Pearson plc — FY2017 Form 20-F summary
Reporting period: Year ended December 31, 2017; filed April 4, 2018. Although the request metadata specifies 2017 Q4, this is an annual report and the supplied filing text does not provide a clear standalone fourth-quarter results breakdown. Financial statements are prepared under IFRS and reported in pounds sterling.
Business context
Pearson is an international education company providing courseware, assessment and education services, with operations in North America, Core markets and Growth markets. It also held a 25% equity-accounted interest in Penguin Random House (PRH) at year-end. North America accounted for 65% of continuing sales.
Key financial metrics
| Metric (£m unless stated) | 2017 | 2016 |
|---|---|---|
| Continuing sales | 4,513 | 4,552 |
| Operating profit/(loss), reported | 451 | (2,497) |
| Adjusted operating profit | 576 | 635 |
| Profit/(loss) before tax | 421 | (2,557) |
| Profit/(loss) for the year | 408 | (2,335) |
| Basic earnings/(loss) per share | 49.9p | (286.8)p |
| Net cash generated from operations | 462 | 522 |
| Net debt at year-end | 432 | 1,092 |
| Cash and liquid resources | 645 | 1,459 |
Gross profit was £2,447m (2016: £2,459m); gross margin was approximately 54.2% (2016: 54.0%). Net finance costs were £30m (2016: £60m), including net interest payable of £79m (2016: £59m). Tax expense was £13m, a 3.1% effective rate; the low rate mainly reflected releases of uncertain tax provisions. The 2017 dividend was rebased to 17p per share, from 52p in 2016; a 12p final dividend was proposed, subject to shareholder approval.
The Group had £1,085m of borrowings at December 31, 2017 and a fully undrawn $1.75bn revolving credit facility maturing in 2021. It reported compliance with the facility’s covenants. Credit ratings were BBB and Baa2, both with negative outlooks.
Material changes versus 2016
- Sales decreased 1% as reported; at constant 2016 exchange rates they declined 4%, or an estimated 2% excluding disposals. Currency movements added £126m to reported sales.
- Reported operating profit swung to £451m from a £2,497m loss, principally because 2016 included a £2,548m North America goodwill impairment. The 2017 result included £128m of net disposal gains and £79m of restructuring costs. Adjusted operating profit fell from £635m to £576m; management said trading profit declined by about £58m after adjusting for impairments, restructuring and disposal gains.
- North America sales fell to £2,929m from £2,981m and adjusted operating profit to £394m from £420m. Core sales were £815m (2016: £803m), with adjusted operating profit of £50m (2016: £57m). Growth sales were £769m (2016: £768m), with adjusted operating profit of £38m (2016: £29m).
- Operating cash generation declined £60m, mainly due to increased special pension payments. Net debt decreased by £660m, primarily due to PRH and GEDU disposal proceeds and PRH recapitalization dividends, partly offset by pension contributions and shareholder returns.
Outlook, commentary, risks and unusual items
- 2018 outlook: Adjusted operating profit guidance was £520m–£560m, including businesses held for sale. Management identified continued pressure in US higher-education courseware, forecasting revenue flat to down by a mid-single-digit percentage. Cost inflation of about £50m and other operating factors and incentives of £30m were expected to be partly offset by £80m of incremental restructuring benefits. Approximately £90m of major restructuring costs were excluded from adjusted profit.
- Portfolio actions: Pearson sold 22% of PRH in October 2017, retaining 25%, and sold its Chinese test-preparation business (GEDU). Wall Street English was classified as held for sale at year-end and sold in March 2018. US K-12 courseware was also classified as held for sale; in February 2018 Pearson said it was discussing a possible disposal. The PRH sale and GEDU disposal generated reported pre-tax gains of £96m and £44m, respectively.
- Strategy and execution: Management emphasized digital transformation, investment in structurally growing markets and simplification. It planned a further £300m of cost reductions by the end of 2019, alongside about 3,000 further role reductions. Execution costs, customer-service disruption and failure to realize savings or product returns were identified risks.
- Principal business risks: US courseware demand faced declining enrolments, open educational resources, rental and used-textbook competition, and changing purchasing behavior. Other risks included government funding and policy changes, competition and rapid digitization, cyber and data-privacy incidents, assessment-service failures, foreign exchange (about 60% of revenue was generated in US dollars), pensions, emerging-market exposure and Brexit-related uncertainty.
- Contingencies and accounting changes: Pearson disclosed an approximately £90m historical benefit from the UK controlled-foreign-company group-financing exemption under European Commission State Aid review; it recorded no provision, pending a final decision. Adoption of IFRS 15 in 2018 was expected to reduce opening retained earnings by about £143m. IFRS 16 was expected to have a material balance-sheet impact; operating lease commitments were about £1.2bn undiscounted.
- Pensions and unusual cash items: The UK defined-benefit plan showed a £545m IAS 19 surplus. Pearson made £202m of pension payments relating to the PRH merger in 2013 and £25m related to the FT Group sale. The plan targeted self-sufficient funding by the end of 2019, subject to market conditions.
Important facts for investors to verify
- Reconcile statutory profit, adjusted operating profit and the impact of the 2016 goodwill impairment, 2017 disposal gains and restructuring exclusions.
- Track US higher-education courseware revenue, enrolment trends, adoption of digital and rental models, and whether the forecast decline moderates as expected.
- Confirm the status and proceeds of the US K-12 courseware disposal, and the financial effects of the completed Wall Street English sale and other portfolio changes.
- Assess cash conversion and liquidity after special pension payments, debt repayments, the share buyback and the lower cash balance; monitor credit-rating outlooks and covenant headroom.
- Review the resolution of the approximately £90m UK State Aid tax issue, IFRS 15 transition effects, IFRS 16 lease liabilities and progress toward the pension-funding target.