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PSON Pearson Plc

1,042.50
7.50 (0.72%)
Last Updated: 12:43:12
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Pearson Plc LSE:PSON London Ordinary Share GB0006776081 ORD 25P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  7.50 0.72% 1,042.50 1,042.50 1,043.00 1,045.00 1,034.50 1,034.50 278,483 12:43:12
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Miscellaneous Publishing 3.67B 378M 0.5497 19.00 7.18B

Pearson PLC Final Results (7203F)

23/02/2018 7:00am

UK Regulatory


TIDMPSON

RNS Number : 7203F

Pearson PLC

23 February 2018

Pearson 2017 Preliminary Results (Unaudited)

 
23 February 2018            Pearson, the world's learning company, announces 
                             its preliminary full year results for 2017. 
==========================  ========================================================================== 
Highlights                     Operating performance on track 
                                 *    2017 adjusted operating profit of GBP576m is at the 
                                      top end of our upwardly-revised October 2017 guidance 
                                      range, adjusting for currency movements. 
 
 
                                 *    Adjusted earnings per share of 54.1p is above the 
                                      October 2017 guidance range of 49.0p-52.0p reflecting 
                                      strong profitability, a lower than expected tax rate 
                                      of 11.1% and after a net interest charge of GBP79m. 
 
 
                                 *    Total underlying revenues declined 2%, in line with 
                                      the performance in the nine-months, due to a decline 
                                      of 4% in North America partly offset by stabilisation 
                                      in Core and Growth. 
 
 
                                 *    Statutory operating profit for the year was GBP451m 
                                      (2016: a loss of GBP2,497m). 
 
 
                                 *    Strong cash flow with cash conversion at 116%. 
 
 
                                 *    Robust financial position with net debt of GBP0.4bn 
                                      (2016: GBP1.1bn) benefiting from strong cash flow and 
                                      the proceeds of disposals in 2017. Reduced leverage 
                                      at 0.6x net debt to EBITDA (2016:1.4x). 
 
 
                                 *    Returned GBP153m of capital (repurchasing 22m shares) 
                                      to 31 December 2017 via the GBP300m share buyback 
                                      announced on 17 October 2017. The buyback was 
                                      completed on 16 February 2018 repurchasing a total of 
                                      42.8m shares at an average price of 700p. 
 
 
                                 *    The Board proposes a final dividend of 12p (2016: 
                                      34p), which equates to a full year dividend of 17p 
                                      (2016: 52p). 
 
 
                                 *    As a result of our strategic review announced in May 
                                      2017 we are now classifying US K12 courseware as 
                                      held-for-sale. 
 
 
                                 *    In March, Pearson will publish the first of our fully 
                                      audited efficacy reports into a series of key 
                                      products. 
==========================  ========================================================================== 
John Fallon, Chief Executive said: 
 "Pearson has made good progress against its strategic priorities 
 in 2017 with further simplification of the portfolio, strengthening 
 of our balance sheet and delivering results at the top end of guidance. 
 We are confident we will make further progress against our strategic 
 priorities and grow underlying profit in 2018." 
====================================================================================================== 
Financial Summary 
==========================  ========================================================================== 
                                                               Headline         CER     Underlying 
GBPm                                  2017           2016        growth      growth         growth 
Business performance 
Sales                                4,513          4,552          (1)%        (4)%           (2)% 
Adjusted operating 
 profit                                576            635          (9)%       (13)%           (9)% 
Operating cash flow                    669            663            1% 
Adjusted earnings 
 per share                           54.1p          58.8p          (8)% 
Dividend per share                     17p            52p         (67)% 
Net debt                             (432)        (1,092)           60% 
Statutory results 
Sales                                4,513          4,552          (1)%        (4)%           (2)% 
Operating profit/(loss)                451        (2,497)           n/a 
Profit/(loss) for 
 the year                              408        (2,335)           n/a 
Cash generated from 
 operations                            462            522         (11)% 
Basic earnings / loss 
 per share                           49.9p       (286.8)p           n/a 
 
 

Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude both currency movements and portfolio changes. b) The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the attached condensed consolidated financial statements 2, 3, 4, 5, 7, and 17.

 
Progress on our strategic priorities During 2017 we made good progress 
 on our strategic priorities of digital transformation, investing 
 in structural growth and simplification as we become a leaner and 
 more agile business. 
============================================================================================ 
Grow market share 
 through digital                 *    We have historically provided a measure of digital 
 transformation                       and services revenue for Pearson. On that basis, 
                                      digital and services revenues grew to 69% of sales in 
                                      2017, up from 68% in 2016, with c.10% of our revenues 
                                      derived from non-digital services. 
 
 
                                 *    We are today giving further transparency on our 
                                      digital transformation with an additional view 
                                      showing our revenues split between three categories: 
                                      digital (32%), digitally enabled (27%) and 
                                      non-digital (41%). US higher education digital 
                                      courseware revenue grew by 9% to become the majority 
                                      of our revenues in this segment, although in 2017 
                                      this growth was more than offset by the anticipated 
                                      continuation of underlying market pressures on our 
                                      print courseware revenue. 
 
 
                                 *    US higher education digital courseware revenue grew 
                                      by 9% to become the majority of our revenues in this 
                                      segment, although in 2017 this growth was more than 
                                      offset by the anticipated continuation of underlying 
                                      market pressures on our print courseware revenue. 
 
 
                                 *    We continue to focus on Inclusive Access (Direct 
                                      Digital Access) solutions, signing 210 new 
                                      institutions in 2017 taking the total to over 500 
                                      institutions. During the year, we delivered over 1m 
                                      course enrolments in this way rising to c.5% of our 
                                      higher education courseware revenue. 
 
 
                                 *    We've reduced the rental price of 2,000 eBook titles 
                                      and have seen revenues rise by 22% during the year. 
                                      Furthermore, we saw early success with our print 
                                      rental pilot which started in Fall 2017, and we 
                                      expect to expand the number of titles to around 130 
                                      in Spring 2018. 
 
 
                                 *    We have continued to invest in the Global Learning 
                                      Platform (GLP) and our innovative product and feature 
                                      pipeline. Over the next 12 months we will launch 
                                      pilot versions of new Developmental Math courseware 
                                      and an enhanced Revel platform based on the GLP. 
 
 
                                 *    US student assessment saw growth of 7% in the volume 
                                      of digital tests. 
 
 
                                 *    BTEC registrations in Core student assessment and 
                                      qualifications stabilised in 2017 following a period 
                                      of policy change. 
==========================  ================================================================ 
        Invest in 
     structural growth           *    Online Program Management (OPM), virtual schools 
          markets                     (Connections Education), Professional Certification 
                                      (VUE) and English are our biggest growth 
 +8% OPM course enrolments            opportunities. These are structurally growing markets, 
                                      which drive recurring revenue streams, which 
    +6% Connections FTE               accounted for around 33% of our 2017 revenues 
        enrolments                    excluding Wall Street English (WSE), GEDU and US K12 
                                      courseware. 
   +1% VUE test volumes 
 
   +67% PTE test volumes         *    OPM and Connections Education both delivered good 
                                      enrolment growth partially offset by contract exits 
                                      and in-sourcing, but ended the year with strong 
                                      pipelines that set them up for growth in 2018 and 
                                      beyond. 
 
 
                                 *    VUE signed over 50 new contracts in 2017 including a 
                                      ten-year contract with the Association of American 
                                      Medical Colleges (AAMC) to administer the Medical 
                                      College Admission Test (MCAT). 
 
 
                                 *    English - Pearson Test of English (PTE) grew global 
                                      volumes by 67%. English courseware declined slightly 
                                      as gains in Growth were offset by declines in Core 
                                      and North America ahead of new product introductions. 
                                      Revenues in our English school franchise business in 
                                      Brazil declined as a result of macroeconomic 
                                      pressure. 
==========================  ================================================================ 
Become simpler and             Simplification 
 more efficient                  *    We completed the sales of Global Education (GEDU) and 
                                      a 22% stake in Penguin Random House and announced 
                                      that we had signed an agreement to sell WSE. 
 
 
                                 *    We are today announcing that our US K12 courseware 
                                      business is held for sale and we are in discussions 
                                      with potential buyers regarding a disposal of the 
                                      business. 
 
 
GBP300m                          Restructuring 
 Cost efficiency opportunity       *    The efficiency programme that we presented in August 
                                        2017 is on track to deliver GBP300m of annualised 
                                        cost savings by 2020(2) . 
 
 
                                   *    We are making faster progress than expected in some 
                                        areas and this is reflected in the phasing of costs 
                                        and benefits. Restructuring costs in 2017 were around 
                                        GBP80m, slightly higher than our guided GBP70m and we 
                                        now expect restructuring costs of GBP90m in 2018 and 
                                        GBP130m in 2019 with further incremental savings, 
                                        building on the GBP15m delivered in 2017, of GBP80m 
                                        in 2018, GBP105m in 2019 and GBP100m impacting 2020. 
 
 
                                   *    Many of the savings will come from the simplification 
                                        of our technology architecture which allows the 
                                        increased use of shared service centres enabling us 
                                        to standardise processes and reduce headcount. That, 
                                        in turn, facilitates opportunities such as the 
                                        greater centralisation of procurement and the 
                                        reduction in the number of our office locations. 
 
 
2018 Outlook  In 2018, we expect to report adjusted operating 
               profit of between GBP520m and GBP560m and adjusted 
               earnings per share of 49p to 53p (including businesses 
               held for sale.) The base for 2018 adjusted operating 
               profit guidance is 2017 adjusted operating profit 
               of GBP510m, being GBP576m less the full year 
               impacts of disposals made in 2017 (GBP44m) and 
               less favourable exchange rates at 31 December 
               2017 (GBP22m). 
Board change  Pearson announces that Harish Manwani, a non-executive 
               director of Pearson since 2013, is retiring from 
               the board at the Annual General Meeting in May, 
               and will not be seeking re-election, in anticipation 
               of his future commitments. 
 
               Pearson's chairman Sidney Taurel said: 
               "The board joins me in thanking Harish for his 
               commitment and invaluable contribution to Pearson. 
               He has brought considerable experience, particularly 
               in the terms of change management and organisation 
               structure, emerging markets and consumer products 
               and has helped us to focus our strategic thinking. 
               We wish Harish all the best in his future endeavours." 
 

Contacts

 
                     Jo Russell, Tom Waldron, 
Investor Relations    Anjali Kotak                 +44 (0) 207 010 2310 
===================  ===========================  ===================== 
Media                Tom Steiner                   +44 (0) 207 010 2310 
===================  ===========================  ===================== 
Webcast details      Analyst and investor webcast details: 
                      Pearson's results presentation for investors 
                      and analysts will be audiocast live today from 
                      0900 (GMT) via www.pearson.com. 
 

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. In 2017, Pearson's sales 
                     decreased by GBP39m in headline terms to GBP4,513m. 
                     Adjusted operating profit fell GBP59m to GBP576m 
                     (2016: GBP635m). 
 
