financial
statements.
On an underlying basis, sales increased by 2% in the first six
months of 2018 compared to the equivalent period in 2017 and
adjusted operating profit increased by 46%. Currency movements
decreased sales by £128m and adjusted operating profit by
£17m. Portfolio changes decreased sales by £92m and
adjusted operating profit by £25m. The impact of adopting IFRS
15 on the results for the first six months of 2018 was to increase
sales by £6m and adjusted operating profit by
£6m.
Adjusted
operating profit includes the results from discontinued operations
when relevant but excludes intangible charges for amortisation and
impairment, acquisition related costs, gains and losses arising
from acquisitions and disposals and the cost of major
restructuring. In 2017 we excluded the impact of US tax reform on
our associate operating profit as outlined in the section on
taxation. A summary of these adjustments is included below and in
more detail in note 2 to the condensed financial
statements.
|
|
|
|
all figures in £ millions
|
2018
|
2017
|
2017
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
Operating
profit
|
233
|
16
|
451
|
Add
back: Cost of major restructuring
|
24
|
-
|
79
|
Add
back: Intangible charges
|
57
|
91
|
166
|
Add
back: Other net gains and losses
|
(207)
|
-
|
(128)
|
Add
back: Impact of US tax reform
|
-
|
-
|
8
|
Adjusted operating profit
|
107
|
107
|
576
|
In May 2017, we announced a restructuring programme, to run between
2017 and 2019, to drive further significant cost savings. This
programme began in the second half of 2017 and costs incurred to
date were £79m in the second half of 2017 and £24m in the
first half of 2018 and relate to delivery of cost efficiencies in
our US higher education courseware business and enabling functions
together with further rationalisation of the property and supplier
portfolio. The restructuring costs in 2018 relate predominantly to
staff redundancies.
Intangible amortisation charges to the end of June 2018 were
£57m compared to a charge of £91m in the equivalent
period in 2017. Other net gains (before tax) of £207m in 2018
relate to the sale of the Wall Street English language teaching
business (WSE), realising a gain of £184m, the disposal of our
equity interest in UTEL, the online University partnership in
Mexico, realising a gain of £19m, and various other smaller
disposal items for a net gain of £4m. There were no other
gains or losses in the first half of 2017. Gains of £128m in
the second half of 2017 largely relate to the sale of our test
preparation business in China which resulted in a profit on sale of
£44m and the part sale of our share in PRH which resulted in a
profit of £96m.
The statutory operating profit from continuing operations of
£233m in the first half of 2018 compares to a profit of
£16m in the first half of 2017. The increase in 2018 is
largely due to the profit on disposal of WSE and UTEL and reduced
intangible charges, partly offset by restructuring costs in the
first half of 2018.
Net
finance costs
Net interest payable to 30 June 2018 was £26m, compared to
£47m in the first half of 2017. The decrease is primarily due
to lower levels of net debt together with reduced costs associated
with bond redemptions in the first half of 2018 compared to those
in the first half of 2017.
Finance income relating to retirement benefits has been excluded
from our adjusted earnings as we believe the income statement
presentation does not reflect the economic substance of the
underlying assets and liabilities. Also included in the statutory
definition of net finance costs (but not in our adjusted measure)
are interest costs relating to acquisition consideration, foreign
exchange and other gains and losses on derivatives. Interest
relating to acquisition consideration is excluded from adjusted
earnings as it is considered to be part of the acquisition cost
rather than being reflective of the underlying financing costs of
the Group. Foreign exchange and other gains and losses are excluded
from adjusted earnings as they represent short-term fluctuations in
market value and are subject to significant volatility. Other gains
and losses may not be realised in due course as it is normally the
intention to hold the related instruments to maturity (for more
information see note 3 to the condensed financial
statements).
In the period to 30 June 2018, the total of these items excluded
from adjusted earnings was a charge of £5m compared to a gain
of £21m in the first half of 2017. Finance income relating to
retirement benefits increased from £2m in the first half of
2017 to £5m in 2018 reflecting the comparative funding
position of the plans at the beginning of each year. This increase
was more than offset by foreign exchange losses on unhedged cash
and cash equivalents and other financial instruments that generated
profits in 2017. For a reconciliation of the adjusted measure see
note 3 to the condensed financial statements.
Taxation
Taxes on income in the period are accrued using the tax rates that
would be applicable to expected annual earnings. The reported tax
charge on statutory earnings for the six months to 30 June 2018 was
£13m compared to £6m in the period to 30 June 2017. The
charge reflects the overall mix of profits projected for the full
year and the tax rates expected to apply to those statutory
profits.
The effective tax rate on adjusted earnings for the period to June
2018 was 20% compared to an effective rate of 21% in the first
half of 2017. This rate is lower than the average statutory rate
applicable to the countries we operate in as it includes the
benefit of tax deductions attributable to amortisation of goodwill
and other intangibles. This benefit more accurately aligns the
adjusted tax charge with the expected rate of cash tax payment. For
a reconciliation of the adjusted measure see notes 4 and 5 to the
condensed financial statements.
The statutory tax charge for the first six months of 2018 was
£13m compared to £6m for the comparative period in 2017.
The statutory tax rate of 6% in 2018 is lower than the adjusted
rate due to a lower effective tax rate on disposal gains. As a
result of US tax reform, the reported tax charge on a statutory
basis for the full year 2017 included a benefit from revaluation of
deferred tax balances to the reduced federal rate of £5m and a
repatriation tax charge of £6m. In addition to the impact on
the reported tax charge, the Group's share of profit from
associates was adversely impacted by £8m. These charges have
been excluded from our adjusted measures in 2017.
Tax paid decreased from £33m in the six months to 30 June 2017
to £8m in the first six months of 2018 due to refunds in
respect of prior years received in the first half of
2018.
Other
comprehensive income
Included in other comprehensive income are the net exchange
differences on translation of foreign operations. The loss on
translation of £15m at 30 June 2018 compares to a loss at 30
June 2017 of £116m. The loss in 2018 arises from weakness of
many of the currencies to which the Group is exposed even after
taking account of a strengthening in the US dollar. A significant
proportion of the Group's operations are based in the US and the US
dollar strengthened slightly in the first six months of 2018 from
an opening rate of £1:$1.35 to a closing rate at the end of
June 2018 of £1:$1.32. At the end of June 2017 the US dollar
had weakened from an opening rate of £1:$1.23 to a closing
rate of £1:$1.30 and this movement was the main reason for the
loss in the first half of 2017.
Also included in other comprehensive income at 30 June 2018 is an
actuarial gain of £122m in relation to post retirement plans.
The gain arises from the favourable impact of changes in the
assumptions used to value the net assets in the plans and in
particular movements in the discount rate. The gain in 2018
compares to an actuarial loss at 30 June 2017 of
£16m.
Cash
flows
Our
operating cash flow measure is used to align cash flows with our
adjusted profit measures (see note 17 to the condensed financial
statements). Operating cash outflow increased on a headline basis
by £130m from £72m in the first half of 2017 to
£202m in the first half of 2018. The increase includes the
impact of lower dividends from PRH, higher incentive payments in
2018 relating to 2017 performance and revenue related movements in
working capital.
The
equivalent statutory measure, net cash used in operations, was
£131m in 2018 compared to £219m in 2017. Compared to
operating cash flow, this measure includes restructuring costs and
special pension contributions but does not include regular
dividends from associates or capital expenditure on property,
plant, equipment and software. Restructuring costs paid increased
from £24m in the first half of 2017 to £27m in the first
half of 2018. Special pension contributions in the first half of
2017 of £174m related to the FT Group disposal (£12m) and
to agreements relating to the PRH merger in 2013 (£162m).
There were no special pension contributions made in the first half
of 2018.
The
Group's net debt increased from £432m at the end of 2017 to
£775m at the end of June 2018 principally due to the seasonal
operating cash outflow, the share buy-back programme, and dividend
payments which more than offset the proceeds from disposals and
recapitalisation dividends and loan repayments from PRH in the
period.
Post-retirement
benefits
Pearson
operates a variety of pension and post-retirement plans. Our UK
Group pension plan has by far the largest defined benefit section.
We have some smaller defined benefit sections in the US and Canada
but, outside the UK, most of our companies operate defined
contribution plans.
The
charge to profit in respect of worldwide pensions and retirement
benefits amounted to £25m in the period to 30 June 2018 (30
June 2017: £42m) of which a charge of £30m (30 June 2017:
£44m) was reported in adjusted operating profit and income of
£5m (30 June 2017: £2m) was reported against other net
finance costs. The reduction in the charge in 2018 is largely
explained by a past service credit of £11m relating to changes
in the US post-retirement medical plan.
The
overall surplus on UK Group pension plans of £545m at the end
of 2017 has increased to a surplus of £670m at the end of June
2018. The increase has arisen principally due to favourable
movements in assumptions used to value the
liabilities.
In
total, our worldwide net position in respect of pensions and other
post-retirement benefits increased from a net asset of £441m
at the end of 2017 to a net asset of £570m at the end of June
2018.
Dividends
The
dividend accounted for in the six months to 30 June 2018 is the
final dividend in respect of 2017 of 12.0p. An interim dividend for
2018 of 5.5p was approved by the Board in July 2018 and will be
accounted for in the second half of 2018.
Share
buyback
The share buyback programme announced in October 2017 was completed
on 16 February 2018. In 2017, our brokers purchased 21m shares and
in 2018 purchased a further 22m shares. Cash payments for these
purchases and related costs were £149m in 2017 and £153m
in the first half of 2018. The shares bought back were cancelled
and the nominal value of these shares were transferred to a capital
redemption reserve. The nominal value of shares cancelled under the
programme was £11m.
