Pearson plc — 2018 Form 20-F summary
Business context and reporting period. This annual report, filed April 4, 2019, covers the fiscal year ended December 31, 2018 and uses IFRS. Pearson is an international education company, organized into North America, Core and Growth segments, and also holds a 25% equity-method interest in Penguin Random House (PRH). The filing is an annual report, not a standalone fourth-quarter report.
Key financial metrics
| Metric | 2018 | 2017 | Context |
|---|---|---|---|
| Sales | £4,129m | £4,513m | Down 9% reported; down 6% at constant exchange rates. Excluding disposals and IFRS 15 effects, management estimated a 1% constant-currency decline. |
| Gross profit / margin | £2,186m / 52.9% | £2,447m / 54.2% | Margin decline reflected business mix, including disposals of businesses with higher gross margins. |
| Operating profit | £553m | £451m | Included disposal gains of £230m in 2018 and £128m in 2017. |
| Adjusted operating profit | £546m | £576m | Down £30m; excludes specified disposal, restructuring, acquired-intangible and other items. |
| Profit before tax / profit for year | £498m / £590m | £421m / £408m | 2018 included a £92m tax credit; 2017 had a £13m tax charge. |
| Basic / diluted EPS | 75.6p / 75.5p | 49.9p / 49.9p | Higher profit and a lower weighted-average share count following buybacks contributed to the increase. |
| Net cash generated from operations | £547m | £462m | 2017 included £227m of special pension contributions. Net cash from operating activities was £462m versus £298m. |
| Net debt | £143m | £432m | Gross borrowings were £720m and cash and liquid resources were £568m at year-end. |
Material changes and unusual items
- North America sales declined 5% to £2,784m; underlying sales were down 1% after specified adjustments. Higher Education Courseware and School Courseware remained pressured. Core sales were £806m, broadly flat on an adjusted constant-currency basis; Growth sales were £539m, with adjusted underlying growth estimated at 1% after disposals and currency.
- Reported operating profit benefited from £207m gain on the sale of Wall Street English, £19m from UTEL and £4m of other disposal gains. Restructuring charges were £102m, including a London property rationalization charge, partly offset by property-sale gains. A separate £8m UK pension GMP equalization charge was recorded.
- The tax credit reflected one-off benefits, including £111m from tax-provision releases and £25m from reassessment of tax treatment. Tax authorities could reach different conclusions on open matters.
- Pearson adopted IFRS 15 and IFRS 9 in 2018 without restating comparative figures. IFRS 15 reduced opening retained earnings by £108m; the IFRS 9 opening adjustment was £10m. The filing says IFRS 15 increased 2018 sales and operating profit by £9m each.
Outlook, risks and contingencies
Management forecast 2019 adjusted operating profit of £610m–£660m, including the K12 business despite its March 2019 sale. Guidance assumed December 31, 2018 exchange rates, expected around £50m cost inflation and £33m of additional strategic investment, and anticipated £130m of incremental restructuring benefits and £150m of restructuring costs excluded from adjusted profit. PRH’s expected adjusted contribution was £60m–£65m after tax.
On March 29, 2019, Pearson completed the sale of US K12 courseware for headline consideration of $250m: $25m cash initially and a $225m unconditional vendor note, expected to be repaid over three to seven years. After repayment, Pearson is entitled to 20% of future equity cash flows and 20% of net sale proceeds. The sale and March refinancing were subsequent events, not year-end transactions.
- Key risks include execution and adoption of the ongoing digital and simplification transformation; continued weakness in US courseware; government funding, procurement and policy changes; competition and pricing pressure; and foreign-exchange exposure, particularly the US dollar.
- Further risks include data privacy, cyber and IT disruption; testing-service failures; intellectual-property infringement; pension assumptions and funding; tax uncertainty; and operational dependence on third parties. The UK pension plan reported a £163m technical-provisions surplus at its January 2018 valuation.
- The group had a $1.75bn undrawn revolving facility at year-end and reported covenant compliance. In March 2019 it announced a reduced $1.19bn facility, extended to February 2024. IFRS 16 was expected to add about £910m of lease liabilities at transition and reduce 2019 profit before tax by about £10m.
- Contingencies include tax, legal, royalty, warranty and guarantee matters; management did not expect these to cause a material gain or loss. A UK controlled-foreign-company financing exemption State Aid decision was under assessment; the group disclosed approximately £116m of past benefit and no provision recorded.
Most important facts for investors to verify
- Reconcile adjusted profit to statutory results and assess the sustainability of earnings excluding disposal gains and the unusually favorable tax credit.
- Track underlying revenue and margins in North America, especially Higher Education Courseware, and the delivery of restructuring savings against forecast inflation and investment.
- Verify collection terms, credit exposure and ultimate repayment of the $225m K12 vendor note, as well as the contingent 20% participation.
- Review the tax-authority outcomes, the potential State Aid exposure, and the assumptions behind pension assets, liabilities and risk-reduction transactions.
- Assess liquidity and covenant headroom after the 2019 facility refinancing and the IFRS 16 lease transition; confirm the proposed 13.0p final dividend, subject to shareholder approval.
- Check the filing’s inconsistent description of Standard & Poor’s outlook: one passage says BBB stable, while the detailed risk-management disclosure says BBB negative; Moody’s is reported as Baa2 stable.