                     Currency movements, primarily from the depreciation 
                     of Sterling against the US Dollar and other currencies 
                     during the period, increased sales by GBP126m 
                     and operating profits by GBP23m. 
 
                     The effect of disposals reduced sales by GBP54m 
                     and continuing adjusted operating profits by 
                     GBP24m. 
 
                     Stripping out the impact of portfolio changes 
                     and currency movements, revenues were down 2% 
                     in underlying terms while adjusted operating 
                     profit fell GBP58m or 9%. 
 
                     Trading contributed GBP58m to this decline in 
                     adjusted operating profit, other operating factors 
                     including increased amortisation expense and 
                     staff incentive contributed GBP95m to the decline 
                     and cost inflation, an estimated GBP55m. This 
                     was partly offset by a GBP150m year on year benefit 
                     from restructuring savings. 
 
                     Net interest payable in 2017 was GBP79m, compared 
                     to GBP59m in 2016. The increase was primarily 
                     due to additional charges relating to the early 
                     redemption of various bonds during the year and 
                     higher US interest rates. 
 
                     Our adjusted tax rate in 2017 was 11.1% (2016: 
                     16.5%). The decrease in tax rate was primarily 
                     due to uncertain tax position provision releases 
                     following the expiry of the relevant statutes 
                     of limitation. 
 
                     Adjusted earnings per share were 54.1p (2016: 
                     58.8p). 
 
                     Cash generation. Operating cash flow rose by 
                     1% in headline terms, despite a decrease adjusted 
                     in operating profit, driven by a strong cash 
                     conversion of 116% driven by tight working capital 
                     control, strong collections and high PRH cash 
                     dividends. 
 
                     Return on invested capital. On a gross(3) basis 
                     ROIC decreased from 5.0% in 2016 to 4.3% in 2017 
                     and from 7.2% in 2016 to 6.2% in 2017 on a net(4) 
                     basis. The movement largely reflects lower profit 
                     in the year and increased tax payments. 
 
                     Statutory results. Our statutory profit from 
                     continuing operations of GBP451m in 2017 compares 
                     to a loss of GBP2,497m in 2016. The loss in 2016 
                     is mainly attributable to an impairment charge 
                     to North American goodwill and the higher level 
                     of restructuring spend. 
 
                     Capital allocation. Our capital allocation policy 
                     remains unchanged: to maintain a strong balance 
                     sheet and a solid investment grade rating, to 
                     continue to invest in the business, to have a 
                     sustainable and progressive dividend policy, 
                     and to return surplus cash to our shareholders. 
 
                     Balance sheet. Net debt to EBITDA was 0.6x (or 
                     2.1x on a simplified credit agency view adjusting 
                     for leases and other items). Net debt decreased 
                     to GBP432m (2016: GBP1,092m) reflecting disposal 
                     proceeds, operating cash flow and a benefit from 
                     the weakening of the US Dollar relative to Sterling, 
                     partially offset by restructuring costs, pension 
                     contributions including amounts related to agreements 
                     regarding the disposals of the FT and Penguin, 
                     interest, tax, dividend payments and the share 
                     buyback. 
 
                     During 2017, we took steps to reduce our level 
                     of gross debt and optimise our balance sheet, 
                     successfully executing market tenders repurchasing 
                     $383m of our $500m 3.75% US Dollar Notes due 
                     2022 and $406m of our $500m 3.25% US Dollar Notes 
                     due 2023. In addition, we redeemed the $300m 
                     4.625% Senior Notes due June 2018 and the $550m 
                     6.25% Notes due May 2018. 
 
                     During January 2018, we also successfully repurchased 
                     a total of $569m of debt at an average interest 
                     rate of around 2.5% by tendering for EUR250m 
                     of our Euro 1.875% Notes due May 2021 and EUR200m 
                     of our Euro 1.375% Notes due May 2025 and cancelling 
                     the associated currency swaps. 
 
                     Pension plan. The overall surplus on the UK Group 
                     pension plan of GBP158m at the end of 2016 has 
                     increased to a surplus of GBP545m at the end 
                     of 2017. The increase has arisen due to increased 
                     contributions including GBP227m as part of the 
                     agreements relating to the PRH merger in 2013 
                     and FT Group sale in 2015, together with the 
                     impact of favourable movements in assumptions. 
 
                     Our UK Pension Plan used its strong funding position 
                     to purchase two insurance buy-in policies with 
                     Legal & General and Aviva, covering approximately 
                     GBP1.2bn (one third) of its total liabilities. 
                     This put the Plan in an even stronger position 
                     and substantially reduced Pearson's future pension 
                     funding risk, at no further cost to the company. 
 
                     Dividend. In line with our policy, the Board 
                     is proposing a final dividend of 12p (2016: 34p) 
                     which results in an overall dividend of 17p (2016: 
                     52p) subject to shareholder approval. 
 
                     Share buyback. We launched a GBP300m share buyback, 
                     beginning on 18 October 2017 utilising part of 
                     the proceeds from the disposal of a 22% stake 
                     in Penguin Random House. We completed the programme 
                     on 16 February 2018. 
 
                     Businesses held for sale. Following the decision 
                     to sell both WSE and the K12 school courseware 
                     business in the US, the assets and liabilities 
                     of those businesses have been classified as held 
                     for sale on the balance sheet at 31 December 
                     2017. 
2018 Outlook        2017 has been a year of progress for Pearson, 
                     delivering adjusted operating profit at the top 
                     end of our guidance range and continuing to invest 
                     in the digital transformation and simplification 
                     of the company. We expect to make further progress 
                     in 2018, with underlying profit growth, reporting 
                     adjusted operating profit of between GBP520m 
                     and GBP560m and adjusted earnings per share of 
                     49p to 53p. This reflects our portfolio and exchange 
                     rates as at 31 December 2017 and the following 
                     factors: 
 
                     Trading. We expect ongoing headwinds in our US 
                     higher education courseware to be offset by improving 
                     conditions in our other businesses. 
 
                     Portfolio changes. We completed the sale of a 
                     22% stake in Penguin Random House and our Chinese 
                     English test-prep business GEDU in 2017. The 
                     annualised impact of these disposals will reduce 
                     2018 operating profit by GBP44m. We expect to 
                     complete the disposal of WSE and our stake in 
                     Mexican joint-venture Utel in the first-half 
                     of 2018 and have today announced that we have 
                     concluded the strategic review of our US K12 
                     courseware business and have classified the business 
                     as held for sale. WSE contributed GBP195m to 
                     2017 sales and WSE and Utel contributed GBP5m 
                     to 2017 adjusted operating profit and GBP5m to 
                     statutory profit. US K12 courseware is expected 
                     to contribute GBP385m to 2018 sales and around 
                     GBP11m to 2018 operating profit. 
 
                     Other operational factors, incentive and inflation. 
                     Our 2018 guidance incorporates cost inflation 
                     of c.GBP50m together with other operational factors 
                     and incentives of GBP30m. 
 
                     Restructuring benefits. We expect incremental 
                     in-year benefits from the 2017-2019 restructuring 
                     programme of GBP80m in 2018. Exceptional restructuring 
                     costs of GBP90m will continue to be excluded 
                     from adjusted operating profit. 
 
                     Interest & Tax. We expect a 2018 net interest 
                     charge of c.GBP45m and a tax rate of 20%. 
 
                     Currency. In 2017, Pearson generated approximately 
                     61% of its sales in the US, 7% in Greater China, 
                     5% in the Euro zone, 3% in Brazil, 3% in Canada, 
                     3% in Australia, 2% in South Africa and 1% in 
                     India and our guidance is based on exchange rates 
                     at 31 December 2017. 
 
                     We calculate that a 5c move in the in the US 
                     Dollar exchange rate to Sterling would impact 
                     adjusted EPS by around 2p to 2.5p. 
Notes: 
 (1.) Digital includes products such as digital courseware and eBooks 
 and digital services such as OPM and virtual schools. An example 
 of Digitally-enabled would be professional certification services 
 built around the administration of computer based tests, but in 
 physical centres that ensure the security of the test. Non-digital 
 includes our print products, and also non-digital services such 
 as CTI our university in South Africa. 
 (2) A significant part of these costs and savings are US Dollar 
 denominated and other non-Sterling currencies and are therefore 
 subject to exchange rate movements over the implementation timeframe. 
 (3) Gross ROIC is a non-GAAP measure and has been disclosed as it 
 is part of Pearson's key business performance measures. ROIC is 
 used to track investment returns and to help inform capital allocation 
 decisions within the business. Average values for total invested 
 capital are calculated as the average monthly balance for the year. 
 (4) Net ROIC. For the first time in 2017 we have presented ROIC 
 on a net basis after removing impaired goodwill from the invested 
 capital balance. The net approach assumes that goodwill that has 
 been impaired is treated in a similar fashion to goodwill disposed 
 as it is no longer being used to generate returns. 
=========================================================================== 
 

Operational review - Geography

 
                                         Headline      CER  Underlying 
GBP millions                2017   2016    growth   growth      growth 
Sales 
North America              2,929  2,981      (2)%     (4)%        (4)% 
Core                         815    803        1%     (1)%          0% 
Growth                       769    768        0%     (4)%          0% 
Total sales                4,513  4,552      (1)%     (4)%        (2)% 
 
Adjusted operating 
 profit 
North America                394    420      (6)%    (10)%       (10)% 
Core                          50     57     (12)%    (14)%       (14)% 
Growth                        38     29       31%      17%          3% 
Penguin Random House          94    129     (27)%    (29)%        (8)% 
Total adjusted operating 
 profit                      576    635      (9)%    (13)%        (9)% 
 

See note 2 in the consolidated financial statements for the reconciliation to the equivalent statutory measures.

 
North America (65% of revenues) 
Revenues declined 4% in underlying terms, primarily due to anticipated 
 declines in higher education and school courseware, school assessment, 
 and Learning Studio, a learning management system we are retiring. 
 
 North American higher education courseware fell 3%. School courseware 
 fell high single digits, impacted by a lower adoption participation 
 rate and weak Open Territory sales in the second half of the year. 
 School assessment declined high-single digits, due to previously 
 announced contract losses. Learning Studio revenues continued to 
 decline as we move towards the retirement of the product in 2019. 
 Offsetting that we saw modest growth in both virtual schools and 
 Online Program Management (OPM) due to good underlying volume growth 
 partially offset by some contract exits and in-sourcing. Revenues 
 in North American Professional Certification were flat on phasing 
 of new contracts and a slowdown in IT certification late in 2017. 
 
 Adjusted operating profits fell 10% in underlying terms, due primarily 
 to the impact of lower sales and other operating factors partially 
 offset by restructuring savings. 
Courseware     In school, revenue declined high single digits 
                primarily due to sharp declines across Open Territory 
                states in the second half of the year. This was 
                partially offset by growth in Adoption state 
                revenues where strong performance in Texas Grades 
                K-12 Spanish, Indiana Grades K-12 Science and 
                South Carolina Grades 6-8 Science outweighed 
                a lower adoption participation rate resulting 
                from our decision not to compete for the California 
                Grades K-8 English Language Arts (ELA) adoption 
                with a core basal programme. 
 