Businesses
held for sale
Following
the decision in 2017 to sell both our Wall Street English language
teaching business and the K12 school courseware business in the US,
the assets and liabilities of those businesses were classified as
held for sale on the balance sheet at 31 December 2017. During the
first half of 2018 the Wall Street business has been sold and the
K12 business remains on the balance sheet as a held for sale asset
prior to an expected disposal later in the year. At 30 June 2017
the English test preparation business, Global Education (GEDU) and
a portion of our PRH investment were classified as held for sale
prior to their disposals in the second half of 2017.
Principal
risks and uncertainties
The principal risks and uncertainties have not changed from those
detailed in the 2017 Annual Report and are summarised
below.
Business transformation and change
The pace and scope of our business transformation initiatives
increase our execution risk that benefits may not be fully
realised, costs may increase, or that our business-as-usual
activities may be impacted and do not perform in line with
expectations.
Products and services
Failure to accelerate our shift to digital by developing and
delivering (to time and quality) market leading global products and
services that will have the biggest impact on learners and drive
growth; ensuring Pearson offers products to market at the right
price and with a deal structure that remains competitive as well as
supports our strategy.
Talent
Failure to attract, retain and develop staff, including adapting to
new skill sets required to run the business.
Political and regulatory risk
Changes in policy and/or regulations have the potential to impact
business models and/or decisions across all markets.
Testing failure
Failure to deliver tests and assessments and other related
contractual requirements because of operational or technology
issues, resulting in negative publicity impacting our brand and
reputation.
Health and safety
Failure to adequately protect the health, safety and wellbeing of
our employees, learners and other stakeholders from harm could
adversely impact our reputation.
Safeguarding
Failure to adequately protect children and learners, particularly
in our direct delivery businesses.
Customer digital experience
Challenges with reliability and availability of customer facing
systems could result in incidents of poor customer digital
experience and impact our customer service
responsiveness.
Corporate security and business resilience
Corporate security: Failure to ensure security for our staff,
learners, assets and reputation, due to increasing numbers of and
variety of local and global threats. Business resilience: Failure
to plan for or prevent incidents at any of our locations. Incident
management and technology disaster recovery plans may not be
comprehensive across the whole Group.
Tax
Legislative change caused by the OECD Base Erosion and Profit
Shifting initiative, the UK exit from the EU, other tax reform or
domestic government initiatives, potentially in response to the
ongoing EU anti-tax abuse activities, results in a higher effective
tax rate, double taxation and/or negative reputational
impact.
Treasury
Failure to manage treasury financial risks e.g. debt repayments,
key corporate ratios, counterparty risk, rising interest rates and
transactional FX exposure.
Data privacy and information security
Risk of a data privacy incident or other failure to comply with
data privacy regulations and standards, and/or a weakness in
information security, including a failure to prevent or detect a
malicious attack on oursystems, could result in a major data
privacy or confidentiality breach causing reputational damage,
damage to the student experience, lack of compliance and financial
loss.
Intellectual property and rights, permissions and
royalties
Failure to adequately manage, procure, register or protect
intellectual property (IP) rights (including patents and general
copyright) in our brands, content and technology or to prevent
unauthorised printing and distribution of books and digital piracy
may prevent us from enforcing our rights which will reduce our
sales and/or erode our revenues. Failure to obtain permissions, or
to comply with the terms of permissions, for copyrighted or
otherwise protected materials such as photos resulting in potential
litigation; risk of authors alleging improper calculations or
payments of royalties.
Compliance
Failure to effectively manage risks associated with compliance
(global and local legislation), including failure to vet
third-parties, resulting in reputational harm, anti-bribery and
corruption liability, or sanctions violations.
Competition law
Failure to comply with anti-trust and competition legislation could
result in costly legal proceedings and/or adversely
impact our reputation.
CONDENSED
CONSOLIDATED INCOME STATEMENT
for
the period ended 30 June 2018
|
|
|
|
|
all figures in £ millions
|
note
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
Sales
|
2
|
1,865
|
2,047
|
4,513
|
Cost
of goods sold
|
|
(912)
|
(993)
|
(2,066)
|
Gross profit
|
|
953
|
1,054
|
2,447
|
|
|
|
|
|
Operating
expenses
|
|
(942)
|
(1,081)
|
(2,202)
|
Other
net gains and losses
|
2
|
207
|
-
|
128
|
Share
of results of joint ventures and associates
|
|
15
|
43
|
78
|
Operating profit
|
2
|
233
|
16
|
451
|
|
|
|
|
|
Finance
costs
|
3
|
(63)
|
(66)
|
(110)
|
Finance
income
|
3
|
32
|
40
|
80
|
Profit / (loss) before tax
|
4
|
202
|
(10)
|
421
|
Income
tax
|
5
|
(13)
|
(6)
|
(13)
|
Profit / (loss) for the period
|
|
189
|
(16)
|
408
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Equity
holders of the company
|
|
188
|
(17)
|
406
|
Non-controlling
interest
|
|
1
|
1
|
2
|
|
|
|
|
|
Earnings / (loss) per
share
(in pence per
share)
|
|
|
|
|
Basic
|
6
|
24.1p
|
(2.1)p
|
49.9p
|
Diluted
|
6
|
24.1p
|
(2.1)p
|
49.9p
|
The
accompanying notes to the condensed consolidated financial
statements form an integral part of the financial
information.
CONDENSED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for
the period ended 30 June 2018
|
|
|
|
all figures in £ millions
|
2018
|
2017
|
2017
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
Profit
/ (loss) for the period
|
189
|
(16)
|
408
|
|
|
|
|
Items that may be reclassified to the income statement
|
|
|
|
Net
exchange differences on translation of foreign
operations
|
(15)
|
(116)
|
(262)
|
Currency
translation adjustment disposed
|
(4)
|
-
|
(51)
|
Attributable
tax
|
(2)
|
4
|
9
|
|
|
|
|
Items that are not reclassified to the income
statement
|
|
|
|
Fair
value gain on other financial assets
|
2
|
21
|
13
|
Attributable
tax
|
(1)
|
(8)
|
(4)
|
|
|
|
|
Remeasurement
of retirement benefit obligations
|
122
|
(16)
|
182
|
Attributable
tax
|
(25)
|
(1)
|
(42)
|
Other comprehensive income / (expense) for the period
|
77
|
(116)
|
(155)
|
|
|
|
|
Total comprehensive income / (expense) for the period
|
266
|
(132)
|
253
|
|
|
|
|
Attributable to:
|
|
|
|
Equity
holders of the company
|
265
|
(133)
|
251
|
Non-controlling
interest
|
1
|
1
|
2
|
CONDENSED
CONSOLIDATED BALANCE SHEET
as
at 30 June 2018
|
|
|
|
|
all figures in £ millions
|
note
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Property, plant and equipment
|
|
268
|
306
|
281
|
Intangible assets
|
11
|
3,067
|
3,266
|
2,964
|
Investments in joint ventures and associates
|
|
385
|
651
|
398
|
Deferred income tax assets
|
|
51
|
432
|
95
|
Financial assets - derivative financial instruments
|
|
72
|
125
|
140
|
Retirement benefit assets
|
|
670
|
321
|
545
|
Other financial assets
|
|
86
|
86
|
77
|
Trade and other receivables
|
|
103
|
120
|
103
|
Non-current assets
|
|
4,702
|
5,307
|
4,603
|
|
|
|
|
|
Intangible assets - pre-publication
|
|
771
|
985
|
741
|
Inventories
|
|
167
|
238
|
148
|
Trade and other receivables
|
|
1,059
|
1,234
|
1,110
|
Financial assets - derivative financial instruments
|
|
-
|
6
|
-
|
Financial assets - marketable securities
|
|
-
|
11
|
8
|
Cash and cash equivalents (excluding overdrafts)
|
|
330
|
458
|
518
|
Current assets
|
|
2,327
|
2,932
|
2,525
|
|
|
|
|
|
Assets classified as held for sale
|
10
|
607
|
608
|
760
|
Total assets
|
|
7,636
|
8,847
|
7,888
|
|
|
|
|
|
Financial liabilities - borrowings
|
|
(1,069)
|
(1,816)
|
(1,066)
|
Financial liabilities - derivative financial
instruments
|
|
(58)
|
(175)
|
(140)
|
Deferred income tax liabilities
|
|
(137)
|
(470)
|
(164)
|
