Pearson plc — FY2019 Form 20-F
Reporting period: Year ended December 31, 2019; filed April 1, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS and presented in pounds sterling. Pearson’s education business is organized into North America, Core and Growth; the Group also held a 25% interest in Penguin Random House (PRH), classified as held for sale at year-end.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | £3,869m | £4,129m |
| Gross profit | £2,011m | £2,186m |
| Operating profit | £275m | £553m |
| Adjusted operating profit | £581m | £546m |
| Profit before tax | £232m | £498m |
| Profit for the year | £266m | £590m |
| Basic earnings per share | 34.0p | 75.6p |
| Net cash generated from operations | £480m | £547m |
| Net debt | £1,016m | £143m |
| Cash and cash equivalents at year-end | £437m | £568m |
- Gross margin was approximately 52.0%, down from approximately 52.9%; reported operating margin was approximately 7.1%, versus 13.4%.
- Adjusted operating profit is a management-defined, non-IFRS measure. It includes £65m of PRH adjusted operating profit; reported sales exclude PRH revenue.
- Operating cash flow after interest and tax was £369m, compared with £462m in 2018. Capital expenditure was £55m on property, plant and equipment and £138m on software intangibles.
- Borrowings were £1,664m and cash and liquid resources were £437m at December 31, 2019. The increase in net debt was substantially affected by IFRS 16, which added £666m of net debt on transition; lease liabilities were £838m at year-end.
- The proposed 2019 full-year dividend was 19.5p per share, including a 13.5p final dividend subject to shareholder approval.
Material changes versus 2018
- Sales fell 6% reported and 9% at constant exchange rates. Management estimated sales were flat at constant rates after excluding disposals. Currency movements added £97m to sales and £15m to operating profit.
- North America sales declined 9% reported; higher education courseware was down 12%, with print down close to 30%. Core sales rose 4% reported, while Growth sales fell 8% reported, largely reflecting disposals; excluding currency and disposals, Growth sales rose 4%.
- Reported operating profit fell by £278m. The main factors were the absence of 2018 disposal gains (£230m in 2018 versus £16m in 2019), higher restructuring and intangible charges, and lost contributions from disposed businesses. Management said underlying trading profit increased by about £30m after specified adjustments.
- Restructuring costs increased to £157m from £90m, excluding associate costs. Intangible charges rose to £163m from £113m, including a £65m impairment of acquired intangibles in Brazil.
- IFRS 16 adoption increased adjusted and statutory operating profit by £25m, but increased net finance costs by £34m and reduced 2019 profit before tax by £9m. 2018 comparatives were not restated.
- The US K12 courseware sale closed in March 2019. Consideration included an unconditional $225m vendor note; £182m of related receivables was recognized at year-end. Pearson announced the sale of its remaining 25% PRH stake in December 2019, expected to close in the first half of 2020.
Outlook, risks and unusual items
- Original 2020 adjusted operating profit guidance, issued in February 2020, was £410m–£490m. On March 23, Pearson updated its outlook for COVID-19, but the supplied filing text does not provide a revised full-year numerical range. The company said guidance might need further updating as uncertainty evolved.
- Management estimated Pearson VUE test-centre closures would reduce 2020 adjusted operating profit by approximately £25m–£35m, with a similar monthly impact for each additional month of closures, partly offset by cost actions. US state testing cancellations were estimated to reduce profit by about £15m after mitigation, with further cancellations a risk. UK exam cancellations were expected to have a modest profit impact.
- Management described increased use of digital products and greater interest in virtual schools and online university programs, while noting that the duration of disruption and resulting financial effects were uncertain. Cost inflation of about £30m, restored staff incentives and strategic investment of about £45m combined, and £60m of incremental restructuring benefits were among the stated 2020 planning assumptions.
- At the end of February 2020, Pearson reported approximately £1bn of immediately available liquidity from cash and its revolving credit facility. It said scenario modelling indicated covenant compliance and sufficient funding for present requirements, while noting uncertainty and potential working-capital pressure. The $1.19bn facility had £230m drawn at year-end 2019; the company reported compliance with its covenants.
- The £350m share buyback announced in January 2020 was paused on March 23 amid uncertainty, after £167m of purchases. The PRH sale proceeds were expected to support the buyback plan.
- COVID-19 was treated as a non-adjusting post-balance-sheet event. Management warned that prolonged disruption could prompt reassessment of goodwill, pre-publication assets, tax balances, sales-return provisions and pension estimates; several goodwill-generating units had limited sensitivity headroom.
- Other material areas of estimation or uncertainty include £152m of provisions for tax uncertainties, a £122m sales-return liability, £870m of pre-publication assets and valuation of the K12 disposal receivable. Contingencies include a UK controlled-foreign-company tax matter (Pearson cited approximately £116m of historical benefit) and a Brazilian tax assessment with potential exposure up to £124m, plus £45m relating to future deductions; the company said it had not recorded provisions for these matters and expected no material loss from disclosed claims.
- Key business risks include education funding and policy changes, competition and digital transition, execution of transformation, cyber and data privacy incidents, testing-service failures, foreign-exchange movements, pension assumptions and the pandemic. About 62% of 2019 continuing sales were generated in the US.
Most important facts for investors to verify
- How the March 2020 COVID-19 outlook update translated into actual 2020 revenue, adjusted operating profit and cash flow, including the duration and scale of assessment and test-centre disruption.
- Whether the PRH sale completed on expected terms and timing, and the net proceeds available after transaction costs, taxes and other uses.
- Collections, timing and valuation assumptions for the K12 vendor note and related receivable, including its sensitivity to forecast sales and discount rates.
- Underlying revenue and margin trends in North American higher education courseware, and whether digital growth and restructuring savings offset continued print pressure.
- Net debt, lease obligations, covenant headroom and liquidity after IFRS 16 and pandemic-related working-capital changes; distinguish lease-related debt from other borrowing.
- Potential goodwill impairment and changes to estimates for pre-publication assets, tax exposures, sales returns and pensions as post-year-end conditions develop.
- Approval and payment of the proposed 13.5p final dividend, and the timing or resumption of the paused share buyback.