                Our new adoption participation rate fell to 61% 
                from 64% in 2016. We won an estimated 38% share 
                of adoptions competed for (30% in 2016) and 29% 
                of total new adoption expenditure of $365m (19% 
                of $470m in 2016). 
 
                In higher education, total US college enrolments, 
                as reported by the National Student Clearinghouse, 
                fell 1.1%, with combined two-year public and 
                four-year for-profit enrolments declining 2.5%. 
                Enrolment weakness was particularly focused on 
                part-time students where enrolment declined 3.3%, 
                a bigger decline than in any of the last five 
                years. Full-time enrolment grew 0.3%, the first 
                expansion since Fall 2010. 
 
                Net revenues in our higher education courseware 
                business declined 3% during the year. We estimate 
                around 2% of this decline was driven by lower 
                enrolment; just over 1% from the adoption of 
                Open Educational Resources (OER); around 5% from 
                the secondary market, new initiatives and other 
                factors, primarily the growth in print rental; 
                offset by c.3% benefit from institutional selling 
                and the shift to digital and a 2% benefit in 
                2017 from lower returns by the channel. 
 
                In 2017, Pearson's US higher education courseware 
                market share, as reported by MPI, was in the 
                upper half of the c40-41.5% range seen over the 
                last five years. 
 
                During 2017 we performed strongly in Statistics 
                and Business Statistics, Biology and Accounting. 
                Statistics benefited from the popularity of "best 
                in class" learning application StatCrunch, Biology 
                from the success of Campbell Biology 11e and 
                MasteringBiology, and Accounting from the success 
                of Miller-Nobles Horngren Accounting 11e and 
                MyAccountingLab. This was offset by weakness 
                in Information Technology, particularly in the 
                for-profit sector and continued softness in Developmental 
                Mathematics. 
 
                Digital revenues grew 9% benefiting from continued 
                growth in direct sales, favourable mix and selected 
                price increases. Global digital registrations 
                of MyLab and related products fell 1%. In North 
                America, digital registrations fell 3% with good 
                growth in Science, Business & Economics and Revel 
                offset by lower overall enrolment and continued 
                softness in Developmental Mathematics. Revel 
                registrations grew more than 50%. Including stand-alone 
                e-book registrations, total North American digital 
                registrations were flat. 
 
                The actions announced in early 2017 to promote 
                access over ownership met with success. We reduced 
                the rental price of 2,000 eBook titles and saw, 
                eBook revenues increase more than 20% in response. 
                Our print rental programme has had a successful 
                start, and we have added more than 90 further 
                titles. In institutional courseware solutions 
                we signed 210 institutions to our Inclusive Access 
                (Direct Digital Access, DDA) solutions, taking 
                the total to over 500. During the year, we delivered 
                over 1m course enrolments with inclusive access 
                rising to c.5% of our higher education revenue 
                as more colleges and faculties see the benefit 
                of this model. 
Assessment     In school assessment (State and National assessments), 
                revenues declined high single digits due to previously 
                announced contract losses. 
 
                Colorado announced in June 2017 they will be 
                leaving the PARCC consortium after the 17/18 
                school year. Pearson won the subsequent bid to 
                deliver ELA, Math, Science, and Social Studies 
                for at least the next six years. 
 
                Pearson secured contract extensions in Virginia, 
                Indiana, Arizona, Minnesota, Puerto Rico, Kentucky, 
                New York City and North Carolina and for the 
                National Assessment of Educational Progress. 
 
                We delivered 25.3m standardised online tests 
                to K12 students, up 7% from 2016. TestNav 8, 
                Pearson's next-generation online test platform, 
                supported a peak load of 752,000 tests in a single 
                day and provided 99.99% up time. Our AI scoring 
                systems scored 35m responses to open-ended test 
                items, around 30% of the total. Paper based standardised 
                test volumes fell 7% to 20.4m. 
 
                In Professional Certification, VUE global test 
                volume rose 1% to over 15m. Revenues in North 
                America were flat, with continued growth in certification 
                for professional bodies, offset by modest declines 
                in US teacher certification and the GED High 
                School Equivalency Test, after strong performance 
                last year, and by weakness in higher level IT 
                certifications in the second half. 
 
                We signed over 50 new contracts in 2017 including 
                a ten-year contract with the (AAMC) to administer 
                the MCAT, and contracts with ExxonMobil for five 
                years and the Project Management Institute for 
                four years. Our renewal rate on existing contracts 
                continues to be over 95%. During the year we 
                renewed over 50 contracts including the American 
                Board of Internal Medicine (ABIM) for nine years, 
                Florida Teacher Licensure Assessments for five 
                years, Pharmacy Technician Certification Board 
                (PTCB) for five years, and The Institute of Internal 
                Auditors for four years. 
 
                Clinical assessment sales declined slightly on 
                an absence of new major product introductions. 
                Q-Interactive, Pearson's digital solution for 
                Clinical Assessment administration, saw continued 
                strong growth in license sales with sub-test 
                administrations up more than 33% over the same 
                period last year. 
Services       Connections Education our virtual school business, 
                served nearly 78,000 Full Time Equivalent students 
                through full-time virtual and blended school 
                programs, up 6% on last year. 
 
                Two new full-time online, state-wide, partner 
                schools opened for the 2017-18 school year. Enrolment 
                growth from new and existing schools was partially 
                offset by the termination of a school partnership 
                at the end of the 2016-2017 school year. 
 
                Revenues grew modestly as enrolment growth was 
                partially offset by increased in-sourcing, as 
                some partners took non-core services in-house. 
 
                Enrolment and revenue is expected to grow in 
                2018 as growth in existing school partnerships 
                and the opening of new partner schools for the 
                2018-19 school year offsets the termination of 
                two further contracts and the in-sourcing of 
                services by some customers. 
 
                The 2017 Connections Academy Parent Satisfaction 
                Survey showed strong results with 92% of families 
                with students enrolled in full-time online partner 
                schools stating they would recommend the schools 
                to others and 95% agreeing that the curriculum 
                is of high quality. Results from the survey are 
                available at pear.sn/HPTn30dCNHH. 
 
                In Pearson Online Services, revenues declined 
                high single digits, primarily due to a decline 
                in Learning Studio revenues as we retire the 
                product and the restructuring of smaller non-OPM 
                contracts. Learning Studio declined by just over 
                50% to a revenue contribution of GBP11m in 2017. 
                In OPM, we grew revenues modestly as course enrolments 
                grew strongly, up 8% to more than 341,000, boosted 
                by good growth and program extensions at key 
                partners including Arizona State University Online, 
                Maryville University, Rutgers University and 
                University of Alabama at Birmingham and from 
                new partners, partially offset by contract exits. 
 
                We signed 45 multi-year programs in 2017 renewed 
                19 programs and launched 14 new programs at partners 
                including Maryville University, Duquesne University 
                and Ohio University. During the year we also 
                agreed the termination of nine programs that 
                were not mutually viable and did not renew a 
                further six programs. 
 
                Brinker International, Inc. (NYSE: EAT), one 
                of the world's leading casual dining restaurant 
                companies and owner of Chili's(R) Grill & Bar 
                and Maggiano's Little Italy(R), with over 1,600 
                owned, operated and franchised restaurant locations, 
                partnered with Pearson to launch a comprehensive 
                employer-education program Best You EDU that 
                provides free educational opportunities to Brinker 
                employees including foundational, GED and Associate 
                Degree programs. 
2018 Outlook   In US higher education courseware, we expect 
                revenues to be flat to down mid-single digit 
                percent as similar pressures seen in the last 
                two years continue with lower college enrolments, 
                increased use of OER and attrition from growth 
                in the secondary market driven by print rental, 
                are partially offset by growth in digital revenues, 
                benefits from our actions to promote access over 
                ownership and a continued normalisation of channel 
                returns behaviour. 
 
                Evidence of a marginally slower rate of decline 
                in US student enrolment together with slightly 
                lower than expected attrition from OER in 2017, 
                mean that we are now planning for an underlying 
                decline in demand of around 6% in US higher education 
                courseware, slightly improved from our prior 
                range of 6% to 7%. 
 
                We expect stable testing revenues in North America 
                student assessment as new contracts offset a 
                continued contraction in revenue associated with 
                our PARCC contract. 
 
                Connections Education is expected to grow modestly 
                as new partner school openings and good growth 
                in enrolment is partially offset by in-sourcing 
                of non-core services by some partners and contract 
                exits. North American Online Program Management 
                is expected to see modest growth in revenue as 
                investment in new programs begin to ramp up. 
                Professional certification is expected to grow 
                revenues in the mid-single digits benefiting 
                from new contracts, including our nationwide 
                contract with the AAMC. 
=============  ========================================================== 
Core (18% of revenues) 
Revenues grew 1% in headline terms, were down 1% at CER and flat 
 on underlying terms, primarily due to growth in OPM in the UK and 
 Australia and growth in Pearson Test of English offset by declines 
 in school, higher education, English courseware and student assessment 
 and qualifications. 
 
 Adjusted operating profit declined 14%, or GBP8m, in underlying 
 terms due to revenue mix, investment in new products and services 
 and business exits, partially offset by restructuring savings. 
Courseware     Courseware revenues declined moderately. In school, 
                revenues declined in Australia, due to market 
                contraction in the primary sector partly offset 
                by slight growth in secondary, and declines in 
                smaller markets in Europe and Africa. In higher 
                education, revenues were down slightly due to 
                declines in smaller markets, whilst in Australia 
                and the UK an increase in direct to institution 
                sales and a further shift to digital offset declines 
                in traditional textbook sales. In English, there 
                were declines in smaller markets. 
Assessment     In student assessment and qualifications, revenues 
                declined mid-single digits primarily due to lower 
                AS level, iGCSE and Apprenticeship volumes as 
                a result of policy changes. BTEC revenues also 
                declined modestly as revenues recognised in 2017 
                lagged the greater stability we have seen in 
                registrations and billed revenue in the year. 
                We successfully delivered the National Curriculum 
                Test for 2017, marking 3.5m scripts, up slightly 
                from 2016. 
 
                Clinical assessment grew strongly with revenues 
                benefiting from strong growth in the new editions 
                of the Wechsler Intelligence Scale for Children 
                (WISC-V) and the Clinical Evaluation of Language 
                Fundamentals (CELF-5). 
 
                Pearson Test of English (PTE) saw continued strong 
                growth in test volumes, which rose 84% from 2016, 
                driven primarily by its use to support visa applications 
                to the Australian Department of Immigration and 
                Border Protection and good growth in New Zealand. 
 
                In Professional certification, revenues were 
                flat as the impact of last year's renegotiated 
                terms of the UK Driving Theory test for the DVSA 
                was offset by growth from new and existing contracts. 
Services       In higher education services, revenues grew strongly. 
                Our OPM revenues were up 33%. In Australia, we 
                saw good growth due to our successful partnership 
                with Monash University, and continued success 
                of the Graduate Diploma in Psychology. We have 
                a total of c.9,300 course registrations across 
                the seven programs in Australia up from c.6,900 
                in 2016. In the UK, we launched five new programs 
                in addition to the two launched in 2016. UK course 
                registrations grew, reaching c.1,400 compared 
                to c.370 in 2016. 
 