Retirement benefit obligations
|
|
(100)
|
(140)
|
(104)
|
Provisions for other liabilities and charges
|
|
(53)
|
(67)
|
(55)
|
Other liabilities
|
12
|
(117)
|
(373)
|
(133)
|
Non-current liabilities
|
|
(1,534)
|
(3,041)
|
(1,662)
|
|
|
|
|
|
Trade and other liabilities
|
12
|
(1,173)
|
(1,331)
|
(1,342)
|
Financial liabilities - borrowings
|
|
(33)
|
(266)
|
(19)
|
Financial liabilities - derivative financial
instruments
|
|
(17)
|
(1)
|
-
|
Current income tax liabilities
|
|
(243)
|
(182)
|
(231)
|
Provisions for other liabilities and charges
|
|
(21)
|
(27)
|
(25)
|
Current liabilities
|
|
(1,487)
|
(1,807)
|
(1,617)
|
|
|
|
|
|
Liabilities classified as held for sale
|
10
|
(518)
|
(37)
|
(588)
|
Total liabilities
|
|
(3,539)
|
(4,885)
|
(3,867)
|
|
|
|
|
|
Net assets
|
|
4,097
|
3,962
|
4,021
|
|
|
|
|
|
Share capital
|
|
195
|
206
|
200
|
Share premium
|
|
2,604
|
2,600
|
2,602
|
Treasury shares
|
|
(59)
|
(76)
|
(61)
|
Reserves
|
|
1,348
|
1,227
|
1,272
|
Total equity attributable to equity holders of the
company
|
|
4,088
|
3,957
|
4,013
|
Non-controlling interest
|
|
9
|
5
|
8
|
Total equity
|
|
4,097
|
3,962
|
4,021
|
The
condensed consolidated financial statements were approved by the
Board on 26 July 2018.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for
the period ended 30 June 2018
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
2018 half year
|
At 1 January 2018
|
200
|
2,602
|
(61)
|
5
|
13
|
592
|
662
|
4,013
|
8
|
4,021
|
Adjustment
on initial application of IFRS 15 net of tax - (see note
1b)
|
-
|
-
|
-
|
-
|
-
|
-
|
(108)
|
(108)
|
-
|
(108)
|
Adjustment
on initial application of IFRS 9 net of tax - (see note
1c)
|
-
|
-
|
-
|
-
|
-
|
-
|
(10)
|
(10)
|
-
|
(10)
|
At 1 January 2018 (adjusted)
|
200
|
2,602
|
(61)
|
5
|
13
|
592
|
544
|
3,895
|
8
|
3,903
|
Profit
for the period
|
-
|
-
|
-
|
-
|
-
|
-
|
188
|
188
|
1
|
189
|
Other
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
2
|
(19)
|
94
|
77
|
-
|
77
|
Total
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
2
|
(19)
|
282
|
265
|
1
|
266
|
Equity-settled
transactions
|
-
|
-
|
-
|
-
|
-
|
-
|
19
|
19
|
-
|
19
|
Issue
of ordinary shares under share option schemes
|
1
|
2
|
-
|
-
|
-
|
-
|
-
|
3
|
-
|
3
|
Buyback
of equity
|
(6)
|
-
|
-
|
6
|
-
|
-
|
(1)
|
(1)
|
-
|
(1)
|
Purchase
of treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Release
of treasury shares
|
-
|
-
|
2
|
-
|
-
|
-
|
(2)
|
-
|
-
|
-
|
Changes
in non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(93)
|
(93)
|
-
|
(93)
|
At 30 June 2018
|
195
|
2,604
|
(59)
|
11
|
15
|
573
|
749
|
4,088
|
9
|
4,097
|
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
continued
for
the period ended 30 June 2018
|
|
|
|
|
Equity
attributable to equity holders of the company
|
|
|
all figures in £ millions
|
Share
capital
|
Share
premium
|
Treasury
shares
|
Capital
redemption reserve
|
Fair
value reserve
|
Translation
reserve
|
Retained
earnings
|
Total
|
Non-controlling
interest
|
Total
equity
|
|
|
|
|
|
|
|
|
|
|
|
2017
half year
|
At
1 January 2017
|
205
|
2,597
|
(79)
|
-
|
-
|
905
|
716
|
4,344
|
4
|
4,348
|
Loss
for the period
|
-
|
-
|
-
|
-
|
-
|
-
|
(17)
|
(17)
|
1
|
(16)
|
Other
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
21
|
(116)
|
(21)
|
(116)
|
-
|
(116)
|
Total
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
21
|
(116)
|
(38)
|
(133)
|
1
|
(132)
|
Equity-settled
transactions
|
-
|
-
|
-
|
-
|
-
|
-
|
19
|
19
|
-
|
19
|
Issue
of ordinary shares under share option schemes
|
1
|
3
|
-
|
-
|
-
|
-
|
-
|
4
|
-
|
4
|
Buyback
of equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Purchase
of treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Release
of treasury shares
|
-
|
-
|
3
|
-
|
-
|
-
|
(3)
|
-
|
-
|
-
|
Changes
in non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(277)
|
(277)
|
-
|
(277)
|
At
30 June 2017
|
206
|
2,600
|
(76)
|
-
|
21
|
789
|
417
|
3,957
|
5
|
3,962
|
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for
the period ended 30 June 2018
|
|
|
|
|
Equity
attributable to equity holders of the company
|
|
|
all figures in £ millions
|
Share
capital
|
Share
premium
|
Treasury
shares
|
Capital
redemption reserve
|
Fair
value reserve
|
Translation
reserve
|
Retained
earnings
|
Total
|
Non-controlling
interest
|
Total
equity
|
|
|
|
|
|
|
|
|
|
|
|
2017
full year
|
At
1 January 2017
|
205
|
2,597
|
(79)
|
-
|
-
|
905
|
716
|
4,344
|
4
|
4,348
|
Profit
for the period
|
-
|
-
|
-
|
-
|
-
|
-
|
406
|
406
|
2
|
408
|
Other
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
13
|
(313)
|
145
|
(155)
|
-
|
(155)
|
Total
comprehensive income / (expense)
|
-
|
-
|
-
|
-
|
13
|
(313)
|
551
|
251
|
2
|
253
|
Equity-settled
transactions
|
-
|
-
|
-
|
-
|
-
|
-
|
33
|
33
|
-
|
33
|
Issue
of ordinary shares under share option schemes
|
-
|
5
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
5
|
Buyback
of equity
|
(5)
|
-
|
-
|
5
|
-
|
-
|
(300)
|
(300)
|
-
|
(300)
|
Purchase
of treasury shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Release
of treasury shares
|
-
|
-
|
18
|
-
|
-
|
-
|
(18)
|
-
|
-
|
-
|
Changes
in non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
(2)
|
2
|
-
|
Dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
(318)
|
(318)
|
-
|
(318)
|
At
31 December 2017
|
200
|
2,602
|
(61)
|
5
|
13
|
592
|
662
|
4,013
|
8
|
4,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED CASH FLOW STATEMENT
for
the period ended 30 June 2018
|
|
|
|
|
all figures in £ millions
|
note
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
Net
cash (used in) / generated from operations
|
17
|
(131)
|
(219)
|
462
|
Interest
paid
|
|
(34)
|
(48)
|
(89)
|
Tax
paid
|
|
(8)
|
(33)
|
(75)
|
Net cash (used in) / generated from operating
activities
|
|
(173)
|
(300)
|
298
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Acquisition
of subsidiaries, net of cash acquired
|
13
|
(5)
|
(12)
|
(11)
|
Purchase
of investments
|
|
(3)
|
(3)
|
(3)
|
Purchase
of property, plant and equipment
|
|
(32)
|
(32)
|
(82)
|
Purchase
of intangible assets
|
|
(80)
|
(79)
|
(150)
|
Disposal
of subsidiaries, net of cash disposed
|
14
|
84
|
(6)
|
19
|
Proceeds
from sale of joint ventures and associates
|
14
|
18
|
-
|
411
|
Proceeds
from sale of property, plant and equipment
|
|
-
|
3
|
-
|
Proceeds
from sale of liquid resources
|
|
10
|
11
|
20
|
Loans
repaid by / (advanced to) related parties
|
|
46
|
(5)
|
(13)
|
Investment
in liquid resources
|
|
(2)
|
(13)
|
(18)
|
Interest
received
|
|
16
|
9
|
20
|
Dividends
received from joint ventures and associates
|
|
66
|
60
|
458
|
Net cash generated from / (used in) investing
activities
|
|
118
|
(67)
|
651
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds
from issue of ordinary shares
|
|
3
|
4
|
5
|
Buyback
of equity
|
|
(153)
|
-
|
(149)
|
Proceeds
from borrowings
|
|
389
|
150
|
2
|
Repayment
of borrowings
|
|
(417)
|
(459)
|
(1,294)
|
Finance
lease principal payments
|
|
(1)
|
(3)
|
(5)
|
Dividends
paid to company's shareholders
|
|
(93)
|
(277)
|
(318)
|
Net cash used in financing activities
|
|
(272)
|
(585)
|
(1,759)
|
|
|
|
|
|
Effects
of exchange rate changes on cash and cash equivalents
|
(3)
|
(13)
|
16
|
Net decrease in cash and cash equivalents
|
|
(330)
|
(965)
|
(794)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
630
|
1,424
|
1,424
|
Cash and cash equivalents at end of period
|
|
300
|
459
|
630
|
For the purposes of the cash flow statement, cash and cash
equivalents are presented net of overdrafts repayable on demand.
These overdrafts are excluded from cash and cash equivalents
disclosed on the balance sheet. In addition, at 30 June 2018,
£nil (2017 half year: £25m, 2017 full year:
£127m) of cash included above has been classified as held
for sale on the balance sheet.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
1a. 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 IAS 34 'Interim
Financial Reporting' as adopted by the European Union (EU). The
condensed consolidated financial statements should be read in
conjunction with the annual financial statements for the year ended
31 December 2017 which have been prepared in accordance with
International Financial Reporting Standards (IFRS) and IFRS
Interpretations Committee interpretations as adopted by the EU. In
respect of accounting standards applicable to the Group in the
current period there is no difference between EU-adopted IFRS and
International Accounting Standards Board (IASB)-adopted
IFRS.
