PEARSON PLC annual report, Q4 FY2021

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Pearson plc — FY2021 Form 20-F summary

Business context and reporting period

This is Pearson’s annual report for the fiscal year ended December 31, 2021, filed March 30, 2022—not a standalone fourth-quarter report. Pearson is a global education and learning company, reporting under IFRS in sterling. Its five principal divisions are Assessment & Qualifications, Virtual Learning, English Language Learning, Workforce Skills and Higher Education; international courseware local publishing businesses are under strategic review. North America generated 67% of 2021 sales.

Financial performance and position

  • Revenue: £3.428 billion, up 1% reported from £3.397 billion in 2020; underlying growth was 8%. Currency movements reduced reported sales by £206 million and portfolio changes by £27 million.
  • Profit: Statutory operating profit was £183 million, down from £411 million; profit before tax was £157 million versus £354 million; and net profit was £160 million versus £310 million. Basic EPS was 21.1p versus 41.0p.
  • Adjusted operating profit: £385 million, up 23% reported and 33% underlying from £313 million. Adjusted operating margin was approximately 11.2% of sales. The statutory operating margin was approximately 5.3%.
  • Cash flow: Cash generated from operations was £570 million, up from £450 million. Net cash from operating activities after interest and tax was £326 million, compared with £389 million. Capital expenditure was £176 million, including £112 million on software intangibles.
  • Debt and liquidity: Net debt fell to £350 million from £463 million. Cash and cash equivalents were £937 million at year-end; total borrowings, including leases, were £1.4 billion. Available liquidity was approximately £1.6 billion, including cash and an undrawn $1.19 billion revolving credit facility. The Group reported covenant compliance and investment-grade ratings of BBB- (Fitch) and Baa3 (Moody’s), both stable.
  • Margins and balance sheet: Gross profit was £1.681 billion, approximately 49.0% of sales, versus £1.630 billion, approximately 48.0%, in 2020. Net assets were £4.280 billion, compared with £4.134 billion.

Material changes versus 2020

  • Underlying growth and adjusted profit improved as assessment activity recovered, virtual learning grew and cost savings supported operating leverage. Assessment & Qualifications sales rose 11% reported; Virtual Learning rose 3%; English Language Learning rose 9%; Workforce Skills rose 6%.
  • Higher Education sales fell 11% reported (5% underlying), amid lower US enrolments, fewer courses per enrolment, price pressure and lower monetisation. Strategic Review sales declined 12% reported.
  • Statutory operating profit and EPS fell substantially, primarily because 2020 included a £180 million gain on the sale of Penguin Random House, while 2021 included £214 million of restructuring costs. The 2021 restructuring included a £119 million impairment of property right-of-use assets and write-downs of product development assets.
  • Net cash from operating activities was lower despite higher cash generated from operations, principally because 2021 tax payments were £177 million versus a £2 million tax receipt in 2020. The 2021 tax payments included State Aid amounts the Group expects to recover.

Outlook, risks and unusual items

  • Outlook: The filing provides no specific consolidated revenue or profit guidance. Management’s strategy emphasizes digital-first products, direct consumer relationships, Pearson+ and lifelong learning. Management said forecasts generally assume a return to normality from 2022; the going-concern assessment covers through June 30, 2023 and concluded that liquidity and covenant headroom remain adequate under severe downside scenarios.
  • Capital returns and transactions: The Board proposed a 2021 final dividend of 14.2p per share, subject to shareholder approval, taking the stated annual dividend to 20.5p. It approved a £350 million share buyback for 2022. Pearson completed its £65 million acquisition of Faethm and smaller acquisitions in 2021; it acquired Credly in January 2022 for approximately $200 million total consideration.
  • Takeover approach: Apollo made three unsolicited, preliminary and highly conditional proposals, most recently 870p per share plus the 14.2p final dividend. Pearson’s Board rejected each as undervaluing the company. Apollo announced on March 30, 2022 that it did not intend to make a formal offer.
  • Key risks: Exposure includes digital competition and pricing pressure, especially in Higher Education; changes in enrolment and learning preferences; COVID-19 effects on testing and education markets; government funding and procurement decisions; cybersecurity, privacy and service disruption; execution of transformation and acquisitions; inflation; and foreign exchange, with a significant share of sales generated in US dollars. The Ukraine conflict’s direct impact was expected to be immaterial, but broader effects were uncertain.
  • Contingencies and unusual items: Pearson paid £105 million in 2021 relating to alleged UK State Aid and is appealing the decision, expecting recovery. Brazilian tax authorities challenge historical goodwill amortisation deductions; potential exposure was stated as up to £143 million through 2021 plus £13 million for future periods, with no provision recorded. Pearson also settled an SEC matter concerning 2018 student-data breach disclosures for a $1 million civil penalty, without admitting or denying the findings.
  • Audit and controls: PwC issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included goodwill valuation, right-of-use property impairment and Assessment & Qualifications revenue recognition.

Important facts for investors to verify

  • Reconcile statutory profit and EPS with adjusted results, particularly the £214 million restructuring charge and the prior-year Penguin Random House disposal gain.
  • Track Higher Education enrolments, pricing and monetisation, and whether Pearson+ and Inclusive Access can offset ongoing courseware declines.
  • Assess cash conversion, working-capital seasonality, the £177 million 2021 tax payment and the timing or likelihood of recovery of State Aid payments.
  • Review the status and potential outcomes of the Brazil tax assessments and UK State Aid appeal, as well as the SEC settlement remediation.
  • Monitor liquidity, debt maturities, covenant headroom and capital allocation, including execution of the £350 million buyback and Credly integration.
  • Evaluate the assumptions behind goodwill and property valuations, and progress toward digital growth and the 2030 net-zero target.