                English services grew, with strong growth in 
                WSE Italy, due to the opening of new centres 
                in 2015 and 2016, partially offset by declines 
                in Japan. 
2018 Outlook   In Core, we are expecting modest growth driven 
                by our recent investments in student assessment 
                and qualifications, where we are offering new 
                products and services of considerably greater 
                value, along with continued growth in PTE and 
                OPM with 10 new program launches in the UK, and 
                growth in existing programs in Australia. 
=============  ========================================================== 
Growth (17% of revenues) 
Revenues were flat in both headline and underlying terms due to 
 growth in China, school courseware in South Africa and Pearson Test 
 of English, offset by declines in higher education services primarily 
 due to lower enrolment at CTI and business disposals in India, and 
 declines in Brazil. Revenues were down 4% at CER due to the disposal 
 of GEDU. 
 
 Adjusted operating profit increased 3% in underlying terms, reflecting 
 the higher revenues in China, South Africa school courseware and 
 PTE in India, together with the benefits of restructuring, partially 
 offset by lower revenues in Brazil. 
Courseware     Courseware revenues grew moderately, due to strong 
                growth in school textbook sales in South Africa 
                and English language courseware in China, partially 
                offset by weakness in Brazil. 
Services       In English services, growth in Wall Street English 
                in China, due to new centre openings, was offset 
                by declines in Brazil due to macroeconomic pressures. 
 
                In school services, revenue fell, with student 
                enrolment in our sistemas business in Brazil 
                falling 14% primarily due to NAME, our public 
                sistema, where we took the strategic decision 
                to exit two thirds of our contracts with municipalities 
                due to unattractive economic prospects, together 
                with a reduction in student enrolments in our 
                Dom Bosco private sistema due to challenging 
                economic conditions. In India, Pearson MyPedia, 
                an inside service 'sistema' solution for schools, 
                expanded to over 500 schools with approximately 
                157,000 learners. 
 
                In higher education services, revenues declined 
                sharply due to a 14% fall in total student enrolment 
                at CTI our university in South Africa driven 
                by the cumulative impact of economic factors 
                in recent years, partially offset by improved 
                new student enrolments in 2017, together with 
                business exits in India. 
Assessment     Professional Certification grew strongly. Pearson 
                Test of English saw over 30% growth in the volume 
                of tests taken in India. 
2018 Outlook   In our growth markets we expect a modest increase 
                in revenues, with growth in China in ELT products, 
                PTE and in South Africa due to improving enrolments 
                in CTI partially offset by declines in school 
                courseware after a strong 2017. In Brazil, we 
                expect revenue to increase modestly from growth 
                in Wizard and school sistemas, partially offset 
                by declines in government contracts. In India, 
                we expect PTE and MyPedia to continue growing. 
=============  ========================================================== 
Penguin Random House 
Following the disposal of a 22% stake on 5 October 2017 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 up slightly on a headline and underlying basis year on 
 year on rising audio sales, broadly stable print sales, and modest 
 ongoing declines in demand for e-books, whilst the business benefitted 
 from bestsellers by Dan Brown, R.J. Palacio, John Grisham, Jamie 
 Oliver, and Dr. Seuss. 
2018 Outlook   In Penguin Random House, we anticipate a broadly 
                level publishing performance and expect an annual 
                after-tax contribution of around GBP60-65m to 
                our adjusted operating profit. 
=============  ========================================================== 
 

FINANCIAL REVIEW

Operating result

Sales decreased on a headline basis by GBP39m or 1% from GBP4,552m in 2016 to GBP4,513m in 2017 and adjusted operating profit decreased by GBP59m or 9% from GBP635m in 2016 to GBP576m in 2017 (for a reconciliation of this measure see note 2 to the condensed financial statements).

The headline basis compares the reported results. We also present sales and profits on an underlying basis which exclude the effects of exchange and the effect of portfolio changes arising from acquisitions and disposals. 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 2016 or 2017. Portfolio changes mainly relate to the closure of our English language schools in Germany and the sale of the Pearson English Business Solutions business in North America during 2016 and the sale of our test preparation business in China and reduction in our equity interest in PRH in 2017. Acquisitions were not significant in either 2016 or 2017.

On an underlying basis, sales decreased by 2% in 2017 compared to 2016 and adjusted operating profit decreased by 9%. Currency movements increased sales by GBP126m and adjusted operating profit by GBP23m. Portfolio changes decreased sales by GBP54m and adjusted operating profit by GBP24m.

Adjusted operating profit includes the results from discontinued operations when relevant but excludes intangible charges for amortisation and impairment, acquisition related costs, gains and losses arising from acquisitions and disposals and the cost of major restructuring. In 2017 we have excluded the impact of US tax reform on our associate operating profit as outlined in the section on taxation. A summary of these adjustments is included below and in more detail in note 2 to the condensed financial statements.

 
all figures in GBP millions              2017     2016 
 
 
Operating profit / (loss)                 451  (2,497) 
Add back: Cost of major restructuring      79      338 
Add back: Intangible charges              166    2,769 
Add back: Other net gains and losses    (128)       25 
Add back: Impact of US tax reform           8        - 
--------------------------------------  -----  ------- 
Adjusted operating profit                 576      635 
 

Amortisation and impairment charges in 2017 were GBP166m compared to a charge of GBP2,769m in 2016. The 2016 charge includes an impairment charge to North American goodwill of GBP2,548m. This charge arose following trading in the final quarter of 2016 and the consequent revision to strategic plans which reflected underlying issues in the North American higher education courseware market that were more severe than had previously been anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops.

Other net gains of GBP128m in 2017 largely relate to the sale of our test preparation business in China which resulted in a profit on sale of GBP44m and the part sale of our share in PRH which resulted in a profit of GBP96m. Other net losses in 2016 of GBP25m mainly relate to the closure of our English language schools in Germany and the sale of the Pearson English Business Solutions business in North America.

Total restructuring cost in 2016 amounted to GBP338m and included costs associated with headcount reductions, property rationalisation and closure or exit from certain systems, platforms, products and supplier and customer relationships. In May 2017, we announced an additional restructuring programme, to run between 2017 and 2019, that will drive further significant cost savings. Costs incurred to date relating to this new programme were GBP79m at the end of 2017 and related to cost efficiencies in our higher education and enabling functions together with further rationalisation of the property portfolio.

The statutory operating profit from continuing operations of GBP451m in 2017 compares to a loss of GBP2,497m in 2016. The loss in 2016 is mainly attributable to the impairment charge to North American goodwill noted above and the higher level of restructuring spend.

Net finance costs

Net interest payable was GBP79m in 2017, compared to GBP59m in 2016. The increase was primarily due to higher US interest rates in 2017, additional charges relating to the early redemption of various bonds during the year and some additional interest on tax provisions. In March and November 2017 respectively, the Group redeemed the $550m 6.25% Global dollar bonds and $300m 4.625% US dollar notes, both originally due in 2018. In addition, in August 2017, the Group redeemed $385 m out of the $500m 3.75% US dollar notes due in 2022 and $406m out of the $500m 3.25% US dollar notes due in 2023. Although there is a charge in respect of the early redemptions there are partial year savings as a result which have flowed through the income statement in the period since redemption, with the full annualised savings coming through in 2018.

Finance income relating to retirement benefits has been excluded from our adjusted earnings as we believe the income statement presentation does not reflect the economic substance of the underlying assets and liabilities. Also included in the statutory definition of net finance costs (but not in our adjusted measure) are interest costs relating to acquisition consideration, foreign exchange and other gains and losses on derivatives. Interest relating to acquisition consideration is excluded from adjusted earnings as it is considered to be part of the acquisition cost rather than being reflective of the underlying financing costs of the Group. Foreign exchange and other gains and losses are excluded from adjusted earnings as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity (for more information see note 3 to the condensed financial statements).

In 2017, the total of these items excluded from adjusted earnings was a gain of GBP49m compared to a loss of GBP1m in 2016. Finance income relating to retirement benefits decreased from GBP11m in 2016 to GBP3m in 2017 reflecting the comparative funding position of the plans at the beginning of each year. This decrease was more than offset by foreign exchange gains on unhedged cash and cash equivalents and other financial instruments that generated losses in 2016. For a reconciliation of the adjusted measure see note 3 to the condensed financial statements.

Taxation

The effective tax rate on adjusted earnings in 2017 was 11.1% compared to an effective rate of 16.5% in 2016. The decrease in tax rate was primarily due to uncertain tax position provision releases following the expiry of the relevant statutes of limitation. For a reconciliation of the adjusted measure see notes 4 and 5 to the condensed financial statements.

The reported tax charge on a statutory basis in 2017 was GBP13m (3.1%) compared to a benefit of GBP222m (8.7%) in 2016. The statutory tax benefit in 2016 was mainly due to the release of deferred tax liabilities relating to tax deductible goodwill that was impaired. Operating tax paid in 2017 was GBP75m compared to GBP63m in 2016.

As a result of US tax reform, the reported tax charge on a statutory basis includes a benefit from revaluation of deferred tax balances to the reduced federal rate of GBP5m and a repatriation tax charge of GBP6m. The Group continues to analyse the detail of the new legislation and this may result in revisions to these impacts.

In addition to the impact on the reported tax charge, the Group's share of profit from associates was adversely impacted by GBP8m. The charge has been excluded from our adjusted measures.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of GBP262m in 2017 compares to a gain in 2016 of GBP913m and has arisen due to the relative weakness of the US dollar compared to Sterling. A significant proportion of the Group's operations are based in the US and the US dollar weakened in 2017 from an opening rate of GBP1:$1.23 to a closing rate at the end of 2017 of GBP1:$1.35. At the end of 2016 most of the currencies that Pearson is exposed to had strengthened relative to Sterling following the Brexit vote. In 2016 the US dollar had strengthened in comparison to the opening rate moving from GBP1:$1.47 to GBP1:$1.23.

Also included in other comprehensive income in 2017 is an actuarial gain of GBP182m in relation to retirement benefit obligations of the Group and our share of the retirement benefit obligations of PRH. The gain arises from the impact of favourable movements in mortality assumptions, discount rate, member options on retirement and asset returns which offset the impact of the UK plan's purchase of insurance buy-in policies. The gain in 2017 compares to an actuarial loss in 2016 of GBP276m.

Cash flows

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 17 to the condensed financial statements). Operating cash flow increased on a headline basis by GBP6m from GBP663m in 2016 to GBP669m in 2017. The increase is also reflected in operating cash conversion (operating cash flow as a percentage of adjusted operating profit) which increased from 104% in 2016 to 116% in 2017. The increase is largely explained by increased dividends from PRH and increased cash collections.