The
condensed consolidated financial statements have also been prepared
in accordance with the accounting policies set out in the 2017
Annual Report, except as outlined in notes 1b and 1c below, and
have been prepared under the historical cost convention as modified
by the revaluation of certain financial assets and liabilities
(including derivative financial instruments) at fair
value.
The
2017 Annual Report refers to new standards that the Group will
adopt in future periods but that are not yet effective in 2018. The
Group continues in the process of assessing the impact of these new
standards and will provide more information on their impact in due
course. Adoption of the new lease standard (IFRS 16) is likely to
have a material impact on the Group and further details can be
found in the 2017 Annual Report.
The
Group's forecasts and projections, taking account of reasonably
possible changes in trading performance, seasonal working capital
requirements and potential acquisition activity, show that the
Group should be able to operate within the level of its current
committed borrowing facilities. The directors have confirmed
that they have a reasonable expectation that the Group has adequate
resources to continue in operational existence. The condensed
consolidated financial statements have therefore been prepared on a
going concern basis.
The
preparation of condensed consolidated financial statements requires
the use of certain critical accounting assumptions. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas requiring
a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the condensed
consolidated financial statements have been set out in the 2017
Annual Report.
The
financial information for the year ended 31 December 2017 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 2017 was unqualified and did not contain
an emphasis of matter paragraph or any statement under section 498
of the Companies Act 2006.
The
condensed consolidated financial statements and related notes for
the six months to 30 June 2018 are unaudited but have been reviewed
by the auditors and their review opinion is included at the end of
these statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
1b. Change of accounting policy: IFRS
15
The
Group has adopted IFRS 15 'Revenue from Contracts with Customers'
at 1 January 2018 and applied the modified retrospective approach.
Comparatives for 2017 have not been restated and the cumulative
impact of adoption has been recognised as a decrease to retained
earnings with a corresponding decrease in net assets at 1 January
2018 as follows:
|
|
|
|
|
all figures in £ millions
|
|
|
|
2018
|
|
|
|
|
1
January
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
Unexercised
customer rights (or breakage)
|
|
|
|
(103)
|
Online
Program Management (OPM) marketing
|
|
|
|
(38)
|
Administration
fees
|
|
|
|
(2)
|
Commissions
|
|
|
|
1
|
Income
tax
|
|
|
|
34
|
Total impact at 1 January 2018
|
|
|
|
(108)
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Deferred
income tax assets
|
|
|
|
16
|
Current assets
|
|
|
|
|
Inventories
|
|
|
|
12
|
Trade
and other receivables
|
|
|
|
133
|
Assets
classified as held for sale
|
|
|
|
31
|
Current liabilities
|
|
|
|
|
Trade
and other liabilities
|
|
|
|
(215)
|
Liabilities
classified as held for sale
|
|
|
|
(85)
|
Total impact at 1 January 2018
|
|
|
|
(108)
|
IFRS 15 has had an impact on retained earnings in four areas as
outlined below. There was no net impact on any of our associate
investments.
Unexercised customer rights (or breakage): The Group sells rights
to future performance to customers which may go unexercised. While
the customer has paid for future performance, usage is at the
customer's discretion and those rights may expire prior to usage,
or never be used. The Group maintains historical customer data to
understand usage patterns over time (i.e. redemption rates). Where
the Group expects to have no future obligation (based on these
redemption rates), revenue has historically been recognised
immediately for this portion of the sale. Under IFRS 15, where the
Group previously recognised this breakage element on subscriptions,
revenue is now recognised evenly over the period of use. Where
breakage relates to sales of tests or vouchers, revenue is now
recognised when the underlying tests are delivered. This revised
treatment in respect of breakage has primarily affected the school
and higher education businesses in North America and resulted in
higher deferred income at adoption on 1 January 2018.
Online Program Management (OPM) marketing: Historically the OPM
business recognised revenue for the pre-semester costs of marketing
and recruitment as a separate performance obligation from course
delivery during the semester (i.e. revenue was recognised in line
with the marketing costs incurred). Under IFRS 15, revenue has been
recognised on a straight-line basis over the semester with no
revenue recognised up front for pre-semester recruitment and
marketing costs based on management's judgement under the new
standard's requirements assessing the start of the Group's contract
and determining the Group's performance obligations. This revised
treatment of pre-semester costs only affects the OPM business in
North America and has resulted in a lower contract related asset
balance at adoption on 1 January 2018.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
1b. Change of accounting policy: IFRS
15
continued
Administration fees: This relates to non-refundable upfront
administration fees charged to customers which do not relate to the
transfer of a promised good or service to the customer. Rather
these fees are charged to cover internal costs, such as
registration fees for testing candidate exams. Historically
administration fees have been recognised in revenue up-front when
charged. Under IFRS 15, such fees have been deferred and recognised
over the period over which services are provided as they do not
relate to a specific performance obligation. This revised treatment
primarily affects the UK Assessments business and has resulted in
higher deferred income at adoption on 1 January 2018.
Commissions: This relates to incremental costs of obtaining
customer contracts, such as sales incentive plans or sales
commissions specifically linked to obtaining new contracts.
Historically such commissions have been charged to the profit and
loss account as incurred. Under IFRS 15, sales commissions in
respect of customer transactions with an accounting period of
greater than one year have been capitalised and amortised over that
accounting period, using practical expedients permissible under the
new standard. This revised treatment affects the US Assessments
business and resulted in a higher contract related asset upon
adoption on 1 January 2018.
In addition to the changes above, IFRS 15 also requires that the
Group's provision for sales returns is reclassified. Previously
this provision was netted off in trade receivables and from 1
January 2018 this is now shown in two parts as a separate returns
refund liability within trade and other liabilities and an
inventory returns asset within inventory. The effect on transition
was to increase trade and other receivables by £170m, increase
trade and other liabilities by £182m and inventory by
£12m. In addition held for sale assets and liabilities were
both increased by £13m. The impact of adoption on the results
for the period to 30 June 2018 is outlined below:
|
|
|
|
|
all figures in £ millions
|
2018 half year
|
|
Amounts
pre IFRS 15
|
Transition
adjustment
|
In
period adjustment
|
Amounts
as reported
|
|
|
|
|
|
Sales
|
1,859
|
-
|
6
|
1,865
|
Operating
profit
|
227
|
-
|
6
|
233
|
Profit
before tax
|
196
|
-
|
6
|
202
|
Income
tax
|
(11)
|
-
|
(2)
|
(13)
|
Profit for the period
|
185
|
-
|
4
|
189
|
Other
comprehensive income / (expense) for the period
|
79
|
-
|
(2)
|
77
|
Total comprehensive income / (expense) for the period
|
264
|
-
|
2
|
266
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Deferred
income tax assets
|
34
|
16
|
1
|
51
|
Current assets
|
|
|
|
|
Inventories
|
160
|
12
|
(5)
|
167
|
Trade
and other receivables
|
996
|
133
|
(63)
|
1,066
|
Assets
classified as held for sale
|
588
|
31
|
(12)
|
607
|
Current liabilities
|
|
|
|
|
Trade
and other liabilities
|
(1,023)
|
(215)
|
65
|
(1,173)
|
Liabilities
classified as held for sale
|
(449)
|
(85)
|
16
|
(518)
|
|
|
|
|
|
Net assets
|
4,203
|
(108)
|
2
|
4,097
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for
the period ended 30 June 2018
1b. Change of accounting policy: IFRS
15
continued
Had the Group been applying IFRS 15 during 2017, it is estimated
that both sales and profit before tax would have been £2m
higher for the full year, with the balance sheet impact at the
beginning and end of the year being similar.
1c. Change of accounting policy: IFRS
9
The Group adopted IFRS 9 'Financial Instruments' at 1 January 2018
and applied the new rules in accordance with the transitional
provisions. Comparatives for 2017 have not been restated. The Group
has assessed the impact of adopting IFRS 9 and the only material
adjustment is an increase in the provision for losses against trade
debtors which was reflected as an adjustment to retained earnings
at 1 January 2018 as shown below.
|
|
|
|
|
all figures in £ millions
|
|
|
|
2018
|
|
|
|
|
1
January
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
Provision
for losses against trade debtors
|
|
|
|
(13)
|
Income
tax
|
|
|
|
3
|
Total impact at 1 January 2018
|
|
|
|
(10)
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Deferred
income tax assets
|
|
|
|
3
|
Current assets
|
|
|
|
|
Trade
and other receivables
|
|
|
|
(12)
|
Assets
classified as held for sale
|
|
|
|
(1)
|
Total impact at 1 January 2018
|
|
|
|
(10)
|
The adjustment above arises from adoption of the expected credit
loss model for impairments under IFRS 9. The adoption of this model
requires the recognition of impairment provisions based on expected
credit losses rather than only incurred credit losses, as is the
case under IAS 39. Although there is a transition impact from
adoption of the new model there was no material impact on profit
before tax for the period to 30 June 2018.
Under IFRS 9, the Group's equity financial investments continue to
be recognised at fair value and the Group has elected the option to
recognise all movements in fair value in other comprehensive income
(FVOCI). Gains or losses realised on the subsequent sale of these
financial assets (FVOCI investments) are no longer recycled through
the profit and loss account, but are instead reclassified from the
FVOCI reserve to retained earnings. There were no material
disposals of these assets in the first six months of
2018.
