Pearson plc — FY2020 Form 20-F summary
Reporting period: Year ended December 31, 2020; filed April 1, 2021. This is an annual report, not a standalone Q4 filing, and the supplied text does not provide separate quarterly results. Financial statements are prepared under IFRS and reported in pounds sterling.
Business context
Pearson is a global education company providing courseware, assessments, certifications and learning services. Its 2020 reporting segments were Global Online Learning, Global Assessment, North American Courseware and International. North America represented 69% of 2020 sales. Pearson completed the sale of its remaining 25% stake in Penguin Random House in April 2020 and reported the business through the disposal date.
Financial performance and position
| Metric (£m unless stated) | 2020 | 2019 |
|---|---|---|
| Sales | 3,397 | 3,869 |
| Operating profit | 411 | 275 |
| Adjusted operating profit | 313 | 581 |
| Profit before tax | 354 | 232 |
| Profit for the year | 310 | 266 |
| Basic EPS | 41.0p | 34.0p |
| Net cash generated from operations | 450 | 480 |
| Net cash from operating activities | 389 | 369 |
| Net debt | 463 | 1,016 |
| Cash and cash equivalents | 1,097 | 437 |
| Net assets | 4,134 | 4,323 |
- Sales fell 12% reported and 11% at constant exchange rates; excluding disposals, management estimated a 10% constant-currency decline. Operating margin was approximately 12.1%, compared with 7.1% in 2019, but 2020 operating profit included a substantial disposal gain.
- Gross profit was £1,630m, down from £2,011m; cost of goods sold increased to 52.0% of sales from 48.0%, reflecting mix as higher-margin businesses declined.
- Adjusted operating profit fell to £313m from £581m. Management attributed the underlying trading decline of about £210m to COVID-19 impacts in assessment and international markets and continuing US higher-education courseware pressure, partly offset by online-learning growth and cost savings.
- Reported operating profit included a £180m gain on the PRH sale, partly offset by £8m of PIHE disposal-related charges. Restructuring costs were nil in 2020 versus £157m in 2019; acquired-intangible charges were £80m versus £163m.
- Net finance costs rose to £57m from £43m, including higher interest expense and costs on the bond issued in June. The tax charge was £44m, versus a £34m tax credit in 2019.
- Segment sales: Global Online Learning £697m (up 19%); Global Assessment £892m (down 13%); North American Courseware £894m (down 18%); International £914m (down 21%).
- Net debt declined mainly due to PRH sale proceeds, deferred US K12 proceeds and operating cash flow. Pearson issued £350m of 3.75% notes due 2030. The $1.19bn revolving credit facility was undrawn at year-end; total available liquidity was approximately £1.9bn.
- The board proposed a final dividend of 13.5p per share, making the proposed full-year dividend 19.5p, unchanged from 2019 and subject to shareholder approval. The share buyback was suspended; £176m had been spent before suspension.
Outlook, risks and unusual items
- For 2021, management expected revenue and adjusted operating profit growth, but the filing does not provide a clear numerical growth target. It anticipated good growth in Virtual Learning and Workforce Skills, recovery in Assessment and Qualifications as restrictions eased, gradual improvement in English Language Learning, and a further decline in Higher Education revenue, though at a slower rate than in recent years. Q1 sales were expected to lag the difficult 2020 comparison, with growth anticipated in Q2 and Q3 if pandemic recovery continued.
- COVID-19 materially affected 2020 trading, especially Global Assessment and International, through test-center and school closures, exam cancellations, reduced mobility and customer budget pressure. Further disruption, delayed reopening or a slower recovery could weigh on results and cash flow.
- Management’s severe downside liquidity scenario projected more than £800m of liquidity headroom and covenant compliance through June 2022. The company reported compliance with facility covenants. S&P and Moody’s downgraded Pearson in 2020 to BBB- and Baa3, respectively, both with stable outlooks.
- On March 8, 2021, Pearson announced a new strategy and five-division structure focused on Virtual Learning, Higher Education, English Language Learning, Workforce Skills, Assessment & Qualifications, supported by Direct to Consumer. Execution, restructuring and adoption risks are noted; Pearson was also reviewing international courseware and local publishing businesses.
- After year-end, Pearson paid £100m in March 2021 under charging notices relating to alleged UK State Aid, while maintaining its appeal and expecting recovery. Brazilian tax authorities challenge goodwill amortisation deductions; potential exposure was estimated at up to £106m through 2020 plus £20m for future deductions, with no provision recorded. Pearson was named in 14 US and one Canadian antitrust class-action lawsuits concerning Inclusive Access; motions to dismiss were pending.
- Other material risks include cyber and data privacy incidents, assessment-service failures, competition and digital transition, foreign exchange (69% of 2020 sales generated in US dollars), pension assumptions, goodwill impairment and execution of business transformation. The auditor identified goodwill and intangible valuations, uncertain tax provisions, sales returns and pre-publication asset recoverability as critical audit matters.
Important facts for investors to verify
- How much of reported 2020 operating profit and EPS improvement reflects the PRH disposal gain and share-count reduction, versus recurring operating performance.
- Whether 2021 recovery assumptions for test centers, examinations, schools and international mobility were achieved, and how segment adjusted profit developed.
- The outcome and cash implications of the State Aid appeal and Brazilian tax assessments, including recovery of the £100m payment.
- Progress on the new strategy, portfolio reviews and any resulting restructuring costs, disposals, acquisitions or goodwill impairments.
- Liquidity, covenant headroom, credit ratings and the effect of the £350m bond and suspended buyback on capital allocation and leverage.
- Approval and payment of the proposed 13.5p final dividend, and whether the stated 19.5p full-year dividend remains sustainable.