The equivalent statutory measure, net cash generated from operations, was GBP462m in 2017 compared to GBP522m in 2016. Compared to operating cash flow, this measure includes restructuring costs and special pension contributions but does not include regular dividends from associates or capital expenditure on property, plant, equipment and software. Restructuring costs paid decreased from GBP167m in 2016 to GBP71m in 2017 primarily due to the new restructuring programme only commencing during the second half of 2017. Special pension contributions increased to GBP227m in 2017 from GBP90m in 2016. In 2016 the funding was in respect of the FT Group disposal in 2015 and in 2017 related both to the FT Group disposal (GBP25m) and to agreements relating to the PRH merger in 2013 (GBP202m).

The Group's net debt decreased from GBP1,092m at the end of 2016 to GBP432m at the end of 2017 as the proceeds from disposals, operating cash flow and the positive effect of exchange rate movements more than offset restructuring spend, tax, interest, pension and dividend payments. The Group's gross debt was restructured during the year including the repayment of various bonds as detailed in note 15 to the condensed financial statements.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. Our UK Group pension plan has by far the largest defined benefit section. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans.

The charge to profit in respect of worldwide pensions and retirement benefits amounted to GBP72m in 2017 (2016: GBP70m) of which a charge of GBP75m (2016: GBP81m) was reported in adjusted operating profit and income of GBP3m (2016: GBP11m) was reported against other net finance costs.

The overall surplus on the UK Group pension plan of GBP158m at the end of 2016 has increased to a surplus of GBP545m at the end of 2017. The increase has arisen principally due to increased contributions, including the GBP227m as part of the agreements relating to PRH and FT Group, and due to the impact of favourable movements in assumptions discussed above.

In total, our worldwide net position in respect of pensions and other post-retirement benefits increased from a net asset of GBP19m at the end of 2016 to a net asset of GBP441m at the end of 2017.

Dividends

The dividend accounted for in our 2017 financial statements totalling GBP318m represents the final dividend in respect of 2016 (34.0p) and the interim dividend for 2017 (5.0p). We are proposing a final dividend for 2017 of 12.0p bringing the total paid and payable in respect of 2017 to 17.0p. This final 2017 dividend which was approved by the Board in February 2018, is subject to approval at the forthcoming AGM and will be charged against 2018 profits. For 2017, the dividend is covered 3.2 times by adjusted earnings.

Share buyback

The GBP300m share buyback programme announced in October 2017 was completed on 16 February 2018. In 2017, our brokers purchased 21m shares at a value of GBP153m of which GBP149m had been cancelled at 31 December 2017. Cash payments of GBP149m had been made in respect of the purchases with the outstanding GBP4m settlement made at the beginning of January 2018. This GBP4m together with the remaining value of the buy-back programme (GBP147m) was recorded as a liability on the balance sheet at 31 December 2017. A further 22m shares were repurchased under the programme in 2018. The shares bought back are being cancelled and the nominal value of these shares is transferred to a capital redemption reserve. The nominal value of shares cancelled at 31 December 2017 was GBP5m.

Return on invested capital (ROIC)

Our ROIC is calculated as adjusted operating profit less cash tax paid, expressed as a percentage of average gross invested capital. For the first time in 2017 we have presented an additional ROIC measure showing ROIC on a net basis. The net basis removes impaired goodwill from the invested capital balance. The net approach assumes that goodwill which has been impaired is treated in a similar fashion to goodwill disposed as it is no longer being used to generate returns.

On a gross basis ROIC decreased from 5.0% in 2016 to 4.3% in 2017 and from 7.2% in 2016 to 6.2% in 2017 on a net basis. The movement largely reflects lower profit in the year and increased tax payments (see note 18 to the condensed financial statements).

Businesses held for sale

Following the decision to sell both our Wall Street English language teaching business and the K12 school courseware business in the US, the assets and liabilities of those businesses have been classified as held for sale on the balance sheet at 31 December 2017.

CONDENSED CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2017

 
 
all figures in GBP millions                         note     2017       2016 
 
 
Continuing operations 
 
Sales                                                2      4,513      4,552 
Cost of goods sold                                        (2,066)    (2,093) 
--------------------------------------------------  ----  -------  --------- 
Gross profit                                                2,447      2,459 
 
Operating expenses                                        (2,202)    (2,480) 
Other net gains and losses                           2        128       (25) 
Impairment of intangible assets                                 -    (2,548) 
Share of results of joint ventures and associates              78         97 
--------------------------------------------------  ----  -------  --------- 
Operating profit / (loss)                            2        451    (2,497) 
 
Finance costs                                        3      (110)       (97) 
Finance income                                       3         80         37 
--------------------------------------------------  ----  -------  --------- 
Profit / (loss) before tax                           4        421    (2,557) 
Income tax                                           5       (13)        222 
--------------------------------------------------  ----  -------  --------- 
Profit / (loss) for the year                                  408    (2,335) 
 
 
 
Attributable to: 
Equity holders of the company                                 406    (2,337) 
Non-controlling interest                                        2          2 
 
 
Earnings / (loss) per share (in pence per share) 
 Basic                                                6     49.9p   (286.8)p 
 Diluted                                              6     49.9p   (286.8)p 
 

The accompanying notes to the condensed consolidated financial statements form an integral part of the financial information.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2017

 
 
all figures in GBP millions                                                    2017     2016 
 
 
Profit / (loss) for the year                                                    408  (2,335) 
 
Items that may be reclassified to the income statement 
Net exchange differences on translation of foreign operations - Group         (158)      910 
Net exchange differences on translation of foreign operations - associates    (104)        3 
Currency translation adjustment disposed                                       (51)        - 
Attributable tax                                                                  9      (5) 
 
Fair value gain on other financial assets                                        13        - 
Attributable tax                                                                (4)        - 
 
Items that are not reclassified to the income statement 
Remeasurement of retirement benefit obligations - Group                         175    (268) 
Remeasurement of retirement benefit obligations - associates                      7      (8) 
Attributable tax                                                               (42)       58 
Other comprehensive (expense) / income for the year                           (155)      690 
 
Total comprehensive income / (expense) for the year                             253  (1,645) 
 
Attributable to: 
Equity holders of the company                                                   251  (1,648) 
Non-controlling interest                                                          2        3 
----------------------------------------------------------------------------  -----  ------- 
 

CONDENSED CONSOLIDATED BALANCE SHEET

as at 31 December 2017

 
 
 all figures in GBP millions                            note      2017      2016 
 
 
 Property, plant and equipment                                     281       343 
 Intangible assets                                       11      2,964     3,442 
 Investments in joint ventures and associates                      398     1,247 
 Deferred income tax assets                                         95       451 
 Financial assets - derivative financial instruments               140       171 
 Retirement benefit assets                                         545       158 
 Other financial assets                                             77        65 
 Trade and other receivables                                       103       104 
-----------------------------------------------------  -----  --------  -------- 
 Non-current assets                                              4,603     5,981 
 
 Intangible assets - pre-publication                               741     1,024 
 Inventories                                                       148       235 
 Trade and other receivables                                     1,110     1,357 
 Financial assets - marketable securities                            8        10 
 Cash and cash equivalents (excluding overdrafts)                  518     1,459 
-----------------------------------------------------  -----  --------  -------- 
 Current assets                                                  2,525     4,085 
 
 Assets classified as held for sale                      10        760         - 
 Total assets                                                    7,888    10,066 
 
 Financial liabilities - borrowings                            (1,066)   (2,424) 
 Financial liabilities - derivative financial 
  instruments                                                    (140)     (264) 
 Deferred income tax liabilities                                 (164)     (466) 
 Retirement benefit obligations                                  (104)     (139) 
 Provisions for other liabilities and charges                     (55)      (79) 
 Other liabilities                                       12      (133)     (422) 
-----------------------------------------------------  -----  --------  -------- 
 Non-current liabilities                                       (1,662)   (3,794) 
 
 Trade and other liabilities                             12    (1,342)   (1,629) 
 Financial liabilities - borrowings                               (19)      (44) 
 Current income tax liabilities                                  (231)     (224) 
 Provisions for other liabilities and charges                     (25)      (27) 
-----------------------------------------------------  -----  --------  -------- 
 Current liabilities                                           (1,617)   (1,924) 
 
 Liabilities classified as held for sale                 10      (588)         - 
-----------------------------------------------------  -----  --------  -------- 
 Total liabilities                                             (3,867)   (5,718) 
 
 Net assets                                                      4,021     4,348 
 
 Share capital                                                     200       205 
 Share premium                                                   2,602     2,597 
 Treasury shares                                                  (61)      (79) 
 Reserves                                                        1,272     1,621 
-----------------------------------------------------  -----  --------  -------- 
 Total equity attributable to equity holders 
  of the company                                                 4,013     4,344 
 Non-controlling interest                                            8         4 
-----------------------------------------------------  -----  --------  -------- 
 Total equity                                                    4,021     4,348 
 

The condensed consolidated financial statements were approved by the Board on 22 February 2018.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2017

 
 
                                       Equity attributable to equity holders 
                                                   of the company 
                  ------------------------------------------------------------------------------- 
all figures in                                   Capital     Fair 
GBP                 Share    Share  Treasury  redemption    value  Translation  Retained           Non-controlling   Total 
millions          capital  premium    shares     reserve  reserve      reserve  earnings    Total         interest  equity 
 
                                                           2017 
-------------------------------------------------------------------------------------------------------------------------- 
At 1 January 
 2017                 205    2,597      (79)           -        -          905       716    4,344                4   4,348 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------ 
Profit for the 
 year                   -        -         -           -        -            -       406      406                2     408 
Other 
 comprehensive 
 income / 
 (expense)              -        -         -           -        9        (313)       149    (155)                -   (155) 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------ 
Total 
 comprehensive 
 income / 
 (expense)              -        -         -           -        9        (313)       555      251                2     253 
Equity-settled 
 transactions           -        -         -           -        -            -        33       33                -      33 
Issue of 
 ordinary 
 shares under 
 share 
 option schemes         -        5         -           -        -            -         -        5                -       5 
Buyback of 
 equity               (5)        -         -           5        -            -     (300)    (300)                -   (300) 
Purchase of 
treasury 
shares                  -        -         -           -        -            -         -        -                -       - 
Release of 
 treasury 
 shares                 -        -        18           -        -            -      (18)        -                -       - 
Changes in 
 non-controlling 
 interest               -        -         -           -        -            -       (2)      (2)                2       - 
Dividends               -        -         -           -        -            -     (318)    (318)                -   (318) 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------ 
At 31 December 
 2017                 200    2,602      (61)           5        9          592       666    4,013                8   4,021 
 
 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY continued

for the year ended 31 December 2017

 
 
                                       Equity attributable to equity holders 
                                                   of the company 
                  ------------------------------------------------------------------------------- 
all figures in                                   Capital     Fair 
GBP                 Share    Share  Treasury  redemption    value  Translation  Retained           Non-controlling    Total 
millions          capital  premium    shares     reserve  reserve      reserve  earnings    Total         interest   equity 
 