IFRS 9 also introduced a new, simpler hedge accounting model with a
principles-based approach designed to align the accounting result
with the economic hedging strategy. The Group previously used fair
value hedge relationships to hedge interest rate risk and currency
risk on its bond borrowings and also used net investment hedging
relationships to hedge currency re-translation risk on its overseas
assets. The Group has confirmed that its previous hedge
relationships continue to qualify as hedges under IFRS 9 in
2018.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
for
the period ended 30 June 2018
2. Segment information
The primary segments for management and reporting are Geographies
(North America, Core and Growth). In addition, the Group separately
discloses the results from the Penguin Random House associate
(PRH).
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Sales by Geography
|
|
|
|
|
North
America
|
|
1,223
|
1,285
|
2,929
|
Core
|
|
383
|
384
|
815
|
Growth
|
|
259
|
378
|
769
|
Total sales
|
|
1,865
|
2,047
|
4,513
|
|
|
|
|
|
Adjusted operating profit by Geography
|
|
|
|
|
North
America
|
|
64
|
43
|
394
|
Core
|
|
10
|
10
|
50
|
Growth
|
|
11
|
8
|
38
|
PRH
|
|
22
|
46
|
94
|
Total adjusted operating profit
|
|
107
|
107
|
576
|
There were no material inter-segment sales.
The Group derived revenue for the period to 30 June 2018 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
|
|
North
|
Core
|
Growth
|
Total
|
|
|
America
|
|
|
|
|
|
|
|
|
|
Courseware
|
|
|
|
|
|
Products
transferred at a point in time (sale or return)
|
|
276
|
81
|
105
|
462
|
Products
transferred at a point in time (other)
|
|
-
|
-
|
15
|
15
|
Products
and services transferred over time
|
|
265
|
25
|
8
|
298
|
|
|
541
|
106
|
128
|
775
|
|
|
|
|
|
|
Assessments
|
|
|
|
|
|
Products
transferred at a point in time
|
|
22
|
40
|
5
|
67
|
Products
and services transferred over time
|
|
403
|
214
|
24
|
641
|
|
|
425
|
254
|
29
|
708
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
Products
transferred at a point in time
|
|
-
|
13
|
13
|
26
|
Products
and services transferred over time
|
|
257
|
10
|
89
|
356
|
|
|
257
|
23
|
102
|
382
|
|
|
|
|
|
|
Total sales
|
|
1,223
|
383
|
259
|
1,865
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
2. Segment
information
continued
Adjusted operating profit is one of the Group's key business
performance measures; it includes the operating profit from the
total business including the results of discontinued operations
when relevant.
In
May 2017, we announced a restructuring programme, to run between
2017 and 2019, to drive further significant cost savings. This
programme began in the second half of 2017 and costs incurred to
date were £79m in the second half of 2017 and £24m in the
first half of 2018 and relate to delivery of cost efficiencies in
our US higher education courseware business and enabling functions
together with further rationalisation of the property and supplier
portfolio.
Charges relating to acquired intangibles, acquisition costs and
movements in contingent acquisition consideration are also excluded
from adjusted operating profit when relevant as these items reflect
past acquisition activity and do not necessarily reflect the
current year performance of the Group. Intangible amortisation
charges to the end of June 2018 were £57m compared to a charge
of £91m in the equivalent period in 2017.
Other
net gains of £207m in 2018 relate to the sale of the Wall
Street English language teaching business (£184m) and the
disposal of our associate interest in UTEL, the online University
partnership in Mexico, (£19m) together with other small net
gains totalling £4m.There were no other gains or losses in the
first half of 2017. Gains of £128m in the second half of 2017
largely relate to the sale of our test preparation business in
China which resulted in a profit on sale of £44m and the part
sale of our share in PRH which resulted in a profit of
£96m.
As a result of US tax reform there is an adjustment to the share of
profit from associates of £8m in the second half of 2017
relating to the revaluation of deferred tax balances. This
adjustment was excluded from our adjusted operating profit (see
also notes 4 and 5).
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
2. Segment
information
continued
The
following table reconciles adjusted operating profit to operating
profit for each of our primary segments.
|
|
|
|
|
|
all figures in £ millions
|
North
America
|
Core
|
Growth
|
PRH
|
Total
|
|
|
|
|
|
|
2018 half year
|
Adjusted
operating profit
|
64
|
10
|
11
|
22
|
107
|
Cost
of major restructuring
|
(18)
|
(4)
|
(2)
|
-
|
(24)
|
Intangible
charges
|
(35)
|
(4)
|
(11)
|
(7)
|
(57)
|
Other
net gains and losses
|
4
|
-
|
203
|
-
|
207
|
Impact
of US tax reform
|
-
|
-
|
-
|
-
|
-
|
Operating profit
|
15
|
2
|
201
|
15
|
233
|
|
|
|
|
|
|
2017
half year
|
Adjusted
operating profit
|
43
|
10
|
8
|
46
|
107
|
Cost
of major restructuring
|
-
|
-
|
-
|
-
|
-
|
Intangible
charges
|
(46)
|
(6)
|
(24)
|
(15)
|
(91)
|
Other
net gains and losses
|
-
|
-
|
-
|
-
|
-
|
Impact
of US tax reform
|
-
|
-
|
-
|
-
|
-
|
Operating profit / (loss)
|
(3)
|
4
|
(16)
|
31
|
16
|
|
|
|
|
|
|
2017
full year
|
Adjusted
operating profit
|
394
|
50
|
38
|
94
|
576
|
Cost
of major restructuring
|
(60)
|
(11)
|
(8)
|
-
|
(79)
|
Intangible
charges
|
(89)
|
(12)
|
(37)
|
(28)
|
(166)
|
Other
net gains and losses
|
(3)
|
-
|
35
|
96
|
128
|
Impact
of US tax reform
|
-
|
-
|
-
|
(8)
|
(8)
|
Operating profit
|
242
|
27
|
28
|
154
|
451
|
Corporate costs are allocated to business segments on an
appropriate basis depending on the nature of the cost and therefore
the total segment result is equal to the Group operating
profit.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
3. Net finance costs
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Net
interest payable
|
|
(26)
|
(47)
|
(79)
|
Net
finance income in respect of retirement benefits
|
|
5
|
2
|
3
|
Finance
costs associated with transactions
|
|
(1)
|
(5)
|
(6)
|
Net
foreign exchange (losses) / gains
|
|
(13)
|
19
|
44
|
Derivatives
in a hedge relationship
|
|
-
|
-
|
1
|
Derivatives
not in a hedge relationship
|
|
4
|
5
|
7
|
Net finance costs
|
|
(31)
|
(26)
|
(30)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Finance
costs
|
|
(63)
|
(66)
|
(110)
|
Finance
income
|
|
32
|
40
|
80
|
Net finance costs
|
|
(31)
|
(26)
|
(30)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Net
interest payable reflected in adjusted earnings
|
|
(26)
|
(47)
|
(79)
|
Other
net finance (costs) / income
|
|
(5)
|
21
|
49
|
Net finance costs
|
|
(31)
|
(26)
|
(30)
|
Net interest payable is the finance cost measure used in
calculating adjusted earnings.
Net finance costs classified as other net finance costs / income
are excluded in the calculation of our adjusted
earnings.
Net finance income relating to retirement benefits is excluded as
we believe the presentation does not reflect the economic substance
of the underlying assets and liabilities. We exclude finance costs
relating to acquisition transactions as these relate to future earn
outs or acquisition expenses and are not part of the underlying
financing.
Foreign exchange and other gains and losses are also excluded as
they represent short-term fluctuations in market value and are
subject to significant volatility. Other gains and losses may not
be realised in due course as it is normally the intention to hold
the related instruments to maturity. In 2018 and 2017 the foreign
exchange gains and losses largely relate to foreign exchange
differences on unhedged US dollar and Euro loans, cash and cash
equivalents.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
4. Profit before tax
|
|
|
|
|
all figures in £ millions
|
note
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
NOTES
TO THE CONDENSED
|
|
|
|
|
Profit / (loss) before tax
|
|
202
|
(10)
|
421
|
Cost
of major restructuring
|
2
|
24
|
-
|
79
|
Intangible
charges
|
2
|
57
|
91
|
166
|
Other
net gains and losses
|
2
|
(207)
|
-
|
(128)
|
Other
net finance (income) / costs
|
3
|
5
|
(21)
|
(49)
|
Impact
of US tax reform
|
2
|
-
|
-
|
8
|
Adjusted profit before tax
|
|
81
|
60
|
497
|
5. Income tax
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Income tax charge
|
|
(13)
|
(6)
|
(13)
|
Tax
benefit on cost of major restructuring
|
|
(6)
|
-
|
(26)
|
Tax
benefit on intangible charges
|
|
(14)
|
(25)
|
(85)
|
Tax
charge on other net gains and losses
|
|
15
|
10
|
20
|
Tax
(benefit) / charge on other net finance costs
|
|
(1)
|
5
|
9
|
Impact
of US tax reform added back
|
|
-
|
-
|
1
|
Tax
amortisation benefit on goodwill and intangibles
|
|
3
|
3
|
39
|
Adjusted income tax charge
|
|
(16)
|
(13)
|
(55)
|
|
|
|
|
|
Tax
rate reflected in statutory earnings
|
|
6.4%
|
n/a
|
3.1%
|
Tax
rate reflected in adjusted earnings
|
|
20.0%
|
21.0%
|
11.1%
|
The
adjusted income tax charge excludes the tax benefit or charge on
items that are excluded from the profit or loss before tax (see
note 4).
In
the second half of 2017, as a result of US tax reform, the reported
tax charge on a statutory basis includes a benefit from revaluation
of deferred tax balances to the reduced federal rate of £5m
and a repatriation tax charge of £6m. In addition to the
impact on the reported tax charge, the Group's share of profit from
associates was adversely impacted by £8m (see also notes 2 and
4). These adjustments have been excluded from the adjusted
operating profit and tax charge as they are considered to be
transition adjustments that are not expected to recur in the near
future.
The
tax benefit from tax deductible goodwill and intangibles is added
to the adjusted income tax charge as this benefit more accurately
aligns the adjusted tax charge with the expected rate of cash tax
payments.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
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
period, excluding ordinary shares purchased by the company and held
as treasury shares. Diluted earnings per share is calculated by
adjusting the weighted average number of ordinary shares to take
account of all dilutive potential ordinary shares and adjusting the
profit attributable, if applicable, to account for any tax
consequences that might arise from conversion of those shares. A
dilution is not calculated for a loss.
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Earnings
/ (loss) for the period
|
|
189
|
(16)
|
408
|
Non-controlling
interest
|
|
(1)
|
(1)
|
(2)
|
Earnings / (loss) attributable to equity shareholders
|
|
188
|
(17)
|
406
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (millions)
|
|
779.0
|
815.0
|
813.4
|
Effect
of dilutive share options (millions)
|
|
0.6
|
-
|
0.3
|
Weighted average number of shares (millions) for diluted
earnings
|
779.6
|
815.0
|
813.7
|
|
|
|
|
|
|
|
|
|
|
Earnings / (loss) per share
|
|
|
|
|
Basic
|
|
24.1p
|
(2.1)p
|
49.9p
|
Diluted
|
|
24.1p
|
(2.1)p
|
49.9p
|
7. Adjusted earnings per share
In order to show results from operating activities on a consistent
basis, an adjusted earnings per share is presented which excludes
certain items as set out below.
Adjusted earnings is a non-GAAP financial measure and is included
as it is a key financial measure used by management to evaluate
performance and allocate resources to business segments. The
measure also enables our investors to more easily, and
consistently, track the underlying operational performance of the
Group and its business segments by separating out those items of
income and expenditure relating to acquisition and disposal
transactions and major restructuring programmes.
The adjusted earnings per share includes both continuing and
discontinued businesses on an undiluted basis when relevant. The
company's definition of adjusted earnings per share may not be
comparable to other similarly titled measures reported by other
companies. A reconciliation of the adjusted measures to their
corresponding statutory measures is shown in the tables below and
in the relevant notes.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
7.
Adjusted earnings per share
continued
|
|
|
|
|
|
|
|
|
|
all figures in £ millions
|
note
|
Statutory income statement
|
Cost of major restructuring
|
Other net gains and losses
|
Intangible charges
|
Other net finance costs
|
Impact of US tax reform
|
Tax amortisation benefit
|
Adjusted income statement
|
|
|
|
|
|
|
|
|
|
|
2018 half year
|
Operating profit
|
2
|
233
|
24
|
(207)
|
57
|
-
|
-
|
-
|
107
|
Net
finance costs
|
3
|
(31)
|
-
|
-
|
-
|
5
|
-
|
-
|
(26)
|
Profit before tax
|
4
|
202
|
24
|
(207)
|
57
|
5
|
-
|
-
|
81
|
Income
tax
|
5
|
(13)
|
(6)
|
15
|
(14)
|
(1)
|
-
|
3
|
(16)
|
Profit for the period
|
|
189
|
18
|
(192)
|
43
|
4
|
-
|
3
|
65
|
Non-controlling
interest
|
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
Earnings
|
|
188
|
18
|
(192)
|
43
|
4
|
-
|
3
|
64
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares (millions)
|
|
|
|
779.0
|
Weighted average number of shares (millions) for diluted
earnings
|
|
|
|
779.6
|
|
|
|
|
|
Adjusted earnings per share (basic)
|
|
|
|
8.2p
|
Adjusted earnings per share (diluted)
|
|
|
|
8.2p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
7.
Adjusted earnings per share
continued
|
|
|
|
|
|
|
|
|
|
all figures in £ millions
|
note
|
Statutory income statement
|
Cost of major restructuring
|
Other net gains and losses
|
Intangible charges
|
Other net finance costs
|
Impact of US tax reform
|
Tax amortisation benefit
|
Adjusted income statement
|
|
|
|
|
|
|
|
|
|
|
2017 half year
|
Operating
profit
|
2
|
16
|
-
|
-
|
91
|
-
|
-
|
-
|
107
|
Net
finance costs
|
3
|
(26)
|
-
|
-
|
-
|
(21)
|
-
|
-
|
(47)
|
Profit
/ (loss) before tax
|
4
|
(10)
|
-
|
-
|
91
|
(21)
|
-
|
-
|
60
|
Income
tax
|
5
|
(6)
|
-
|
10
|
(25)
|
5
|
-
|
3
|
(13)
|
Profit
/ (loss) for the period
|
|
(16)
|
-
|
10
|
66
|
(16)
|
-
|
3
|
47
|
Non-controlling
interest
|
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
Earnings
/ (loss)
|
|
(17)
|
-
|
10
|
66
|
(16)
|
-
|
3
|
46
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares (millions)
|
|
|
|
815.0
|
Weighted average number of shares (millions) for diluted
earnings
|
|
|
|
815.0
|
|
|
|
|
|
Adjusted earnings per share (basic)
|
|
|
|
5.6p
|
Adjusted earnings per share (diluted)
|
|
|
|
5.6p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
7.
Adjusted earnings per share
continued
|
|
|
|
|
|
|
|
|
|
all figures in £ millions
|
note
|
Statutory income statement
|
Cost of major restructuring
|
Other net gains and losses
|
Intangible charges
|
Other net finance costs
|
Impact of US tax reform
|
Tax amortisation benefit
|
Adjusted income statement
|
|
|
|
|
|
|
|
|
|
|
2017 full year
|
Operating
profit
|
2
|
451
|
79
|
(128)
|
166
|
-
|
8
|
-
|
576
|
Net
finance costs
|
3
|
(30)
|
-
|
-
|
-
|
(49)
|
-
|
-
|
(79)
|
Profit
before tax
|
4
|
421
|
79
|
(128)
|
166
|
(49)
|
8
|
-
|
497
|
Income
tax
|
5
|
(13)
|
(26)
|
20
|
(85)
|
9
|
1
|
39
|
(55)
|
Profit
for the period
|
|
408
|
53
|
(108)
|
81
|
(40)
|
9
|
39
|
442
|
Non-controlling
interest
|
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
Earnings
|
|
406
|
53
|
(108)
|
81
|
(40)
|
9
|
39
|
440
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares (millions)
|
|
|
|
813.4
|
Weighted average number of shares (millions) for diluted
earnings
|
|
|
|
813.7
|
|
|
|
|
|
Adjusted earnings per share (basic)
|
|
|
|
54.1p
|
Adjusted earnings per share (diluted)
|
|
|
|
54.1p
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
8. Dividends
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Amounts
recognised as distributions to equity shareholders in the
period
|
93
|
277
|
318
|
The
directors are proposing an interim dividend of 5.5p per equity
share, payable on 14 September 2018 to shareholders on the register
at the close of business on 17 August 2018. This interim dividend,
which will absorb an estimated £43m of shareholders' funds,
has not been included as a liability as at 30 June
2018.
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:
|
|
|
|
|
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Average
rate for profits
|
|
1.38
|
1.27
|
1.30
|
Period
end rate
|
|
1.32
|
1.30
|
1.35
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
10. Assets and liabilities classified as
held for sale
Held
for sale assets and liabilities in 2018 relate to the K12 school
courseware business in the US (K12). Following the decision in
2017 to sell both our Wall Street English language teaching
business and the K12 business, the assets and liabilities of those
businesses were classified as held for sale on the balance sheet at
31 December 2017. During the first half of 2018 the Wall Street
business has been sold and the K12 business remains on the balance
sheet as a held for sale asset prior to an expected disposal later
in the year. At 30 June 2017 the English test preparation
business, Global Education (GEDU) and a portion of our PRH
investment were classified as held for sale prior to their
disposals in the second half of 2017. The held for sale
balances are analysed as follows:
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Property,
plant and equipment
|
|
-
|
9
|
16
|
Intangible
assets
|
|
72
|
-
|
181
|
Investment
in joint ventures and associates
|
|
-
|
563
|
-
|
Deferred
income tax assets
|
|
86
|
-
|
68
|
Trade
and other receivables
|
|
33
|
-
|
27
|
Non-current assets
|
|
191
|
572
|
292
|
|
|
|
|
|
Intangible
assets - pre-publication
|
|
239
|
-
|
247
|
Inventories
|
|
58
|
1
|
46
|
Trade
and other receivables
|
|
119
|
10
|
48
|
Cash
and cash equivalents (excluding overdrafts)
|
|
-
|
25
|
127
|
Current assets
|
|
416
|
36
|
468
|
|
|
|
|
|
Total assets
|
|
607
|
608
|
760
|
|
|
|
|
|
Deferred
income tax liabilities
|
|
-
|
(1)
|
(2)
|
Other
liabilities
|
|
(335)
|
-
|
(284)
|
Non-current liabilities
|
|
(335)
|
(1)
|
(286)
|
|
|
|
|
|
Trade
and other liabilities
|
|
(183)
|
(36)
|
(302)
|
Current liabilities
|
|
(183)
|
(36)
|
(302)
|
|
|
|
|
|
Total liabilities
|
|
(518)
|
(37)
|
(588)
|
|
|
|
|
|
Net assets
|
|
89
|
571
|
172
|
Goodwill
is allocated to the held for sale businesses on a relative fair
value basis where these businesses form part of a larger cash
generating unit (CGU). The goodwill allocated to the K12 business
was reassessed at 30 June 2018.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
11. Non-current intangible
assets
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Goodwill
|
|
2,156
|
2,251
|
2,030
|
Other
intangibles
|
|
911
|
1,015
|
934
|
Non-current intangible assets
|
|
3,067
|
3,266
|
2,964
|
There
were no impairments to goodwill or intangibles in either 2018 or
2017.