                                                           2016 
--------------------------------------------------------------------------------------------------------------------------- 
At 1 January 
 2016                 205    2,590      (72)           -        -          (7)     3,698    6,414                4    6,418 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------- 
Loss for the 
 year                   -        -         -           -        -            -   (2,337)  (2,337)                2  (2,335) 
Other 
 comprehensive 
 income / 
 (expense)              -        -         -           -        -          912     (223)      689                1      690 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------- 
Total 
 comprehensive 
 income / 
 (expense)              -        -         -           -        -          912   (2,560)  (1,648)                3  (1,645) 
Equity-settled 
 transactions           -        -         -           -        -            -        22       22                -       22 
Issue of 
 ordinary 
 shares under 
 share 
 option schemes         -        7         -           -        -            -         -        7                -        7 
Buyback of 
equity                  -        -         -           -        -            -         -        -                -        - 
Purchase of 
 treasury 
 shares                 -        -      (27)           -        -            -         -     (27)                -     (27) 
Release of 
 treasury 
 shares                 -        -        20           -        -            -      (20)        -                -        - 
Changes in 
 non-controlling 
 interest               -        -         -           -        -            -         -        -              (3)      (3) 
Dividends               -        -         -           -        -            -     (424)    (424)                -    (424) 
----------------  -------  -------  --------  ----------  -------  -----------  --------  -------  ---------------  ------- 
At 31 December 
 2016                 205    2,597      (79)           -        -          905       716    4,344                4    4,348 
 

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2017

 
 
all figures in GBP millions                                     note     2017   2016 
 
 
Cash flows from operating activities 
Net cash generated from operations                               17       462    522 
Interest paid                                                            (89)   (67) 
Tax paid                                                                 (75)   (45) 
Net cash generated from operating activities                              298    410 
 
Cash flows from investing activities 
Acquisition of subsidiaries, net of cash acquired                13      (11)   (15) 
Purchase of investments                                                   (3)    (6) 
Purchase of property, plant and equipment                                (82)   (88) 
Purchase of intangible assets                                           (150)  (157) 
Disposal of subsidiaries, net of cash disposed                             19   (54) 
Proceeds from sale of joint ventures and associates                       411      4 
Proceeds from sale of investments                                           -     92 
Proceeds from sale of property, plant and equipment                         -      4 
Proceeds from sale of liquid resources                                     20     42 
Loans (advanced to) / repaid by related parties                          (13)     14 
Investment in liquid resources                                           (18)   (24) 
Interest received                                                          20     16 
Dividends received from joint ventures and associates                     458    131 
--------------------------------------------------------------  ----  -------  ----- 
Net cash generated from / (used in) investing activities                  651   (41) 
 
Cash flows from financing activities 
Proceeds from issue of ordinary shares                                      5      7 
Buyback of equity                                                       (149)      - 
Purchase of treasury shares                                                 -   (27) 
Proceeds from borrowings                                                    2      4 
Repayment of borrowings                                               (1,294)  (249) 
Finance lease principal payments                                          (5)    (6) 
Transactions with non-controlling interest                                  -    (2) 
Dividends paid to company's shareholders                                (318)  (424) 
Net cash used in financing activities                                 (1,759)  (697) 
 
Effects of exchange rate changes on cash and cash equivalents              16     81 
Net decrease in cash and cash equivalents                               (794)  (247) 
 
Cash and cash equivalents at beginning of year                          1,424  1,671 
Cash and cash equivalents at end of year                                  630  1,424 
 

For the purposes of the cash flow statement, cash and cash equivalents are presented net of overdrafts repayable on demand. These overdrafts are excluded from cash and cash equivalents disclosed on the balance sheet. In addition, in 2017, GBP127m of cash included above has been classified as held for sale on the balance sheet.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   1.     Basis of preparation 

The condensed consolidated financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as adopted by the European Union (EU). In respect of accounting standards applicable to the Group, there is no difference between EU-adopted IFRS and International Accounting Standards Board (IASB)-adopted IFRS.

The condensed consolidated financial statements have also been prepared in accordance with the accounting policies set out in the 2016 Annual Report and have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities (including derivative financial instruments) at fair value.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, seasonal working capital requirements and potential acquisition activity, show that the Group should be able to operate within the level of its current committed borrowing facilities. The directors have confirmed that they have a reasonable expectation that the Group has adequate resources to continue in operational existence. The condensed consolidated financial statements have therefore been prepared on a going concern basis.

The preparation of condensed consolidated financial statements requires the use of certain critical accounting assumptions. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas requiring a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed consolidated financial statements have been set out in the 2016 Annual Report.

This preliminary announcement does not constitute the Group's full financial statements for the year ended 31 December 2017. The Group's full financial statements will be approved by the Board of Directors and reported on by the auditors in March 2018. Accordingly, the financial information for 2017 is presented unaudited in the preliminary announcement.

The financial information for the year ended 31 December 2016 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The independent auditors' report on the full financial statements for the year ended 31 December 2016 was unqualified and did not contain an emphasis of matter paragraph or any statement under section 498 of the Companies Act 2006.

The Group will adopt IFRS 15 'Revenue from Contracts with Customers' as at 1 January 2018 and apply the modified retrospective approach. Comparatives for 2017 will not be restated and the cumulative impact of adoption will be recognised in retained earnings as at 1 January 2018. Had the Group been applying IFRS 15 during 2017, it is estimated that both sales and profit before tax would have been around GBP2m higher, with the balance sheet impact at the beginning and end of the year being similar. The impact on sales and profit before tax for 2018 is not expected to be materially different to 2017, assuming a like for like business portfolio. The Group is currently estimating that the cumulative pre-tax impact of adopting IFRS 15 on 1 January 2018 will reduce retained earnings and decrease net assets by around GBP143m.

The Group will also adopt IFRS 9 'Financial Instruments as at 1 January 2018 and apply the new rules retrospectively, with the practical expedients permitted in the standard. Comparatives for 2017 will not be restated. The Group has assessed the impact of adopting IFRS 9 and is expecting the only material adjustment to be a small increase in the provision for losses against trade debtors. The Group does not anticipate the expected credit loss model having a material impact on profit before tax for 2018 unless market conditions or other factors change the outlook for credit losses. The Group is currently estimating its provision for these losses as at 1 January 2018 to increase by around 1% of gross trade debtors as a result of adopting the expected credit loss model for impairments.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   2.     Segment information 

The primary segments for management and reporting are Geographies (North America, Core and Growth). In addition, the Group separately discloses the results from the Penguin Random House associate (PRH).

 
 
all figures in GBP millions                2017   2016 
 
 
Sales by Geography 
North America                             2,929  2,981 
Core                                        815    803 
Growth                                      769    768 
Total sales                               4,513  4,552 
 
Adjusted operating profit by Geography 
North America                               394    420 
Core                                         50     57 
Growth                                       38     29 
PRH                                          94    129 
---------------------------------------- 
Total adjusted operating profit             576    635 
 

There were no material inter-segment sales.

Adjusted operating profit is one of the Group's key business performance measures; it includes the operating profit from the total business including the results of discontinued operations when relevant.

In January 2016, the Group announced that it was embarking on a restructuring programme to simplify the business, reduce costs and position the Group for growth in its major markets. The costs of this programme in 2016 were significant enough to exclude from the adjusted operating profit measure so as to better highlight the underlying performance. A new programme of restructuring, announced in May 2017, began in the second half of 2017 and is expected to drive further significant cost savings. The costs of this new programme have also been excluded from the adjusted operating profit measure for the same reason.

Other net gains and losses that represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets are excluded from adjusted operating profit as they distort the performance of the Group. Other net gains of GBP128m in 2017 largely relate to the sale of our test preparation business in China which resulted in a profit on sale of GBP44m and the part sale of our share in PRH which resulted in a profit of GBP96m (see also note 14). In 2016, the net losses in the Core segment mainly relate to the closure of our English language schools in Germany and in the North America segment relate to the sale of the Pearson English Business Solutions business.

Charges relating to acquired intangibles, acquisition costs and movements in contingent acquisition consideration are also excluded from adjusted operating profit when relevant as these items reflect past acquisition activity and do not necessarily reflect the current year performance of the Group. In 2016, intangible charges included an impairment of goodwill in our North American business of GBP2,548m.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   2.     Segment information continued 

As a result of US tax reform there is an adjustment to the share of profit from associates of GBP8m in 2017 relating to the revaluation of deferred tax balances. This adjustment has been excluded from our adjusted operating profit (see also note 5).

The following table reconciles adjusted operating profit to operating profit for each of our primary segments.

 
 
all figures in GBP millions   North America  Core  Growth   PRH    Total 
 
                                  2017 
------------------------------------------------------------------------ 
Adjusted operating profit               394    50      38    94      576 
Cost of major restructuring            (60)  (11)     (8)     -     (79) 
Intangible charges                     (89)  (12)    (37)  (28)    (166) 
Other net gains and losses              (3)     -      35    96      128 
Impact of US tax reform                   -     -       -   (8)      (8) 
----------------------------  -------------  ----  ------  ----  ------- 
Operating profit                        242    27      28   154      451 
 
                                  2016 
------------------------------------------------------------------------ 
Adjusted operating profit               420    57      29   129      635 
Cost of major restructuring           (172)  (62)    (95)   (9)    (338) 
Intangible charges                  (2,684)  (16)    (33)  (36)  (2,769) 
Other net gains and losses             (12)  (12)     (1)     -     (25) 
Impact of US tax reform                   -     -       -     -        - 
Operating (loss) / profit           (2,448)  (33)   (100)    84  (2,497) 
 

Corporate costs are allocated to business segments on an appropriate basis depending on the nature of the cost and therefore the total segment result is equal to the Group operating profit.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   3.     Net finance costs 
 
 
all figures in GBP millions                              2017  2016 
 
 
Net interest payable                                     (79)  (59) 
Net finance income in respect of retirement benefits        3    11 
Finance costs associated with transactions                (6)     - 
Net foreign exchange gains / (losses)                      44  (20) 
Derivatives in a hedge relationship                         1     - 
Derivatives not in a hedge relationship                     7     8 
Net finance costs                                        (30)  (60) 
 
Analysed as: 
Finance costs                                           (110)  (97) 
Finance income                                             80    37 
Net finance costs                                        (30)  (60) 
 
Analysed as: 
Net interest payable                                     (79)  (59) 
Other net finance income / (costs)                         49   (1) 
Net finance costs                                        (30)  (60) 
 

Net finance costs classified as other net finance costs / income are excluded in the calculation of our adjusted earnings.

Net finance income relating to retirement benefits is excluded as we believe the presentation does not reflect the economic substance of the underlying assets and liabilities. We exclude finance costs relating to acquisition transactions as these relate to future earn outs or acquisition expenses and are not part of the underlying financing.