12. Trade and other
liabilities
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Trade
payables
|
|
(327)
|
(222)
|
(265)
|
Accruals
|
|
(375)
|
(427)
|
(447)
|
Deferred
income
|
|
(304)
|
(802)
|
(322)
|
Other
liabilities
|
|
(284)
|
(253)
|
(441)
|
Trade and other liabilities
|
|
(1,290)
|
(1,704)
|
(1,475)
|
|
|
|
|
|
Analysed
as:
|
|
|
|
|
Trade
and other liabilities - current
|
|
(1,173)
|
(1,331)
|
(1,342)
|
Other
liabilities - non-current
|
|
(117)
|
(373)
|
(133)
|
Total trade and other liabilities
|
|
(1,290)
|
(1,704)
|
(1,475)
|
The
deferred income balance comprises contract liabilities in respect
of advance payments in assessment, testing and training businesses;
subscription income in school and college businesses; and
obligations to deliver digital content in future
periods.
Trade
and other liabilities includes the impact of adoption of IFRS 15 in
2018 (see note 1b). This impact increased trade payables by
£122m and deferred income by £28m at 30 June 2018.
Comparatives have not been restated.
Included
in other current liabilities in the full year 2017 is a liability
of £151m in respect of the remaining commitment on the share
buyback programme. This liability was paid in full in the first
half of 2018.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
13. Business combinations
There
were no significant acquisitions in the year and there were no
material adjustments to prior year acquisitions. The net cash
outflow relating to acquisitions in the period is shown in the
table below:
|
|
all figures in £ millions
|
Total
|
|
|
|
|
Cash
- Current year acquisitions
|
-
|
Deferred
payments for prior year acquisitions and other items
|
(5)
|
Net cash outflow on acquisitions
|
(5)
|
14. Disposals
In
March 2018, Pearson completed the sale of its Wall Street English
language teaching business (WSE) resulting in a pre-tax profit on
sale of £184m. Tax on the disposal is estimated at £14m.
In May 2018 Pearson disposed of the equity interest in UTEL, the
online University partnership in Mexico realising a gain of
£19m before tax of £2m. An analysis of disposals is
shown below.
|
|
|
|
|
|
all figures in £ millions
|
|
WSE
|
UTEL
|
Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
(17)
|
-
|
-
|
(17)
|
Intangible assets
|
|
(15)
|
-
|
(3)
|
(18)
|
Investments in joint ventures and associates
|
|
-
|
(3)
|
-
|
(3)
|
Net deferred income tax assets
|
|
(1)
|
-
|
-
|
(1)
|
Intangible assets - pre publication
|
|
(8)
|
-
|
-
|
(8)
|
Inventories
|
|
(1)
|
-
|
-
|
(1)
|
Trade and other receivables
|
|
(30)
|
-
|
(1)
|
(31)
|
Cash and cash equivalents (excluding overdrafts)
|
|
(119)
|
-
|
-
|
(119)
|
Trade and other liabilities
|
|
165
|
-
|
5
|
170
|
Cumulative translation adjustment
|
|
4
|
-
|
-
|
4
|
Net (assets) / liabilities disposed
|
|
(22)
|
(3)
|
1
|
(24)
|
|
|
|
|
|
|
Cash proceeds
|
|
212
|
22
|
-
|
234
|
Deferred proceeds
|
|
-
|
-
|
2
|
2
|
Fair value of financial asset acquired
|
|
-
|
-
|
3
|
3
|
Costs of disposal
|
|
(6)
|
-
|
(2)
|
(8)
|
Gain on disposal
|
|
184
|
19
|
4
|
207
|
|
|
|
|
|
|
Cash flow from disposals
|
|
|
|
|
|
Proceeds - current period disposals
|
|
212
|
22
|
-
|
234
|
Cash and cash equivalents disposed
|
|
(119)
|
-
|
-
|
(119)
|
Costs and other disposal liabilities paid
|
|
(4)
|
-
|
(9)
|
(13)
|
Net cash inflow / (outflow) from disposals
|
|
89
|
22
|
(9)
|
102
|
|
|
|
|
|
|
Analysed as:
|
|
|
|
|
|
Disposal of subsidiaries, net of cash disposed
|
|
89
|
-
|
(5)
|
84
|
Proceeds from sale of joint ventures and associates
|
|
-
|
22
|
(4)
|
18
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
15. Net debt
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Derivative
financial instruments
|
|
72
|
125
|
140
|
Current assets
|
|
|
|
|
Derivative
financial instruments
|
|
-
|
6
|
-
|
Marketable
securities
|
|
-
|
11
|
8
|
Cash
and cash equivalents (excluding overdrafts)
|
|
330
|
458
|
518
|
Non-current liabilities
|
|
|
|
|
Borrowings
|
|
(1,069)
|
(1,816)
|
(1,066)
|
Derivative
financial instruments
|
|
(58)
|
(175)
|
(140)
|
Current liabilities
|
|
|
|
|
Borrowings
|
|
(33)
|
(266)
|
(19)
|
Derivative
financial instruments
|
|
(17)
|
(1)
|
-
|
Total
|
|
(775)
|
(1,658)
|
(559)
|
Cash
and cash equivalents classified as held for sale
|
|
-
|
25
|
127
|
Net debt
|
|
(775)
|
(1,633)
|
(432)
|
In January 2018, Pearson repurchased €250m of its €500m
Euro 1.875% Notes due May 2021 and €200m of its
€500m Euro 1.375% Notes due May 2025. Borrowings at 30 June
2018 include seasonal drawings on the Group's revolving credit
facility (RCF) of £411m (2017 half year: £150m, 2017
full year: £nil).
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
16. Classification of assets and
liabilities measured at fair value
|
---------Level
2---------
|
-----Level
3------
|
|
all figures in £ millions
|
Available
for sale assets
|
Derivatives
|
Other
assets
|
FVOCI
investments / Available for sale assets
|
Other
liabilities
|
Total fair value
|
2018 half year
|
|
|
|
|
|
|
|
Investments
in unlisted securities
|
-
|
-
|
-
|
86
|
-
|
86
|
Marketable
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
Derivative
financial instruments
|
-
|
72
|
-
|
-
|
-
|
72
|
Total
financial assets held at fair value
|
-
|
72
|
-
|
86
|
-
|
158
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
-
|
(75)
|
-
|
-
|
-
|
(75)
|
Total
financial liabilities held at fair value
|
-
|
(75)
|
-
|
-
|
-
|
(75)
|
|
|
|
|
|
|
|
2017
half year
|
|
|
|
|
|
|
|
Investments
in unlisted securities
|
-
|
-
|
-
|
86
|
-
|
86
|
Marketable
securities
|
11
|
-
|
-
|
-
|
-
|
11
|
Derivative
financial instruments
|
-
|
131
|
-
|
-
|
-
|
131
|
Total
financial assets held at fair value
|
11
|
131
|
-
|
86
|
-
|
228
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
-
|
(176)
|
-
|
-
|
-
|
(176)
|
Total
financial liabilities held at fair value
|
-
|
(176)
|
-
|
-
|
-
|
(176)
|
|
|
|
|
|
|
|
2017
full year
|
|
|
|
|
|
|
|
Investments
in unlisted securities
|
-
|
-
|
-
|
77
|
-
|
77
|
Marketable
securities
|
8
|
-
|
-
|
-
|
-
|
8
|
Derivative
financial instruments
|
-
|
140
|
-
|
-
|
-
|
140
|
Total
financial assets held at fair value
|
8
|
140
|
-
|
77
|
-
|
225
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
-
|
(140)
|
-
|
-
|
-
|
(140)
|
Total
financial liabilities held at fair value
|
-
|
(140)
|
-
|
-
|
-
|
(140)
|
On
adoption of IFRS 9 'Financial Instruments' on 1 January 2018, the
Group's financial investments (previously categorised as available
for sale assets) continue to be recognised at fair value as FVOCI
investments (see also note 1c) .
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
16. Classification of assets and
liabilities measured at fair value
continued
The
fair values of level 2 assets and liabilities are determined by
reference to market data and established estimation techniques such
as discounted cash flow and option valuation models. Within level 3
assets and liabilities, the fair value of FVOCI investments
previously known as available for sale assets (see note 1c) is
determined by reference to the financial performance of the
underlying asset and amounts realised on the sale of similar
assets, while the fair value of other liabilities represents the
present value of the estimated future liability. There have been no
transfers in classification during the year.
The
market value of the Group's bonds is £656m (2017 half
year: £1,886m, 2017 full year: £1,066m) compared to
their carrying value of £655m (2017 half year:
£1,899m, 2017 full year: £1,062m). For all other
financial assets and liabilities, fair value is not materially
different to carrying value.