Foreign exchange and other gains and losses are also excluded as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity. In 2017 and 2016 the foreign exchange gains and losses largely relate to foreign exchange differences on unhedged US dollar and Euro loans, cash and cash equivalents.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   4.     Profit before tax 
 
 
all figures in GBP millions          note   2017     2016 
 
 
Profit / (loss) before tax                   421  (2,557) 
Cost of major restructuring           2       79      338 
Intangible charges                    2      166    2,769 
Other net gains and losses            2    (128)       25 
Other net finance (income) / costs    3     (49)        1 
Impact of US tax reform               2        8        - 
-----------------------------------  ----  -----  ------- 
Adjusted profit before tax                   497      576 
 
   5.     Income tax 
 
 
all figures in GBP millions                              2017   2016 
 
 
Income tax (charge) / benefit                            (13)    222 
Tax benefit on cost of major restructuring               (26)   (84) 
Tax benefit on intangible charges                        (85)  (255) 
Tax charge / (benefit) on other net gains and losses       20   (14) 
Tax charge on other net finance costs                       9      - 
Impact of US tax reform added back                          1      - 
Tax amortisation benefit on goodwill and intangibles       39     36 
Adjusted income tax charge                               (55)   (95) 
 
Tax rate reflected in statutory earnings                 3.1%   8.7% 
Tax rate reflected in adjusted earnings                 11.1%  16.5% 
 

The adjusted income tax charge excludes the tax benefit or charge on items that are excluded from the profit or loss before tax (see note 4).

As a result of US tax reform, the reported tax charge on a statutory basis includes a benefit from revaluation of deferred tax balances to the reduced federal rate of GBP5m and a repatriation tax charge of GBP6m. In addition to the impact on the reported tax charge, the Group's share of profit from associates was adversely impacted by GBP8m (see also notes 2 and 4). These adjustments have been excluded from the adjusted operating profit and tax charge as they are considered to be transition adjustments that are not expected to recur in the near future.

The tax benefit from tax deductible goodwill and intangibles is added to the adjusted income tax charge as this benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payments.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   6.     Earnings per share 

Basic earnings per share is calculated by dividing the profit or loss attributable to equity shareholders of the company (earnings) by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of those shares. A dilution is not calculated for a loss.

 
 
all figures in GBP millions                                              2017      2016 
 
 
Earnings / (loss) for the year                                            408   (2,335) 
Non-controlling interest                                                  (2)       (2) 
----------------------------------------------------------------------  -----  -------- 
Earnings / (loss) attributable to equity shareholders of the company      406   (2,337) 
 
 
Weighted average number of shares (millions)                            813.4     814.8 
Effect of dilutive share options (millions)                               0.3         - 
Weighted average number of shares (millions) for diluted earnings       813.7     814.8 
 
 
Earnings / (loss) per share 
Basic                                                                   49.9p  (286.8)p 
Diluted                                                                 49.9p  (286.8)p 
 
   7.     Adjusted earnings per share 

In order to show results from operating activities on a consistent basis, an adjusted earnings per share is presented which excludes certain items as set out below.

Adjusted earnings is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. The measure also enables our investors to more easily, and consistently, track the underlying operational performance of the Group and its business segments by separating out those items of income and expenditure relating to acquisition and disposal transactions, and major restructuring programmes.

The adjusted earnings per share includes both continuing and discontinued businesses on an undiluted basis when relevant. The company's definition of adjusted earnings per share may not be comparable to other similarly titled measures reported by other companies. A reconciliation of the adjusted measures to their corresponding statutory measures is shown in the tables below and in the relevant notes.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   7.     Adjusted earnings per share continued 
 
 
                                                      Other 
                                                        net                 Other   Impact 
                         Statutory         Cost of    gains                   net    of US             Tax    Adjusted 
all figures in              income           major      and  Intangible   finance      tax    amortisation      income 
 GBP millions     note   statement   restructuring   losses     charges     costs   reform         benefit   statement 
 
                                                         2017 
---------------------------------------------------------------------------------------------------------------------- 
Operating profit 
 / (loss)          2           451              79    (128)         166         -        8               -         576 
Net finance 
 costs             3          (30)               -        -           -      (49)        -               -        (79) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Profit / (loss) 
 before tax        4           421              79    (128)         166      (49)        8               -         497 
Income tax         5          (13)            (26)       20        (85)         9        1              39        (55) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Profit / (loss) 
 for the year                  408              53    (108)          81      (40)        9              39         442 
Non-controlling 
 interest                      (2)               -        -           -         -        -               -         (2) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Earnings / 
 (loss)                        406              53    (108)          81      (40)        9              39         440 
 
Weighted average number of shares (millions)                                                                     813.4 
Weighted average number of shares (millions) 
 for diluted earnings                                                                                            813.7 
 
Adjusted earnings per share (basic)                                                                              54.1p 
Adjusted earnings per share (diluted)                                                                            54.1p 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   7.     Adjusted earnings per share continued 
 
 
                                                      Other 
                                                        net                 Other   Impact 
                         Statutory         Cost of    gains                   net    of US             Tax    Adjusted 
all figures in              income           major      and  Intangible   finance      tax    amortisation      income 
 GBP millions     note   statement   restructuring   losses     charges     costs   reform         benefit   statement 
 
                                                         2016 
---------------------------------------------------------------------------------------------------------------------- 
Operating profit 
 / (loss)          2       (2,497)             338       25       2,769         -        -               -         635 
Net finance 
 costs             3          (60)               -        -           -         1        -               -        (59) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Profit / (loss) 
 before tax        4       (2,557)             338       25       2,769         1        -               -         576 
Income tax         5           222            (84)     (14)       (255)         -        -              36        (95) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Profit / (loss) 
 for the year              (2,335)             254       11       2,514         1        -              36         481 
Non-controlling 
 interest                      (2)               -        -           -         -        -               -         (2) 
----------------  ----  ----------  --------------  -------  ----------  --------  -------  --------------  ---------- 
Earnings / 
 (loss)                    (2,337)             254       11       2,514         1        -              36         479 
 
Weighted average number of shares (millions)                                                                     814.8 
Weighted average number of shares (millions) 
 for diluted earnings                                                                                            814.8 
 
Adjusted earnings per share (basic)                                                                              58.8p 
Adjusted earnings per share (diluted)                                                                            58.8p 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   8.     Dividends 
 
 
all figures in GBP millions                                               2017  2016 
 
 
Amounts recognised as distributions to equity shareholders in the year     318   424 
 

The directors are proposing a final dividend of 12.0p per equity share, payable on 11 May 2018 to shareholders on the register at the close of business on 6 April 2018. This final dividend, which will absorb an estimated GBP93m of shareholders' funds, has not been included as a liability as at 31 December 2017.

   9.     Exchange rates 

Pearson earns a significant proportion of its sales and profits in overseas currencies, the most important being the US dollar. The relevant rates are as follows:

 
 
                            2017  2016 
 
 
Average rate for profits    1.30  1.33 
Year end rate               1.35  1.23 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   10.     Assets and liabilities classified as held for sale 

Held for sale assets and liabilities relate to the Wall Street English language teaching business (WSE) and the K12 school courseware business in the US (K12). The held for sale balances are analysed as follows:

 
 
all figures in GBP millions                             WSE     K12    2017 
 
 
 Property, plant and equipment                           16       -      16 
 Intangible assets                                       15     166     181 
 Deferred income tax assets                               -      68      68 
 Trade and other receivables                              4      23      27 
---------------------------------------------------  ------  ------  ------ 
 Non-current assets                                      35     257     292 
 
 Intangible assets - pre-publication                      8     239     247 
 Inventories                                              -      46      46 
 Trade and other receivables                             12      36      48 
 Cash and cash equivalents (excluding overdrafts)       127       -     127 
---------------------------------------------------  ------  ------  ------ 
 Current assets                                         147     321     468 
 
 Total assets                                           182     578     760 
 
 Deferred income tax liabilities                        (2)       -     (2) 
 Other liabilities                                     (10)   (274)   (284) 
---------------------------------------------------  ------  ------  ------ 
 Non-current liabilities                               (12)   (274)   (286) 
 
 Trade and other liabilities                          (152)   (150)   (302) 
 Current liabilities                                  (152)   (150)   (302) 
 
 Total liabilities                                    (164)   (424)   (588) 
 
 Net assets                                              18     154     172 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   11.     Non-current intangible assets 
 
 
all figures in GBP millions       2017   2016 
 
 
Goodwill                         2,030  2,341 
Other intangibles                  934  1,101 
-------------------------------  -----  ----- 
Non-current intangible assets    2,964  3,442 
 

At the end of 2016, following trading in the final quarter of the year, it became clear that underlying issues in the North American higher education courseware market were more severe than had been previously anticipated. These issues related to declining student enrolments, changes in buying patterns of students and correction of inventory levels by distributors and bookshops. As a result of revisions to strategic plans and estimates for future cash flows it was determined during the goodwill impairment review that the fair value less costs of disposal of the North America cash generating unit (CGU) no longer supported the carrying value of this goodwill and as a consequence impaired goodwill by GBP2,548m. There were no impairments to goodwill or intangibles in 2017.

   12.     Trade and other liabilities 
 
 
all figures in GBP millions                 2017     2016 
 
 
Trade payables                             (265)    (333) 
Accruals                                   (447)    (507) 
Deferred income                            (322)    (883) 
Other liabilities                          (441)    (328) 
---------------------------------------  -------  ------- 
Trade and other liabilities              (1,475)  (2,051) 
 
Analysed as: 
Trade and other liabilities - current    (1,342)  (1,629) 
Other liabilities - non-current            (133)    (422) 
---------------------------------------  -------  ------- 
Total trade and other liabilities        (1,475)  (2,051) 
 

The deferred income balance comprises advance payments in assessment, testing and training businesses; subscription income in school and college businesses; and obligations to deliver digital content in future periods.

Included in other current liabilities in 2017 is a liability of GBP151m in respect of the remaining commitment on the share buyback programme.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   13.     Business combinations 

There were no significant acquisitions completed in the year and there were no material adjustments to prior year acquisitions. The net cash outflow relating to acquisitions in the year is shown in the table below:

 
 
all figures in GBP millions                               2017 
 
 
Cash - Current year acquisitions                             - 
Deferred payments for prior year acquisitions and other 
 items                                                    (11) 
Net cash outflow on acquisitions                          (11) 
 
   14.     Disposals including business closures 

In August 2017, Pearson completed the sale of its test preparation business in China (GEDU) resulting in a pre-tax profit on sale of GBP44m. In October 2017, the sale of a 22% share in Penguin Random House (PRH) resulted in a pre-tax profit of GBP96m. An analysis of these disposals together with other disposals in the period is shown below.

 
 
all figures in GBP millions                           GEDU     PRH  Other    2017 
 
 
 Property, plant and equipment                         (7)       -      -     (7) 
 Intangible assets                                     (2)       -    (7)     (9) 
 Investments in joint ventures and associates            -   (352)      -   (352) 
 Net deferred income tax assets                        (1)     (2)      -     (3) 
 Intangible assets - pre publication                     -       -    (1)     (1) 
 Inventories                                           (1)       -    (1)     (2) 
 Trade and other receivables                          (16)       -      -    (16) 
 Current income tax receivable                           -     (5)      -     (5) 
 Cash and cash equivalents (excluding overdrafts)     (13)       -      -    (13) 
 Trade and other liabilities                            33       -      1      34 
 Cumulative translation adjustment                       3      48      -      51 
---------------------------------------------------  -----  ------  -----  ------ 
 Net assets disposed                                   (4)   (311)    (8)   (323) 
 
 Proceeds                                               54     413      1     468 
 Costs of disposal                                     (6)     (6)    (5)    (17) 
 Gain / (loss) on disposal                              44      96   (12)     128 
 
 Cash flow from disposals 
 Proceeds - current year disposals                                            468 
 Cash and cash equivalents disposed                                          (13) 
 Costs and other disposal liabilities paid                                   (25) 
 Net cash inflow from disposals                                               430 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   15.     Net debt and EBITDA 
 
 
all figures in GBP millions                        note     2017     2016 
 
 
Non-current assets 
Derivative financial instruments                             140      171 
Current assets 
Marketable securities                                          8       10 
Cash and cash equivalents (excluding overdrafts)             518    1,459 
Non-current liabilities 
Borrowings                                               (1,066)  (2,424) 
Derivative financial instruments                           (140)    (264) 
Current liabilities 
Borrowings                                                  (19)     (44) 
Total                                                      (559)  (1,092) 
Cash and cash equivalents classified as held 
 for sale                                                    127        - 
-------------------------------------------------  ----  -------  ------- 
Net debt                                                   (432)  (1,092) 
 
EBITDA (excluding restructuring) 
Adjusted operating profit                           2        576      635 
Depreciation                                                  80       80 
Software amortisation                                         82       70 
EBITDA                                                       738      785 
 
Net debt / EBITDA ratio                                     0.6x     1.4x 
 

In March 2017, the Group redeemed its $550m 6.25% Global dollar bonds due in 2018. In August 2017, the Group redeemed $385m of its $500m 3.75% US dollar notes due in 2022 and $406m of its $500m 3.25% US dollar notes due in 2023. In November 2017, the Group redeemed its $300m 4.625% US dollar notes due in 2018.

The net debt / EBITDA ratio is presented as it is a measure commonly used by investors to measure balance sheet strength.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   16.     Classification of assets and liabilities measured at fair value 
 
                                               ---------Level                           -----Level 
                                                  2---------                               3------ 
                                      Available   Derivatives     Other   Available          Other    Total 
                                            for                  assets         for    liabilities     fair 
                                           sale                                sale                   value 
 all figures in GBP millions             assets                              assets 
                                                   2017 
----------------------------------------------------------------------------------------------------------- 
 
Investments in unlisted securities            -             -         -          77              -       77 
Marketable securities                         8             -         -           -              -        8 
Derivative financial instruments              -           140         -           -              -      140 
Total financial assets held at 
 fair value                                   8           140         -          77              -      225 
 
Derivative financial instruments              -         (140)         -           -              -    (140) 
-----------------------------------  ----------  ------------  --------  ----------  -------------  ------- 
Total financial liabilities held 
 at fair value                                -         (140)         -           -              -    (140) 
 
                                                   2016 
----------------------------------------------------------------------------------------------------------- 
 
Investments in unlisted securities            -             -         -          65              -       65 
Marketable securities                        10             -         -           -              -       10 
Derivative financial instruments              -           171         -           -              -      171 
Total financial assets held at 
 fair value                                  10           171         -          65              -      246 
 
Derivative financial instruments              -         (264)         -           -              -    (264) 
Total financial liabilities held 
 at fair value                                -         (264)         -           -              -    (264) 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   16.     Classification of assets and liabilities measured at fair value continued 

The fair values of level 2 assets and liabilities are determined by reference to market data and established estimation techniques such as discounted cash flow and option valuation models. Within level 3 assets and liabilities, the fair value of available for sale assets is determined by reference to the financial performance of the underlying asset and amounts realised on the sale of similar assets, while the fair value of other liabilities represents the present value of the estimated future liability. There have been no transfers in classification during the year.

The market value of the Group's bonds is GBP1,066m (2016: GBP2,381m) compared to their carrying value of GBP1,062m (2016: GBP2,420m). For all other financial assets and liabilities, fair value is not materially different to carrying value.

Movements in fair values of level 3 assets and liabilities are shown in the table below:

 
 
all figures in GBP millions           2017  2016 
 
 
Investments in unlisted securities 
At beginning of year                    65   143 
Exchange differences                   (4)     8 
Additions                                3     6 
Fair value movements                    13     - 
Disposals                                -  (92) 
At end of year                          77    65 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   17.     Cash flows 
 
 
all figures in GBP millions                                                              2017     2016 
 
 
Reconciliation of profit / (loss) for the year to net cash generated from operations 
 
Profit / (loss) for the year                                                              408  (2,335) 
Income tax                                                                                 13    (222) 
Depreciation, amortisation and impairment charges                                         313    2,912 
Net (profit) / loss on disposal of businesses                                           (128)       25 
Net loss on disposal of fixed assets                                                       12       15 
Net finance costs                                                                          30       60 
Share of results of joint ventures and associates                                        (78)     (97) 
Net foreign exchange adjustment                                                          (26)       43 
Share-based payment costs                                                                  33       22 
Pre-publication                                                                          (35)     (19) 
Inventories                                                                                24       17 
Trade and other receivables                                                               133      156 
Trade and other liabilities                                                                 6       61 
Retirement benefit obligations                                                          (232)    (106) 
Provisions for other liabilities and charges                                             (11)     (10) 
Net cash generated from operations                                                        462      522 
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   17.     Cash flows continued 
 
 
all figures in GBP millions                                            note     2017     2016 
 
 
Reconciliation of net cash generated from operations to closing net debt 
 
Net cash generated from operations                                               462      522 
Dividends from joint ventures and associates                                     458      131 
Less: re-capitalisation dividends from PRH                                     (312)        - 
Net purchase of PPE including finance lease principal payments                  (87)     (90) 
Net purchase of intangible assets                                              (150)    (157) 
Add back: cost of major restructuring paid                                        71      167 
Add back: special pension contribution                                           227       90 
Operating cash flow                                                              669      663 
Operating tax paid                                                              (75)     (63) 
Net operating finance costs paid                                                (69)     (51) 
---------------------------------------------------------------------  ----  -------  ------- 
Operating free cash flow                                                         525      549 
Costs of major restructuring paid                                               (71)    (167) 
Special pension contribution                                                   (227)     (90) 
Non-operating tax received                                                         -       18 
Free cash flow                                                                   227      310 
Dividends paid (including to non-controlling interests)                        (318)    (424) 
---------------------------------------------------------------------  ----  -------  ------- 
Net movement of funds from operations                                           (91)    (114) 
Acquisitions and disposals                                                       416       19 
Re-capitalisation dividends from PRH                                             312        - 
Purchase of treasury shares                                                        -     (27) 
Loans (advanced) / repaid                                                       (13)       14 
New equity                                                                         5        7 
Buyback of equity                                                              (149)        - 
Other movements on financial instruments                                          14        4 
Net movement of funds                                                            494     (97) 
Exchange movements on net debt                                                   166    (341) 
Movement in net debt                                                             660    (438) 
Opening net debt                                                             (1,092)    (654) 
Closing net debt                                                        15     (432)  (1,092) 
 

Operating cash flow and free cash flow are non-GAAP measures and have been disclosed as they are part of Pearson's corporate and operating measures. These measures are presented in order to align the cash flows with corresponding adjusted profit measures.

Dividends received from associates include dividends from PRH in 2017 of GBP312m relating to the re-capitalisation of PRH. The re-capitalisation was part of the transaction that included the sale of 22% of our equity interest in the venture (see note 14).

Special pension contributions of GBP227m in 2017 were made as part of the agreements relating to the PRH merger in 2013 (GBP202m) and the sale of the FT Group in 2015 (GBP25m). In 2016 special pension contributions of GBP90m relate to the sale of the FT Group.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   18.     Return on invested capital (ROIC) 
 
 
all figures in GBP millions                             2017    2016   2017   2016 
 
 
                                                       Gross   Gross    Net    Net 
 
Adjusted operating profit                                576     635    576    635 
Less: operating tax paid                                (75)    (63)   (75)   (63) 
---------------------------------------------------- 
Return                                                   501     572    501    572 
 
Average: goodwill                                      7,236   6,987  3,794  3,429 
Average: other non-current intangibles                 2,606   2,481  2,606  2,481 
Average: intangible assets - pre-publication             995     926    995    926 
Average: tangible fixed assets and working capital       731   1,070    731  1,070 
Average: total invested capital                       11,568  11,464  8,126  7,906 
 
ROIC                                                    4.3%    5.0%   6.2%   7.2% 
 

ROIC is a non-GAAP measure and has been disclosed as it is part of Pearson's key performance indicators. ROIC is used to track investment returns and to help inform capital allocation decisions within the business. Average values for total invested capital are calculated as the average monthly balance for the year.

For the first time in 2017 we have presented ROIC on a net basis after removing impaired goodwill from the invested capital balance. The net approach assumes that goodwill which has been impaired is treated in a similar fashion to goodwill disposed as it is no longer being used to generate returns.

   19.     Contingencies 

There are contingent Group liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries, joint ventures and associates. In addition there are contingent liabilities of the Group in respect of legal claims, contract disputes, royalties, copyright fees, permissions and other rights. None of these claims are expected to result in a material gain or loss to the Group.

On 24 November 2017 the European Commission published an opening decision that the United Kingdom controlled foreign company group financing partial exemption ("FCPE") constitutes State Aid. No final decision has yet been published, and may anyway be challenged by the UK tax authorities. The Group has benefited from the FCPE in 2017 and prior periods by approximately GBP90m. At present the Group believes no provision is required in respect of this issue.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

   20.     Related parties 

At 31 December 2017 the Group had loans to Penguin Random House (PRH) of GBP46m (2016: GBP33m) which were unsecured with interest calculated based on market rates. The loans are provided under a working capital facility and fluctuate during the year.

At 31 December 2017, the Group also had a current asset receivable from PRH of GBP19m (2016: GBP21m) and a current liability payable of GBP3m (2016: GBPnil) arising from the provision of services. Service fee income from PRH was GBP3m in 2017 (2016: GBP4m).

During the year the Group received dividends of GBP458m (2016: GBP131m) from PRH including GBP312m in relation to the re-capitalisation of the venture following Pearson's disposal of part of its share. At 31 December 2017 the Group had a dividend receivable from PRH of GBP49m (2016: GBPnil) which was also due in respect of re-capitalisation.

Apart from transactions with the Group's associates and joint ventures noted above, there were no other material related party transactions and no guarantees have been provided to related parties in the year.

   21.     Events after the balance sheet date 

During January 2018, Pearson successfully executed market tenders to repurchase EUR250m of its EUR500m Euro 1.875% Notes due May 2021 and EUR200m of its EUR500m Euro 1.375% Notes due May 2025.

On 16 February 2018, Pearson completed its GBP300m share buyback programme. In aggregate between 18 October 2017 and 16 February 2018, Pearson repurchased 42,835,577 shares, including 21,839,676 repurchased since 31 December 2017 at a cost of GBP151m.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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