Movements
in fair values of level 3 assets and liabilities are shown in the
table below:
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Investments in unlisted securities
|
|
|
|
|
At
beginning of period
|
|
77
|
65
|
65
|
Exchange
differences
|
|
2
|
(3)
|
(4)
|
Additions
|
|
5
|
3
|
3
|
Fair
value movements
|
|
2
|
21
|
13
|
Disposals
|
|
-
|
-
|
-
|
At end of period
|
|
86
|
86
|
77
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
17. Cash flows
|
|
|
|
|
all figures in £ millions
|
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Reconciliation of profit / (loss) for the period to net cash (used
in) / generated from operations
|
|
|
|
|
|
|
|
|
Profit
/ (loss) for the period
|
|
189
|
(16)
|
408
|
Income
tax
|
|
13
|
6
|
13
|
Depreciation,
amortisation and impairment charges
|
|
123
|
155
|
313
|
Net
(profit) / loss on disposal of businesses
|
|
(207)
|
6
|
(128)
|
Net
loss on disposal of fixed assets
|
|
6
|
-
|
12
|
Net
finance costs
|
|
31
|
26
|
30
|
Share
of results of joint ventures and associates
|
|
(15)
|
(43)
|
(78)
|
Net
foreign exchange adjustment
|
|
8
|
(6)
|
(26)
|
Share-based
payment costs
|
|
19
|
19
|
33
|
Pre-publication
|
|
(13)
|
(8)
|
(35)
|
Inventories
|
|
(19)
|
(13)
|
24
|
Trade
and other receivables
|
|
(16)
|
54
|
133
|
Trade
and other liabilities
|
|
(241)
|
(231)
|
6
|
Retirement
benefit obligations
|
|
(4)
|
(169)
|
(232)
|
Provisions
for other liabilities and charges
|
|
(5)
|
1
|
(11)
|
Net cash (used in) / generated from operations
|
|
(131)
|
(219)
|
462
|
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
17. Cash flows
continued
|
|
|
|
|
all figures in £ millions
|
note
|
2018
|
2017
|
2017
|
|
|
half year
|
half
year
|
full
year
|
|
|
|
|
|
Reconciliation of net cash (used in) / generated from operations to
closing net debt
|
|
|
|
|
|
|
|
|
Net cash (used in) / generated from operations
|
|
(131)
|
(219)
|
462
|
Dividends
from joint ventures and associates
|
|
66
|
60
|
458
|
Less:
re-capitalisation dividends from PRH
|
|
(51)
|
-
|
(312)
|
Net
purchase of PPE including finance lease principal
payments
|
(33)
|
(32)
|
(87)
|
Net
purchase of intangible assets
|
|
(80)
|
(79)
|
(150)
|
Add
back: cost of major restructuring paid
|
|
27
|
24
|
71
|
Add
back: special pension contribution
|
|
-
|
174
|
227
|
Operating cash flow
|
|
(202)
|
(72)
|
669
|
Operating
tax paid
|
|
(8)
|
(33)
|
(75)
|
Net
operating finance costs paid
|
|
(18)
|
(39)
|
(69)
|
Operating free cash flow
|
|
(228)
|
(144)
|
525
|
Costs
of major restructuring paid
|
|
(27)
|
(24)
|
(71)
|
Special
pension contribution
|
|
-
|
(174)
|
(227)
|
Free cash flow
|
|
(255)
|
(342)
|
227
|
Dividends
paid (including to non-controlling interests)
|
|
(93)
|
(277)
|
(318)
|
Net movement of funds from operations
|
|
(348)
|
(619)
|
(91)
|
Acquisitions
and disposals
|
|
94
|
(21)
|
416
|
Re-capitalisation
dividends from PRH
|
|
51
|
-
|
312
|
Purchase
of treasury shares
|
|
-
|
-
|
-
|
Loans
repaid / (advanced)
|
|
46
|
(5)
|
(13)
|
New
equity
|
|
3
|
4
|
5
|
Buyback
of equity
|
|
(153)
|
-
|
(149)
|
Other
movements on financial instruments
|
|
1
|
3
|
14
|
Net movement of funds
|
|
(306)
|
(638)
|
494
|
Exchange
movements on net debt
|
|
(37)
|
97
|
166
|
Movement in net debt
|
|
(343)
|
(541)
|
660
|
Opening
net debt
|
|
(432)
|
(1,092)
|
(1,092)
|
Closing net debt
|
15
|
(775)
|
(1,633)
|
(432)
|
Operating
cash flow and free cash flow are non-GAAP measures and have been
disclosed as they are part of Pearson's corporate and operating
measures. These measures are presented in order to align the cash
flows with corresponding adjusted profit measures.
Dividends
received from associates include dividends from PRH in the first
half of 2018 of £51m and in the second half of 2017 of
£312m relating to the re-capitalisation of PRH. The
re-capitalisation was part of the transaction that included the
sale of 22% of our equity interest in the venture.
Special
pension contributions of £174m for the first half of 2017 and
£227m for the full year of 2017 were made as part of the
agreements relating to the PRH merger in 2013 and the sale of the
FT Group in 2015. There were no special pension contributions in
the first half of 2018.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for
the period ended 30 June 2018
18. Contingencies
There are contingent Group liabilities that arise in the normal
course of business in respect of indemnities, warranties and
guarantees in relation to former subsidiaries and in respect of
guarantees in relation to subsidiaries, joint ventures and
associates. In addition there are contingent liabilities of the
Group in respect of legal claims, contract disputes, royalties,
copyright fees, permissions and other rights. None of these claims
are expected to result in a material gain or loss to the
Group.
As previously reported, on 24 November 2017 the European Commission
published an opening decision that the United Kingdom controlled
foreign company group financing partial exemption ("FCPE")
constitutes State Aid. No final decision has yet been
published, and may anyway be challenged by the UK tax authorities.
The Group has benefited from the FCPE in 2018 and prior periods by
approximately £103m. At present the Group believes no
provision is required in respect of this issue.
19. Related parties
At 30 June 2018 the Group had loans to Penguin Random House (PRH)
of £nil (2017 half year: £38m, 2017 full year:
£46m) which were unsecured with interest calculated based
on market rates. The loans are provided under a working capital
facility and fluctuate during the year.
At 30 June 2018, the Group also had a current asset receivable from
PRH of £13m (2017 half year: £12m, 2017 full year:
£19m) mainly arising from PRH's management of accounts
receivable balances on Pearson's behalf and a current liability
payable of £nil (2017 half year: £nil, 2017 full
year: £3m) arising from the provision of services.
Service fee income from PRH was £1m in the first half of
2018 (2017 half year: £1m, 2017 full year:
£3m).
During the period the Group received dividends of
£66m (2017 half year: £60m, 2017 full year:
£458m) from PRH including £312m in the second half
of 2017 and £51m in the first half of 2018 relating to the
re-capitalisation of the venture following Pearson's disposal of
part of its share. At 31 December 2017 the Group had a dividend
receivable from PRH of £49m which was due in respect of
re-capitalisation. There were no dividends receivable at either 30
June 2018 or 30 June 2017.
Apart from transactions with the Group's associates and joint
ventures noted above, there were no other material related party
transactions and no guarantees have been provided to related
parties in the period.
20. Events after the balance sheet
date
There were no significant post balance sheet events.
STATEMENT
OF DIRECTORS' RESPONSIBILITIES
The directors confirm that these condensed consolidated financial
statements have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and that the interim management report
includes a fair review of the information required by DTR 4.2.7 and
DTR 4.2.8 namely:
●
An indication of important events that have
occurred during the first six months and their impact on the
condensed consolidated financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
●
Material related party transactions in the first
six months and any material changes in related party transactions
described in the 2017 Annual Report.
The directors of Pearson plc are listed in the 2017 Annual Report.
There have been no changes to the Board since the publication of
the Annual Report.
A list of current directors is maintained on the Pearson plc
website: www.pearson.com.
By order of the Board
John Fallon
Chief Executive
26 July 2018
Coram Williams
Chief Financial Officer
26 July 2018
INDEPENDENT
REVIEW REPORT TO PEARSON PLC
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Pearson plc's condensed consolidated financial
statements (the 'interim financial statements') in the Interim
Financial Report of Pearson plc for the six month period ended 30
June 2018. Based on our review, nothing has come to our
attention that causes us to believe that the interim financial
statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34 'Interim
Financial Reporting' as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
●
the condensed consolidated balance sheet at 30
June 2018;
●
the condensed consolidated income statement and
condensed consolidated statement of comprehensive income for the
period then ended;
●
the condensed consolidated statement of changes in
equity for the period then ended;
●
the condensed consolidated cash flow statement for
the period then ended; and
●
the explanatory notes to the condensed
consolidated financial statements.
The interim financial statements included in the Interim Financial
Report have been prepared in accordance with International
Accounting Standard 34 'Interim Financial Reporting' as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Interim Financial Report, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the
Interim Financial Report in accordance with the Disclosure Guidance
and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the Interim Financial Report based on our
review. This report, including the conclusion, has been
prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or
assume responsibility for any other purpose or to any other person
to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in
writing.
INDEPENDENT REVIEW REPORT TO PEARSON
PLC
continued
What a review of condensed consolidated financial statements
involves
We conducted our review in accordance with International Standard
on Review Engagements (UK and Ireland) 2410 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Auditing Practices Board for use in the
United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the Interim
Financial Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
26 July 2018
London
a)
The maintenance and integrity of the Pearson plc website is the
responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the interim financial statements since
they were initially presented on the website.
b)
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
PEARSON
plc
|
|
|
Date:
27
July 2018
|
|
|
By: /s/
NATALIE WHITE
|
|
|
|
------------------------------------
|
|
Natalie
White
|
|
Deputy
Company Secretary
|
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